Document:

EXHIBIT
10.17

 

DIGIRAD CORPORATION

 

1998 STOCK OPTION/STOCK ISSUANCE PLAN

(Amended and Restated as of November 5, 2002)

 

ARTICLE ONE

 

GENERAL PROVISIONS

 

I.              PURPOSE OF THE
PLAN

 

This 1998 Stock Option/Stock Issuance Plan is intended to promote the
interests of Digirad Corporation by providing eligible persons with the
opportunity to acquire a proprietary interest, or otherwise increase their
proprietary interest, in the Corporation as an incentive for them to remain in
the service of the Corporation.

 

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

 

II.            STRUCTURE OF THE
PLAN

 

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

 

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

 

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

 

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

 

III.           ADMINISTRATION
OF THE PLAN

 

A.            Except as provided in Paragraph B of this Section III,
the Plan shall be administered by the Board or one or more committees appointed
by the Board, provided that (1) beginning with the Section 12 Registration
Date, the Primary Committee shall have sole and exclusive authority to
administer the Plan with respect to Section 16 Insiders, and (2) administration
of the Plan may otherwise, at the Board’s discretion, be vested in the Primary
Committee or a Secondary Committee.

 

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

 

 

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

 

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

 

IV.           ELIGIBILITY

 

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

 

(i)            Employees,

 

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

 

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

 

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

 

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

 

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V.            STOCK SUBJECT TO
THE PLAN

 

A.            The stock issuable under the Plan shall be shares of
authorized but unissued or reacquired Common Stock, including shares
repurchased by the Corporation on the open market.  The maximum number of shares of Common Stock initially reserved
for issuance over the term of the Plan shall not exceed 5,876,153 shares.  Such share reserve includes (i) 1,720,659
shares that were initially reserved for issuance by the Board on December 17,
1998 and approved by the stockholders on February 1, 1999, plus (ii) an
additional 1,000,000 shares that were approved for issuance by the Board on
March 9, 2000 and by the stockholders on November 14, 2000, plus (iii) an
additional 1,200,000 shares that were approved for issuance by the Board and
stockholders on November 14, 2000, plus (iv) an additional 1,500,000 shares
that were approved for issuance by the Board on May 15, 2001 and by the
stockholders on June 25, 2001, plus (v) effective immediately following and
contingent upon a 1-for-200 reverse split of the Company’s capital stock (the
“Stock Split”) effected on October 23, 2002, an additional 4,849,050 shares
that were approved for issuance by the Board and stockholders on October 18,
2002, plus (vi) an additional 1,000,000 shares that were approved for issuance
by the Board on November 5, 2002 and by the stockholders on November 5,
2002.  Such 5,876,153 share reserve
shall be in addition to the 13,671 shares issued or reserved for issuance under
the Corporation’s 1997 Stock Option/Stock Issuance Plan following the Stock
Split.

 

B.            Shares of Common Stock subject to outstanding options
shall be available for subsequent issuance under the Plan to the extent those
options expire or terminate for any reason prior to exercise in full.  Unvested shares issued under the Plan and
subsequently cancelled or repurchased by the Corporation, at the original issue
price paid per share, pursuant to the Corporation’s repurchase rights under the
Plan shall be added back to the number of shares of Common Stock reserved for issuance
under the Plan.

 

C.            If any change is made to the Common Stock by reason of
any stock split, stock dividend, recapitalization, combination of shares,
exchange of shares or other change affecting the outstanding Common Stock as a
class without the Corporation’s receipt of consideration, appropriate
adjustments shall be made to (i) the maximum number and/or class of securities
issuable under the Plan, (ii) the number and/or class of securities for which
any one person may be granted stock options, separately exercisable stock
appreciation rights and direct stock issuances under this Plan per calendar
year, and (iii) the number and/or class of securities and the exercise price
per share in effect under each outstanding option under the Plan.  Such adjustments to the outstanding options
are to be effected in a manner which shall preclude the enlargement or dilution
of rights and benefits under such options. The adjustments deter-mined by the
Plan Administrator shall be final, binding and conclusive.

 

ARTICLE TWO

 

DISCRETIONARY OPTION GRANT PROGRAM

 

I.              OPTION TERMS

 

Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
shall comply with the

 

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terms specified below.  Each document evidencing an Incentive Option shall, in addition,
be subject to the provisions of the Plan applicable to such options.

 

A.            Exercise
Price.

 

1.             The exercise price per share shall be fixed by the
Plan Administrator but shall not be less than eighty-five percent (85%) of the
Fair Market Value per share of Common Stock on the option grant date, provided
that the Plan Administrator may fix the exercise price at less than 85% if the
optionee, at the time of the option grant, shall have made a payment to the
Company (including payment made by means of a salary reduction) equal to the
excess of the Fair Market Value of the Common Stock on the option grant date
over such exercise price.

 

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

 

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

 

(ii)           with respect to the
exercise of options after the Section 12 Registration Date, shares of Common
Stock held for the requisite period necessary to avoid a charge to the
Corporation’s earnings for financial reporting purposes and valued at Fair
Market Value on the Exercise Date, or

 

(iii)          with respect to the
exercise of options for vested shares after the Section 12 Registration Date
and to the extent the sale complies with all applicable laws relating to the
regulation and sale of securities, through a special sale and remittance
procedure pursuant to which the Optionee shall concurrently provide irrevocable
written instructions to (a) a Corporation-designated brokerage firm to effect
the immediate sale of the purchased shares and remit to the Corporation, out of
the sale proceeds available on the settlement date, sufficient funds to cover
the aggregate exercise price payable for the purchased shares plus all
applicable Federal, state and local income and employment taxes required to be
withheld by the Corporation by reason of such exercise, and (b) the Corporation
to deliver the certificates for the purchased shares directly to such brokerage
firm in order to complete the sale.

 

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

 

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

 

C.            Effect
of Termination of Service.

 

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

 

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(i)            Any option outstanding
at the time of the Optionee’s cessation of Service for any reason shall remain
exercisable for such period of time thereafter as shall be determined by the
Plan Administrator and set forth in the documents evidencing the option (which
shall in no event be less than six (6) months in the case of death or
disability nor less than thirty (30) days in the case of any other cessation of
Service), provided no such option shall be exercisable after the expiration of
the option term.

 

(ii)           Any option exercisable
in whole or in part by the Optionee at the time of death may be subsequently
exercised by the personal representative of the Optionee’s estate or by the
person or persons to whom the option is transferred pursuant to the Optionee’s
will or in accordance with the laws of descent and distribution.

 

(iii)          Subject to clause
C.2.(ii) below of this Section I, during the applicable post-Service exercise
period, the option may not be exercised in the aggregate for more than the
number of vested shares for which the option is exercisable on the date of the
Optionee’s cessation of Service.  Upon
the expiration of the applicable exercise period or (if earlier) upon the
expiration of the option term, the option shall terminate and cease to be
outstanding for any vested shares for which the option has not been exercised.

 

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

 

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

 

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

 

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

 

E.             Repurchase
Rights.  The Plan Administrator shall have the
discretion to grant options which are exercisable for unvested shares of Common
Stock and to reserve the right to repurchase any or all of those unvested
shares should the optionee thereafter cease to be in Service to the
Corporation.  The terms upon which such
repurchase right shall be exercisable (including the period and procedure for
exercise and the appropriate vesting schedule for the purchased shares) shall
be established by the Plan Administrator and set forth in the document
evidencing such repurchase right.

 

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F.             Limited
Transferability of Options.  During the
lifetime of the Optionee, options shall be exercisable only by the Optionee and
shall not be assignable or transferable other than by will or by the laws of
descent and distribution following the Optionee’s death.

 

II.            INCENTIVE
OPTIONS

 

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

 

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

 

B.            Exercise
Price.  The exercise price per share shall not be
less than one hundred percent (100%) of the Fair Market Value per share of
Common Stock on the option grant date.

 

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

 

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

 

III.           CANCELLATION AND
REGRANT OF OPTIONS

 

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

 

ARTICLE THREE

 

STOCK ISSUANCE PROGRAM

 

I.              STOCK ISSUANCES

 

Shares of Common Stock may be issued under the Stock Issuance Program
through direct and immediate issuances without any intervening option
grants.  Each such stock

 

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issuance shall be evidenced by a Stock Issuance
Agreement which complies with the terms specified below.

 

II.            STOCK ISSUANCE
TERMS

 

A.            Purchase
Price.

 

1.             The purchase price per share shall be fixed by the
Plan Administrator, but shall not be less than eighty-five percent (85%) of the
Fair Market Value per share of Common Stock on the issuance date.

 

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

 

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

 

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

 

B.            Vesting
Provisions.

 

1.             Shares of Common Stock issued under the Stock Issuance
Program may, in the discretion of the Plan Administrator, be fully and
immediately vested upon issuance or may vest in one or more installments over
the Participant’s period of Service or upon attainment of specified performance
objectives.  The elements of the vesting
schedule applicable to any unvested shares of Common Stock issued under the
Stock Issuance Program, namely:

 

(i)            the Service period to
be completed by the Participant or the performance objectives to be attained,

 

(ii)           the number of
installments in which the shares are to vest,

 

(iii)          the interval or
intervals (if any) which are to lapse between installments, and

 

(iv)          the effect which death,
Permanent Disability or other event designated by the Plan Administrator is to
have upon the vesting schedule,

 

shall be determined by the Plan Administrator and
incorporated into the Stock Issuance Agreement.

 

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

 

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the Participant’s unvested shares of Common Stock and
(ii) such escrow arrangements as the Plan Administrator shall deem appropriate.

 

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

 

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

 

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

 

ARTICLE FOUR

 

MISCELLANEOUS

 

I.              FINANCING

 

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

 

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II.            SHARE
ESCROW/LEGENDS

 

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

 

III.           CORPORATE
TRANSACTION

 

A.            Except as otherwise provided in the agreements
evidencing an option, each outstanding option under the Discretionary Option
Grant Program shall automatically accelerate in the event of a Corporate
Transaction so that each such option shall, immediately prior to the effective
date of the Corporate Transaction, become fully exercisable with respect to the
total number of shares of Common Stock at the time subject to such option and
may be exercised for any or all of those shares as fully-vested shares of
Common Stock, provided that an outstanding option shall not so accelerate if
and to the extent:  (i) such option is,
in connection with the Corporate Transaction, either to be assumed by the
successor corporation (or parent thereof) or to be replaced with a comparable
option to purchase shares of the capital stock of the successor corporation (or
parent thereof), (ii) such option is to be replaced with a cash incentive
program of the successor corporation which preserves the spread existing on the
unvested option shares at the time of the Corporate Transaction and provides
for subsequent payout in accordance with the same vesting schedule applicable
to those option shares or (iii) the acceleration of such option is subject to
other limitations imposed by the Plan Administrator at the time of the option
grant.  The determination of option
comparability under clause (i) above shall be made by the Plan Administrator,
and its determination shall be final, binding and conclusive.

 

B.            Except as otherwise provided in the agreements
creating the repurchase rights, outstanding repurchase rights, if any, shall
terminate automatically, and the shares of Common Stock subject to those
terminated rights shall immediately vest in full, in the event of any Corporate
Transaction, provided that such repurchase right shall not lapse to the extent:
(i) those repurchase rights are to be assigned to the successor corporation (or
parent thereof) in connection with such Corporate Transaction or (ii) such
accelerated vesting is precluded by other limitations imposed by the Plan
Administrator at the time the option is issued or the repurchase right is
created.

 

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

 

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

 

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(iii) the maximum number and/or class of securities
for which any one person may be granted stock options, separately exercisable
stock appreciation rights and direct stock issuances under the Plan per
calendar year.

 

E.             Repurchase rights which are assigned in connection
with a Corporate Transaction shall be exercisable with respect to the property
issued to the Optionee of Participant upon consummation of such Corporate
Transaction in exchange for the Common Stock held by the Optionee or Participant
subject to the repurchase rights immediately prior to the Corporate
Transaction.

 

F.             Except as otherwise limited by the Plan Administrator
at the time an Option is granted, vesting under outstanding options will
automatically accelerate in the event the Optionee’s Service subsequently
terminates by reason of an Involuntary Termination within twenty-four (24)
months following the effective date of any Corporate Transaction in which those
options are assumed or replaced and do not otherwise accelerate.  Any options so accelerated shall remain
exercisable for fully-vested shares until the earlier of (i) the expiration of
the option term or (ii) the expiration of the one (1)-year period measured from
the effective date of the Involuntary Termination.  The portion of any Incentive Option accelerated in connection
with a Corporate Transaction or Change in Control shall remain exercisable as
an Incentive Option only to the extent the applicable One Hundred Thousand
Dollar limitation is not exceeded and the provisions governing the exercise and
holding period are met.  To the extent
such dollar limitation is exceeded, the accelerated portion of such option
shall be exercisable as a Non-Statutory Option under the Federal tax laws.

 

G.            Except as otherwise limited by the Plan Administrator
at the time the option is granted under the Discretionary Option Program or the
repurchase rights are created, the outstanding repurchase rights with respect
to shares held by an Optionee or Participant will automatically lapse and cease
to be exercisable in the event the Optionee’s or the Participant’s Service
subsequently terminates by means of an Involuntary Termination within
twenty-four (24) months following the effective date of any Corporate
Transaction in which those repurchase rights are assigned or otherwise
continue.

 

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

 

IV.           CHANGE IN
CONTROL

 

A.            In the event of any Change in Control, each
outstanding option under the Discretionary Option Grant Program shall
automatically accelerate so that each such option shall, immediately prior to
the effective date of the Change in Control, become fully exercisable with
respect to the total number of shares of Common Stock at the time subject to
such option and may be exercised for any or all of those shares as fully-vested
shares of Common Stock.

 

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B.            Outstanding repurchase rights, if any, shall terminate
automatically, and the shares of Common Stock subject to those terminated
rights shall immediately vest in full, in the event of any Change in Control.

 

V.            VESTING

 

Notwithstanding any other provision of this agreement, the vesting
schedule imposed with respect to any option grant or share issuance shall not
result in the Optionee or Participant vesting in fewer than 20% per year for
five years from the date of the option grant or share issuance.

 

VI.           TAX WITHHOLDING

 

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

 

B.            The Plan Administrator may, in its discretion, provide
any or all holders of Non-Statutory Options or unvested shares of Common Stock
under the Plan with the right to use shares of Common Stock in satisfaction of
all or part of the Taxes incurred by such holders in connection with the
exercise of their options or the vesting of their shares.  Such right may be provided to any such
holder in either or both of the following formats:

 

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

 

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

 

VII.         EFFECTIVE DATE
AND TERM OF THE PLAN

 

A.            The Plan shall become effective immediately upon the
Plan Effective Date.  Options may be
granted under the Discretionary Option Grant at any time on or after the Plan
Effective Date.  However, no options
granted under the Plan may be exercised, and no shares shall be issued under
the Plan, until the Plan is approved by the Corporation’s stockholders.  If such stockholder approval is not obtained
within twelve (12) months after the Plan Effective Date, then all options
previously granted under this Plan shall terminate and cease to be outstanding,
and no further options shall be granted and no shares shall be issued under the
Plan.

 

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

 

C.            The Plan shall terminate upon the earliest of (i) the
tenth anniversary of the Plan Effective Date, (ii) the date on which all shares
available for issuance under the Plan shall have been issued as fully-vested
shares or (iii) the termination of all outstanding options in connection with a
Corporate Transaction.  Upon such plan
termination, all outstanding option grants and unvested stock issuances shall
thereafter continue to have force and effect in accordance with the provisions
of the documents evidencing such grants or issuances.

 

VIII.        AMENDMENT OF THE
PLAN

 

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

 

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

 

IX.           USE OF PROCEEDS

 

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

 

X.            REGULATORY
APPROVALS

 

A.            The implementation of the Plan, the granting of any
stock option under the Plan and the issuance of any shares of Common Stock (i)
upon the exercise of any granted option or (ii) under the Stock Issuance
Program shall be subject to the Corporation’s procurement of all

 

12

 

approvals and permits required by regulatory
authorities having jurisdiction over the Plan, the stock options granted under
it and the shares of Common Stock issued pursuant to it.

 

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

 

XI.           NO
EMPLOYMENT/SERVICE RIGHTS

 

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

 

XII.         FINANCIAL
REPORTS

 

The Corporation shall deliver a balance sheet and an income statement
at least annually to each individual holding an outstanding option under the
Plan, unless such individual is a key Employee whose duties in connection with
the Corporation (or any Parent or Subsidiary) assure such individual access to
equivalent information.

 

13

 

APPENDIX

 

The following definitions shall be in effect under the
Plan:

 

A.            Board shall mean the
Corporation’s Board of Directors.

 

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

 

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

 

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

 

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

 

D.            Common Stock shall
mean the Corporation’s common stock.

 

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

 

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

 

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

 

F.             Corporation shall mean
Digirad Corporation, a Delaware corporation, and its successors.

 

G.            Discretionary Option Grant Program
shall mean the discretionary option grant program in effect under the Plan.

 

A-1

 

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

 

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

 

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

 

(i)            If
the Common Stock is at the time traded on the Nasdaq National Market, then the
Fair Market Value shall be deemed equal to the closing selling price per share
of Common Stock on the date in question, as such price is reported on the
Nasdaq National Market or any successor system.  If there is no closing selling price for the Common Stock on the
date in question, then the Fair Market Value shall be the closing selling price
on the last preceding date for which such quotation exists.

 

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

 

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

 

(iv)          For
purposes of any option grants made prior to the Underwriting Date, the Fair
Market Value shall be determined by the Plan Administrator, after taking into
account such factors as it deems appropriate.

 

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

 

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

 

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

 

(ii)           such
individual’s voluntary resignation following (A) a change in his or her
position with the Corporation which materially reduces his or her level of
responsibility, (B) a reduction in his or her level of compensation (including
base salary, fringe benefits and participation in any corporate-performance
based bonus or incentive

 

A-2

 

programs) by more than fifteen percent (15%) or (C) a
relocation of such individual’s place of employment by more than fifty (50)
miles, provided and only if such change, reduction or relocation is effected by
the Corporation without the individual’s consent.

 

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

 

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

 

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

 

P.             Optionee shall mean
any person to whom an option is granted under the Discretionary Option Grant
Program.

 

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

 

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

 

S.             Permanent Disability or Permanently
Disabled shall mean the inability of the Optionee or the Participant
to engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment expected to result in death or to be
of continuous duration of twelve (12) months or more.

 

T.            Plan shall mean the
Corporation’s 1998 Stock Option/Stock Issuance Plan, as set forth in this
document.

 

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

 

V.            Plan Effective Date
shall mean the date on which the Plan was adopted by the Board.

 

A-3

 

W.           Primary Committee shall
mean the committee of two (2) or more non-employee Board members appointed by
the Board to administer the Discretionary Option Grant and Stock Issuance
Programs with respect to Section 16 Insiders following the Section 12
Registration Date.

 

X.            Secondary Committee shall
mean a committee of two (2) or more Board members appointed by the Board to
administer any aspect of Plan not required hereunder to be administered by the
Primary Committee.  The members of the
Secondary Committee may be Board members who are Employees eligible to receive
discretionary option grants or direct stock issuances under the Plan or any other
stock option, stock appreciation, stock bonus or other stock plan of the
Corporation (or any Parent or Subsidiary).

 

Y.            Section 12 Registration Date
shall mean the date on which the Common Stock is first registered under Section
12(g) or Section 15 of the 1934 Act.

 

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

 

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

 

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

 

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

 

AD.         Stock Issuance Program
shall mean the stock issuance program in effect under the Plan.

 

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

 

AF.         Taxes shall mean the
Federal, state and local income and employment tax liabilities incurred by the
holder of Non-Statutory Options or unvested shares of Common Stock in
connection with the exercise of those options or the vesting of those shares.

 

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

 

A-4

 

AH.         Underwriting Agreement
shall mean the agreement between the Corporation and the underwriter or
underwriters managing the initial public offering of the Common Stock.

 

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

 

A-5EXHIBIT 10.21

 

*** CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN
THIS DOCUMENT (INDICATED BY ASTERISKS) HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT UNDER 17 C.F.R. SECTIONS 200.80(B)(4), 200.83 AND
230.406.

 

 

DIGIRAD
CORPORATION

 

 

June 11, 2002

 

David M. Sheehan

Co-Chief Executive Officer

Digirad Corporation

9350 Trade Place

San Diego, CA  92126-6334

 

Dear Mr. Sheehan:

 

The
purpose of this letter is to describe the terms and conditions pursuant to
which you and certain other members of senior management of Digirad Corporation
(the “Company”) will be compensated in connection with your continued
employment with the Company and/or its wholly-owned subsidiary, Digirad Imaging
Solutions, Inc. (“DIS”).

 

1.             Cash
Bonus Awards.

 

a.             Payment
of Cash Bonus.  In the event that
you have continued in Service (as hereinafter defined) to the Company and/or
DIS on each of June 17, 2002, September 30, 2002 and December 31, 2002 (each
date, a “Cash Bonus Eligibility Date”), you will be entitled to be paid a cash
bonus in the amount of Twenty-Five Thousand Dollars ($25,000) (the “Cash
Bonus”) on each of June 17, 2002, October 15, 2002 and January 15, 2003,
respectively (each date, a “Cash Bonus Payment Date”).  As used herein, the term “Service” shall
mean the continuous provision of services to the Company and/or DIS by you in
the capacity of an employee, a non-employee member of the board of directors, a
consultant or an independent advisor.

 

b.             Eligibility
for Cash Bonus.  Should your Service
terminate before any Cash Bonus Eligibility Date by reason of (i) your
voluntary resignation or (ii) a Termination for Cause (as hereinafter defined),
you will not be entitled to receive any further Cash Bonus on any future Cash
Bonus Payment Date pursuant this paragraph 1. 
Should your Service terminate before any Cash Bonus Eligibility Date for
any reason other than (i) your voluntary resignation or (ii) a Termination for
Cause, you will still be entitled to receive a Cash Bonus on each remaining
Cash Bonus Payment Date.  Should the
Company consummate an Acquisition (as hereinafter defined) on or before any
Cash Bonus Eligibility Date, you will not be entitled to receive any further
Cash Bonus on any future Cash Bonus Payment Date pursuant to this paragraph 1.

 

 

c.             Termination
for Cause.  As used herein,
“Termination for Cause” shall mean the termination of your Service for one or
more of the following reasons:  (i) your
commission of any act of fraud, embezzlement or dishonesty, (ii) your willful
and material misappropriation of the assets of the Company and/or DIS or (iii)
any other intentional misconduct on your part adversely affecting the business
or affairs of the Company and/or DIS in a material manner.  The foregoing definition will not in any way
preclude or restrict the right of the Company and/or DIS to discharge or
dismiss you for any reason, provided, however, that such reasons will not be
deemed, for purposes of this letter agreement, to constitute grounds for
Termination for Cause.

 

2.             Acquisition
Bonus Awards.

 

a.             Payment
of Acquisition Bonus.  In the event
that at any time on or before June 30, 2004, the Company receives Acquisition
Proceeds (as hereinafter defined) in connection with the consummation by the
Company of one or more Acquisitions (as hereinafter defined), you, John
Dahldorf and other members of senior management (as determined by you and John
Dahldorf in your discretion, with the consent and approval of the Compensation
Committee of the Board of Directors) will be entitled to receive an aggregate
bonus (the “Acquisition Bonus”) in connection with the Company’s receipt of
Acquisition Proceeds.  The aggregate
amount of the Acquisition Bonus to be paid to you, Mr. Dahldorf and other
members of senior management shall be a single amount (i) not less than Four
Hundred Thousand Dollars ($400,000) and (ii) not greater than that amount which
is ten percent (10%) of any Acquisition Proceeds received by the Company in
excess of Thirty Million Dollars ($30,000,000).  Any Acquisition Bonus paid may be distributed among you, Mr.
Dahldorf and the other members of senior management in the discretion of you
and Mr. Dahldorf, with the consent and approval of the Compensation Committee
of the Board of Directors.

 

b.             Eligibility
for Acquisition Bonus.  You and any
member of senior management will only be entitled to receive a portion of any
Acquisition Bonus awarded pursuant to this paragraph 3 if you and/or any such
member of senior management have continued in Service through the effective
closing date of such Acquisition. 
Should your Service terminate before the effective closing date of a
transaction constituting an Acquisition by reason of (i) your voluntary
resignation or (ii) a Termination for Cause (as previously defined), you will
not be entitled to receive any Acquisition Bonus in connection with the
respective Acquisition pursuant to this paragraph 3.  In the event that, during the sixty (60) day period prior to the
effective closing date of an Acquisition, your Service should terminate for any
reason other than (i) your voluntary resignation or (ii) a Termination for
Cause, you will still be entitled to receive the Acquisition Bonus to be paid
in connection with the consummation of the respective Acquisition; provided,
however, that you will not be entitled to receive any portion of an Acquisition
Bonus which may be distributed in connection with any future Acquisition which
is consummated on or before June 30, 2004.

 

c.             Form
of Acquisition Bonus.  Any
Acquisition Bonus awarded pursuant to this paragraph 3 will be paid to you and
any members of senior management in the same form and upon the same date as
Acquisition Proceeds are paid to the Company and/or DIS or to the holders of
the outstanding securities of the Company and/or DIS, as the case may be.

 

2

 

d.             Definitions.

 

(i)            “Acquisition”
shall mean any of the following transactions pursuant to which assets or
securities of the Company and/or DIS are acquired for consideration paid in
cash, securities or other property:

 

(a)           a merger, consolidation or other
similar transaction approved by the stockholders of the Company and/or DIS, as
the case may be, unless securities representing more than fifty percent (50%)
of the total combined voting power of the voting securities of the successor
corporation are immediately thereafter beneficially owned, directly or
indirectly and in substantially the same proportion, by the persons who
beneficially owned the outstanding voting securities of the Company and/or DIS,
as the case may be, immediately prior to such transaction, or

 

(b)           the sale, transfer or other
disposition of all or substantially all of the property or assets of the
Company and/or DIS, as the case may be (including, without limitation, the
sale, transfer or other disposition of all or substantially all of the
Company’s assets used in the design, manufacture and sale of digital gamma
cameras); provided, however, that the foregoing definition shall not apply to
the sale by the Company of its goods (including, without limitation, its
digital gamma cameras) in the ordinary course of business, or

 

(c)           the direct sale by the stockholders
of the Company and/or DIS, as the case may be, of securities possessing more
than fifty percent (50%) of the total combined voting power of the outstanding
securities of the Company or DIS, as the case may be (except in connection with
capital raising transactions), to a person or persons different from the persons
holding those securities immediately prior to such sale.

 

(ii)           “Acquisition
Proceeds” shall mean the following items of consideration (in cash, securities
or other property) paid by the acquiring person or persons in effecting the
Acquisition:

 

(a)           for an Acquisition effected by a
merger, consolidation, or other similar transaction or by the direct purchase
of the outstanding securities of the Company and/or DIS, as the case may be,
the aggregate amount of consideration (valued at fair market value) paid to the
holders of the outstanding securities of the Company and/or DIS, as the case
may be, in acquisition of their stockholder interests, or

 

(b)           for an Acquisition effected by the
purchase of all or a material portion of the assets of the Company and/or DIS,
the portion of the consideration (valued at fair market value) paid to the
Company for those assets.

 

3.             Performance
Bonus Awards.

 

a.             Payment
of Performance Bonus.  Provided that
you have continued in Service to the Company and/or DIS on and through              ***            , you will be entitled to be paid a cash bonus (the
“Performance Bonus”), in an amount representing              ***

 

***        Portions of this page have been omitted pursuant to a request for
Confidential Treatment and filed separately with the commission.

 

3

 

	
   

  	
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b.             Eligibility
for Performance Bonus.  Should your
Service terminate on or before             
***             by reason of (i)
your voluntary resignation or (ii) a Termination for Cause (as previously
defined), you will not be entitled to receive any Performance Bonus pursuant
this paragraph 3.  Should your Service
terminate on or before             
***             for any reason
other than (i) your voluntary resignation or (ii) a Termination for Cause, you
will still be entitled to receive a Performance Bonus pursuant to this
paragraph 3.

 

4.             Stock
Option Grants.  Upon the final
closing of the Company’s sale and issuance of shares of its Series H Preferred
Stock (“Series H Closing”), and following the appropriate increase to the
Company’s stock option pool, you and other members of senior management (as
determined by you and approved by the board of directors) will be granted stock
options to purchase shares of the Company’s common stock under the Company’s
stock option/stock issuance plan pursuant to the following terms and
conditions.

 

***        Portions of this page have been omitted pursuant to a request for
Confidential Treatment and filed separately with the commission.

 

4

 

a.             Number
of Options.  The number of shares of
common stock underlying the stock option granted to you shall represent
approximately                 ***             the outstanding shares of the
Company’s common stock (on an as-converted basis) following the Series H
Closing.

 

b.             Option
Pool.  The Company’s stock
option/stock issuance pool shall constitute approximately ten percent (10%) of
the outstanding shares of the Company’s common stock (on an as-converted basis)
following the final closing of the Company’s sale and issuance of shares of its
Series H Preferred Stock.

 

c.             Exercise
Price.  Each option will have an
exercise price per share equal to
                 ***             the final price per share of the
Company’s Series H Preferred Stock (as reflected in the Company’s Amended and
Restated Certificate of Incorporation and as adjusted for stock splits and
combinations).

 

d.             Option
Type and Term.  The options granted
hereunder will be incentive stock options under the federal tax laws, to the
maximum extent allowable, and the balance will be a non-statutory options.  The options will have a maximum term of ten
(10) years, subject to earlier termination following cessation of employment.

 

e.             Vesting
of Options.                 
***              the shares of
common stock covered under the option granted to you will vest                            ***

 

***

 

                     ***                   .  Notwithstanding the foregoing, however,             ***

 

         ***        the shares of common stock covered under the option granted
to you and any other member of senior management will immediately vest upon an
Acceleration Event (as hereinafter defined)

 

f.              Acceleration
Event.  As used herein, an
“Acceleration Event” shall mean the consummation of one of the following
transactions pursuant to which assets or securities of the Company and DIS are
acquired for consideration paid in cash, securities or other property:

 

(i)            a
merger, consolidation or other similar transaction approved by the stockholders
of the Company, unless securities representing more than fifty percent (50%) of
the total combined voting power of the voting securities of the successor
corporation are immediately thereafter beneficially owned, directly or
indirectly and in substantially the same proportion, by the persons who
beneficially owned the outstanding voting securities of the Company, as the
case may be, immediately prior to such transaction, or

 

(ii)           the
sale, transfer or other disposition of all or substantially all of the property
or assets of the Company and DIS; or

 

(iii)          the
direct sale by the stockholders of the Company of securities possessing more
than fifty percent (50%) of the total combined voting power of the outstanding
securities of the Company (except in connection with capital raising
transactions), to a person or persons different from the persons holding those
securities immediately prior to such sale.

 

***        Portions of this page have been omitted pursuant to a request for
Confidential Treatment and filed separately with the commission.

 

5

 

5.             Parachute
Payments.  In the event that any
payments to which you or any member of senior management become entitled in
accordance with the provisions of this letter agreement would otherwise
constitute a parachute payment under Section 280G of the Internal Revenue Code,
then such payments will be subject to reduction to the extent necessary to
assure that you receive the greater of (i) the amount of those
payments which would not constitute such a parachute payment or (ii) the
amount which yields you the greatest after-tax amount of benefits after taking
into account any excise tax imposed on the payments provided to you under this
letter agreement pursuant to Section 4999 of the Internal Revenue
Code.  However, provided certain
conditions are met, payments that would otherwise be subject to the provisions
of Sections 280G and 4999 of the Internal Revenue Code may be exempt from those
rules, if the stockholders approve those payments.

 

6.             Miscellaneous.

 

a.             Limitations.  This letter agreement will in no way affect
the right of the Company and/or DIS to adjust, reclassify, reorganize or
otherwise change its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its business or
assets.

 

b.             Withholding.  If applicable, all payments under this
letter agreement shall be subject to the Company’s collection of all applicable
federal, state and local income and employment taxes required to be withheld
therefrom.

 

c.             Transfer
of Rights.  Any rights or interests
granted hereunder may not be transferred, assigned, pledged or encumbered,
other than a transfer effected by will or the laws of inheritance following
your death.

 

d.             Amendment
and Termination.  The Board of
Directors may amend or terminate this letter agreement only with your prior
written consent.

 

e.             At
Will Employment.  No provision of
this letter agreement will confer any right upon you to continue in Service for
any period of specific duration or interfere with or otherwise restrict in any
way the right of the Company or your right to terminate your Service at any
time for any reason, with or without cause.

 

f.              Governing
Law.  The provisions of this letter
agreement will be governed by and construed in accordance with the laws of the
State of California without resort to its conflict-of-laws rules.

 

g.             Assignment.  The liabilities and obligations of the
Company under this letter agreement will be binding upon any successor
corporation or entity which succeeds to all or substantially all of the assets
and business of the Company by merger or other transaction, whether or not such
transaction qualifies as an Acquisition.

 

 

[REMAINDER OF THE PAGE
INTENTIONALLY LEFT BLANK]

 

6

 

We ask
that you acknowledge your receipt of this letter agreement and your acceptance
of its terms and conditions by signing and dating this letter agreement as soon
as possible.

 

 

	
  Very truly yours,

  
	
   

  
	
  /s/ Timothy J. Wollaeger

  	
   

  
	
   

  
	
  Timothy J. Wollaeger

  
	
  Chairman of the
  Compensation Committee

  The Board of Directors of Digirad Corporation

  
	
   

  
	
   

  
	
  Acknowledged and Agreed:

  
	
   

  
	
   

  
	
  /s/
  David M. Sheehan

  	
   

  
	
  David M. Sheehan

  
	
   

  
	
  Dated: June 11, 2002

  
			

 

7

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