Document:

exv10w1

 

Exhibit 10.1

INDEMNITY AGREEMENT

     THIS
INDEMNITY AGREEMENT (this “Agreement”)
dated as of «Date_1» is made by
and between ZARS Pharma, Inc. a Delaware corporation (the “Company”), and «Name»
(“Indemnitee”).

R E C I T A L S:

     A. The Company desires to attract and retain the services of highly qualified individuals as
directors, officers, employees and agents.

     B. The Company’s bylaws (the “Bylaws”) require that the Company indemnify its
directors, and empowers the Company to indemnify its officers, employees and agents, as authorized
by the Delaware General Corporation Law, as amended (the “Code”), under which the Company
is organized and such Bylaws expressly provide that the indemnification provided therein is not
exclusive and contemplates that the Company may enter into separate agreements with its directors,
officers and other persons to set forth specific indemnification provisions.

     C. Indemnitee does not regard the protection currently provided by applicable law, the
Company’s governing documents and available insurance as adequate under the present circumstances,
and the Company has determined that Indemnitee and other directors, officers, employees and agents
of the Company may not be willing to serve or continue to serve in such capacities without
additional protection.

     D. The Company desires and has requested Indemnitee to serve or continue to serve as a
director, officer, employee or agent of the Company, as the case may be, and has proferred this
Agreement to Indemnitee as an additional inducement to serve in such capacity.

     E. Indemnitee is willing to serve, or to continue to serve, as a director, officer, employee
or agent of the Company, as the case may be, if Indemnitee is furnished the indemnity provided for
herein by the Company.

A G R E E M E N T :

     NOW THEREFORE, in consideration of the mutual covenants and agreements set forth herein, the
parties hereto, intending to be legally bound, hereby agree as follows:

     1. Definitions.

          (a) Agent. For purposes of this Agreement, the term “agent” of the Company means any
person who: (i) is or was a director, officer, employee or other fiduciary of the Company or a
subsidiary of the Company; or (ii) is or was serving at the request or for the convenience of, or
representing the interests of, the Company or a subsidiary of the Company, as a director, officer,
employee or other fiduciary of a foreign or domestic corporation, partnership, joint venture,
trust or other enterprise.

          (b) Expenses. For purposes of this Agreement, the term “expenses” shall be broadly
construed and shall include, without limitation, all direct and indirect costs of any type

 

 

or nature whatsoever (including, without limitation, all attorneys’, witness, or other
professional fees and related disbursements, and other out-of-pocket costs of whatever nature),
actually and reasonably incurred by Indemnitee in connection with the investigation, defense or
appeal of a proceeding or establishing or enforcing a right to indemnification under this
Agreement, the Code or otherwise, and amounts paid in settlement by or on behalf of Indemnitee, but
shall not include any judgments, fines or penalties actually levied against Indemnitee for such
individual’s violations of law. The term “expenses” shall also include reasonable compensation for
time spent by Indemnitee for which he is not compensated by the Company or any subsidiary or third
party (i) for any period during which Indemnitee is not an agent, in the employment of, or
providing services for compensation to, the Company or any subsidiary; and (ii) if the rate of
compensation and estimated time involved is approved by the directors of the Company who are not
parties to any action with respect to which expenses are incurred, for Indemnitee while an agent
of, employed by, or providing services for compensation to, the Company or any subsidiary.

          (c) Proceedings. For purposes of this Agreement, the term “proceeding” shall be
broadly construed and shall include, without limitation, any threatened, pending, or completed
action, suit, arbitration, alternate dispute resolution mechanism, investigation, inquiry,
administrative hearing or any other actual, threatened or completed proceeding, whether brought in
the right of the Company or otherwise and whether of a civil, criminal, administrative or
investigative nature, and whether formal or informal in any case, in which Indemnitee was, is or
will be involved as a party or otherwise by reason of: (i) the fact that Indemnitee is or was a
director or officer of the Company; (ii) the fact that any action taken by Indemnitee or of any
action on Indemnitee’s part while acting as director, officer, employee or agent of the Company; or
(iii) the fact that Indemnitee is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, and in any such case described above, whether or not serving in
any such capacity at the time any liability or expense is incurred for which indemnification,
reimbursement, or advancement of expenses may be provided under this Agreement.

          (d) Subsidiary. For purposes of this Agreement, the term “subsidiary” means any
corporation or limited liability company of which more than 50% of the outstanding voting
securities or equity interests are owned, directly or indirectly, by the Company and one or more of
its subsidiaries, and any other corporation, limited liability company, partnership, joint venture,
trust, employee benefit plan or other enterprise of which Indemnitee is or was serving at the
request of the Company as a director, officer, employee, agent or fiduciary.

          (e) Independent Counsel. For purposes of this Agreement, the term “independent
counsel” means a law firm, or a partner (or, if applicable, member) of such a law firm, that is
experienced in matters of corporation law and neither presently is, nor in the past five (5) years
has been, retained to represent: (i) the Company or Indemnitee in any matter material to either
such party, or (ii) any other party to the proceeding giving rise to a claim for indemnification
hereunder. Notwithstanding the foregoing, the term “independent counsel” shall not include any
person who, under the applicable standards of professional conduct then

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prevailing, would have a conflict of interest in representing either the Company or Indemnitee
in an action to determine Indemnitee’s rights under this Agreement.

     2. Agreement to Serve. Indemnitee will serve, or continue to serve, as a director,
officer, employee or agent of the Company or any subsidiary, as the case may be, faithfully and to
the best of his or her ability, at the will of such corporation (or under separate agreement, if
such agreement exists), in the capacity Indemnitee currently serves as an agent of such
corporation, so long as Indemnitee is duly appointed or elected and qualified in accordance with
the applicable provisions of the bylaws or other applicable charter documents of such corporation,
or until such time as Indemnitee tenders his or her resignation in writing; provided, however, that
nothing contained in this Agreement is intended as an employment agreement between Indemnitee and
the Company or any of its subsidiaries or to create any right to continued employment of Indemnitee
with the Company or any of its subsidiaries in any capacity.

     The Company acknowledges that it has entered into this Agreement and assumes the obligations
imposed on it hereby, in addition to and separate from its obligations to Indemnitee under the
Bylaws, to induce Indemnitee to serve, or continue to serve, as a director, officer, employee or
agent of the Company, and the Company acknowledges that Indemnitee is relying upon this Agreement
in serving as a director, officer, employee or agent of the Company.

     3. Indemnification.

          (a) Indemnification in Third Party Proceedings. Subject to Section 10 below, the
Company shall indemnify Indemnitee to the fullest extent permitted by the Code, as the same may be
amended from time to time (but, only to the extent that such amendment permits Indemnitee to
broader indemnification rights than the Code permitted prior to adoption of such amendment), if
Indemnitee is a party to or threatened to be made a party to or otherwise involved in any
proceeding, for any and all expenses, actually and reasonably incurred by Indemnitee in connection
with the investigation, defense, settlement or appeal of such proceeding.

          (b) Indemnification in Derivative Actions and Direct Actions by the Company. Subject
to Section 10 below, the Company shall indemnify Indemnitee to the fullest extent permitted by the
Code, as the same may be amended from time to time (but, only to the extent that such amendment
permits Indemnitee to broader indemnification rights than the Code permitted prior to adoption of
such amendment), if Indemnitee is a party to or threatened to be made a party to or otherwise
involved in any proceeding by or in the right of the Company to procure a judgment in its favor,
against any and all expenses actually and reasonably incurred by Indemnitee in connection with the
investigation, defense, settlement, or appeal of such proceedings.

     4. Indemnification of Expenses of Successful Party. Notwithstanding any other
provision of this Agreement, to the extent that Indemnitee has been successful on the merits or
otherwise in defense of any proceeding or in defense of any claim, issue or matter therein,
including the dismissal of any action without prejudice, the Company shall indemnify

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Indemnitee against all expenses actually and reasonably incurred in connection with the
investigation, defense or appeal of such proceeding.

     5. Partial Indemnification. If Indemnitee is entitled under any provision of this
Agreement to indemnification by the Company for some or a portion of any expenses actually and
reasonably incurred by Indemnitee in the investigation, defense, settlement or appeal of a
proceeding, but is precluded by applicable law or the specific terms of this Agreement to
indemnification for the total amount thereof, the Company shall nevertheless indemnify Indemnitee
for the portion thereof to which Indemnitee is entitled.

     6. Advancement of Expenses. To the extent not prohibited by law, the Company shall
advance the expenses incurred by Indemnitee in connection with any proceeding, and such
advancement shall be made within twenty (20) days after the receipt by the Company of a statement
or statements requesting such advances (which shall include invoices received by Indemnitee in
connection with such expenses but, in the case of invoices in connection with legal services, any
references to legal work performed or to expenditures made that would cause Indemnitee to waive any
privilege accorded by applicable law shall not be included with the invoice) and upon request of
the Company, an undertaking to repay the advancement of expenses if and to the extent that it is
ultimately determined by a court of competent jurisdiction in a final judgment, not subject to
appeal, that Indemnitee is not entitled to be indemnified by the Company. Advances shall be
unsecured, interest free and without regard to Indemnitee’s ability to repay the expenses. Advances
shall include any and all expenses actually and reasonably incurred by Indemnitee pursuing an
action to enforce Indemnitee’s right to indemnification under this Agreement, or otherwise and this
right of advancement, including expenses incurred preparing and forwarding statements to the
Company to support the advances claimed. Indemnitee acknowledges that the execution and delivery
of this Agreement shall constitute an undertaking providing that Indemnitee shall, to the fullest
extent required by law, repay the advance if and to the extent that it is ultimately determined by
a court of competent jurisdiction in a final judgment, not subject to appeal, that Indemnitee is
not entitled to be indemnified by the Company. The right to advances under this Section shall
continue until final disposition of any proceeding, including any appeal therein. This Section 6
shall not apply to any claim made by Indemnitee for which indemnity is excluded pursuant to Section
10(b).

     7. Notice and Other Indemnification Procedures.

          (a) Notification of Proceeding. Indemnitee will notify the Company in writing
promptly upon being served with any summons, citation, subpoena, complaint, indictment, information
or other document relating to any proceeding or matter which may be subject to indemnification or
advancement of expenses covered hereunder. The failure of Indemnitee to so notify the Company
shall not relieve the Company of any obligation which it may have to Indemnitee under this
Agreement or otherwise.

          (b) Request for Indemnification and Indemnification Payments. Indemnitee shall notify
the Company promptly in writing upon receiving notice of any demand, judgment or other requirement
for payment that Indemnitee reasonably believes to the subject to indemnification under the terms
of this Agreement, and shall request payment thereof by the Company. Indemnification payments
requested by Indemnitee under Section 3 hereof shall be

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made by the Company no later than sixty (60) days after receipt of the written request of
Indemnitee. Claims for advancement of expenses shall be made under the provisions of Section 6
herein.

          (c) Application for Enforcement. In the event the Company fails to make timely
payments as set forth in Sections 6 or 7(b) above, Indemnitee shall have the right to apply to any
court of competent jurisdiction for the purpose of enforcing Indemnitee’s right to indemnification
or advancement of expenses pursuant to this Agreement. In such an enforcement hearing or
proceeding, the burden of proof shall be on the Company to prove by that indemnification or
advancement of expenses to Indemnitee is not required under this Agreement or permitted by
applicable law. Any determination by the Company (including its Board of Directors, stockholders
or independent counsel) that Indemnitee is not entitled to indemnification hereunder, shall not be
a defense by the Company to the action nor create any presumption that Indemnitee is not entitled
to indemnification or advancement of expenses hereunder.

          (d) Indemnification of Certain Expenses. The Company shall indemnify Indemnitee
against all expenses incurred in connection with any hearing or proceeding under this Section 7
unless the Company prevails in such hearing or proceeding on the merits in all material respects.

     8. Assumption of Defense. In the event the Company shall be requested by Indemnitee
to pay the expenses of any proceeding, the Company, if appropriate, shall be entitled to assume the
defense of such proceeding, or to participate to the extent permissible in such proceeding, with
counsel reasonably acceptable to Indemnitee. Upon assumption of the defense by the Company and the
retention of such counsel by the Company, the Company shall not be liable to Indemnitee under this
Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same
proceeding, provided that Indemnitee shall have the right to employ separate counsel in such
proceeding at Indemnitee’s sole cost and expense. Notwithstanding the foregoing, if Indemnitee’s
counsel delivers a written notice to the Company stating that such counsel has reasonably concluded
that there may be a conflict of interest between the Company and Indemnitee in the conduct of any
such defense or the Company shall not, in fact, have employed counsel or otherwise actively pursued
the defense of such proceeding within a reasonable time, then in any such event the fees and
expenses of Indemnitee’s counsel to defend such proceeding shall be subject to the indemnification
and advancement of expenses provisions of this Agreement.

     9. Insurance. To the extent that the Company maintains an insurance policy or policies
providing liability insurance for directors, officers, employees, or agents of the Company or of
any subsidiary (“D&O Insurance”), Indemnitee shall be covered by such policy or policies in
accordance with its or their terms to the maximum extent of the coverage available for any such
director, officer, employee or agent under such policy or policies. If, at the time of the receipt
of a notice of a claim pursuant to the terms hereof, the Company has D&O Insurance in effect, the
Company shall give prompt notice of the commencement of such proceeding to the insurers in
accordance with the procedures set forth in the respective policies. The Company shall thereafter
take all necessary or desirable action to cause such insurers to pay, on behalf of

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Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of
such policies.

     10. Exceptions.

          (a) Certain Matters. Any provision herein to the contrary notwithstanding, the
Company shall not be obligated pursuant to the terms of this Agreement to indemnify Indemnitee on
account of any proceeding with respect to (i) remuneration paid to Indemnitee if it is determined
by final judgment or other final adjudication that such remuneration was in violation of law (and,
in this respect, both the Company and Indemnitee have been advised that the Securities and Exchange
Commission believes that indemnification for liabilities arising under the federal securities laws
is against public policy and is, therefore, unenforceable and that claims for indemnification
should be submitted to appropriate courts for adjudication, as indicated in Section 10(d) below);
(ii) a final judgment rendered against Indemnitee for an accounting, disgorgement or repayment of
profits made from the purchase or sale by Indemnitee of securities of the Company against
Indemnitee or in connection with a settlement by or on behalf of Indemnitee to the extent it is
acknowledged by Indemnitee and the Company that such amount paid in settlement resulted from
Indemnitee’s conduct from which Indemnitee received monetary personal profit, pursuant to the
provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended, or other provisions
of any federal, state or local statute or rules and regulations thereunder; (iii) a final judgment
or other final adjudication that Indemnitee’s conduct was in bad faith, knowingly fraudulent or
deliberately dishonest or constituted willful misconduct (but only to the extent of such specific
determination); or (iv) on account of conduct that is established by a final judgment as
constituting a breach of Indemnitee’s duty of loyalty to the Company or resulting in any personal
profit or advantage to which Indemnitee is not legally entitled. For purposes of the foregoing
sentence, a final judgment or other adjudication may be reached in either the underlying proceeding
or action in connection with which indemnification is sought or a separate proceeding or action to
establish rights and liabilities under this Agreement.

          (b) Claims Initiated by Indemnitee. Any provision herein to the contrary
notwithstanding, the Company shall not be obligated to indemnify or advance expenses to Indemnitee
with respect to proceedings or claims initiated or brought by Indemnitee against the Company or its
directors, officers, employees or other agents and not by way of defense, except (i) with respect
to proceedings brought to establish or enforce a right to indemnification under this Agreement or
under any other agreement, provision in the Bylaws or Certificate of Incorporation or applicable
law, or (ii) with respect to any other proceeding initiated by Indemnitee that is either approved
by the Board of Directors or Indemnitee’s participation is required by applicable law. However,
indemnification or advancement of expenses may be provided by the Company in specific cases if the
Board of Directors determines it to be appropriate.

          (c) Unauthorized Settlements. Any provision herein to the contrary notwithstanding,
the Company shall not be obligated pursuant to the terms of this Agreement to indemnify Indemnitee
under this Agreement for any amounts paid in settlement of a proceeding effected without the
Company’s written consent. Neither the Company nor Indemnitee shall unreasonably withhold consent
to any proposed settlement; provided, however, that the

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Company may in any event decline to consent to (or to otherwise admit or agree to any
liability for indemnification hereunder in respect of) any proposed settlement if the Company is
also a party in such proceeding and determines in good faith that such settlement is not in the
best interests of the Company and its stockholders.

          (d) Securities Act Liabilities. Any provision herein to the contrary notwithstanding,
the Company shall not be obligated pursuant to the terms of this Agreement to indemnify Indemnitee
or otherwise act in violation of any undertaking appearing in and required by the rules and
regulations promulgated under the Securities Act of 1933, as amended (the “Act”), or in any
registration statement filed with the SEC under the Act. Indemnitee acknowledges that paragraph
(h) of Item 512 of Regulation S-K currently generally requires the Company to undertake in
connection with any registration statement filed under the Act to submit the issue of the
enforceability of Indemnitee’s rights under this Agreement in connection with any liability under
the Act on public policy grounds to a court of appropriate jurisdiction and to be governed by any
final adjudication of such issue. Indemnitee specifically agrees that any such undertaking shall
supersede the provisions of this Agreement and to be bound by any such undertaking.

     11. Nonexclusivity and Survival of Rights. The provisions for indemnification and
advancement of expenses set forth in this Agreement shall not be deemed exclusive of any other
rights which Indemnitee may at any time be entitled under any provision of applicable law, the
Company’s Certificate of Incorporation, Bylaws or other agreements, both as to action in
Indemnitee’s official capacity and Indemnitee’s action as an agent of the Company, in any court in
which a proceeding is brought, and Indemnitee’s rights hereunder shall continue after Indemnitee
has ceased acting as an agent of the Company and shall inure to the benefit of the heirs,
executors, administrators and assigns of Indemnitee. The obligations and duties of the Company to
Indemnitee under this Agreement shall be binding on the Company and its successors and assigns
until terminated in accordance with its terms. The Company shall require any successor (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of
the business or assets of the Company, expressly to assume and agree to perform this Agreement in
the same manner and to the same extent that the Company would be required to perform if no such
succession had taken place.

          No amendment, alteration or repeal of this Agreement or of any provision hereof shall limit or
restrict any right of Indemnitee under this Agreement in respect of any action taken or omitted by
such Indemnitee in his or her corporate status prior to such amendment, alteration or repeal. To
the extent that a change in the Code, whether by statute or judicial decision, permits greater
indemnification or advancement of expenses than would be afforded currently under the Company’s
Certificate of Incorporation, Bylaws and this Agreement, it is the intent of the parties hereto
that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change. No
right or remedy herein conferred is intended to be exclusive of any other right or remedy, and
every other right and remedy shall be cumulative and in addition to every other right and remedy
given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or
employment of any right or remedy hereunder, or otherwise, by Indemnitee shall not prevent the
concurrent assertion or employment of any other right or remedy by Indemnitee.

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     12. Term. This Agreement shall continue until and terminate upon the later of: (a)
five (5) years after the date that Indemnitee shall have ceased to serve as a director or and/or
officer, employee or agent of the Company; or (b) one (1) year after the final termination of any
proceeding, including any appeal then pending, in respect to which Indemnitee was granted rights of
indemnification or advancement of expenses hereunder.

          No legal action shall be brought and no cause of action shall be asserted by or in the right
of the Company against an Indemnitee or an Indemnitee’s estate, spouse, heirs, executors or
personal or legal representatives after the expiration of five (5) years from the date of accrual
of such cause of action, and any claim or cause of action of the Company shall be extinguished and
deemed released unless asserted by the timely filing of a legal action within such five-year
period; provided, however, that if any shorter period of limitations is otherwise applicable to
such cause of action, such shorter period shall govern.

     13. Subrogation. In the event of payment under this Agreement, the Company shall be
subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who, at
the request and expense of the Company, shall execute all papers required and shall do everything
that may be reasonably necessary to secure such rights, including the execution of such documents
necessary to enable the Company effectively to bring suit to enforce such rights.

     14. Interpretation of Agreement. It is understood that the parties hereto intend this
Agreement to be interpreted and enforced so as to provide indemnification to Indemnitee to the
fullest extent now or hereafter permitted by law.

     15. Severability. If any provision of this Agreement shall be held to be invalid,
illegal or unenforceable for any reason whatsoever, (a) the validity, legality and enforceability
of the remaining provisions of the Agreement (including without limitation, all portions of any
paragraphs of this Agreement containing any such provision held to be invalid, illegal or
unenforceable, that are not themselves invalid, illegal or unenforceable) shall not in any way be
affected or impaired thereby; and (b) to the fullest extent possible, the provisions of this
Agreement (including, without limitation, all portions of any paragraph of this Agreement
containing any such provision held to be invalid, illegal or unenforceable, that are not themselves
invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested
by the provision held invalid, illegal or unenforceable and to give effect to Section 14 hereof.

     16. Amendment and Waiver. No supplement, modification, amendment, or cancellation of
this Agreement shall be binding unless executed in writing by the parties hereto. No waiver of any
of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other
provision hereof (whether or not similar) nor shall such waiver constitute a continuing waiver.

     17. Notice. Except as otherwise provided herein, any notice or demand which, by the
provisions hereof, is required or which may be given to or served upon the parties hereto shall be
in writing and, if by telegram, telecopy or telex, shall be deemed to have been validly served,
given or delivered when sent, if by overnight delivery, courier or personal delivery, shall be
deemed to have been validly served, given or delivered upon actual delivery and, if mailed, shall
be deemed to have been validly served, given or delivered three (3) business days after deposit in

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the United States mail, as registered or certified mail, with proper postage prepaid and
addressed to the party or parties to be notified at the addresses set forth on the signature page
of this Agreement (or such other address(es) as a party may designate for itself by like notice).
If to the Company, notices and demands shall be delivered to the attention of the Secretary of the
Company.

     18. Governing Law. This Agreement shall be governed exclusively by and construed
according to the laws of the State of Delaware, as applied to contracts between Delaware residents
entered into and to be performed entirely within Delaware.

     19. Counterparts. This Agreement may be executed in one or more counterparts, each of
which shall for all purposes be deemed to be an original but all of which together shall constitute
but one and the same Agreement. Only one such counterpart need be produced to evidence the
existence of this Agreement.

     20. Headings. The headings of the sections of this Agreement are inserted for
convenience only and shall not be deemed to constitute part of this Agreement or to affect the
construction hereof.

     21. Entire Agreement. This Agreement constitutes the entire agreement between the
parties with respect to the subject matter hereof and supersedes all prior agreements,
understandings and negotiations, written and oral, between the parties with respect to the subject
matter of this Agreement, including that certain Indemnity Agreement
dated «Date_2»; provided,
however, that this Agreement is a supplement to and in furtherance of the Company’s Certificate of
Incorporation, Bylaws, the Code and any other applicable law, and shall not be deemed a substitute
therefor, and does not diminish or abrogate any rights of Indemnitee thereunder.

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     IN WITNESS WHEREOF, the parties hereto have entered into this Agreement effective as
of the date first above written.

	 	 	 	 	 	 	 
	 	 	COMPANY
	 
	 	 	 	 	 	 
	 	 	ZARS Pharma, Inc., a Delaware corporation
	 
	 	 	 	 	 	 
	 

	 	By:
	 	 	 	 
	 	 	 	 	 
	 

	 	 	 	Name:
	 	«Name»
	 

	 	 	 	 	 	 
	 

	 	 	 	Title:	 	 
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	INDEMNITEE
	 
	 	 	 	 	 	 
	 	 	 
	 	 	Signature of Indemnitee
	 
	 	 	 	 	 	 
	 	 	 
	 	 	Print or Type Name of Indemnitee

10.exv10w7

 

Exhibit 10.7

ZARS, INC.

1997
STOCK OPTION PLAN, as amended

SECTION 1. PURPOSE

     The purpose of the Zars, Inc. 1997 Stock Option Plan (the “Plan”) is to further the
growth and development of Zars, Inc. (the “Company”) by affording an opportunity for stock
ownership to selected shareholders, employees, officers, directors, consultants and other
parties who provide services to or are otherwise connected with the Company and its
Subsidiaries (as defined in Section 2(q) below).

SECTION 2. DEFINITIONS

     Unless otherwise indicated, the following terms when used herein shall have the
following meanings:

     a. “Affiliate” shall mean, with respect to any person or entity, a person or entity
that directly or indirectly through one or more intermediaries, controls, or is controlled
by, or is under common control with, such person or entity.

     b. “Board of Directors” shall mean the Board of Directors of the Company.

     c. “Cause” shall mean a termination on account of (1) repeated refusal to obey written
directions of the Board of Directors or a superior officer of the Company (so long as such
directions do not involve illegal or immoral acts); (2) repeated acts of substance abuse
which are materially injurious to the Company, (3) fraud or dishonesty that is materially
injurious to the Company, (4) commission of a criminal offense involving money or other
property of the Company (excluding any traffic violations or similar violations), or (5)
commission of a criminal offense that constitutes a felony in the jurisdiction in which the
offense is committed.

     d. “Change in Control” shall be deemed to have occurred (1) at such time as a third
person, including a “group” as defined in Section 13(d)(3) of the Securities Exchange Act of
1934, as amended (the “Exchange Act”), becomes the beneficial owner of shares of the Company
having 50% or more of the total number of votes that may be cast for the election of Directors
of the Company, or (2) on the date on which the shareholders of the Company approve (i) any
agreement for a merger or consolidation in which the Company will not survive as an
independent corporation or (ii) any sale, exchange or other disposition of all or
substantially all of the Company’s assets, or (3) on the effective date of any sale, exchange
or other disposition of greater than 50% in fair market value of the Company’s assets. In
determining whether clause (1) of the preceding sentence has been satisfied, the third person
owning shares must be someone other than a person or an Affiliate of a person that, as of
March 1, 1997, was the beneficial owner of shares of the Company having 20% or more of the
total number of

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votes that may be cast for the election of Directors of the Company. The reasonable determination
of the Committee (as defined in Section 4.1 below) as to whether any one of the preceding events
has occurred shall be final and conclusive.

     e. “Code” shall mean the Internal Revenue Code of 1986, as amended.

     f. “Common Stock” shall mean the Company’s common stock, $.12 par value per share, and
any share or shares of the Company’s capital stock hereafter issued or issuable in
substitution for such shares.

     g. “Derivative Securities” shall mean (i) options and warrants to purchase or rights to
subscribe for Common Stock, (ii) securities by their terms convertible into or exchangeable
for Common Stock, and (iii) options and warrants to purchase or rights to subscribe for such
convertible or exchangeable securities; provided, however, that Derivative Securities shall
not include Options granted hereunder.

     h. “Director” shall mean a member of the Board of Directors.

     i. “Incentive Stock Option” shall mean any option granted to an eligible employee under
the Plan, which the Company intends at the time the option is granted to be an Incentive Stock
Option within the meaning of Section 422 of the Code,

     j. “Limited SAR” shall mean a stock appreciation right subject to the terms of Section
10.

     k. “Nonqualified Stock Option” shall mean any option granted to an eligible employee,
Director or consultant under the Plan which is not an Incentive Stock Option.

     l. “Option” shall mean and refer collectively to Incentive Stock Options and
Nonqualified Stock Options.

     m.
“Option Agreement” means the agreement specified in Section 7.2.

     n. “Optionee” shall mean any employee, Director or consultant who is granted an Option
under the Plan. “Optionee” shall also mean the personal representative of an Optionee and any
other person who acquires the right to exercise an Option by bequest or inheritance.

     o. “Parent” shall mean a parent corporation of the Company as defined in Section
424(e) of the Code.

     p. “Related Option” shall mean an Incentive Stock Option or a Nonqualified Stock Option
which has been granted in conjunction with a Limited SAR.

     q. “Subsidiary” shall mean a subsidiary corporation of the Company as defined in
Section 424(f) of the Code.

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SECTION 3. EFFECTIVE DATE

     The effective date of the Plan is March 21, 1997; provided, however, that the adoption
of the Plan by the Board of Directors is subject to approval and ratification by the
shareholders of the Company within 12 months of the effective date. Options granted under the
Plan prior to approval of the Plan by the shareholders of the Company shall be subject to
approval of the Plan by the shareholders of the Company.

SECTION 4. ADMINISTRATION

     4.1 Administrative Committee. The Plan shall be administered by a
Committee appointed by and serving at the pleasure of the Board of Directors, consisting of
not less than two Directors (the “Committee”). Subject to the foregoing, the number of
Directors comprising the Committee shall be determined from time to time by the Board of
Directors and may include the total number of Directors serving on the Board of Directors.
Unless otherwise adopted by resolution of the Board of Directors, the initial Committee shall
consist of all members of the Board of Directors. The Board of Directors may from time to time
remove members from or add members to the Committee, and vacancies on the Committee, howsoever
caused, shall be filled by the Board of Directors. In the event the Company becomes subject to
the periodic reporting requirements of the Exchange Act as a public company, the Committee
shall be composed of Directors satisfying any applicable requirements of Rule 16b-3 under the
Exchange Act.

     4.2 Committee Meetings and Actions. The Committee shall hold meetings at such
times and places as it may determine. A majority of the members of the Committee shall
constitute a quorum, and the acts of the majority of the members present at a meeting or a
consent in writing signed by all members of the Committee shall be the acts of the Committee
and shall be final, binding and conclusive upon all persons, including the Company, its
Subsidiaries, its shareholders, and all persons having any interest in Options which may be or
have been granted pursuant to the Plan.

     4.3 Powers of Committee. The Committee shall have the full and exclusive right to
grant and determine terms and conditions of all Options granted under the Plan and to
prescribe, amend and rescind rules and regulations for administration of the Plan. In granting
Options, the Committee shall take into consideration the contribution the Optionee has made or
may make to the success of the Company or its Subsidiaries and such other factors as the
Committee shall determine. Subject to the provisions of this Plan, the terms and conditions of
Options and Limited SARs granted hereunder need not be the same.

     4.4 Interpretation of Plan. The determination of the Committee as to any
disputed question arising under the Plan, including questions of construction and
interpretation, shall be final, binding and conclusive upon all persons, including the
Company, its Subsidiaries, its shareholders, and all persons having any interest in
Options or Limited SARs which may be or have been granted pursuant to the Plan.

3

 

     4.5 Indemnification. Each person who is or shall have been a member of the Committee
or of the Board of Directors shall be indemnified and held harmless by the Company against and from
any loss, cost, liability or expense that may be imposed upon or reasonably incurred in connection
with or resulting from any claim, action, suit or proceeding to which such person may be a party or
in which such person may be involved by reason of any action taken or failure to act under the Plan
and against and from any and all amounts paid in settlement thereof, with the Company’s approval,
or paid in satisfaction of a judgment in any such action, suit or proceeding against him, provided
such person shall give the Company an opportunity, at its own expense, to handle and defend the
same before undertaking to handle and defend it on such person’s own behalf. The foregoing right of
indemnification shall not be exclusive of, and is in addition to, any other rights of
indemnification to which any person may be entitled under the Company’s Articles 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.

SECTION 5. STOCK SUBJECT TO THE PLAN

     5.1 Number. The aggregate number of shares of Common Stock which may be issued
under Options granted pursuant to the Plan shall be 1,565,895. For purposes of this Section
5.1, (i) shares of Common Stock issued upon exercise of Options, and any shares of capital
stock of the Company received in respect thereof, whether by reason of a stock split, share
reclassification, stock dividend or otherwise, shall not be included in determining the number
of shares of Common Stock outstanding, and (ii) shares of Common Stock deliverable upon
exercise or conversion of Derivative Securities shall be deemed to be outstanding from the
date of issuance of such Derivative Securities. No further adjustment shall be made upon the
exercise or conversion of any such Derivative Securities. No adjustment shall be made (i) on
the expiration of any Derivative Securities without exercise or upon termination or any
conversion right, or (ii) in the event that the Company shall purchase or redeem any
outstanding shares of Common Stock, and the number of shares of Common Stock which may be
issued under Options granted pursuant to the Plan shall not be reduced as a result of any such
expiration, termination, purchase or redemption. The shares of Common Stock (i) issuable upon
exercise or conversion of such Derivative Securities or (ii) so purchased or redeemed, shall
not be deemed to be outstanding for purposes of adjusting the number of shares which may be
issued under Options following any future issuance of Common Stock or Derivative Securities by
the Company. Shares which may be issued under Options may consist, in whole or in part, of
authorized but unissued stock or treasury stock of the Company not reserved for any other
purpose. The Committee’s reasonable determination as to the number of shares at Common Stock
available for issuance under the Plan shall be final and conclusive.

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     5.2 Unused Stock. If any outstanding Option under the Plan expires or for any
other reason ceases to be exercisable, in whole or in part, other than upon exercise of the
Option or a Limited SAR, the shares which were subject to such Option and as to which the
Option had not been exercised shall continue to be available under the Plan.

     5.3 Adjustment for Change in Outstanding Shares. If there is any change, increase
or decrease, in the outstanding shares of Common Stock which is effected without receipt of
additional consideration by the Company, by reason of a stock dividend, recapitalization,
merger, consolidation, stock split, combination or exchange of stock, or other similar
circumstances, then in each such event, appropriate adjustments with respect to the aggregate
number of shares of stock available under the Plan, the number of shares of stock subject to
each outstanding Option and the Option prices shall be deemed to be made in order to prevent
the dilution or enlargement of any Optionee’s rights. In connection with such adjustments,
fractional shares shall be rounded to the nearest whole share. In no event shall any
adjustment made in the number of shares available under the Plan duplicate any adjustment made
pursuant to Section 5.1. Any Committee determination confirming or approving any adjustments
shall be final and conclusive.

     5.4
Reorganization or Sale of Assets. If the Company is merged or consolidated with another
corporation and the Company is not the surviving corporation, or if all or substantially all of
the assets of the Company are acquired by another entity, or if the Company is liquidated or
reorganized (each of such events being referred to hereinafter as a “Reorganization Event”),
the Committee shall, in its sole discretion, as to outstanding Options (1) make appropriate
provision for the substitution on an equitable basis of appropriate stock options, capital
stock or other property of the Company, or of the merged, consolidated or otherwise reorganized
corporation or for the assumption by the merged, consolidated or otherwise reorganized
corporation, (2) upon written notice to all Optionees, which notice shall be given not less
than 20 days prior to the effective date of the Reorganization Event, provide that all
unexercised Options and Limited SARs that are vested or exercisable must be exercised within a
specified number of days (which shall not be less than ten) of the date of such notice or such
Options and Limited SARs will terminate, (3) provide that all unexercised Options and Limited
SARs that are vested or exercisable shall be cashed out in exchange for cash, securities, other
property or any combination thereof, the fair market value (determined at the time of the
Reorganization Event) of which is equal to the difference, on a per share basis, between the
exercise price of the Common Stock under each Option and the estimated fair market value of the
cash, securities or other property issuable or exchangeable in respect of the Common Stock
pursuant to the Reorganization Event, or (4) make such other provision as shall be set forth in
the agreement or plan of merger, consolidation, liquidation or reorganization related to the
Reorganization Event. In response to any notice provided pursuant to clause (2) of the
preceding sentence, an Optionee may make an irrevocable election to exercise such Options
contingent upon and effective as of the effective date of the Reorganization Event. The
Committee may, in its sole discretion, in connection with any Reorganization Event which does
not also result in a Change in Control,

5

 

accelerate any vesting requirements or exercise dates with respect to any or all outstanding
Options on any basis and subject to such conditions as are deemed acceptable to the Committee,
which acceleration, whether in full or in part, need not be the same with respect to all Optionees.
In no event shall the occurrence of such Reorganization Event have the effect of postponing or
delaying any vesting requirements with respect to any outstanding Options. The Committee’s
determinations in making any acceleration shall be final and conclusive.

SECTION 6. ELIGIBILITY

     All full-time employees of the Company and its Subsidiaries shall be eligible to receive
both Incentive Stock Options and Nonqualified Stock Options under the Plan. Directors,
shareholders, officers, consultants and others who are not full-time employees of the Company
or its Subsidiaries shall be eligible to receive Nonqualified stock Options, but not Incentive
Stock Options, under the Plan. Any Director who is otherwise eligible to participate, who
makes an election in writing not to receive any grants under the Plan, shall not be eligible
to receive any such grants during the period set forth in such election.

SECTION 7. GRANT OF OPTIONS

     7.1 Grant of Options. The Committee may from time to time, in its sole
discretion, determine which of the eligible employees, Directors, officers and consultants of
the Company or its Subsidiaries should receive Options, the type of Options to be granted
(whether Incentive Stock Options or Nonqualified Stock Options), the number of shares subject
to such Options, whether the Optionee shall also receive Limited SARs, and the dates on which
such Options are to be granted. No employee may be granted Incentive Stock Options to the
extent that the aggregate fair market value (determined as of the time each Option is granted)
of the Common Stock with respect to which any such Options are exercisable for the first time
during a calendar year (under all incentive stock option plans of the Company and its Parent
and Subsidiaries) would exceed $100,000.

     7.2 Option Agreement. Each Option granted under the Plan shall be evidenced by a
written Option Agreement setting forth the terms upon which the Option is granted. Each Option
Agreement shall designate the type of Options being granted (whether Incentive Stock Options
or Nonqualified Stock Options), whether the Optionee shall also receive Limited SARs, and
shall state the number of shares of Common Stock, as designated by the Committee, to which
that Option pertains. More than one Option may be granted to an eligible person.

     7.3 Exercise Price. The exercise price per share of Common Stock under each
Option shall be determined by the Committee and stated in the Option Agreement. The option
price for Incentive Stock Options granted under the Plan shall not be less than 100% of the
fair market value (determined as of the day the Option is granted) of the shares subject to
the Option.

6

 

     7.4 Determination of Fair Market Value. If the Common Stock is listed upon an
established stock exchange or exchanges, then the fair market value per share shall be deemed
to be the average of the quoted closing prices of the Common Stock on such stock exchange or
exchanges on the day for which the determination is made, or if no sale of the Common Stock
shall have been made on any stock exchange on that day, an the next preceding day on which
there was such a sale. If the Common Stock is not listed upon an established stock exchange
but is traded on The NASDAQ Stock Market -National Market System, the fair market value per
share shall be deemed to be the closing price of the Common Stock in the National Market
System on the day for which the determination is made, or if there shall have been no trading
of the Common Stock on that day, on the next preceding day on which there was such trading. If
the Common Stock is not listed upon an established stock exchange and is not traded in the
National Market System, the fair market value per share shall be deemed to be the mean between
the dealer “bid” and “ask” closing prices of the Common Stock on The NASDAQ Market — Small Cap
System or in the over-the-counter market on the day for which the determination is made, or if
there shall have been no trading of the Common Stock on that day, on the next preceding day on
which there was such trading. If none of these conditions apply, the fair market value per
share shall be deemed to be an amount as determined in good faith by the Committee.

     7.5 Duration of Options. Each Option shall be of a duration as specified in the
Option Agreement; provided, however, that the term of each Option shall be no more than ten
years from the date on which the Option is granted and shall be subject to early termination
as provided herein.

     7.6 Additional Limitations on Grant. No Incentive Stock Option shall be granted
to an employee who, at the time the Incentive Stock Option is granted, owns stock (as
determined in accordance with Section 424(d) of the Code) representing more than 10% of the
total combined voting power of all classes of stock of the Company or of any Parent or
Subsidiary, unless the option price of such Incentive Stock Option is at least 110% of the
fair market value (determined as of the day the Incentive Stock Option is granted) of the
stock subject to the Incentive Stock Option and the Incentive Stock Option by its terms is not
exercisable more than five years from the date it is granted.

     7.7 Other Terms and Conditions. The Option Agreement may contain such other
provisions, which shall not be inconsistent with the Plan, as the Committee shall deem
appropriate, including, without limitation, provisions that relate the Optionee’s ability to
exercise an Option to the passage of time or the achievement of specific goals established
by the Committee or the occurrence of certain events specified by the Committee.

7

 

SECTION 8. EXERCISE OF OPTIONS

     8.1 Manner of Exercise. Subject to the limitations and conditions of the Plan or
the Option Agreement, an Option shall be exercisable, in whole or in part, from time to time,
by giving written notice of exercise to the Secretary of the Company, which notice shall
specify the number of shares of Common Stock to be purchased and shall be accompanied by (1)
payment in full to the Company of the purchase price of the shares to be purchased, plus (2)
payment in full of such amount as the Company shall determine to be sufficient to satisfy any
liability it may have for any withholding of federal, state or local income or other taxes
incurred by reason of the exercise of the Option, and (3) a representation meeting the
requirements of Section 13.2 if requested by the Company, and (4) a Shareholder Agreement or
Statement of Acceptance of the same meeting the requirements of Section 13.3 if requested by
the Company.

     8.2 Payment of Purchase Price. Payment for shares and withholding taxes shall be
in the form of (1) cash, (2) a certified or bank cashier’s check to the order of the Company,
(3) shares of previously-held Common Stock, properly endorsed to the Company, in an amount the
fair market value of which on the date of receipt by the Company (as determined in accordance
with Section 7.4) equals or exceeds the option price of the shares with respect to which the
Option is being exercised, if acceptable to the Committee, in its sole discretion, (4) delivery
(on a form prescribed by the Committee) of an irrevocable direction to a securities broker or
lender approved by the Committee to sell or pledge shares of Common Stock and to deliver all or
a part of the sales or loan proceeds to the Company in payment of all or part of the purchase
price and any withholding taxes, or (5) in any combination of the foregoing or in any other
form or method approved by the Committee, in its sole discretion, consistent with applicable
laws and regulations. Upon the exercise of any Option, the Company, in its sole discretion, may
make financing available to the Optionee for the payment of the purchase price on such terms
and conditions as the Committee shall specify.

SECTION 9. CHANGE IN CONTROL

     9.1
Committee’s Discretion. Notwithstanding any vesting requirements contained in any Option Agreement, upon the
occurrence of a Change in Control the Committee may, in its sole discretion, accelerate any
vesting requirements or exercise dates with respect to any or all outstanding Options on any
basis and subject to such conditions as are deemed acceptable to the Committee, which
acceleration, whether in full or in part, need not be the same with respect to all Optionees.
In no event shall the occurrence of a Change in Control have the effect of postponing or
delaying any vesting requirements with respect to any outstanding Options. The Committee’s
determinations in making any acceleration shall be final and conclusive.

     9.2
Acceleration of the unvested portion of outstanding Options in the
Event of a Change in Control. Notwithstanding any vesting
requirements contained in any Option Agreement,

     a)
upon the occurrence of a Change in Control, and

     b)
if one of the following events occurs subsequent to a Change in
Control:

     (i)
an employee is terminated without “Cause” (as defined
below);

     (ii)
the principal place of the performance of an employee’s
responsibilities and duties is changed to a location outside of a
thirty (30) mile radius from the Company’s then current place of
business; or

     (iii)
there is a substantial reduction in an employee’s
responsibilities, duties, or base pay, excluding Company-wide
initiatives, that has not been cured within thirty (30) days after
written notice from employee of such event,

     then
the unvested portion of the outstanding Options shall be accelerated
as follows:

     c)
CEO, CFO, CSO, EVP and Board of Directors: 100% of the
unvested portion of the outstanding Options held by the
Company’s then serving Chief Executive Officer, Chief Financial
Officer, Chief Scientific Officer, or any Executive Vice President of
the Company shall vest immediately, and;

     d)
Other Employees: 66 2/3% of the unvested portion of the
outstanding Options held by then employees of the Company shall vest
immediately.

     9.3
Cause. “Cause” shall specifically mean, (i)
conviction of a felony or any crime involving moral turpitude or
dishonesty; (ii) participation in a fraud or act of dishonesty
against the Company; (iii) willful breach of duties to the
Company or failure to follow lawful directions of the CEO or Board of
Directors, in either case if such breach or failure has not been cured
within thirty (30) days after written notice from the Company’s
CEO or Board of Directors of such event; or (iv) material breach
of the Proprietary Information, Inventions and Non-Competition
Agreement.

SECTION 10. LIMITED STOCK APPRECIATION RIGHTS

     The Committee may, but shall not be obligated to, grant Limited SARs pursuant to the
provisions of this Section 10 to any Optionee with respect to all or any portion of

8

 

the shares of Common Stock subject to the Related Option. The Limited SAR may be granted either
concurrently with the grant of the Related Option or at any time thereafter prior to the complete
exercise, termination, expiration or cancellation of the Related Option. Each Limited SAR shall be
exercisable to the extent and in the manner the Related Option is then exercisable and may be
subject to such additional limitations on exercisability as the Option Agreement may provide. In no
event shall a Limited SAR be exercisable after the expiration, termination or exercise of the
Related Option. Upon the exercise of Limited SARs, the Related Option shall be considered to have
been exercised to the extent of the number of shares of Common Stock with respect to which Limited
SARs are exercised, both for purposes of acquiring shares of Common Stock upon exercise of an
Option and for purposes of determining the number of shares of Common Stock which may be issued
pursuant to the Plan. Upon the exercise of Limited SARs, the Optionee shall receive in cash or
other immediately available funds an amount equal to the fair market value (as determined in
accordance with Section 7.4) on the date of exercise of such Limited SAR of the shares of Common
Stock with respect to which such Limited SAR shall have been exercised over the aggregate exercise
price of the Related Option.

SECTION 11. EFFECT OF TERMINATION OF EMPLOYMENT

     11.1 Termination of Employment Other Than Upon Death, Disability or For Cause. Upon
termination of an Optionee’s employment with the Company or a Subsidiary other than upon death or
disability (within the meaning of Section 22(e)(3) of the Code) and other than for Cause, an
Optionee may, at any time within three months after the date of termination but not later than the
date of expiration of the Option, exercise the Option to the extent the Optionee was entitled to do
so on the date of termination. Any Options not exercisable as of the date of termination and any
Options or portions of Options of terminated Optionees not exercised as provided herein shall
terminate.

     11.2 Termination By Death of Optionee. If an Optionee shall die while in the
employ of the Company or a Subsidiary or within a period of three months after the
termination of employment with the Company or a Subsidiary under circumstances to which
Section 11.1 apply, the personal representatives of the Optionee’s estate or the person or
persons who shall have acquired the Option from the Optionee by bequest or inheritance may
exercise the Option at any time within the year after the date of death but not later than
the expiration date of the Option, to the extent the Optionee was entitled to do so on the
date of death. Any Options not exercisable as of the date of death and any Options or
portions of Options of deceased Optionees not exercised as provided herein shall terminate.

     11.3 Termination By Disability of Optionee. Upon termination of an Optionee’s
employment with the Company or a Subsidiary by reason of the Optionee’s disability (within the
meaning of Section 22(e)(3) of the Code), the Optionee may exercise the Option at any time
within one year after the date of termination but not later

9

 

than the expiration date of the Option, to the extent the Optionee was entitled to do so on the
date of termination. Any Options not exercisable as of the date of termination and any Options or
portions of Options of disabled Optionees not exercised as provided herein shall terminate.

     11.4 Termination of Directors and Consultants. For purposes of this Section
11, a termination of employment shall be deemed to include the termination of a Director’s
service as a member of the Board of Directors and the termination of a consulting
arrangement in the case of consultants.

     11.5 Other Terminations. Subject to the provisions of Section 11.6 below, upon
termination of an Optionee’s employment with the Company or a Subsidiary under circumstances
other than those set forth in Sections 11.1, 11.2 or 11.3, including without limitation a
termination for Cause, or upon the sale of all of the shares of a shareholder who is an
Optionee, Options granted to the Optionee shall terminate immediately.

     11.6 Extension of Option Termination Date. The Committee, in its sole discretion,
may extend the termination date of an Option granted under the Plan without regard to the
preceding provisions of this Section 11. In such event, the termination date shall be a date
selected by the Committee, in its sole discretion, but not later than the latest expiration
date of the Option. Such extension may be made by resolution duly adopted by the Committee, in
the Option Agreement as originally executed or by amendment to the Option Agreement, either
prior to or following termination of an Optionee’s employment. The Committee shall have no
power to extend the termination date of an Incentive Stock Option beyond the periods provided
in Sections 11.1, 11.2 and 11.3 prior to the termination of the Optionee’s employment or
without the approval of the Optionee, which may be granted or withheld in the Optionee’s sole
discretion. Any extension of the termination date of an Incentive Stock Option shall be deemed
to be the grant of a new Option for purposes of the Code.

SECTION 12. NON-TRANSFERABILITY OF OPTION

     Options and Limited SARs granted pursuant to the Plan are not transferable by the
Optionee other than by will or the laws of descent and distribution and shall be exercisable
during the Optionee’s lifetime only by the Optionee. Upon any attempt to transfer, assign,
pledge, hypothecate or otherwise dispose of the Option or Limited SAR contrary to the
provisions hereof, or upon the levy of any attachment or similar process upon the Option or
Limited SAR, the Option and Limited SAR shall immediately become null and void.

SECTION 13. ISSUANCE OF SHARES

     13.1 Transfer of Shares to Optionee. As soon as practicable after the Optionee has
given the Company written notice of exercise of an Option and has otherwise met the
requirements of Section 8.1, the Company shall issue or transfer to the Optionee the number of
shares of Common Stock as to which the Option has been exercised and shall

10

 

deliver to the Optionee a certificate or certificates therefor, registered in the Optionee’s
name. In no event shall the Company be required to transfer fractional shares to the Optionee, and
in lieu thereof, the Company may pay an amount in cash equal to the fair market value (as
determined in accordance with Section 7.4) of such fractional shares on the date of exercise. If
the issuance or transfer of shares by the Company would for any reason, in the opinion of counsel
for the Company, violate any applicable federal or state laws or regulations, the Company may delay
issuance or transfer of such shares to the Optionee until compliance with such laws can reasonably
be obtained. In no event shall the Company be obligated to effect or obtain any listing,
registration, qualification, consent or approval under any applicable federal or state laws or
regulations or any contract or agreement to which the Company is a party with respect to the
issuance of any such shares.

     13.2 Investment Representation. Upon request by the Company, the Optionee shall
deliver to the Company a representation in writing that the purchase of all shares with
respect to which notice of exercise of the Option has been given by the Option is being made
for investment only and not for resale or with a view to distribution, and containing such
other representations and provisions with respect thereto as the Company may require. Upon
such request, delivery of such representation promptly and prior to the transfer or delivery
of any such shares and prior to the expiration of the option period shall be a condition
precedent to the right to purchase such shares.

     13.3 Shareholder Agreement. Upon request by the Company, the Optionee shall
execute and deliver to the Company a Shareholder Agreement or Statement of Acceptance of the
same in such form as the Company may provide at the time of exercise of the Option, including,
without limitation, in the form attached hereto as Annex A. Such Agreements may include,
without limitation, restrictions upon the Optionee’s right to transfer shares, including the
creation of an irrevocable right of first refusal in the Company and its shareholders, and
provisions requiring the Optionee to transfer the shares to the Company or the Company’s
shareholders upon a termination of employment. Upon such request, execution of the Shareholder
Agreement or Statement of Acceptance of the same by the Optionee prior to the transfer or
delivery of any shares and prior to the expiration of the option period shall be a condition
precedent to the right to purchase such shares, unless such condition is expressly waived in
writing by the Company.

SECTION 14. AMENDMENTS

     The Board of Directors may at any time and from time to time alter, amend, suspend or
terminate the Plan or any part thereof as it may deem proper, except that no such action shall
diminish or impair the rights under an Option previously granted. Unless the shareholders of
the Company shall have given their approval, the total number of shares for which Options may
be issued under the Plan shall not be increased, except as provided
in Sections 5.1 and 5.3,
and no amendment shall be made which reduces the price at which the Common Stock may be
offered under the Plan below the

11

 

minimum required by Section 7.3, except as provided in Section 5.3, or which materially modifies
the requirements as to eligibility for participation in the Plan. Subject to the terms and
conditions of the Plan, the Board of Directors may modify, extend or renew outstanding Options
granted under the Plan, or accept the surrender of outstanding Options to the extent not
theretofore exercised and authorize the granting of new Options in substitution therefore, except
that no such action shall diminish or impair the rights under an Option previously granted without
the consent of the Optionee.

SECTION 15. TERM OF PLAN

     This
Plan shall terminate on March 31, 2007; provided, however, that the Board of
Directors may at any time prior thereto suspend or terminate the Plan.

SECTION 16. RIGHTS AS SHAREHOLDER

     An Optionee shall have no rights as a shareholder of the Company with respect to any
shares of Common Stock covered by an Option until the date of the issuance of the stock
certificate for such shares.

SECTION 17. NO EMPLOYMENT RIGHTS

     Nothing contained in this Plan or in any Option granted under the Plan shall confer upon
any Optionee any right with respect to the continuation of such Optionee’s employment by the
Company or any Subsidiary or interfere in any way with the right of the Company or any
Subsidiary, subject to the terms of any separate written employment agreement to the contrary,
at any time, for any or no reason, to terminate such employment or to increase or decrease the
compensation of the Optionee from the rate in existence at the time of the grant of the
Option.

SECTION 18. GOVERNING LAW

     This Plan, and all Options granted under this Plan, shall be construed and shall take
effect in accordance with the laws of the State of Utah, without regard to the conflicts of
laws rules of such State.

     Adopted to be effective this 21st day of March, 1997.

	 	 	 	 	 	 	 
	 	 	Zars, Inc.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	/s/ Jie Zhang	 	 
	 

	 	Title:
	 	 
President
	 	 
	 

	 	 	 	 

	 	 

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ANNEX A

Form
of Shareholder Agreement

INCENTIVE STOCK OPTION AGREEMENT

	 	 	 	 	 	 	 
	OPTIONEE:
	 	 	 	 	 	 
	 	 	 	 	 
	DATE OF GRANT:	 	 	 	 
	 

	 	 	 	 

	 	 

          AGREEMENT between Zars, Inc. (the “Company”), and the above named Optionee
(“Optionee”), an employee of the Company or a Subsidiary thereof.

          The Company and Option agree as follows:

	1.	 	Grant of option.

     Optionee is hereby granted an Incentive Stock Option, within the meaning of Section
422 of the Code (the “Option”), to purchase Common Stock of the Company pursuant to the
Zars, Inc. 1997 Stock Option Plan (the “Plan”). The Option and this Agreement are subject to and
shall be construed in accordance with the terms and conditions of the Plan, as now or
hereafter in effect. Any terms which are used in this Agreement without being defined and
which are defined in the Plan shall have the meaning specified in the Plan.

	2.	 	Date of Grant.

     The date of the grant of the Option is the date first set forth above, the date of the
action by the Committee which administers the Plan (the “Committee”) in granting the same.

	3.	 	Number and Price of Shares.

     The number of shares as to which the Option is granted is the number set forth in
Schedule 3A to this Agreement. The purchase price per share is the amount set forth in
Schedule 3B to this Agreement.

	4.	 	Expiration Date.

     Unless sooner terminated as provided in Section 11 of the Plan, the Option shall expire
and terminate on the date set forth in Schedule 4 to this Agreement, and in no event shall
the Option be exercisable after that date.

13

 

	5.	 	Manner of Exercise.

     Except as provided in this Agreement, the Option shall be exercisable, in whole or in
part, from time to time, in the manner provided in Section 8 of the Plan.

	6.	 	Time of Exercise.

     The Option granted hereby shall become vested in and exercisable by Optionee in the
installments, on the dates and subject to the conditions set forth in Schedule 6 to this
Agreement; provided, however, that Optionee must have been continuously employed by the
Company or a Subsidiary thereof from the date of grant of the Option until the date specified
on Schedule 6 or until the conditions specified on Schedule 6 have been satisfied.

	7.	 	Shareholder Agreement.

     Upon exercise of the Option and at the request of the Company, the Optionee shall
execute and deliver to the Company a Shareholder Agreement or Statement of Acceptance
thereof as set forth in Section 13.3 of the Plan. Upon such request, execution and
delivery of the Shareholder Agreement or Statement of Acceptance thereof prior to the
transfer or delivery of any shares and prior to the expiration of the option period shall
be a condition precedent to the right to purchase such shares,

	8.	 	Nontransferability of Option.

     The Option is not transferable by Optionee other than by Will or the laws of descent and
distribution, and the Option shall be exercisable during Optionee’s lifetime only by Optionee.
Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of the Option
contrary to the provisions hereof, or upon the levy of any attachment or similar process upon
the Option, the Option shall immediately become null and void.

	9.	 	Withholding for Taxes.

     The Company shall have the right to deduct from Optionee’s salary any federal or state
taxes required by law to be withheld with respect to the exercise of the Option or any
disqualifying disposition of the Common Stock acquired upon exercise of the Option.

	10.	 	Legends.

     Certificates representing Common Stock acquired upon exercise of this Option may contain
such legends and transfer restrictions as the Company shall deem reasonably necessary or
desirable, including, without limitation, legends restricting transfer of the Common Stock
until there has been compliance with federal and state securities laws and until Optionee or
any other holder of the Common Stock has paid the

14

 

Company such amounts as may be necessary in order to satisfy any withholding tax liability of the
Company resulting from a disqualifying disposition described in Section 422(a) of the Code.

	11.	 	Employee Benefits.

     Optionee agrees that the grant and vesting of the Option and the receipt of shares of
Common Stock upon exercise of the Option will constitute special incentive compensation that
will not be taken into account as “salary” or “compensation” or “bonus” in determining the
amount of any payment under any pension, retirement, profit sharing or other remuneration plan
of the Company.

	12.	 	Amendment.

     Subject to the terms and conditions of the Plan, the Committee may modify, extend or
renew the Option, or accept the surrender of the Option to the extent not theretofore
exercised and authorize the granting of new Options in substitution therefor, except that no
such action shall diminish or impair the rights under the Option without the consent of the
Optionee.

	13.	 	Interpretation.

     The interpretations and constructions of any provision of and determinations on any
question arising under the Plan or this Agreement shall be made by the Committee, and all
such interpretations, constructions and determinations shall be final and conclusive as to
all parties.

	14.	 	Receipt of Plan.

     By entering into this Agreement, Optionee acknowledges (i) that he or she has received
and read a copy of the Plan and (ii) that this Agreement is subject to and shall be
construed in accordance with the terms and conditions of the Plan, as now or hereinafter in
effect.

	15.	 	Governing Law.

     This Agreement shall be construed and shall take effect in accordance with the laws of
the State of Utah, without regard to the conflicts of laws rules of such State.

	16.	 	Miscellaneous.

     This Agreement constitutes the entire understanding and agreement of the parties with
respect to the subject matter hereof and supersedes all prior and contemporaneous agreements
or understandings, inducements or conditions, express or implied, written or oral, between the
parties with respect hereto. If any provision of this Agreement, or the application thereof
shall for any reason and to any extent be invalid or unenforceable, the

15

 

remainder of this Agreement and the application of such provision to other circumstances shall be
interpreted so as best to reasonably effect the intent of the parties hereto. All notices or other
communications which are required to be given or may be given to either party pursuant to the terms
of this Agreement shall be in writing and shall be delivered personally or by registered or
certified mail, postage prepaid, to the address of the parties as set forth following the signature
of such party. Notice shall be deemed given on the date of delivery in the case of personal
delivery or on the delivery or refusal date as specified on the return receipt in the case of
registered or certified mail. Either party may change its address for such communications by giving
notice thereof to the other party in conformity with this Section 16.

     IN WITNESS WHEREOF, the Company by a duly authorized officer of the Company and
Optionee have executed this Agreement on                     , effective as of the date of grant.

	 	 	 	 	 	 	 
	 	 	Zars, Inc.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	Title:
	 	 

	 	 
	 

	 	 	 	 	 	 
	 

	 	Address:	 	 	 	 
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	 	 	 
	 
	 

	 	OPTIONEE	 	 
	 
	 	 	 	 	 	 
	 	 	 	 	 
	 

	 	Address:	 	 	 	 
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	 	 	 

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SCHEDULES

TO

INCENTIVE STOCK OPTION AGREEMENT

Schedule

	 	 	 	 	 	 	 	 	 
	3A	 	Number of Shares of Stock:	 	 	 	 
	 

	 	 	 	 	 	 

	 	 
	3B	 	Purchase Price per Share:	 	 	 	 
	 

	 	 	 	 	 	 

	 	 
	4

	 	Expiration Date:	 	 	 	 	 	 
	 	 	 	 	 	 	 
	6

	 	Vesting Schedule:	 	 	 	 	 	 
	 	 	 	 	 	 	 

	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Number of Shares	 	 
	 	 	Date	 	 	 	Which Become Exercisable	 	 
	 

	 	 

	 	 	 	 

	 	 
	 

	 	 

	 	 	 	 

	 	 
	 

	 	 

	 	 	 	 

	 	 
	 

	 	 

	 	 	 	 

	 	 
	 

	 	 

	 	 	 	 

	 	 
	 

	 	 

	 	 	 	 

	 	 
	 

	 	 

	 	 	 	 

	 	 
	 

	 	 

	 	 	 	 

	 	 
	 

	 	 

	 	 	 	 

	 	 
	 

	 	 

	 	 	 	 

	 	 
	 

	 	 

	 	 	 	 

	 	 

     Additional
Conditions to Vesting: Notwithstanding the foregoing, no portion of the Option
shall be vested and exercisable until the following conditions have been satisfied:

 

 

 

17

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