Document:

Exhibit 10.4

 

MATHSTAR, INC.

AMENDED AND RESTATED

2004 LONG-TERM INCENTIVE PLAN

 

Effective Date: 
October 8, 2004

 

 

MATHSTAR, INC.

AMENDED AND RESTATED

2004 LONG-TERM INCENTIVE PLAN

 

Table of Contents

 

	
  Section

  	
   

  
	
   

  	
   

  
	
  1.
  Purpose of the Plan

  	
   

  
	
   

  	
   

  
	
  2. Definitions

  	
   

  
	
   

  	
   

  
	
  3. Shares Subject to the Plan

  	
   

  
	
   

  	
   

  
	
  4.
  Administration

  	
   

  
	
   

  	
   

  
	
  5. Term of Plan

  	
   

  
	
   

  	
   

  
	
  6. Terms and Conditions of Qualified Options

  	
   

  
	
   

  	
   

  
	
  7. Terms and Conditions of Non-Qualified Options

  	
   

  
	
   

  	
   

  
	
  8. Automatic Grants of Director Options to Non-employee Directors

  	
   

  
	
   

  	
   

  
	
  9. Terms and Conditions of Stock Appreciation Rights

  	
   

  
	
   

  	
   

  
	
  10. Awards of Restricted Stock

  	
   

  
	
   

  	
   

  
	
  11. Other Awards

  	
   

  
	
   

  	
   

  
	
  12. Performance-Based Awards

  	
   

  
	
   

  	
   

  
	
  13. Adjustments Upon Certain Events

  	
   

  
	
   

  	
   

  
	
  14. Shares Acquired for Investment

  	
   

  
	
   

  	
   

  
	
  15. No Right to Employment or Awards

  	
   

  
	
   

  	
   

  
	
  16. Other Benefit and Compensation Programs

  	
   

  
	
   

  	
   

  
	
  17.
  Successors and Assigns

  	
   

  
	
   

  	
   

  
	
  18. Nontransferability of Awards; Designation of Beneficiary

  	
   

  
	
   

  	
   

  
	
  19. Amendments or Termination

  	
   

  
	
   

  	
   

  
	
  20. International Participants

  	
   

  
	
   

  	
   

  
	
  21. General

  	
   

  
	
   

  	
   

  
	
  22.
  Effective Date

  	
   

  

 

ii

 

MATHSTAR, INC.

AMENDED AND RESTATED

2004 LONG-TERM INCENTIVE PLAN

 

1.                                      Purpose of the Plan

 

The purpose of
the Plan is to aid the Company and its Affiliates in recruiting and retaining
employees, independent contractors and other service providers to the Company and
to motivate such employees, independent contractors and other service providers
to exert their best efforts on behalf of the Company and its Affiliates by
providing incentives through the granting of Awards. The Company expects that
it will benefit from the stock ownership opportunities and other benefits
provided to such Participants under this Plan to encourage alignment of their
interest in the Company’s success with that of other stakeholders.

 

2.                                       Definitions

 

The following capitalized
terms used in the Plan have the respective meanings set forth in this Section;
other terms are defined elsewhere in the Plan:

 

(a)                                  “Affiliate” means a
Parent or Subsidiary.

 

(b)                                 “Award” means an
Option, Stock Appreciation Right, Share of Restricted Stock, Other Stock-Based
Award or Other Cash-Based Award granted pursuant to the Plan.

 

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

 

(d)                                 “Code” means the
Internal Revenue Code of 1986, as amended, or any successor thereto.

 

(e)                                  “Committee” means the
Compensation Committee of the Board or, if the Board has not appointed a
separate Compensation Committee, the entire Board.

 

(f)                                    “Common Stock” means
the Company’s common stock, $0.01 par value per share.

 

(g)                                 “Company” means
MathStar, Inc., a Minnesota corporation.

 

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

 

(i)                                     “Director Option”
means a Non-Qualified Option granted to a Director pursuant to
Section 8.

 

(j)                                     “Effective Date”
means the earlier of the date the Company’s initial public offering is declared
effective by the Securities and Exchange Commission or December 31, 2005.

 

 

(k)                                  “Employee” means any
person, including officers and Directors, employed by the Company or any
Subsidiary.  The payment to a Director by
the Company of directors’ fees shall not be sufficient to constitute employment
by the Company.

 

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

 

(m)                               “Exercise Price” means the purchase price per Share under
the terms of an Option.

 

(n)                                 “Fair Market Value” means,
on a given date, (i) if the Common Stock is
listed or admitted to unlisted trading privileges on any national securities
exchange, the average of the closing sales prices of the Common Stock on the
end of any day on all national securities exchanges on which the Common Stock
may at the time be listed or, if there have been no sales on any such exchange
on any day, the average of the highest bid and lowest asked prices on all such
exchanges at the end of such day or, (ii) if the Common Stock is not so listed
or admitted but transactions in the Common Stock are reported on The NASDAQ
Stock Market, the closing price quoted on the The NASDAQ Stock Market on such
day, or (iii) if the Common Stock is not so listed or admitted to unlisted
trading privileges or quoted on The NASDAQ Stock Market, and bid and asked
prices therefor in the domestic over-the-counter market are reported by Pink
Sheets LLC (or any comparable reporting service), the average of the closing
bid and asked prices on such day as reported by Pink Sheets LLC (or any
comparable reporting service), or (iv) if the Common Stock is not listed on any
national securities exchange or quoted on The NASDAQ Stock Market or in the
domestic over-the-counter market, the fair value of the Common Stock determined
by the Committee in good faith in the exercise of its reasonable discretion.

 

(o)                                 “Non-employee
Director” means a Director
who is not an Employee of the Company.

 

(p)                                 “Non-Qualified Option”
means a stock option granted pursuant to Section 7 that does not qualify
as an incentive stock option as defined in Section 422 of the Code.

 

(q)                                 “Option” means a
Qualified Option or a Non-Qualified Option (including a Director Option).

 

(r)                                    “Other Stock-Based Awards” means
Awards granted pursuant to Section 11(a) or Section 12.

 

(s)                                  “Other Cash-Based
Awards” means Awards granted pursuant to Section 11(b) or
Section 12.

 

(t)                                    “Parent” means any “parent
corporation” of the Company, as such term is defined in Section 424(e) of the
Code or any successor provision.  The
term shall include any Parent which becomes such after adoption of the Plan.

 

2

 

(u)                                 “Participant” means
an employee of the Company or an Affiliate who is selected by the Committee to
participate in the Plan; a Director of the Company who receives Director
Options or other Awards under the Plan; or any consultant, agent, advisor or
independent contractor who is selected by the Committee to participate in the
Plan and who renders bona fide services to the Company or an Affiliate that
(i) are not in connection with the offer and sale of the Company’s
securities in a capital-raising transaction and (ii) do not directly or
indirectly promote or maintain a market for the Company’s securities.  Except where the context otherwise requires,
references in this Plan to “employment” and related terms shall apply to
services in any such capacity.

 

(v)                                 “Performance-Based Awards” means
Options, Awards of Restricted Stock, Other Stock-Based Awards and Other
Cash-Based Awards granted pursuant to Section 12.

 

(w)                               “Plan” means this MathStar, Inc. 2004 Long-Term
Incentive Plan, as amended or supplemented from time to time.

 

(x)                                   “Qualified Option”
means a stock option granted pursuant to Section 6 that is intended to
qualify as an incentive stock option under Section 422 of the Code.

 

(y)                                 “Restricted Stock” means
any shares of Common Stock granted under Section 10.

 

(z)                                   “Stock Appreciation Right” means
a stock appreciation right granted pursuant to Section 9.

 

(aa)                            “Subsidiary” means any “subsidiary corporation” of the
Company, as such term is defined in Section 424(f) of the Code.  The term shall include any Subsidiary which
becomes such after adoption of the Plan.

 

3.                                      Shares Subject to
the Plan

 

The total
number of shares of Common Stock which may be issued under the Plan is
4,000,000 shares.  The full number of
shares of Common Stock available under the Plan may be used for any Option or
other type of Award.  The aggregate
number of shares of Common Stock available under the Plan shall be subject to
adjustment upon the occurrence of any of the events and in the manner set forth
in Section 13.  If an Option or Stock
Appreciation Right expires or is terminated, surrendered or cancelled without
having been fully exercised, if Restricted Stock is forfeited, or if any other
grant of an Award results in any shares of Common Stock not being issued, the
shares of Common Stock covered by such Award shall again be available for use
under the Plan.  Any shares of Common
Stock which are used as full or partial payment to the Company upon exercise of
an Option or for any other Award that requires a payment to the Company and any
shares surrendered or withheld to pay employment taxes or other withholding
obligations also shall be available for the grant of Awards under the
Plan.  The issuance of shares of Common
Stock upon the exercise or satisfaction of an Award shall reduce the total
number of shares of Common Stock available under the Plan.  No fractional shares

 

3

 

of Common
Stock will be issued under the Plan, but instead any fractional Share will be
rounded downward to the next lowest whole Share.

 

4.                                      Administration

 

(a)                                  Delegation of Authority.  The Plan shall be administered by the
Committee.  The Committee shall consist
of the Board, unless the Board appoints a Committee consisting of at least two
but fewer than all the members of the Board. 
If the Committee does not consist of the entire Board, the Committee’s
members shall serve at the pleasure of the Board, which may from time to time
appoint members in substitution for members previously appointed and fill
vacancies, however caused, in the Committee. 
The Committee may select one of its members as its Chairperson and shall
hold its meetings at such times and places as it may determine.  A majority of the Committee’s members shall
constitute a quorum.  All determinations
of the Committee made at a meeting in which a quorum is present shall be made
by a majority of its members present at the meeting.  Any decision or determination of the
Committee reduced to writing and signed by a majority of the members shall be
fully as effective as if it had been made by a majority vote at a meeting duly
called and held.

 

(b)                                 Authority
of Committee.  The Committee shall have exclusive power to
make Awards and to determine when and to whom Awards shall be granted, and the
form, amount and other terms and conditions of each Award, subject to the
provisions of this Plan.  The Committee
may determine whether, to what extent and under what circumstances Awards may
be settled, paid or exercised in cash, shares of Common Stock or other Awards or other property, or
cancelled, forfeited or suspended.  The
Committee shall have the authority to interpret this Plan and any Award or
agreement made under this Plan, to establish, amend, waive and rescind any
rules and regulations relating to the administration of this Plan, to determine
the terms and provisions of any agreements entered into hereunder (not
inconsistent with this Plan), and to make all other determinations necessary or
advisable for the administration of this Plan. 
The Committee may correct any defect, supply any omission or reconcile
any inconsistency in this Plan or in any Award or agreement in the manner and
to the extent it shall deem desirable. 
The determinations of the Committee in the administration of this Plan,
as described herein, shall be final, binding and conclusive.

 

(c)                                  Indemnification.  To
the full extent permitted by law, each member and former member of the
Committee and each person to whom the Committee delegates or has delegated
authority under this Plan shall be entitled to indemnification by the Company
against and from any loss, liability, judgment, damages, cost and reasonable
expense incurred by such member, former member or other person by reason of any
action taken, failure to act or determination made in good faith under or with
respect to this Plan.

 

(d)                                 Tax Withholding.  The Committee shall have the right to require
payment by a Participant of any amount it may determine to be necessary to
withhold for

 

4

 

federal,
state, local, non-U.S. income, payroll or other taxes as a result of the
exercise, grant or vesting of an Award. 
With the consent of the Committee, the Participant may pay a portion or
all of such withholding taxes by delivering shares of Common Stock to the
Company or having the Company withhold shares of Common Stock with a Fair
Market Value or cash equal to the amount of such taxes that would have
otherwise been payable by the Participant.

 

(e)                                  Deferral.  In the discretion of the Committee, in
accordance with any procedures established by the Committee and consistent with
the provisions of Section 162(m) of the Code when applied to Participants
who may be “covered employees” thereunder, a Participant may be permitted to
defer the issuance of shares of Common Stock or cash deliverable upon the
exercise of an Option or Stock Appreciation Right, vesting of Restricted Stock,
or satisfaction of Other Stock-Based Awards or Other Cash-Based Awards, for a
specified period or until a specified date, but not beyond the expiration of
the term of such Option, Stock Appreciation Right, Restricted Stock grant, or
other Award.

 

(f)                                    Dividends or Dividend Equivalents.  If the Committee so determines, any Award
granted under the Plan may be credited with dividends or dividend equivalents
paid with respect to any underlying shares of Common Stock.  The Committee may apply any restrictions to
the dividends or dividend equivalents that the Committee deems appropriate and
may determine the form of payment, including cash, shares of Common Stock,
Restricted Stock or otherwise.

 

5.                                      Term of Plan

 

This Plan
shall commence on October 8, 2004 (the “Effective Date”) and shall terminate on
October 7, 2014 or at such earlier date as the Board of Directors shall
determine.  The termination of this Plan
shall not affect any Awards then outstanding under the Plan.  No Award may be granted under the Plan after
October 7, 2014.

 

6.                                      Terms
and Conditions of Qualified Options

 

Options
granted under the Plan may be Qualified Options.  When the Committee approves a grant of a
Qualified Option to a Participant, it shall prepare or cause to be prepared an
option agreement (“Qualified Option Agreement”) setting forth the terms of the
Qualified Option, and such Qualified Option Agreement shall be signed on behalf
of the Company and by the Participant. 
Qualified Options granted under this Plan shall be subject to the foregoing
and to the following terms and conditions and to such other terms and
conditions, not inconsistent therewith, as the Committee shall determine:

 

(a)                                  Number of Shares and Exercise Price.  The Qualified Option Agreement shall state
the total number of shares of Common Stock subject to the Qualified Option it
evidences.  The Exercise Price per share
of Common Stock shall be determined by the Committee and set forth in the
Qualified Option Agreement.  The Exercise
Price of any Qualified Option may be less than, equal to or greater than Fair
Market Value.  The number of shares of
Common Stock subject to the Qualified

 

5

 

Option and the
Exercise Price shall be adjustable as provided in Section 12(a) of this Plan.

 

(b)                                 Exercisability; Term.  Qualified Options granted under the Plan
shall be exercisable at such time(s) and upon such terms and conditions as may
be determined by the Committee.  However,
subject to Section 6(l), a Qualified Option shall not be exercisable more than
ten (10) years after the date it is granted. 
The period during which a Qualified Option may be exercised once it is
granted may not be reduced, except as provided in Sections 6(e), (f) and (g) of
this Plan.

 

(c)                                  Exercise of Qualified Options.
Except as otherwise provided in the applicable Qualified Option Agreement, a
Qualified Option may be exercised for all, or from time to time any part, of
the shares of Common Stock for which it is then exercisable.  For purposes of this Section 6, the exercise
date of a Qualified Option shall be the date a written notice of exercise and
full payment of the purchase price are received by the Company in accordance
with this Section 6(c) and Section 6(d) below. 
The purchase price for the shares of Common Stock as to which a
Qualified Option is exercised shall be paid to the Company in cash or its
equivalent, such as by check or wire transfer, or, if provided in the Qualified
Option Agreement or with the consent of the Committee:  (i) in shares of Common Stock having a Fair
Market Value equal to the aggregate Exercise Price of the shares of Common
Stock being purchased and satisfying such other requirements as may be imposed
by the Committee; provided, that such shares were then purchased on the open
market or have been held by the Participant for at least six months (or such
other period as established from time to time by the Committee in order to
avoid adverse accounting treatment under generally accepted accounting
principles); (ii) partly in cash and partly in such shares; or (iii) if there
is a public market for the shares of Common Stock at such time, through the
delivery of irrevocable instructions to a broker to sell shares of Common Stock
obtained upon the exercise of the Qualified Option and to deliver promptly to
the Company an amount out of the proceeds of such sale equal to the aggregate
Exercise Price for the shares being purchased.

 

(d)                                 Manner of Exercise of Qualified
Options.  A Qualified
Option shall be exercised only by the Participant (i) delivering a completed
and signed written notice of exercise to the Company in the form prescribed by
the Company specifying the number of shares of Common Stock as to which the
Qualified Option is being exercised; (ii) delivering the original Qualified Option
Agreement to the Company; and (iii) paying to the Company the full amount of
the Exercise Price for the number of shares of Common Stock with respect to
which the Qualified Option is being exercised as provided in Section 6(c)
above.  When shares of Common Stock are
issued to the Participant upon the exercise of that Participant’s Qualified
Option, the fact of such issuance shall be noted on the Qualified Option
Agreement by the Company before the Qualified Option Agreement is returned to
the Participant.  When all shares of
Common Stock covered by the Qualified Option Agreement have been issued by the
Company to the Participant or when

 

6

 

the Qualified
Option expires, the Participant shall deliver the Qualified Option Agreement to
the Company, which shall cancel it. 
After the receipt by the Company of the written notice of exercise and
payment in full of the Exercise Price in accordance with Sections 6(c) and
6(d), the Company shall delivery to the Participant exercising the Qualified
Option stock certificates evidencing the number of shares with respect to which
the Qualified Option has been exercised, issued in the Participant’s name;
provided, however, that such delivery shall be deemed effective for all
purposes when the Company or its stock transfer agent (if any) has deposited
such stock certificates in the United States mail, postage prepaid, addressed
to the Participant at the address specified in the written notice of exercise.

 

(e)                                  Termination of Employment or
Service.  If a Participant
who holds a Qualified Option shall cease to be employed by or performing
services for the Company or any Affiliate for any reason other than death,
unless the applicable Qualified Option Agreement provides otherwise, such
Qualified Option shall immediately and automatically terminate and be
forfeited, whether or not exercisable, and neither such Participant nor any of
the Participant’s heirs, personal representatives, successors or assigns shall
have any rights with respect to such Qualified Option.  Notwithstanding the foregoing, if an
independent contractor or other non-employment relationship between the
Participant and the Company or an Affiliate is terminated due to the commencement
of an employment relationship with the Company or an Affiliate, this provision
shall apply only upon termination of both the independent contractor and
employment relationship between the Participant and the Company or an
Affiliate.  In the case of a Participant
who is a natural person and who ceases to be employed by or performing services
for the Company or an Affiliate due to his or her disability (with disability
being determined in the sole discretion of the Committee), the Committee, at
its discretion, may permit exercise of the portion of the Qualified Option that
is exercisable upon such termination of employment until the earlier of the
originally stated date of termination of the Qualified Option or up to one (1)
year after such termination of employment or other service.

 

(f)                                    Death of Participant.  Unless otherwise provided in the applicable
Qualified Option Agreement, if a Participant who is a natural person shall
cease to be employed by or performing services for the Company or any Affiliate
as a result of the Participant’s death, any Qualified Option held by such
Participant may be exercised to the same extent that the Participant would have
been entitled to exercise it at the date of death and may be exercised within a
period of one (1) year after the date of death, but in no case later than the
expiration date of such Qualified Option. 
Such Qualified Option shall be exercised pursuant to Sections 6(c) and
(d) of this Plan by the person or persons to whom the Participant’s rights
under the Qualified Option shall pass by will or the laws of descent and
distribution.

 

(g)                                 Termination of Qualified Options Not
Exercisable.  Unless the
applicable Qualified Option Agreement provides otherwise, upon termination of a

 

7

 

Participant’s
employment or other services with the Company or an Affiliate for any reason,
including by reason of death or disability of the Participant, any portion of
the Participant’s Qualified Option that is not exercisable shall automatically
and immediately terminate as to such Participant, and the shares of Common
Stock subject to such portion of the Qualified Option shall be available for
the grant of Awards under the Plan.

 

(h)                                 No Obligation to Exercise Qualified
Option.  The grant of a
Qualified Option under the Plan shall impose no obligation on the Participant
to exercise such Qualified Option.

 

(i)                                     Eligible Recipients.  Qualified Options may be granted only to
persons who are employees of the Company or an Affiliate.

 

(j)                                     Exercise Price.  Subject to the provisions of Section 6(l),
the exercise price of shares of Common Stock that are subject to a Qualified
Option shall not be less than 100% of the Fair Market Value of such shares at
the time the Qualified Option is granted, as determined in good faith by the Committee.

 

(k)                                  Limit on Exercisability.  The aggregate Fair Market Value (determined
at the time the Qualified Option is granted) of the shares of Common Stock with
respect to which Qualified Options are exercisable by the Participant for the
first time during any calendar year, under this Plan or any other plan of the
Company or any Affiliate, shall not exceed $100,000.  To the extent a Qualified Option exceeds this
$100,000 limit, the portion of the Qualified Option in excess of such limit
shall be deemed a Non-Qualified Option.

 

(l)                                     Restrictions for Certain
Shareholders.  The
purchase price of shares of Common Stock that are subject to a Qualified Option
granted to an employee of the Company or any Affiliate who, at the time such
Qualified Option is granted, owns 10% or more of the total combined voting
power of all classes of stock of the Company or of any Affiliate, shall not be
less than 110% of the Fair Market Value of such shares on the date such
Qualified Option is granted, and such Qualified Option may not be exercisable
more than five (5) years after the date on which it is granted.  For the purposes of this subparagraph, the
rules of Section 424(d) of the Code shall apply in determining the stock
ownership of any employee of the Company or any Affiliate.

 

(m)                               Limits on Transferability and
Exercise of Qualified Options. 
Qualified Options shall not be transferable except by will or the laws
of descent and distribution, and Qualified Options shall be exercisable during
a Participant’s lifetime only by such Participant.

 

(n)                                 Effect of Not Meeting Requirements.  Subject to the discretion of the Committee to
provide otherwise, if the terms of a Qualified Option do not meet any
requirements of this Plan or the Code necessary to be treated as a Qualified

 

8

 

Option under
the Code, such Qualified Option shall not terminate but shall be a
Non-Qualified Option granted under this Plan.

 

7.                                      Terms and Conditions of
Non-Qualified Options

 

Options granted under the
Plan may be Non-Qualified Options.  When
the Committee approves a grant of a Non-Qualified Option to a Participant, it
shall prepare or cause to be prepared an option agreement (“Non-Qualified
Option Agreement”) setting forth the terms of the Non-Qualified Option, and
such Non-Qualified Option Agreement shall be signed on behalf of the
Company and by the Participant. 
Non-Qualified Options granted under this Plan shall be subject to the foregoing and to the
following terms and conditions and to such other terms and conditions, not
inconsistent therewith, as the Committee shall determine; provided, however,
that Non-Qualified Options that are Director Options shall be
governed by the provisions of Section 8 to the extent that they are
inconsistent with the provisions of this Section 7.

 

(a)                                  Number of Shares and Exercise Price.  The Non-Qualified Option Agreement shall
state the total number of shares of Common Stock subject to the Non-Qualified
Option it evidences.  The Exercise Price
per share of Common Stock shall be determined by the Committee and set forth in
the Non-Qualified Option Agreement. 
The Exercise Price of any Non-Qualified Option may be less than, equal
to or greater than Fair Market Value. 
The number of shares of Common Stock subject to the Non-Qualified Option
and the Exercise Price shall be adjustable as provided in Section 13(a) of this
Plan.

 

(b)                                 Exercisability; Term.  Non-Qualified
Options granted under the Plan shall be exercisable at such time(s) and upon
such terms and conditions as may be determined by the Committee, but in no
event shall a Non-Qualified Option be exercisable more than ten (10) years
after the date it is granted, except as the Committee may determine under
Section 13(d) of the Plan.  The period
during which a Non-Qualified Option may be exercised once it is granted may not
be reduced, except as provided in Sections 7(e), (f) and (g) of this Plan.

 

(c)                                  Exercise of Non-Qualified Options. Except as otherwise provided in the
applicable Non-Qualified Option Agreement, a Non-Qualified Option may be
exercised for all, or from time to time any part, of the shares of Common Stock
for which it is then exercisable.  For
purposes of this Section 7, the exercise date of a Non-Qualified Option
shall be the date a written notice of exercise and full payment of the purchase
price are received by the Company in accordance with this Section 7(c) and
Section 7(d) below.  The purchase price
for the shares of Common Stock as to which a Non-Qualified Option is exercised
shall be paid to the Company in cash or its equivalent, such as by check or
wire transfer or, if provided in the Non-Qualified Option Agreement or
with the consent of the Committee:  (i)
in shares of Common Stock having a Fair Market Value equal to the aggregate
Exercise Price of the shares of Common Stock being purchased and satisfying
such other requirements as may be imposed by the Committee; provided, that such
shares were then purchased on the open market or have been held by the
Participant for at least six months (or such other period as established

 

9

 

from time to
time by the Committee in order to avoid adverse accounting treatment under
generally accepted accounting principles); (ii) partly in cash and partly in
such shares; or (iii) if there is a public market for the shares of Common
Stock at such time, through the delivery of irrevocable instructions to a
broker to sell shares of Common Stock obtained upon the exercise of the Non-Qualified
Option and to deliver promptly to the Company an amount out of the proceeds of
such sale equal to the aggregate Exercise Price for the shares being purchased.

 

(d)                                 Manner of Exercise of Non-Qualified
Options.  A Non-Qualified
Option shall be exercised only by the Participant (i) delivering a completed
and signed written notice of exercise to the Company in the form prescribed by
the Company specifying the number of shares of Common Stock as to which the
Non-Qualified Option is being exercised; (ii) delivering the original Non-Qualified
Option Agreement to the Company; and (iii) paying to the Company the full
amount of the Exercise Price for the number of shares of Common Stock with
respect to which the Non-Qualified Option is being exercised as provided in
Section 7(c) above.  When shares of Common
Stock are issued to the Participant upon the exercise of that Participant’s
Non-Qualified Option, the fact of such issuance shall be noted on the Non-Qualified
Option Agreement by the Company before the Non-Qualified Option Agreement
is returned to the Participant.  When all
shares of Common Stock covered by the Non-Qualified Option Agreement have
been issued by the Company to the Participant or when the Non-Qualified
Option expires, the Participant shall deliver the Non-Qualified Option
Agreement to the Company, which shall cancel it.  After the receipt by the Company of the
written notice of exercise and payment in full of the Exercise Price in
accordance with Sections 7(c) and 7(d), the Company shall delivery to the
Participant exercising the Non-Qualified Option stock certificates evidencing
the number of shares with respect to which the Non-Qualified Option has been
exercised, issued in the Participant’s name; provided, however, that such
delivery shall be deemed effective for all purposes when the Company or its
stock transfer agent (if any) has deposited such stock certificates in the
United States mail, postage prepaid, addressed to the Participant at the
address specified in the written notice of exercise.

 

(e)                                  Termination of Employment or Service.  If a Participant who holds a Non-Qualified
Option shall cease to be employed by or performing services for the Company or
any Affiliate for any reason other than death, unless the applicable Non-Qualified
Option Agreement provides otherwise, such Non-Qualified Option shall
immediately and automatically terminate and be forfeited, whether or not
exercisable, and neither such Participant nor any of the Participant’s heirs,
personal representatives, successors or assigns shall have any rights with
respect to such Non-Qualified Option. 
Notwithstanding the foregoing, if an independent contractor or other
non-employment relationship between the Participant and the Company or an
Affiliate is terminated due to the commencement of an employment relationship
with the Company or an Affiliate, this provision shall apply only upon
termination of both the independent contractor and employment relationship
between the Participant and the Company

 

10

 

or an
Affiliate.  In the case of a Participant
who is a natural person and who ceases to be employed by or performing services
for the Company or an Affiliate due to his or her disability (with disability
being determined in the sole discretion of the Committee), the Committee, at
its discretion, may permit exercise of the portion of the Non-Qualified
Option that is exercisable upon such termination of employment until the
earlier of the originally stated date of termination of the Non-Qualified
Option or up to one year after such termination of employment or other service.

 

(f)                                    Death of Participant.  Unless otherwise provided in the applicable
Non-Qualified Option Agreement, if a Participant who is a natural person
shall cease to be employed by or performing services for the Company or any
Affiliate as a result of the Participant’s death, any Non-Qualified
Option held by such Participant may be exercised to the same extent that the
Participant would have been entitled to exercise it at the date of death and
may be exercised within a period of one (1) year after the date of death,
but in no case later than the expiration date of such Non-Qualified
Option.  Such Non-Qualified Option
shall be exercised pursuant to Sections 7(c) and (d) of this Plan by the person
or persons to whom the Participant’s rights under the Non-Qualified
Option shall pass by will or the laws of descent and distribution.

 

(g)                                 Termination of Non-Qualified Options
Not Exercisable.  Unless
the applicable Non-Qualified Option Agreement provides otherwise, upon termination
of a Participant’s employment or other services with the Company or an
Affiliate for any reason, including by reason of death or disability of the
Participant, any portion of the Participant’s Non-Qualified Option that is not
exercisable shall automatically and immediately terminate as to such
Participant, and the shares of Common Stock subject to such portion of the
Non-Qualified Option shall be available for the grant of Awards under the Plan.

 

(h)                                 No Obligation to Exercise
Non-Qualified Option.  The
grant of a Non-Qualified Option under the Plan shall impose no obligation on
the Participant to exercise such Non-Qualified Option.

 

8.                                      Automatic
Grants of Director Options to Non-employee Directors

 

(a)                                  Automatic Grants of Director
Options.  Under the Plan,
each Non-employee Director shall automatically be granted Director Options to
purchase shares of Common Stock as follows:

 

(i)                                     Initial
Grants of Director Options.  Each Non-employee Director will be
granted an initial Option (the “Initial Grant”) as follows:

 

A.                                   Non-Employee
Directors.  Each person serving as a
Non-employee Director on the Effective Date shall automatically be granted a
Director Option on such date to purchase                     
shares of Common Stock.

 

11

 

B.                                     Future
Non-Employee Directors.  Each person
who is first elected or appointed to serve as a Non-employee Director after the
Effective Date shall automatically be granted a Director Option on the date of
his or her initial election or appointment to the Company’s Board of Directors
to purchase                     
shares of Common Stock.

 

(ii)                                  Additional
Grants of Director Options.  On the [third] anniversary date of the Initial
Grant of a Director Option to a Non-employee Director under the Plan, and on
each successive [third]
anniversary thereof, such Non-employee Director will automatically be granted
an additional Option to purchase                     
shares of Common Stock, but only if such person is a Non-employee Director on
such date.

 

(iii)                               Vesting,
Exercisability and Expiration.  All
Director Options granted under Section 8(a) shall vest and become exercisable
in cumulative installments with respect to [one-third]
of such Director Options on the [first,
second and third December 31] following the date of grant of such
Director Option.  All Director Options
granted under this Section 8(a) shall expire [eight
(8)] years after the date of grant.

 

(iv)                              Exercise
Price.  The exercise price of
Director Options granted under this Section 8 shall be equal to 100% of
the Fair Market Value of one share of Common Stock on the date of grant of the
Director Option.

 

(b)                                 Discretionary Grants.  In addition to the Director Options granted
pursuant to Section 8(a), a Director may be granted one or more Options or
other Awards under other provisions of the Plan, and such Options or other
Awards will be subject to such terms and conditions, consistent with the other
provisions of the Plan, as may be determined by the Committee in its sole discretion.

 

(c)                                  Termination of Status as a Director.  Subject to the provisions of
Sections 8(d) and 8(e), if a Director ceases to serve as a Director, he or
she may, but only within ninety (90) days after the date he or she ceases to be
a Director of the Company, exercise his or her Director Option to the extent
that he or she was entitled to exercise it at the date of such
termination.  Any portion of a Director
Option that is not exercisable on the date a Director ceases to be a Director
of the Company, and any portion of a Director Option which the Director was
entitled to exercise that is not exercised within the time specified herein,
shall immediately and automatically terminate and be forfeited, and neither
such Director nor any of the Director’s heirs, personal representatives,
successors or assigns shall have any rights with respect to such Director
Option.

 

(d)                                 Disability of Director.  Notwithstanding the provisions of Section
8(c) above, if a Director is unable to continue his or her service as a Director
with the Company as a result of his or her total and permanent disability (as
defined in Section 22(e)(3) of the Code), he or she may, buy only within
ninety (90) days

 

12

 

from the date of termination of such service, exercise his or her
Director Option to the extent he or she was entitled to exercise it at the date
of such termination.  Any portion of a
Director Option that is not exercisable on the date a Director ceases to be a
Director of the Company, and any portion of a Director Option which the
Director was entitled to exercise that is not exercised within the time
specified herein, shall immediately and automatically terminate and be
forfeited, and neither such Director nor any of the Director’s heirs, personal
representatives, successors or assigns shall have any rights with respect to
such Director Option.

 

(e)                                  Death of Director.  Upon the death of a Director holding a
Director Option:

 

(i)                                     during
the term of the Director Option when such Director was, at the time of his or
her death, a Director of the Company and who shall have been a Director since
the date of grant of the Director Option, the Director Option may be exercised,
at any time within one year following the date of death, by the person who
acquired the right to exercise such Director Option by bequest or inheritance,
but only to the extent of the right to exercise that existed at the date of
death;

 

(ii)                                  within
ninety (90) days after the termination of the Director’s status as a Director,
the Director Option may be exercised, at any time within ninety (90) days
following the date of death, by such Director’s estate or by a person who
acquired the right to exercise the Director Option by bequest or inheritance,
but only to the extent of the right to exercise that had accrued at the date of
death; and

 

(iii)                               any
portion of a Director Option that is not exercisable on the date of a Director’s
death, and any portion of a Director Option which the Director was entitled to
exercise that is not exercised within the time specified in
Section 8(e)(i) or Section 8(e)(ii), shall immediately and
automatically terminate and be forfeited, and neither such Director nor any of
the Director’s heirs, personal representatives, successors or assigns shall have
any rights with respect to such Director Option.

 

9.                                      Terms and Conditions of
Stock Appreciation Rights

 

(a)                                  Grants.  The
Committee may grant a Stock Appreciation Right independent of an Option or in
connection with an Option or a portion thereof. 
Any grant of a Stock Appreciation Right under the Plan shall be
evidenced by an Award agreement in such form as the Committee shall from time
to time approve and which shall set forth the terms and conditions of the Stock
Appreciation Right.  The Committee may
impose such terms and conditions upon any Stock Appreciation Right as it deems
fit.  A Stock Appreciation Right granted
in connection with an Option or a portion thereof (i) may be granted at the
time the related Option is granted or at any time before the exercise or
cancellation of the related Option, (ii) shall cover the same number of shares
of Common Stock covered by the Option (or such fewer number of shares of Common
Stock as the Committee may determine), and

 

13

 

(iii) shall be
subject to the same terms and conditions as such Option except for such
additional limitations as are contemplated by this Section 9 (or such
additional limitations as may be included in the Award agreement evidencing
such Stock Appreciation Right).

 

(b)                                 Terms. The exercise price per share of Common
Stock of a Stock Appreciation Right shall be an amount determined by the
Committee but in no event shall such amount be less than the Fair Market Value
of a share of Common Stock on the date the Stock Appreciation Right is
granted.  In addition, in the case of a
Stock Appreciation Right granted in conjunction with an Option or a portion
thereof, the exercise price shall not be less than the Exercise Price of the
related Option.  Each Stock Appreciation
Right granted independent of an Option shall entitle a Participant upon
exercise to an amount equal to (i) the excess of (A) the Fair Market Value on
the exercise date of one share of Common Stock over (B) the exercise price per
share, times (ii) the number of shares of Common Stock covered by the Stock
Appreciation Right.  Each Stock
Appreciation Right granted in conjunction with an Option or a portion thereof
shall entitle a Participant to surrender to the Company the unexercised Option
or any portion thereof and to receive from the Company in exchange therefor an
amount equal to (I) the excess of (x) the Fair Market Value on the exercise
date of one share of Common Stock over (y) the Exercise Price per share of
Common Stock, times (II) the number of shares of Common Stock covered by the
Option, or portion thereof, which is surrendered.  Payment shall be made in shares of Common
Stock or in cash, or partly in shares and partly in cash (any such shares of
Common Stock valued at such Fair Market Value), all as set forth in the Award
agreement evidencing such Stock Appreciation Right or as otherwise determined
in the discretion of the Committee. 
Stock Appreciation Rights may be exercised from time to time upon actual
receipt by the Company of written notice of exercise stating the number of
shares of Common Stock with respect to which the Stock Appreciation Right is
being exercised.  The date a notice of
exercise is received by the Company shall be the exercise date.

 

(c)                                  Termination of Employment or
Service.  If a Participant
who holds a Stock Appreciation Right shall cease to be employed by or
performing services for the Company or any Affiliate for any reason other than
death, unless the applicable Award agreement provides otherwise, such Stock
Appreciation Right shall immediately and automatically terminate and be
forfeited, whether or not exercisable, and neither such Participant nor any of
the Participant’s heirs, personal representatives, successors or assigns shall
have any rights with respect to such Stock Appreciation Right.  Notwithstanding the foregoing, if an
independent contractor or other non-employment relationship between the
Participant and the Company or an Affiliate is terminated due to the
commencement of an employment relationship with the Company or an Affiliate,
this provision shall apply only upon termination of both the independent
contractor and employment relationship between the Participant and the Company
or an Affiliate.  In the case of a
Participant who is a natural person and who ceases to be employed by or
performing services for the Company or an Affiliate

 

14

 

due to his or
her disability (with disability being determined in the sole discretion of the
Committee), the Committee, at its discretion, may permit exercise of the
portion of the Stock Appreciation Right that is exercisable upon such
termination of employment until the earlier of the originally stated date of
termination of the Stock Appreciation Right or up to one year after such
termination of employment or other service.

 

(d)                                 Death of Participant.  Unless otherwise provided in the applicable
Award agreement, if a Participant who is a natural person shall cease to be
employed by or performing services for the Company or any Affiliate as a result
of the Participant’s death, any Stock Appreciation Right held by such
Participant may be exercised to the same extent that the Participant would have
been entitled to exercise it at the date of death and may be exercised within a
period of one (1) year after the date of death, but in no case later than
the expiration date of such Stock Appreciation Right.  Such Stock Appreciation Right shall be
exercised pursuant to Section 9(b) of this Plan by the person or persons to
whom the Participant’s rights under the Stock Appreciation Right shall pass by
will or the laws of descent and distribution.

 

(e)                                  Termination of Stock Appreciation
Rights Not Exercisable. 
Unless the applicable Award agreement provides otherwise, upon termination
of a Participant’s employment or other services with the Company or an
Affiliate for any reason, including by reason of death or disability of the
Participant, any portion of the Participant’s Stock Appreciation Rights that is
not exercisable shall automatically and immediately terminate as to such
Participant.

 

10.                               Awards of Restricted Stock

 

(a)                                  Grant.  Awards
of Restricted Stock subject to forfeiture and transfer restrictions may be
granted by the Committee under the Plan. 
Any Awards of Restricted Stock shall be evidenced by an Award agreement
in such form as the Committee shall from time to time approve and which shall
set forth the terms and conditions of the Award of Restricted Stock.  Subject to the provisions of the Plan, the
Committee shall determine the number of shares of Restricted Stock to be
granted to each Participant; the duration of any period during which, and the
conditions, if any, under which, the Restricted Stock may be forfeited to the
Company; and the other terms and conditions of such Awards.  The Committee may determine a period of time
during which the Participant receiving the Award of Restricted Stock must
remain in the continuous employment of the Company in order for the forfeiture
and transfer restrictions elapse.  If the
Committee so determines, the restrictions may lapse during any such restricted
period in installments with respect to specified portions of the shares of
Restricted Stock covered by the Award of Restricted Stock.  The Committee may also impose performance or
other conditions that will subject the shares subject to the Award of
Restricted Stock to forfeiture and transfer restrictions.  The Committee may, at any time, in its
discretion, waive all or any part of any restrictions applicable to any or all
outstanding Awards of Restricted Stock.

 

15

 

(b)                                 Transfer
Restrictions. Shares
of Restricted Stock may not be sold, assigned, transferred, pledged or
otherwise encumbered, except as provided in the Plan or the applicable Award
agreement.  At the time of the grant of
an Award of Restricted Stock, a stock certificate representing the number of
shares of Restricted Stock awarded thereunder shall be registered in the name
of the Participant and held by the Company. 
Such stock certificate may bear a legend describing the conditions of
the Restricted Stock Award.  Unless the
Award agreement evidencing an Award of Restricted Stock or the Committee
provides otherwise, the Participant receiving the Award of Restricted Stock
shall have all rights of a shareholder with respect to the shares of Restricted
Stock subject to such Award, including the right to receive any dividends and
the right to vote such shares, subject to the following restrictions:  (i) the Participant receiving the Award of
Restricted Stock shall not be entitled to delivery of the stock certificate
until the expiration of the restricted period and the fulfillment of any other
restrictive conditions set forth in the applicable Award agreement; (ii) none of
the shares of Common Stock subject to the Award of Restricted Stock may be
sold, assigned, transferred, pledged, hypothecated or otherwise encumbered or
disposed of during such restricted period or until after the fulfillment of any
such other restrictive condition; and (iii) all of the shares of Restricted
Stock shall be forfeited and all rights of the Participant to such shares shall
terminate, without any further obligation on the part of the Company, unless
the Participant remains in the continuous employment of the Company for the
entire restricted period.  Any shares of
Common Stock, any other securities of the Company and any other property
(except for cash dividends) distributed with respect to the shares subject to
an Award of Restricted Stock shall be subject to the same restrictions, terms
and conditions as such shares.  After the
lapse or termination of the restrictions of an Award of Restricted Stock, or at
such earlier time as otherwise determined by the Committee, a stock certificate
evidencing the shares of Common Stock subject to the Award of Restricted Stock
that bears no legend describing the conditions of an Award of Restricted Stock
shall be delivered to the Participant or his or her beneficiary or estate, as
the case may be.

 

(c)                                  Dividends. Dividends or dividend equivalents paid on any
shares of Restricted Stock may be paid directly to the Participant, withheld by
the Company subject to vesting of the Restricted Stock pursuant to the terms of
the applicable Award agreement, or may be reinvested in additional Awards of
Restricted Stock, as determined by the Committee in its discretion.

 

(d)                                 Termination of Employment or
Service.  If a Participant
who holds a Restricted Stock Award shall cease to be employed by or performing
services for the Company or any Affiliate for any reason other than death prior
to the vesting of shares of Restricted Stock granted to such Participant,
unless the applicable Award agreement provides otherwise, such Restricted Stock
Award shall immediately and automatically terminate and be forfeited and
neither such Participant nor any of the Participant’s heirs, personal
representatives, successors or assigns shall have any rights with respect to
such unvested Restricted Stock Award. 
Notwithstanding the foregoing, if an independent contractor or other
non-employment

 

16

 

relationship
between the Participant and the Company or an Affiliate is terminated due to
the commencement of an employment relationship with the Company or an
Affiliate, this provision shall apply only upon termination of both the
independent contractor and employment relationship between the Participant and
the Company or an Affiliate.  In the case
of a Participant who is a natural person and who ceases to be employed by or
performing services for the Company or an Affiliate due to his or her
disability (with disability being determined in the sole discretion of the
Committee), the Committee, at its discretion, may permit a portion or all of
the shares subject to the Restricted Stock Award held by such Participant to
vest on the date of such termination.

 

(e)                                  Death of Participant.  Unless otherwise provided in the applicable
Award agreement, if a Participant who is a natural person shall cease to be
employed by or performing services for the Company or any Affiliate as a result
of the Participant’s death prior to the vesting of shares subject to the
Restricted Stock Award granted to such Participant, the Committee, at its
discretion, may permit a portion or all of the shares of Restricted Stock to
vest as of the date of death or to continue the Restricted Stock Award under
such terms and conditions as the Committee may determine.  The person entitled to any such shares of
Restricted Stock shall be the person or persons to whom the Participant’s
rights under the Restricted Stock Award shall pass by will or the laws of
descent and distribution.

 

(f)                                    Termination of Restricted Stock
Awards Not Vested.  Unless
the applicable Award agreement provides otherwise, upon termination of a
Participant’s employment or other services with the Company or an Affiliate for
any reason, including by reason of death or disability of the Participant, any
portion of the Participant’s Restricted Stock Award that has not vested shall
automatically and immediately terminate as to such Participant, and the shares
subject to such portion of the Restricted Stock Award shall be available for
the grant of Awards under the Plan.

 

(g)                                 Other
Provisions.  Each Award agreement relating to an Award of
Restricted Stock authorized under this Section 10 may contain such other
provisions as the Committee shall deem advisable including, but not limited to,
a requirement that shares of Common Stock acquired under an Award of Restricted
Stock be subject to a restriction on the Participant’s ability to transfer the
shares to third parties without the consent of the Company.

 

11.                               Other Awards

 

(a)                                  Other Stock-Based Awards.  The Committee, in its sole discretion, may
grant Awards of shares of Common Stock and Awards that are valued in whole or
in part by reference to, or are otherwise based on, shares of Common Stock or
on the Fair Market Value thereof (“Other Stock-Based Awards”). Such Other
Stock-Based Awards shall be in such form, and dependent on such conditions, as
the Committee shall determine including, without limitation, the right to
receive, or vest with respect to, one or more shares of Common Stock (or the
equivalent cash

 

17

 

value of such
shares) upon the completion of a specified period of service, the occurrence of
an event and/or the attainment of performance objectives. Other Stock-Based
Awards may be granted alone or in addition to any other Awards granted under
the Plan. Subject to the provisions of the Plan, the Committee shall determine
the number of shares of Common Stock to be awarded to a Participant under (or
otherwise related to) such Other Stock-Based Awards; whether such Other
Stock-Based Awards shall be settled in cash, shares of Common Stock or a
combination of cash and such shares; and all other terms and conditions of such
Awards (including, without limitation, the vesting provisions thereof and
provisions ensuring that all shares so awarded and issued shall be fully paid
and non-assessable).  Any Other
Stock-Based Awards shall be evidenced by an Award agreement in such form as the
Committee shall from time to time approve and which shall set forth the terms
and conditions of the Other Stock-Based Award. 
Unless the applicable Award agreement provides otherwise, if a
Participant who holds an Other Stock-Based Award shall cease to be employed by
or performing services for the Company or an Affiliate for any reason, such
Other Stock-Based Award shall be treated by the Committee as though it is
either a Non-Qualified Option or a Restricted Stock Award, as the Committee
shall determine in its discretion.

 

(b)                                 Other Cash-Based Awards.  In addition to the Awards described above,
and subject to the terms of the Plan, the Committee may grant such other
incentives denominated in cash and payable in cash under the Plan as the
Committee determines to be in the best interests of the Company and subject to
such other terms and conditions as it deems appropriate (“Other Cash-Based
Awards”).  Any Other Cash-Based Awards
shall be evidenced by an Award agreement in such form as the Committee shall
from time to time approve and which shall set forth the terms and conditions of
the Other Cash-Based Award.  Unless the
applicable Award agreement provides otherwise, if a Participant who holds an
Other Cash-Based Award shall cease to be employed by or performing services for
the Company or an Affiliate for any reason, such Other Cash-Based Award shall
be treated as though it is a Stock Appreciate Right or otherwise as the
Committee shall determine in its discretion.

 

12.                               Performance-Based
Awards.

 

(a)                                  Performance-Based Awards.  Notwithstanding anything to the contrary
herein, the Committee may grant performance-based Options, Awards of Restricted
Stock, Other Stock-Based Awards and Other Cash-Based Awards to Participants (“Performance-Based
Awards”). Any such Awards granted to Participants who may be “covered employees”
under Section 162(m) of the Code or any successor section thereto shall be
consistent with the provisions thereof. 
In such cases, a Participant’s Performance-Based Award shall be
determined based on the attainment of written performance goals approved by the
Committee for a performance period established by the Committee (i) when the
outcome for that performance period is substantially uncertain and (ii) by the
earlier of (A) ninety (90) days after the commencement of the performance
period to which the

 

18

 

performance
goal relates or (B) the number of days which is equal to twenty-five percent
(25%) of the relevant performance period.

 

(b)                                 Performance Goals.  The performance goals referred to in Section
12(a) must be objective and shall be based upon one or more of the following
criteria:  (i) consolidated earnings
before or after taxes (including earnings before interest, taxes, depreciation
and amortization); (ii) net income; (iii) operating income; (iv) earnings
per share; (v) book value per share of Common Stock; (vi) return on
shareholders’ equity; (vii) expense management; (viii) return on investment;
(ix) improvements in capital structure; (x) profitability of an identifiable
business unit or product; (xi) maintenance or improvements of profit
margins; (xii) stock price; (xiii) market share; (xiv) revenues or sales; (xv)
costs; (xvi) cash flow; (xvii) working capital; (xviii) return on assets; (xix)
asset turnover; (xx) inventory turnover; (xxi) economic value added
(economic profit); and (xxii) total shareholder return.  The foregoing criteria may relate to the
Company, one or more of its Parents or Subsidiaries or one or more of its
divisions or units, or any combination of the foregoing, and may be applied on
an absolute basis and/or be relative to one or more peer group companies or
indices, or any combination thereof, all as the Committee shall determine. In
addition, to the degree consistent with Section 162(m) of the Code (or any
successor section thereto), the performance goals may be calculated without
regard to the negative effect of unusual or nonrecurring items, extraordinary
items, discontinued operations or cumulative effects of accounting changes. The
Committee shall determine whether, with respect to a performance period, the
applicable performance goals have been met with respect to a given Participant
who may be a covered employee and, if they have, shall so certify and ascertain
the amount of the applicable Performance-Based Award. No Performance-Based
Awards will be paid for such performance period until such certification is
made by the Committee. The amount of the Performance-Based Award actually paid
to a given Participant may be less than the amount determined by the applicable
performance goal formula, at the discretion of the Committee. The amount of the
Performance-Based Award determined by the Committee for a performance period
shall be paid to the Participant at such time as determined by the Committee in
its sole discretion after the end of such performance period.

 

13.                               Adjustments Upon Certain
Events

 

Notwithstanding any other provisions in the Plan to the
contrary, the following provisions shall apply to all Awards granted under the
Plan:

 

(a)                                  Generally. 
Upon any change in the outstanding shares of Common Stock after the
Effective Date by reason of any stock dividend, stock split, reverse stock
split, reclassification, combination, exchange of shares or other similar
recapitalization of the Company, there shall be an appropriate adjustment to
(i) the number or kind of shares of Common Stock or other securities
issued or reserved for issuance pursuant to the Plan or pursuant to outstanding
Awards, (ii) the Exercise Price of any Option or the exercise price of any
Stock Appreciation Right, and/or

 

19

 

(iii) any
other affected terms of such Awards. 
Notwithstanding the foregoing, no fractional shares shall be issued or
paid for.  No adjustment shall be made
under this Section 13(a) upon the issuance by the Company of any warrants,
rights or options to acquire additional Common Stock or of securities
convertible into Common Stock unless such warrants, rights, options or
convertible securities are issued to all shareholders of the Company on a
proportionate basis.

 

(b)                                 Change in Control.  Notwithstanding
anything contained in this Plan to the contrary, and unless otherwise provided
in the applicable Award agreement at the time of grant, in the event of a “Change
in Control” (as defined below), the following shall occur as of the effective
date of such Change in Control with respect to any and all Awards outstanding
as of the effective date of such Change in Control:  (i) any and all Awards granted hereunder
will be, as nearly as may reasonably be, automatically converted into the same
type of Award to acquire the kind and amount of shares of stock or other
securities or property (including cash) which the Participant would have owned
or have been entitled to receive as of the effective date of the Change in
Control had the Awards been exercised or realized in full immediately before
the effective date of the Change in Control; (ii) any vesting schedule of
all Awards shall remain unchanged; (iii) appropriate adjustment shall be made
in the application of the provisions of all outstanding Awards with respect to
the rights and interests thereafter of each Participant, to the end that the
provisions set forth in each Award shall thereafter correspondingly be made
applicable, as nearly as may reasonably be, in relation to any shares of stock
or other securities or property (including cash) thereafter deliverable under
the Award; and (iv) any restrictions imposed on Awards, including Awards of
Restricted Stock and Performance-Based Awards of Restricted Stock, shall remain
unchanged.

 

(c)                                  Definition of Change of Control.  For purposes of this Section 13, “Change in
Control” means:

 

(i)                                     The
sale, lease, exchange or other transfer, directly or indirectly, of all or
substantially all of the assets of the Company (in one transaction or in a
series of related transactions) to a person or entity that is not controlled by
the Company;

 

(ii)                                  The
approval by the Company’s shareholders of any plan or proposal for the
liquidation or dissolution of the Company;

 

(iii)                               Any
person or entity becomes the “beneficial owner” (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of more than fifty percent
(50%) of the combined voting power of the outstanding securities of the Company
ordinarily having the right to vote at elections of directors who were not
beneficial owners of at least fifty percent (50%) of such combined voting power
as of the Effective Date; or

 

20

 

(iv)                              A
merger or consolidation to which the Company is a party if the shareholders of
the Company immediately prior to the effective date of such merger or
consolidation have, solely on account of ownership of securities of the Company
at such time, “beneficial ownership” (as defined in Rule 13d-3 under the
Exchange Act) immediately following the effective date of such merger or
consolidation of securities of the surviving company representing less than
fifty percent (50%) of the combined voting power of the surviving corporation’s
then outstanding securities ordinarily having the right to vote at elections of
directors.

 

The provisions of this Section shall similarly apply to successive
transactions of the types described in Sections 13(c)(i) through (iv).

 

(d)                                 Additional Adjustments of Awards.  Subject to the above provisions, the
Committee shall have the discretion, exercisable at any time before a sale,
merger, consolidation, reorganization, liquidation, dissolution or other Change
in Control transaction, to take such further action as it determines to be
necessary or advisable with respect to Awards. 
Such authorized action may include (but shall not be limited to)
establishing, amending or waiving the type, terms, conditions or duration of,
or restrictions on, Awards so as to provide for earlier, later, extended or
additional time for exercise and lifting restrictions and other modifications,
and the Committee may take such actions with respect to all Participants, to
certain categories of Participants or to only individual Participants.  The Committee may take such action before or
after granting Awards to which the action relates and before or after any
public announcement with respect to such sale, merger, consolidation,
reorganization, liquidation, dissolution or Change in Control that is the
reason for such action.  The grant of an
Award under the Plan shall not affect in any way the right or power of the
Company to make adjustments, reclassifications, reorganizations or changes of
its capital or business structure or to merge or to consolidate or to dissolve,
liquidate or sell, or transfer all or any part of its business or assets.

 

14.                               Shares
Acquired for Investment

 

Shares of Common Stock acquired by a Participant under this Plan shall
be acquired by the Participant for investment and without intention of resale
unless, in the opinion of counsel to the Company, such shares may be purchased
without any investment representation. 
Where an investment representation is deemed necessary, the Committee
may require a written representation to that effect by the Participant as a
condition of a Participant exercising an Option or otherwise obtaining shares
of Common Stock pursuant an Award granted under this Plan, and the Committee
may place an appropriate legend on the stock certificates evidencing the shares
of Common Stock so issued indicating that such shares have not been registered
under federal or state securities laws and describing the restrictions on
transfer.  Each Award shall be subject to
the requirement that if, at any time, the Committee shall determine in its
discretion that the listing, registration or qualification of the shares of
Common Stock subject to the Award upon any securities exchange or under any
state or federal law, or the consent or approval of any governmental regulatory
body, if necessary or desirable as a condition of, or in

 

21

 

connection with, the granting of such Award or the issuance or purchase
of shares of Common Stock thereunder, then such Award shall not be granted or
exercised in whole or in part unless such listing, registration, qualification,
consent or approval shall have been effected or obtained free of any conditions
not acceptable to the Committee.

 

15.                               No Right to Employment or
Awards

 

The granting of an Award
under the Plan shall impose no obligation on the Company or any Affiliate to
continue the employment of a Participant and shall not lessen or affect the
Company’s or the Affiliate’s right to terminate the employment of such
Participant. No Participant or other person shall have any claim to be granted
any Award, and there is no obligation for uniform treatment of Participants or
holders or beneficiaries of Awards. The terms and conditions of Awards and the
Committee’s determinations and interpretations with respect thereto need not be
the same with respect to each Participant.

 

16.                               Other Benefit and
Compensation Programs

 

Payments and other benefits
received by a Participant under an Award shall not be deemed a part of a
Participant’s regular, recurring compensation for purposes of any termination,
indemnity or severance pay laws and shall not be included in, nor have any
effect on, the determination of benefits under any other employee benefit plan,
contract or similar arrangement provided by the Company or an Affiliate, unless
expressly so provided by such other plan, contract or arrangement or the
Committee determines that an Award or portion of an Award should be included to
reflect competitive compensation practices or to recognize that an Award has
been made in lieu of a portion of competitive cash compensation.

 

17.                               Successors and Assigns

 

The Plan shall be binding on
all successors and assigns of the Company and a Participant including, without
limitation, the estate of such Participant and the executor, administrator or
trustee of such estate, or any receiver or trustee in bankruptcy or representative
of the Participant’s creditors.

 

18.                               Nontransferability of
Awards; Designation of Beneficiary

 

(a)                                  Nontransferability.  No
Award or interest in an Award may be sold, assigned, pledged (as collateral for
a loan or as security for the performance of an obligation or for any other
purpose) or transferred by the Participant or made subject to attachment or
similar proceedings otherwise than by will or by the applicable laws of descent
and distribution, except to the extent a Participant designates one or more
beneficiaries on a Company-approved form who may exercise the Award or receive
payment under the Award after the Participant’s death.  During a Participant’s lifetime, an Award may
be exercised only by the Participant.

 

(b)                                 Designation
of Beneficiary.  A Participant may designate a beneficiary to
succeed to the Participant’s Awards under the Plan in the event of the
Participant’s death by filing a beneficiary form with the Company and, upon the
death of the Participant, such beneficiary shall succeed to the rights of the

 

22

 

Participant to the extent
permitted by law and the terms of this Plan and the applicable Award
agreement.  In the absence of a validly
designated beneficiary who is living at the time of the Participant’s death,
the Participant’s executor or administrator of the Participant’s estate shall
succeed to the Awards, which shall be transferable by will or pursuant to laws
of descent and distribution.

 

19.                               Amendments or Termination

 

The Board may amend, alter
or discontinue the Plan, but no amendment, alteration or discontinuation shall
be made without the consent of a Participant if such action would diminish any
of the rights of the Participant under any Award theretofore granted to such
Participant under the Plan; provided,
however, that the Committee may amend the Plan in such manner as it
deems necessary to permit the granting of Awards meeting the requirements of
the Code or other applicable laws.

 

20.                               International Participants

 

With respect to Participants
who reside or work outside the United States of America, the Committee may, in
its sole discretion, amend the terms of the Plan or adopt such modifications,
procedures or subplans with respect to such Participants as are necessary or
desirable to ensure the viability of the benefits of the Plan, comply with
applicable foreign laws or obtain more favorable tax or other treatment for a
Participant, the Company or an Affiliate; provided, however, that no such
changes shall apply to the Awards to Participants who may be “covered employees”
under Section 162(m) of the Code or any successor thereto unless consistent
with the provisions thereof.

 

21.                               General

 

(a)                                  Issuance of Shares of Common Stock.  Notwithstanding any other provision of the
Plan, the Company shall have no obligation to issue or deliver any shares of
Common Stock under an Award granted under the Plan or make any other
distribution of benefits under the Plan unless, in the opinion of the Company’s
counsel, such issuance, delivery or distribution would comply with all
applicable laws (including, without limitation, the requirements of the
Securities Act of 1933, as amended, or any successor thereto (the “Securities
Act”) or the laws of any state or foreign jurisdiction) and the applicable
requirements of any securities exchange or similar entity.  The Company shall be under no obligation to
any Participant to register for offering or resale or to qualify for an
exemption from registration under the Securities Act, or to register or qualify
under the laws of any state or foreign jurisdiction, any Awards, shares of
Common Stock, security or interest in a security paid or issued under, or
created by, the Plan, or to continue in effect any such registrations or
qualifications if made.  The Company may
issue stock certificates evidencing shares of Common Stock with such legends
and subject to such restrictions on transfer and stop transfer instructions as
counsel for the Company deems necessary or desirable for compliance by the Company
with federal, state and foreign securities laws.  The Company may also

 

23

 

require such
other action or agreement by the Participants as may from time to time be
necessary to comply with applicable securities laws.

 

(b)                                 No Rights as a Shareholder.  Unless otherwise provided by the Committee or
in the Plan or an Award agreement evidencing an Award or in any other written
agreement between a Participant and the Company or an Affiliate, no Award shall
entitle the Participant to any cash dividend, voting or other right of a
shareholder unless and until the date of issuance under the Plan of any shares
of Common Stock that are subject to such Award.

 

(c)                                  No Trust or Fund.  The Plan is intended to constitute an “unfunded”
plan.  Nothing contained herein shall
require the Company to segregate any monies, other property, or shares of
Common Stock, or to create any trusts, or to make any special deposits for any
immediate or deferred amounts payable to any Participant, and no Participant
shall have any rights that are greater than those of a general unsecured
creditor of the Company.

 

(d)                                 Severability.  If any provision of the Plan or any Award
agreement shall be held illegal or invalid for any reason, the illegality or
invalidity shall not affect the remaining parts of the Plan or Award agreement,
and such Plan or Award agreement shall be construed and enforced as if the
illegal or invalid provision had not been included.

 

(e)                                  Choice of Law.  The validity, construction, interpretation,
administration and effect of the Plan, and rights relating to the Plan and to
Awards granted under the Plan, shall be governed by the substantive laws, but
not the choice of law rules, of the State of Minnesota.

 

22.                               Effective Date

 

The
Plan shall be effective on October 8, 2004 (the “Effective Date”), which is the
date it was approved by the Board. 
Amendments to the Plan were approved by the Board on May 10, 2005
and the Plan, as so amended, was approved by the Company’s shareholders on
June 10, 2005.

 

24

 

MATHSTAR, INC.

RESTRICTED STOCK AWARD AGREEMENT

 

 

	
  Participant:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Grant Date:

  	
   

  	
                                                      ,
  20

  
	
   

  	
   

  	
   

  
	
  Number of Shares of Restricted Stock

  	
   

  	
                                                        Shares

  
	
   

  	
   

  	
   

  
	
  Restricted
  Stock Award Reference No.:

  	
   

  	
  RS-

  

 

THIS
RESTRICTED STOCK AWARD AGREEMENT is made as of the Grant Date set forth above
by and between MathStar, Inc., a Minnesota corporation (the “Company”), and the
individual named above (the “Participant”) pursuant to the terms of the
MathStar, Inc. 2004 Long-Term Incentive Plan, as such Plan may be amended from
time to time (the “Plan”).

 

The Company
desires, by granting to the Participant shares of the Company’s common stock,
par value $0.01 per share (the “Common Stock”), as hereinafter provided, to
provide Participant with incentive to achieve corporate objectives.

 

NOW,
THEREFORE, in consideration of the provision of services by Participant to the
Company, the mutual covenants hereinafter set forth, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agree as follows:

 

1.             Grant
of Shares of Restricted Stock.  The
Company hereby grants to the Participant the number of shares of Common Stock
set forth above (the “Restricted Stock”) on the terms and conditions set forth
in this Agreement.

 

2.             Restrictions
on Transfer; Forfeiture.

 

a.                                       The
shares of Restricted Stock may not be sold, assigned, transferred, pledged or
otherwise encumbered by the Participant until such shares of Restricted Stock
are vested as hereinafter provided.  Any
attempt to dispose of shares of Restricted Stock in a manner contrary to these
restrictions shall be void and of no force or effect.

 

b.                                      If
the Participant’s active employment or other service with the Company or with
an Affiliate is terminated for any reason before the shares of Restricted Stock
are vested, including because of the disability of the Participant but not upon
the death of the Participant, all shares of Restricted Stock shall immediately
and automatically terminate and be forfeited to the Company, and neither the
Participant nor any of the Participant’s

 

 

heirs,
personal representatives, successors or assigns shall have any rights with
respect to such Restricted Stock.

 

c.                                       The
Participant’s death shall not affect this grant of shares of Restricted Stock,
which shall continue under the same terms and conditions for the benefit of the
Participant’s heirs, personal representatives and/or legatees according to the
Participant’s will or the laws of descent and distribution.

 

3.             Vesting;
Term.

 

a.                                       All
shares of Restricted Stock awarded to Participant pursuant to Section 1
shall vest, and the restrictions on said shares shall terminate, only upon the
effective date of either a “Change in Control” (as such term is defined in the
Plan) or an initial public offering (“IPO”) of the Company’s equity
securities.  (Changes in Control and IPOs
are hereinafter collectively referred to as “Liquidity Events.”)  If a Liquidity Event does not occur during
the term of this award of Restricted Stock, all shares of Restricted Stock
shall immediately and automatically terminate and be forfeited to the Company,
and neither the Participant nor any of the Participant’s heirs, personal
representatives, successors or assigns shall have any rights with respect to
such Restricted Stock.  Notwithstanding
the foregoing, before the effective date of a pending Liquidity Event, the
Committee may delay the vesting of the shares of Restricted Stock and the
termination of the restrictions thereon for up to one (1) year after the
effective date of the Liquidity Event.

 

b.                                      This
award of Restricted Stock shall terminate and be of no force or effect as to
any shares of Restricted Stock not vested on or before [ten years from Grant Date].

 

4.             Stock
Certificates.

 

a.     The
Company will issue a stock certificate in the name of the Participant
representing the shares of Restricted Stock granted under this Plan.  The Participant agrees that the Company will
hold such stock certificate in custody until the shares of Restricted Stock
vest or terminate and are forfeited, and that the certificate may bear an appropriate
legend referring to the terms, conditions and restrictions applicable to the
grant of shares of Restricted Stock substantially in the following form:

 

The transferability of the shares of common
stock represented by this certificate is subject to the terms and conditions of
the MathStar, Inc. 2004 Long-Term Incentive Plan and a Restricted Stock Award
Agreement entered into under such Plan between the registered owner of this
stock certificate and MathStar, Inc. 
Copies of such Plan and Agreement are on file at the offices of
MathStar, Inc.

 

b.     As
a condition of this award, the Participant agrees that, simultaneously with the
execution of this Agreement, the Participant will execute and deliver to the
Company a stock power in the form attached hereto as Exhibit A, endorsed
in blank,  relating to each certificate
evidencing the shares of Restricted Stock.

 

2

 

5.             Consideration
for Restricted Shares.  The
Participant is not required to pay any consideration to the Company or its
Affiliates upon the grant or vesting of the shares of Restricted Stock other
than the rendering of services for the Company.

 

6.             Dividends.  The Participant shall have the right to
receive dividends and other distributions with respect to the shares of
Restricted Stock; provided, however, that all dividends in stock, all stock
rights and all stock issued upon split-ups or reclassifications shall be
subject to the same restrictions as the shares Restricted Stock upon which such
stock dividends, rights or additional shares are issued, and shall be held in
custody by the Company until the restrictions thereon shall have lapsed.

 

7.             Employment
and Retention.  The shares of
Restricted Stock granted hereunder will not confer upon the Participant any
right with respect to continuance of employment or other retention by the
Company, nor will they interfere in any way with the Company’s right to
terminate Participant’s employment or other retention at any time for any
reason or for no reason.

 

8.             Income
Tax Withholding; Tax and Financial Advice. 
The Company shall have the right to require the payment (through
withholding from the Participant’s salary or otherwise) of any federal, state
or local taxes required by law to be withheld with respect to the grant of the
shares of Restricted Stock or the vesting of such shares of Restricted
Stock.  The Participant acknowledges and
represents to the Company that the Participant has obtained advice with respect
to the tax and other financial consequences of the grant of the shares of Restricted
Stock including, without limitation, advice with respect to the election that
the Participant may make under Section 83(b) of the Code.

 

9.             Plan
Governs.  The provisions of this
Restricted Stock Agreement are subject to the Plan, and if any provision of
this Restricted Stock Agreement conflicts with the Plan, the provisions of the
Plan shall govern.  All capitalized terms
used but not defined in this Restricted Stock Agreement shall have the same
meanings ascribed to them in the Plan. 
The Participant acknowledges and represents to the Company that the
Participant has received a copy of the Plan, the Participant has reviewed the
Plan and this Agreement and/or had them reviewed by the Participant’s advisors
to the Participant’s satisfaction, and that the Participant understands the
Plan and this Agreement.

 

10.           Interpretation.  The interpretation and construction of any
provision of this Restricted Stock Agreement, including whether a Vesting Event
has occurred on or before a Vesting Date, shall be made by the Committee and
shall be final, conclusive and binding on the Participant and all other
persons.

 

3

 

IN WITNESS
WHEREOF, the Company has caused this Agreement to be
executed in its corporate name by its duly authorized officers and the
Participant has executed this Agreement, as of the Grant Date set forth above.

 

	
   

  	
   

  	
  MATHSTAR,
  INC.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  	
  Signature

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Name Typed
  or Printed

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Its:

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Title Typed
  or Printed

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  PARTICIPANT:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Signature

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name Typed
  or Printed

  
	
   

  	
   

  	
  Participant’s
  Address:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Participant’s
  Social Security or Tax

  
	
   

  	
   

  	
  Identification
  Number:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
							

 

4

 

EXHIBIT A

 

STOCK POWER

(Assignment Separate from Certificate)

 

For Value
Received,                                                            
hereby sells, assigns and transfers unto                                                                       
(            )
shares of the non-voting common stock of MathStar, Inc. (the “Company”)
standing in his/her/its name on the books of the Company represented by Stock
Certificate No.               
herewith and does hereby irrevocably constitute and appoint                                                 
attorney-in-fact to transfer the said stock on the books of the Company with
full power of substitution in the premises.

 

 

	
  Dated:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Signature

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Name Typed
  or Printed

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  IN PRESENCE
  OF

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
							

 

5

 

MATHSTAR, INC.

 

INCENTIVE STOCK OPTION AGREEMENT

 

	
  OPTIONEE:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  GRANT
  DATE:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  NUMBER
  OF OPTION SHARES:

  	
   

  	
                                  
  Shares

  
	
   

  	
   

  	
   

  
	
  EXERCISE
  PRICE PER SHARE:

  	
   

  	
  $                         per Share

  
	
   

  	
   

  	
   

  
	
  EXPIRATION
  DATE:

  	
   

  	
   

  

 

THIS
AGREEMENT is made as of the Grant Date set forth above
by and between MathStar, Inc., a Minnesota corporation (the “Company”), and the
Optionee named above, who is an employee of the Company or an Affiliate of the
Company (the “Optionee”).

 

The Company
desires, by affording the Optionee an opportunity to purchase shares of its
Common Stock, par value $.01 per share (the “Common Stock”), as hereinafter
provided, to carry out the purpose of the MathStar, Inc. Amended and Restated
2004 Long-Term Incentive Plan (the “Option Plan”).

 

NOW,
THEREFORE, in consideration of the mutual covenants
hereinafter set forth, and for other good and valuable consideration, the
parties hereby agree as follows:

 

1.             Grant
of Option.  The Company hereby grants
to the Optionee the right and option (the “Option”) to purchase all or any part
of the aggregate number of shares of Common Stock set forth above (the “Option
Shares”) (such number being subject to adjustment as provided in Section 9
hereof) on the terms and subject to the conditions set forth in this
Agreement.  This Option is intended to be
an “incentive stock option” within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the “Code”).

 

2.             Purchase
Price.  The per share purchase price
of the Option Shares shall be the Exercise Price Per Share set forth above
(such Exercise Price Per Share being subject to adjustment as provided in
Section 9 hereof).

 

3.             Term
and Exercise of Option.

 

(a)           The term of this Option
shall commence on the Grant Date set forth above and shall continue until the
Expiration Date set forth above, unless earlier terminated as provided herein.

 

(b)           Subject to the earlier
termination of this Option pursuant to its terms and to the terms of the Plan,
this Option shall vest and become exercisable as follows but only if the
Optionee then is an employee of the Company or an Affiliate:  the Option shall vest as to twenty-five
percent (25%) of the Option Shares on                     
and as to an

 

1

 

additional twenty-five percent (25%) on each of the
second, third and fourth anniversary dates of the above date.

 

(c)           To
exercise this Option, the Optionee shall give written notice to the Company, to
the attention of its President or other designated agent, in substantially the
form attached hereto as Exhibit A, and the Optionee shall deliver
payment in full for the Option Shares with respect to which this Option is then
being exercised, as provided in Section 4(a) below.

 

(d)           Neither the Optionee
nor the Optionee’s legal representatives, legatees or distributees, as the case
may be, will be, or will be deemed to be, a holder of any Option Shares for any
purpose unless and until certificates for such Option Shares are issued to the
Optionee or the Optionee’s legal representatives, legatees or distributees,
under the terms of the Option Plan.

 

4.             Limitations
on Exercise of Option.

 

(a)           The exercise of this
Option will be contingent upon receipt from the Optionee (or the purchaser
acting under Section 7 below) of the full Exercise Price of such Option
Shares.  Payment of the Exercise Price
shall be made in cash or by a certified or cashier’s check.  However, in its sole discretion, the Company
may accept previously acquired shares of Common Stock of the Company that have
been owned by the Optionee for at least six (6) months, which shares have an
aggregate Fair Market Value on the date of exercise which is not less than the
total Exercise Price, or shares of Common Stock issuable upon the exercise of
this Option, or a combination of cash and such shares of Common Stock, in
payment of the Exercise Price.  No Option
Shares will be issued until full payment therefor has been made and the
Optionee has executed any and all agreements that the Company may require the
Optionee to execute.

 

(b)           The issuance of Option
Shares upon the exercise of this Option shall be subject to all applicable
laws, rules, and regulations.  If, in the
opinion of the Board of Directors of the Company or a Committee of the Board of
Directors, (i) the listing, registration, or qualification of the Option
Shares upon any securities exchange or under any state or federal law,
(ii) the consent or approval of any regulatory body, or (iii) an
agreement of the Optionee with respect to the disposition of the Option Shares,
is necessary or desirable as a condition to the issuance or sale of the Option
Shares, this Option shall not be exercised and/or the Option Shares shall not
be sold unless and until such listing, registration, qualification, consent,
approval or agreement is effected or obtained in form satisfactory to the Board
of Directors or the Committee.

 

5.             Nontransferability
of Option.  This Option shall not be
transferable by the Optionee other than by will or the laws of descent and
distribution, and during the lifetime of the Optionee, this Option shall be
exercisable only by the Optionee.

 

6.             Termination
of Employment for “Cause”.  Upon
termination of the Optionee’s employment with the Company or an Affiliate for “cause”
(as “cause” is determined in the sole discretion of the Board or the
Committee), this Option shall automatically terminate and be immediately
forfeited, whether or not vested, and neither the Optionee nor the Optionee’s
heirs, personal representatives, successors or assigns shall have any rights
with respect to this Option.

 

2

 

7.             Termination
of Employment Not for “Cause”; Death or Disability of Optionee.  Upon termination of the Optionee’s employment
with the Company or an Affiliate not for “cause” (as “cause” is determined in
the sole discretion of the Board or the Committee), the Optionee shall have the
shorter of thirty (30) days after such termination or until the Expiration Date
to exercise any portion of the Option that was vested on such termination date,
but the unvested portion of the Option shall automatically terminate and be
immediately forfeited, and neither the Optionee nor any of the Optionee’s
heirs, personal representatives, successors or assigns shall have any rights
with respect to such unvested portion of the Option.  If the Optionee dies while employed by the
Company or an Affiliate, this Option may be exercised to the same extent that
the Optionee would have been entitled to exercise it at the date of death and
may be exercised within a period of one (1) year after the date of death, but
in no case later than the Expiration Date set forth above.  In such event, this Option shall be
exercisable only by the executors or administrators of the Optionee or by the
person or persons to whom the Optionee’s rights under the Option shall pass by
the Optionee’s will or the laws of descent and distribution.  Any portion of an Option that is not
exercisable at the time of an Optionee’s death shall automatically terminate.

 

8.             No
Right to Continued Employment.  This
Option will not confer upon the Optionee any right with respect to continuance
of employment by the Company or an Affiliate of the Company, nor will it
interfere in any way with the Company’s right or the Affiliate’s right to
terminate the Optionee’s employment at any time.

 

9.             Adjustments.
In the event of any change in the outstanding shares of Common Stock by reason
of any stock dividend, stock split, reverse stock split, reclassification,
combination, exchange of shares, or other similar recapitalization of the
Company, there shall be an appropriate and proportionate adjustment to the
number of Option Shares and the per share Exercise Price Per Share hereunder so
that the Optionee then shall receive for the aggregate Exercise Price paid by
the Optionee upon exercise of this Option the number of shares the Optionee
would have received if this Option had been exercised before such
recapitalization event occurred.  No adjustment
shall be made under this Section 9 upon the issuance by the Company of any
warrants, rights, or options to acquire additional Common Stock or of
securities convertible into Common Stock unless such warrants, rights, options
or convertible securities are issued to all of the Company’s shareholders on a
proportionate basis.

 

10.          Effective
of Certain Transactions. 
Notwithstanding any provision in this Option to the contrary, at the
time of the occurrence of any of the events described in Sections 10(a) through
(d) below, the Option shall be automatically converted into an Option to
acquire the kind and amount of shares of stock or other securities or property
that the Optionee would have owned or have been entitled to receive immediately
after the occurrence of the event, had the Option been exercised in full
immediately before the effective date of such event; provided, however, that
the vesting schedule of the Option shall remain unchanged, and, in any such
case, appropriate adjustment shall be made in the application of the provisions
of this Option with respect to the rights and interests thereafter of the
Optionee, to the end that the provisions set forth in this Option shall
thereafter correspondingly be made applicable, as nearly as may reasonably be,
in relation to any shares of stock or other securities or property thereafter
deliverable on the exercise of this Option:

 

3

 

(a)           The
sale, lease, exchange or other transfer, directly or indirectly, of all or
substantially all of the assets of the Company (in one transaction or in a
series of related transactions) to a person or entity that is not controlled by
the Company,

 

(b)           The
approval by the Company’s shareholders of any plan or proposal for the
liquidation or dissolution of the Company;

 

(c)           Any
person or entity becomes the “beneficial owner” (as defined in Rule 13d-3
under the Securities Exchange Act of 1934, as amended (“Exchange Act”)),
directly or indirectly, of more than fifty percent (50%) of the combined voting
power of the outstanding securities of the Company ordinarily having the right
to vote at elections of directors who were not beneficial owners of at least
fifty percent (50%) of such combined voting power as of the date the Company’s
Board of Directors adopted the Option Plan, and

 

(d)           A
merger or consolidation to which the Company is a party if the shareholders of
the Company immediately prior to the effective date of such merger or
consolidation have, solely on account of ownership of securities of the Company
at such time, “beneficial ownership” (as defined in Rule 13d-3 under the
Exchange Act) immediately following the effective date of such merger or
consolidation of securities of the surviving company representing less than fifty
percent (50%) of the combined voting power of the surviving corporation’s then
outstanding securities ordinarily having the right to vote at elections of
directors.

 

Notwithstanding any provision in the Option Plan or this Option
Agreement to the contrary, the Board of Directors or the Committee shall not
have the power or right, either before or after the occurrence of an event
described in subparagraph (a) through (d) above, to rescind, modify or amend
the provisions of this Section 10 without the consent of the Optionee.

 

11.          Limitation on Payments and Benefits.  Notwithstanding anything in
this Agreement to the contrary, if any of the payments or benefits to be made
or provided in connection with this Agreement, together with any other
payments, benefits or awards which you have the right to receive from the
Company, or any corporation which is a member of an “affiliated group” (as
defined in Section 1504(a) of the Code without regard to Section 1504(b) of the
Code) of which the Company is a member (“Affiliate”), constitute an “excess
parachute payment” (as defined in Section 280G(b) of the Code), such payments,
benefits or awards to be made or provided in connection with this Agreement, or
any other agreement between you and the Company or its Affiliates, may be
reduced, eliminated, modified or waived to the extent necessary to prevent all,
or any portion, of such payments, benefits or awards from becoming “excess
parachute payments” and therefore subject to the excise tax imposed under
Section 4999 of the Code.  The Optionee
will have the sole right and discretion to determine whether the payments,
benefits or awards to be made or provided in connection with this Agreement, or
any other agreement between the Optionee and the Company, should be reduced, whether
or not such other agreement with the Company or an Affiliate expressly
addresses the potential application of Section 280G or Section 4999 of the Code
(including, without limitation, that “payments” under such agreement be
reduced).  The Optionee will also have
the right to designate the particular payments, benefits or awards that are to
be reduced, eliminated, modified or waived; provided that no such adjustment
will be made if it results in additional expense to the Company in excess of
expenses the Company would have experienced if no adjustment had been
made.  The determination as to whether
any such decrease in the payments or benefits is necessary must be made in good
faith by legal counsel or a certified public

 

4

 

accountant selected by you and reasonably acceptable to the Company,
and such determination will be conclusive and binding upon you and the
Company.  The Company will pay or
reimburse you on demand for the reasonable fees, costs and expenses of the
counsel or accountant selected to make the determinations under this Section
11.

 

12.          Interpretation.  The interpretation and construction of any
provision of the Option Plan and this Option shall be made by the Board of
Directors or the Committee and shall be final, conclusive and binding on the
Optionee and all other persons.

 

13.          Definitions;
Option Plan Governs.  Any capitalized
term used herein that is not expressly defined herein shall have the meaning
ascribed to it in the Option Plan.  This
Option is in all respects subject to and governed by all of the provisions of
the Option Plan.

 

IN WITNESS
WHEREOF, the Company has caused this Agreement to be
executed in its corporate name by its duly authorized officer, and the Optionee
has executed this Agreement as of the Grant Date set forth above.

 

	
  COMPANY:

  	
   

  	
  MathStar,
  Inc.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Its:

  
	
  OPTIONEE:

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Address:

  	
   

  

 

5

 

EXHIBIT A

NOTICE OF EXERCISE OF

STOCK OPTION

 

	
  TO:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  FROM:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  DATE:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  RE:

  	
   

  	
  Exercise of
  Stock Option

  

 

I hereby
exercise my option to purchase                  
shares of Common Stock at $         per
share (total exercise price of $           ).  This notice is given in accordance with the
terms of my Incentive Stock Option Agreement (“Agreement”) dated                .  The option price and vested amount is in
accordance with Sections 2 and 3 of the Agreement.

 

Check one:

 

	
  o

  	
  Enclosed is
  cash, or a cashier’s or certified check payable to MathStar, Inc. for the
  total exercise price of the shares being purchased.

  
	
   

  	
   

  
	
  o

  	
  Attached is
  a certificate(s) for
                      
  shares of common stock duly endorsed in blank and surrendered for the
  exercise price of the shares being purchased.*

  

 

	
   

  	
  *The use of
  this alternative is subject to the approval of MathStar, Inc.

  
	
   

  	
   

  
	
   

  	
  Please
  prepare the stock certificate in the following name(s):

  

 

	
  Sincerely,

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (Signature)

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (Print or
  Type Name)

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Letter and
  consideration

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  received on

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (effective
  date of exercise)

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
									

 

6Exhibit 10.5

 

Variable Compensation Plan

 

2005

 

Plan Prepared for and accepted by

 

	
   

  	
  Signature:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  

 

Date:             

 

1

 

Variable
Compensation Plan Objectives

 

The purpose of the 2005 Variable Compensation Plan (the “Plan”) is:

 

A.           To provide economic motivation to those
individuals directly involved in obtaining design win and sales commitments for
products and services of MathStar, Inc. (the “Company”) for the purpose of
meeting or exceeding the Company’s design wins, sales goals and sales
objectives.

B.             To create incentive
for meeting defined design win goals.

C.             To create incentive
for meeting defined sales objectives.

D.            To provide a
compensation model for each eligible individual.

E.              To attract and
retain world-class sales personnel, sales managers, field application engineers
and field application managers.

 

Eligibility

 

Eligibility for variable compensation is determined by MathStar Inc.
Sales Management and Human Resources and is fundamentally based on individuals
who meet all or part of the following criteria:

 

A.           Responsibility for
account management

B.             Responsibility for
territory management

C.             Support of pre and
post sales design win activity

D.            Achievement of sales
revenue goals

E.              Negotiation and/ or
conclusion of sales commitments

F.              Support for
strategic initiatives and associated goals and milestones

G.             Eligibility in the
Plan is limited to the period of time the individual is a full-time employee of
the Company

H.            Eligible individuals
will earn variable compensation as of their first day of full-time employment

I.                 If an eligible employee’s employment
with the Company is terminated for any reason, variable compensation will be
paid on revenue recognized through the last day of employment.  Revenue is determined by the invoice date and
subject to any credits issued against this revenue through the date the final
variable compensation amount is disbursed. 
If the individual transfers to another position where the individual is
not eligible for this plan, this agreement ceases to be in effect for that
employee at midnight on the day of transfer.

 

Variable
Compensation For Field Sales Personnel

 

Variable
Compensation may be earned in addition to the eligible employee’s base
salary.  The total of Base Salary and
Variable compensation will be the Employees target compensation. From time to
time, Management may award other types of compensation that will have no effect
on employees target compensation.

 

2

 

The Company reserves the right to change or modify territories and or
assigned responsibilities for the field team at any time.  Any changes must be approved by the Vice
President of Sales with written notification to the affected individual or individuals.  The variable compensation plans for those
affected by these changes will be reviewed and any changes needed to the
variable compensation plan will be made. 
The variable compensation plan will than be reissued to the employee or
employees reflecting their new assigned responsibilities.

 

Variable compensation is paid based on the combination of net eligible
sales (“Sales”) earned and design wins. 
Sales is defined as product and services that are recognized by the
Company as revenue. Sales can be recognized to a territory, region, account
base or an individual’s responsibility including resale through an authorized
distributor or authorized sales representative and based on customer design
location ship-to and bill-to information. 
Sales will be reduced by any credit issued by the Company during the
quarter such as product returns, price protections, and rebates.  A design win is defined as:

 

1.               The sale of
a tool set and/or a development board for a particular development effort

 

2.               The sale of
at least 10 parts into a particular program

 

3.               A purchase
of a development NRE of at least $100,000

 

4.               Any action or
transaction designated by the CEO as a design win

 

Variable
Compensation Calculation For Applications and Applications Management

 

For
each design win a  $2000 cash bonus will
be paid.

 

The
aggregate award for any one design cannot be more than 2x a single design
win.  It will be the VP of Sales
responsibility to determine any pro rata awards for participation by multiple
applications people.

 

The
award form will be filled out monthly, as required.

 

Variable
Compensation Calculation For Sales and Sales Management

 

FSE Compensation

 

For
the first 4 wins, a  $2000 cash bonus
will be paid.

 

For
the next 6 wins, a  $3000 cash bonus will
be paid.

 

For
the next 5 wins, a $4000 cash bonus will be paid.

 

For
more than 15 wins, a $5000 cash bonus will be paid.

 

3

 

Sales Manager Compensation

 

For the first
4 wins, a  $3000 cash bonus will be paid.

 

For the next 6
wins, a  $4000 cash bonus will be paid.

 

For design
wins greater than 10, a $5000 cash bonus will be paid.

 

The Sales
Manager will be paid on design wins achieved by the team under the manger and
for any individual wins.

 

VP Sales
Compensation

 

For
the first 10 wins, a  $5000 cash bonus
will be paid.

 

For
the next 10 wins, a  $6000 cash bonus
will be paid.

 

For
more than 20 wins, a $7000 cash bonus will be paid.

 

The
Sales Manager will be paid on design wins achieved by the team under the manger
and for any individual wins.

 

A.           Those individuals that
generate revenue will also be compensated at 5% of revenue. This applies only
to the sales person (FSE, Manager, or VP) of record for a particular order.

 

B.             The Sales variable
compensation will be calculated monthly using the form contained in the
appendix to this document.

 

Payment

 

Variable compensation is paid monthly within 15 days after the filing
of the sales incentive form.

 

Inclusions
and Exclusions

 

The following items are eligible for variable sales compensation.

 

•    Chip
sales

•    Board
level product sales

•    System
level product sales

•    NRE
sales

•    Development
charges

•    Early
technology access charges

•    IP
sales

•    Royalty
payments received by the Company

•    Sales
through an authorized sales representative

 

4

 

•      Sales
through an authorized distributor

 

The following items are NOT eligible for variable compensation.

 

•      Inter-company
sales to subsidiaries

•      Product
for internal use only

•      Surcharges,
taxes, freight and customs duties

 

In unique business transactions, the eligibility of that transaction
for inclusion in calculating Sales variable compensation shall be determined by
the Vice President of Sales.

 

Sales
Splits

 

In the event that different sales persons from different territories or
regions share the same customer, all sales persons responsible for such
customers will carry the full quota and get credit for all sales into this
account.  These figures will be used to
calculate the annual sales variable compensation for each individual.

 

Effective
Dates

 

The effective date of this Plan is March 1, 2005 through February 28th,
2006.  The company reserves the right to
amend this Plan.  Any modifications to
the Plan will require approval by the Worldwide SalesVice President and Human
Resources.

 

Variable compensation plans for each individual and any changes to
these plans must be documented.  Proper
approval from the individual, sales management, Vice President of Sales and
Human Resources must be obtained for any changes.

 

Any questions pertaining to this plan should be directed to sales
Management and/or Human resources.

 

This Plan was received and accepted by:

 

 

	
   

  	
   

  	
   

  	
   

  
	
  (Signature- CFO)

  	
   

  	
  (Date)

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  (Signature- HR)

  	
   

  	
  (Date)

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  (Signature- V.P. of Sales)

  	
   

  	
  (Date)

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  (Signature- President & CEO)

  	
   

  	
  (Date)

  	
   

  

 

5

 

Apendix A

 

Design
Win and Sales Incentive

 

FSE or FAE:

 

Month:

 

Design Wins

 

	
  Customer

  	
   

  	
  Design Win #

  	
   

  	
  Monetary Award

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total for Month

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

 

Incentive

 

	
  Customer

  	
   

  	
  Revenue

  	
   

  	
  P.O.

  	
   

  	
  Incentive Rate

  	
   

  	
  Incentive

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total for Month

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

CFO:

 

VP Sales:

 

6

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