Document:

Exhibit 10.4

 

APPLIED OPTOELECTRONICS, INC.

 

2000 INCENTIVE SHARE PLAN

 

 

ARTICLE 1

PURPOSE AND EFFECTIVE DATE

 

1.1                               Purpose.  The purpose of the 2000 Incentive Share Plan (the “Plan”) is to advance the interests of Applied Optoelectronics, Inc. (the “Company”) and its shareholders by enabling the Company and each of its Subsidiaries (as hereinafter defined) to (A) provide share ownership opportunities to certain of their key employees to participate in the Company’s growth and (B) enhance their ability to attract and retain individuals of superior managerial or technical ability and to motivate employees, consultants, independent contractors, agents, and other persons to exert their best efforts towards future progress and profitability of the Company.

 

1.2                               Effective Date.  The effective date of the Plan shall be the date that this Plan is approved by the shareholders of the Company.

 

ARTICLE 2

DEFINITIONS

 

As used in this Plan, the following terms shall have the meanings set forth below unless the context otherwise requires:

 

2.1                               “Award” shall mean the grant of a Stock Option, a Stock Appreciation Right, Restricted Stock, a Performance Award, or any other grant of incentive compensation pursuant to this Plan.

 

2.2                               “Award Period” shall have the meaning set forth in Subsection 16.2 of this Plan.

 

2.3                               “Board” shall mean the Board of Directors of the Company, as the same may be constituted from time to time.

 

2.4                               “Change in Control” has the meaning given such term in the applicable Award agreement or, if not defined therein, shall mean, after the effective date of this Plan stated in Subsection 1.2, (i) the occurrence of an event of a nature that would be required to be reported by the Company in response to Item 1 of a Current Report on Form 8-K (or any successor to such form), whether or not the Company is, in fact, required to report on such form, promulgated pursuant to the Exchange Act; provided that, without limitation, such a Change in Control shall be deemed to have occurred if (a) any Person or group (as defined in the Exchange Act), other than (A) the Company, (B) a wholly-owned Subsidiary, (C) any employee benefit plan (including, without limitation, an employee stock ownership plan) adopted by the Company or any wholly-owned Subsidiary or (D) any trustee or other fiduciary holding securities under any employee benefit plan adopted by the

 

 

Company or any Subsidiary, becomes the “beneficial owner” (as defined in Rule 13d-3 (or any successor to such rule) promulgated under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities or (b) during any period of twenty-four (24) months, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof, unless the election by the Board or the nomination for election by the Company’s shareholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of such twenty-four (24) month period or whose election or nomination for election was previously so approved; (ii) a Corporate Transaction is consummated, other than a Corporate Transaction that would result in substantially all of the holders of voting securities of the Company outstanding immediately prior thereto owning (directly or indirectly and in substantially the same proportions relative to each other) not less than fifty percent (50%) of the combined voting power of the voting securities of the issuing/surviving/resulting entity outstanding immediately after such Corporate Transaction; or (iii) an agreement for the sale or other disposition of all or substantially all of the Company’s assets (evaluated on a consolidated basis, without regard to whether the sale or disposition is effected via a sale or disposition of assets of the Company, the sale or disposition of the securities of one or more Subsidiaries or the sale or disposition of the assets of one or more Subsidiaries) is consummated.

 

2.5                               “Code” shall mean the Internal Revenue Code of 1986, as amended from time to time (or any successor to such legislation).

 

2.6                               “Committee” shall mean the Compensation Committee of the Board, if such a committee shall have been appointed and consist of two (2) or more directors of the Company who are both “Non-Employee Directors” (as that term is defined in Rule 16b-3 (or any successor to such rule) promulgated under the Exchange Act) and “outside directors” within the meaning of Section 162(m) of the Code and such Treasury regulations as may be promulgated thereunder.  If a separate Compensation Committee with such membership shall not have been appointed, “Committee” shall mean the Board.

 

2.7                               “Company” shall mean Applied Optoelectronics, Inc., a Texas corporation.

 

2.8                               “Consultant” shall mean any Person who or which is engaged by the Company or any Subsidiary to render services as a consultant or advisor.

 

2.9                               “Corporate Transaction” shall mean any reorganization, merger, consolidation or conversion involving the Company or any exchange of securities involving Shares, other than a Recapitalization.

 

2.10                        “Designated Beneficiary” shall mean the beneficiary designated by a Participant, in a manner authorized by the Committee, to exercise the rights of such Participant in the event of such Participant’s death.  In the absence of an effective designation by a Participant, the Designated Beneficiary shall be such Participant’s estate.

 

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2.11                        “Disability” shall mean permanent and total inability to engage in any substantial gainful activity, even with reasonable accommodation, by reason of any medically determinable physical or mental impairment which has lasted or can reasonably be expected to last without material interruption for a period of not less than twelve (12) months, as determined in the sole discretion of the Committee.

 

2.12                        “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended from time to time (or any successor to such legislation).

 

2.13                        “Fair Market Value” shall mean with respect to the Shares, as of any date, (i) if the Shares are listed or admitted to trade on a national securities exchange, the closing price of the Shares on the composite tape, as published in the Wall Street Journal, of the principal national securities exchange on which the Shares are so listed or admitted to trade, on such date or, if there is no trading in Shares on such date, then the closing price of the Shares as quoted on such composite tape on the next preceding date on which there was trading in such Shares; (ii) if the Shares are not listed or admitted to trade on a national securities exchange, then the closing price of the Shares as quoted on the National Market System of the NASD; (iii) if the Shares are not listed or admitted to trade on a national securities exchange or the National Market System of the NASD, the mean between the bid and asked price for the Shares on such date, as furnished by the NASD through NASDAQ or a similar organization if NASDAQ is no longer reporting such information; or (iv) if the Shares are not listed or admitted to trade on a national securities exchange or the National Market System of the NASD and if bid and asked prices for the Shares are not so furnished by the NASD or a similar organization, the value established by the Board, determined without regard to any restriction other than a restriction which, by its terms, will never lapse.

 

2.14                        “Incentive Stock Option” shall mean any option to purchase Shares awarded pursuant to this Plan which qualifies as an “Incentive Stock Option” pursuant to Section 422 of the Code.

 

2.15                        “Named Executive Officer” shall have the meaning set forth in Subsection 16.1 of this Plan.

 

2.16                        “NASD” shall mean the National Association of Securities Dealers, Inc.

 

2.17                        “Non-Qualified Stock Option” shall mean any option to purchase Shares awarded pursuant to this Plan that does not qualify as an Incentive Stock Option (including, without limitation, any option to purchase Shares originally designated as or intended to qualify as an Incentive Stock Option) but which does not (for whatever reason) qualify as an Incentive Stock Option.

 

2.18                        “Non-Tandem Stock Appreciation Right” shall mean any Stock Appreciation Right granted alone and not in connection with an Award which is a Stock Option.

 

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2.19                        “Optionee” shall mean any Participant who has been granted and holds a Stock Option awarded pursuant to this Plan.

 

2.20                        “Participant” shall mean any Person who has been granted and holds an Award granted pursuant to this Plan.

 

2.21                        “Performance Award” shall mean any Award granted pursuant to this Plan of Shares, rights based upon, payable in or otherwise related to Shares (including Restricted Stock) or cash, as the Committee may determine, at the end of a specified performance period established by the Committee.

 

2.22                        “Permitted Modification” shall be deemed to be any modification of an Award which is made in connection with a Corporate Transaction and which provides (i) in connection with a Stock Option, that subsequent to the consummation of the Corporate Transaction (A) the exercise price of such Stock Option will be proportionately adjusted to reflect the exchange ratio applicable to the particular Corporate Transaction and/or (B) the nature and amount of consideration to be received upon exercise of the Stock Option will be the same (on a per share basis) as was received by Persons who were holders of Shares immediately prior to the consummation of the Corporate Transaction, (ii) in connection with a Stock Appreciation Right, that subsequent to the consummation of the Corporate Transaction (A) the base price of such Stock Appreciation Right will be proportionately adjusted to reflect the exchange ratio applicable to the particular Corporate Transaction and/or (B) the benefits to be received by the holder of such Stock Appreciation Right will be measured based upon the nature and amount of consideration received (on a per share basis) by Persons who were holders of Shares immediately prior to the consummation of the Corporate Transaction, or (iii) for a modification expressly provided for in this Plan or in an Award agreement.

 

2.23                        “Person” shall mean an individual, partnership, limited liability company, corporation, joint stock company, trust, estate, joint venture, association or unincorporated organization or any other form of business organization.

 

2.24                        “Plan” shall mean this Applied Optoelectronics, Inc. 2000 Incentive Share Plan as set out in this document and as it may be amended from time to time.

 

2.25                        “Reload Option” shall mean a Stock Option as defined in Subsection 6.6(b) of this Plan.

 

2.26                        “Recapitalization” shall mean any stock split, stock dividend, reverse stock split, combination or subdivision of Shares or any other similar increase or decrease in the number of Shares issued and outstanding, without the Company receiving consideration therefor in money, services, or property (other than securities issued by the Company).

 

2.27                        “Restricted Stock” shall mean any Shares granted pursuant to this Plan that are subject to restrictions or substantial risk of forfeiture.

 

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2.28                        “Retirement” shall mean the termination of employment of an employee of the Company or any Subsidiary pursuant to the terms of any retirement plan or policy maintained by the Company or any Subsidiary in which such employee participates.

 

2.29                        “Securities Act” shall mean the Securities Act of 1933, as amended from time to time (or any successor to such legislation).

 

2.30                        “Shares” shall mean shares of the common stock of the Company and any shares of capital stock or other securities hereafter issued or issuable upon, in respect of or in substitution or exchange for shares of common stock of the Company.

 

2.31                        “Stock Appreciation Right” shall mean the right of the holder thereof to receive property or Shares with a Fair Market Value equal to or cash in an amount equal to the excess of the Fair Market Value of the aggregate number of Shares subject to such Stock Appreciation Right on the date of exercise over the Fair Market Value of the aggregate number of Shares subject to such Stock Appreciation Right on the date of the grant of such Stock Appreciation Right (or such other value as may be specified in the agreement granting such Stock Appreciation Right).  A Stock Appreciation Right may be a Tandem Stock Appreciation Right or a Non-Tandem Stock Appreciation Right.

 

2.32                        “Stock Option”  shall mean any Incentive Stock Option or Non-Qualified Stock Option.

 

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

 

2.34                        “Tandem Stock Appreciation Right” shall mean a Stock Appreciation Right granted in connection with an Award which is a Stock Option.

 

2.35                        “Transactional Consideration” shall have the meaning set forth in Subsection 12.2 of this Plan.

 

ARTICLE 3

ADMINISTRATION OF THIS PLAN

 

3.1                               Committee.  This Plan shall be administered and interpreted by the Committee.

 

3.2                               Administration.

 

(a)                                 Subject to the provisions of this Plan and directions from the Board, the Committee is authorized to:

 

(i)                                     determine the Persons to whom Awards are to be granted;

 

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(ii)           determine the types and combinations of Awards to be granted; the number of Shares to be covered by an Award; the exercise price of an Award; the time or times when an Award shall be granted and may be exercised; the terms, performance criteria or other conditions, vesting periods or any restrictions for an Award; any restrictions on Shares acquired pursuant to the exercise of an Award; and any other terms and conditions of an Award;

 

(iii)          conclusively interpret the provisions of this Plan;

 

(iv)                              prescribe, amend and rescind rules and regulations relating to this Plan;

 

(v)                                 rely upon employees of the Company for such clerical and record keeping duties as may be necessary in connection with the administration of this Plan;

 

(vi)                              accelerate or defer (with the consent of the Participant) the vesting of any rights pursuant to an Award; and

 

(vii)                           make all other determinations and take all other actions necessary or advisable for the administration of this Plan.

 

The President of the Company shall also be authorized, subject to the provisions of this Plan and directions from the Board and the Committee, to determine the types and combinations of Awards to be granted; the number of Shares to be covered by an Award; the exercise price of an Award; the time or times when an Award shall be granted and may be exercised; the terms, performance criteria or other conditions, vesting periods or any restrictions for an Award; any restrictions on Shares acquired pursuant to the exercise of an Award; and any other terms and conditions of an Award; provided, however, that the President of the Company may not (1) grant any Award to himself or herself (2) grant Awards to any one person with respect to more than 100,000 Shares in the aggregate (which number shall be adjusted pro rata in the event of any adjustment to the limitation set forth in ARTICLE 4.1 hereof), or (3) modify any Award made by the Committee or Board.

 

(b)                                 A majority of the Committee members shall constitute a quorum for action by the Committee. All determinations of the Committee in connection with the Plan shall be made by not less than a majority of its members.  All questions of interpretation and application of this Plan or pertaining to any question of fact or Award granted hereunder will be decided by the Committee, whose decision will be final, conclusive and binding upon the Company and each other affected party.

 

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ARTICLE 4

SHARES SUBJECT TO PLAN

 

4.1                               Limitations.  The maximum number of Shares that may be issued with respect to Awards granted pursuant to this Plan shall not exceed 3,604,100 unless increased or decreased by reason of changes in the capitalization of the Company as hereinafter provided or by amendment of this Plan.  The Shares issued pursuant to this Plan may be authorized but unissued Shares, or may be issued Shares which have been reacquired by the Company.

 

4.2                               Changes.  To the extent that any Award granted pursuant to this Plan shall be forfeited, shall expire or shall be canceled, in whole or in part, then the number of Shares covered by the Award so forfeited, expired or canceled may again be awarded pursuant to the provisions of this Plan.  In the event that Shares are delivered to the Company in full or partial payment of the exercise price for the exercise of a Stock Option, the number of Shares available for future Awards granted pursuant to this Plan shall be reduced only by the net number of Shares issued upon the exercise of the Stock Option.  Awards that may be satisfied either by the issuance of Shares or by cash or other consideration shall, until the form of consideration to be paid is finally determined, be counted against the maximum number of Shares that may be issued pursuant to this Plan. If the Award is ultimately satisfied by the payment of consideration other than Shares, such Shares may again be made the subject of an Award granted pursuant to this Plan.  Awards will not reduce the number of Shares that may be issued pursuant to this Plan if the settlement of the Award will not require the issuance of Shares, as, for example, a Stock Appreciation Right that can be satisfied only by the payment of cash.

 

ARTICLE 5

ELIGIBILITY

 

5.1                               Eligibility.  Eligibility for participation in this Plan shall be confined to those individuals who are employed by the Company or a Subsidiary and such Consultants and non-employee Directors as may be designated by the Committee.  In making any determination as to Persons to whom Awards shall be granted, the type of Award and/or the number of Shares to be covered by the Award, the Committee shall consider the position and responsibilities of the Person, the importance of the Person to the Company, the duties of the Person, the past, present and potential contributions of the Person to the growth and success of the Company and such other factors as the Committee may deem relevant in connection with accomplishing the purposes of this Plan.

 

ARTICLE 6

STOCK OPTIONS

 

6.1                               Grants.  The Committee may grant Stock Options alone or in addition to other Awards granted pursuant to this Plan to any eligible Person.  Each Person so selected shall be offered a Stock Option to purchase the number of Shares determined by the Committee.  The Committee shall specify whether such Stock Option is an Incentive Stock Option or Non-Qualified Stock Option and any other terms or conditions relating to such Award; provided, however only employees of the Company or a Subsidiary may be granted Incentive Stock Options.  To the extent that any Stock 

 

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Option designated as an Incentive Stock Option does not qualify as an Incentive Stock Option (whether because of its provisions, the failure of the shareholders of the Company to authorize the issuance of Incentive Stock Options, the time or manner of its exercise or otherwise), such Stock Option or the portion thereof which does not qualify shall be deemed to constitute a Non-Qualified Stock Option.  Each Person to be granted a Stock Option shall enter into a written agreement with the Company, in such form as the Committee may prescribe, setting forth the terms and conditions (including, without limitation, the exercise price and vesting schedule) of the Stock Option.  At any time and from time to time, the Optionee and the Committee may agree to modify an option agreement in such respects as they may deem appropriate, including, without limitation, the conversion of an Incentive Stock Option into a Non-Qualified Stock Option.  The Committee may require that an Optionee meet certain conditions before the Stock Option or a portion thereof may vest or be exercised, as, for example, that the Optionee remain in the employ of the Company or a Subsidiary for a stated period or periods of time.

 

6.2                               Incentive Stock Options Limitations.

 

(a)                                 In no event shall any individual be granted Incentive Stock Options to the extent that the Shares covered by any Incentive Stock Options (and any incentive stock options granted pursuant to any other plans of the Company or its Subsidiaries) that may be exercised for the first time by such individual in any calendar year have an aggregate Fair Market Value in excess of $100,000.  For this purpose, the Fair Market Value of the Shares shall be determined as of the date(s) on which the Incentive Stock Options are granted.  It is intended that the limitation on Incentive Stock Options provided in this Subsection 6.2(a) be the maximum limitation on Stock Options which may be considered Incentive Stock Options pursuant to the Code.

 

(b)                                 The option exercise price of an Incentive Stock Option shall not be less than one hundred percent (100%) of the Fair Market Value of the Shares subject to such Incentive Stock Option on the date of the grant of such Incentive Stock Option.

 

(c)                                  Notwithstanding anything herein to the contrary, in no event shall any employee owning more than ten percent (10%) of the total combined voting power of the Company or any Subsidiary be granted an Incentive Stock Option unless the option exercise price of such Incentive Stock Option shall be at least one hundred ten percent (110%) of the Fair Market Value of the Shares subject to such Incentive Stock Option on the date of the grant of such Incentive Stock Option.

 

(d)                                 In no event shall any individual be granted an Incentive Stock Option after the expiration of ten (10) years from the date this Plan is adopted or is approved by the shareholders of the Company (if shareholder approval is required by Section 422 of the Code), whichever is earlier.

 

(e)                                  To the extent shareholder approval of this Plan is required by Section 422 of the Code, no individual shall be granted an Incentive Stock Option unless this Plan is approved by the shareholders of the Company within twelve (12) months before or after the date this Plan is initially adopted.  In the event this Plan is amended to increase the number of Shares subject to issuance upon the exercise of Incentive Stock Options or to change the class of employees eligible to receive 

 

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Incentive Stock Options, no individual shall be granted an Incentive Stock Option unless such amendment is approved by the shareholders of the Company within twelve (12) months before or after such amendment.

 

(f)                                   No Incentive Stock Option shall be granted to any employee owning more than ten percent (10%) of the total combined voting power of the Company or any Subsidiary unless the term of such Incentive Stock Option is equal to or less than five (5) years measured from the date on which such Incentive Stock Option is granted.

 

(g)                                  No Incentive Stock Option granted pursuant to this Plan shall be transferable other than by will or the laws of decent and distribution and it shall be exercisable only by the Optionee during his or her lifetime.

 

6.3                               Option Term.  The term of a Stock Option shall be for such period of time from the date of its grant as may be determined by the Committee; provided, however, that no Incentive Stock Option shall be exercisable after the expiration of ten (10) years from the date of its grant.

 

6.4                               Time of Exercise.  No Stock Option may be exercised unless it is exercised prior to the expiration of its stated term and, in connection with options granted to employees of the Company or its Subsidiaries,  at the time of such exercise, the Optionee is, and has been continuously since the date of grant of such Stock Option, employed by the Company or a Subsidiary, except that:

 

(a)                                 A Stock Option may, to the extent vested as of the date the Optionee ceases to be an employee of the Company or a Subsidiary, be exercised during the three-month period immediately following the date the Optionee ceases (for any reason other than death, Disability or Retirement) to be an employee of the Company or a Subsidiary (or within such other period as may be specified in the applicable option agreement), provided that, if the Stock Option has been designated as an Incentive Stock Option and the option agreement provides for a longer exercise period, the exercise of such Stock Option after such three-month period shall be treated as the exercise of a Non-Qualified Stock Option;

 

(b)                                 If the Optionee dies while entitled to exercise a Stock Option, such Stock Option may, to the extent vested as of the date of the Optionee’s death, be exercised by the Optionee’s Designated Beneficiary during the three year period immediately following the date of the Optionee’s death (or within such other period as may be specified in the applicable option agreement); provided that, if the Stock Option has been designated as an Incentive Stock Option and the option agreement provides for a longer exercise period, the exercise of such Stock Option after such one-year period shall be treated as the exercise of a Non-Qualified Stock Option;

 

(c)                                  If the Optionee ceases to be an employee of the Company or a Subsidiary by reason of the Optionee’s Disability or Retirement, a Stock Option, to the extent vested as of the date the Optionee ceases to be an employee of the Company or a Subsidiary, may be exercised during the three year period immediately following the date of such cessation of employment (or within such other period as may be specified in the applicable option agreement); provided that, if the Stock 

 

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Option has been designated as an Incentive Stock Option and the option agreement provides for a longer exercise period, the exercise of such Stock Option after such one-year period shall be treated as the exercise of a Non-Qualified Stock Option; and

 

Nothing contained in this Subsection 6.4 will be deemed to extend the term of a Stock Option or to revive any Stock Option which has previously lapsed or been canceled, terminated or surrendered.  Stock Options granted under this Plan to Consultants or non-employee Directors will contain such terms and conditions with respect to the death or disability of a Consultant or non-employee Director or termination of a Consultant’s or non-employee Director’s relationship with the Company as the Committee deems necessary or appropriate.  Such terms and conditions will be set forth in the option agreements evidencing the grant of such Stock Options.

 

6.5                               Vesting of Stock Options.

 

(a)                                 Each Stock Option granted pursuant to this Plan may only be exercised to the extent that the Optionee is vested in such Stock Option, except as specified below with respect to Early Exercise.  Each Stock Option shall vest separately in accordance with the option vesting schedule determined by the Committee, which will be incorporated in the option agreement entered into between the Company and such Optionee.  The option vesting schedule may be accelerated if, in the sole discretion of the Committee, the acceleration of the option vesting schedule would be in the best interests the Company.

 

“Early Exercise” means the exercise of a Stock Option prior to vesting in accordance with the applicable provisions of this Plan and the Award agreement evidencing the Stock Option.  “Repurchase Rights” means the right the Company may have pursuant to this Plan or an Award agreement to repurchase unvested shares of Common Stock that the applicable Participant may have received through Early Exercise of a Stock Option or through an Award of Restricted Stock at the same price that such Participant paid (if any).

 

An Award agreement covering a Non-Qualified Stock Option may (in the Committee’s sole discretion) permit the Early Exercise of all or a portion of such Stock Option prior to the vesting of such Stock Option, but only prior to an Initial Public Offering.  Shares purchased through the Early Exercise of such Option will be restricted and will be subject to the same vesting schedule as set forth in the Stock Option, and will also be subject to any repurchase rights if provided in the Award agreement

 

(b)                                 In the event of the dissolution or liquidation of the Company, each Stock Option granted pursuant to this Plan shall terminate as of a date to be fixed by the Committee; provided, however, that not less than thirty (30) days’ written notice of the date so fixed shall be given to each Optionee.  During such period all Stock Options which have not previously been terminated, exercised or surrendered will (subject to the provisions of Subsections 6.3 and 6.4) fully vest and become exercisable, notwithstanding the vesting schedule set forth in the option agreement evidencing the grant of such Stock Option.  Upon the date fixed by the Committee, any unexercised Stock Options shall terminate and be of no further effect.

 

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(c)                                  Upon a Change in Control, all Stock Options and any associated Stock Appreciation Rights Options will be treated in accordance with the applicable Award agreements.  An Award agreement granting an Award pursuant to this Plan may be amended, with the written consent of the parties thereto, to modify the treatment of any Stock Options or Stock Appreciation Rights upon Change in Control as specified in the associated Award agreement.  In particular, an Award agreement granting an Award pursuant to this Plan may be amended to eliminate any provision in the associated Award agreement providing for immediate exercisability of Stock Options or Stock Appreciation Rights upon Change in Control.

 

6.6                               Manner of Exercise of Stock Options.

 

(a)                                 Except as otherwise provided in this Plan, Stock Options may be exercised as to Shares only in amounts and at intervals of time specified in the written option agreement between the Company and the Optionee.  Each exercise of a Stock Option, or any part thereof, shall be evidenced by a written notice delivered by the Optionee to the Company.  The purchase price of the Shares as to which a Stock Option shall be exercised shall be paid in full at the time of exercise, and may be paid to the Company either:

 

(i)                                     in cash (including check, bank draft or money order); or

 

(ii)                                  by other consideration deemed acceptable by the Committee in its sole discretion.

 

(b)                                 If, as permitted in the option agreement or by the Committee, an Optionee delivers Shares already owned by the Optionee in full or partial payment of the exercise price for any Stock Option or the Optionee elects to have the Company retain that number of Shares out of the Shares being acquired through the exercise of the Stock Option having a Fair Market Value equal to the exercise price of the Stock Option being exercised, the Committee may, in its sole discretion, authorize the grant of a new Stock Option (a “Reload Option”) for that number of Shares equal to the number of already owned Shares surrendered or newly acquired Shares being retained by the Company in payment of the option exercise price of the underlying Stock Option being exercised.  The grant of a Reload Option will become effective upon the exercise of the underlying Stock Option.  The option exercise price of the Reload Option shall be the Fair Market Value of a Share on the effective date of the grant of the Reload Option.  Each Reload Option shall be exercisable no later than the time when the underlying stock option being exercised could be last exercised. The Committee may also specify additional terms, conditions and restrictions for the Reload Option and the Shares to be acquired upon the exercise thereof.

 

(c)                                  The amount, as determined by the Committee, of any federal, state or local tax required to be withheld by the Company due to the exercise of a Stock Option shall, subject to the authorization of the Committee, be satisfied, at the election of the Optionee, either (i) by payment by the Optionee to the Company of the amount of such withholding obligation in cash or other consideration acceptable to the Committee in its sole discretion or (ii) through either the retention by 

 

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the Company of a number of Shares out of the Shares being acquired through the exercise of the Stock Option or the delivery of already owned Shares having a Fair Market Value equal to the amount of the withholding obligation.  If an Optionee elects to use the method described in clause (ii) of the preceding sentence in full or partial satisfaction of any tax liability resulting from the exercise of a Stock Option, the Committee may authorize the grant of a Reload Option for that number of Shares as shall equal the number of Shares used to satisfy the tax liabilities of the Optionee arising out of the exercise of such Stock Option.  Such Reload Option will be granted at the price and on the terms set forth in Subsection 6.6 (b).  The cash payment or an amount equal to the Fair Market Value of the Shares so withheld, as the case may be, shall be remitted by the Company to the appropriate taxing authorities.

 

(d)                                 An Optionee shall not have any of the rights of a shareholder of the Company with respect to the Shares subject to a Stock Option except to the extent that such Stock Option is exercised and one or more certificates representing such Shares shall have been delivered to the Optionee.

 

6.7                               First Refusal Rights.   Until such time as the Common Stock is first registered under Section 12 of the Exchange Act, the Company shall have the right of first refusal with respect to any proposed disposition by the Optionee (or any successor in interest) of any Shares issued under the Plan. Such right of first refusal shall be exercisable in accordance with the terms established by the Committee.

 

ARTICLE 7

STOCK APPRECIATION RIGHTS

 

7.1                               Grants.  The Committee may grant to any eligible Consultant, non-employee Director or employee of the Company or a Subsidiary either Non-Tandem Stock Appreciation Rights or Tandem Stock Appreciation Rights.  Stock Appreciation Rights shall be subject to such terms and conditions as the Committee shall impose.  The grant of the Stock Appreciation Right may provide that the holder will be paid for the value of the Stock Appreciation Right either in cash or in Shares, or a combination thereof, at the sole discretion of the Committee.  In the event of the exercise of a Stock Appreciation Right payable in Shares, the holder of the Stock Appreciation Right shall receive that number of whole Shares having an aggregate Fair Market Value on the date of exercise equal to the value obtained by multiplying (i) either (a) in the case of a Tandem Stock Appreciation Right, the difference between the Fair Market Value of a Share on the date of exercise over the per share exercise price of the related Stock Option, or (b) in the case of a Non-Tandem Stock Appreciation Right, the difference between the Fair Market Value of a Share on the date of exercise over the Fair Market Value on the date of the grant by (ii) the number of Shares as to which the Stock Appreciation Right is exercised.  However, notwithstanding the foregoing, the Committee, in its sole discretion, may place a ceiling on the amount payable upon exercise of a Stock Appreciation Right, but any such limitation shall be specified at the time that the Stock Appreciation Right is granted.

 

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7.2          Exercisability.   A Tandem Stock Appreciation Right granted in connection with an Incentive Stock Option (i) may be exercised at, and only at, the times and to the extent the related Incentive Stock Option is exercisable, (ii) will expire upon the termination of the related Incentive Stock Option, (iii) may not exceed 100% of the difference between the exercise price of the related Incentive Stock Option and the Fair Market Value of the Shares subject to the related Incentive Stock Option at the time the Tandem Stock Appreciation Right is exercised and (iv) may be exercised at, and only at, such times as the Fair Market Value of the Shares subject to the related Incentive Stock Option exceeds the exercise price of the related Incentive Stock Option.  A Tandem Stock Appreciation Right may be transferred at, and only at, the times and to the extent the related Stock Option is transferable.  If a Tandem Stock Appreciation Right is granted, there shall be surrendered and canceled from the related Stock Option at the time of exercise of the Tandem Stock Appreciation Right, in lieu of exercise pursuant to the related Stock Option, that number of Shares of the Stock Option to which the exercised Tandem Stock Appreciation Right relates.

 

7.3          Certain Limitations on Non-Tandem Stock Appreciation Rights.  A Non-Tandem Stock Appreciation Right will be exercisable as provided by the Committee and will have such other terms and conditions as the Committee may determine.  A Non-Tandem Stock Appreciation Right is subject to acceleration of vesting or immediate termination in certain circumstances in the same manner as Stock Options pursuant to Subsections 6.4 and 6.5 of this Plan.

 

7.4          Limited Stock Appreciation Rights.   The Committee may grant limited Stock Appreciation Rights, either as Tandem Stock Appreciation Rights or Non-Tandem Stock Appreciation Rights, which may become exercisable only upon the occurrence of a Change in Control or such other event as the Committee may designate at the time of grant or thereafter.

 

ARTICLE 8

RESTRICTED STOCK

 

8.1          Grants.  The Committee may grant Awards of Restricted Stock to any eligible Consultant, non-employee Director or employee of the Company or a Subsidiary for such minimum consideration, if any, as may be required by applicable law or such greater consideration as may be determined by the Committee, in its sole discretion.  The terms and conditions of the Restricted Stock shall be specified by the grant agreement.  The Committee, in its sole discretion, may specify any particular rights which the Participant to whom a grant of Restricted Stock is made shall have in the Restricted Stock during the restriction period and the restrictions applicable to the particular Award, the vesting schedule (which may be based on service, performance or other factors) and rights to acceleration of vesting (including, without limitation, whether non-vested Shares are forfeited or vested upon termination of employment).  Further, the Committee may grant performance-based Awards consisting of Restricted Stock by conditioning the grant, or vesting or such other factors, such as the release, expiration or lapse of restrictions upon any such Award (including the acceleration of any such conditions or terms) of such Restricted Stock upon the attainment of specified performance goals or such other factors as the Committee may determine.  The Committee shall also determine when the restrictions shall lapse or expire and the conditions, if any, pursuant to which the Restricted Stock will be forfeited or sold back to the Company. Each Award of Restricted Stock may have different restrictions and conditions.  Unless otherwise set forth

 

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in the grant agreement, Restricted Stock may not be sold, pledged, encumbered or otherwise disposed of by the recipient until the restrictions specified in the Award expire.  Awards of Restricted Stock are subject to acceleration of vesting, termination of restrictions and termination in the same manner as Stock Options pursuant to Subsections 6.4 and 6.5 of this Plan.

 

8.2          Awards and Certificates.  Any Restricted Stock issued hereunder may be evidenced in such manner as the Committee, in its sole discretion, shall deem appropriate including, without limitation, book-entry registration or issuance of a stock certificate or certificates.  In the event any stock certificate is issued in respect of Shares of Restricted Stock, such certificate shall bear an appropriate legend with respect to the restrictions applicable to such Award.  The Company may retain, at its option, the physical custody of any stock certificate representing any awards of Restricted Stock during the restriction period or require that the certificates evidencing Restricted Stock be placed in escrow or trust, along with a stock power endorsed in blank, until all restrictions are removed or expire.

 

ARTICLE 9

PERFORMANCE AWARDS

 

9.1          Grants.  A Performance Award may consist of either or both, as the Committee may determine, of (i) the right to receive Shares or Restricted Stock, or any combination thereof as the Committee may determine or (ii) the right to receive a fixed dollar amount payable in Shares, Restricted Stock, cash or any combination thereof, as the Committee may determine.  The Committee may grant Performance Awards to any eligible Consultant, non-employee Director or employee of the Company or a Subsidiary, for such minimum consideration, if any, as may be required by applicable law or such greater consideration as may be determined by the Committee, in its sole discretion.  The terms and conditions of Performance Awards shall be specified at the time of the grant and may include provisions establishing the performance period, the performance criteria to be achieved during a performance period, the criteria used to determine vesting (including the acceleration thereof), whether Performance Awards are forfeited or vest upon termination of employment during a performance period and the maximum or minimum settlement values.  Each Performance Award shall have its own terms and conditions, which shall be determined in the sole discretion of the Committee.  If the Committee determines, in its sole discretion, that the established performance measures or objectives are no longer suitable because of a change in the Company’s business, operations, corporate structure or for other reasons that the Committee deems satisfactory, the Committee may modify the performance measures or objectives and/or the performance period.  Performance Awards are subject to acceleration of vesting, termination of restrictions and termination in the same manner as Stock Options pursuant to Subsections 6.4 and 6.5 of this Plan.

 

9.2          Terms and Conditions.   Performance Awards may be valued by reference to the Fair Market Value of a Share or according to any other formula or method deemed appropriate by the Committee, in its sole discretion, including, but not limited to, achievement of specific financial, production, sales, cost or earnings performance objectives that the Committee believes to be relevant or the Company’s performance or the performance of the Shares measured against the performance of the market, the Company’s industry segment or its direct competitors.  Performance Awards may also

 

14

 

be conditioned upon the applicable Participant remaining in the employ of the Company or one of its Subsidiaries for a specified period.  Performance Awards may be paid in cash, Shares (including Restricted Stock) or other consideration, or any combination thereof.  Performance Awards may be payable in a single payment or in installments and may be payable at a specified date or dates or upon attaining the performance objective or objectives, all at the sole discretion of the Committee.  The extent to which any applicable performance objective has been achieved shall be conclusively determined by the Committee in its sole discretion.

 

ARTICLE 10

OTHER AWARDS

 

10.1        Other Awards. The Committee may grant to any eligible Consultant, non-employee Director or employee of the Company or a Subsidiary other forms of Awards based upon, payable in or otherwise related to, in whole or in part, Shares, if the Committee, in its sole discretion, determines that such other form of Award is consistent with the purposes of this Plan.  The terms and conditions of such other form of Award shall be specified in a written agreement which sets forth the terms and conditions of such Award, including, but not limited to, the price, if any, and the vesting schedule, if any, of such Award.  Such Awards may be granted for such minimum consideration, if any, as may be required by applicable law or for such other greater consideration as may be determined by the Committee, in its sole discretion.

 

ARTICLE 11

COMPLIANCE WITH SECURITIES AND OTHER LAWS

 

11.1        Compliance.  As a condition to the issuance or transfer of any Award or any security issuable in connection with such Award, the Company may require an opinion of counsel, satisfactory to the Company, to the effect that (i) such issuance and/or transfer will not be in violation of the Securities Act or any other applicable securities laws and (ii) such issuance and/or transfer will not be in violation of the rules and regulations of any securities exchange or automated quotation system on which the Shares are listed or admitted to trading.  Further, the Company may refrain from issuing, delivering or transferring any Award or any security issuable in connection with such Award until the Committee has determined that such issuance, delivery or transfer will not violate such securities laws or rules and regulations and that either the recipient has tendered to the Company, or the Company or a Subsidiary has withheld, any federal, state or local tax owed as a result of such issuance, delivery or transfer, when the Company has a legal liability to satisfy such tax.  The Company shall not be liable for damages due to delay in the issuance, delivery or transfer of any Award or any security issuable in connection with such Award or any agreement, instrument or certificate evidencing such Award or security for any reason whatsoever, including, but not limited to, a delay caused by the listing requirements of any securities exchange or automated quotation system or any registration requirements under the Securities Act, the Exchange Act, or under any other state or federal law, rule or regulation.  The Company is under no obligation to take any action or incur any expense to register or qualify the issuance, delivery or transfer of any Award 

 

15

 

or any security issuable in connection with such Award under applicable securities laws or to perfect any exemption from such registration or qualification or to list any security on any securities exchange or automated quotation system.  Furthermore, the Company will have no liability to any person for refusing to issue, deliver or transfer any Award or any security issuable in connection with such Award if such refusal is based upon the foregoing provisions of this ARTICLE 11.  As a condition to any issuance, delivery or transfer of any Award or any security issuable in connection with such Award, the Company may place legends on any agreement, instrument or certificate evidencing such Award or security, issue stop transfer orders with respect thereto and require such agreements or undertakings as the Company may deem necessary or advisable to assure compliance with applicable laws or regulations, including, if the Company or its counsel deems it appropriate, representations from the recipient of such Award or security to the effect that such recipient is acquiring such Award or security solely for investment and not with a view to distribution and that no distribution of the Award or the security will be made unless registered pursuant to applicable federal and state securities laws, or in the opinion of counsel to the Company, such registration is unnecessary.

 

ARTICLE 12

ADJUSTMENTS UPON THE OCCURRENCE OF A RECAPITALIZATION OR CORPORATE TRANSACTION

 

12.1        In the event of a Recapitalization, the number and class of Shares subject to this Plan and to each outstanding Award, and the exercise price of each Award which is based upon Shares, shall (to the extent deemed appropriate by the Committee) be proportionately adjusted (as determined by the Committee in its sole discretion) to account for any increase or decrease in the number, or change in the class, of issued and outstanding Shares of the Company resulting from such Recapitalization.

 

12.2        If a Corporate Transaction is consummated and immediately following the consummation of such Corporate Transaction the Persons who were holders of Shares immediately prior to the consummation of such Corporate Transaction do not receive any securities or other property (hereinafter collectively referred to as “Transactional Consideration”) as a result of such Corporate Transaction and substantially all of such Persons continue to hold the Shares held by them immediately prior to the consummation of such Corporate Transaction (in substantially the same proportions relative to each other), the Awards will remain outstanding and will (subject to, and except as provided in, the other provisions of this Plan and the Award agreement) continue in full force and effect in accordance with its terms (without any modification) following the consummation of the Corporate Transaction.

 

12.3        If a Corporate Transaction is consummated and immediately following the consummation of such Corporate Transaction the Persons who were holders of Shares immediately prior to the consummation of such Corporate Transaction do receive Transactional Consideration as a result of such Corporate Transaction or substantially all of such Persons do not continue to hold the Shares held by them immediately prior to the consummation of such Corporate Transaction (in

 

16

 

substantially the same proportions relative to each other), the terms and conditions of the Awards will be modified as follows:

 

(i)            If the documentation pursuant to which a Corporate Transaction will be consummated provides for the assumption (by the entity issuing Transactional Consideration to the Persons who were the holders of Shares immediately prior to the consummation of such Corporate Transaction) of the Awards granted pursuant to this Plan without any modification or amendment (other than Permitted Modifications), such Awards will remain outstanding and will continue in full force and effect in accordance with its terms following the consummation of such Corporate Transaction (subject to such Permitted Modifications).

 

(ii)           If the documentation pursuant to which a Corporate Transaction will be consummated does not provide for the assumption by the entity issuing Transactional Consideration to the Persons who were the holders of Shares immediately prior to the consummation of such Corporate Transaction of the Awards granted pursuant to this Plan without any modification or amendment (other than Permitted Modifications), all vesting restrictions (performance based or otherwise) applicable to Awards which will not be so assumed will accelerate and the holders of such Awards may (subject to the expiration of the term of such Awards) exercise/receive the benefits of such Awards without regard to such vesting restrictions during the ten (10) day period immediately preceding the consummation of such Corporate Transaction.  For purposes of the immediately preceding sentence, all performance based goals will be deemed to have been satisfied in full.  The Company will provide each Participant holding Awards which will not be so assumed with reasonable notice of the termination of such vesting restrictions and the impending termination of such Awards.  Upon the consummation of such a Corporate Transaction, all unexercised Awards which are not to be so assumed will automatically terminate and cease to be outstanding.

 

Nothing contained in this ARTICLE 12 will be deemed to extend the term of an Award or to revive any Award which has previously lapsed or been canceled, terminated or surrendered.

 

ARTICLE 13

AMENDMENT OR TERMINATION OF THIS PLAN

 

13.1        Amendment of This Plan.  Notwithstanding anything contained in this Plan to the contrary, all provisions of this Plan (including, without limitation, the maximum number of Shares that may be issued with respect to Awards to be granted pursuant to this Plan) may at any time or from time to time be modified or amended by the Board; provided, however, that no Award at any time outstanding pursuant to this Plan may be modified, impaired or canceled adversely to the holder of the Award without the consent of such holder.

 

13.2        Termination of This Plan.  The Board may suspend or terminate this Plan at any time, and such suspension or termination may be retroactive or prospective.  Termination of this Plan shall not impair or affect any Award previously granted hereunder and the rights of the holder of the Award shall remain in effect until the Award has been exercised in its entirety or has expired or otherwise has been terminated by the terms of such Award.

 

17

 

ARTICLE 14

AMENDMENTS AND ADJUSTMENTS TO AWARDS

 

14.1        Amendments and Adjustments.  The Committee may amend, modify or terminate any outstanding Award with the Participant’s consent at any time prior to payment or exercise in any manner not inconsistent with the terms of this Plan, including, without limitation, (i) to change the date or dates as of which and/or the terms and conditions pursuant to which (A) a Stock Option becomes exercisable or (B) a Performance Award is deemed earned, (ii) to amend the terms of any outstanding Award to provide an exercise price per share which is higher or lower than the then current exercise price per share of such outstanding Award or (iii) to cancel an Award and grant a new Award in substitution therefor under such different terms and conditions as the Committee determines in its sole discretion to be appropriate including, but not limited to, having an exercise price per share which may be higher or lower than the exercise price per share of the canceled Award.  The Committee may also make adjustments in the terms and conditions of, and the criteria included in agreements evidencing Awards in recognition of unusual or nonrecurring events (including, without limitation, the events described in ARTICLE 12 hereof) affecting the Company, or the financial statements of the Company or any Affiliate, or of changes in applicable laws, regulations or accounting principles, whenever the Committee determines that such adjustments are appropriate to prevent reduction or enlargement of the benefits or potential benefits intended to be made available pursuant to this Plan.

 

ARTICLE 15

GENERAL PROVISIONS

 

15.1        No Limit on Other Compensation Arrangements.   Nothing contained in this Plan shall prevent the Company from adopting or continuing in effect other compensation arrangements, and such arrangements may be either generally applicable or applicable only in specific cases.  This Plan shall not affect any other stock option, incentive, or other compensation or benefit plan of the Company or any Subsidiary, except as may be expressly provided therein.

 

15.2        Other Awards.  The grant of an Award shall not confer upon the recipient the right to receive any future or other Awards under this Plan or any other plans of the Company or any Subsidiary, whether or not any awards may be granted to similarly situated employees, or the right to receive future Awards upon the same terms or conditions as previously granted.

 

15.3        No Right to Employment or Continuation of Relationship.   Nothing in this Plan or in any Award, nor the grant of any Award, shall confer upon or be construed as giving any Participant any right to remain in the employ of the Company or a Subsidiary or to continue as a Consultant or non-employee Director.  Further, the Company or a Subsidiary may at any time dismiss a Participant from emp1oyment or terminate the relationship of any Consultant or non-employee Director with the Company or any Subsidiary, free from any liability or any claim pursuant to this Plan.  No

 

18

 

Consultant, non-employee Director or employee of the Company or any Subsidiary shall have any claim to be granted any Award, and there is no obligation for uniformity of treatment of any Consultant, non-employee Director or employee of the Company or any Subsidiary or of any Participants.

 

15.4        Governing Law.  The validity, construction and effect of this Plan and any rules and regulations relating to this Plan shall be determined in accordance with the laws of the State of Texas, without giving effect to the conflict of laws principles thereof.

 

15.5        Severability.  If any provision of this Plan or any Award is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction or as to any individual or Award, or would disqualify this Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable law, or if it cannot be construed or deemed amended without, in the sole determination of the Committee, materially altering the intent of this Plan or the Award, such provision shall be stricken as to such jurisdiction, individual or Award and the remainder of this Plan and any such Award shall remain in full force and effect.

 

15.6        No Fractional Shares.  No fractional Shares shall be issued or delivered pursuant to this Plan or any Award, and the Committee shall determine, in its sole discretion, whether cash, other securities or other property shall be paid or transferred in lieu of any fractional Shares or whether such fractional Shares or any rights thereto shall be canceled, terminated or otherwise eliminated.

 

15.7        Headings.   Headings are given to the ARTICLEs and Subsections of this Plan solely as a convenience to facilitate reference.  Such headings shall not be deemed in any way material or relevant to the construction or interpretation of this Plan or any provision thereof.

 

15.8        Gender.  If the context requires, words of one gender when used in this Plan shall include the others and words used in the singular shall include the plural, and vice versa.

 

15.9        Transferability of Awards.  Awards shall not be transferable otherwise than by will or the laws of descent and distribution without the written consent of the Committee (which may be granted or withheld at the sole discretion of the Committee).  Awards may be exercised, during the lifetime of the holder, only by the holder.  Any attempted assignment, transfer, pledge, hypothecation or other disposition of an Award contrary to the provisions hereof, or the levy of any execution, attachment or similar process upon an Award shall be null and void and without effect.

 

15.10      Rights of Participants.  Except as hereinbefore expressly provided in this Plan, any Person to whom an Award is granted shall have no rights by reason of any subdivision or consolidation of stock of any class or the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class or by reason of any dissolution, liquidation, reorganization, merger or consolidation or spinoff of assets or stock of another corporation, and any issue by the Company of shares of stock of any class or securities convertible into shares of stock of any class shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or exercise price of Shares subject to an Award.

 

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15.11      No Limitation Upon the Rights of the Company.  The grant of an Award pursuant to this Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, or changes of its capital or business structure; to merge, convert or consolidate; to dissolve or liquidate; or sell or transfer all or any part of its business or assets.

 

15.12      Date of Grant of an Award.   Except as noted in this ARTICLE 15.12, the granting of an Award shall take place only upon the execution and delivery by the Company and the Participant of a written agreement and neither any other action taken by the Committee nor anything contained in this Plan or in any resolution adopted or to be adopted by the Committee, the Board or the shareholders of the Company shall constitute the granting of an Award pursuant to this Plan.  Solely for purposes of determining the Fair Market Value of the Shares subject to an Award, such Award will be deemed to have been granted as of the date specified by the Committee notwithstanding any delay which may elapse in executing and delivering the applicable agreement.

 

15.13      Tax Withholding.  The Company or any Subsidiary shall be entitled to deduct from other compensation payable to an employee any sums required by federal, state, or local tax law to be withheld with respect to the granting or exercise of a Stock Option or other Award under this Plan.  In the alternative, the Company or any Subsidiary may require the recipient (or other person exercising the Award) to pay such sums directly to the employer, and neither the Company or any Subsidiary shall have any obligation to issue any Shares or make any payment until such payment has been received.

 

15.14      Other Laws.  The Company shall not be obligated to issue any Shares pursuant to any Award granted under the Plan at any time when the offering of the Shares covered by such Award is not either (I) registered under the Securities Act of 1933 and such other state and federal laws, rules or regulations as the Company or the Committee deems applicable or (ii) exempt from the registration requirements of such laws, rules or regulations available for the issuance and sale of such shares.

 

ARTICLE 16

NAMED EXECUTIVE OFFICERS

 

16.1        Applicability of ARTICLE 16.  The provisions of this ARTICLE 16 shall apply only if the Company is a “publicly held corporation” as defined in Section 162(m)(2) of the Code, and then only to those executive officers (i) whose compensation is required to be reported in the Company’s proxy statement pursuant to Item 402(a)(3)(i) and (ii) (or any successor thereto) of Regulation S-K (or any successor thereto) under the general rules and regulations under the Exchange Act and (ii) whose total compensation, including estimated Awards, is determined by the Committee to possibly be subject to the limitations on deductions imposed by Section 162(m) of the Code (“Named Executive Officers”).  In the event of any inconsistencies between this ARTICLE 16 and the other Plan provisions as they pertain to Named Executive Officers, the provisions of this ARTICLE 16 shall control.

 

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16.2        Establishment of Performance Goals.  Awards for Named Executive Officers, other than Stock Options and Stock Appreciation Rights, shall be based on the attainment of certain performance goals.  No later than the earlier of (i) ninety (90) days after the commencement of the applicable fiscal year of the Company or one of its Subsidiaries or such other award period as may be established by the Committee (“Award Period”) and (ii) the completion of twenty-five percent (25%) of such Award Period, the Committee shall establish, in writing, the performance goals applicable to each such Award for Named Executive Officers.  At the time the performance goals are established, their outcome must be substantially uncertain.  In addition, the performance goal must state, in terms of an objective formula or standard, the method for computing the amount of compensation payable to the Named Executive Officer if the goal is obtained.  Such formula or standard shall be sufficiently objective so that a third party with knowledge of the relevant performance results could calculate the amount to be paid to the subject Named Executive Officer.  The material terms of the performance goals for Named Executive Officers and the compensation payable thereunder shall be submitted to the shareholders of the Company for their review and approval if and to the extent required for such compensation to be deductible pursuant to Section 162(m) (or any successor thereto) of the Code, and the Treasury Regulations thereunder.  Shareholder approval, if necessary, shall be obtained for such performance goals prior to any Award being paid to such Named Executive Officer.  If shareholder approval is required and not received with respect to such performance goals, no amount shall be paid to such Named Executive Officer for such applicable Award Period pursuant to this Plan.

 

16.3        Components of Awards.  Each Award granted to a Named Executive Officer, other than Stock Options and Stock Appreciation Rights, shall be based on performance goals which are sufficiently objective so that a third party having knowledge of the relevant facts could determine whether the goal was met.  Except as provided in Subsection 16.8 herein, performance measures which may serve as determinants of Named Executive Officers’ Awards shall be limited to the following measures:  earnings per share; return on assets; return on equity; return on capital; net profit after taxes; net profit before taxes; operating profits; stock price; and sales or expenses.  Within ninety (90) days following the end of each Award Period, the Committee shall certify in writing that the performance goals, and any other material terms were satisfied.  Thereafter, Awards shall be made for each Named Executive Officer as determined by the Committee.  The Awards may not vary from the pre-established amount based on the level of achievement.

 

16.4        No Mid-Year Change in Awards.  Except as provided in Subsections 16.8 and 16.9 herein, each Named Executive Officer’s Awards shall be based exclusively on the performance measures established by the Committee pursuant to Subsections 16.2 and 16.3.

 

16.5        No Partial Award Period Participation.  A Named Executive Officer who becomes eligible to participate in this Plan after performance goals have been established in an Award Period pursuant to Subsections 16.2 and 16.3 may not participate in this Plan prior to the next succeeding Award Period, except with respect to Awards which are Stock Options or Stock Appreciation Rights.

 

16.6        Performance Goals.  Except as provided in Subsection 16.8 herein, performance goals shall not be changed following their establishment, and Named Executive Officers shall not

 

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receive any payout, except with respect to Awards which are Stock Options or Stock Appreciation Rights, when the minimum performance goals are not met or exceeded.

 

16.7        Individual Performance and Discretionary Adjustments.   Except as provided in Subsection 16.8 herein, subjective evaluations of individual performance of Named Executive Officers shall not be reflected in their Awards, other than Awards which are Stock Options or Stock Appreciation Rights.  The payment of such Awards shall be entirely dependent upon the attainment of the preestablished performance goals.

 

16.8        Amendments.  No amendment of this Plan with respect to any Named Executive Officer may be made which would (i) increase the maximum amount that can be paid to any one Participant pursuant to this Plan, (ii) change the specified performance goal for payment of Awards, or (iii) modify the requirements as to eligibility for participation in this Plan, unless the Company’s shareholders have first approved such amendment in a manner which would permit the deduction under Section 162(m) (or any successor thereto) of the Code of such payment in the fiscal year it is paid.  The Committee shall amend this ARTICLE 16 and such other provisions as it deems appropriate, to cause amounts payable to Named Executive Officers to satisfy the requirements of Section 162(m) (or any successor thereto) and the Treasury regulations promulgated thereunder.

 

16.9        Stock Options and Stock Appreciation Rights - Grant Price.  Notwithstanding any provision of this Plan (including the provisions of this ARTICLE 16) to the contrary, the amount of compensation which a Named Executive Officer may receive with respect to Stock Options and Stock Appreciation Rights which are granted hereunder is based solely on an increase in the value of the applicable Shares after the date of grant of such Award.  Thus, no Stock Option may be granted hereunder to a Named Executive Officer with an exercise price less than the Fair Market Value of Shares on the date of grant.  Furthermore, the maximum number of Shares (or cash equivalent value) with respect to which Stock Options or Stock Appreciation Rights may be granted hereunder to any Named Executive Officer during any calendar year may not exceed 1,000,000 Shares, subject to adjustment as provided in ARTICLE 12 hereunder.

 

16.10      Maximum Amount of Compensation.  The maximum amount of compensation payable as an Award (other than an Award which is a Stock Option or Stock Appreciation Right) to any Named Executive Officer during any calendar year may not exceed $1,000,000.

 

22Exhibit 10.6

 

APPLIED OPTOELECTRONICS, INC.

 

2004 INCENTIVE SHARE PLAN

 

 

ARTICLE 1

PURPOSE AND EFFECTIVE DATE

 

1.1                               Purpose.  The purpose of the 2004 Incentive Share Plan (the “Plan”) is to advance the interests of Applied Optoelectronics, Inc. (the “Company”) and its shareholders by enabling the Company and each of its Subsidiaries (as hereinafter defined) to (A) provide share ownership opportunities to certain of their key employees to participate in the Company’s growth and (B) enhance their ability to attract and retain individuals of superior managerial or technical ability and to motivate employees, consultants, independent contractors, agents, and other persons to exert their best efforts towards future progress and profitability of the Company.

 

1.2                               Effective Date.  The effective date of the Plan shall be the date that this Plan is approved by the shareholders of the Company.

 

ARTICLE 2

DEFINITIONS

 

As used in this Plan, the following terms shall have the meanings set forth below unless the context otherwise requires:

 

2.1                               “Award” shall mean the grant of a Stock Option, a Stock Appreciation Right, Restricted Stock, a Performance Award, or any other grant of incentive compensation pursuant to this Plan.

 

2.2                               “Award Period” shall have the meaning set forth in Subsection 16.2 of this Plan.

 

2.3                               “Board” shall mean the Board of Directors of the Company, as the same may be constituted from time to time.

 

2.4                               “Change in Control” has the meaning given such term in the applicable Award agreement or, if not defined therein, shall mean, after the effective date of this Plan stated in Subsection 1.2, (i) the occurrence of an event of a nature that would be required to be reported by the Company in response to Item 1 of a Current Report on Form 8-K (or any successor to such form), whether or not the Company is, in fact, required to report on such form, promulgated pursuant to the Exchange Act; provided that, without limitation, such a Change in Control shall be deemed to have occurred if (a) any Person or group (as defined in the Exchange Act), other than (A) the Company, (B) a wholly-owned Subsidiary, (C) any employee benefit plan (including, without limitation, an employee stock ownership plan) adopted by the Company or any wholly-owned Subsidiary or (D) any trustee or other fiduciary holding securities under any employee benefit plan adopted by the

 

 

Company or any Subsidiary, becomes the “beneficial owner” (as defined in Rule 13d-3 (or any successor to such rule) promulgated under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities or (b) during any period of twenty-four (24) months, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof, unless the election by the Board or the nomination for election by the Company’s shareholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of such twenty-four (24) month period or whose election or nomination for election was previously so approved; (ii) a Corporate Transaction is consummated, other than a Corporate Transaction that would result in substantially all of the holders of voting securities of the Company outstanding immediately prior thereto owning (directly or indirectly and in substantially the same proportions relative to each other) not less than fifty percent (50%) of the combined voting power of the voting securities of the issuing/surviving/resulting entity outstanding immediately after such Corporate Transaction; or (iii) an agreement for the sale or other disposition of all or substantially all of the Company’s assets (evaluated on a consolidated basis, without regard to whether the sale or disposition is effected via a sale or disposition of assets of the Company, the sale or disposition of the securities of one or more Subsidiaries or the sale or disposition of the assets of one or more Subsidiaries) is consummated.

 

2.5                               “Code” shall mean the Internal Revenue Code of 1986, as amended from time to time

(or any successor to such legislation).

 

2.6                               “Committee” shall mean the Compensation Committee of the Board, if such a committee shall have been appointed and consist of two (2) or more directors of the Company who are both “Non-Employee Directors” (as that term is defined in Rule 16b-3 (or any successor to such rule) promulgated under the Exchange Act) and “outside directors” within the meaning of Section 162(m) of the Code and such Treasury regulations as may be promulgated thereunder.  If a separate Compensation Committee  with such membership shall not have been appointed, “Committee” shall mean the Board.

 

2.7                               “Company” shall mean Applied Optoelectronics, Inc., a Texas corporation.

 

2.8                               “Consultant” shall mean any Person who or which is engaged by the Company or any Subsidiary to render services as a consultant or advisor.

 

2.9                               “Corporate Transaction” shall mean any reorganization, merger, consolidation or conversion involving the Company or any exchange of securities involving Shares, other than a Recapitalization.

 

2.10                        “Designated Beneficiary” shall mean the beneficiary designated by a Participant, in a manner authorized by the Committee, to exercise the rights of such Participant in the event of such Participant’s death.  In the absence of an effective designation by a Participant, the Designated Beneficiary shall be such Participant’s estate.

 

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2.11                        “Disability” shall mean permanent and total inability to engage in any substantial gainful activity, even with reasonable accommodation, by reason of any medically determinable physical or mental impairment which has lasted or can reasonably be expected to last without material interruption for a period of not less than twelve (12) months, as determined in the sole discretion of the Committee.

 

2.12                        “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended from time to time (or any successor to such legislation).

 

2.13                        “Fair Market Value” shall mean with respect to the Shares, as of any date, (i) if the Shares are listed or admitted to trade on a national securities exchange, the closing price of the Shares on the composite tape, as published in the Wall Street Journal, of the principal national securities exchange on which the Shares are so listed or admitted to trade, on such date or, if there is no trading in Shares on such date, then the closing price of the Shares as quoted on such composite tape on the next preceding date on which there was trading in such Shares; (ii) if the Shares are not listed or admitted to trade on a national securities exchange, then the closing price of the Shares as quoted on the National Market System of the NASD; (iii) if the Shares are not listed or admitted to trade on a national securities exchange or the National Market System of the NASD, the mean between the bid and asked price for the Shares on such date, as furnished by the NASD through NASDAQ or a similar organization if NASDAQ is no longer reporting such information; or (iv) if the Shares are not listed or admitted to trade on a national securities exchange or the National Market System of the NASD and if bid and asked prices for the Shares are not so furnished  by the NASD or a similar organization, the value established by the Board, determined without regard to any restriction other than a restriction which, by its terms, will never lapse.

 

2.14                        “Incentive Stock Option” shall mean any option to purchase Shares awarded pursuant to this Plan which qualifies as an “Incentive Stock Option” pursuant to Section 422 of the Code.

 

2.15                        “Named Executive Officer” shall have the meaning set forth in Subsection 16.1 of this Plan.

 

2.16                        “NASD” shall mean the National Association of Securities Dealers, Inc.

 

2.17                        “Non-Qualified Stock Option” shall mean any option to purchase Shares awarded pursuant to this Plan that does not qualify as an Incentive Stock Option (including, without limitation, any option to purchase Shares originally designated as or intended to qualify as an Incentive Stock Option) but which does not (for whatever reason) qualify as an Incentive Stock Option.

 

2.18                        “Non-Tandem Stock Appreciation Right” shall mean any Stock Appreciation Right granted alone and not in connection with an Award which is a Stock Option.

 

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2.19                        “Optionee” shall mean any Participant who has been granted and holds a Stock Option awarded pursuant to this Plan.

 

2.20                        “Participant” shall mean any Person who has been granted and holds an Award granted pursuant to this Plan.

 

2.21                        “Performance Award” shall mean any Award granted pursuant to this Plan of Shares, rights based upon, payable in or otherwise related to Shares (including Restricted Stock) or cash, as the Committee may determine, at the end of a specified performance period established by the Committee.

 

2.22                        “Permitted Modification” shall be deemed to be any modification of an Award which is made in connection with a Corporate Transaction and which provides (i) in connection with a Stock Option, that subsequent to the consummation of the Corporate Transaction (A) the exercise price of such Stock Option will be proportionately adjusted to reflect the exchange ratio applicable to the particular Corporate Transaction and/or (B) the nature and amount of consideration to be received upon exercise of the Stock Option will be the same (on a per share basis) as was received by Persons who were holders of Shares immediately prior to the consummation of the Corporate Transaction, (ii) in connection with a Stock Appreciation Right, that subsequent to the consummation of the Corporate Transaction (A) the base price of such Stock Appreciation Right will be proportionately adjusted to reflect the exchange ratio applicable to the particular Corporate Transaction and/or (B) the benefits to be received by the holder of such Stock Appreciation Right will be measured based upon the nature and amount of consideration received (on a per share basis) by Persons who were holders of Shares immediately prior to the consummation of the Corporate Transaction, or (iii) for a modification expressly provided for in this Plan or in an Award agreement.

 

2.23                        “Person” shall mean an individual, partnership, limited liability company, corporation, joint stock company, trust, estate, joint venture, association or unincorporated organization or any other form of business organization.

 

2.24                        “Plan” shall mean this Applied Optoelectronics, Inc. 2004 Incentive Share Plan as set out in this document and as it may be amended from time to time.

 

2.25                        “Reload Option” shall mean a Stock Option as defined in Subsection 6.6(b) of this Plan.

 

2.26                        “Recapitalization” shall mean any stock split, stock dividend, reverse stock split, combination or subdivision of Shares or any other similar increase or decrease in the number of Shares issued and outstanding, without the Company receiving consideration therefor in money, services, or property (other than securities issued by the Company).

 

2.27                        “Restricted Stock” shall mean any Shares granted pursuant to this Plan that are subject to restrictions or substantial risk of forfeiture.

 

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2.28                        “Retirement” shall mean the termination of employment of an employee of the Company or any Subsidiary pursuant to the terms of any retirement plan or policy maintained by the Company or any Subsidiary in which such employee participates.

 

2.29                        “Securities Act” shall mean the Securities Act of 1933, as amended from time to time (or any successor to such legislation).

 

2.30                        “Shares” shall mean shares of the common stock of the Company and any shares of capital stock or other securities hereafter issued or issuable upon, in respect of or in substitution or exchange for shares of common stock of the Company.

 

2.31                        “Stock Appreciation Right” shall mean the right of the holder thereof to receive property or Shares with a Fair Market Value equal to or cash in an amount equal to the excess of the Fair Market Value of the aggregate number of Shares subject to such Stock Appreciation Right on the date of exercise over the Fair Market Value of the aggregate number of Shares subject to such Stock Appreciation Right on the date of the grant of such Stock Appreciation Right (or such other value as may be specified in the agreement granting such Stock Appreciation Right).  A Stock Appreciation Right may be a Tandem Stock Appreciation Right or a Non-Tandem Stock Appreciation Right.

 

2.32                        “Stock Option”  shall mean any Incentive Stock Option or Non-Qualified Stock Option.

 

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

 

2.34                        “Tandem Stock Appreciation Right” shall mean a Stock Appreciation Right granted in connection with an Award which is a Stock Option.

 

2.35                        “Transactional Consideration” shall have the meaning set forth in Subsection 12.2 of this Plan.

 

ARTICLE 3

ADMINISTRATION OF THIS PLAN

 

3.1                               Committee.  This Plan shall be administered and interpreted by the Committee.

 

3.2                               Administration.

 

(a)                                 Subject to the provisions of this Plan and directions from the Board, the Committee is authorized to:

 

(i)                                     determine the Persons to whom Awards are to be granted;

 

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(ii)                                  determine the types and combinations of Awards to be granted; the number of Shares to be covered by an Award; the exercise price of an Award; the time or times when an Award shall be granted and may be exercised; the terms, performance criteria or other conditions, vesting periods or any restrictions for an Award; any restrictions on Shares acquired pursuant to the exercise of an Award; and any other terms and conditions of an Award;

 

(iii)                               conclusively interpret the provisions of this Plan;

 

(iv)                              prescribe, amend and rescind rules and regulations relating to this Plan;

 

(v)                                 rely upon employees of the Company for such clerical and record keeping duties as may be necessary in connection with the administration of this Plan;

 

(vi)                              accelerate or defer (with the consent of the Participant) the vesting of any rights pursuant to an Award; and

 

(vii)                           make all other determinations and take all other actions necessary or advisable for the administration of this Plan.

 

The President of the Company shall also be authorized, subject to the provisions of this Plan and directions from the Board and the Committee, to determine the types and combinations of Awards to be granted; the number of Shares to be covered by an Award; the exercise price of an Award; the time or times when an Award shall be granted and may be exercised; the terms, performance criteria or other conditions, vesting periods or any restrictions for an Award; any restrictions on Shares acquired pursuant to the exercise of an Award; and any other terms and conditions of an Award; provided, however, that the President of the Company may not (1) grant any Award to himself or herself (2) grant Awards to any one person with respect to more than 100,000 Shares in the aggregate (which number shall be adjusted pro rata in the event of any adjustment to the limitation set forth in ARTICLE 4.1 hereof), or (3) modify any Award made by the Committee or Board.

 

(b)                                 A majority of the Committee members shall constitute a quorum for action by the Committee. All determinations of the Committee in connection with the Plan shall be made by not less than a majority of its members.  All questions of interpretation and application of this Plan or pertaining to any question of fact or Award granted hereunder will be decided by the Committee, whose decision will be final, conclusive and binding upon the Company and each other affected party.

 

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ARTICLE 4

SHARES SUBJECT TO PLAN

 

4.1                               Limitations.  The maximum number of Shares that may be issued with respect to Awards granted pursuant to this Plan shall not exceed 1,500,000 unless increased or decreased by reason of changes in the capitalization of the Company as hereinafter provided or by amendment of this Plan.  The Shares issued pursuant to this Plan may be authorized but unissued Shares, or may be issued Shares which have been reacquired by the Company.

 

4.2                               Changes.  To the extent that any Award granted pursuant to this Plan shall be forfeited, shall expire or shall be canceled, in whole or in part, then the number of Shares covered by the Award so forfeited, expired or canceled may again be awarded pursuant to the provisions of this Plan.  In the event that Shares are delivered to the Company in full or partial payment of the exercise price for the exercise of a Stock Option, the number of Shares available for future Awards granted pursuant to this Plan shall be reduced only by the net number of Shares issued upon the exercise of the Stock Option.  Awards that may be satisfied either by the issuance of Shares or by cash or other consideration shall, until the form of consideration to be paid is finally determined, be counted against the maximum number of Shares that may be issued pursuant to this Plan. If the Award is ultimately satisfied by the payment of consideration other than Shares, such Shares may again be made the subject of an Award granted pursuant to this Plan.  Awards will not reduce the number of Shares that may be issued pursuant to this Plan if the settlement of the Award will not require the issuance of Shares, as, for example, a Stock Appreciation Right that can be satisfied only by the payment of cash.

 

ARTICLE 5

ELIGIBILITY

 

5.1                               Eligibility. Eligibility for participation in this Plan shall be confined to those individuals who are employed by the Company or a Subsidiary and such Consultants and non-employee Directors as may be designated by the Committee.  In making any determination as to Persons to whom Awards shall be granted, the type of Award and/or the number of Shares to be covered by the Award, the Committee shall consider the position and responsibilities of the Person, the importance of the Person to the Company, the duties of the Person, the past, present and potential contributions of the Person to the growth and success of the Company and such other factors as the Committee may deem relevant in connection with accomplishing the purposes of this Plan.

 

ARTICLE 6

STOCK OPTIONS

 

6.1                               Grants.  The Committee may grant Stock Options alone or in addition to other Awards granted pursuant to this Plan to any eligible Person.  Each Person so selected shall be offered a Stock Option to purchase the number of Shares determined by the Committee.  The Committee shall specify whether such Stock Option is an Incentive Stock Option or Non-Qualified Stock Option and any other terms or conditions relating to such Award; provided, however only employees of the Company or a Subsidiary may be granted Incentive Stock Options.  To the extent that any Stock

 

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Option designated as an Incentive Stock Option does not qualify as an Incentive Stock Option (whether because of its provisions, the failure of the shareholders of the Company to authorize the issuance of Incentive Stock Options, the time or manner of its exercise or otherwise), such Stock Option or the portion thereof which does not qualify shall be deemed to constitute a Non-Qualified Stock Option.  Each Person to be granted a Stock Option shall enter into a written agreement with the Company, in such form as the Committee may prescribe, setting forth the terms and conditions (including, without limitation, the exercise price and vesting schedule) of the Stock Option.  At any time and from time to time, the Optionee and the Committee may agree to modify an option agreement in such respects as they may deem appropriate, including, without limitation, the conversion of an Incentive Stock Option into a Non-Qualified Stock Option.  The Committee may require that an Optionee meet certain conditions before the Stock Option or a portion thereof may vest or be exercised, as, for example, that the Optionee remain in the employ of the Company or a Subsidiary for a stated period or periods of time.

 

6.2                               Incentive Stock Options Limitations.

 

(a)                                 In no event shall any individual be granted Incentive Stock Options to the extent that the Shares covered by any Incentive Stock Options (and any incentive stock options granted pursuant to any other plans of the Company or its Subsidiaries) that may be exercised for the first time by such individual in any calendar year have an aggregate Fair Market Value in excess of $100,000.  For this purpose, the Fair Market Value of the Shares shall be determined as of the date(s) on which the Incentive Stock Options are granted.  It is intended that the limitation on Incentive Stock Options provided in this Subsection 6.2(a) be the maximum limitation on Stock Options which may be considered Incentive Stock Options pursuant to the Code.

 

(b)                                 The option exercise price of an Incentive Stock Option shall not be less than one hundred percent (100%) of the Fair Market Value of the Shares subject to such Incentive Stock Option on the date of the grant of such Incentive Stock Option.

 

(c)                                  Notwithstanding anything herein to the contrary, in no event shall any employee owning more than ten percent (10%) of the total combined voting power of the Company or any Subsidiary be granted an Incentive Stock Option unless the option exercise price of such Incentive Stock Option shall be at least one hundred ten percent (110%) of the Fair Market Value of the Shares subject to such Incentive Stock Option on the date of the grant of such Incentive Stock Option.

 

(d)                                 In no event shall any individual be granted an Incentive Stock Option after the expiration of ten (10) years from the date this Plan is adopted or is approved by the shareholders of the Company (if shareholder approval is required by Section 422 of the Code), whichever is earlier.

 

(e)                                  To the extent shareholder approval of this Plan is required by Section 422 of the Code, no individual shall be granted an Incentive Stock Option unless this Plan is approved by the shareholders of the Company within twelve (12) months before or after the date this Plan is initially adopted.  In the event this Plan is amended to increase the number of Shares subject to issuance upon the exercise of Incentive Stock Options or to change the class of employees eligible to receive

 

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Incentive Stock Options, no individual shall be granted an Incentive Stock Option unless such amendment is approved by the shareholders of the Company within twelve (12) months before or after such amendment.

 

(f)                                   No Incentive Stock Option shall be granted to any employee owning more than ten percent (10%) of the total combined voting power of the Company or any Subsidiary unless the term of such Incentive Stock Option is equal to or less than five (5) years measured from the date on which such Incentive Stock Option is granted.

 

(g)                                  No Incentive Stock Option granted pursuant to this Plan shall be transferable other than by will or the laws of decent and distribution and it shall be exercisable only by the Optionee during his or her lifetime.

 

6.3                               Option Term.  The term of a Stock Option shall be for such period of time from the date of its grant as may be determined by the Committee; provided, however, that no Incentive Stock Option shall be exercisable after the expiration of ten (10) years from the date of its grant.

 

6.4                               Time of Exercise.  No Stock Option may be exercised unless it is exercised prior to the expiration of its stated term and, in connection with options granted to employees of the Company or its Subsidiaries,  at the time of such exercise, the Optionee is, and has been continuously since the date of grant of such Stock Option, employed by the Company or a Subsidiary, except that:

 

(a)                                 A Stock Option may, to the extent vested as of the date the Optionee ceases to be an employee of the Company or a Subsidiary, be exercised during the three-month period immediately following the date the Optionee ceases (for any reason other than death, Disability or Retirement) to be an employee of the Company or a Subsidiary (or within such other period as may be specified in the applicable option agreement), provided that, if the Stock Option has been designated as an Incentive Stock Option and the option agreement provides for a longer exercise period, the exercise of such Stock Option after such three-month period shall be treated as the exercise of a Non-Qualified Stock Option;

 

(b)                                 If the Optionee dies while entitled to exercise a Stock Option, such Stock Option may, to the extent vested as of the date of the Optionee’s death, be exercised by the Optionee’s Designated Beneficiary during the three year period immediately following the date of the Optionee’s death (or within such other period as may be specified in the applicable option agreement); provided that, if the Stock Option has been designated as an Incentive Stock Option and the option agreement provides for a longer exercise period, the exercise of such Stock Option after such one-year period shall be treated as the exercise of a Non-Qualified Stock Option;

 

(c)                                  If the Optionee ceases to be an employee of the Company or a Subsidiary by reason of the Optionee’s Disability or Retirement, a Stock Option, to the extent vested as of the date the Optionee ceases to be an employee of the Company or a Subsidiary, may be exercised during the three year period immediately following the date of such cessation of employment (or within such other period as may be specified in the applicable option agreement); provided that, if the Stock

 

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Option has been designated as an Incentive Stock Option and the option agreement provides for a longer exercise period, the exercise of such Stock Option after such one-year period shall be treated as the exercise of a Non-Qualified Stock Option; and

 

Nothing contained in this Subsection 6.4 will be deemed to extend the term of a Stock Option or to revive any Stock Option which has previously lapsed or been canceled, terminated or surrendered.  Stock Options granted under this Plan to Consultants or non-employee Directors will contain such terms and conditions with respect to the death or disability of a Consultant or non-employee Director or termination of a Consultant’s or non-employee Director’s relationship with the Company as the Committee deems necessary or appropriate.  Such terms and conditions will be set forth in the option agreements evidencing the grant of such Stock Options.

 

6.5                               Vesting of Stock Options.

 

(a)                                 Each Stock Option granted pursuant to this Plan may only be exercised to the extent that the Optionee is vested in such Stock Option, except as specified below with respect to Early Exercise.  Each Stock Option shall vest separately in accordance with the option vesting schedule determined by the Committee, which will be incorporated in the option agreement entered into between the Company and such Optionee.  The option vesting schedule may be accelerated if, in the sole discretion of the Committee, the acceleration of the option vesting schedule would be in the best interests the Company.

 

“Early Exercise” means the exercise of a Stock Option prior to vesting in accordance with the applicable provisions of this Plan and the Award agreement evidencing the Stock Option.  “Repurchase Rights” means the right the Company may have pursuant to this Plan or an Award agreement to repurchase unvested shares of Common Stock that the applicable Participant may have received through Early Exercise of a Stock Option or through an Award of Restricted Stock at the same price that such Participant paid (if any).

 

An Award agreement covering a Non-Qualified Stock Option may (in the Committee’s sole discretion) permit the Early Exercise of all or a portion of such Stock Option prior to the vesting of such Stock Option, but only prior to an Initial Public Offering.  Shares purchased through the Early Exercise of such Option will be restricted and will be subject to the same vesting schedule as set forth in the Stock Option, and will also be subject to any repurchase rights if provided in the Award agreement

 

(b)                                 In the event of the dissolution or liquidation of the Company, each Stock Option granted pursuant to this Plan shall terminate as of a date to be fixed by the Committee; provided, however, that not less than thirty (30) days’ written notice of the date so fixed shall be given to each Optionee.  During such period all Stock Options which have not previously been terminated, exercised or surrendered will (subject to the provisions of Subsections 6.3 and 6.4) fully vest and become exercisable, notwithstanding the vesting schedule set forth in the option agreement evidencing the grant of such Stock Option.  Upon the date fixed by the Committee, any unexercised Stock Options shall terminate and be of no further effect.

 

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(c)                                  Upon a Change in Control, all Stock Options and any associated Stock Appreciation Rights Options will be treated in accordance with the applicable Award agreements.  An Award agreement granting an Award pursuant to this Plan may be amended, with the written consent of the parties thereto, to modify the treatment of any Stock Options or Stock Appreciation Rights upon Change in Control as specified in the associated Award agreement.  In particular, an Award agreement granting an Award pursuant to this Plan may be amended to eliminate any provision in the associated Award agreement providing for immediate exercisability of Stock Options or Stock Appreciation Rights upon Change in Control.

 

6.6                               Manner of Exercise of Stock Options.

 

(a)                                 Except as otherwise provided in this Plan, Stock Options may be exercised as to Shares only in amounts and at intervals of time specified in the written option agreement between the Company and the Optionee.  Each exercise of a Stock Option, or any part thereof, shall be evidenced by a written notice delivered by the Optionee to the Company.  The purchase price of the Shares as to which a Stock Option shall be exercised shall be paid in full at the time of exercise, and may be paid to the Company either:

 

(i)                                     in cash (including check, bank draft or money order); or

 

(ii)                                  by other consideration deemed acceptable by the Committee in its sole discretion.

 

(b)                                 If, as permitted in the option agreement or by the Committee, an Optionee delivers Shares already owned by the Optionee in full or partial payment of the exercise price for any Stock Option or the Optionee elects to have the Company retain that number of Shares out of the Shares being acquired through the exercise of the Stock Option having a Fair Market Value equal to the exercise price of the Stock Option being exercised, the Committee may, in its sole discretion, authorize the grant of a new Stock Option (a “Reload Option”) for that number of Shares equal to the number of already owned Shares surrendered or newly acquired Shares being retained by the Company in payment of the option exercise price of the underlying Stock Option being exercised.  The grant of a Reload Option will become effective upon the exercise of the underlying Stock Option.  The option exercise price of the Reload Option shall be the Fair Market Value of a Share on the effective date of the grant of the Reload Option.  Each Reload Option shall be exercisable no later than the time when the underlying stock option being exercised could be last exercised. The Committee may also specify additional terms, conditions and restrictions for the Reload Option and the Shares to be acquired upon the exercise thereof.

 

(c)                                  The amount, as determined by the Committee, of any federal, state or local tax required to be withheld by the Company due to the exercise of a Stock Option shall, subject to the authorization of the Committee, be satisfied, at the election of the Optionee, either (i) by payment by the Optionee to the Company of the amount of such withholding obligation in cash or other consideration acceptable to the Committee in its sole discretion or (ii) through either the retention by

 

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the Company of a number of Shares out of the Shares being acquired through the exercise of the Stock Option or the delivery of already owned Shares having a Fair Market Value equal to the amount of the withholding obligation.  If an Optionee elects to use the method described in clause (ii) of the preceding sentence in full or partial satisfaction of any tax liability resulting from the exercise of a Stock Option, the Committee may authorize the grant of a Reload Option for that number of Shares as shall equal the number of Shares used to satisfy the tax liabilities of the Optionee arising out of the exercise of such Stock Option.  Such Reload Option will be granted at the price and on the terms set forth in Subsection 6.6 (b).  The cash payment or an amount equal to the Fair Market Value of the Shares so withheld, as the case may be, shall be remitted by the Company to the appropriate taxing authorities.

 

(d)                                 An Optionee shall not have any of the rights of a shareholder of the Company with respect to the Shares subject to a Stock Option except to the extent that such Stock Option is exercised and one or more certificates representing such Shares shall have been delivered to the Optionee.

 

6.7                               First Refusal Rights.  Until such time as the Common Stock is first registered under Section 12 of the Exchange Act, the Company shall have the right of first refusal with respect to any proposed disposition by the Optionee (or any successor in interest) of any Shares issued under the Plan. Such right of first refusal shall be exercisable in accordance with the terms established by the Committee.

 

ARTICLE 7

STOCK APPRECIATION RIGHTS

 

7.1                               Grants.  The Committee may grant to any eligible Consultant, non-employee Director or employee of the Company or a Subsidiary either Non-Tandem Stock Appreciation Rights or Tandem Stock Appreciation Rights.  Stock Appreciation Rights shall be subject to such terms and conditions as the Committee shall impose.  The grant of the Stock Appreciation Right may provide that the holder will be paid for the value of the Stock Appreciation Right either in cash or in Shares, or a combination thereof, at the sole discretion of the Committee.  In the event of the exercise of a Stock Appreciation Right payable in Shares, the holder of the Stock Appreciation Right shall receive that number of whole Shares having an aggregate Fair Market Value on the date of exercise equal to the value obtained by multiplying (i) either (a) in the case of a Tandem Stock Appreciation Right, the difference between the Fair Market Value of a Share on the date of exercise over the per share exercise price of the related Stock Option, or (b) in the case of a Non-Tandem Stock Appreciation Right, the difference between the Fair Market Value of a Share on the date of exercise over the Fair Market Value on the date of the grant by (ii) the number of Shares as to which the Stock Appreciation Right is exercised.  However, notwithstanding the foregoing, the Committee, in its sole discretion, may place a ceiling on the amount payable upon exercise of a Stock Appreciation Right, but any such limitation shall be specified at the time that the Stock Appreciation Right is granted.

 

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7.2                               Exercisability.   A Tandem Stock Appreciation Right granted in connection with an Incentive Stock Option (i) may be exercised at, and only at, the times and to the extent the related Incentive Stock Option is exercisable, (ii) will expire upon the termination of the related Incentive Stock Option, (iii) may not exceed 100% of the difference between the exercise price of the related Incentive Stock Option and the Fair Market Value of the Shares subject to the related Incentive Stock Option at the time the Tandem Stock Appreciation Right is exercised and (iv) may be exercised at, and only at, such times as the Fair Market Value of the Shares subject to the related Incentive Stock Option exceeds the exercise price of the related Incentive Stock Option.  A Tandem Stock Appreciation Right may be transferred at, and only at, the times and to the extent the related Stock Option is transferable.  If a Tandem Stock Appreciation Right is granted, there shall be surrendered and canceled from the related Stock Option at the time of exercise of the Tandem Stock Appreciation Right, in lieu of exercise pursuant to the related Stock Option, that number of Shares of the Stock Option to which the exercised Tandem Stock Appreciation Right relates.

 

7.3                               Certain Limitations on Non-Tandem Stock Appreciation Rights.  A Non-Tandem Stock Appreciation Right will be exercisable as provided by the Committee and will have such other terms and conditions as the Committee may determine.  A Non-Tandem Stock Appreciation Right is subject to acceleration of vesting or immediate termination in certain circumstances in the same manner as Stock Options pursuant to Subsections 6.4 and 6.5 of this Plan.

 

7.4                               Limited Stock Appreciation Rights.   The Committee may grant limited Stock Appreciation Rights, either as Tandem Stock Appreciation Rights or Non-Tandem Stock Appreciation Rights, which may become exercisable only upon the occurrence of a Change in Control or such other event as the Committee may designate at the time of grant or thereafter.

 

ARTICLE 8

RESTRICTED STOCK

 

8.1                               Grants.  The Committee may grant Awards of Restricted Stock to any eligible Consultant, non-employee Director or employee of the Company or a Subsidiary for such minimum consideration, if any, as may be required by applicable law or such greater consideration as may be determined by the Committee, in its sole discretion.  The terms and conditions of the Restricted Stock shall be specified by the grant agreement.  The Committee, in its sole discretion, may specify any particular rights which the Participant to whom a grant of Restricted Stock is made shall have in the Restricted Stock during the restriction period and the restrictions applicable to the particular Award, the vesting schedule (which may be based on service, performance or other factors) and rights to acceleration of vesting (including, without limitation, whether non-vested Shares are forfeited or vested upon termination of employment).  Further, the Committee may grant performance-based Awards consisting of Restricted Stock by conditioning the grant, or vesting or such other factors, such as the release, expiration or lapse of restrictions upon any such Award (including the acceleration of any such conditions or terms) of such Restricted Stock upon the attainment of specified performance goals or such other factors as the Committee may determine.  The Committee shall also determine when the restrictions shall lapse or expire and the conditions, if any, pursuant to which the Restricted Stock will be forfeited or sold back to the Company. Each Award of Restricted Stock may have different restrictions and conditions.  Unless otherwise set forth

 

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in the grant agreement, Restricted Stock may not be sold, pledged, encumbered or otherwise disposed of by the recipient until the restrictions specified in the Award expire.  Awards of Restricted Stock are subject to acceleration of vesting, termination of restrictions and termination in the same manner as Stock Options pursuant to Subsections 6.4 and 6.5 of this Plan.

 

8.2                               Awards and Certificates.  Any Restricted Stock issued hereunder may be evidenced in such manner as the Committee, in its sole discretion, shall deem appropriate including, without limitation, book-entry registration or issuance of a stock certificate or certificates.  In the event any stock certificate is issued in respect of Shares of Restricted Stock, such certificate shall bear an appropriate legend with respect to the restrictions applicable to such Award.  The Company may retain, at its option, the physical custody of any stock certificate representing any awards of Restricted Stock during the restriction period or require that the certificates evidencing Restricted Stock be placed in escrow or trust, along with a stock power endorsed in blank, until all restrictions are removed or expire.

 

ARTICLE 9

PERFORMANCE AWARDS

 

9.1                               Grants.  A Performance Award may consist of either or both, as the Committee may determine, of (i) the right to receive Shares or Restricted Stock, or any combination thereof as the Committee may determine or (ii) the right to receive a fixed dollar amount payable in Shares, Restricted Stock, cash or any combination thereof, as the Committee may determine.  The Committee may grant Performance Awards to any eligible Consultant, non-employee Director or employee of the Company or a Subsidiary, for such minimum consideration, if any, as may be required by applicable law or such greater consideration as may be determined by the Committee, in its sole discretion.  The terms and conditions of Performance Awards shall be specified at the time of the grant and may include provisions establishing the performance period, the performance criteria to be achieved during a performance period, the criteria used to determine vesting (including the acceleration thereof), whether Performance Awards are forfeited or vest upon termination of employment during a performance period and the maximum or minimum settlement values.  Each Performance Award shall have its own terms and conditions, which shall be determined in the sole discretion of the Committee.  If the Committee determines, in its sole discretion, that the established performance measures or objectives are no longer suitable because of a change in the Company’s business, operations, corporate structure or for other reasons that the Committee deems satisfactory, the Committee may modify the performance measures or objectives and/or the performance period.  Performance Awards are subject to acceleration of vesting, termination of restrictions and termination in the same manner as Stock Options pursuant to Subsections 6.4 and 6.5 of this Plan.

 

9.2                               Terms and Conditions.   Performance Awards may be valued by reference to the Fair Market Value of a Share or according to any other formula or method deemed appropriate by the Committee, in its sole discretion, including, but not limited to, achievement of specific financial, production, sales, cost or earnings performance objectives that the Committee believes to be relevant or the Company’s performance or the performance of the Shares measured against the performance of the market, the Company’s industry segment or its direct competitors.  Performance Awards may

 

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also be conditioned upon the applicable Participant remaining in the employ of the Company or one of its Subsidiaries for a specified period.  Performance Awards may be paid in cash, Shares (including Restricted Stock) or other consideration, or any combination thereof.  Performance Awards may be payable in a single payment or in installments and may be payable at a specified date or dates or upon attaining the performance objective or objectives, all at the sole discretion of the Committee.  The extent to which any applicable performance objective has been achieved shall be conclusively determined by the Committee in its sole discretion.

 

ARTICLE 10

OTHER AWARDS

 

10.1                        Other Awards. The Committee may grant to any eligible Consultant, non-employee Director or employee of the Company or a Subsidiary other forms of Awards based upon, payable in or otherwise related to, in whole or in part, Shares, if the Committee, in its sole discretion, determines that such other form of Award is consistent with the purposes of this Plan.  The terms and conditions of such other form of Award shall be specified in a written agreement which sets forth the terms and conditions of such Award, including, but not limited to, the price, if any, and the vesting schedule, if any, of such Award.  Such Awards may be granted for such minimum consideration, if any, as may be required by applicable law or for such other greater consideration as may be determined by the Committee, in its sole discretion.

 

ARTICLE 11

COMPLIANCE WITH SECURITIES AND OTHER LAWS

 

11.1                        Compliance.  As a condition to the issuance or transfer of any Award or any security issuable in connection with such Award, the Company may require an opinion of counsel, satisfactory to the Company, to the effect that (i) such issuance and/or transfer will not be in violation of the Securities Act or any other applicable securities laws and (ii) such issuance and/or transfer will not be in violation of the rules and regulations of any securities exchange or automated quotation system on which the Shares are listed or admitted to trading.  Further, the Company may refrain from issuing, delivering or transferring any Award or any security issuable in connection with such Award until the Committee has determined that such issuance, delivery or transfer will not violate such securities laws or rules and regulations and that either the recipient has tendered to the Company, or the Company or a Subsidiary has withheld, any federal, state or local tax owed as a result of such issuance, delivery or transfer, when the Company has a legal liability to satisfy such tax.  The Company shall not be liable for damages due to delay in the issuance, delivery or transfer of any Award or any security issuable in connection with such Award or any agreement, instrument or certificate evidencing such Award or security for any reason whatsoever, including, but not limited to, a delay caused by the listing requirements of any securities exchange or automated quotation system or any registration requirements under the Securities Act, the Exchange Act, or under any other state or federal law, rule or regulation.  The Company is under no obligation to take any action or incur any expense to register or qualify the issuance, delivery or transfer of any Award

 

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or any security issuable in connection with such Award under applicable securities laws or to perfect any exemption from such registration or qualification or to list any security on any securities exchange or automated quotation system.  Furthermore, the Company will have no liability to any person for refusing to issue, deliver or transfer any Award or any security issuable in connection with such Award if such refusal is based upon the foregoing provisions of this ARTICLE 11.  As a condition to any issuance, delivery or transfer of any Award or any security issuable in connection with such Award, the Company may place legends on any agreement, instrument or certificate evidencing such Award or security, issue stop transfer orders with respect thereto and require such agreements or undertakings as the Company may deem necessary or advisable to assure compliance with applicable laws or regulations, including, if the Company or its counsel deems it appropriate, representations from the recipient of such Award or security to the effect that such recipient is acquiring such Award or security solely for investment and not with a view to distribution and that no distribution of the Award or the security will be made unless registered pursuant to applicable federal and state securities laws, or in the opinion of counsel to the Company, such registration is unnecessary.

 

ARTICLE 12

ADJUSTMENTS UPON THE OCCURRENCE OF A RECAPITALIZATION OR CORPORATE TRANSACTION

 

12.1                        In the event of a Recapitalization, the number and class of Shares subject to this Plan and to each outstanding Award, and the exercise price of each Award which is based upon Shares, shall (to the extent deemed appropriate by the Committee) be proportionately adjusted (as determined by the Committee in its sole discretion) to account for any increase or decrease in the number, or change in the class, of issued and outstanding Shares of the Company resulting from such Recapitalization.

 

12.2                        If a Corporate Transaction is consummated and immediately following the consummation of such Corporate Transaction the Persons who were holders of Shares immediately prior to the consummation of such Corporate Transaction do not receive any securities or other property (hereinafter collectively referred to as “Transactional Consideration”) as a result of such Corporate Transaction and substantially all of such Persons continue to hold the Shares held by them immediately prior to the consummation of such Corporate Transaction (in substantially the same proportions relative to each other), the Awards will remain outstanding and will (subject to, and except as provided in, the other provisions of this Plan and the Award agreement) continue in full force and effect in accordance with its terms (without any modification) following the consummation of the Corporate Transaction.

 

12.3                        If a Corporate Transaction is consummated and immediately following the consummation of such Corporate Transaction the Persons who were holders of Shares immediately prior to the consummation of such Corporate Transaction do receive Transactional Consideration as a result of such Corporate Transaction or substantially all of such Persons do not continue to hold the Shares held by them immediately prior to the consummation of such Corporate Transaction (in

 

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substantially the same proportions relative to each other), the terms and conditions of the Awards will be modified as follows:

 

(i)                                     If the documentation pursuant to which a Corporate Transaction will be consummated provides for the assumption (by the entity issuing Transactional Consideration to the Persons who were the holders of Shares immediately prior to the consummation of such Corporate Transaction) of the Awards granted pursuant to this Plan without any modification or amendment (other than Permitted Modifications), such Awards will remain outstanding and will continue in full force and effect in accordance with its terms following the consummation of such Corporate Transaction (subject to such Permitted Modifications).

 

(ii)                                  If the documentation pursuant to which a Corporate Transaction will be consummated does not provide for the assumption by the entity issuing Transactional Consideration to the Persons who were the holders of Shares immediately prior to the consummation of such Corporate Transaction of the Awards granted pursuant to this Plan without any modification or amendment (other than Permitted Modifications), all vesting restrictions (performance based or otherwise) applicable to Awards which will not be so assumed will accelerate and the holders of such Awards may (subject to the expiration of the term of such Awards) exercise/receive the benefits of such Awards without regard to such vesting restrictions during the ten (10) day period immediately preceding the consummation of such Corporate Transaction.  For purposes of the immediately preceding sentence, all performance based goals will be deemed to have been satisfied in full.  The Company will provide each Participant holding Awards which will not be so assumed with reasonable notice of the termination of such vesting restrictions and the impending termination of such Awards.  Upon the consummation of such a Corporate Transaction, all unexercised Awards which are not to be so assumed will automatically terminate and cease to be outstanding.

 

Nothing contained in this ARTICLE 12 will be deemed to extend the term of an Award or to revive any Award which has previously lapsed or been canceled, terminated or surrendered.

 

ARTICLE 13

AMENDMENT OR TERMINATION OF THIS PLAN

 

13.1                        Amendment of This Plan.  Notwithstanding anything contained in this Plan to the contrary, all provisions of this Plan (including, without limitation, the maximum number of Shares that may be issued with respect to Awards to be granted pursuant to this Plan) may at any time or from time to time be modified or amended by the Board; provided, however, that no Award at any time outstanding pursuant to this Plan may be modified, impaired or canceled adversely to the holder of the Award without the consent of such holder.

 

13.2                        Termination of This Plan.  The Board may suspend or terminate this Plan at any time, and such suspension or termination may be retroactive or prospective.  Termination of this Plan shall not impair or affect any Award previously granted hereunder and the rights of the holder of the Award shall remain in effect until the Award has been exercised in its entirety or has expired or otherwise has been terminated by the terms of such Award.

 

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ARTICLE 14

AMENDMENTS AND ADJUSTMENTS TO AWARDS

 

14.1                        Amendments and Adjustments.  The Committee may amend, modify or terminate any outstanding Award with the Participant’s consent at any time prior to payment or exercise in any manner not inconsistent with the terms of this Plan, including, without limitation, (i) to change the date or dates as of which and/or the terms and conditions pursuant to which (A) a Stock Option becomes exercisable or (B) a Performance Award is deemed earned, (ii) to amend the terms of any outstanding Award to provide an exercise price per share which is higher or lower than the then current exercise price per share of such outstanding Award or (iii) to cancel an Award and grant a new Award in substitution therefor under such different terms and conditions as the Committee determines in its sole discretion to be appropriate including, but not limited to, having an exercise price per share which may be higher or lower than the exercise price per share of the canceled Award.  The Committee may also make adjustments in the terms and conditions of, and the criteria included in agreements evidencing Awards in recognition of unusual or nonrecurring events (including, without limitation, the events described in ARTICLE 12 hereof) affecting the Company, or the financial statements of the Company or any Affiliate, or of changes in applicable laws, regulations or accounting principles, whenever the Committee determines that such adjustments are appropriate to prevent reduction or enlargement of the benefits or potential benefits intended to be made available pursuant to this Plan.

 

ARTICLE 15

GENERAL PROVISIONS

 

15.1                        No Limit on Other Compensation Arrangements.   Nothing contained in this Plan shall prevent the Company from adopting or continuing in effect other compensation arrangements, and such arrangements may be either generally applicable or applicable only in specific cases.  This Plan shall not affect any other stock option, incentive, or other compensation or benefit plan of the Company or any Subsidiary, except as may be expressly provided therein.

 

15.2                        Other Awards.  The grant of an Award shall not confer upon the recipient the right to receive any future or other Awards under this Plan or any other plans of the Company or any Subsidiary, whether or not any awards may be granted to similarly situated employees, or the right to receive future Awards upon the same terms or conditions as previously granted.

 

15.3                        No Right to Employment or Continuation of Relationship.   Nothing in this Plan or in any Award, nor the grant of any Award, shall confer upon or be construed as giving any Participant any right to remain in the employ of the Company or a Subsidiary or to continue as a Consultant or non-employee Director.  Further, the Company or a Subsidiary may at any time dismiss a Participant from emp1oyment or terminate the relationship of any Consultant or non-employee Director with the Company or any Subsidiary, free from any liability or any claim pursuant to this Plan.  No 

 

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Consultant, non-employee Director or employee of the Company or any Subsidiary shall have any claim to be granted any Award, and there is no obligation for uniformity of treatment of any Consultant, non-employee Director or employee of the Company or any Subsidiary or of any Participants.

 

15.4                        Governing Law.  The validity, construction and effect of this Plan and any rules and regulations relating to this Plan shall be determined in accordance with the laws of the State of Texas, without giving effect to the conflict of laws principles thereof.

 

15.5                        Severability.  If any provision of this Plan or any Award is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction or as to any individual or Award, or would disqualify this Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable law, or if it cannot be construed or deemed amended without, in the sole determination of the Committee, materially altering the intent of this Plan or the Award, such provision shall be stricken as to such jurisdiction, individual or Award and the remainder of this Plan and any such Award shall remain in full force and effect.

 

15.6                        No Fractional Shares.  No fractional Shares shall be issued or delivered pursuant to this Plan or any Award, and the Committee shall determine, in its sole discretion, whether cash, other securities or other property shall be paid or transferred in lieu of any fractional Shares or whether such fractional Shares or any rights thereto shall be canceled, terminated or otherwise eliminated.

 

15.7                        Headings.   Headings are given to the ARTICLEs and Subsections of this Plan solely as a convenience to facilitate reference.  Such headings shall not be deemed in any way material or relevant to the construction or interpretation of this Plan or any provision thereof.

 

15.8                        Gender.  If the context requires, words of one gender when used in this Plan shall include the others and words used in the singular shall include the plural, and vice versa.

 

15.9                        Transferability of Awards.  Awards shall not be transferable otherwise than by will or the laws of descent and distribution without the written consent of the Committee (which may be granted or withheld at the sole discretion of the Committee).  Awards may be exercised, during the lifetime of the holder, only by the holder.  Any attempted assignment, transfer, pledge, hypothecation or other disposition of an Award contrary to the provisions hereof, or the levy of any execution, attachment or similar process upon an Award shall be null and void and without effect.

 

15.10                 Rights of Participants.  Except as hereinbefore expressly provided in this Plan, any Person to whom an Award is granted shall have no rights by reason of any subdivision or consolidation of stock of any class or the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class or by reason of any dissolution, liquidation, reorganization, merger or consolidation or spinoff of assets or stock of another corporation, and any issue by the Company of shares of stock of any class or securities convertible into shares of stock of any class shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or exercise price of Shares subject to an Award.

 

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15.11                 No Limitation Upon the Rights of the Company.  The grant of an Award pursuant to this Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, or changes of its capital or business structure; to merge, convert or  consolidate; to dissolve or liquidate; or sell or transfer all or any part of its business or assets.

 

15.12                 Date of Grant of an Award.   Except as noted in this ARTICLE 15.12, the granting of an Award shall take place only upon the execution and delivery by the Company and the Participant of a written agreement and neither any other action taken by the Committee nor anything contained in this Plan or in any resolution adopted or to be adopted by the Committee, the Board or the shareholders of the Company shall constitute the granting of an Award pursuant to this Plan.  Solely for purposes of determining the Fair Market Value of the Shares subject to an Award, such Award will be deemed to have been granted as of the date specified by the Committee notwithstanding any delay which may elapse in executing and delivering the applicable agreement.

 

15.13                 Tax Withholding.  The Company or any Subsidiary shall be entitled to deduct from other compensation payable to an employee any sums required by federal, state, or local tax law to be withheld with respect to the granting or exercise of a Stock Option or other Award under this Plan.  In the alternative, the Company or any Subsidiary may require the recipient (or other person exercising the Award) to pay such sums directly to the employer, and neither the Company or any Subsidiary shall have any obligation to issue any Shares or make any payment until such payment has been received.

 

15.14                 Other Laws.  The Company shall not be obligated to issue any Shares pursuant to any Award granted under the Plan at any time when the offering of the Shares covered by such Award is not either (I) registered under the Securities Act of 1933 and such other state and federal laws, rules or regulations as the Company or the Committee deems applicable or (ii) exempt from the registration requirements of such laws, rules or regulations available for the issuance and sale of such shares.

 

ARTICLE 16

NAMED EXECUTIVE OFFICERS

 

16.1                        Applicability of ARTICLE 16.  The provisions of this ARTICLE 16 shall apply only if the Company is a “publicly held corporation” as defined in Section 162(m)(2) of the Code, and then only to those executive officers (i) whose compensation is required to be reported in the Company’s proxy statement pursuant to Item 402(a)(3)(i) and (ii) (or any successor thereto) of Regulation S-K (or any successor thereto) under the general rules and regulations under the Exchange Act and (ii) whose total compensation, including estimated Awards, is determined by the Committee to possibly be subject to the limitations on deductions imposed by Section 162(m) of the Code (“Named Executive Officers”).  In the event of any inconsistencies between this ARTICLE 16 and the other Plan provisions as they pertain to Named Executive Officers, the provisions of this ARTICLE 16 shall control.

 

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16.2                        Establishment of Performance Goals.  Awards for Named Executive Officers, other than Stock Options and Stock Appreciation Rights, shall be based on the attainment of certain performance goals.  No later than the earlier of (i) ninety (90) days after the commencement of the applicable fiscal year of the Company or one of its Subsidiaries or such other award period as may be established by the Committee (“Award Period”) and (ii) the completion of twenty-five percent (25%) of such Award Period, the Committee shall establish, in writing, the performance goals applicable to each such Award for Named Executive Officers.  At the time the performance goals are established, their outcome must be substantially uncertain.  In addition, the performance goal must state, in terms of an objective formula or standard, the method for computing the amount of compensation payable to the Named Executive Officer if the goal is obtained.  Such formula or standard shall be sufficiently objective so that a third party with knowledge of the relevant performance results could calculate the amount to be paid to the subject Named Executive Officer.  The material terms of the performance goals for Named Executive Officers and the compensation payable thereunder shall be submitted to the shareholders of the Company for their review and approval if and to the extent required for such compensation to be deductible pursuant to Section 162(m) (or any successor thereto) of the Code, and the Treasury Regulations thereunder.  Shareholder approval, if necessary, shall be obtained for such performance goals prior to any Award being paid to such Named Executive Officer.  If shareholder approval is required and not received with respect to such performance goals, no amount shall be paid to such Named Executive Officer for such applicable Award Period pursuant to this Plan.

 

16.3                        Components of Awards.  Each Award granted to a Named Executive Officer, other than Stock Options and Stock Appreciation Rights, shall be based on performance goals which are sufficiently objective so that a third party having knowledge of the relevant facts could determine whether the goal was met.  Except as provided in Subsection 16.8 herein, performance measures which may serve as determinants of Named Executive Officers’ Awards shall be limited to the following measures:  earnings per share; return on assets; return on equity; return on capital; net profit after taxes; net profit before taxes; operating profits; stock price; and sales or expenses.  Within ninety (90) days following the end of each Award Period, the Committee shall certify in writing that the performance goals, and any other material terms were satisfied.  Thereafter, Awards shall be made for each Named Executive Officer as determined by the Committee.  The Awards may not vary from the pre-established amount based on the level of achievement.

 

16.4                        No Mid-Year Change in Awards.  Except as provided in Subsections 16.8 and 16.9 herein, each Named Executive Officer’s Awards shall be based exclusively on the performance measures established by the Committee pursuant to Subsections 16.2 and 16.3.

 

16.5                        No Partial Award Period Participation.  A Named Executive Officer who becomes eligible to participate in this Plan after performance goals have been established in an Award Period pursuant to Subsections 16.2 and 16.3 may not participate in this Plan prior to the next succeeding Award Period, except with respect to Awards which are Stock Options or Stock Appreciation Rights.

 

16.6                        Performance Goals.  Except as provided in Subsection 16.8 herein, performance goals shall not be changed following their establishment, and Named Executive Officers shall not 

 

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receive any payout, except with respect to Awards which are Stock Options or Stock Appreciation Rights, when the minimum performance goals are not met or exceeded.

 

16.7                        Individual Performance and Discretionary Adjustments.   Except as provided in Subsection 16.8 herein, subjective evaluations of individual performance of Named Executive Officers shall not be reflected in their Awards, other than Awards which are Stock Options or Stock Appreciation Rights.  The payment of such Awards shall be entirely dependent upon the attainment of the preestablished performance goals.

 

16.8                        Amendments.  No amendment of this Plan with respect to any Named Executive Officer may be made which would (i) increase the maximum amount that can be paid to any one Participant pursuant to this Plan, (ii) change the specified performance goal for payment of  Awards, or (iii) modify the requirements as to eligibility for participation in this Plan, unless the Company’s shareholders have first approved such amendment in a manner which would permit the deduction under Section 162(m) (or any successor thereto) of the Code of such payment in the fiscal year it is paid.  The Committee shall amend this ARTICLE 16 and such other provisions as it deems appropriate, to cause amounts payable to Named Executive Officers to satisfy the requirements of Section 162(m) (or any successor thereto) and the Treasury regulations promulgated thereunder.

 

16.9                        Stock Options and Stock Appreciation Rights - Grant Price.  Notwithstanding any provision of this Plan (including the provisions of this ARTICLE 16) to the contrary, the amount of compensation which a Named Executive Officer may receive with respect to Stock Options and Stock Appreciation Rights which are granted hereunder is based solely on an increase in the value of the applicable Shares after the date of grant of such Award.  Thus, no Stock Option may be granted hereunder to a Named Executive Officer with an exercise price less than the Fair Market Value of Shares on the date of grant.  Furthermore, the maximum number of Shares (or cash equivalent value) with respect to which Stock Options or Stock Appreciation Rights may be granted hereunder to any Named Executive Officer during any calendar year may not exceed 1,000,000 Shares, subject to adjustment as provided in ARTICLE 12 hereunder.

 

16.10                 Maximum Amount of Compensation.  The maximum amount of compensation payable as an Award (other than an Award which is a Stock Option or Stock Appreciation Right) to any Named Executive Officer during any calendar year may not exceed $1,000,000.

 

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