Document:

Exhibit 10.1

CDRV
INVESTORS, INC. 

STOCK INCENTIVE PLAN

Article I

Purpose

CDRV Investors, Inc. has established this stock
incentive plan to foster and promote its long-term financial success. Capitalized
terms have the meaning given in Article XI.

Article II

Powers of the Board

Section 2.1   Power to Grant Awards.   The
Board shall select Employees to participate in the Plan. The Board shall also
determine from time to time whether, and the terms under which, Eligible
Directors (or classes or categories of Eligible Directors) may receive Director
Share Awards. The Board shall determine the terms of each Award, consistent
with the Plan.

Section 2.2   Administration.   The
Board shall be responsible for the administration of the Plan. The Board may
prescribe, amend and rescind rules and regulations relating to the
administration of the Plan, provide for conditions and assurances it deems
necessary or advisable to protect the interests of the Company and make all
other determinations necessary or advisable for the administration and
interpretation of the Plan. Any authority exercised by the Board under the Plan
shall be exercised by the Board in its sole discretion. Determinations,
interpretations or other actions made or taken by the Board under the Plan
shall be final, binding and conclusive for all purposes and upon all persons.

Section 2.3   Delegation by the Board.   All
of the powers, duties and responsibilities of the Board specified in this Plan
may be exercised and performed by any duly constituted committee thereof to the
extent authorized by the Board to exercise and perform such powers, duties and
responsibilities, and any determination, interpretation or other action taken
by such committee shall have the same effect hereunder as if made or taken by
the Board.

Article III

Shares Subject to Plan

Section 3.1   Number.   The maximum number of shares
of Common Stock that may be issued under the Plan or be subject to
Awards may not exceed  1,417,320 shares, provided that immediately following the initial offering and
grant of Awards hereunder such number shall automatically be reduced by (x) the
number of shares of Common Stock covered by Awards offered but not granted
under the Plan in the initial offering and grant of Awards hereunder minus (y) 50,000 shares. The shares of Common Stock to
be delivered under the Plan may consist, in whole or in part, of treasury
Common Stock or authorized but unissued Common Stock that is not reserved for
any other purpose.

Section 3.2   Canceled, Terminated or Forfeited
Awards.   If any Award or portion thereof is for any reason
forfeited, canceled or otherwise terminated without exercise, the shares of
Common Stock subject to such Award or portion thereof shall again be available
for grant under the Plan.

Section 3.3   Adjustment in Capitalization.   The
number of shares of Common Stock available for issuance under the Plan and the
number, class, exercise price or other terms of any outstanding Award may be
adjusted by the Board if it shall deem such an adjustment necessary or
appropriate to reflect any Common Stock dividend, stock split or share
combination or any recapitalization, merger, consolidation, exchange of shares,
liquidation or dissolution of the Company or other similar transaction
affecting the Common Stock.

Article IV

Stock Purchase

Section 4.1   Awards and Administration.   The
Board may offer and sell shares of Common Stock to Participants at such time or
times as it shall determine, the terms of which shall be set forth in a
Subscription Agreement.

Section 4.2   Minimum Purchase Price.   Unless
otherwise determined by the Board, the purchase price for any shares of Common
Stock to be offered and sold pursuant to this Article IV shall not be less
than the Fair Market Value on the Grant Date.

Section 4.3   Payment.   Unless
otherwise determined by the Board, the purchase price with respect to shares of
Common Stock offered and sold pursuant to this Article IV shall be paid in
cash or other readily available funds simultaneously with the closing of the
purchase of such Common Stock. The Board may authorize the Company or one or
more of its Subsidiaries to guarantee indebtedness incurred by a Participant in
connection with a purchase of shares pursuant to this Article IV, on such
terms as the Board shall determine.

Article V

Terms of Options

Section 5.1   Grant of Options.   The
Board may grant Options to Participants at such time or times as it shall
determine. Options granted pursuant to the Plan will not be “incentive stock
options” as defined in the Code unless otherwise determined by the Board. Each
Option granted to a Participant shall be evidenced by an Option Agreement that
shall specify the number of shares of Common Stock that may be purchased
pursuant to such Option, the exercise price at which a share of Common Stock
may be purchased pursuant to such Option, the duration of such Option (not to
exceed the tenth anniversary of the Grant Date), and such other terms as the
Board shall determine.

Section 5.2   Exercise Price.   The
exercise price per share of Common Stock to be purchased upon exercise of an
Option shall not be less than the Fair Market Value on the Grant Date.

Section 5.3   Vesting and Exercise of Options.   Options
shall become vested or exercisable in accordance with the vesting schedule or
upon the attainment of such performance criteria as shall be specified by the
Board on or before the Grant Date. Unless otherwise determined by the Board or
before on the Grant Date, one-fifth of the Options shall vest and become
exercisable on each of the first, second, third, fourth and fifth anniversaries
of the Grant Date. The Board may accelerate the vesting or exercisability of
any Option, all Options or any class of Options at any time and from time to
time.

Section 5.4   Payment.   The Board
shall establish procedures governing the exercise of Options, which procedures
shall generally require that prior written notice of exercise be given and that
the exercise price (together with any required withholding taxes or other
similar taxes, charges or fees) be paid in full in cash, cash equivalents or
other readily-available funds at the time of exercise. Notwithstanding the
foregoing, on such terms as may be the Board may establish from time to time
following a Public Offering (i) the Board may permit a Participant to
tender shares of Common Stock such Participant has owned for all or a portion
of the applicable exercise price or minimum required withholding taxes and (ii) the
Board may authorize the Company to establish a broker-assisted exercise program.
In connection with any Option exercise, the Company may require the Participant
to furnish or execute such other documents as it shall reasonably deem
necessary to (a) evidence such exercise, (b) determine whether registration
is then required under the U.S. federal securities laws or similar non-U.S.
laws or (c) comply with or satisfy the requirements of the U.S. federal
securities laws, applicable state or non-U.S. securities laws or any other law.
As a condition to the exercise of any Option before a Public Offering, a
Participant shall enter into a Subscription Agreement.

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Article VI

Termination of Employment

Section 6.1   Expiration
of Options Following Termination of Employment.   Unless
otherwise determined by the Board before or after the Grant Date, if a
Participant’s employment with the Company and its Subsidiaries terminates, such
Participant’s Options shall be treated as follows:

(a)    if such
employment terminates by reason of the Participant’s death or Disability (each,
a “Special Termination”), any Options held
by the Participant shall immediately vest in full;

(b)   in the case
of any termination other than a Special Termination, any unvested Options shall
terminate effective as of such termination of employment;

(c)    except in
the case of a termination for Cause, vested Options (including any options that
vest pursuant to Section 6.1(a) above) shall remain exercisable
through the earliest of (i) the normal expiration date, (ii) 60 days
after the Participant’s termination of employment (180 days in the case of a
Special Termination or a retirement at normal retirement age or later) and (iii) any
cancellation pursuant to Section 7.1; and

(d)   in the case
of a termination for Cause, any and all Options held by such Participant
(whether or not then vested or exercisable) shall terminate immediately upon
such termination of employment.

Section 6.2   Certain Rights upon Termination of
Employment Prior to a Public Offering.   Each Subscription
Agreement and Option Agreement shall provide that the Company and the CD&R
Fund shall have successive rights prior to a Public Offering to purchase all or
any portion of a Participant’s shares of Common Stock and vested Options upon
any termination of employment, at a purchase price per share equal to the Fair
Market as of the effective date of such termination of employment (or, if the
Participant’s employment qualifies as a termination for Cause, for a purchase
price per share equal to the lesser of (i) such Fair Market Value and (ii) such
Participant’s per share purchase price), minus any
applicable exercise price. The Board may provide in a Subscription Agreement
that following a Participant’s Special Termination, retirement at or after
normal retirement age or termination of employment by the Company or its
Subsidiaries without Cause in each case prior to a Public Offering, such
Participant may require the Company to repurchase all (but not less than all)
of such Participant’s shares of Common Stock (but excluding any shares acquired
on exercise of an Option), at a purchase price per share equal to the Fair
Market Value on the date of the Participant’s termination of employment,
subject to the Company having the ability to do so under the terms of its
financing arrangements and under Delaware law.

Article VII

Change in Control

Section 7.1   Accelerated Vesting and Payment.   Except
as otherwise provided in this Article VII, and unless otherwise provided
in the Award Agreement, upon a Change in Control each Option, whether vested or
unvested, shall be canceled in exchange for a payment in an amount equal to the
excess, if any, of the Change in Control Price over the exercise price for such
Option.

Section 7.2   Alternative
Options.   No cancellation, acceleration or other payment shall
occur with respect to any Option if the Board reasonably determines in good
faith, prior to the occurrence of a Change in Control, that such Option shall
be honored or assumed, or new rights substituted therefor following the Change
in Control (such honored, assumed or substituted award, an “Alternative Award”), provided that
any Alternative Award must:

(a)    give the
Participant who held such Option rights and entitlements substantially
equivalent to or better than the rights and terms applicable under such Option,
including, but not limited to, an identical or better exercise and vesting
schedule, identical or better timing and methods of payment and, if the
Alternative Award or the securities underlying it are not publicly-traded,
identical or better 

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rights following a
termination of employment to require the Company or the acquiror in such Change
in Control to repurchase the Alternative Award or securities underlying such
Alternative Award; and

(b)   have terms
such that if, within two years following a Change in Control, a Participant’s
employment is involuntarily or constructively terminated or terminates as a
result of his or her death, Disability or retirement at or after normal
retirement age, such Alternative Award shall immediately vest in full and such
Participant shall receive a cash payment equal to the excess (if any) of the
fair market value of the stock subject to the Alternative Award on the date of
surrender over the price that such Participant would be required to pay to
exercise such Alternative Award or shall have an immediate right to exercise
such Alternative Award and receive shares that are then publicly-traded.

Section 7.3   Limitation of Benefits.   If,
whether as a result of accelerated vesting, the grant of an Alternative Award
or otherwise, a Participant would receive any payment, deemed payment or other
benefit as a result of the operation of Section 7.1 or Section 7.2
that, together with any other payment, deemed payment or other benefit a
Participant may receive under any other plan, program, policy or arrangement,
would constitute an “excess parachute payment” under section 280G of the Code,
then, notwithstanding anything in this Plan to the contrary, the payments,
deemed payments or other benefits such Participant would otherwise receive
under this Section 7.1 or Section 7.2 shall be reduced to the extent
necessary to eliminate any such excess parachute payment and such Participant
shall have no further rights or claims with respect thereto. If the preceding
sentence would result in a reduction of the payments, deemed payments or other
benefits a Participant would otherwise receive in more than an immaterial
amount, the Company will use its commercially reasonable best efforts to seek
the approval of the Company’s shareholders in the manner provided for in
section 280G(b)(5) of the Code and the regulations thereunder with respect
to such reduced payments or other benefits (if the Company is eligible to do
so), so that such payments would not be treated as “parachute payments” for
these purposes (and therefore would cease to be subject to reduction pursuant
to this Section 7.3).

Article VIII

Director Share Awards

The Board may provide for the grant of Director Share
Awards to Eligible Directors (or categories or classes of Eligible Directors)
on such terms as the Board shall determine from time to time, including as part
of the retainer or other fees payable to an Eligible Director, or as part of an
arrangement that permits the deferral of payment of such fees, on a mandatory
or elective basis, into the right to receive shares of Common Stock and distributions
thereon in the future or a cash payment measured by reference to the value
therof.

Article IX

Authority to Vary Terms or Establish Local
Jurisdiction Plans

The Board may vary the terms of Awards under the Plan,
or establish sub-plans under this Plan to authorize the grant of awards that
have additional or different terms or features than those otherwise provided
for in the Plan, if and to the extent the Board determines necessary or
appropriate to permit the grant of awards that are best suited to further the
purposes of the Plan and to comply with applicable securities laws in a
particular jurisdiction or provide terms appropriately suited for Employees in
such jurisdiction in light of the tax laws of such jurisdiction while being as
consistent as otherwise possible with the terms of Awards under the Plan; provided that this Article IX shall not be deemed to
authorize any increase the number of shares of Common Stock available for
issuance under the Plan set forth in Section 3.1.

Article X

Amendment, Modification, and Termination of the
Plan

The Board may terminate or suspend the Plan at any
time, and may amend or modify the Plan from time to time. No amendment,
modification, termination or suspension of the Plan shall in any manner 

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adversely affect any Award
theretofore granted under the Plan without the consent of the Participant
holding such Award or the consent of a majority of Participants holding similar
Awards (such majority to be determined based on the number of shares covered by
such Awards). Shareholder approval of any such amendment, modification,
termination or suspension shall be obtained to the extent mandated by
applicable law, or if otherwise deemed appropriate by the Board.

Article XI

Definitions

Section 11.1   Definitions.   Whenever
used herein, the following terms shall have the respective meanings set forth
below:

“Affiliate” shall
mean, with respect to any Person, any other Person directly or indirectly
controlling, controlled by or under common control with such first Person; provided that a director, member of management or other
Employee of the Company or any of its Subsidiaries shall not be deemed to be an
Affiliate of the CD&R Fund. For these purposes, “control” (including the
terms “controlled by” and “under common control with”) means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management policies of a Person by reason of ownership of voting securities, by
contract or otherwise.

“Alternative Award”
has the meaning given in Section 7.2.

“Award” shall
mean an Option, or Director Share Award or an offer and sale of shares of
Common Stock pursuant to Article IV, in each case granted pursuant to the
terms of the Plan.

“Award Agreement”
means a Subscription Agreement, an Option Agreement or any other agreement
evidencing an Award.

“Board” means
the Board of Directors of the Company.

“CD&R Fund”
means The Clayton, Dubilier & Rice Private Equity Fund VI Limited
Partnership, a Cayman Islands limited partnership, and any successor investment
vehicle managed by Clayton, Dubilier & Rice, Inc., a Delaware
corporation.

“Cause” means,
unless otherwise provided in the Award Agreement, any of the following:  (i) the Participant’s commission of a
crime involving fraud, theft, false statements or other similar acts or
commission of any crime that is a felony (or a comparable classification in a
jurisdiction that does not use these terms); (ii) the Participant’s
engaging in any conduct that constitutes an employment disqualification under
applicable law; (iii) the Participant’s willful or grossly negligent
failure to perform his or her employment-related duties for the Company and its
Subsidiaries; (iv) the Participant’s material violation of any Company
policy as in effect from time to time; (v) the Participant’s engaging in
any act or making any statement that impairs, impugns, denigrates, disparages
or negatively reflects upon the name, reputation or business interests of the
Company or its Subsidiaries; (vi) the Participant’s material breach of any
Award Agreement, employment agreement, or noncompetition, nondisclosure or
nonsolicitation agreement to which the Participant is a party or by which the
Participant is bound or (vii) the Participant’s engaging in any conduct
injurious or detrimental to the Company or its any of its Subsidiaries. The
determination as to whether “Cause” has occurred shall be made by the Board,
which shall have the authority to waive the consequences under the Plan of the
existence or occurrence of any of the events, acts or omissions constituting “Cause.”  A termination for Cause shall be deemed to
include a determination following a Participant’s termination of employment for
any reason that the circumstances existing prior to such termination for the
Company or one of its Subsidiaries to have terminated such Participants
employment for Cause.

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“Change in Control”
means the first to occur of the following events after the Effective Date:

(i)    the
acquisition by any person, entity or “group” (as defined in Section 13(d) of
the Securities Exchange Act of 1934, as amended) of 50% or more of the combined
voting power of the Company’s then outstanding voting securities, other than
any such acquisition by the Company, any of its Subsidiaries, any employee
benefit plan of the Company or any of its Subsidiaries, the CD&R Fund or
any of its co-investors in connection with the CD&R Fund’s investment in
the Company, or any Affiliates of the foregoing;

(ii)   the
merger, consolidation or other similar transaction involving the Company, as a
result of which persons who were stockholders of the Company immediately prior
to such merger, consolidation, or other similar transaction do not, immediately
thereafter, own, directly or indirectly, more than 50% of the combined voting
power entitled to vote generally in the election of directors of the merged or
consolidated company;

(iii)  within any
24-month period, the persons who were directors of the Company at the
beginning of such period (the “Incumbent Directors”)
shall cease to constitute at least a majority of the Board, provided that any director elected or nominated for
election, to the Board, by a majority of the Incumbent Directors then still in
office shall be deemed to be an Incumbent Director for purposes of this clause
(iii); or

(iv)  the sale,
transfer or other disposition of all or substantially all of the assets of the
Company to one or more persons or entities that are not, immediately prior to
such sale, transfer or other disposition, Affiliates of  the Company.

Notwithstanding the
foregoing, a Public Offering shall not constitute a Change in Control.

“Change in Control Price”
means the price per share of Common Stock offered in conjunction with any
transaction resulting in a Change in Control. If any part of the offered price
is payable other than in cash, the Change in Control price shall be determined
in good faith by the Board as constituted immediately prior to the Change in
Control.

“Code” means the United States Internal Revenue Code
of 1986, as amended, and any successor thereto.

“Common Stock”
means the Common Stock, par value $.01 per share, of the Company.

“Company” means
CDRV Investors, Inc., a Delaware corporation, and any successor thereto.

“Director Share Award”
means an award pursuant to Article VIII to an Eligible Director of Common
Stock, a right to receive Common Stock or a payment measured by reference
thereto and distributions thereon.

“Disability” means,
unless otherwise provided in an Award Agreement, a Participant’s long-term
disability within the meaning of the long-term disability insurance plan or
program of the Company or Subsidiary of the Company then covering the
Participant, or in the absence of such a plan or program, as determined by the
Board. The Board’s reasoned and good faith judgment of Disability shall be
final and shall be based on such competent medical evidence as shall be
presented to it by the Participant or by any physician or group of physicians
or other competent medical expert employed by the Participant or the Company to
advise the Board.

“Eligible Director”
means a member of the Board other than an employee or officer of the Company or
any of its Subsidiaries.

“Employee” means
any executive, officer or other employee of the Company or any Subsidiary.

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“Fair Market Value”
means, as of any date of determination prior to a Public Offering, the per
share fair market value on such date of a share of Common Stock as determined
in good faith by the Board. In making a determination of Fair Market Value, the
Board shall give due consideration to such factors as it deems appropriate,
including, but not limited to, the earnings and other financial and operating
information of the Company in recent periods, the potential value of the
Company as a whole, the future prospects of the Company and the industries in
which it competes, the history and management of the Company, the general
condition of the securities markets, the fair market value of securities of
companies engaged in businesses similar to those of the Company, and any recent
valuation of the Common Stock that shall have been performed by an independent
valuation firm (although nothing herein shall obligate the Board to obtain any
such independent valuation). Unless otherwise determined by the Board or provided
in an Award Agreement, any determination of Fair Market Value as of the end of
any fiscal year shall continue to apply throughout the next succeeding fiscal
year. The determination of Fair Market Value will not give effect to any
restrictions on transfer of the Common Stock or take into account any control
premium, but shall be determined taking into account the fact that such shares
would represent a minority interest in the Company and are illiquid. Initially,
the Fair Market Value shall be $100.00 per share, which is the price paid by
the CD&R Fund and its co-investors in connection with their initial
investment in the Company. Following a Public Offering, “Fair Market Value”
shall mean, as of any date of determination, the mid-point between the high and
the low trading prices for such date per share of Common Stock as reported on
the principal stock exchange on which the shares of Common Stock are then
listed.

“Grant Date”
means, with respect to any Award, the date as of which such Award is granted pursuant
to the Plan.

“Option”
means the right granted pursuant to the Plan to purchase one share of Common
Stock.

“Option
Agreement” means an agreement between the Company and a Participant
embodying the terms of any Options granted pursuant to the Plan and in the form
approved by the Board from time to time for such purpose.

“Participant” means any
Employee or Eligible Director who is granted an Award.

“Person”
means any natural person, firm, partnership, limited liability company,
association, corporation, company, trust, business trust, governmental
authority or other entity.

“Plan”
means this CDRV Investors, Inc. Stock Incentive Plan.

“Public
Offering” means the first day as of which (i) sales of Common
Stock are made to the public in the United States pursuant to an underwritten
public offering of the Common Stock led by one or more underwriters at least
one of which is an underwriter of nationally recognized standing or (ii) the
Board has determined that shares of the Common Stock otherwise have become publicly-traded
for this purpose.

“Special
Termination” has the meaning given in Section 6.1.

“Subscription
Agreement” means a stock subscription agreement between the Company
and a Participant embodying the terms of any stock purchase made pursuant to
the Plan and in the form approved by the Board from time to time for such
purpose.

“Subsidiary”
means any corporation limited liability company or other entity, a majority of
whose outstanding voting securities is owned, directly or indirectly, by the
Company.

Section 11.2  Gender and Number.  Except when otherwise
indicated by the context, words in the masculine gender used in the Plan shall
include the feminine gender, the singular shall include the plural, and the
plural shall include the singular.

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Article XII

Miscellaneous Provisions

Section 12.1  Nontransferability
of Awards.  Except as otherwise provided herein or as the
Board may permit on such terms as it shall determine, no Awards granted under
the Plan may be sold, transferred, pledged, assigned, hedged, encumbered or
otherwise alienated or hypothecated, other than by will or by the laws of
descent and distribution. All rights with respect to Awards granted to a
Participant under the Plan shall be exercisable during the Participant’s
life-time by such Participant only (or, in the event of the Participant’s
Disability, such Participant’s legal representative). Following a Participant’s
death, all rights with respect to Awards that were outstanding at the time of
such Participant’s death and have not terminated shall be exercised by his
designated beneficiary or by his estate in the absence of a designated
beneficiary.

Section 12.2  Tax
Withholding.  The Company or the Subsidiary employing a
Participant shall have the power to withhold, or to require such Participant to
remit to the Company or such Subsidiary, an amount sufficient to satisfy all
U.S. federal, state, local and any non-U.S. withholding tax or other
governmental tax, charge or fee requirements in respect of any Award granted
under the Plan.

Section 12.3  Beneficiary
Designation.  Pursuant to such rules and procedures
as the Board may from time to time establish, a Participant may name
beneficiary or beneficiaries (who may be named contingently or successively) by
whom any right under the Plan is to be exercised in case of such Participant’s
death. Each designation will revoke all prior designations by the same
Participant, shall be in a form reasonably prescribed by the Board, and will be
effective only when filed by the Participant in writing with the Board during
his lifetime.

Section 12.4  Delivery of
Financial Statements to Participants.  Each year the
Company will provide the Company’s annual financial statements to the
Participants.

Section 12.5  Limitation
on Number of Outstanding Options.  At no time shall the
total number of shares of Common Stock issuable upon exercise of all
outstanding Options and the total number of shares of Common Stock provided for
under any bonus or similar plan or agreement of the Company exceed 30%. as
calculated in accordance with the conditions and exclusions of California Code
of Regulations, Title 10, Ch. 3, Section 260.140.45, of the securities
outstanding at the time the calculation is made.

Section 12.6  No Guarantee
of Employment or Participation.  Nothing in the Plan or in
any agreement granted hereunder shall interfere with or limit in any way the
right of the Company or any Subsidiary to terminate any Participant’s
employment or retention at any time, or confer upon any Participant any right
to continue in the employ or retention of the Company or any Subsidiary. No
Employee or Eligible Director shall have a right to be selected as a
Participant or, having been so selected, to receive any Awards.

Section 12.7  No
Limitation on Compensation; No Impact on Benefits.  Nothing
in the Plan shall be construed to limit the right of the Company or any
Subsidiary to establish other plans or to pay compensation to its Employees or
Eligible Directors, in cash or property, in a manner that is not expressly
authorized under the Plan. Except as may otherwise be specifically and
unequivocally stated under any employee benefit plan, policy or program, no
amount payable in respect of any Award shall be treated as compensation for
purposes of calculating a Participant’s rights under any such plan, policy or
program. The selection of an Employee as a Participant shall neither entitle
such Employee to, nor disqualify such Employee from, participation in any other
award or incentive plan.

Section 12.8  Requirements
of Law.  The granting of Awards and the issuance of shares
of Common Stock pursuant to the Plan shall be subject to all applicable laws, rules and
regulations, and to such approvals by any governmental agencies or national
securities exchanges as may be required. No Awards shall be granted under the
Plan, and no shares of Common Stock shall be issued under the Plan, if such 

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grant or issuance would
result in a violation of applicable law, including U.S. federal securities laws
and any applicable state or non-U.S. securities laws.

Section 12.9  Freedom of
Action.  Nothing in the Plan or any Award Agreement
evidencing an Award shall be construed as limiting or preventing the Company or
any Subsidiary from taking any action that it deems appropriate or in its best
interest (as determined in its sole and absolute discretion) and no Participant
(or person claiming by or through a Participant) shall have any right relating
to the diminishment in the value of any Award as a result of any such action.

Section 12.10  Unfunded
Plan; Plan Not Subject to ERISA.  The plan is an unfunded
plan and Participants shall have the status of unsecured creditors of the
Company. The Plan is not intended to be subject to the Employee Retirement
Income and Security Act of 1974, as amended.

Section 12.11  Term of Plan.  The
Plan shall be effective as of the date specified by the Board and shall
continue in effect, unless sooner terminated pursuant to Article X, until
the tenth anniversary of such date, the provisions of the Plan shall continue
thereafter to govern all outstanding Awards.

Section 12.12  No Voting
Rights.  Except as otherwise required by law, no
Participant holding any Awards granted under the Plan shall have any right in
respect of such Awards to vote on any matter submitted to the Company’s
stockholders until such time as the shares of Common Stock underlying such
Awards have been issued.

Section 12.13  Governing Law.  The Plan, and all agreements
hereunder, shall be governed by and construed in accordance with the law of the
State of New York regardless of the application of rules of conflict of
law that would apply the laws of any other jurisdiction, except to the extent
that the corporate law of the State of Delaware specifically and mandatorily
applies.

Effective Date: May 27, 2004

 9EXHIBIT 4.3

2003 EQUITY
INCENTIVE PLAN

OF

DTS, INC.

1.                                      Purpose of this Plan

The purpose of this 2003 Equity Incentive Plan is to enhance the
long-term stockholder value of DTS, Inc. by offering opportunities to eligible
individuals to participate in the growth in value of the equity of DTS, Inc.

2.                                      Definitions and Rules of
Interpretation

2.1          Definitions

This Plan uses the following defined terms:

(a)          “Administrator” means the Board, the Committee, or any
officer or employee of the Company to whom the Board or the Committee delegates
authority to administer this Plan.

(b)          “Affiliate” means a “parent” or “subsidiary” (as each is
defined in Section 424 of the Code) of the Company and any other entity that
the Board or Committee designates as an “Affiliate” for purposes of this Plan.

(c)           “Applicable
Law” means
any and all laws of whatever jurisdiction, within or without the United States,
and the rules of any stock exchange or quotation system on which Shares are
listed or quoted, applicable to the taking or refraining from taking of any
action under this Plan, including the administration of this Plan and the
issuance or transfer of Awards or Award Shares.

(d)          “Award” means a Stock Award, SAR, Cash Award, or
Option granted in accordance with the terms of this Plan.

(e)           “Award
Agreement” means
the document evidencing the grant of an Award.

(f)            “Award Shares” means Shares covered by an outstanding Award or purchased under an
Award.

(g)          “Awardee” means: (i) a person to whom an Award has
been granted, including a holder of a Substitute Award, (ii) a person to
whom an Award has been transferred in accordance with all applicable
requirements of Sections 6.5, 7(h), and 17.

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

(i)           “Cash Award” means the right to receive cash as described
in Section 8.3.

(j)            “Change in Control” means any transaction or event that the Board specifies as a Change in
Control under Section 10.4.

(k)          “Code” means the Internal Revenue Code of 1986.

 1
 

 

(l)           “Committee” means a committee composed of Company
Directors appointed in accordance with the Company’s charter documents and
Section 4.

(m)          “Company” means DTS, Inc., a Delaware corporation.

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

(o)          “Consultant” means an individual who, or an employee of
any entity that, provides bona fide services to the Company or an Affiliate not
in connection with the offer or sale of securities in a capital-raising
transaction, but who is not an Employee.

(p)          “Director” means a member of the Board of Directors of
the Company or an Affiliate.

(q)          “Divestiture” means any transaction or event that the
Board specifies as a Divestiture under Section 10.5.

(r)           “Domestic Relations Order” means a “domestic relations order” as
defined in, and otherwise meeting the requirements of, Section 414(p) of
the Code, except that reference to a “plan” in that definition shall be to this
Plan.

(s)           “Effective
Date” means the
first date of the sale by the Company of shares of its capital stock in an
initial public offering pursuant to a registration statement on Form S-1 filed
with the SEC.

(t)           “Employee” means a regular employee of the Company or
an Affiliate, including an officer or Director, who is treated as an employee
in the personnel records of the Company or an Affiliate, but not individuals
who are classified by the Company or an Affiliate as: (i) leased from or
otherwise employed by a third party, (ii) independent contractors, or
(iii) intermittent or temporary workers. 
The Company’s or an Affiliate’s classification of an individual as an “Employee”
(or as not an “Employee”) for purposes of this Plan shall not be altered
retroactively even if that classification is changed retroactively for another
purpose as a result of an audit, litigation or otherwise.  An Awardee shall not cease to be an Employee
due to transfers between locations of the Company, or between the Company and
an Affiliate, or to any successor to the Company or an Affiliate that assumes
the Awardee’s Options under Section 10. 
Neither service as a Director nor receipt of a director’s fee shall be
sufficient to make a Director an “Employee”.

(u)          “Exchange Act” means the Securities Exchange Act of 1934.

(v)           “Executive” means, if the Company has any class of any
equity security registered under Section 12 of the Exchange Act, an individual
who is subject to Section 16 of the Exchange Act or who is a “covered employee”
under Section 162(m) of the Code, in either case because
of the individual’s relationship with the Company or an Affiliate.  If the Company does not have any class of any
equity security registered under Section 12 of the Exchange Act, “Executive”
means any (i) Director, (ii) officer elected or appointed by the Board, or
(iii) beneficial owner of more than 10% of any class of the Company’s
equity securities.

(w)          “Expiration
Date” means,
with respect to an Award, the date stated in the Award Agreement as the
expiration date of the Award or, if no such date is stated in the Award
Agreement, then the last day of the maximum exercise period for the Award, disregarding
the effect of an Awardee’s Termination or any other event that would shorten
that period.

(x)           “Fair Market
Value” means
the value of Shares as determined under Section 18.2.

 2
 

 

(y)           “Fundamental
Transaction”
means any transaction or event described in Section 10.3.

(z)           “Grant Date”
means the
date the Administrator approves the grant of an Award.  However, if the Administrator specifies that
an Award’s Grant Date is a future date or the date on which a condition is
satisfied, the Grant Date for such Award is that future date or the date that
the condition is satisfied.

(aa)        “Incentive Stock Option” means an Option intended to qualify as an
incentive stock option under Section 422 of the Code and designated as an
Incentive Stock Option in the Award Agreement for that Option.

(bb)        “Nonstatutory Option” means any Option other than an Incentive
Stock Option.

(cc)         “Non-Employee Director” means any person who is a member of the
Board but is not an Employee of the Company or any Affiliate of the Company and
has not been an Employee of the Company or any Affiliate of the Company at any
time during the preceding twelve months. Service as a Director does not in
itself constitute employment for purposes of this definition.

(dd)        “Objectively Determinable
Performance Condition” shall mean a
performance condition (i) that is established (A) at the time an
Award is granted or (B)  no later than the earlier of (1) 90 days
after the beginning of the period of service to which it relates, or
(2) before the elapse of 25% of the period of service to which it relates,
(ii) that is uncertain of achievement at the time it is established, and
(iii) the achievement of which is determinable by a third party with
knowledge of the relevant facts. 
Examples of measures that may be used in Objectively Determinable
Performance Conditions include net order dollars, net profit dollars, net
profit growth, net revenue dollars, revenue growth, individual performance,
earnings per share, return on assets, return on equity, and other financial objectives,
objective customer satisfaction indicators and efficiency measures, each with
respect to the Company and/or an Affiliate or individual business unit.

(ee)         “Officer” means an officer of the Company as defined in
Rule 16a-1 adopted under the Exchange Act.

(ff)           “Option” means a right to purchase Shares of the Company granted under this
Plan.

(gg)        “Option
Price” means
the price payable under an Option for Shares, not including any amount payable
in respect of withholding or other taxes.

(hh)        “Option
Shares” means
Shares covered by an outstanding Option or purchased under an Option.

(ii)          “Plan” means this 2003 Equity Incentive Plan of DTS,
Inc.

(jj)           “Prior Plans” means the Company’s 1997 Stock
Option Plan and the 2002 Stock Option Plan in effect.

(kk)        “Purchase
Price”
means the price payable under a Stock Award for Shares, not including any
amount payable in respect of withholding or other taxes.

(ll)          “Rule 16b-3”
means Rule
16b-3 adopted under Section 16(b) of the Exchange Act.

 3
 

 

(mm)       “SAR” or “Stock
Appreciation Right” means a right to receive cash based on a change in the Fair Market
Value of a specific number of Shares pursuant to an Award Agreement, as
described in Section 8.1.

(nn)        “Securities
Act” means
the Securities Act of 1933.

(oo)        “Share” means a share of the common stock of the
Company or other securities substituted for the common stock under Section 10.

(pp)        “Stock Award” means an offer by the Company to sell shares
subject to certain restrictions pursuant to the Award Agreement as described in
Section 8.2.

(qq)        “Substitute
Award” means
a Substitute Option, Substitute SAR or Substitute Stock Award granted in
accordance with the terms of this Plan.

(rr)         “Substitute
Option” means
an Option granted in substitution for, or upon the conversion of, an option
granted by another entity to purchase equity securities in the granting entity.

(ss)         “Substitute
SAR” means
a SAR granted in substitution for, or upon the conversion of, a stock
appreciation right granted by another entity with respect to equity securities
in the granting entity.

(tt)          “Substitute Stock Award” means a Stock Award granted in substitution
for, or upon the conversion of, a stock award granted by another entity to
purchase equity securities in the granting entity.

(uu)        “Termination” means that the Awardee has ceased to be, with
or without any cause or reason, an Employee, Director or Consultant.  However, unless so determined by the
Administrator, or otherwise provided in this Plan, “Termination” shall not
include a change in status from an Employee, Consultant or Director to another
such status.  An event that causes an
Affiliate to cease being an Affiliate shall be treated as the “Termination” of
that Affiliate’s Employees, Directors, and Consultants.

2.2          Rules of Interpretation

Any reference to a “Section,” without more, is to a Section of this
Plan.  Captions and titles are used for
convenience in this Plan and shall not, by themselves, determine the meaning of
this Plan.  Except when otherwise
indicated by the context, the singular includes the plural and vice versa.  Any reference to a statute is also a
reference to the applicable rules and regulations adopted under that
statute.  Any reference to a statute,
rule or regulation, or to a section of a statute, rule or regulation, is a
reference to that statute, rule, regulation, or section as amended from time to
time, both before and after the Effective Date and including any successor
provisions.

3.             Shares Subject to this Plan; Term
of this Plan

3.1          Number of Award Shares

The Shares issuable under
this Plan shall be authorized but unissued or reacquired Shares, including
Shares repurchased by the Company on the open market. The number of Shares initially reserved for issuance over the
term of this Plan shall not exceed 3,000,000 Shares.  Such reserve shall consist of (i) the number
of Shares available for issuance, as of the Effective Date, under the Prior
Plans as last approved by the
Company’s stockholders, including
the Shares subject to outstanding options under the Prior Plans, plus (ii)
those Shares issued under the Prior Plans that are forfeited or repurchased

 4
 

 

by the Company or that
are issuable upon exercise of options granted pursuant to the Prior Plans that
expire or become unexercisable for any reason without having been exercised in
full after the Effective Date, plus (iii) an additional increase of
approximately 928,949 Shares to be approved by the Company’s stockholders prior to the Effective
Date.  The maximum number of Shares shall
be cumulatively increased on the first January 1 after the Effective Date and
each January 1 thereafter for 10 years, by a number of Shares equal to the
least of (a) 4% of the number of Shares issued and outstanding on the
immediately preceding December 31, (b) 1,500,000 Shares, and
(c) a number of Shares set by the Board. 
When an Award is granted, the maximum number of Shares that may be
issued under this Plan shall be reduced by the number of Shares covered by that
Award.  However, if an Award later
terminates or expires without having been exercised in full, the maximum number
of shares that may be issued under this Plan shall be increased by the number
of Shares that were covered by, but not purchased under, that Award.  By contrast, the repurchase of Shares by the
Company shall not increase the maximum number of Shares that may be issued
under this Plan.  Notwithstanding
anything in this Plan to the contrary, at no time during the eighteen (18)
months following the Effective Date may the sum of the number of Shares subject
to Awards under this Plan and the number of Shares subject to options under the
Prior Plans exceed 15% of the outstanding Shares on a “fully diluted”
basis.  For the purposes of this Section 3.1, outstanding Shares on a “fully
diluted” basis shall be the number of Shares that is equal to (x) the number of
Shares issued and outstanding plus (y) all Shares subject to or
available for Awards or options under this Plan and the Prior Plans,
respectively, and 50% of the Shares then issuable upon the exercise of warrants
that were outstanding on the Effective Date of the Plan.

3.2          Source
of Shares

Award Shares may be: 
(a) Shares that have never been issued, (b) Shares that have
been issued but are no longer outstanding, or (c) Shares that are
outstanding and are acquired to discharge the Company’s obligation to deliver
Award Shares.

3.3          Term
of this Plan

(a)          This
Plan shall be effective on, and Awards may be granted under this Plan on and
after, the earliest the date on which the Plan has been both adopted by the
Board and approved by the Company’s stockholders.

(b)          Subject
to the provisions of Section 14, Awards may be granted under this Plan for
a period of ten years from the earlier of the date on which the Board approves
this Plan and the date the Company’s stockholders approve this Plan.  Accordingly, Awards may not be granted under
this Plan after the earlier of those dates.

4.                                      Administration

4.1          General

(a)          The Board shall have ultimate responsibility
for administering this Plan.  The Board
may delegate certain of its responsibilities to a Committee, which shall
consist of at least two members of the Board. 
The Board or the Committee may further delegate its responsibilities to
any Employee of the Company or any Affiliate. 
Where this Plan specifies that an action is to be taken or a
determination made by the Board, only the Board may take that action or make
that determination.  Where this Plan
specifies that an action is to be taken or a determination made by the
Committee, only the Committee may take that action or make that determination.  Where this Plan references the “Administrator,”
the action may be taken or determination made by the Board, the Committee, or
other Administrator.  However, only the
Board or the Committee may approve grants of Awards to Executives, and an Administrator
other than the Board or the Committee may grant Awards only within guidelines

 5
 

 

established
by the Board or Committee.  Moreover, all
actions and determinations by any Administrator are subject to the provisions
of this Plan.

(b)          So long as the Company has registered and
outstanding a class of equity securities under Section 12 of the Exchange
Act, the Committee shall consist of Company Directors who are “Non-Employee
Directors” as defined in Rule 16b-3 and, after the expiration of any
transition period permitted by Treasury Regulations
Section 1.162-27(h)(3), who are “outside directors” as defined in
Section 162(m) of the Code.

4.2          Authority
of the Board or the Committee

Subject to the other provisions of this Plan, the Board or the
Committee shall have the authority to:

(a)          grant
Awards, including Substitute Awards;

(b)          determine
the Fair Market Value of Shares;

(c)           determine
the Option Price and the Purchase Price of Awards;

(d)          select
the Awardees;

(e)           determine
the times Awards are granted;

(f)            determine
the number of Shares subject to each Award;

(g)          determine
the methods of payment that may be used to purchase Award Shares;

(h)          determine
the methods of payment that may be used to satisfy withholding tax obligations;

(i)           determine
the other terms of each Award, including but not limited to the time or times
at which Awards may be exercised, whether and under what conditions an Award is
assignable, and whether an Option is a Nonstatutory Option or an Incentive
Stock Option;

(j)            modify
or amend any Award;

(k)          authorize
any person to sign any Award Agreement or other document related to this Plan
on behalf of the Company;

(l)           determine
the form of any Award Agreement or other document related to this Plan, and
whether that document, including signatures, may be in electronic form;

(m)          interpret
this Plan and any Award Agreement or document related to this Plan;

(n)          correct
any defect, remedy any omission, or reconcile any inconsistency in this Plan,
any Award Agreement or any other document related to this Plan;

(o)          adopt,
amend, and revoke rules and regulations under this Plan, including rules and
regulations relating to sub-plans and Plan addenda;

(p)          adopt,
amend, and revoke special rules and procedures which may be inconsistent with
the terms of this Plan, set forth (if the Administrator so chooses) in
sub-plans regarding (for example) the operation and administration of this Plan
and the terms of Awards, if and to the extent necessary or useful to
accommodate non-U.S. Applicable Laws and practices as they apply to Awards and

 6
 

 

Award
Shares held by, or granted or issued to, persons working or resident outside of
the United States or employed by Affiliates incorporated outside the United
States;

(q)          determine
whether a transaction or event should be treated as a Change in Control, a
Divestiture or neither;

(r)           determine
the effect of a Fundamental Transaction and, if the Board determines that a
transaction or event should be treated as a Change in Control or a Divestiture,
then the effect of that Change in Control or Divestiture; and

(s)           make
all other determinations the Administrator deems necessary or advisable for the
administration of this Plan.

4.3          Scope of Discretion

Subject to the provisions of this Section 4.3, on
all matters for which this Plan confers the authority, right or power on the
Board, the Committee, or other Administrator to make decisions, that body may
make those decisions in its sole and absolute discretion.  Those decisions will be final, binding and
conclusive.  In making its decisions, the
Board, Committee or other Administrator need not treat all persons eligible to
receive Awards, all Awardees, all Awards or all Award Shares the same way.  Notwithstanding anything herein to the
contrary, and except as provided in Section 14.3, the discretion of the
Board, Committee or other Administrator is subject to the specific provisions
and specific limitations of this Plan, as well as all rights conferred on
specific Awardees by Award Agreements and other agreements.

5.             Persons Eligible to Receive
Awards

5.1          Eligible Individuals

Awards (including Substitute Awards) may be granted to, and only to,
Employees, Directors and Consultants, including to prospective Employees,
Directors and Consultants conditioned on the beginning of their service for the
Company or an Affiliate.  However,
Incentive Stock Options may only be granted to Employees, as provided in
Section 7(g).

5.2          Section 162(m) Limitation

(a)          Options and SARs 
Subject to the provisions of this Section 5.2, for so long as the Company
is a “publicly held corporation” within the meaning of Section 162(m) of the
Code: (i) no Employee may be granted one or more SARs and Options within
any fiscal year of the Company under this Plan to purchase more than 1,500,000
Shares under Options or to receive compensation calculated with reference to
more than that number of Shares under SARs, subject to adjustment pursuant to
Section 10, (ii) Options and SARs may be granted to an Executive only by
the Committee (and, notwithstanding anything to the contrary in Section 4.1(a),
not by the Board).  If an Option or SAR
is cancelled without being exercised or if the Option Price of an Option is
reduced, that cancelled or repriced Option or SAR shall continue to be counted
against the limit on Awards that may be granted to any individual under this
Section 5.2.  Notwithstanding anything
herein to the contrary, a new Employee of the Company or an Affiliate shall be
eligible to receive up to a maximum of 2,000,000 Shares under Options in the
calendar year in which they commence employment, or such compensation
calculated with reference to such number of Shares under SARs, subject to
adjustment pursuant to Section 10.

(b)          Cash Awards and Stock Awards  Any
Cash Award or Stock Award intended as “qualified performance-based compensation”
within the meaning of Section 162(m) of the Code must vest or become
exercisable contingent on the achievement of one or more Objectively
Determinable

 7
 

 

Performance
Conditions.  The Committee shall have the
discretion to determine the time and manner of compliance with Section 162(m)
of the Code.

6.                                      Terms and Conditions of Option

The following rules apply to all Options:

6.1          Price

No Nonstatutory Option may
have an Option Price less than 85% of the Fair Market Value of the Shares on the
Grant Date.  No Option intended as “qualified
incentive-based compensation” within the meaning of Section 162(m) of the
Code may have an Option Price less than 100% of the Fair Market Value of the
Shares on the Grant Date.  In no event
will the Option Price of any Option be less than the par value of the Shares
issuable under the Option if that is required by Applicable Law.  The Option Price of an Incentive Stock Option
shall be subject to Section 7(f).

6.2          Term

No Option shall be
exercisable after its Expiration Date. 
No Option may have an Expiration Date that is more than ten years after
its Grant Date.  Additional provisions
regarding the term of Incentive Stock Options are provided in
Sections 7(a) and 7(e).

6.3          Vesting

Options shall be exercisable:
(a) on the Grant Date, or (b) in accordance with a schedule related
to the Grant Date, the date the Optionee’s directorship, employment or
consultancy begins, or a different date specified in the Option Agreement.  Additional provisions regarding the vesting
of Incentive Stock Options are provided in Section 7(c).  No Option granted to an individual who is
subject to the overtime pay provisions of the Fair Labor Standards Act may be
exercised before the expiration of six months after the Grant Date.

6.4          Form
and Method of Payment

(a)          The
Board or Committee shall determine the acceptable form and method of payment
for exercising an Option.

(b)          Acceptable
forms of payment for all Option Shares are cash, check or wire transfer,
denominated in U.S. dollars except as specified by the Administrator for
non-U.S. Employees or non-U.S. sub-plans.

(c)           In
addition, the Administrator may permit payment to be made by any of the
following methods:

(i)           other
Shares, or the designation of other Shares, which (A) are “mature” shares
for purposes of avoiding variable accounting treatment under generally accepted
accounting principles (generally mature shares are those that have been owned
by the Optionee for more than six months on the date of surrender), and (B)
have a Fair Market Value on the date of surrender equal to the Option Price of
the Shares as to which the Option is being exercised;

(ii)          provided that a public market exists for the
Shares, consideration received by the Company under a procedure under which a
licensed broker-dealer advances funds on behalf of an Optionee or sells Option
Shares on behalf of an Optionee (a “Cashless Exercise Procedure”), provided that
if the Company extends or arranges for the extension of credit to an Optionee
under any Cashless Exercise Procedure, no Officer or Director may participate
in that Cashless Exercise Procedure;

 8
 

 

(iii)         with respect only
to Optionees who are neither Officers nor Directors as of the date of exercise,
one or more promissory notes meeting the requirements of Section 6.4(e)
provided, however, that promissory notes may not be used for any portion of an
Award which is not vested at the time of exercise;

(iv)         cancellation of any debt owed by the Company
or any Affiliate to the Optionee by the Company including without limitation
waiver of compensation due or accrued for services previously rendered to the
Company; and

(v)           any
combination of the methods of payment permitted by any paragraph of this
Section 6.4.

(d)          The
Administrator may also permit any other form or method of payment for Option
Shares permitted by Applicable Law.

(e)           The
promissory notes referred to in Section 6.4(c)(iii) shall be full
recourse.  Unless the Committee specifies
otherwise after taking into account any relevant accounting issues, the promissory
notes shall bear interest at a fair market value rate when the Option is
exercised.  Interest on the promissory
notes shall also be at least sufficient to avoid imputation of interest under
Sections 483, 1274, and 7872 of the Code. 
The promissory notes and their administration shall at all times comply
with any applicable margin rules of the Federal Reserve.  The promissory notes may also include such
other terms as the Administrator specifies. 
Payment may not be made by promissory note by Officers or Directors if
Shares are registered under Section 12 of the Exchange Act.

6.5          Nonassignability
of Options

Except
as determined by the Administrator, no Option shall be assignable or otherwise
transferable by the Optionee except by will or by the laws of descent and
distribution.  However, Options may be
transferred and exercised in accordance with a Domestic Relations Order and may
be exercised by a guardian or conservator appointed to act for the Optionee.  Incentive Stock Options may only be assigned
in compliance with Section 7(h).

6.6          Substitute Options

The Board may cause the Company to grant Substitute Options in
connection with the acquisition by the Company or an Affiliate of equity
securities of any entity (including by merger, tender offer, or other similar
transaction) or of all or a portion of the assets of any entity.  Any such substitution shall be effective on
the effective date of the acquisition. 
Substitute Options may be Nonstatutory Options or Incentive Stock
Options.  Unless and to the extent
specified otherwise by the Board, Substitute Options shall have the same terms
and conditions as the options they replace, except that (subject to the
provisions of Section 10) Substitute Options shall be Options to purchase
Shares rather than equity securities of the granting entity and shall have an
Option Price determined by the Board.

6.7          Repricings

In furtherance of, and not in limitation of
the provisions of Section
10, Options may be repriced, replaced or regranted through cancellation or
modification without stockholder approval.

7.                                      Incentive Stock Options

The following rules apply only to Incentive Stock Options and only to
the extent these rules are more restrictive than the rules that would otherwise
apply under this Plan.  With the consent of
the Optionee, or where this Plan provides that an action may be taken
notwithstanding any other provision of this Plan, the Administrator may deviate
from the requirements of this Section, notwithstanding that any Incentive Stock
Option modified by the Administrator will thereafter be treated as a
Nonstatutory Option.

 9
 

 

(a)          The Expiration Date of an Incentive Stock
Option shall not be later than ten years from its Grant Date, with the result
that no Incentive Stock Option may be exercised after the expiration of ten
years from its Grant Date.

(b)          No
Incentive Stock Option may be granted more than ten years from the date this
Plan was approved by the Board.

(c)           Options
intended to be incentive stock options under Section 422 of the Code that are
granted to any single Optionee under all incentive stock option plans of the
Company and its Affiliates, including incentive stock options granted under
this Plan, may not vest at a rate of more than $100,000 in Fair Market Value of
stock (measured on the grant dates of the options) during any calendar
year.  For this purpose, an option vests
with respect to a given share of stock the first time its holder may purchase
that share, notwithstanding any right of the Company to repurchase that
share.  Unless the administrator of that
option plan specifies otherwise in the related agreement governing the option,
this vesting limitation shall be applied by, to the extent necessary to satisfy
this $100,000 rule, treating certain stock options that were intended to be
incentive stock options under Section 422 of the Code as Nonstatutory
Options.  The stock options or portions
of stock options to be reclassified as Nonstatutory Options are those with the
highest option prices, whether granted under this Plan or any other equity compensation
plan of the Company or any Affiliate that permits that treatment.  This Section 7(c) shall not cause an
Incentive Stock Option to vest before its original vesting date or cause an
Incentive Stock Option that has already vested to cease to be vested.

(d)          In
order for an Incentive Stock Option to be exercised for any form of payment
other than those described in Section 6.4(b), that right must be stated at the
time of grant in the Option Agreement relating to that Incentive Stock Option.

(e)           Any
Incentive Stock Option granted to a Ten Percent Stockholder, must have an
Expiration Date that is not later than five years from its Grant Date, with the
result that no such Option may be exercised after the expiration of five years
from the Grant Date.  A “Ten Percent Stockholder” is any
person who, directly or by attribution under Section 424(d) of the Code,
owns stock possessing more than ten percent of the total combined voting power
of all classes of stock of the Company or of any Affiliate on the Grant Date.

(f)            The
Option Price of an Incentive Stock Option shall never be less than the Fair
Market Value of the Shares at the Grant Date. 
The Option Price for the Shares covered by an Incentive Stock Option
granted to a Ten Percent Stockholder shall never be less than 110% of the Fair
Market Value of the Shares at the Grant Date.

(g)          Incentive
Stock Options may be granted only to Employees. 
If an Optionee changes status from an Employee to a Consultant, that
Optionee’s Incentive Stock Options become Nonstatutory Options if not exercised
within the time period described in Section 7(i) (determined by treating
that change in status as a Termination solely for purposes of this Section
7(g)).

(h)          No
rights under an Incentive Stock Option may be transferred by the Optionee,
other than by will or the laws of descent and distribution.  During the life of the Optionee, an Incentive
Stock Option may be exercised only by the Optionee.  The Company’s compliance with a Domestic
Relations Order, or the exercise of an Incentive Stock Option by a guardian or
conservator appointed to act for the Optionee, shall not violate this Section
7(h).

(i)           An
Incentive Stock Option shall be treated as a Nonstatutory Option if it remains
exercisable after, and is not exercised within, the three-month period
beginning with the Optionee’s Termination for any reason other than the
Optionee’s death or disability (as defined in Section 22(e) of the Code).  In the case of Termination due to death, an
Incentive Stock Option shall continue to be treated as an Incentive Stock
Option if it remains exercisable after, and is not exercised within, the
three-month

 10
 

 

period after the Optionee’s Termination provided it is exercised before
the Expiration Date.  In the case of
Termination due to disability, an Incentive Stock Option shall be treated as a
Nonstatutory Option if it remains exercisable after, and is not exercised
within, one year after the Optionee’s Termination.

(j)            An
Incentive Stock Option may only be modified by the Board.

8.             Stock Appreciation Rights, Stock
Awards and Cash Awards

8.1          Stock Appreciation Rights

The following rules apply to SARs:

(a)          General.  SARs may be
granted either alone, in addition to, or in tandem with other Awards granted
under this Plan. The Administrator may grant SARs to eligible participants
subject to terms and conditions not inconsistent with this Plan and determined
by the Administrator. The specific terms and conditions applicable to the
Awardee shall be provided for in the Award Agreement. SARs shall be exercisable,
in whole or in part, at such times as the Administrator shall specify in the
Award Agreement.  The grant or vesting of
a SAR may be made contingent on the achievement of Objectively Determinable
Performance Conditions.

(b)          Exercise of
SARs.  Upon
the exercise of an SAR, in whole or in part, an Awardee shall be entitled to a
payment in an amount equal to the excess of the Fair Market Value of a fixed
number of Shares covered by the exercised portion of the SAR on the date of
exercise, over the Fair Market Value of the Shares covered by the exercised
portion of the SAR on the Grant Date. 
The amount due to the Awardee upon the exercise of a SAR shall be paid
in cash, Shares or a combination thereof, over the period or periods specified
in the Award Agreement.  An Award
Agreement may place limits on the amount that may be paid over any specified
period or periods upon the exercise of a SAR, on an aggregate basis or as to
any Awardee.  A SAR shall be considered
exercised when the Company receives written notice of exercise in accordance
with the terms of the Award Agreement from the person entitled to exercise the
SAR.  If a SAR has been granted in tandem
with an Option, upon the exercise of the SAR, the number of shares that may be
purchased pursuant to the Option shall be reduced by the number of shares with
respect to which the SAR is exercised.

(c)           Nonassignability
of SARs.  Except as determined by the Administrator, no
SAR shall be assignable or otherwise transferable by the Awardee except by will
or by the laws of descent and distribution. 
Notwithstanding anything herein to the contrary, SARs may be transferred
and exercised in accordance with a Domestic Relations Order.

(d)          Substitute SARs.  The
Board may cause the Company to grant Substitute SARs in connection with the
acquisition by the Company or an Affiliate of equity securities of any entity
(including by merger) or all or a portion of the assets of any entity.  Any such substitution shall be effective on the
effective date of the acquisition.  Unless
and to the extent specified otherwise by the Board, Substitute SARs shall have
the same terms and conditions as the options they replace, except that (subject
to the provisions of Section 10) Substitute SARs shall be exercisable with
respect to the Fair Market Value of Shares rather than equity securities of the
granting entity and shall be on terms that, as determined by the Board in its
sole and absolute discretion, properly reflects the substitution.

(e)           Repricings.  A SAR
may be repriced, replaced or regranted, through cancellation or modification
without stockholder approval.

8.2          Stock Awards

The following rules apply to all Stock Awards:

 11

 

(a)          General.  The
specific terms and conditions of a Stock Award applicable to the Awardee shall
be provided for in the Award Agreement. The Award Agreement shall state the
number of Shares that the Awardee shall be entitled to receive or purchase, the
terms and conditions on which the Shares shall vest, the price to be paid and,
if applicable, the time within which the Awardee must accept such offer. The
offer shall be accepted by execution of the Award Agreement.  The Administrator may require that all Shares
subject to a right of repurchase or risk of forfeiture be held in escrow until
such repurchase right or risk of forfeiture lapses.  The grant or vesting of a Stock Award may be
made contingent on the achievement of Objectively Determinable Performance
Conditions.

(b)          Right of
Repurchase.  If so provided in the Award Agreement, Award
Shares acquired pursuant to a Stock Award may be subject to repurchase by the
Company or an Affiliate if not vested in accordance with the Award Agreement.

(c)           Form of Payment.  The
Administrator shall determine the acceptable form and method of payment for
exercising a Stock Award.  Acceptable
forms of payment for all Award Shares are cash, check or wire transfer,
denominated in U.S. dollars except as specified by the Administrator for
non-U.S. Employees or non-U.S. sub-plans. 
In addition, the Administrator may permit payment to be made by any of
the methods permitted with respect to the exercise of Options pursuant to
Section 6.4.

(d)          Nonassignability
of Stock Awards.  Except
as determined by the Administrator, no Stock Award shall be assignable or
otherwise transferable by the Awardee except by will or by the laws of descent
and distribution.  Notwithstanding
anything to the contrary herein, Stock Awards may be transferred and exercised
in accordance with a Domestic Relations Order.

(e)           Substitute
Stock Award.  The Board may cause the Company to grant
Substitute Stock Awards in connection with the acquisition by the Company or an
Affiliate of equity securities of any entity (including by merger) or all or a
portion of the assets of any entity. 
Unless and to the extent specified otherwise by the Board, Substitute
Stock Awards shall have the same terms and conditions as the stock awards they
replace, except that (subject to the provisions of Section 10) Substitute
Stock Awards shall be Stock Awards to purchase Shares rather than equity
securities of the granting entity and shall have a Purchase Price that, as
determined by the Board in its sole and absolute discretion, properly reflects
the substitution.  Any such Substituted
Stock Award shall be effective on the effective date of the acquisition.

8.3          Cash Awards

The following rules apply to all Cash Awards:

Cash Awards may be granted either alone, in addition to, or in tandem with
other Awards granted under this Plan. After the Administrator determines that
it will offer a Cash Award, it shall advise the Awardee, by means of an Award
Agreement, of the terms, conditions and restrictions related to the Cash Award.

9.                                      Exercise of Awards

9.1          In
General

An Award shall be exercisable in accordance with
this Plan and the Award Agreement under which it is granted.

9.2          Time
of Exercise

Options and Stock Awards
shall be considered exercised when the Company receives: (a) written
notice of exercise from the person entitled to exercise the Option or Stock
Award, (b) full payment, or provision for payment, in a form and method
approved by the Administrator, for the Shares

 12
 

 

for which the Option or Stock Award is being exercised, and (c) with respect
to Nonstatutory Options, payment, or provision for payment, in a form approved
by the Administrator, of all applicable withholding taxes due upon
exercise.  An Award may not be exercised
for a fraction of a Share.  SARs shall be
considered exercised when the Company receives written notice of the exercise
from the person entitled to exercise the SAR.

9.3          Issuance
of Award Shares

The Company shall issue
Award Shares in the name of the person properly exercising the Award.  If the Awardee is that person and so
requests, the Award Shares shall be issued in the name of the Awardee and the
Awardee’s spouse.  The Company shall
endeavor to issue Award Shares promptly after an Award is exercised or after
the Grant Date of a Stock Award, as applicable. 
Until Award Shares are actually issued, as evidenced by the appropriate
entry on the stock register of the Company or its transfer agent, the Awardee
will not have the rights of a stockholder with respect to those Award Shares,
even though the Awardee has completed all the steps necessary to exercise the
Award.  No adjustment shall be made for
any dividend, distribution, or other right for which the record date precedes
the date the Award Shares are issued, except as provided in Section 10.

9.4          Termination

(a)          In General 
Except as provided in an Award Agreement or in writing by the
Administrator, including in an Award Agreement, and as otherwise provided in
Sections 9.4(b), (c), (d) and (e) after an Awardee’s Termination, the
Awardee’s Awards shall be exercisable to the extent (but only to the extent)
they are vested on the date of that Termination and only during the three
months after the Termination, but in no event after the Expiration Date.  To the extent the Awardee does not exercise
an Award within the time specified for exercise, the Award shall automatically
terminate.

(b)          Leaves of Absence 
Unless otherwise provided in the Award Agreement, no Award may be
exercised more than three months after the beginning of a leave of absence,
other than a personal or medical leave approved by an authorized representative
of the Company with employment guaranteed upon return.  Awards shall not continue to vest during a
leave of absence, unless otherwise determined by the Administrator with respect
to an approved personal or medical leave with employment guaranteed upon
return.

(c)           Death or Disability 
Unless otherwise provided by the Administrator, if an Awardee’s
Termination is due to death or disability (as determined by the Administrator
with respect to all Awards other than Incentive Stock Options and as defined by
Section 22(e) of the Code with respect to Incentive Stock Options), all Awards
of that Awardee to the extent exercisable at the date of that Termination may
be exercised for one year after that Termination, but in no event after the
Expiration Date.  In the case of
Termination due to death, an Award may be exercised as provided in
Section 17.  In the case of
Termination due to disability, if a guardian or conservator has been appointed
to act for the Awardee and been granted this authority as part of that
appointment, that guardian or conservator may exercise the Award on behalf of
the Awardee.  Death or disability
occurring after an Awardee’s Termination shall not cause the Termination to be
treated as having occurred due to death or disability.  To the extent an Award is not so exercised
within the time specified for its exercise, the Award shall automatically
terminate.

(d)          Divestiture  If an
Awardee’s Termination is due to a Divestiture, the Board may take any one or
more of the actions described in Section 10.3 or 10.4 with respect to the
Awardee’s Awards.

 13
 

 

(e)           Termination for Cause  In
the discretion of the Administrator, which may be exercised on the date of
grant, or at a date later in time, if an Awardee’s Termination is due to Cause,
all of the Awardee’s Awards shall automatically terminate and cease to be
exercisable at the time of Termination and the Administrator may rescind any
and all exercises of Awards by the Awardee that occurred after the first event
constituting Cause.  “Cause”
means employment-related dishonesty, fraud, misconduct or disclosure or misuse
of confidential information, or other employment-related conduct that is likely
to cause significant injury to the Company, an Affiliate, or any of their
respective employees, officers or directors (including, without limitation,
commission of a felony or similar offense), in each case as determined by the
Administrator.  “Cause” shall not require
that a civil judgment or criminal conviction have been entered against or
guilty plea shall have been made by the Awardee regarding any of the matters
referred to in the previous sentence. 
Accordingly, the Administrator shall be entitled to determine “Cause”
based on the Administrator’s good faith belief. 
If the Awardee is criminally charged with a felony or similar offense,
that shall be a sufficient, but not a necessary, basis for such a belief.

(f)            Administrator Discretion 
Notwithstanding the provisions of Section 9.4 (a)-(e), the Plan
Administrator shall have complete discretion, exercisable either at the time an
Award is granted or at any time while the Award remains outstanding, to:

(i)           Extend the period of time for which the Award
is to remain exercisable, following the Awardee’s Termination, from the limited
exercise period otherwise in effect for that Award to such greater period of
time as the Administrator shall deem appropriate, but in no event beyond the
Expiration Date; and/or

(ii)          Permit the Award to be exercised,
during the applicable post-Termination exercise period, not only with respect
to the number of vested Shares for which such Award may be exercisable at the
time of the Awardee’s Termination but also with respect to one or more
additional installments in which the Awardee would have vested had the Awardee
not been subject to Termination.

(g)          Consulting or Employment
Relationship  Nothing in this Plan or in any Award
Agreement, and no Award or the fact that Award Shares remain subject to
repurchase rights, shall: 
(A) interfere with or limit the right of the Company or any
Affiliate to terminate the employment or consultancy of any Awardee at any
time, whether with or without cause or reason, and with or without the payment
of severance or any other compensation or payment, or (B) interfere with the
application of any provision in any of the Company’s or any Affiliate’s charter
documents or Applicable Law relating to the election, appointment, term of
office, or removal of a Director.

10.                               Certain Transactions and Events

10.1        In
General

Except as provided in this Section 10, no change in
the capital structure of the Company, merger, sale or other disposition of
assets or a subsidiary, change in control, issuance by the Company of shares of
any class of securities or securities convertible into shares of any class of
securities, exchange or conversion of securities, or other transaction or event
shall require or be the occasion for any adjustments of the type described in
this Section 10.  Additional
provisions with respect to the foregoing transactions are set forth in
Section 14.3.

10.2        Changes
in Capital Structure

In the event of any stock split, reverse stock
split, recapitalization, combination or reclassification of stock, stock
dividend, spin-off, or similar change to the capital structure of the
Company (not including a Fundamental Transaction or Change in Control), the
Board shall make whatever adjustments it concludes are appropriate to:
(a) the number and type of Awards that may be

 14
 

 

granted under this Plan, (b) the number and type of Options that
may be granted to any individual under this Plan, (c) the terms of any
SAR, (d) the Purchase Price of any Stock Award, (e) the Option Price
and number and class of securities issuable under each outstanding Option, and (f)
the repurchase price of any securities substituted for Award Shares that are
subject to repurchase rights.  The
specific adjustments shall be determined by the Board.  Unless the Board specifies otherwise, any
securities issuable as a result of any such adjustment shall be rounded down to
the next lower whole security.  The Board
need not adopt the same rules for each Award or each Awardee.

10.3        Fundamental
Transactions

Except for grants to Non-Employee Directors pursuant
to Section 11 herein, in the event of (a) a merger or consolidation in which
the Company is not the surviving corporation (other than a merger or
consolidation with a wholly-owned subsidiary, a reincorporation of the Company
in a different jurisdiction, or other transaction in which there is no substantial
change in the stockholders of the Company or their relative stock holdings and
the Awards granted under this Plan are assumed, converted or replaced by the
successor corporation, which assumption shall be binding on all Participants),
(b) a merger in which the Company is the surviving corporation but after which
the stockholders of the Company immediately prior to such merger (other than
any stockholder that merges, or which owns or controls another corporation that
merges, with the Company in such merger) cease to own their shares or other
equity interest in the Company, (c) the sale of all or substantially all of the
assets of the Company, or (d) the acquisition, sale, or transfer of more than
50% of the outstanding shares of the Company by tender offer or similar
transaction (each, a “Fundamental
Transaction”), any or all outstanding Awards may be assumed,
converted or replaced by the successor corporation (if any), which assumption,
conversion or replacement shall be binding on all participants under this
Plan.  In the alternative, the successor
corporation may substitute equivalent Awards or provide substantially similar
consideration to participants as was provided to stockholders (after taking
into account the existing provisions of the Awards).  The successor corporation may also issue, in
place of outstanding Shares held by the participants, substantially similar
shares or other property subject to repurchase restrictions no less favorable
to the participant. In the event such successor corporation (if any) does not
assume or substitute Awards, as provided above, pursuant to a transaction
described in this Subsection 10.3, the vesting with respect to such Awards
shall fully and immediately accelerate or the repurchase rights of the Company
shall fully and immediately terminate, as the case may be, so that the Awards
may be exercised or the repurchase rights shall terminate before, or otherwise
in connection with the closing or completion of the Fundamental Transaction or
event, but then terminate.  Notwithstanding
anything in this Plan to the contrary, the Committee may, in its sole
discretion, provide that the vesting of any or all Award Shares subject to
vesting or a right of repurchase shall accelerate or lapse, as the case may be,
upon a transaction described in this Section 10.3. If the Committee exercises
such discretion with respect to Options, such Options shall become exercisable
in full prior to the consummation of such event at such time and on such
conditions as the Committee determines, and if such Options are not exercised
prior to the consummation of the Fundamental Transaction, they shall terminate
at such time as determined by the Committee. 
Subject to any greater rights granted to participants under the
foregoing provisions of this Section 10.3, in the event of the occurrence of
any Fundamental Transaction, any outstanding Awards shall be treated as
provided in the applicable agreement or plan of merger, consolidation,
dissolution, liquidation, or sale of assets.

10.4        Changes
of Control

The Board may also, but need not, specify that other
transactions or events constitute a “Change in Control”.  The Board may do that either before or after
the transaction or event occurs. 
Examples of transactions or events that the Board may treat as Changes
of Control are: (a) any person or entity, including a “group” as
contemplated by Section 13(d)(3) of the Exchange Act, acquires securities
holding 30% or more of the total combined voting power or value of the Company,
or (b) as a result of or in connection with a contested election of
Company Directors, the persons who were Company Directors immediately before
the election cease to constitute a majority of the Board.  In connection with a Change

 15
 

 

in Control, notwithstanding any other provision of this Plan, the Board
may, but need not, take any one or more of the actions described in Section
10.3.  In addition, the Board may extend
the date for the exercise of Awards (but not beyond their original Expiration
Date).  The Board need not adopt the same
rules for each Award or each Awardee. 
Notwithstanding anything in this Plan to the contrary, in the event of a
Termination of services for any reason other than death, disability or Cause,
within 18 months following the consummation of a Fundamental Transaction or
Change in Control, any Awards, assumed or substituted in a Fundamental
Transaction or Change in Control, which are subject to vesting conditions
and/or the right of repurchase in favor of the Company or a successor entity,
shall accelerate fully so that such Award Shares are immediately exercisable
upon Termination or, if subject to the right of repurchase in favor of the
Company, such repurchase rights shall lapse as of the date of Termination. Such
Awards shall be exercisable for a period of three (3) months following
termination.

10.5        Divestiture

If the Company or an Affiliate sells or otherwise
transfers equity securities of an Affiliate to a person or entity other than
the Company or an Affiliate, or leases, exchanges or transfers all or any portion
of its assets to such a person or entity, then the Board may specify that such
transaction or event constitutes a “Divestiture”.  In connection with a Divestiture,
notwithstanding any other provision of this Plan, the Board may, but need not, take one or more of the actions described in Section 10.3
or 10.4 with respect to Awards or Award Shares held by, for example, Employees,
Directors or Consultants for whom that transaction or event results in a
Termination.  The Board need not adopt
the same rules for each Award or each Awardee.

10.6        Dissolution

If the Company adopts a plan of dissolution, the
Board may cause Awards to be fully vested and exercisable (but not after their
Expiration Date) before the dissolution is completed but contingent on its completion
and may cause the Company’s repurchase rights on Award Shares to lapse upon
completion of the dissolution.  The Board
need not adopt the same rules for each Award or each Awardee.  Notwithstanding anything herein to the
contrary, in the event of a dissolution of the Company, to the extent not
exercised before the earlier of the completion of the dissolution or their
Expiration Date, Awards shall terminate immediately prior to the dissolution.

10.7        Cut-Back
to Preserve Benefits

If the Administrator determines that the net
after-tax amount to be realized by any Awardee, taking into account any
accelerated vesting, termination of repurchase rights, or cash payments to that
Awardee in connection with any transaction or event set forth in this Section 10
would be greater if one or more of those steps were not taken or payments were
not made with respect to that Awardee’s Awards or Award Shares, then, at the
election of the Awardee, to such extent, one or more of those steps shall not
be taken and payments shall not be made.

11.  Automatic Option Grants to
Non-Employee Directors and Non-Employee Director Fee Option Grants

11.1        Automatic
Option Grants to Non-Employee Directors

(a)          Grant Dates 
Option grants to Non-Employee Directors shall be made on the dates
specified below:

(i)           Each
Non-Employee Director who is then serving as a member of the Board on the
Effective Date (the “Current
Directors”) and each Non-Employee Director who is first

 16
 

 

elected or appointed to the Board at any time after the effective date
of this Plan shall automatically be granted, on the date of such initial
election or appointment, a Nonstatutory Option to purchase 7,500 Shares (the “Initial Grant”).

(ii)          Commencing
in 2004, on the date of each annual stockholders meeting, each individual who
is to continue to serve as a Non-Employee Director shall automatically be
granted a Nonstatutory Option to purchase 3,750 Shares (the “Annual Grant”),
provided, however, that such individual has served as a Non-Employee Director
for at least six (6) months.

(b)          Exercise Price

(i)           The
Option Price shall be equal to one hundred percent (100%) of the Fair Market
Value of the Shares on the Option grant date.

(ii)          The
Option Price shall be payable in one or more of the alternative forms
authorized pursuant to Section 6.4. 
Except to the extent the sale and remittance procedure specified
thereunder is utilized, payment of the Option Price must be made on the date of
exercise.

(c)           Option Term   Each Option shall have a term of ten (10)
years measured from the Option grant date.

(d)          Exercise and Vesting of Options  Except as otherwise determined by the whole
Board, the Shares underlying each Option granted pursuant to Section 11.1 shall
vest and be exercisable as set forth below.

(i)           Initial Grant.  The Shares underlying each
Option issued pursuant to the Initial Grant shall vest and be exercisable as to
4.1666% of the Shares at the end of each full succeeding month from the date of
grant, rounded down to the nearest whole Share, for so long as the Non-Employee
Director continuously remains a Director of, or a Consultant to, the Company
provided, however, that the Shares underlying each Option issued to Current
Directors, pursuant to the Initial Grant, shall be fully vested and immediately
exercisable on the grant date.

(ii)          Annual Grant.  The Shares underlying each
Option issued pursuant to the Annual Grant shall vest and be exercisable as to
8.3333% of the Shares at the end of each full succeeding month from the date of
grant, rounded down to the nearest whole Share, for so long as the Non-Employee
Director continuously remains a Director of, or a Consultant to, the Company.

(e)           Termination of Board Service  The following provisions shall govern the
exercise of any Options held by the Awardee at the time the Awardee ceases to
serve as a Non-Employee Director:

(i)           In General  Except as otherwise provided in Section 11.3,
after cessation of service as a Director (the “Cessation Date”), the Awardee’s Options
shall be exercisable to the extent (but only to the extent) they are vested on
the Cessation Date and only during the three months after such Cessation Date,
but in no event after the Expiration Date. 
To the extent the Awardee does not exercise an Option within the time specified
for exercise, the Option shall automatically terminate.

(ii)          Death or Disability  If an Awardee’s cessation of service on the
Board is due to death or disability (as determined by the Board), all Options
of that Awardee, to the extent exercisable upon such Cessation Date, may be
exercised for one year after the Cessation Date, but in no event after the
Expiration Date.  In the case of a
cessation of service due to death, an Option may be

 17
 

 

exercised as provided in Section 17.  In the case of a cessation of service due to
disability, if a guardian or conservator has been appointed to act for the
Awardee and been granted this authority as part of that appointment, that
guardian or conservator may exercise the Option on behalf of the Awardee.  Death or disability occurring after an
Awardee’s cessation of service shall not cause the cessation of service to be
treated as having occurred due to death or disability.  To the extent an Option is not so exercised
within the time specified for its exercise, the Option shall automatically
terminate.

11.2        Director
Fee Option Grants

(a)          Option Grants.  The Board shall have the sole and exclusive authority to determine the
calendar year or years for which the Director fee option grant program (the “Director Fee Option Program”)
is to be in effect.  For each such
calendar year the program is in effect, each Non-Employee Director may elect to
apply all or any portion of the annual retainer fee otherwise payable in cash,
for his or her service on the Board for that year, to the acquisition of a
special Option grant under this Director Fee Option Program.  Such election must be filed with the Company’s
Chief Financial Officer prior to first day of the calendar year for which the
annual retainer fee which is the subject of that election is otherwise
payable.  Each Non-Employee Director who
files such a timely election shall automatically be granted an Option under
this Director Fee Option Program on the first trading day in January in the
calendar year for which the annual retainer fee which is the subject of that
election would otherwise be payable in cash.

(b)          Option Terms  Each Option shall be a Nonstatutory Option governed by the terms and
conditions specified below.

(i)           Exercise Price

A.            The Purchase Price shall be thirty-three and
one-third percent (33-1/3%) of the Fair Market Value per Share on the Option
grant date.

B.            The
Purchase Price shall become immediately due upon exercise of the Option and
shall be payable in one or more of the alternative forms authorized pursuant to
Section 6.4 of this Plan.  Except to the
extent the sale and remittance procedure specified thereunder is utilized,
payment of the Purchase Price must be made on the date that the Option is
exercised.

(ii)          Number of
Option Shares.  The number of Shares subject to the Option
shall be determined pursuant to the following formula (rounded down to the
nearest whole number):

X = A ÷ (B x 66-2/3%), where

X is the number of Option Shares,

A
is the portion of the annual retainer fee subject to the Non-Employee Director’s
      election, and

B is the Fair Market Value of a Share on the option grant date.

(iii)         Exercise
and Term of Options  The Option shall become exercisable in
a series of twelve (12) equal monthly installments upon the Awardee’s
completion of each month of Board service over the twelve (12)-month period
measured from the grant date.  Each
Option shall have a maximum term of ten (10) years measured from the Option
grant date.

 18
 

 

(iv)         Termination of Board
Service  Should the Awardee cease Board service for
any reason (other than death or permanent disability) while holding one or more
Options under this Director Fee Option Program, then each such Option shall
remain exercisable, for any or all of the Shares for which the Option is
exercisable at the time of such cessation of Board service, until the earlier
of (x) the expiration of the ten (10)-year Option term or (y) the expiration of
the three (3)-year period measured from the date of such cessation of Board
service.  However, each Option held by
the Awardee under this Director Fee Option Program at the time of his or her
cessation of Board service shall immediately terminate and cease to remain
outstanding with respect to any and all Shares for which the Option is not
otherwise at that time exercisable.

(v)           Death or
Permanent Disability  Should the Awardee’s service as a
Board member cease by reason of death or permanent disability, then each Option
held by such Awardee under this Director Fee Option Program shall immediately
become exercisable for all the Shares at the time subject to that Option, and
the Option may be exercised for any or all of those Shares as fully-vested
Shares until the earlier of (x) the expiration of the ten (10)-year option term
or (y) the expiration of the three (3)-year period measured from the date of
such cessation of Board service.

Should the Awardee die after cessation of his or her Board service but
while holding one or more Options under this Director Fee Option Program, then
each such Option may be exercised, for any or all of the shares for which the
Option is exercisable at the time of the Awardee’s cessation of Board service
(less any Shares subsequently purchased by the Awardee prior to death), by the
personal representative of the Awardee’s estate or by the person or persons to
whom the Option is transferred pursuant to the Awardee’s will or in accordance
with the laws of descent and distribution or by the designated beneficiary or
beneficiaries of such option.  Such right
of exercise shall lapse, and the Option shall terminate, upon the earlier of
(xx) the expiration of the ten (10)-year Option term or (yy) the three (3)-year
period measured from the date of the Awardee’s cessation of Board service.

11.3        Certain Transactions and Events

(a)          In the event of a Fundamental Transaction
while the Awardee remains a Non-Employee Director, the Shares at the time
subject to each outstanding Option held by such Awardee pursuant to Section 11,
but not otherwise vested, shall automatically vest in full so that each such
Option shall, immediately prior to the effective date of the Fundamental
Transaction, become exercisable for all the Shares as fully vested Shares and
may be exercised for any or all of those vested Shares. Immediately following
the consummation of the Fundamental Transaction, each Option shall terminate
and cease to be outstanding, except to the extent assumed by the successor
corporation (or Affiliate thereof).

(b)          In the event of a Change in Control while the
Awardee remains a Non-Employee Director, the Shares at the time subject to each
outstanding Option held by such Awardee pursuant to Section 11, but not
otherwise vested, shall automatically vest in full so that each such Option
shall, immediately prior to the effective date of the Change in Control, become
exercisable for all the Shares as fully vested Shares and may be exercised for
any or all of those vested Shares. Each such Option shall remain exercisable
for such fully vested Shares until the expiration or sooner termination of the
Option term in connection with a Change in Control.

(c)           Each Option which is assumed in connection
with a Fundamental Transaction shall be appropriately adjusted, immediately
after such Fundamental Transaction, to apply to the number and class of
securities which would have been issuable to the Awardee in consummation of
such Fundamental Transaction had the Option been exercised immediately prior to
such Fundamental Transaction. Appropriate adjustments shall also be made to the
Option Price payable per share under each outstanding Option, provided the
aggregate Option Price payable for such securities shall remain the same. To
the extent the actual holders of the Company’s outstanding Common Stock receive
cash consideration for their Common Stock in consummation of the Fundamental
Transaction, the successor corporation may, in connection with the assumption
of the outstanding Options granted pursuant to

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Section
11, substitute one or more shares of its own common stock with a fair market
value equivalent to the cash consideration paid per share of Common Stock in
such Fundamental Transaction.

(d)          The grant of Options pursuant to Section 11
shall in no way affect the right of the Company to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.

(e)           The remaining terms of each Option granted
pursuant to Section 11 shall, as applicable, be the same as terms in effect for
Awards granted under this Plan. 
Notwithstanding the foregoing, the provisions of Section 9.4 and Section
10 shall not apply to Options granted pursuant to Section 11.

11.4        Limited Transferability of Options

Each Option granted pursuant to Section 11 may be assigned in whole or
in part during the Awardee’s lifetime to one or more members of the Awardee’s
family or to a trust established exclusively for one or more such family
members or to an entity in which the Awardee is majority owner or to the
Awardee ‘s former spouse, to the extent such assignment is in connection with the
Awardee ‘s estate or financial plan or pursuant to a Domestic Relations Order.
The assigned portion may only be exercised by the person or persons who acquire
a proprietary interest in the Option pursuant to the assignment. The terms
applicable to the assigned portion shall be the same as those in effect for the
Option immediately prior to such assignment and shall be set forth in such
documents issued to the assignee as the Administrator may deem appropriate. The
Awardee may also designate one or more persons as the beneficiary or
beneficiaries of his or her outstanding Options under Section 11, and those
Options shall, in accordance with such designation, automatically be
transferred to such beneficiary or beneficiaries upon the Awardee ‘s death
while holding those Options. Such beneficiary or beneficiaries shall take the
transferred Options subject to all the terms and conditions of the applicable
Award Agreement evidencing each such transferred Option, including (without
limitation) the limited time period during which the Option may be exercised
following the Awardee ‘s death.

12.                               Withholding and Tax Reporting

12.1        Tax
Withholding Alternatives

(a)          General  Whenever Award Shares are issued or become
free of restrictions, the Company may require the Awardee to remit to the
Company an amount sufficient to satisfy any applicable tax withholding
requirement, whether the related tax is imposed on the Awardee or the
Company.  The Company shall have no
obligation to deliver Award Shares or release Award Shares from an escrow or
permit a transfer of Award Shares until the Awardee has satisfied those tax
withholding obligations.  Whenever
payment in satisfaction of Awards is made in cash, the payment will be reduced
by an amount sufficient to satisfy all tax withholding requirements.

(b)          Method of Payment  The Awardee shall pay any required
withholding using the forms of consideration described in Section 6.4(b),
except that, in the discretion of the Administrator, the Company may also
permit the Awardee to use any of the forms of payment described in Section
6.4(c).  The Administrator, in its sole
discretion, may also permit Award Shares to be withheld to pay required
withholding.  If the Administrator
permits Award Shares to be withheld, the Fair Market Value of the Award Shares
withheld, as determined as of the date of withholding, shall not exceed the
amount determined by the applicable minimum statutory withholding rates.

12.2        Reporting of Dispositions

Any holder of Option Shares acquired under an
Incentive Stock Option shall promptly notify the Administrator, following such
procedures as the Administrator may require, of the sale or other

 20
 

 

disposition of any of those Option Shares if the disposition occurs
during:  (a) the longer of two years
after the Grant Date of the Incentive Stock Option and one year after the date
the Incentive Stock Option was exercised, or (b) such other period as the
Administrator has established.

13.          Compliance with Law

The grant of Awards and the issuance and subsequent transfer of Award
Shares shall be subject to compliance with all Applicable Law, including all
applicable securities laws.  Awards may
not be exercised, and Award Shares may not be transferred, in violation of
Applicable Law.  Thus, for example,
Awards may not be exercised unless: 
(a) a registration statement under the Securities Act is then in
effect with respect to the related Award Shares, or (b) in the opinion of
legal counsel to the Company, those Award Shares may be issued in accordance
with an applicable exemption from the registration requirements of the
Securities Act and any other applicable securities laws.  The failure or inability of the Company to
obtain from any regulatory body the authority considered by the Company’s legal
counsel to be necessary or useful for the lawful issuance of any Award Shares
or their subsequent transfer shall relieve the Company of any liability for
failing to issue those Award Shares or permitting their transfer.  As a condition to the exercise of any Award
or the transfer of any Award Shares, the Company may require the Awardee to
satisfy any requirements or qualifications that may be necessary or appropriate
to comply with or evidence compliance with any Applicable Law.

14.          Amendment or Termination of this Plan or Outstanding Awards

14.1        Amendment and Termination

                       The Board
may at any time amend, suspend, or terminate this Plan.

14.2        Stockholder
Approval

The Company shall obtain the approval of the Company’s stockholders for
any amendment to this Plan if stockholder approval is necessary or desirable to
comply with any Applicable Law or with the requirements applicable to the grant
of Awards intended to be Incentive Stock Options.  The Board may also, but need not, require
that the Company’s stockholders approve any other amendments to this Plan.

14.3        Effect

No amendment, suspension, or termination of this Plan, and no
modification of any Award even in the absence of an amendment, suspension, or
termination of this Plan, shall impair any existing contractual rights of any
Awardee unless the affected Awardee consents to the amendment, suspension,
termination, or modification. 
Notwithstanding anything herein to the contrary, no such consent shall
be required if the Board determines, in its sole and absolute discretion, that
the amendment, suspension, termination, or modification:  (a) is required or advisable in order for the
Company, this Plan or the Award to satisfy Applicable Law, to meet the
requirements of any accounting standard or to avoid any adverse accounting
treatment, or (b) in connection with any transaction or event described in
Section 10, is in the best interests of the Company or its stockholders.  The Board may, but need not, take the tax or
accounting consequences to affected Awardees into consideration in acting under
the preceding sentence.  Those decisions
shall be final, binding and conclusive. 
Termination of this Plan shall not affect the Administrator’s ability to
exercise the powers granted to it under this Plan with respect to Awards
granted before the termination of Award Shares issued under such Awards even if
those Award Shares are issued after the termination.

 21
 

 

15.          Reserved Rights

15.1        Nonexclusivity of this
Plan

This Plan shall not limit the power of the Company or any Affiliate to
adopt other incentive arrangements including, for example, the grant or
issuance of stock options, stock, or other equity-based rights under other
plans.

15.2        Unfunded
Plan

This Plan shall be unfunded. 
Although bookkeeping accounts may be established with respect to
Awardees, any such accounts will be used merely as a convenience.  The Company shall not be required to
segregate any assets on account of this Plan, the grant of Awards, or the
issuance of Award Shares.  The Company
and the Administrator shall not be deemed to be a trustee of stock or cash to
be awarded under this Plan.  Any
obligations of the Company to any Awardee shall be based solely upon contracts
entered into under this Plan, such as Award Agreements.  No such obligations shall be deemed to be
secured by any pledge or other encumbrance on any assets of the Company.  Neither the Company nor the Administrator
shall be required to give any security or bond for the performance of any such
obligations.

16.          Special Arrangements Regarding Award Shares

16.1        Escrow
of Stock Certificates

To enforce any restrictions on Award Shares, the Administrator may
require their holder to deposit the certificates representing Award Shares,
with stock powers or other transfer instruments approved by the Administrator
endorsed in blank, with the Company or an agent of the Company to hold in
escrow until the restrictions have lapsed or terminated.  The Administrator may also cause a legend or
legends referencing the restrictions to be placed on the certificates.

16.2        Repurchase Rights

(a)          General  If a Stock Award is subject to vesting
conditions, the Company shall have the right, during the seven months after the
Awardee’s Termination, to repurchase any or all of the Award Shares that were
unvested as of the date of that Termination. 
The repurchase price shall be determined by the Administrator in
accordance with this Section 16.2 which shall be either (i) the Purchase
Price for the Award Shares (minus the amount of any cash dividends paid or
payable with respect to the Award Shares for which the record date precedes the
repurchase) or (ii) the lower of (A) the Purchase Price for the
Shares or (B) the Fair Market Value of those Award Shares as of the date
of the Termination.  The repurchase price
shall be paid in cash.  The Company may
assign this right of repurchase.

(b)          Procedure  The Company or its assignee may choose to
give the Awardee a written notice of exercise of its repurchase rights under
this Section 16.2.  However, the Company’s
failure to give such a notice shall not affect its rights to repurchase Award
Shares.  The Company must, however,
tender the repurchase price during the period specified in this Section 16.2
for exercising its repurchase rights in order to exercise such rights.

 22
 

 

17.          Beneficiaries

An Awardee may file a written designation of one or more beneficiaries
who are to receive the Awardee’s rights under the Awardee’s Awards after the
Awardee’s death.  An Awardee may change
such a designation at any time by written notice.  If an Awardee designates a beneficiary, the
beneficiary may exercise the Awardee’s Awards after the Awardee’s death.  If an Awardee dies when the Awardee has no
living beneficiary designated under this Plan, the Company shall allow the
executor or administrator of the Awardee’s estate to exercise the Award or, if
there is none, the person entitled to exercise the Option under the Awardee’s
will or the laws of descent and distribution. 
In any case, no Award may be exercised after its Expiration Date.

18.          Miscellaneous

18.1        Governing Law

This Plan, the Award Agreements and all other agreements entered into
under this Plan, and all actions taken under this Plan or in connection with
Awards or Award Shares, shall be governed by the laws of the State of Delaware.

18.2        Determination of Value

Fair Market Value shall be
determined as follows:

(a)          Listed Stock.  If
the Shares are traded on any established stock exchange or quoted on a national
market system, Fair Market Value shall be the closing sales price for the
Shares as quoted on that stock exchange or system for the date the value is to
be determined (the “Value Date”) as reported in The  Wall Street Journal
or a similar publication.  If no sales
are reported as having occurred on the Value Date, Fair Market Value shall be
that closing sales price for the last preceding trading day on which sales of
Shares are reported as having occurred. 
If no sales are reported as having occurred during the five trading days
before the Value Date, Fair Market Value shall be the closing bid for Shares on
the Value Date.  If Shares are listed on
multiple exchanges or systems, Fair Market Value shall be based on sales or bid
prices on the primary exchange or system on which Shares are traded or quoted.

(b)          Stock Quoted
by Securities Dealer  If Shares are regularly quoted
by a recognized securities dealer but selling prices are not reported on any
established stock exchange or quoted on a national market system, Fair Market
Value shall be the mean between the high bid and low asked prices on the Value
Date.  If no prices are quoted for the
Value Date, Fair Market Value shall be the mean between the high bid and low
asked prices on the last preceding trading day on which any bid and asked
prices were quoted.

(c)           No
Established Market  If Shares are not traded on any
established stock exchange or quoted on a national market system and are not
quoted by a recognized securities dealer, the Administrator (following
guidelines established by the Board or Committee) will determine Fair Market
Value in good faith.  The Administrator
will consider the following factors, and any others it considers significant,
in determining Fair Market Value: (i) the price at which other securities
of the Company have been issued to purchasers other than Employees, Directors,
or Consultants, (ii) the Company’s stockholder’s equity, prospective
earning power, dividend-paying capacity, and non-operating assets, if any, and
(iii) any other relevant factors, including the economic outlook for the
Company and the Company’s industry, the Company’s position in that industry,
the Company’s goodwill and other intellectual property, and the values of
securities of other businesses in the same industry.

18.3        Reservation of Shares

During the term of this Plan, the Company shall at all times reserve
and keep available such number of Shares as are still issuable under this Plan.

 23
 

 

18.4               Electronic Communications

Any Award Agreement, notice of exercise of an Award, or other document
required or permitted by this Plan may be delivered in writing or, to the
extent determined by the Administrator, electronically.  Signatures may also be electronic if
permitted by the Administrator.

18.5        Notices

Unless the Administrator specifies otherwise, any notice to the Company
under any Option Agreement or with respect to any Awards or Award Shares shall
be in writing (or, if so authorized by Section 18.4, communicated
electronically), shall be addressed to the Secretary of the Company, and shall
only be effective when received by the Secretary of the Company.

 24
 

 

Amendment to

2003 Equity Incentive Plan

of DTS, Inc.

Notwithstanding
the provisions of Section 11 of the 2003 Equity Incentive Plan (the “Plan”) of DTS, Inc. (the “Company”), the Plan was amended on
May 9, 2005 to provide as follows:

Any
automatic option grant to newly elected or appointed non-employee directors
under the Plan made during the period from May 19, 2005 to December 31, 2005
shall consist of an option to purchase 30,000 shares of the Company’s common
stock, vesting monthly over a three year period starting on the date of the
grant.

Any
annual automatic option grant to non-employee directors under the Plan made
during the period from May 19, 2005 to December 31, 2005 shall consist of an
option to purchase 10,000 shares of the Company’s common stock, vesting monthly
over a one year period starting on the date of the grant, provided that such
individual has served as a non-employee director for at least 6 months.

Any
automatic option grant to newly elected or appointed non-employee directors
under the Plan made at any time on or after January 1, 2006 shall consist of an
option to purchase 15,000 shares of the Company’s common stock, vesting monthly
over a three year period starting on the date of the grant.

Any
annual automatic option grant to non-employee directors under the Plan made at
any time on or after January 1, 2006 shall consist of an option to purchase
5,000 shares of the Company’s common stock, vesting monthly over a one year
period starting on the date of the grant, provided that such individual has
served as a non-employee director for at least 6 months.

Each
non-employee director first elected or appointed to the Board at any time on or
after January 1, 2006 shall automatically be granted on the date of such
initial election or appointment, 7,500 shares of restricted stock under the
Plan, which shall vest over a period of three years in equal installments at
the end of each full month from the date of the grant for so long as the
non-employee director continuously remains a director of, or a consultant to,
the Company.

On
the date of each annual stockholders’ meeting held on or after January 1, 2006,
each individual who is to continue to serve as a non-employee director shall
automatically be granted 2,500 shares of restricted stock under the Plan,
provided that such individual has served as a non-employee director for at
least 6 months.  Such restricted stock
shall vest over a period of one year in equal installments at the end of each
full month from the date of grant for so long as the non-employee director continuously
remains a director of, or a consultant to, the Company.

None
of the above-referenced compensation shall be paid to any member of the Board
(or committees thereof) who is an employee of the Company.

 25

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