Document:

Exhibit 4.3

 

INVESTORS’ RIGHTS AGREEMENT

 

This Investors’ Rights Agreement (this “Agreement”) is made as of the
2nd day of December 1997, by and between OMP Acquisition Corporation, a
California corporation (the “Company”), Mandarin Partners LLC (“Mandarin”) and
Zein and Samar Obagi Family Trust (“Obagi”). Mandarin and Obagi are referred to
collectively as the “Investors”.

 

RECITALS

 

WHEREAS, the Company and the Investors are parties to certain stock
purchase agreements of even date herewith (collectively, the “Purchase
Agreements”);

 

WHEREAS, in order to induce the Company to enter into the Purchase
Agreements and to induce the Investors to invest funds in the Company pursuant
to the Purchase Agreements, the Investors and the Company hereby agree that
this Agreement shall govern the rights of the Investors to cause the Company to
register shares of Common Stock issued or issuable to the Investors and certain
other matters as set forth herein;

 

NOW, THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS:

 

1.             Definitions.
For purposes of this Agreement:

 

(a)           The term “Act” means the Securities Act of
1933, as amended.

 

(b)           The term “Co-Sale Stock” means any shares of
the Company’s capital stock now owned or subsequently acquired by any Investor.

 

(c)           The term “Form S-3” means such form under the
Act as in effect on the date hereof or any registration form under the Act
subsequently adopted by the SEC which permits inclusion or incorporation of
substantial information by reference to other documents filed by the Company with
the SEC.

 

(d)           The term “Holder” means any person owning or
having the right to acquire Registrable Securities or any assignee thereof in
accordance with Section 8.2 hereof.

 

(e)           The term “1934 Act” shall mean the Securities
Exchange Act of 1934, as amended.

 

(f)            The term “register”, “registered,” and
“registration” refer to a registration effected by preparing and filing a
registration statement or similar document in compliance with the Act, and the
declaration or ordering of effectiveness of such registration statement or
document.

 

 

(g)           The
term “Registrable Securities” means (i) any common stock (“Common Stock”) of
the Company held or hereafter acquired by a Holder and (ii) any capital stock
held or hereafter acquired by a Holder which capital stock is convertible into
Common Stock, excluding in all cases, however, any Registrable Securities sold
by a person in a transaction in which his rights under Section 2 are not
assigned.

 

(h)           The number of shares of “Registrable
Securities then outstanding” shall be determined by the number of shares of
Common Stock then outstanding which are Registrable Securities.

 

(i)            The term “SEC” shall mean the Securities and
Exchange Commission.

 

2.             Registration Rights. The Company covenants and agrees as follows:

 

2.1           Request for Registration.

 

(a)           If the Company shall receive at any time at
least three (3) months after the effective date of the first registration
statement for a public offering of securities of the Company (other than a
registration statement relating either to the sale of securities to employees
of the Company pursuant to a stock option, stock purchase or similar plan or a
SEC Rule 145 transaction), a
written request from the Holders of a majority of the Registrable Securities
then outstanding that the Company file a registration statement under the Act
covering the registration of at least fifty percent (50%) of the Registrable
Securities then outstanding (or a lesser percent if the anticipated aggregate
offering price, net of underwriting discounts and commissions, would exceed
$7,500,000), then the Company shall:

 

(i)            within ten (10) days of the receipt thereof,
give written notice of such request to all Holders; and

 

(ii)           effect as soon as practicable, and in any
event within sixty (60) days of
the receipt of such request, the registration under the Act of all Registrable
Securities which the Holders request to be registered, subject to the
limitations of subsection 2.1(b), within twenty (20) days of the mailing of
such notice by the Company in accordance with Section 5.7.

 

(b)           If the Holders initiating the registration
request hereunder (“Initiating Holders”) intend to distribute the Registrable
Securities covered by their request by means of an underwriting, they shall so
advise the Company as a part of their request made pursuant to subsection
2.1(a) and the Company shall include such information in the written notice
referred to in subsection 2.l(a). The underwriter will be selected by the
Company and shall be reasonably acceptable to a majority in interest of the
Initiating Holders. In such event, the right of any Holder to include its
Registrable Securities in such registration shall be conditioned upon such
Holder’s participation in such underwriting and the inclusion of such Holder’s
Registrable Securities in the underwriting (unless otherwise mutually agreed by
a majority in interest of the

 

2

 

Initiating Holders
and such Holder) to the extent provided herein. All Holders proposing to
distribute their securities through such underwriting shall (together with the
Company as provided in subsection 2.3(e)) enter into an underwriting agreement
in customary form with the underwriter or underwriters selected for such
underwriting. Notwithstanding any other provision of this Section 2.1, if the
underwriter advises the Initiating Holders in writing that marketing factors
require a limitation of the number of shares to be underwritten, then the
Initiating Holders shall so advise all Holders of Registrable Securities which
would otherwise be underwritten pursuant hereto, and the number of shares of
Registrable Securities that may be included in the underwriting shall be
allocated among all Holders thereof, including the Initiating Holders, in
proportion (as nearly as practicable) to the amount of Registrable Securities
of the Company owned by each Holder; provided, however, that the number of
shares of Registrable Securities to be included in such underwriting shall not
be reduced unless all other securities are first entirely excluded from the
underwriting.

 

(c)           Notwithstanding the
foregoing, if the Company shall furnish to Holders requesting a registration
statement pursuant to this Section 2.1, a certificate signed by the Chief
Executive Officer of the Company stating that in the good faith judgment of the
Board of Directors of the Company, it would be seriously detrimental to the
Company and its shareholders for such registration statement to be filed and it
is therefore essential to defer the filing of such registration statement, the
Company shall have the right to defer taking action with respect to such filing
for a period of not more than 120 days after receipt of the request of the
Initiating Holders.

 

(d)           In addition, the
Company shall not be obligated to effect, or to take any action to effect, any
registration pursuant to this Section 2.1:

 

(i)            After the Company has
effected two (2) registrations pursuant to this Section 2.1 and such
registrations have been declared or ordered effective;

 

(ii)           During the period
starting with the date sixty (60) days prior to the Company’s good faith
estimate of the date of filing of, and ending on a date one hundred eighty
(180) days after the effective date of, a registration subject to Section 2.2
hereof; provided that the Company is actively employing in good faith all
reasonable efforts to cause such registration statement to become effective; or

 

(iii)          If the Initiating
Holders propose to dispose of shares of Registrable Securities that may be
immediately registered on Form S-3 pursuant to a request made pursuant to
Section 2.11 below.

 

2.2           Company Registration.
If (but without any obligation to do so) the Company proposes to register
(including for this purpose a registration effected by the Company for
shareholders other than the Holders) any of its stock or other securities under
the Act in connection with the public offering of such securities solely for
cash (other than a registration relating solely to the sale of securities to
participants in a Company stock plan, a registration on any form which does not
include substantially the same information as would be required to be

 

3

 

included in a
registration statement covering the sale of the Registrable Securities, or a
registration in which the only Common Stock being registered is Common Stock
issuable upon conversion of debt securities which are also being registered),
the Company shall, at such time, promptly give each Holder written notice of
such registration. Upon the written request of each Holder given within twenty
(20) days after mailing of such notice by the Company in accordance with
Section 8.7, the Company shall, subject to the provisions of Section 2.7, cause
to be registered under the Act all of the Registrable Securities that each such
Holder has requested to be registered.

 

2.3           Obligations of the
Company. Whenever required under this Section 2 to effect the registration
of any Registrable Securities, the Company shall, as expeditiously as
reasonably possible:

 

(a)           Prepare and file with
the SEC a registration statement with respect to such Registrable Securities
and use its best efforts to cause such registration statement to become
effective, and, upon the request of the Holders of a majority of the Registrable
Securities registered thereunder, keep such registration statement effective
for a period of up to one hundred twenty (120) days or until the distribution
contemplated in the Registration Statement has been completed; provided,
however, that (i) such 120-day period shall be extended for a period of time
equal to the period the Holder refrains from selling any securities included in
such registration at the request of an underwriter of Common Stock (or other
securities) of the Company; and (ii) in the case of any registration of
Registrable Securities on Form S-3 which are intended to be offered on a
continuous or delayed basis, such 120-day period shall be extended, if
necessary, to keep the registration statement effective until all such Registrable
Securities are sold, provided that Rule 415, or any successor rule under the
Act, permits an offering on a continuous or delayed basis, and provided further
that applicable rules under the Act governing the obligation to file a
post-effective amendment permit, in lieu of filing a post-effective amendment
which (I) includes any prospectus required by Section 10(a)(3) of the Act or
(II) reflects facts or events representing a material or fundamental change in
the information set forth in the registration statement, the incorporation by
reference of information required to be included in (I) and (II) above to be
contained in periodic reports filed pursuant to Section 13 or 15(d) of the 1934
Act in the registration statement.

 

(b)           Prepare and file with
the SEC such amendments and supplements to such registration statement and the
prospectus used in connection with such registration statement as may be
necessary to comply with the provisions of the Act with respect to the
disposition of all securities covered by such registration statement.

 

(c)           Furnish to the Holders
such numbers of copies of a prospectus, including a preliminary prospectus, in
conformity with the requirements of the Act, and such other documents as they
may reasonably request in order to facilitate the disposition of Registrable
Securities owned by them.

 

4

 

(d)           Use its best efforts to register and qualify
the securities covered by such registration statement under such other
securities or Blue Sky laws of such jurisdictions as shall be reasonably
requested by the Holders; provided that the Company shall not be required in
connection therewith or as a condition thereto to qualify to do business or to
file a general consent to service of process in any such states or
jurisdictions.

 

(e)           In the event of any underwritten public
offering, enter into and perform its obligations under an underwriting
agreement, in usual and customary form, with the managing underwriter of such
offering. Each Holder participating in such underwriting shall also enter into
and perform its obligations under such an agreement.

 

(f)            Notify each Holder of Registrable Securities
covered by such registration statement at any time when a prospectus relating
thereto is required to be delivered under the Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.

 

(g)           Cause all such Registrable Securities
registered pursuant hereunder to be listed on each securities exchange on which
similar securities issued by the Company are then listed.

 

(h)           Provide a transfer agent and registrar for all
Registrable Securities registered pursuant hereunder and a CUSIP number for all
such Registrable Securities, in each case not later than the effective date of
such registration.

 

2.4           Furnish Information.

 

(a)           It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Section 2 with
respect to the Registrable Securities of any selling Holder that such Holder
shall furnish to the Company such information regarding itself, the Registrable
Securities held by it, and the intended method of disposition of such
securities as shall be required to effect the registration of such Holder’s
Registrable Securities.

 

(b)           The Company shall have no obligation with
respect to any registration requested pursuant to Section 2.1 or Section 2.11
if, due to the operation of subsection 2.4(a), the number of shares or the
anticipated aggregate offering price of the Registrable Securities to be included
in the registration does not equal or exceed the number of shares or the
anticipated aggregate offering price required to originally trigger the
Company’s obligation to initiate such registration as specified in subsection
2.1(a) or subsection 2.11(b)(2), whichever is applicable.

 

2.5           Expenses of Demand Registration. All expenses other than underwriting
discounts and commissions incurred in connection with registrations, filings or
qualifications pursuant to Section 2.1, including (without limitation) all
registration, filing and qualification fees, printers’ and accounting fees,
fees and disbursements of counsel for the Company

 

5

 

(including fees
and disbursements of counsel for the Company in its capacity as counsel to the
selling Holders hereunder; if Company counsel does not make itself available
for this purpose, the Company will pay the reasonable fees and disbursements of
one counsel for the selling Holders) shall be borne by the Company; provided,
however, that the Company shall not be required to pay for any expenses of any
registration proceeding begun pursuant to Section 2.1 if the registration
request is subsequently withdrawn at the request of the Holders of a majority
of the Registrable Securities to be registered (in which case all Participating
Holders shall bear such expenses), unless the Holders of a majority of the
Registrable Securities agree to forfeit their right to one demand registration
pursuant to Section 2.1.

 

2.6           Expenses of Company
Registration. The Company shall bear and pay all expenses incurred in
connection with any registration, filing or qualification of Registrable
Securities with respect to the registrations pursuant to Section 2.2 for each
Holder (which right may be assigned as provided in Section 8.2), including
(without limitation) all registration, filing, and qualification fees, printers
and accounting fees relating or apportionable thereto and the fees and
disbursements of counsel for the Company in its capacity as counsel to the
selling Holders hereunder; if Company counsel does not make itself available
for this purpose, the Company will pay the reasonable fees and disbursements of
one counsel for the selling Holders selected by them, but excluding
underwriting discounts and commissions relating to Registrable Securities.

 

2.7           Underwriting
Requirements. In connection with any offering involving an underwriting of
shares of the Company’s capital stock, the Company shall not be required under
Section 2.2 to include any of the Holders’ securities in such underwriting
unless they accept the terms of the underwriting as agreed upon between the
Company and the underwriters selected by it (or by other persons entitled to
select the underwriters), and then only in such quantity as the underwriters
determine in their sole discretion will not jeopardize the success of the
offering by the Company. If the total amount of securities, including
Registrable Securities, requested by shareholders to be included in such
offering exceeds the amount of securities sold other than by the Company that
the underwriters determine in their sole discretion is compatible with the
success of the offering, then the Company shall be required to include in the
offering only that number of such securities, including Registrable Securities,
which the underwriters determine in their sole discretion will not jeopardize
the success of the offering (the securities so included to be apportioned pro
rata among the selling shareholders according to the total amount of securities
entitled to be included therein owned by each selling shareholder or in such
other proportions as shall mutually be agreed to by such selling shareholders)
but in no event shall (i) the amount of securities of the selling shareholders
included in the offering be reduced below twenty percent (20%) of the total
amount of securities included in such offering, unless such offering is the
initial public offering of the Company’s securities in which case the selling
shareholders may be excluded if the underwriters make the determination
described above and no other shareholder’s securities are included or (ii)
notwithstanding (i) above, any shares being sold by a shareholder exercising a
demand registration right similar to that granted in Section 2.1 be excluded
from such offering. For purposes of the preceding parenthetical concerning
apportionment, for any selling shareholder which is a holder of Registrable
Securities and which is a partnership or corporation, the partners, retired
partners and shareholders of such Holder,

 

6

 

or the estates and
family members of any such partners and retired partners and any trusts for the
benefit of any of the foregoing persons shall be deemed to be a single “selling
shareholder”, and any pro-rata reduction with respect to such “selling
shareholder” shall be based upon the aggregate amount of shares carrying
registration rights owned by all entities and individuals included in such
“selling shareholder”, as defined in this sentence.

 

2.8           Delay of Registration. No Holder shall have any right to obtain or
seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Section 1.

 

2.9           Indemnification. In the event any Registrable Securities are
included in a registration statement under this Section 2:

 

(a)           To the extent permitted
by law, the Company will indemnify and hold harmless each Holder, any
underwriter (as defined in the Act) for such Holder and each person, if any,
who controls such Holder or underwriter within the meaning of the Act or the
1934 Act, against any losses, claims, damages, or liabilities (joint or
several) to which they may become subject under the Act, the 1934 Act or other
federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect
thereof) arise out of or are based upon any of the following statements,
omissions or violations (collectively a “Violation”); (i) any untrue statement
or alleged untrue statement of a material fact contained in such registration
statement, including any preliminary prospectus or final prospectus contained
therein or any amendments or supplements thereto, (ii) the omission or alleged
omission to state therein a material fact required to be stated therein, or
necessary to make the statements therein not misleading, or (iii) any violation
or alleged violation by the Company of the Act, the 1934 Act, any state
securities law or any rule or regulation promulgated under the Act, the 1934
Act or any state securities law; and the Company will pay to each such Holder,
underwriter or controlling person, as incurred, any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability, or action; provided, however, that the
indemnity agreement contained in this subsection 2.9(a) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability, or
action if such settlement is effected without the consent of the Company (which
consent shall not be unreasonably withheld), nor shall the Company be liable in
any such case for any such loss, claim, damage, liability, or action to the
extent that it arises out of or is based upon a Violation which occurs in
reliance upon and in conformity with written information furnished expressly
for use in connection with such registration by any such Holder, underwriter or
controlling person.

 

(b)           To the extent permitted by law, each selling
Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the
registration statement, each person, if any, who controls the Company within
the meaning of the Act, any underwriter, any other Holder selling securities in
such registration statement and any controlling person of any such underwriter
or other Holder, against any losses, claims, damages, or liabilities (joint or
several) to which any of the foregoing persons may become subject, under the
Act, the 1934 Act or other federal or state law, insofar as such losses,
claims, damages, or

 

7

 

liabilities (or
actions in respect thereto) arise out of or are based upon any Violation, in
each case to the extent (and only to the extent) that such Violation occurs in
reliance upon and in conformity with written information furnished by such
Holder expressly for use in connection with such registration; and each such
Holder will pay, as incurred, any legal or other expenses reasonably incurred
by any person intended to be indemnified pursuant to this subsection 2.9(b), in
connection with investigating or defending any such loss, claim, damage,
liability, or action; provided, however, that the indemnity agreement contained
in this subsection 2.9(b) shall not apply to amounts paid in settlement of any
such loss, claim, damage, liability or action if such settlement is effected
without the consent of the Holder, which consent shall not be unreasonably
withheld; provided, that, in no event shall any indemnity under this subsection
2.9(b) exceed the gross proceeds from the offering received by such Holder.

 

(c)           Promptly after receipt
by an indemnified party under this Section 2.9 of notice of the commencement of
any action (including any governmental action), such indemnified party will, if
a claim in respect thereof is to be made against any indemnifying party under
this Section 2.9, deliver to the indemnifying party a written notice of the
commencement thereof and the indemnifying party shall have the right to
participate in, and, to the extent the indemnifying party so desires, jointly
with any other indemnifying party similarly noticed, to assume the defense
thereof with counsel mutually satisfactory to the parties; provided, however,
that an indemnified party (together with all other indemnified parties which
may be represented without conflict by one counsel) shall have the right to
retain one separate counsel, with the fees and expenses to be paid by the
indemnifying party, if representation of such indemnified party by the counsel
retained by the indemnifying party would be inappropriate due to actual or
potential differing interests between such indemnified party and any other
party represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action, if prejudicial to its ability to defend such
action, shall relieve such indemnifying party of any liability to the
indemnified party under this Section 2.9, but the omission so to deliver
written notice to the indemnifying party will not relieve it of any liability
that it may have to any indemnified party otherwise than under this Section
2.9.

 

(d)           If the indemnification provided for in this
Section 2.9 is held by a court of competent jurisdiction to be unavailable to an indemnified party
with respect to any loss, liability, claim, damage, or expense referred to
therein, then the indemnifying party, in lieu of indemnifying such indemnified
party hereunder, shall contribute to the amount paid or payable by such
indemnified party as a result of such loss, liability, claim, damage, or
expense in such proportion as is appropriate to reflect the relative fault of
the indemnifying party on the one hand and of the indemnified party on the
other in connection will the statements or omissions that resulted in such
loss, liability, claim, damage, or expense as well as any other relevant
equitable considerations. The relative fault of the indemnifying party and of
the indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties’ relative
intent, knowledge, access to information, and opportunity to correct or prevent
such statement or omission.

 

8

 

(e)           Notwithstanding the
foregoing, to the extent that the provisions on indemnification and
contribution contained in the underwriting agreement entered into in connection
with the underwritten public offering are in conflict with the foregoing
provisions, the provisions in the underwriting agreement shall control.

 

(f)            The obligations of the
Company and Holders under this Section 2.9 shall
survive the completion of any offering of Registrable Securities in a
registration statement under this Section 2, and otherwise.

 

2.10         Reports Under
Securities Exchange Act of 1934. With a view to making available to the
Holders the benefits of Rule 144 promulgated under the Act and any other rule
or regulation of the SEC that may at any time permit a Holder to sell
securities of the Company to the public without registration or pursuant to a
registration on Form S-3, the Company agrees to:

 

(a)           make and keep public
information available, as those terms are understood and defined in SEC Rule
144, at all times after ninety (90) days after the effective date of the first
registration statement filed by the Company for the offering of its securities
to the general public;

 

(b)           file with the SEC in a
timely manner all reports and other documents required of the Company under the
Act and the 1934 Act; and

 

(c)           furnish to any Holder,
so long as the Holder owns any Registrable Securities, forthwith upon request
(i) a written statement by the Company that it has complied with the reporting
requirements of SEC Rule 144 (at any time after ninety (90) days after the
effective date of the first registration statement filed by the Company), the
Act and the 1934 Act (at any time after it has become subject to such reporting
requirements), or that it qualifies as a registrant whose securities may be
resold pursuant to Form S-3 (at any time after it so qualifies), (ii) a copy of
the most recent annual or quarterly report of the Company and such other
reports and documents so filed by the Company, and (iii) such other information
as may be reasonably requested in availing any Holder of any rule or regulation
of the SEC which permits the selling of any such securities without
registration or pursuant to such form.

 

2.11         Form S-3 Registration.
In case the Company shall receive from any Holder or Holders a written request
or requests that the Company effect a registration on Form S-3 and any related
qualification or compliance with respect to all or a part of the Registrable
Securities owned by such Holder or Holders, the Company will:

 

(a)           promptly give written
notice of the proposed registration, and any related qualification or
compliance, to all other Holders; and

 

(b)           as soon as practicable,
effect such registration and all such qualifications and compliances as may be
so requested and as would permit or facilitate the sale and distribution of all
or such portion of such Holder’s or Holders’ Registrable Securities as are

 

9

 

specified in such
request, together with all or such portion of the Registrable Securities of any
other Holder or Holders joining in such request as are specified in a written
request given within fifteen (15) days after receipt of such written notice
from the Company; provided, however, that the Company shall not be obligated to
effect any such registration, qualification or compliance, pursuant to this
section 2.11: (1) if Form S-3 is not available for such offering by the
Holders; (2) if the Holders, together with the holders of any other securities
of the Company entitled to inclusion in such registration, propose to sell
Registrable Securities and such other securities (if any) at an aggregate price
to the public (net of any underwriters’ discounts or commissions) of less than
$1,000,000; (3) If the Company shall furnish to the Holders a certificate
signed by the President of the Company stating that in the good faith judgment
of the Board of Directors of the Company, it would be seriously detrimental to
the Company and its shareholders for such Form S-3 Registration to be effected
at such time, in which event the Company shall have the right to defer the
filing of the Form S-3 registration statement for a period of not more than
sixty (60) days after receipt of the request of the Holder or Holders under
this Section 2.11; (4) if the
Company has, within the twelve (12) month period preceding the date of such
request, already effected one registration on Form S-3 for the Holders pursuant
to this Section 2.11; or (5) in any particular jurisdiction in which the
Company would be required to qualify to do business or to execute a general
consent to service of process in effecting such registration, qualification or
compliance.

 

(c)           Subject to the
foregoing, the Company shall file a registration statement covering the
Registrable Securities and other securities so requested to be registered as
soon as practicable after receipt of the request or requests of the Holders.
All expenses incurred in connection with a registration requested pursuant to
Section 2.11, including (without limitation) all registration, filing,
qualification, printer’s and accounting fees and the reasonable fees and
disbursements of counsel for the selling Holder or Holders and counsel for the
Company, but excluding any underwriters’ discounts or commissions associated
with Registrable Securities, shall be borne pro rata by the Holder or Holders
participating in the Form S-3 Registration. Registrations effected pursuant to
this Section 2.11 shall not be counted as demands for registration or
registrations effected pursuant to Sections 2.1 or 2.2, respectively.

 

2.12         Limitations on
Subsequent Registration Rights. From and after the date of this Agreement,
the Company shall not, without the prior written consent of the Holders of a
majority of the outstanding Registrable Securities, enter into any agreement
with any holder or prospective holder of any securities of the Company which
would allow such holder or prospective holder (a) to include such securities in
any registration filed under Section 2.1 hereof, unless under the terms of such
agreement, such holder or prospective holder may include such securities in any
such registration only to the extent that the inclusion of his securities will
not reduce the amount of the Registrable Securities of the Holders which is
included or (b) to make a demand registration which could result in such
registration statement being declared effective prior to the earlier of either
of the dates set forth in subsection 2.1(a) or within one hundred twenty (120)
days of the effective date of any registration effected pursuant to Section
2.1.

 

10

 

2.13         “Market Stand-Off”
Agreement. Each Investor hereby agrees that, during the period of duration
specified by the Company and an underwriter of common stock or other securities
of the Company, following the effective date of a registration statement of the
Company filed under the Act, it shall not, to the extent requested by the
Company and such underwriter, directly or indirectly sell, offer to sell,
contract to sell (including, without limitation, any short sale), grant any
option to purchase or otherwise transfer or dispose of (other than to donees
who agree to be similarly bound) any securities of the Company held by it at
any time during such period except common stock included in such registration;
provided, however, that:

 

(a)           such agreement shall be
applicable only to the first two such registration statements of the Company
which covers common stock (or other securities) to be sold on its behalf to the
public in an underwritten offering;

 

(b)           all officers and
directors of the Company and all other persons with registration rights
(whether or not pursuant to this Agreement) enter into similar agreements; and

 

(c)           such market stand-off
time period shall not exceed one hundred eighty (180) days.

 

In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the Registrable Securities of each
Investor (and the shares or securities of every other person subject to the
foregoing restriction) until the end of such period.

 

Notwithstanding the foregoing, the obligations described in this
Section 2.13 shall not apply to a registration relating solely to employee
benefit plans on Form S-1 or Form S-8 or similar forms which may be promulgated
in the future, or a registration relating solely to a Commission Rule 145
transaction on Form S-14 or Form S-15 or similar forms which may be promulgated
in the future.

 

2.14         Termination of Registration
Rights.

 

(a)           No Holder shall be
entitled to exercise any right provided for in this Section 1 after three (3)
years following the consummation of the sale of securities pursuant to a
registration statement filed by the Company under the Act in connection with
the initial firm commitment underwritten offering of its securities to the
general public.

 

(b)           In addition, the right
of any Holder to request registration or inclusion in any registration pursuant
to Section 2.2 shall terminate on the closing of the first Company-initiated
registered public offering of Common Stock of the Company if all shares of
Registrable Securities held or entitled to be held upon conversion by such
Holder may immediately be sold under Rule 144 during any 90-day period, or on
such date after the closing of the first Company-initiated registered public
offering of Common Stock of the Company as all shares of Registrable Securities
held or entitled to be held upon conversion by such Holder may

 

11

 

immediately be
sold under Rule 144 during any 90-day period; provided, however, that the
provisions of this Section 2.14(b) shall not apply to any Holder who owns more
than two percent (2%) of the Company’s outstanding stock until such time as
such Holder owns less than two percent (2%) of the outstanding stock of the
Company.

 

3.             Covenants of the
Company.

 

3.1           Delivery of
Financial Statements. The Company shall deliver to each Investor:

 

(a)           as soon as practicable,
but in any event within ninety (90) days after the end of each fiscal year of
the Company, an income statement for such fiscal year, a balance sheet of the
Company and statement of shareholder’s equity as of the end of such year, and a
cash flow statement for such year, such year-end financial reports to be in
reasonable detail, prepared in accordance with generally accepted accounting
principles (“gaap”), and audited and certified by independent public
accountants of nationally recognized standing selected by the Company;

 

(b)           as soon as practicable,
but in any event within forty-five (45) days after the end of each of the first
three (3) quarters of each fiscal year of the Company, an unaudited income
statement, a cash flow statement for such fiscal quarter and an unaudited
balance sheet as of the end of such fiscal quarter;

 

(c)           as soon as practicable,
but in any event thirty (30) days prior to the end of each fiscal year, a
budget and business plan for the next fiscal year, prepared on a monthly basis,
including income statements, balance sheets, and cash flow statements for such
months and, as soon as prepared, any other budgets or revised budgets prepared
by the Company;

 

(d)           with respect to the
financial statements called for in subsection (b) of this Section 3.1, an instrument
executed by the Chief Financial Officer or President of the Company and
certifying that such financials were prepared in accordance with gaap
consistently applied with prior practice for earlier periods (with the
exception of footnotes that may be required by gaap) and fairly present the
financial condition of the Company and its results of operation for the period
specified, subject to year-end audit adjustment;

 

(e)           such other information
relating to the financial condition, business, prospects or corporate affairs
of the Company as the Investor or any assignee of the Investor may from time to
time request, provided, however, that the Company shall not be obligated under
this subsection (e) or any other subsection of Section 3.1 to provide information
which it deems in good faith to be a trade secret or similar confidential
information.

 

12

 

3.2           Inspection. The
Company shall permit each Investor, at such Investor’s expense, to visit and
inspect the Company’s properties, to examine its books of account and records
and to discuss the Company’s affairs, finances and accounts with its officers,
all at such reasonable times as may be requested by the Investor; provided,
however, that the Company shall not be obligated pursuant to this Section 3.2
to provide access to any information which it reasonably considers to be a
trade secret or similar confidential information.

 

4.             Co-Sale Rights.

 

4.1           Sales by Mandarin.

 

(a)           If Mandarin proposes to
sell or transfer any shares of Co-Sale Stock in one or more related
transactions, then Mandarin shall promptly give written notice (the “Notice”)
to the Company and Obagi at least twenty (20) days prior to the closing of such
sale or transfer. The Notice shall describe in reasonable detail the proposed
sale or transfer including, without limitation, the class, series and number of
shares of Co-Sale Stock to be sold or transferred, the nature of such sale or
transfer, the consideration to be paid, and the name and address of each
prospective purchaser or transferee. In the event that the sale or transfer is
being made pursuant to the provisions or Sections 4.1 or 4.2 hereof, the Notice
shall state under which Section of this Agreement the sale or transfer is being
made.

 

(b)           Obagi shall have the right, exercisable upon
written notice to Mandarin within fifteen (15) days after receipt of the
Notice, to participate in such sale of Co-Sale Stock on the same terms and
conditions; provided, that Obagi owns shares of the same class or classes as
the Co-Sale Stock identified in the Notice. The parties acknowledge that the
Series A Preferred Stock and the Series B Preferred of the Company are of the
same class of stock and are to be treated as such for the purposes of this
Section 4.

 

(c)           Obagi may sell all or any part of that number
or shares of Co-Sale Stock, of the same class and/or series as that identified
in the Notice, equal to the product obtained by multiplying (i) the aggregate
number of shares of Co-Sale Stock covered by the Notice by (ii) a fraction the
numerator of which is the number of shares of Co-Sale Stock of the same class
and/or series identified in the Notice owned by Obagi at the time of the sale
or transfer and the denominator of which is the total number of shares of
Co-Sale Stock of the same class and/or series identified in the Notice owned by
Mandarin and Obagi at the time of the sale or transfer.

 

(d)           Obagi shall effect its participation in the
sale by promptly delivering to Mandarin for transfer to the prospective
purchaser one or more certificates, properly endorsed for transfer, which
represent the type and number of shares of Co-Sale Stock which Obagi elects to
sell.

 

(e)           The stock certificate or certificates that
Obagi delivers to Mandarin pursuant to Section 4.l(d) shall be transferred to
the prospective purchaser in consummation of the sale of the Co-Sale Stock
pursuant to the terms and conditions specified in the Notice, and Mandarin
shall concurrently therewith remit to Obagi that portion of the sale proceeds
to which

 

13

 

Obagi is entitled by reason of its participation in such sale. To the
extent that any prospective purchaser or purchasers prohibits such assignment
or otherwise refuses to purchase shares or other securities from Obagi,
Mandarin shall not sell to such prospective purchaser or purchasers any Co-Sale
Stock unless and until, simultaneously with such sale, Mandarin shall purchase
such shares from Obagi for the same consideration and on the same terms and
conditions as the proposed transfer described in the Notice.

 

(f)            The exercise or non-exercise of the rights of
Obagi to participate in one or more sales of Co-Sale Stock made by Mandarin
shall not adversely affect Obagi’s rights to participate in subsequent sales of
Co-Sale Stock subject to Section 4.l (a).

 

(g)           If Obagi does not elect to participate in the
sale of the Co-Sale Stock subject to the Notice, Mandarin may, not later than
ninety (90) days following delivery to the Company and Obagi of the Notice,
conclude a transfer of not less than all of the Co-Sale Stock covered by the
Notice on terms and conditions not more favorable to the transferor than those
described in the Notice. Any proposed transfer on terms and conditions more
favorable than those described in the Notice, as well as any subsequent
proposed transfer of any of the Co-Sale Stock by Mandarin, shall again be
subject to the co-sale rights of Obagi and shall require compliance by Mandarin
with the procedures described in this Section 4.1.

 

4.2           Exempt Transfers.

 

(a)           Notwithstanding the foregoing, the co-sale
rights of Obagi shall not apply to (i) any pledge of Co-Sale Stock made
pursuant to a bona fide loan transaction that creates a mere security interest,
(ii) any bona fide gift or charitable donation or (iii) any distribution to the
members of Mandarin; provided that (A) Mandarin shall inform Obagi of such
pledge, transfer, gift, donation or distribution prior to effecting it and (B)
the pledgee, transferee, donee or distributee shall furnish Obagi with a
written agreement to be bound by and comply with all provisions of Section 4 of
this Agreement. Such transferred Co-Sale Stock shall remain “Co-Sale Stock”
hereunder, and such pledgee, transferee or donee shall be treated as “Mandarin”
for purposes of this Agreement.

 

(b)           Notwithstanding the foregoing, the provisions
of Section 4 shall not apply to the sale of any Co-Sale Stock (i) to the public
pursuant to a registration statement filed with, and declared effective by, the
Securities and Exchange Commission under the Act or (ii) to the Company.

 

4.3           Prohibited Transfers.

 

(a)           In the event Mandarin should sell any Co-Sale
Stock in contravention of the co-sale rights of Obagi under this Agreement (a
“Prohibited Transfer”), Obagi in addition to such other remedies as may be
available at law, in equity or hereunder, shall have the put option provided
below, and Mandarin shall be bound by the applicable provisions of such option.

 

14

 

(b)           In the event of a
Prohibited Transfer, Obagi shall have the right to sell to Mandarin the type
and number of shares of Co-Sale Stock equal to the number of shares Obagi would
have been entitled to transfer to the purchaser under Section 4.1 hereof had the
Prohibited Transfer been effected pursuant to and in compliance with the terms
hereof. Such sale shall be made on the following terms and conditions:

 

(i)            The price per share at
which the shares are to be sold to Mandarin shall be equal to the price per
share paid by the purchaser to Mandarin in the Prohibited Transfer.

 

(ii)           Within thirty (30) days
after the later of the dates on which the Obagi (A) received notice of the
Prohibited Transfer or (B) otherwise become aware of the Prohibited Transfer,
Obagi shall, if exercising the option created hereby, deliver to Mandarin the
certificate or certificates representing shares to be sold, each certificate to
be properly endorsed for transfer.

 

(iii)          Mandarin shall, upon
receipt of the certificate or certificates for the shares to be sold by Obagi,
pursuant to this Section 4.3, pay the aggregate purchase price therefor, in
cash or by other means acceptable to Obagi.

 

(iv)          Notwithstanding the
foregoing, any attempt by Mandarin to transfer Co-Sale Stock in violation of
Section 4 hereof shall be void and the Company agrees it will not effect such a
transfer nor will it treat any alleged transferee as the holder of such shares
without the written consent of Obagi.

 

5.             Participation in
Certain Transactions.

 

5.1           Approved Sale.
If, at any time prior to the termination of this Agreement, the Company’s Board
of Directors (acting in accordance with its fiduciary duties) and the holders
of a majority of the Co-Sale Stock shall approve a sale of a majority of the
stock or substantially all of the assets of the Company (each, an “Approved
Sale”), then subject to Section 5.2 below: (i) Obagi shall consent to and raise
no objection against the Approved Sale; (ii) if the Approved Sale is structured
in whole or in part as a merger or consolidation, or a sale of all or
substantially all assets, Obagi shall waive any dissenter’s rights, appraisal
rights or similar rights in connection with such merger, consolidation or asset
sale; (iii) if the Approved Sale is structured in whole or part as a sale of
securities, Obagi agrees to sell its respective securities on the terms and
conditions approved by the Company’s shareholders in connection with the
consummation of the Approved Sale, including the execution of such agreements
and such instruments and other actions reasonably necessary to provide the
representations, warranties, indemnities, covenants, conditions, escrow
agreements and other provisions and agreements relating to such Approved Sale,
and effectuate the allocation and distribution of the aggregate consideration
upon the Approved Sale.

 

15

 

5.2           Conditions to
Obagi’s Obligations. The obligations of Obagi with respect to an Approved
Sale are subject to the satisfaction of the following conditions: (i) if any
holder of a class and series of stock held by Obagi is given an option as to
the form and amount of consideration to be received, Obagi will be given the
same option; and (ii) Obagi’s maximum indemnification liability pursuant to the
Approved Sale shall not exceed the amount of proceeds received by Obagi from
such Approved Sale.

 

5.3           Approved Sale
Expenses. Obagi shall bear its pro-rata share (based upon the number of
shares sold) of the reasonable out-of-pocket costs of an sale of Co-Sale Stock
pursuant to an Approved Sale to the extent such costs are incurred for the
benefit of all holders of Co-Sale Stock and are not otherwise paid by the
Company or the acquiring party.

 

6.             Restrictions on
Transfer.

 

6.1           Obagi shall be prohibited
from selling or otherwise transferring any shares of Registrable Securities or
Co-Sale Stock issued or issuable to it or from selling or otherwise
transferring any right to acquire such securities to any party other than
Mandarin at any time prior to the earlier of (i) the closing of a firm
commitment underwritten public offering pursuant to an effective registration
statement under the Act covering the offer and sale of the Company’s Common
Stock at an aggregate offering price of not less than $7,500,000, (ii) the
closing of the Company’s sale of all or substantially all of its assets or the
acquisition of the Company by another entity by means of merger or
consolidation resulting in the exchange of the outstanding shares of the
Company’s capital stock for securities or consideration issued, or caused to be
issued, by the acquiring entity or its subsidiary or (iii) the tenth
anniversary of the date of this Agreement (provided that in the case of clause
(iii) hereof, after such tenth anniversary Obagi may sell or otherwise transfer
such Registered Securities or Co-Sale Stock only in compliance with Section 6.2
below).

 

6.2           If an event specified
in clause (i) or (ii) of Section 6.1 shall have not yet occurred as of the
tenth anniversary of the date of this Agreement and Obagi desires to sell or
otherwise transfer any such Registrable Securities or Co-Sale Stock (the
“Target Stock”) at any time after such tenth anniversary, then Obagi shall
promptly deliver to the Company and Mandarin written notice of the intended
disposition and the terms and conditions thereof, including the identity of any
proposed purchaser and the price per share of the securities to be so disposed
(the “Offer Notice”). Thereafter, the Company and Mandarin or either of them
may elect to purchase any or all of the Target Stock on the terms and
conditions set forth in the Offer Notice, such purchase to occur within twenty
(20) business days after receipt by the Company and Mandarin of the Offer
Notice (the “Wait Period”). The Company and Mandarin shall each negotiate in
good faith in determining any allocation between them of the Target Stock
offered in the Offer Notice. If the Company and Mandarin or either of them have
not purchased all such Target Stock prior to expiration of the Wait Period, the
Company’s and Mandarin’s right to purchase any Target Stock not so purchased by
them shall lapse, expire and be of no further effect. Any Target Stock not
purchased by the Company or by Mandarin which is thereafter transferred by
Obagi to a third party shall be subject to the provisions of Sections 5 and 6,
and

 

16

 

such transferee
shall, as a condition precedent to such transfer, agree to be bound by the
provisions of Sections 5 and 6 and shall be treated as “Obagi” for the purposes
of Sections 5 and 6.

 

7.             Repurchase
Obligations.

 

7.1           In the event Zein
Obagi, M.D.’s employment with the Company is terminated under that certain
Employment Agreement of even date herewith by and between Zein Obagi, M.D. and
the Company (the “Employment Agreement”) on any ground articulated in Sections
6(b)(i) (but only if such employment is terminated due to Zein Obagi, M.D.’s
failure to devote at least 20 hours per week of his business time and attention
to the business of OMP as an employee thereof), 6(b)(ii), 6(b)(iii), 6(b)(iv)
or 6(b)(vi) of such Employment Agreement, then the Company may, in its sole
discretion, elect to repurchase any shares of Common Stock held by Obagi at the
then fair market value per share of such stock if the Company also repurchases
any and all Series B Preferred Stock of the Company held by Obagi at a price
per share equal to the original price per share paid by Obagi for such shares
plus an amount equal to any accrued and unpaid dividends associated with each
such share, and in such event Obagi agrees to so sell such Common Stock and
Series B Preferred Stock to the Company. The amount to be paid by the Company
for each share of Common Stock and Series B Preferred Stock shall be adjusted
to give effect to any stock splits, reverse stock splits or recapitalizations
effecting such shares.

 

7.2           The fair market value
of Obagi’s Common Stock for the purposes of Section 7.1 shall be determined as
follows: each of Obagi and the Company shall promptly pick a third party
independent appraisal firm of national recognition and each such appraisal firm
shall promptly value the Common Stock to be so repurchased. If the aggregate
valuations of such stock by such two appraisal firms are within ten percent (10%)
of each other, the value of such stock shall be the average of such appraisal
valuations. If such valuations are not within ten percent (10%) of each other,
then such two appraisal firms shall promptly choose a third appraisal firm of
national recognition and such third appraisal firm shall promptly determine the
aggregate valuation of such stock, such valuation to be binding on the parties.
The Company shall bear the costs of such appraisals.

 

8.             Miscellaneous.

 

8.1           Legend. In
addition to any legends required by applicable federal and state securities
laws, certificates representing Registrable Securities and/or Co-Sale Stock
shall be endorsed with the following legend:

 

“THE SECURITIES
REPRESENTED BY THIS CERTIFICATE AND THE SALE, PLEDGE, HYPOTHECATION OR TRANSFER
OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS AND
CONDITIONS OF A CERTAIN INVESTORS’ RIGHTS AGREEMENT BY AND BETWEEN THE
SHAREHOLDER, THE COMPANY AND CERTAIN HOLDERS OF STOCK OF THE CORPORATION.
COPIES OF

 

17

 

SUCH AGREEMENT MAY
BE OBTAINED UPON WRITTEN REQUEST TO THE SECRETARY OF THE CORPORATION.”

 

Mandarin agrees that the Company may instruct its transfer agent to
impose transfer restrictions on the shares represented by certificates bearing
the legend referred to in this Section 8.1 to enforce the provisions of this
Agreement and the Company agrees to promptly do so. The legend shall be removed
upon termination of this Agreement.

 

8.2           Assignment of Rights.
The rights provided by this Agreement may be assigned (but only with all
related obligations) by a Holder or Investor to a transferee or assignee of all
or part of such Investor’s or Holder’s Registrable Securities and/or Co-Sale
Stock, provided; (a) the Company is, within a reasonable time after such
transfer, furnished with written notice of the name and address of such
transferee or assignee and the securities with respect to which such rights are
being assigned; (b) such transferee or assignee agrees in writing to be bound
by and subject to the terms and conditions of this Agreement, including without
limitation the provisions of Section 2.13 above; and (c) such assignment shall
be effective only if immediately following such transfer the further
disposition of such securities by the transferee or assignee is restricted
under the Act. For the purposes of determining the number of shares of
Registrable Securities and/or Co-Sale Stock held by a transferee or assignee,
the holdings of transferees and assignees of a partnership who are partners or
retired partners of such partnership (including spouses and ancestors, lineal
descendants and siblings of such partners or spouses who acquire Registrable
Securities and/or Co-Sale Stock by gift, will or intestate succession) shall be
aggregated together and with the partnership; provided that all assignees and
transferees who would not qualify individually for assignment of rights
pursuant to this Agreement shall have a single attorney-in-fact for the purpose
of exercising any rights, receiving notices or taking any action under this
Agreement.

 

8.3           Successors and
Assigns. Except as otherwise provided herein, the terms and conditions of
this Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties (including transferees of any shares of
Registrable Securities). Nothing in this Agreement, express or implied, is
intended to confer upon any party other than the parties hereto or their
respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.

 

8.4           Term. The
provisions set forth in Sections 3 through 6 of this Agreement shall terminate upon the earlier of (i) the
closing of a firm commitment underwritten public offering pursuant to an
effective registration statement under the Act covering the offer and sale of
the Company’s Common Stock at an aggregate offering price of not less than
$7,500,000 and (ii) the closing of the Company’s sale of all or substantially
all of its assets or the acquisition of the Company by another entity by means
of merger or consolidation resulting in the exchange of the outstanding shares
of the Company’s capital stock for securities or consideration issued, or
caused to be issued, by the acquiring entity or its subsidiary. The provisions
set forth in Section 2 of this Agreement shall terminate in the manner set
forth in Section 2.14 above.

 

18

 

8.5           Governing law.
This Agreement shall be governed by and construed under the laws of the State
of California as applied to agreements among California residents entered into
and to be performed entirely within California.

 

8.6           Counterparts. This
Agreement may be executed in two or more counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
instrument.

 

8.7           Titles and Subtitles.
The titles and subtitles used in this Agreement are used for convenience only
and are not to be considered in construing or interpreting this Agreement.

 

8.8           Notices. Unless
otherwise provided, any notice required or permitted under this Agreement shall
be given in writing and shall be deemed effectively given upon personal delivery
to the party to be notified or upon deposit with the United States Post Office,
by registered or certified mail, postage prepaid and addressed to the party to
be notified at the address indicated for such party on the signature page
hereof, or at such other address as such party may designate by ten (10) days’
advance written notice to the other parties.

 

8.9           Expenses. If any
action at law or in equity is necessary to enforce or interpret the terms of
this Agreement, the prevailing party shall be entitled to reasonable attorneys’
fees, costs and necessary disbursements in addition to any other relief to
which such party may be entitled.

 

8.10         Amendments and Waivers.
Any term of this Agreement may be amended and the observance of any term of
this Agreement may be waived (either generally or in a particular instance and
either retroactively or prospectively), only with the written consent of the
Company and the holders of a majority of the Registrable Securities then
outstanding. Any amendment or waiver effected in accordance with this Section
shall be binding upon each holder of any Registrable Securities then
outstanding, each future holder of all such Registrable Securities, and the
Company.

 

8.11         Severability. If
one or more provisions of this Agreement are held to be unenforceable under
applicable law, such provision shall be excluded from this Agreement and the
balance of the Agreement shall be interpreted as if such provision were so
excluded and shall be enforceable in accordance with its terms.

 

19

 

8.12         Aggregation of Stock.
All shares of Registrable Securities and Co-Sale Stock held or acquired by
affiliated entities or persons shall be aggregated together for the purpose of
determining the availability of any rights under this Agreement.

 

8.13         Entire Agreement;
Amendment; Waiver. This Agreement (including the Exhibits hereto, if any)
constitutes the full and entire understanding and agreement between the parties
with regard to the subjects hereof and thereof.

 

20

 

IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.

 

 

	
   

  	
  THE COMPANY:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  OMP
  ACQUISITION CORPORATION

  
	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Ian G. Walker

  
	
   

  	
   

  	
  Ian G. Walker, Vice
  President

  
	
   

  	
   

  	
   

  
	
   

  	
  Address:

  	
  c/o Polar Vision

  625 Alaska Avenue

  Torrance, California 90503

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  INVESTORS:

  
	
   

  	
   

  
	
   

  	
  MANDARIN
  PARTNERS LLC

  
	
   

  	
   

  
	
   

  	
  By
  its Manager:   Mandarin Management 

  Partners, Inc.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Peter P. Tong

  	
   

  
	
   

  	
   

  
	
   

  	
  Name:

  	
  Peter P. Tong

  	
   

  
	
   

  	
   

  
	
   

  	
  Its:

  	
  President

  	
   

  
	
   

  	
   

  
	
   

  	
  Address:

  	
  c/o Polar Vision

  	
   

  
	
   

  	
   

  	
  625 Alaska Avenue,
  Torrance, CA 90503

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ZEIN
  AND SAMAR OBAGI FAMILY TRUST

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Zein Obagi

  	
   

  
	
   

  	
   

  	
  Zein
  Obagi, Trustee

  
	
   

  	
   

  
	
   

  	
  Address:

  	
  c/o Zein Obagi, M.D.

  9033 Wilshire Boulevard

  Beverly Hills, California 90211

  
						

 

21Exhibit 10.1

 

OBAGI MEDICAL PRODUCTS, INC.

2000 STOCK OPTION/STOCK ISSUANCE PLAN

 

ARTICLE ONE

 

GENERAL PROVISIONS

 

I.                            PURPOSE
OF THE PLAN

 

This 2000 Stock Option/Stock
Issuance Plan is intended to promote the interests of Obagi Medical Products, Inc.,
a California corporation, by providing eligible persons in the Corporation’s
employ or service with the opportunity to acquire a proprietary interest, or
otherwise increase their proprietary interest, in the Corporation as an
incentive for them to continue in such employ or service.

 

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

 

II.                        STRUCTURE
OF THE PLAN

 

A.                       The Plan shall be divided into two (2) separate equity programs:

 

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

 

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

 

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

 

III.                    ADMINISTRATION
OF THE PLAN

 

A.                       The Plan shall be administered by the Board. However, any or all
administrative functions otherwise exercisable by the Board may be delegated
to the Committee. Members of the Committee shall serve for such period of time
as the Board may determine and shall be subject to removal by the Board at
any time. The Board may also at any time terminate the functions of the
Committee and reassume all powers and authority previously delegated to the
Committee.

 

1

 

B.                         The Plan Administrator shall have full power and authority (subject to
the provisions of the Plan) to establish such rules and regulations as it may deem
appropriate for proper administration of the Plan and to make such
determinations under, and issue such interpretations of, the Plan and any
outstanding options or stock issuances thereunder as it may deem necessary
or advisable. Decisions of the Plan Administrator shall be final and binding on
all parties who have an interest in the Plan or any option or stock issuance
thereunder.

 

IV.                   ELIGIBILITY

 

A.                       The persons eligible to participate in the Plan are as follows:

 

(i)                          Employees,

 

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

 

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

 

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

 

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

 

V.                       STOCK
SUBJECT TO THE PLAN

 

A.                       The stock issuable under the Plan shall be shares of authorized but
unissued or reacquired Common Stock. The maximum number of shares of Common
Stock which may be issued over the term of the Plan shall not exceed
250,000 shares.

 

B.                         Shares of Common Stock subject to outstanding options shall be available
for subsequent issuance under the Plan to the extent (i) the options
expire or terminate for any reason prior to exercise in full or (ii) the
options are cancelled in accordance with the cancellation-

 

2

 

regrant provisions of Article Two. Shares
issued under the Plan and subsequently repurchased by the Corporation pursuant
to the Corporation’s repurchase rights under the Plan shall be added back to
the number of shares of Common Stock reserved for issuance under the Plan and
shall accordingly be available for reissuance through one or more subsequent
option grants or direct stock issuances under the Plan.

 

C.                         Should any change be made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without
the Corporation’s receipt of consideration, appropriate adjustments shall be
made to (i) the maximum number and/or class of securities issuable
under the Plan and (ii) the number and/or class of securities and the
exercise price per share in effect under each outstanding option in order to
prevent the dilution or enlargement of benefits thereunder. The adjustments
determined by the Plan Administrator shall be final, binding and conclusive. In
no event shall any such adjustments be made in connection with the conversion
of one or more outstanding shares of the Corporation’s preferred stock into
shares of Common Stock.

 

3

 

ARTICLE TWO

 

OPTION GRANT PROGRAM

 

I.                            OPTION TERMS

 

Each option shall be evidenced by a Stock
Option Agreement which complies with the terms specified below. Each Stock
Option Agreement evidencing an Incentive Option shall, in addition, be subject
to the provisions of the Plan applicable to such options.

 

A.                       Exercise Price.

 

1.                           The exercise price per share shall be fixed by the Plan Administrator in
accordance with the following provisions:

 

(i)                          The exercise price per share shall not be less
than eighty-five percent (85%) of the Fair Market Value per share of Common
Stock on the option grant date.

 

(ii)                       If the person to whom the option is granted is
a 10% Shareholder, then the exercise price per share shall not be less than one
hundred ten percent (110%) of the Fair Market Value per share of Common Stock
on the option grant date.

 

2.                           The exercise price shall become immediately due upon exercise of the
option and shall, subject to the provisions of Section I of Article Four
and the documents evidencing the option, be payable in cash or check made
payable to the Corporation. Should the Common Stock be registered under section 12
of the 1934 Act at the time the option is exercised, then the exercise price may also
be paid as follows:

 

(i)                          in shares of Common Stock held for the
requisite period necessary to avoid a charge to the Corporation’s earnings for
financial reporting purposes and valued at Fair Market Value on the Exercise
Date, or

 

(ii)                       through a special sale and remittance
procedure pursuant to which the Optionee shall concurrently provide irrevocable
instructions (A) to a Corporation-designated brokerage firm to effect the
immediate sale of the purchased shares and remit to the Corporation, out of the
sale proceeds available on the settlement date, sufficient funds to cover the
aggregate exercise price payable for the purchased shares plus all applicable
Federal, state and local

 

4

 

income and employment taxes
required to be withheld by the Corporation by reason of such exercise and (B) to
the Corporation to deliver the certificates for the purchased shares directly
to such brokerage firm in order to complete the sale.

 

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

 

B.                         Exercise and Term of Options. Each option shall be exercisable at such time
or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option grant. However, no option shall have a term in excess of ten (10) years
measured from the option grant date. The Plan Administrator may not impose
a vesting schedule upon the option grant which is more restrictive than
twenty percent (20%) per year vesting, with the initial vesting to occur not
later than one (1) year after the option grant date. However, such
limitation shall not be applicable to any option grants made to individuals who
are officers of the Corporation, non-employee Board members or independent
consultants.

 

C.                         Manner of Exercising Option. Optionee shall be required to execute and
deliver to the Corporation a Purchase Agreement for the Option Shares for which
the option is exercised.

 

D.                        Effect of Termination of
Service.

 

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

 

(i)                          Should the Optionee cease to remain in Service
for any reason other than death, Disability or Misconduct, then the Optionee
shall have a period of three (3) months following the date of such
cessation of Service during which to exercise each outstanding option held by
such Optionee.

 

(ii)                       Should Optionee’s Service terminate by reason
of Disability, then the Optionee shall have a period of twelve (12) months
following the date of such cessation of Service during which to exercise each
outstanding option held by such Optionee.

 

(iii)                    If the Optionee dies while holding an
outstanding option, then the personal representative of his or her estate or
the person or persons to whom the option is transferred pursuant to the
Optionee’s will or the laws of inheritance shall have a twelve (12)-month
period following the date of the Optionee’s death to exercise such option.

 

5

 

(iv)                   Under
no circumstances, however, shall any such option be exercisable after the
specified expiration of the option term.

 

(v)                      During
the applicable post-Service exercise period, the option may not be
exercised in the aggregate for more than the number of vested shares for which
the option is exercisable on the date of the Optionee’s cessation of Service.
Upon the expiration of the applicable exercise period or (if earlier) upon the
expiration of the option term, the option shall terminate and cease to be
outstanding for any vested shares for which the option has not been exercised.
However, the option shall, immediately upon the Optionee’s cessation of
Service, terminate and cease to be outstanding with respect to any and all
option shares for which the option is not otherwise at the time exercisable or
in which the Optionee is not otherwise at that time vested.

 

(vi)                   Should
Optionee’s Service be terminated for Misconduct, then all outstanding options
held by the Optionee shall terminate immediately and cease to remain
outstanding.

 

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

 

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

 

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

 

E.                          Shareholder Rights. The holder of an option shall have no
shareholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become the
recordholder of the purchased shares.

 

F.                          Repurchase Rights.
Until such time as the Common Stock is first registered under section 12
of the 1934 Act, the Corporation shall have the option, but not the obligation,
to repurchase all or any part of any shares of Common Stock issued under
the Plan. Such repurchase rights shall be exercisable in accordance with the
terms established by the Plan Administrator and set forth in the document
evidencing such right.

 

6

 

G.                         First Refusal Rights. Until such time as the Common Stock
is first registered under section 12 of the 1934 Act, the Corporation
shall have the right of first refusal with respect to any proposed disposition
by the Optionee (or any successor in interest) of any shares of Common Stock
issued under the Plan. Such right of first refusal shall be exercisable in
accordance with the terms established by the Plan Administrator and set forth
in the document evidencing such right.

 

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

 

I.                             Withholding. The Corporation’s obligation to deliver
shares of Common Stock upon the exercise of any options granted under the Plan
shall be subject to the satisfaction of all applicable Federal, state and local
income and employment tax withholding requirements.

 

II.                        INCENTIVE OPTIONS

 

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

 

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

 

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

 

C.                         Dollar Limitation.
The aggregate Fair Market Value of the shares of Common Stock (determined as of
the respective date or dates of grant) for which one or more options granted to
any Employee under the Plan (or any other option plan of the Corporation or any
Parent or Subsidiary) may for the first time become exercisable as
Incentive Options during any one (1) calendar year shall not exceed the
sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee
holds two (2) or more such options which become exercisable for the first
time in the same calendar year, the foregoing limitation on the exercisability
of such options as Incentive Options shall be applied on the basis of the order
in which such options are granted.

 

D.                        10% Shareholder.
If any Employee to whom an Incentive Option is granted is a 10% Shareholder,
then the option term shall not exceed five (5) years measured from the
option grant date.

 

7

 

III.                    CORPORATE TRANSACTION

 

A.                       The shares subject to each option outstanding under the Plan at the time
of a Corporate Transaction shall automatically vest in full so that each such
option shall, immediately prior to the effective date of the Corporate
Transaction, become fully exercisable for all of the shares of Common Stock at
the time subject to that option and may be exercised for any or all of
those shares as fully-vested shares of Common Stock. However, the shares
subject to an outstanding option shall not vest on such an accelerated basis if
and to the extent: (i) such option is assumed by the successor corporation
(or parent thereof) in the Corporate Transaction and the Corporation’s
repurchase rights are concurrently assigned to such successor corporation (or
parent thereof) or (ii) such option is to be replaced with a cash
incentive program of the successor corporation which preserves the spread
existing on the unvested option shares at the time of the Corporate Transaction
and provides for subsequent payout in accordance with the same vesting schedule applicable
to those unvested option shares or (iii) the acceleration of such option
is subject to other limitations imposed by the Plan Administrator at the time
of the option grant.

 

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

 

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

 

D.                        The Plan Administrator shall have the discretion, exercisable either at
the time the option is granted or at any time while the option remains
outstanding, to provide for the automatic acceleration (in whole or in part) of
one or more outstanding options (and the immediate termination of the
Corporation’s repurchase rights with respect to the shares subject to those
options) upon the occurrence of a Corporate Transaction, whether or not those
options are to be assumed in the Corporate Transaction.

 

E.                          The portion of any Incentive Option accelerated in connection with a
Corporate Transaction shall remain exercisable as an Incentive Option only to
the extent the applicable One Hundred Thousand Dollar ($100,000) limitation is
not exceeded. To the extent such dollar limitation is exceeded, the accelerated
portion of such option shall be exercisable as a Non-Statutory Option under the
Federal tax laws.

 

8

 

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

 

IV.                   CORPORATION’S RIGHT TO
ACCELERATE EXERCISE RIGHTS

 

Upon the occurrence of an
Organic Change, the Corporation shall have the right, exercisable in the
Corporation’s sole discretion, to require that all Options which have become
vested be exercised or become void if not exercised within a period of fifteen
(15) days after the Corporation gives notice that it intends to consummate a
transaction which would be an Organic Change, but in any event not later than
the effective date of the Organic Change. The term “Organic Change” shall mean (a) a
merger of the Corporation with or into another corporation, (b) a
consolidation of the Corporation with another corporation, (c) sale of all
or substantially all of the assets of the Corporation, (d) sale or
transfer of more than fifty percent (50%) of the issued and outstanding Stock
of the Corporation to another person in a single transaction or series of
transactions or (e) the filing of a registration statement by the
Corporation under the Securities Act of 1933, as amended, with the United
States Securities and Exchange Commission (the “SEC”) for the registration of
equity securities of the Corporation.

 

V.                       CANCELLATION AND REGRANT OF
OPTIONS

 

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

 

9

 

ARTICLE THREE

 

STOCK ISSUANCE PROGRAM

 

I.                            STOCK ISSUANCE TERMS

 

Shares of Common Stock may be
issued under the Stock Issuance Program through direct and immediate issuances
without any intervening option grants. Each such stock issuance shall be
evidenced by a Stock Issuance Agreement which complies with the terms specified
below.

 

A.                       Purchase Price.

 

1.                           The purchase price per share shall be fixed by the Plan Administrator
but shall not be less than eighty-five percent (85%) of the Fair Market Value
per share of Common Stock on the issue date. However, the purchase price per
share of Common Stock issued to a 10% Shareholder shall not be less than one
hundred and ten percent (110%) of such Fair Market Value.

 

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

 

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

 

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

 

B.                         Vesting Provisions.

 

1.                           Shares of Common Stock issued under the Stock Issuance Program may, in
the discretion of the Plan Administrator, be fully and immediately vested upon
issuance or may vest in one or more installments over the Participant’s
period of Service or upon attainment of specified performance objectives.
However, the Plan Administrator may not impose a vesting schedule upon
any stock issuance effected under the Stock Issuance Program which is more
restrictive than twenty percent (20%) per year vesting, with initial vesting to
occur not later than one (1) year after the issuance date. Such limitation
shall not apply to any Common Stock issuances made to the officers of the
Corporation, non-employee Board members or independent consultants.

 

2.                           Any new, substituted or additional securities or other property
(including money paid other than as a regular cash dividend) which the
Participant may have the

 

10

 

right to receive with respect to the
Participant’s unvested shares of Common Stock by reason of any stock dividend,
stock split, recapitalization, combination of shares, exchange of shares or
other change affecting the outstanding Common Stock as a class without the
Corporation’s receipt of consideration shall be issued subject to (i) the
same vesting requirements applicable to the Participant’s unvested shares of
Common Stock and (ii) such escrow arrangements as the Plan Administrator
shall deem appropriate.

 

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

 

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

 

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

 

C.                         First Refusal Rights.
Until such time as the Common Stock is first registered under section 12
of the 1934 Act, the Corporation shall have the right of first refusal with
respect to any proposed disposition by the Participant (or any successor in
interest) of any shares of Common Stock issued under the Stock Issuance
Program. Such right of first refusal shall be exercisable in accordance with
the terms established by the Plan Administrator and set forth in the document
evidencing such right.

 

D.                        Purchase Option. Until
such time as the Common Stock is first registered under section 12 of the
1934 Act, the Corporation shall have the option, but not the obligation, to
purchase all or any part of any shares of Common Stock issued under the
Plan. Such purchase rights shall be exercisable in accordance with the terms
established by the Plan Administrator and set forth in the document evidencing
such right.

 

11

 

II.                        SHARE ESCROW/LEGENDS

 

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

 

12

 

ARTICLE FOUR

 

MISCELLANEOUS

 

I.                            FINANCING

 

The Plan Administrator may permit
any Optionee or Participant to pay the option exercise price or the purchase
price for shares issued to such person under the Plan by delivering a
full-recourse, interest-bearing promissory note payable in one or more
installments and secured by the purchased shares. However, any promissory note
delivered by a consultant must be secured by collateral in addition to the
purchased shares of Common Stock. In no event shall the maximum credit
available to the Optionee or Participant exceed the sum of (i) the
aggregate option exercise price or purchase price payable for the purchased
shares plus (ii) any Federal, state and local income and employment tax
liability incurred by the Optionee or the Participant in connection with the
option exercise or share purchase.

 

II.                        EFFECTIVE DATE AND TERM OF
PLAN

 

A.                       The Plan shall become effective when adopted by the Board, but no option
granted under the Plan may be exercised, and no shares shall be issued
under the Plan, until the Plan is approved by the Corporation’s shareholders.
If such shareholder approval is not obtained within twelve (12) months after
the date of the Board’s adoption of the Plan, then all options previously
granted under the Plan shall terminate and cease to be outstanding, and no
further options shall be granted and no shares shall be issued under the Plan.
Subject to such limitation, the Plan Administrator may grant options and
issue shares under the Plan at any time after the effective date of the Plan
and before the date fixed herein for termination of the Plan.

 

B.                         The Plan shall terminate upon the earliest of (i) the
expiration of the ten (10)-year period measured from the date the Plan is
adopted by the Board, (ii) the date on which all shares available for
issuance under the Plan shall have been issued as vested shares or (iii) the
termination of all outstanding options in connection with a Corporate
Transaction. All options and unvested stock issuances outstanding at that time
under the Plan shall continue to have full force and effect in accordance with
the provisions of the documents evidencing such options or issuances.

 

III.                    AMENDMENT OF THE PLAN

 

A.                       The Board shall have complete and exclusive power and authority to amend
or modify the Plan in any or all respects. However, no such amendment or
modification shall adversely affect the rights and obligations with respect to
options or unvested stock issuances at the time outstanding under the Plan
unless the Optionee or the Participant consents to such amendment

 

13

 

or modification. In addition, certain
amendments may require shareholder approval pursuant to applicable laws
and regulations.

 

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

 

IV.                   USE OF PROCEEDS

 

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

 

V.                       WITHHOLDING

 

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

 

VI.                   REGULATORY APPROVALS

 

The implementation of the
Plan, the granting of any options under the Plan and the issuance of any shares
of Common Stock (i) upon the exercise of any option or (ii) under the
Stock Issuance Program shall be subject to the Corporation’s procurement of all
approvals and permits required by regulatory authorities having jurisdiction
over the Plan, the options granted under it and the shares of Common Stock
issued pursuant to it.

 

VII.               NO EMPLOYMENT OR SERVICE
RIGHTS

 

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

 

14

 

VIII.           FINANCIAL REPORTS

 

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

 

15

 

APPENDIX

 

The following definitions shall be in effect under the
Plan:

 

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

 

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

 

C.                        Committee shall mean a committee of two
(2) or more Board members appointed by the Board to exercise one or more
administrative functions under the Plan.

 

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

 

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

 

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

 

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

 

F.                         Corporation shall mean Obagi Medical
Products, Inc., a California corporation, and any successor corporation to
all or substantially all of the assets or voting stock of Obagi Medical
Products, Inc. which shall by appropriate action adopt the Plan.

 

G.                        Disability shall mean the inability of
the Optionee or the Participant to engage in any substantial gainful activity
by reason of any medically determinable physical or mental impairment and shall
be determined by the Plan Administrator on the basis of such medical evidence
as the Plan Administrator deems warranted under the circumstances.

 

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

 

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

 

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

 

A-1

 

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

 

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

 

(iii)                   If the Common Stock is at the time neither
listed on any Stock Exchange nor traded on the NASDAQ National Market, then the
Fair Market Value shall be determined by the Plan Administrator after taking
into account such factors as the Plan Administrator shall deem appropriate.

 

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

 

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

 

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

 

(ii)                      such individual’s voluntary resignation
following (A) a change in his or her position with the Corporation which
materially reduces his or her duties and responsibilities or the level of
management to which he or she reports, (B) a reduction in his or her level
of compensation (including base salary, fringe benefits and target bonuses
under any corporate-performance based bonus or incentive programs) by more than
fifteen percent (15%) or (C) a relocation of such individual’s place of
employment by more than fifty (50) miles, provided and only if such change,
reduction or relocation is effected without the individual’s consent.

 

M.                    Misconduct shall mean the commission of any act of fraud, embezzlement or
dishonesty by the Optionee or Participant, any unauthorized use or disclosure
by such person of confidential information or trade secrets of the Corporation
(or any Parent or Subsidiary), or any other intentional misconduct by such
person adversely affecting the business or affairs of the

 

A-2

 

Corporation (or any Parent or Subsidiary) in a
material manner. The foregoing definition shall not be deemed to be inclusive
of all the acts or omissions which the Corporation (or any Parent or
Subsidiary) may consider as grounds for the dismissal or discharge of any
Optionee, Participant or other person in the Service of the Corporation (or any
Parent or Subsidiary).

 

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

 

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

 

P.                         Option Grant Program shall mean the option grant program in effect
under the Plan.

 

Q.                       Optionee shall mean any person to whom an option is granted under the Plan.

 

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

 

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

 

T.                        Plan shall mean the Corporation’s 2000 Stock Option/Stock Issuance Plan, as
set forth in this document.

 

U.                       Plan Administrator shall mean either the Board or the Committee
acting in its capacity as administrator of the Plan.

 

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

 

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

 

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

 

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

 

A-3

 

Z.                        Stock Option Agreement shall mean the agreement entered into by the
Corporation and the Participant at the time of issuance of option shares under
the Stock Option Plan.

 

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

 

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

 

A-4

 

OBAGI MEDICAL PRODUCTS, INC.

STOCK OPTION AGREEMENT

 

RECITALS

 

A.                      The Board has adopted the Plan for the purpose of retaining the services
of selected Employees, non-employee members of the Board or the board of
directors of any Parent or Subsidiary and consultants and other independent
advisors in the service of the Corporation (or any Parent or Subsidiary).

 

B.                        Optionee is to render valuable services to the Corporation (or a Parent
or Subsidiary), and this Agreement is executed pursuant to, and is intended to
carry out the purposes of, the Plan in connection with the Corporation’s grant
of an option to Optionee.

 

C.                        All capitalized terms in this Agreement shall have the meaning assigned
to them in the attached Appendix.

 

NOW,
THEREFORE, it is
hereby agreed as follows:

 

1.                           Grant of Option. The Corporation hereby grants to Optionee,
as of the Grant Date, an option to purchase up to the number of Option Shares
specified in the Grant Notice. The Option Shares shall be purchasable from time
to time during the option term specified in Paragraph 2 at the Exercise Price.

 

2.                           Option Term. This option shall have a term of ten (10) years
measured from the Grant Date and shall accordingly expire at the close of
business on the Expiration Date, unless sooner terminated in accordance with
Paragraph 5, 6 or 7.

 

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

 

4.                           Dates of Exercise. This option shall become exercisable for the
Option Shares in one or more installments as specified in the Grant Notice. As
the option becomes exercisable for such installments, those installments shall
accumulate, and the option shall remain exercisable for the accumulated
installments until the Expiration Date or sooner termination of the option term
under Paragraph 5, 6 or 7.

 

5.                           Cessation of Service. The option term specified in Paragraph 2
shall terminate (and this option shall cease to be outstanding) prior to the
Expiration Date should any of the following provisions become applicable:

 

(a)                      Should Optionee cease to remain in Service for
any reason (other than death, Disability or Misconduct) while this option is
outstanding, then Optionee shall have a

 

1

 

period of three (3) months (commencing
with the date of such cessation of Service) during which to exercise this
option, but in no event shall this option be exercisable at any time after the
Expiration Date.

 

(b)                     Should Optionee die while this option is
outstanding, then the personal representative of Optionee’s estate or the
person or persons to whom the option is transferred pursuant to Optionee’s will
or in accordance with the laws of inheritance shall have the right to exercise
this option. Such right shall lapse, and this option shall cease to be
outstanding, upon the earlier of (i) the expiration of the twelve
(12) month period measured from the date of Optionee’s death or (ii) the
Expiration Date.

 

(c)                      Should Optionee cease Service by reason of
Disability while this option is outstanding, then Optionee shall have a period
of twelve (12) months (commencing with the date of such cessation of Service)
during which to exercise this option. In no event shall this option be
exercisable at any time after the Expiration Date.

 

Note: Exercise of this option on a date later than
three (3) months following cessation of Service due to Disability will
result in loss of favorable Incentive Option treatment, unless such
Disability constitutes Permanent Disability. In the event that Incentive Option
treatment is not available, this option will be taxed as a Non-Statutory Option
upon exercise.

 

(d)                     During the limited period of post-Service
exercisability, this option may not be exercised in the aggregate for more
than the number of Option Shares in which Optionee is, at the time of Optionee’s
cessation of Service, vested pursuant to the Vesting Schedule specified in
the Grant Notice or the special vesting acceleration provisions of Paragraph 6.
Upon the expiration of such limited exercise period or (if earlier) upon the
Expiration Date, this option shall terminate and cease to be outstanding for
any vested Option Shares for which the option has not been exercised. To the
extent Optionee is not vested in the Option Shares at the time of Optionee’s
cessation of Service, this option shall immediately terminate and cease to be
outstanding with respect to those shares.

 

(e)                      Should Optionee’s Service be terminated for
Misconduct then this option shall terminate immediately and cease to remain
outstanding.

 

6.                           Accelerated Vesting.

 

(a)                      In the event of any Corporate Transaction, the
Option Shares at the time subject to this option but not otherwise vested shall
automatically vest in full so that this option shall, immediately prior to the
effective date of the Corporate Transaction, become exercisable for all of the
Option Shares as fully-vested shares and may be exercised for any or all
of those vested shares. However, the Option Shares shall not vest on such an
accelerated basis if and to the extent: (i) this option is assumed by the
successor corporation (or parent thereof) in

 

2

 

the Corporate Transaction and the Corporation’s
repurchase rights are assigned to such successor corporation (or parent
thereof) or (ii) this option is to be replaced with a cash incentive
program of the successor corporation which preserves the spread existing on the
unvested Option Shares at the time of the Corporate Transaction (the excess of
the Fair Market Value of those Option Shares over the Exercise Price payable
for such shares) and provides for subsequent payout in accordance with the same
Vesting Schedule applicable to those unvested Option Shares as set forth
in the Grant Notice.

 

(b)                     Immediately following the Corporate Transaction,
this option shall terminate and cease to be outstanding, except to the extent
assumed by the successor corporation (or parent thereof) in connection with the
Corporate Transaction.

 

(c)                      If this option is assumed in connection with a
Corporate Transaction, then this option shall be appropriately adjusted,
immediately after such Corporate Transaction, to apply to the number and class of
securities which would have been issuable to Optionee in consummation of such
Corporate Transaction had the option been exercised immediately prior to such
Corporate Transaction, and appropriate adjustments shall also be made to the
Exercise Price, provided the aggregate Exercise Price shall remain the
same.

 

(d)                     This Agreement shall not in any way affect the
right of the Corporation to adjust, reclassify, reorganize or otherwise change
its capital or business structure or to merge, consolidate, dissolve, liquidate
or sell or transfer all or any part of its business or assets.

 

7.                           Corporation’s Right to
Accelerate Exercise Rights.
Upon the occurrence of an Organic Change, the Corporation shall have the right,
exercisable in the Corporation’s sole discretion, to require that all Options
which have become vested be exercised or become void if not exercised within a
period of fifteen (15) days after the Corporation gives notice that it intends
to consummate a transaction which would be an Organic Change, but in any event
not later than the effective date of the Organic Change. The term “Organic
Change” shall mean (a) a merger of the Corporation with or into another
corporation, (b) a consolidation of the Corporation with another
corporation, (c) sale of all or substantially all of the assets of the
Corporation, (d) sale or transfer of more than fifty percent (50%) of the
issued and outstanding Stock of the Corporation to another person in a single
transaction or series of transactions or (e) the filing of a
registration statement by the Corporation under the Securities Act of 1933, as
amended, with the United States Securities and Exchange Commission (the “SEC”)
for the registration of equity securities of the Corporation.

 

8.                           Adjustment in Option Shares. Should any change be made to the Common
Stock by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation’s receipt of
consideration, appropriate adjustments shall be made to (i) the total
number and/or class of securities subject to this option and (ii) the
Exercise Price in order to reflect such change and thereby preclude a dilution
or enlargement of benefits hereunder.

 

3

 

9.                           Shareholder Rights. The holder of this option shall not have any
shareholder rights with respect to the Option Shares until such person shall
have exercised the option, paid the Exercise Price and become the record holder
of the purchased shares.

 

10.                     Manner of Exercising Option.

 

(a)                      In order to exercise this option with respect
to all or any part of the Option Shares for which this option is at the
time exercisable, Optionee (or any other person or persons exercising the
option) must take the following actions:

 

(i)                          Execute and deliver to the Corporation a
Purchase Agreement for the Option Shares for which the option is exercised.

 

(ii)                       Pay the aggregate Exercise Price for the
purchased shares in one or more of the following forms:

 

(A)                   cash or check made payable to the Corporation;
or

 

(B)                     a
promissory note payable to the Corporation, but only to the extent authorized
by the Plan Administrator in accordance with Paragraph 14.

 

Should the Common Stock be
registered under section 12 of the 1934 Act at the time the option is
exercised, then the Exercise Price may also be paid as follows:

 

(C)                     in shares of Common Stock held by
Optionee (or any other person or persons exercising the option) for the
requisite period necessary to avoid a charge to the Corporation’s earnings for
financial reporting purposes and valued at Fair Market Value on the Exercise
Date; or

 

(D)                    through a special sale and remittance
procedure pursuant to which Optionee (or any other person or persons exercising
the option) shall concurrently provide irrevocable instructions (a) to a
Corporation-designated brokerage firm to effect the immediate sale of the
purchased shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
Exercise Price payable for the purchased shares plus all applicable Federal,
state and local income and employment taxes required to be withheld by the
Corporation by reason of such exercise and (b) to the Corporation to
deliver the certificates for the purchased shares directly to such brokerage
firm in order to complete the sale.

 

Except to the extent the sale
and remittance procedure is utilized in connection with the option exercise,
payment of the Exercise Price

 

4

 

must Accompany the Purchase Agreement delivered to the
Corporation in connection with the option exercise.

 

(E)                      Upon approval of the Plan Administrator, an
Optionee may pay for all or any portion of the aggregate Option exercise
price for any shares of Stock purchased upon the exercise of any Option by
delivering to the Corporation shares of Stock previously held by such Optionee
or, with the prior consent of the Plan Administrator, by having shares withheld
from the amount of shares of Stock to be received by the Optionee. The shares
of Stock received or withheld by the Corporation as payment for shares of Stock
purchased upon the exercise of Options shall have a fair market value at the
date of exercise (as determined by the Plan Administrator) equal to the
aggregate Option exercise price (or portion thereof) to be paid through the
exchange of previously held shares of Stock or through the withholding of
shares of Stock to be received by the Optionee upon exercise.

 

(iii)                    Furnish to the Corporation appropriate
documentation that the person or persons exercising the option (if other than
Optionee) have the right to exercise this option.

 

(iv)                   Execute and deliver to the Corporation such
written representations as may be requested by the Corporation in order
for it to comply with the applicable requirements of Federal and state
securities laws.

 

(v)                      Make appropriate arrangements with the
Corporation (or Parent or Subsidiary employing or retaining Optionee) for the
satisfaction of all Federal, state and local income and employment tax
withholding requirements applicable to the option exercise.

 

(b)                     As soon as practical after the Exercise Date,
the Corporation shall issue to or on behalf of Optionee (or any other person or
persons exercising this option) a certificate for the purchased Option Shares,
with the appropriate legends affixed thereto.

 

(c)                      In no event may this option be exercised
for any fractional shares.

 

11.                     REPURCHASE RIGHTS. ALL SHARES ACQUIRED UPON
THE EXERCISE OF THIS OPTION SHALL BE SUBJECT TO CERTAIN RIGHTS OF THE
CORPORATION AND ITS ASSIGNS TO REPURCHASE THOSE SHARES IN ACCORDANCE WITH THE
TERMS SPECIFIED IN THE PURCHASE AGREEMENT.

 

12.                     Compliance with Laws and
Regulations.

 

(a)                      The exercise of this option and the issuance
of the Option Shares upon such exercise shall be subject to compliance by the
Corporation and Optionee with all

 

5

 

applicable requirements of law relating thereto and with all applicable
regulations of any stock exchange (or the NASDAQ National Market, if
applicable) on which the Common Stock may be listed for trading at the
time of such exercise and issuance.

 

(b)                     The inability of the Corporation to obtain
approval from any regulatory body having authority deemed by the Corporation to
be necessary to the lawful issuance and sale of any Common Stock pursuant to
this option shall relieve the Corporation of any liability with respect to the
non-issuance or sale of the Common Stock as to which such approval shall not
have been obtained. The Corporation, however, shall use its best efforts to
obtain all such approvals.

 

13.                     Successors and Assigns. Except to the extent otherwise provided in
Paragraphs 3 and 6, the provisions of this Agreement shall inure to the benefit
of, and be binding upon, the Corporation and its successors and assigns and
Optionee, Optionee’s assigns and the legal representatives, heirs and legatees
of Optionee’s estate.

 

14.                     Notices. Any notice required to be given or delivered
to the Corporation under the terms of this Agreement shall be in writing and
addressed to the Corporation at its principal corporate offices. Any notice
required to be given or delivered to Optionee shall be in writing and addressed
to Optionee at the address indicated below Optionee’s signature line on the
Grant Notice. All notices shall be deemed effective upon personal delivery or
upon deposit in the U.S. mail, postage prepaid and properly addressed to the
party to be notified.

 

15.                     Financing. The Plan Administrator may, in its absolute
discretion and without any obligation to do so, permit Optionee to pay the
Exercise Price for the purchased Option Shares by delivering a full-recourse,
interest-bearing promissory note secured by those Option Shares. The payment schedule in
effect for any such promissory note shall be established by the Plan Administrator
in its sole discretion.

 

16.                     Construction. This Agreement and the option evidenced
hereby are made and granted pursuant to the Plan and are in all respects
limited by and subject to the terms of the Plan. All decisions of the Plan
Administrator with respect to any question or issue arising under the Plan or
this Agreement shall be conclusive and binding on all persons having an
interest in this option.

 

17.                     Governing Law. The interpretation, performance and
enforcement of this Agreement shall be governed by the laws of the State of
California without resort to that State’s conflict-of-laws rules.

 

18.                     Shareholder Approval. If the Option Shares covered by this
Agreement exceed, as of the Grant Date, the number of shares of Common Stock
which may be issued under the Plan as last approved by the shareholders,
then this option shall be void with respect to such excess shares, unless
shareholder approval of an amendment sufficiently increasing the number

 

6

 

of shares of Common Stock issuable under the Plan is obtained in
accordance with the provisions of the Plan.

 

19.                     Additional Terms Applicable
to an Incentive Option.
In the event this option is designated an Incentive Option in the Grant Notice,
the following terms and conditions shall also apply to the grant:

 

(a)                      This option shall cease to qualify for
favorable tax treatment as an Incentive Option if (and to the extent) this
option is exercised for one or more Option Shares: (i) more than three (3) months
after the date Optionee ceases to be an Employee for any reason other than
death or Permanent Disability or (ii) more than twelve (12) months after
the date Optionee ceases to be an Employee by reason of Permanent Disability.

 

(b)                     This option shall not become exercisable in
the calendar year in which granted if (and to the extent) the aggregate Fair
Market Value (determined at the Grant Date) of the Common Stock for which this
option would otherwise first become exercisable in such calendar year would, when
added to the aggregate value (determined as of the respective date or dates of
grant) of the Common Stock and any other securities for which one or more other
Incentive Options granted to Optionee prior to the Grant Date (whether under
the Plan or any other option plan of the Corporation or any Parent or
Subsidiary) first become exercisable during the same calendar year, exceed One
Hundred Thousand Dollars ($100,000) in the aggregate. To the extent the
exercisability of this option is deferred by reason of the foregoing
limitation, the deferred portion shall become exercisable in the first calendar
year or years thereafter in which the One Hundred Thousand Dollar ($100,000)
limitation of this Paragraph 19(b) would not be contravened, but such
deferral shall in all events end immediately prior to the effective date of a
Corporate Transaction in which this option is not to be assumed, whereupon the
option shall become immediately exercisable as a Non-Statutory Option for the
deferred portion of the Option Shares.

 

7

 

(c)                      Should Optionee hold, in addition to this
option, one or more other options to purchase Common Stock which become
exercisable for the first time in the same calendar year as this option, then
the foregoing limitations on the exercisability of such options as Incentive
Options shall be applied on the basis of the order in which such options are
granted.

 

 

	
   

  	
   

  	
  OBAGI MEDICAL PRODUCTS, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Address:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  OPTIONEE

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Address:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
							

 

8

 

APPENDIX

 

The following definitions shall be in effect under the
Agreement:

 

A.                      Agreement shall mean this Stock Option
Agreement.

 

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

 

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

 

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

 

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

 

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

 

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

 

F.                         Corporation shall mean Obagi Medical
Products, Inc., a California corporation, and any successor corporation to
all or substantially all of the assets or voting stock of Obagi Medical
Products, Inc., which shall by appropriate action adopt the Plan.

 

G.                        Disability shall mean the inability of
Optionee to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment and shall be determined by
the Plan Administrator on the basis of such medical evidence as the Plan
Administrator deems warranted under the circumstances. Disability shall be
deemed to constitute Permanent Disability in the event that such Disability is
expected to result in death or has lasted or can be expected to last for a
continuous period of twelve (12) months or more.

 

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

 

I.                            Exercise Date shall mean the date on
which the option shall have been exercised in accordance with Paragraph 10 of
the Agreement.

 

J.                           Exercise Price shall mean the exercise
price payable per Option Share as specified in the Grant Notice.

 

A-1

 

K.                       Expiration
Date  shall mean the date on which the option expires as specified in
the Grant Notice.

 

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

 

(i)                         If
the Common Stock is at the time traded on the NASDAQ National Market, then the
Fair Market Value shall be the closing selling price per share of Common
Stock on the date in question, as the price is reported by the National
Association of Securities Dealers on the NASDAQ National Market. If there is no
closing selling price for the Common Stock on the date in question, then the
Fair Market Value shall be the closing selling price on the last preceding date
for which such quotation exists.

 

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

 

(iii)                   If the Common Stock is at the time
neither listed on any Stock Exchange nor traded on the NASDAQ National Market
then the Fair Market Value shall be determined by the Plan Administrator after
taking into account such factors as the Plan Administrator shall deem
appropriate.

 

M.                    Grant Date  shall mean the date of grant
of the option as specified in the Grant Notice.

 

N.                       Grant Notice  shall mean the Notice of
Grant of Stock Option accompanying the Agreement, pursuant to which Optionee
has been informed of the basic terms of the option evidenced hereby.

 

O.                       Incentive Option  shall mean an option
which satisfies the requirements of Code section 422.

 

P.                         Misconduct  shall mean the commission of
any act of fraud, embezzlement or dishonesty by Optionee, any unauthorized use
or disclosure by Optionee of confidential information or trade secrets of the
Corporation (or any Parent or Subsidiary), or any other intentional misconduct
by Optionee adversely affecting the business or affairs of the Corporation (or
any Parent or Subsidiary) in a material manner. The foregoing definition shall
not be deemed

 

A-2

 

to be inclusive of all the acts or omissions which the Corporation (or
any Parent or Subsidiary) may consider as grounds for the dismissal or
discharge of Optionee or any other individual in the Service of the Corporation
(or any Parent or Subsidiary).

 

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

 

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

 

S.                         Option Shares shall mean the number of
shares of Common Stock subject to the option.

 

T.                        Optionee shall mean the person to whom
the option is granted as specified in the Grant Notice.

 

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

 

V.                        Plan shall mean the Corporation’s 2000
Stock Option/Stock Issuance Plan.

 

W.                   Plan Administrator shall mean either
the Board or a committee of the Board acting in its capacity as administrator
of the Plan.

 

X.                       Purchase Agreement shall mean the stock
purchase agreement in substantially the form of Exhibit B to the
Grant Notice.

 

Y.                        Service shall mean the Optionee’s
performance of services for the Corporation (or any Parent or Subsidiary) in
the capacity of an Employee, a non-employee member of the board of directors or
an independent consultant.

 

Z.                        Stock Exchange shall mean the American
Stock Exchange or the New York Stock Exchange.

 

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

 

A-3

 

BB.                Vesting Schedule shall
mean the vesting schedule specified in the Grant Notice pursuant to which
the Optionee is to vest in the Option Shares in a series of installments
over his or her period of Service.

 

A-4

 

OBAGI
MEDICAL PRODUCTS, INC. 

STOCK ISSUANCE AGREEMENT

 

AGREEMENT made as of this            
day of             199   ,
by and between Obagi Medical Products, Inc., a California corporation, and
              ,
Participant in the Corporation’s 2000 Stock Option/Stock Issuance Plan.

 

All capitalized terms in this
Agreement shall have the meaning assigned to them in this Agreement or in the
attached Appendix.

 

A.                      PURCHASE OF SHARES

 

1.                           Purchase. Participant hereby purchases                   
shares of Common Stock (the “Purchased Shares”) pursuant to the provisions of
the Stock Issuance Program at the purchase price of $               
per share (the “Purchase Price”).

 

2.                           Payment. Concurrently with the delivery of this Agreement
to the Corporation, Participant shall pay the Purchase Price for the Purchased
Shares in cash or cash equivalent and shall deliver a duly-executed blank
Assignment Separate from Certificate (in the form attached hereto as Exhibit 1)
with respect to the Purchased Shares.

 

3.                           Stockholder Rights. Until such time as the Corporation exercises
the Repurchase Right or the First Refusal Right, Participant (or any successor
in interest) shall have all stockholder rights (including voting, dividend and
liquidation rights) with respect to the Purchased Shares, subject, however, to
the transfer restrictions of Articles B and C and the provisions of Article H.

 

B.                        SECURITIES LAW COMPLIANCE

 

1.                           Restricted Securities. The Purchased Shares have not been
registered under the 1933 Act and are being issued to Participant in reliance
upon the exemption from such registration provided by SEC Rule 701 for
stock issuances under compensatory benefit plans such as the Plan. Participant
hereby confirms that Participant has been informed that the Purchased Shares
are restricted securities under the 1933 Act and may not be resold or
transferred unless the Purchased Shares are first registered under the Federal
securities laws or unless an exemption from such registration is available.
Accordingly, Participant hereby acknowledges that Participant is prepared to
hold the Purchased Shares for an indefinite period and that Participant is
aware that SEC Rule 144 issued under the 1933 Act which exempts certain
resales of unrestricted securities is not presently available to exempt the
resale of the Purchased Shares from the registration requirements of the 1933
Act.

 

1

 

2.                           Disposition of Purchased
Shares. Participant shall
make no disposition of the Purchased Shares (other than a Permitted Transfer)
unless and until there is compliance with all of the following requirements:

 

(i)                         Participant shall have provided the
Corporation with a written summary of the terms and conditions of the proposed
disposition.

 

(ii)                      Participant shall have complied with all
requirements of this Agreement applicable to the disposition of the Purchased
Shares.

 

(iii)                   Participant shall have provided the
Corporation with written assurances, in form and substance satisfactory to
the Corporation, that (a) the proposed disposition does not require
registration of the Purchased Shares under the 1933 Act or (b) all
appropriate action necessary for compliance with the registration requirements
of the 1933 Act or any exemption from registration available under the 1933 Act
(including Rule 144) has been taken.

 

The Corporation shall not
be required (i) to transfer on its books any Purchased Shares which have
been sold or transferred in violation of the provisions of this Agreement or
(ii) to treat as the owner of the Purchased Shares, or otherwise to accord
voting, dividend or liquidation rights to, any transferee to whom the Purchased
Shares have been transferred in contravention of this Agreement.

 

3.                           Restrictive Legends. The stock certificates for the Purchased
Shares shall be endorsed with one or more of the following restrictive legends:

 

“The shares represented by
this certificate have not been registered under the Securities Act of 1933. The
shares may not be sold or offered for sale in the absence of (a) an
effective registration statement for the shares under such Act, (b) a “no
action” letter of the Securities and Exchange Commission with respect to such
sale or offer or (c) satisfactory assurances to the Corporation that
registration under such Act is not required with respect to such sale or offer.”

 

“The shares represented by
this certificate are subject to certain repurchase rights and rights of first
refusal granted to the Corporation and accordingly may not be sold,
assigned, transferred, encumbered, or in any manner disposed of except in
conformity with the terms of a written agreement dated                   ,
200     between the Corporation and the registered holder
of the shares (or the predecessor in interest to the shares). A copy of such
agreement is maintained at the Corporation’s principal corporate offices.”

 

2

 

C.                        TRANSFER RESTRICTIONS

 

1.                           Restriction on Transfer. Except for any Permitted Transfer, Participant
shall not transfer, assign, encumber or otherwise dispose of any of the
Purchased Shares which are subject to the Repurchase Right. In addition,
Purchased Shares which are released from the Repurchase Right shall not be
transferred, assigned, encumbered or otherwise disposed of in contravention of
the First Refusal Right or the Market Stand-Off.

 

2.                           Transferee Obligations.

 

(a)                      Each transferee or any subsequent transferee
of shares of the Corporation, or any interest in such shares, shall, unless
this Agreement expressly provides otherwise, hold such shares or interest in
the shares subject to all of the provisions of this Agreement and shall make no
further transfers except as permitted in this Agreement. All such transferees
shall also execute copies of this Agreement at the time of transfer.

 

(b)                     If any person (other than the Corporation)
owns stock pursuant to a Permitted Transfer as defined in this Agreement, then
for purposes of this Agreement, the bankruptcy, assignment to creditors,
disability or death of the Optionee who transferred said shares shall cause the
provisions of Article E to be applied to purchase the stock owned by the
transferee.

 

3.                           Market Stand-Off.

 

(a)                      In connection with any underwritten public
offering by the Corporation of its equity securities pursuant to an effective
registration statement filed under the 1933 Act, including the Corporation’s
initial public offering, Owner shall not sell, make any short sale of, loan,
hypothecate, pledge, grant any option for the purchase of, or otherwise dispose
or transfer for value or otherwise agree to engage in any of the foregoing
transactions with respect to, any Purchased Shares without the prior written
consent of the Corporation or its underwriters. Such restriction (the “Market
Stand-Off’) shall be in effect for such period of time from and after the
effective date of the final prospectus for the offering as may be
requested by the Corporation or such underwriters. In no event however, shall
such period exceed one hundred eighty (180) days and the Market Stand-Off shall
in all events terminate two (2) years after the effective date of the
Corporation’s initial public offering.

 

(b)                     Owner shall be subject to the Market Stand-Off
provided and only if the officers and directors of the Corporation are
also subject to similar restrictions.

 

(c)                      Any new, substituted or additional securities
which are by reason of any Recapitalization or Reorganization distributed with
respect to the Purchased Shares shall be immediately subject to the Market
Stand-Off, to the same extent the Purchased Shares are at such time covered by
such provisions.

 

3

 

(d)                     In order to enforce the Market Stand-Off, the
Corporation may impose stop-transfer instructions with respect to the
Purchased Shares until the end of the applicable stand-off period.

 

D.                       REPURCHASE RIGHT AS TO
UNVESTED SHARES

 

1.                           Grant. The Corporation is hereby granted the right
(the “Repurchase Right”), exercisable at any time during the sixty (60) day period
following the date Participant ceases for any reason to remain in Service; to
repurchase at the Purchase Price any or all of the Purchased Shares in which
Participant is not, at the time of his or her cessation of Service, vested in
accordance with the provisions of the Vesting Schedule set forth in
Paragraph D.3 or the special accelerated vesting provisions of Paragraph D.5
(such shares to be hereinafter referred to as the “Unvested Shares”).

 

2.                           Exercise of the Repurchase
Right. The Repurchase
Right shall be exercisable by written notice delivered to each Owner of the
Unvested Shares prior to the expiration of the sixty (60) day exercise period.
The notice shall indicate the number of Unvested Shares to be repurchased and
the date on which the repurchase is to be effected, such date to be not more
than thirty (30) days after the date of such notice. The certificates
representing the Unvested Shares to be repurchased shall be delivered to the
Corporation on or before the close of business on the date specified for the
repurchase. Concurrently with the receipt of such stock certificates, the
Corporation shall pay to Owner, in cash or cash equivalents (including the
cancellation of any purchase-money indebtedness), an amount equal to the
Purchase Price previously paid for the Unvested Shares which are to be
repurchased from Owner.

 

3.                           Termination of the Repurchase Right. The Repurchase Right shall terminate with
respect to any Unvested Shares for which it is not timely exercised under
Paragraph D.2. In addition, the Repurchase Right shall terminate and cease to
be exercisable with respect to any and all Purchased Shares in which
Participant vests in accordance with the following Vesting Schedule:

 

Participant shall vest in
twenty-five percent (25%) of the Purchased Shares, and the Repurchase Right
shall concurrently lapse with respect to those Purchased Shares, upon
Participant’s completion of one (1) year of Service measured from                                      ,
200    .

 

Participant shall vest in the
remaining seventy-five percent (75%) of the Purchased Shares, and the
Repurchase Right shall concurrently lapse with respect to those Purchased
Shares, in a series of thirty-six (36) successive equal monthly
installments upon Participant’s completion of each additional month of Service
over the thirty-six (36) month period measured

 

4

 

from the date on which the
first twenty-five percent (25%) of the Purchased Shares vests hereunder.

 

All Purchased Shares as to
which the Repurchase Right lapses shall, however, remain subject to (i) the
First Refusal Right and (ii) the Market Stand-Off.

 

4.                           Recapitalization. Any new, substituted or additional
securities or other property (including cash paid other than as a regular cash
dividend) which is by reason of any Recapitalization distributed with respect
to the Purchased Shares shall be immediately subject to the Repurchase Right
and any escrow requirements hereunder, but only to the extent the Purchased
Shares are at the time covered by such right or escrow requirements.
Appropriate adjustments to reflect such distribution shall be made to the
number and/or class of Purchased Shares subject to this Agreement and to
the price per share to be paid upon the exercise of the Repurchase Right in
order to reflect the effect of any such Recapitalization upon the Corporation’s
capital structure; provided however, that the aggregate purchase price
shall remain the same.

 

5.                           Corporate Transaction.

 

(a)                      The Repurchase Right shall automatically
terminate in its entirety, and all the Purchased Shares shall vest in full,
immediately prior to the consummation of any Corporate Transaction, except to
the extent the Repurchase Right is to be assigned to the successor entity in
such Corporate Transaction.

 

(b)                     To the extent the Repurchase Right remains in
effect following a Corporate Transaction, such right shall apply to any new
securities or other property (including any cash payments) received in exchange
for the Purchased Shares in consummation of the Corporate Transaction, but only
to the extent the Purchased Shares are at the time covered by such right.
Appropriate adjustments shall be made to the price per share payable upon
exercise of the Repurchase Right to reflect the effect of the Corporate
Transaction upon the Corporation’s capital structure; provided, however,
that the aggregate purchase price shall remain the same. The new securities or
other property (including any cash payments) issued or distributed with respect
to the Purchased Shares in consummation of the Corporate Transaction shall be
immediately deposited in escrow with the Corporation (or the successor entity)
and shall not be released from escrow until Participant vests in such
securities or other property in accordance with the same Vesting Schedule in
effect for the Purchased Shares.

 

6.                           Lapse. The Repurchase Right shall lapse upon the
earliest to occur of (i) the first date on which shares of the Common
Stock are held of record by more than five hundred (500) persons, (ii) a
determination is made by the Board that a public market exists for the
outstanding shares of Common Stock or (iii) a firm commitment underwritten
public offering, pursuant to an effective registration statement under the 1933
Act, covering the offer and sale of the Common Stock in the aggregate amount of
at least ten million dollars

 

5

 

($10,000,000). However, the Market Stand-Off
shall continue to remain in full force and effect following the lapse of the
Repurchase Right.

 

E.                         PURCHASE OPTION AS TO VESTED
SHARES

 

1.                          Corporation’s Option to
Purchase. In the event of the
Participant’s termination of service for any reason, the Corporation shall have
the option (the “Purchase Option”), but not the obligation, to purchase all or
any part of the Shares issued pursuant to this Agreement (including,
without limitation, Shares purchased after termination of employment,
Disability or death). In the event the Corporation does not, upon the
termination of service of the Participant, exercise its option pursuant to this
Article E, the restrictions set forth in the balance of this Agreement
shall not thereby lapse, and the Participant for himself or herself, his or her
heirs, legatees, executors, administrators and other successors in interest,
agrees that the Shares shall remain subject to such restrictions. The following
provisions shall apply to a purchase under this Article E:

 

(a)                      Purchase Price. The per share purchase price of the Shares to
be sold to the Corporation upon exercise of its option under this Article E
shall be equal to the Fair Market Value of each such Share determined in
accordance with the Plan as of the date of termination of service provided that
Participant was not terminated for Misconduct. In the event Participant’s
service is terminated for Misconduct, the price per Share of the Shares to be
sold to the Corporation upon exercise of this option shall be equal to the
exercise price paid per Share.

 

(b)                      Purchase Exercise Period. The Corporation’s option to purchase the
Participant’s Purchased Shares in the event of termination of service shall be
valid for a period of three (3) months commencing with the date of such
termination of service or (if later) the three (3) month period following
the execution of this Agreement in the event such shares are purchased after
termination, Disability or death.

 

(c)                      Notification. In the event the Corporation shall be
entitled to and shall elect to exercise its option to purchase the Participant’s
Purchased Shares under this Article E, the Corporation shall notify the
Participant, or in case of death, his or her representative, in writing of its
intent to purchase the Shares. Such written notice may be mailed by the
Corporation up to and including the last day of the time period provided for in
subparagraph (l)(b) for exercise of the Corporation’s option to purchase.

 

(d)                      Closing. The written notice to the Participant shall
specify the address at, and the time and date on, which payment of the purchase
price is to be made (the “Closing”). The date specified shall not be less than
ten (10) days nor more than sixty (60) days from the date of the mailing
of the notice, and the Participant or his or her successor in interest with
respect to the Shares shall have no further rights as the owner thereof from
and after the date specified in the notice. At the Closing, the purchase price
shall be delivered to the Participant or his or her successor in interest and
the Shares being purchased, duly endorsed for transfer, shall,

 

6

 

to the extent that they are not then in the
possession of the Corporation, be delivered to the Corporation by the
Participant or his or her successor in interest.

 

2.                          Lapse. The Purchase Option shall lapse upon the
earliest to occur of (i) the first date on which shares of the Common
Stock are held of record by more than five hundred (500) persons, (ii) a
determination is made by the Board that a public market exists for the
outstanding shares of Common Stock or (iii) a firm commitment underwritten
public offering, pursuant to an effective registration statement under the 1933
Act, covering the offer and sale of the Common Stock in the aggregate amount of
at least ten million dollars ($10,000,000). However, the Market Stand-Off shall
continue to remain in full force and effect following the lapse of the Purchase
Option.

 

F.                         RIGHT OF FIRST REFUSAL

 

1.                           Grant. The Corporation is hereby granted the right
of first refusal (the “First Refusal Right”), exercisable in connection with
any proposed transfer of the Purchased Shares in which Participant has vested
in accordance with the foregoing provisions. For purposes of this Article F,
the term “transfer” shall include any sale, assignment pledge, encumbrance or
other disposition of the Purchased Shares intended to be made by Owner, but
shall not include any Permitted Transfer.

 

2.                           Notice of Intended
Disposition. In the event
any Owner of Purchased Shares in which Participant has vested desires to accept
a bona fide third-party offer for the transfer of any or all of such shares
(the Purchased Shares subject to such offer to be hereinafter referred to as
the “Target Shares”), Owner shall promptly (i) deliver to the Corporation
written notice (the “Disposition Notice”) of the terms of the offer, including
the purchase price and the identity of the third-party offeror, and (ii) provide
satisfactory proof that the disposition of the Target Shares to such
third-party offeror would not be in contravention of the provisions set forth
in Articles B and C.

 

3.                           Exercise of the First Refusal
Right. The Corporation
shall, for a period of twenty-five (25) days following receipt of the
Disposition Notice, have the right to repurchase any or all of the Target
Shares subject to the Disposition Notice upon the same terms as those specified
therein or upon such other terms (not materially different from those specified
in the Disposition Notice) to which Owner consents. Such right shall be
exercisable by delivery of written notice (the “Exercise Notice”) to Owner
prior to the expiration of the twenty-five (25) day exercise period. If such
right is exercised with respect to all the Target Shares, then the Corporation
shall effect the repurchase of such shares, including payment of the purchase
price, not more than five (5) business days after delivery of the Exercise
Notice; and at such time the certificates representing the Target Shares shall
be delivered to the Corporation.

 

Should the purchase price
specified in the Disposition Notice be payable in property other than cash or
evidences of indebtedness, the Corporation shall have the right to pay the
purchase price in the form of cash equal in amount to the value of such
property. If Owner

 

7

 

and the Corporation cannot agree on such cash
value within ten (10) days after the Corporation’s receipt of the
Disposition Notice, the valuation shall be made by an appraiser of recognized
standing selected by Owner and the Corporation or, if they cannot agree on an
appraiser within twenty (20) days after the Corporation’s receipt of the
Disposition Notice, each shall select an appraiser of recognized standing and
the two (2) appraisers shall designate a third appraiser of recognized
standing, whose appraisal shall be determinative of such value. The cost of
such appraisal shall be shared equally by Owner and the Corporation. The
closing shall then be held on the later of (i) the fifth (5th)
business day following delivery of the Exercise Notice or (ii) the fifth
(5th) business day after such valuation shall have been made.

 

4.                           Non-Exercise of the First
Refusal Right. In the
event the Exercise Notice is not given to Owner prior to the expiration of the
twenty-five (25) day exercise period, Owner shall have a period of thirty (30)
days thereafter in which to sell or otherwise dispose of the Target Shares to
the third-party offeror identified in the Disposition Notice upon terms
(including the purchase price) no more favorable to such third-party offeror than
those specified in the Disposition Notice; provided, however, that any
such sale or disposition must not be effected in contravention of the
provisions of Articles B and C. In the event Owner does not effect such sale or
disposition of the Target Shares within the specified thirty (30) day period,
the First Refusal Right shall continue to be applicable to any subsequent
disposition of the Target Shares by Owner until such right lapses.

 

5.                           Partial Exercise of the First
Refusal Right. In the event the Corporation makes a timely
exercise of the First Refusal Right with respect to a portion, but not all, of
the Target Shares specified in the Disposition Notice, Owner shall have the
option, exercisable by written notice to the Corporation delivered within five (5) business
days after Owner’s receipt of the Exercise Notice, to effect the sale of the
Target Shares pursuant to either of the following alternatives:

 

(i)                         sale or other disposition of all the Target
Shares to the third-party offeror identified in the Disposition Notice, but in
full compliance with the requirements of Paragraph F.4, as if the Corporation
did not exercise the First Refusal Right; or

 

(ii)                      sale to the Corporation of the portion of the
Target Shares which the Corporation has elected to purchase, such sale to be
effected in substantial conformity with the provisions of Paragraph F.3. The
First Refusal Right shall continue to be applicable to any subsequent
disposition of the remaining Target Shares until such right lapses.

 

Owner’s failure to deliver
timely notification to the Corporation shall be deemed to be an election by
Owner to sell the Target Shares pursuant to alternative (i) above.

 

8

 

6.                           Recapitalization/Reorganization.

 

(a)                      Any new, substituted or additional securities
or other property which is by reason of any Recapitalization distributed with
respect to the Purchased Shares shall be immediately subject to the First
Refusal Right, but only to the extent the Purchased Shares are at the time
covered by such right.

 

(b)                     In the event of a Reorganization, the First
Refusal Right shall remain in full force and effect and shall apply to the new
capital stock or other property received in exchange for the Purchased Shares
in consummation of the Reorganization, but only to the extent the Purchased
Shares are at the time covered by such right.

 

7.                           Lapse. The First Refusal Right shall lapse upon the
earliest to occur of (i) the first date on which shares of the Common
Stock are held of record by more than five hundred (500) persons, (ii) a
determination is made by the Board that a public market exists for the
outstanding shares of Common Stock or (iii) a firm commitment underwritten
public offering, pursuant to an effective registration statement under the 1933
Act, covering the offer and sale of the Common Stock in the aggregate amount of
at least ten million dollars ($10,000,000). However, the Market Stand-Off shall
continue to remain in full force and effect following the lapse of the First Refusal
Right.

 

G.                        MARITAL DISSOLUTION

 

For a period of six (6) months
from the time written notice is received of the marital dissolution of any
employee of the Corporation who is a shareholder, the Corporation may give
written notice lo said employee and said employee’s spouse that it elects to
purchase the interest of said employee’s spouse in the Corporation’s shares for
cash at their market value. The purchase price shall be paid within thirty (30)
days after the market value of the shares is determined hereunder.

 

The market value purchase
price shall be determined by both parties and if they are unable to agree by an
appraiser acceptable to both parties. If the parties are unable to agree on a
price or on an appraiser within thirty (30) days following the date of the
Corporation’s written notice of election to purchase, each party shall name his
own appraiser. If the lower of the two resulting market value purchase prices
varies from the higher price by more than ten (10%) percent of the higher
price, the original appraisers shall appoint a third, whose determination of
the price shall be final. Otherwise, the purchase price shall be the mean
between the two purchase prices originally determined. The parties shall share
equally the fees and expenses of the appraisers jointly named, but each party
shall be responsible for the fees and expenses of any appraiser named solely by
him. Each party shall bear his own expenses in presenting evidence to the two
appraisers.

 

9

 

In determining the market value purchase price, the
appraisers appointed under this Agreement shall consider all options and
relevant evidence submitted to them by the parties, or otherwise obtained by
them, and shall set forth their determination in writing together with their
opinions and the considerations on which the opinions are based, with a signed
counterpart to be delivered to each party within thirty (30) days of
commencing appraisal.

 

H.                       DRAG-ALONG RIGHTS

 

1.                           Drag Along Sale. In the event that the
Corporation determines to accept an offer from any Person to purchase 100% of
the outstanding shares of the Corporation, then each of the shareholders shall
sell all Purchased Shares held by them pursuant to such offer to purchase (the “Drag-Along
Sale”). All Shareholders in such Drag-Along Sale (i) shall receive the
same consideration per Purchased Share, shall be subject to the same terms and
conditions of sale and shall otherwise be treated equally (other than with
respect to reasonable employment arrangements) or, where appropriate, pro rata
based upon the number of Purchased Shares held by each shareholder and (ii) shall
execute such documents and take such actions as may be reasonably required
to effect the sale of the Purchased Shares.

 

2.                           Liabilities. All shareholders shall
share pro rata, based upon the number of Purchased Shares being sold by each (i) in
any indemnity liabilities to the purchaser in the Drag-Along Sale (other than
representations as to unencumbered ownership of and ability to transfer the
Purchased Shares being sold of any other seller in the Drag-Along Sale, which
shall be the sole responsibility of such other seller) and (ii) in any
escrow for the purpose of satisfying any such indemnity liabilities.

 

3.                           Notice. The Corporation shall promptly
provide each shareholder with written notice (the “Sale Notice”) not more than
sixty (60) nor less than thirty (30) days prior to the date of the Drag-Along
Sale (the “Drag-Along Sale Date”). Each Sale Notice shall set forth: (i) the
name and address of each proposed transferee or purchaser of Purchased Shares
in the Drag-Along Sale; (ii) the proposed amount and form of
consideration to be paid for such Purchased Shares and the terms and conditions
of payment offered by each proposed transferee or purchaser; (iii) confirmation
that the proposed purchaser or transferee has been informed of the “Drag-Along
Rights” provided for herein and has agreed to purchase said Purchased Shares in
accordance with the terms hereof, and (iv) the Drag-Along Sale Date.

 

I.                            SPECIAL TAX ELECTION

 

1.                           Section 83(b) Election. Under
Code Section 83, the excess of the Fair Market Value of the Purchased
Shares on the date any forfeiture restrictions applicable to such shares lapse
over the Purchase Price paid-for such shares will be reportable as ordinary
income on the lapse date. For this purpose, the term “forfeiture restrictions”
includes the right of the Corporation to repurchase the Purchased Shares
pursuant to the Repurchase Right and/or Purchase Option. Participant may elect
under Code Section 83(b) to be taxed at the time the

 

10

 

Purchased Shares are acquired, rather than when and as such Purchased
Shares cease to be subject to such forfeiture restrictions. Such election must
be filed with the Internal Revenue Service within thirty (30) days after the
date of this Agreement. Even if the Fair Market Value of the Purchased Shares
on the date of this Agreement equals the Purchase Price paid (and thus no tax
is payable), the election must be made to avoid adverse tax consequences in the
future. THE FORM FOR MAKING THIS
ELECTION IS ATTACHED AS EXHIBIT H HERETO. PARTICIPANT UNDERSTANDS THAT
FAILURE TO MAKE THIS FILING WITHIN THE APPLICABLE THIRTY (30) DAY PERIOD WILL RESULT
IN THE RECOGNITION OF ORDINARY INCOME AS THE FORFEITURE RESTRICTIONS LAPSE.

 

2.                          FILING
RESPONSIBILITY. PARTICIPANT ACKNOWLEDGES THAT IT IS PARTICIPANT’S SOLE
RESPONSIBILITY, AND NOT THE CORPORATION’S, TO FILE A TIMELY ELECTION UNDER CODE
SECTION 83(b), EVEN IF PARTICIPANT REQUESTS THE CORPORATION OR ITS
REPRESENTATIVES TO MAKE THIS FILING ON HIS OR HER BEHALF.

 

J.                           GENERAL PROVISIONS

 

1.                           Assignment. The Corporation may assign
the Repurchase Right, Purchase Option, and/or the First Refusal Right to any
person or entity selected by the Board, including (without limitation) one or
more stockholders of the Corporation.

 

2.                           No Employment or Service Contract.
Nothing in this Agreement or in the Plan shall confer upon Participant any
right to continue in Service for any period of specific duration or interfere
with or otherwise restrict in any way the rights of the Corporation (or any
Parent or Subsidiary employing or retaining Participant) or of Participant
which rights are hereby expressly reserved by each, to terminate Participant’s
Service at any time for any reason, with or without cause.

 

3.                           Notice. Any notice required to be given
under this Agreement shall be in writing and shall be deemed effective upon
personal delivery or upon deposit in the U.S. mail, registered or certified,
postage prepaid and properly addressed to the party entitled to such notice at
the address indicated below such party’s signature line on this Agreement or at
such other address as such party may designate by ten (10) days
advance written notice under this paragraph to all other parties to this
Agreement.

 

4.                           No Waiver. The failure of the
Corporation in any instance to exercise the Repurchase Right or the First
Refusal Right shall not constitute a waiver of any other repurchase rights
and/or rights of first refusal that may subsequently arise under the
provisions of this Agreement or any other agreement between the Corporation and
Participant. No waiver of any breach or condition of this Agreement shall be
deemed to be a waiver of any other or subsequent breach or condition, whether
of like or different nature.

 

11

 

5.                           Cancellation of Shares. If the
Corporation shall make available, at the time and place and in the amount and form provided
in this Agreement, the consideration for the Purchased Shares to be repurchased
in accordance with the provisions of this Agreement, then from and after such
time, the person from whom such shares are to be repurchased shall no longer
have any rights as a holder of such shares (other than the right to receive
payment of such consideration in accordance with this Agreement). Such shares
shall be deemed purchased in accordance with the applicable provisions hereof,
and the Corporation shall be deemed the owner and holder of such shares,
whether or not the certificates therefor have been delivered as required by
this Agreement.

 

K.                       MISCELLANEOUS PROVISIONS

 

1.                           Governing Law. This Agreement shall be
governed by, and construed in accordance with, the laws of the State of
California without resort to that State’s conflict-of-laws rules.

 

2.                           Participant Undertaking. Participant
hereby agrees to take whatever additional action and execute whatever
additional documents the Corporation may deem necessary or advisable in
order to carry out or effect one or more of the obligations or restrictions
imposed on either Participant or the Purchased Shares pursuant to the
provisions of this Agreement.

 

3.                           Agreement Is Entire Contract. This
Agreement constitutes the entire contract between the parties hereto with
regard to the subject matter hereof. This Agreement is made pursuant to the
provisions of the Plan and shall in all respects be construed in conformity
with the terms of the Plan.

 

4.                           Counterparts. This Agreement may be
executed in counterparts, each of which shall be deemed to be an original, but
all of which together shall constitute one and the same instrument.

 

12

 

5.                           Successors and Assigns. The provisions
of this Agreement shall inure to the benefit of, and be binding upon, the
Corporation and its successors and assigns and upon Participant, Participant’s
assigns and the legal representatives, heirs and legatees of Participant’s
estate, whether or not any such person shall have become a party to this
Agreement and have agreed in writing to join herein and be bound by the terms
hereof.

 

IN WITNESS WHEREOF, the
parties have executed this Agreement on the day and year first indicated above.

 

 

	
   

  	
   

  	
  OBAGI MEDICAL PRODUCTS, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Address:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  PARTICIPANT

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Address:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
							

 

13

 

SPOUSAL ACKNOWLEDGMENT

 

The undersigned spouse of Participant has read and
hereby approves the foregoing Stock Issuance Agreement. In consideration of the
Corporation’s granting Participant the right to acquire the Purchased Shares in
accordance with the terms of such Agreement, the undersigned hereby agrees to
be irrevocably bound by all the terms of such Agreement, including (without
limitation) the right of the Corporation (or its assigns) to purchase any
Purchased Shares in which Participant is not vested at the time of his or her
cessation of Service. I hereby consent to such sale, approve of the provisions
of the Agreement, and agree that these shares and my interest in them are
subject to the provisions of the Agreement and that I will take no action at
any time to hinder the operation of the Agreement on those shares or my
interest in them.

 

	
   

  	
   

  	
   

  
	
   

  	
  PARTICIPANT’S SPOUSE

  	
   

  
	
   

  	
   

  
	
   

  	
  Address:

  
	
   

  	
   

  	
   

  

 

14

 

EXHIBIT I

 

ASSIGNMENT
SEPARATE FROM CERTIFICATE

 

FOR VALUE RECEIVED               
hereby sell(s), assign(s) and transfer(s) unto Obagi Medical Products, Inc.
(the “Corporation”),                 
(        ) shares of the Common Stock
of the Corporation standing in his or her name on the books of the Corporation
represented by Certificate No.       
herewith and do(es) hereby irrevocably constitute and appoint                    
Attorney to transfer the said stock on the books of the Corporation with full
power of substitution in the premises.

 

	
  Dated:

  	
   

  	
   

  
	
   

  
	
   

  
	
  Signature

  	
   

  	
   

  
				

 

 

Instruction: Please
do not fill in any blanks other than the signature line. Please sign exactly as
you would like your name to appear on the issued stock certificate. The purpose
of this assignment is to enable the Corporation to exercise the Repurchase
Right or Purchase Option without requiring additional signatures on the part of
Participant.

 

15

 

APPENDIX

 

The following definitions shall be in effect under the
Agreement:

 

A.                      Agreement shall mean this Stock
Purchase Agreement.

 

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

 

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

 

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

 

E.                         Corporate Transaction shall mean either
of the following shareholder-approved transactions:

 

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

 

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

 

F.                         Corporation shall mean Obagi Medical
Products, Inc., a California corporation, and any successor corporation to
all or substantially all of the assets or voting stock of Obagi Medical
Products, Inc. which shall by appropriate action adopt the Plan.

 

G.                        Disposition Notice shall have the
meaning assigned to such term in Paragraph E.2.

 

H.                      Exercise Notice  shall have the meaning
assigned to such term in Paragraph E.3.

 

I.                            Exercise Price shall have the meaning
assigned to such term in Paragraph A.1.

 

J.                           Fair Market Value  of a share of Common
Stock on any relevant date, prior to the initial public offering of the Common
Stock, shall be determined by the Plan Administrator after taking into account
such factors as it shall deem appropriate.

 

K.                       First Refusal Right  shall mean the
right granted to the Corporation in accordance with Article E.

 

I.                            Grant Date  shall have the meaning
assigned to such term in Paragraph A.1.

 

A-1

 

M.                    Grant Notice shall mean the Notice of
Grant of Stock Option pursuant to which Optionee has been informed of the basic
terms of the Option.

 

N.                       Incentive Option shall mean an option
which satisfies the requirements of Code section 422.

 

O.                       Market Stand-Off shall mean the market
stand-off restriction specified in Paragraph C.3.

 

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

 

Q.                       1993 Act shall mean the Securities Act of
1933, as amended.

 

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

 

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

 

T.                        Option shall have the meaning assigned
to such term in Paragraph A.1.

 

U.                       Option Agreement shall mean all
agreements and other documents evidencing the Option.

 

V.                        Optionee shall mean the person to whom
the Option is granted under the Plan.

 

W.                   Owner shall mean Optionee and all
subsequent holders of the Purchased Shares who derive their chain of ownership
through a Permitted Transfer from Optionee.

 

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

 

Y.                        Permitted Transfer shall mean (i) a
gratuitous transfer of the Purchased Shares, provided and only if Optionee
obtains the Corporation’s prior written consent to such transfer, (ii) a
transfer of title to the Purchased Shares effected pursuant to Optionee’s will
or the laws of

 

A-2

 

intestate succession following Optionee’s death or (iii) a
transfer to the Corporation in pledge as security for any purchase-money
indebtedness incurred by Optionee in connection with the acquisition of the
Purchased Shares.

 

Z.                        Plan  shall mean the Corporation’s 2000
Stock Option/Stock Issuance Plan.

 

AA.            Plan Administrator  shall mean either
the Board or a committee of the Board acting in its capacity as administrator
of the Plan.

 

BB.                Purchased Shares shall have the meaning
assigned to such term in Paragraph A.1.

 

CC.                Recapitalization  shall mean any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the Corporation’s outstanding Common Stock as a
class without the Corporation’s receipt of consideration.

 

DD.              Reorganization shall mean any of the
following transactions:

 

(i)                         a
merger or consolidation in which the Corporation is not the surviving entity,

 

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

 

(iii)                   a reverse merger in which the
Corporation is the surviving entity but in which the Corporation’s outstanding
voting securities are transferred in whole or in part to a person or
persons different from the persons holding those securities immediately prior
to the merger, or

 

(iv)                  any
transaction effected primarily to change the state in which the Corporation is
incorporated or to create a holding company structure.

 

EE.                  Repurchase Right shall mean the right
granted to the Corporation in accordance with Article D.

 

FF.                  SEC shall mean the Securities and
Exchange Commission.

 

GG.                Service shall mean the Optionee’s
performance of services for the Corporation (or any Parent or Subsidiary) in
the capacity of an employee, subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance, a non-employee member of the board of directors or an
independent consultant.

 

HH.              Subsidiary shall mean any corporation
(other than the Corporation) in an unbroken chain of corporations beginning
with the Corporation, provided each corporation (other than the last
corporation) in the unbroken chain owns, at the time of the determination,
stock

 

A-3

 

possessing fifty percent (50%) or more of the total combined voting
power of all classes of stock in one of the other corporations in such chain.

 

II.                        Target Shares shall have the meaning
assigned to’ such term in Paragraph E.2.

 

JJ.                      Vesting Schedule shall mean the
vesting schedule specified in the Grant Notice pursuant to which the
Optionee is to vest in the Option Shares in a series of installments over
his or her period of Service.

 

A-4

 

OBAGI MEDICAL PRODUCTS, INC.

NOTICE OF GRANT OF STOCK OPTION

 

Notice is hereby given of the
following option grant (the “Option”) to purchase shares of the Common Stock of
Obagi Medical Products, Inc. (the “Corporation”):

 

	
  Optionee:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Grant Date:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Exercise Price:
  

  	
  $

  	
   

  	
   per
  share

  
	
   

  	
   

  	
   

  	
   

  
	
  Number of Option Shares:

  	
   

  	
   

  	
   shares
  of Common Stock

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Expiration Date:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Type of Option:

  	
   

  	
  o  Incentive Stock Option

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  o  Non-Statutory Stock Option

  
	
   

  	
   

  	
   

  
	
  Date Exercisable:

  	
   

  	
  The Option granted hereby shall become exercisable
  as follows (the “Vesting Schedule”):

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  (i)                        twenty-five percent (25%) of
  the Option Shares upon Optionee’s completion of one (1) year of Service
  measured from the Grant Date, and

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  (ii)                     the balance of the Option Shares
  at a rate of twenty-five percent (25%) per annum for each of the following
  three (3) years upon Optionee’s completion of each additional year of
  Service measured from the first anniversary of the Grant Date.

  
							

 

Optionee understands and
agrees that the Option is granted subject to and in accordance with the terms
of the Obagi Medical Products, Inc. 2000 Stock Option/Stock Issuance Plan
(the “Plan”). Optionee further agrees to be bound by the terms of the Plan and
the terms of the Option as set forth in the Stock Option Agreement attached
hereto as Exhibit A.

 

Optionee understands that any
Option Shares purchased under the Option will be subject to the terms set forth
in the Stock Purchase Agreement attached hereto as Exhibit B. Optionee
hereby acknowledges receipt of a copy of the Plan in the form attached
hereto as Exhibit C.

 

 

REPURCHASE
RIGHTS. OPTIONEE HEREBY AGREES THAT ALL SHARES ACQUIRED UPON THE
EXERCISE OF THE OPTION SHALL BE SUBJECT TO CERTAIN REPURCHASE RIGHTS AND RIGHTS
OF FIRST REFUSAL EXERCISABLE BY THE CORPORATION AND ITS ASSIGNS. THE TERMS OF SUCH
RIGHTS ARE SPECIFIED IN THE ATTACHED STOCK PURCHASE AGREEMENT.

 

No Employment or Service
Contract. Nothing in
this Notice or in the attached Stock Option Agreement or Plan shall confer upon
Optionee any right to continue in Service for any period of specific duration
or interfere with or otherwise restrict in any way the rights of the
corporation (or any Parent or Subsidiary employing or retaining Optionee) or of
Optionee, which rights are hereby expressly reserved by each, to terminate
Optionee’s Service at any time for any reason, with or without cause.

 

Definitions. All capitalized terms in this Notice shall
have the meaning assigned to them in this Notice or in the attached Stock
Option Agreement.

 

 

	
  DATED:
                      ,
  200

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  OBAGI MEDICAL PRODUCTS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
					

 

 

	
   

  	
  OPTIONEE

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Address:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  

 

Attachments

Exhibit A – Stock Option Agreement

Exhibit B – Stock Purchase Agreement

Exhibit C – 2000 Stock Option/Stock Issuance Plan

 

2

 

EXHIBIT II

 

SECTION 83(b) TAX
ELECTION

 

16

 

SECTION 83(b) TAX
ELECTION

 

This statement is being made under Section 83(b) of
the Internal Revenue Code, pursuant to Treas. Reg. Section 1.83-2.

 

(1)                     The
taxpayer who performed the services is:

 

Name:

Address:

Taxpayer Ident. No.:

 

(2)                     The
property with respect to which the election is being made is                      
shares of the common stock of Obagi Medical Products, Inc..

 

(3)                     The
property was issued on                       ,
200    .

 

(4)                     The
taxable year in which the election is being made is the calendar year 200_.

 

(5)                     The
property is subject to a repurchase right pursuant to which the issuer has the
right to acquire the property at the original purchase price if for any reason
taxpayer’s service with the issuer terminates. The issuer’s repurchase right
lapses in a series of annual and monthly installments over a four (4) year
period ending on                   ,
200    .

 

(6)                     The
fair market value at the time of transfer (determined without regard to any
restriction other than a restriction which by its terms will never lapse) is $              
per share.

 

(7)                     The
amount paid for such property is $            
per share.

 

(8)                     A
copy of this statement was furnished to Obagi Medical Products, Inc. for
whom taxpayer rendered the services underlying the transfer of property.

 

(9)                     This
statement is executed on                   , 200     .

 

	
   

  	
   

  	
   

  	
   

  
	
  Spouse
  (if any)

  	
   

  	
  Taxpayer

  

 

This
election must be filed with the Internal Revenue Service Center with which
taxpayer files his or her Federal income tax returns and must be made within
thirty (30) days after the execution date of the Stock Issuance Agreement. This
filing should be made by registered or certified mail, return receipt
requested. Participant must retain two (2) copies of the completed form for
filing with his or her Federal and state tax returns for the current tax year
and an additional copy for his or her records.

 

17

 

EXHIBIT III

 

2000 STOCK OPTION/STOCK ISSUANCE PLAN

 

18

 

APPENDIX

 

The following definitions
shall be in effect under the Agreement:

 

A.                      Agreement shall
mean this Stock Issuance Agreement.

 

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

 

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

 

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

 

E.                         Corporate Transaction shall mean either of the following
stockholder-approved transactions:

 

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

 

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

 

F.                         Corporation shall mean Obagi Medical Products, Inc., a California corporation,
and any successor corporation to all or substantially all of the assets or
voting stock of Obagi Medical Products, Inc. which shall by appropriate
action adopt the Plan.

 

G.                        Disposition Notice shall have the meaning assigned to such term
in Paragraph F.2.

 

H.                       Exercise Notice shall have the meaning assigned to such term in Paragraph F.3.

 

I.                            Fair Market Value of a share of Common Stock on any relevant
date, prior to the initial public offering of the Common Stock, shall be
determined by the Plan Administrator after taking into account such factors as
it shall deem appropriate.

 

J.                           First Refusal Right shall mean the right granted to the
Corporation in accordance with Article F.

 

K.                       Market Stand-Off shall mean the market stand-off restriction specified in Paragraph C.3.

 

A-1

 

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

 

M.                    1933 Act shall mean the Securities Act of 1933, as amended.

 

N.                       Owner shall mean Participant and all subsequent holders of the Purchased
Shares who derive their chain of ownership through a Permitted Transfer from
Participant.

 

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

 

P.                         Participant shall mean the person to whom shares are issued under the Stock
Issuance Program.

 

Q.                       Permitted Transfer shall mean (i) a gratuitous transfer of
the Purchased Shares, provided and only if Participant obtains the
Corporation’s prior written consent to such transfer, (ii) a transfer of
title to the Purchased Shares effected pursuant to Participant’s will or the
laws of intestate succession following Participant’s death or (iii) a
transfer to the Corporation in pledge as security for any purchase-money
indebtedness incurred by Participant in connection with the acquisition of the
Purchased Shares.

 

R.                        Plan shall mean the Corporation’s 2000 Stock Option/Stock Issuance Plan
attached hereto as Exhibit III.

 

S.                         Plan Administrator shall mean either the Board or a committee of
the Board acting in its capacity as administrator of the Plan.

 

T.                       Purchase Price shall have the meaning assigned to such term in Paragraph A.1.

 

U.                       Purchased Shares shall have the meaning assigned to such term in Paragraph A.

 

V.                        Recapitalization shall mean any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
Corporation’s outstanding Common Stock as a class without the Corporation’s
receipt of consideration.

 

A-2

 

W.                   Reorganization shall mean any of the following transactions:

 

(i)                         a merger or consolidation in which the
Corporation is not the surviving entity,

 

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

 

(iii)                   a reverse merger in which the Corporation is
the surviving entity but in which the Corporation’s outstanding voting
securities are transferred in whole or in part to a person or persons
different from the persons holding those securities immediately prior to the
merger, or

 

(iv)                  any transaction effected primarily to change
the state in which the Corporation is incorporated or to create a holding
company structure.

 

X.                       Repurchase Right shall mean the right granted to the Corporation in accordance with Article D.

 

Y.                        SEC
shall mean the Securities and Exchange Commission.

 

Z.                        Service shall mean the Participant’s performance of services for the
Corporation (or any Parent or Subsidiary) in the capacity of an employee,
subject to the control and direction of the employer entity as to both the work
to be performed and the manner and method of performance, a non-employee member
of the board or an independent consultant.

 

AA.            Stock Issuance Program shall mean the Stock Issuance Program under
the Plan.

 

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

 

CC.                Target Shares shall have the meaning assigned to such term
in Paragraph F.2.

 

DD.              Vesting Schedule shall mean the vesting schedule specified
in Paragraph D.3 pursuant to which Participant is to vest in the Purchased
Shares in a series of installments over the Participant’s period of
Service.

 

EE.                  Unvested Shares shall have the meaning assigned to such term
in Paragraph D.1.

 

A-3

 

OBAGI MEDICAL PRODUCTS, INC.

STOCK PURCHASE AGREEMENT

 

AGREEMENT made this
             day of
             ,
200   , by and between Obagi Medical Products, Inc.,                                       ,
a California corporation, and                             ,
Optionee under the Corporation’s 2000 Stock Option/Stock Issuance Plan.

 

All capitalized terms in this Agreement shall have the
meaning assigned to them in this Agreement or in the attached Appendix.

 

A.                       EXERCISE
OF OPTION

 

1.                          Exercise. Optionee hereby purchases              
shares of Common Stock (the “Purchased Shares”) pursuant to that certain option
(the “Option”) granted Optionee on                ,
200       (the “Grant Date”) to purchase up to            
shares of Common Stock (the “Option Shares”) under the Plan at the exercise
price of $                        
per share (the “Exercise
Price”).

 

2.                          Payment. Concurrently with the delivery of this Agreement
to the Corporation, Optionee shall pay the Exercise Price for the Purchased
Shares in accordance with the provisions of the Option Agreement and shall
deliver whatever additional documents may he required by the Option
Agreement as a condition for exercise, together with a duly-executed blank
Assignment Separate from Certificate (in the form attached hereto as Exhibit I)
with respect to the Purchased Shares.

 

3.                          Shareholder Rights. Until such time as the Corporation
exercises the Repurchase Right or the First Refusal Right, Optionee (or any
successor in interest) shall have all the rights of a shareholder (including
voting, dividend and liquidation rights) with respect to the Purchased Shares,
subject, however, to the transfer restrictions of Articles B and C and the
provisions of Article H.

 

B.                       SECURITIES
LAW COMPLIANCE

 

1.                          Restricted
Securities. The Purchased Shares have not been registered under the
1933 Act and are being issued to Optionee in reliance upon the exemption from
such registration provided by SEC Rule 701 for stock issuances under
compensatory benefit plans such as the Plan. Optionee hereby confirms that
Optionee has been informed that the Purchased Shares are restricted securities
under the 1933 Act and may not be resold or transferred unless the
Purchased Shares are first registered under the Federal securities laws or
unless an exemption from such registration is available. Accordingly, Optionee
hereby acknowledges that Optionee is prepared to hold the Purchased Shares for
an indefinite period and that Optionee is aware that SEC Rule 144 issued
under the 1933 Act which exempts certain resales of unrestricted securities

 

1

 

is not presently available to exempt the
resale of the Purchased Shares from the registration requirements of the 1933
Act.

 

2.                          Restrictions on Disposition
of Purchased Shares.
Optionee shall make no disposition of the Purchased Shares (other than a Pemitted
Transfer) unless and until there is compliance with all of the following
requirements:

 

(i)                         Optionee shall have provided the Corporation
with a written summary of the terms and conditions of the proposed disposition.

 

(ii)                      Optionee shall have complied with all
requirements of this Agreement applicable to the disposition of the Purchased
Shares,

 

(iii)                   Optionee shall have provided the Corporation
with written assurances, in form and substance satisfactory to the
Corporation, that (a) the proposed disposition does not require
registration of the Purchased Shares under the 1933 Act or (b) all
appropriate action necessary for compliance with the registration requirements
of the 1933 Act or any exemption from registration available under the 1933 Act
(including Rule 144) has been taken.

 

The Corporation shall not be
required (i) to transfer on its books any Purchased Shares which have been
sold or transferred in violation of the provisions of this Agreement or (ii) to
treat as the owner of the Purchased Shares, or otherwise to accord voting,
dividend or liquidation rights to, any transferee to whom the Purchased Shares
have been transferred in contravention of this Agreement.

 

3.                          Restrictive Legends. The stock certificates for the Purchased
Shares shall be endorsed with one or more of the following restrictive legends:

 

“The shares represented by
this certificate have not been registered under the Securities Act of 1933. The
shares may not be sold or offered for sale in the absence of (a) an
effective registration statement for the shares under such Act (b) a “no
action” letter of the Securities and Exchange Commission with respect to such
sale or offer or (c) satisfactory assurances to the Corporation that
registration under such Act is not required with respect to such sale or offer.”

 

“The shares represented by
this certificate are subject to certain repurchase rights and rights of first
refusal granted to the Corporation and accordingly may not be sold,
assigned, transferred, encumbered, or in any manner disposed of except in
conformity with the terms of a written agreement dated                 ,
200   , between the Corporation and the registered holder of the
shares (or the predecessor in interest to the shares). A copy of such agreement
is maintained at the Corporation’s principal corporate offices.”

 

2

 

C.                       TRANSFER
RESTRICTIONS

 

1.                          Restriction on Transfer. Except for any Permitted Transfer, Optionee
shall not transfer, assign, encumber or otherwise dispose of any of the
Purchased Shares which are subject to the Repurchase Right. In addition,
Purchased Shares which are released from the Repurchase Right shall not be
transferred, assigned, encumbered or otherwise disposed of in contravention of
the First Refusal Right or the Market Stand-Off.

 

2.                          Transferee Obligations. (a) Each transferee or any subsequent
transferee of shares of the Corporation, or any interest in such shares, shall,
unless this Agreement expressly provides otherwise, hold such shares or interest
in the shares subject to all of the provisions of this Agreement and shall make
no further transfers except as permitted in this Agreement. All such
transferees shall also execute copies of this Agreement at the time of
transfer.

 

(b)                     If any person (other than the Corporation)
owns stock pursuant to a Permitted Transfer as defined in this Agreement, then
for purposes of this Agreement, the bankruptcy, assignment to creditors,
disability or death of the Optionee who transferred said shares shall cause the
provisions of Article D to be applied to permit purchase of the stock
owned by the transferee by the Corporation.

 

3.                          Market Stand-Off.

 

(a)                      In connection with any underwritten public
offering by the Corporation of its equity securities pursuant to an effective
registration statement filed under the 1933 Act including the Corporation’s
initial public offering, Owner shall not sell, make any short sale of, loan,
hypothecate, pledge, grant any option for the purchase of, or otherwise dispose
or transfer for value or otherwise agree to engage in any of the foregoing
transactions with respect to, any Purchased Shares without the prior written
consent of the Corporation or its underwriters. Such restriction (the “Market
Stand-Off”) shall be in effect for such period of time from and after the
effective date of the final prospectus for the offering as may be
requested by the Corporation or such underwriters. In no event, however, shall
such period exceed one hundred eighty (180) days and the Market Stand-Off shall
in all events terminate two (2) years after the effective date of the
Corporation’s initial public offering.

 

(b)                     Owner shall be subject to the Market Stand-Off
provided and only if the officers and directors of the Corporation are
also subject to similar restrictions.

 

(c)                      Any new, substituted or additional securities
which are by reason of any Recapitalization or Reorganization distributed with
respect to the Purchased Shares shall be immediately subject to the Market
Stand-Off, to the same extent the Purchased Shares are at such time covered by
such provisions.

 

3

 

(d)                     In order to enforce the Market Stand-Off, the
Corporation may impose stop-transfer instructions with respect to the
Purchased Shares until the end of the applicable stand-off period.

 

D.                       REPURCHASE RIGHT

 

1.                          Corporation’s Option to
Purchase. In the event of the
Participant’s termination of service for any reason, the Corporation shall have
the option (the “Purchase Option”), but not the obligation, to purchase all or
any part of the Shares issued pursuant to this Agreement (including,
without limitation, Shares purchased after termination of employment,
Disability or death). In the event the Corporation does not, upon the
termination of service of the Participant, exercise its option pursuant to this
Article D, the restrictions set forth in the balance of this Agreement
shall not thereby lapse, and the Participant for himself or herself, his or her
heirs, legatees, executors, administrators and other successors in interest,
agrees that the Shares shall remain subject to such restrictions. The following
provisions shall apply to a purchase under this Article D:

 

(a)                      Purchase Price. The per share repurchase price of the Shares
to be sold to the Corporation upon exercise of its option under this Article D
shall be equal to the Fair Market Value of each such Share determined in
accordance with the Plan as of the date of termination of service provided that
Participant was not terminated for Misconduct. In the event Participant’s
service is terminated for Misconduct, the price per Share of the Shares to be
sold to the Corporation upon exercise of this option shall be equal to the
exercise price paid per Share.

 

(b)                      Purchase Exercise Period. The Corporation’s option to repurchase the
Participant’s Shares in the event of termination of service shall be valid for
a period of three (3) months commencing with the date of such termination
of service or (if later) the three (3) month period following the execution
of this Agreement in the event such shares are purchased after termination of
employment, Disability or death.

 

(c)                      Notification. In the event the Corporation shall be
entitled to and shall elect to exercise its option to repurchase the
Participant’s Shares under this Article D, the Corporation shall notify
the Participant, or in case of death, his or her representative, in writing of
its intent to repurchase the Shares. Such written notice may be mailed by
the Corporation up to and including the last day of the time period provided
for insubparagraph (l)(b) for exercise of the Corporation’s option to
repurchase.

 

(d)                      Closing. The written notice to the Participant shall
specify the address at, and the time and date on, which payment of the
repurchase price is to be made (the “Closing”). The date specified shall not be
less than ten (10) days nor more than sixty (60) days from the date of the
mailing of the notice, and the Participant or his or her successor in interest
with respect to the Shares shall have no further rights as the owner thereof
from and after the date specified in the notice. At the Closing, the repurchase
price shall be delivered to the Participant or his or her successor in interest
and the Shares being purchased, duly endorsed for transfer,

 

4

 

shall, to the extent that they are not then in
the possession of the Corporation, be delivered to the Corporation by the
Participant or his or her successor in interest.

 

2.                          Termination of the Repurchase
Right. The Repurchase Right shall terminate with
respect to any Purchased Shares for which it is not timely exercised under
subparagraph (l)(b). All Purchased Shares as to which the Repurchase Right
lapses shall, however, remain subject to (i) the First Refusal Right and (ii) the
Market Stand-Off.

 

3.                          Recapitalization. Any new, substituted or additional securities
or other property (including cash paid other than as a regular cash dividend)
which is by reason of any Recapitalization distributed with respect to the
Purchased Shares shall be immediately subject to the Repurchase Right and any
escrow requirements hereunder, but only to the extent the Purchased Shares are
at the time covered by such right or escrow requirements. Appropriate
adjustments to reflect such distribution shall be made to the number and/or class of
Purchased Shares subject to this Agreement and to the price per share to be
paid upon the exercise of the Repurchase Right in order to reflect the effect
of any such Recapitalization upon the Corporation’s capital structure; provided
however, that the aggregate purchase price shall remain the same.

 

4.                          Lapse. The Repurchase Right shall lapse upon the
earliest to occur of (i) the first date on which shares of the Common
Stock are held of record by more than five hundred (500) persons, (ii) a
determination is made by the Board that a public market exists for the
outstanding shares of Common Stock or (iii) a firm commitment underwritten
public offering, pursuant to an effective registration statement under the 1933
Act, covering the offer and sale of the Common Stock in the aggregate amount of
at least ten million dollars ($10,000,000). However, the Market Stand-Off shall
continue to remain in full force and effect following the lapse of the Repurchase
Right.

 

E.                         RIGHT OF FIRST REFUSAL

 

1.                          Grant. The Corporation is hereby granted the right
of first refusal (the “First Refusal Right”), exercisable in connection with
any proposed transfer of the Purchased Shares. For purposes of this Article E,
the term “transfer” shall include any sale, assignment, pledge, purposes or
encumbrance or other disposition of the Purchased Shares intended to be made by
Owner, but shall not include any Permitted Transfer.

 

2.                          Notice of Intended
Disposition. In the event any
Owner of Purchased Shares desires to accept a bona fide third-party offer for
the transfer of any or all of such shares (the Purchased Shares subject to such
offer to be hereinafter referred to as the “Target Shares”), Owner shall
promptly (i) deliver to the Corporation written notice (the “Disposition
Notice”) of the terms of the offer, including the purchase price and the
identity of the third-party offeror, and (ii) provide satisfactory proof
that the disposition of the Target Shares to such third-party offeror would not
be in contravention of the provisions set forth in Articles B and C.

 

5

 

3.                          Exercise of the First Refusal
Right. The Corporation shall, for a period of
twenty-five (25) days following receipt of the Disposition Notice, have the
right to repurchase any or all of the Target Shares subject to the Disposition
Notice upon the same terms as those specified therein or upon such other terms
(not materially different from those specified in the Disposition Notice) to
which Owner consents. Such right shall be exercisable by delivery of written
notice (the “Exercise Notice”) to Owner prior to the expiration of the
twenty-five (25)- day exercise period. If such right is exercised with respect
to all the Target Shares, then the Corporation shall effect the repurchase of
such shares, including payment of the purchase price, not more than five (5) business
days after delivery of the Exercise Notice; and at such time the certificates
representing the Target Shares shall be delivered to the Corporation.

 

Should the purchase price
specified in the Disposition Notice be payable in property other than cash or
evidences of indebtedness, the Corporation shall have the right to pay the
purchase price in the form of cash equal in amount to the value of such
property. If Owner and the Corporation cannot agree on such cash value within
ten (10) days after the Corporation’s receipt of the Disposition Notice,
the valuation shall be made by an appraiser of recognized standing selected by
Owner and the Corporation or, if they cannot agree on an appraiser within
twenty (20) days after the Corporation’s receipt of the Disposition Notice,
each shall select an appraiser of recognized standing and the two (2) appraisers
shall designate a third appraiser of recognized standing, whose appraisal shall
be determinative of such value. The cost of such appraisal shall be shared
equally by Owner and the Corporation. The closing shall then be held on the later
of (i) the fifth (5th) business day following delivery of the
Exercise Notice or (ii) the fifth (5th) business day after such
valuation shall have been made.

 

4.                          Non-Exercise of the First
Refusal Right. In the
event the Exercise Notice is not given to Owner prior to the expiration of the
twenty-five (25)-day exercise period, Owner shall have a period of thirty (30)
days thereafter in which to sell or otherwise dispose of the Target Shares to
the third-party offeror identified in the Disposition Notice upon terms
(including the purchase price) no more favorable to such third-party offeror
than those specified in the Disposition Notice; provided however, that
any such sale or disposition must not be effected in contravention of the
provisions of Articles B and C. In the event Owner does not effect such sale or
disposition of the Target Shares within the specified thirty (30)-day period,
the First Refusal Right shall continue to be applicable to any subsequent
disposition of the Target Shares by Owner until such right lapses.

 

5.                          Partial Exercise of the First
Refusal Right. In the
event the Corporation makes a timely exercise of the First Refusal Right with
respect to a portion, but not all, of the Target Shares specified in the
Disposition Notice, Owner shall have the option, exercisable by written notice
to the Corporation delivered within five (5) business days after Owner’s
receipt of the Exercise Notice, to effect the sale of the Target Shares
pursuant to either of the following alternatives:

 

(i)                         sale or other disposition of all the Target
Shares to the third-party offeror identified in the Disposition Notice, but in
full compliance

 

6

 

with the requirements of
Paragraph E.4, as if the Corporation did not exercise the First Refusal Right;
or

 

(ii)                      sale to the Corporation of the portion of the
Target Shares which the Corporation has elected to purchase, such sale to be
effected in substantial conformity with the provisions of Paragraph E.3. The
First Refusal Right shall continue to be applicable to any subsequent
disposition of the remaining Target Shares until such right lapses.

 

Owner’s failure to deliver
timely notification to the Corporation shall be deemed to be an election by
Owner to sell the Target Shares pursuant to alternative (i) above.

 

6.                          Recapitalization/Reorganization.

 

(a)                      Any new, substituted or additional securities
or other property which is by, reason of any Recapitalization distributed with
respect to the Purchased Shares shall be immediately subject to the First
Refusal Right, but only to the extent the Purchased Shares are at the time
covered by such right.

 

(b)                     in the event of a Reorganization, the First
Refusal Right shall remain in full force and effect and shall apply to the new
capital stock or other property received in exchange for the Purchased Shares
in consummation of the Reorganization, but only to the extent the Purchased
Shares are at the time covered by such right.

 

7.                          Lapse. The First Refusal Right shall lapse upon the
earliest to occur of (i) the first date on which shares of the Common
Stock are held of record by more than five hundred (500) persons, (ii) a
determination is made by the Board that a public market exists for the
outstanding shares of Common Stock or (iii) a firm commitment underwritten
public offering, pursuant to an effective registration statement under the 1933
Act, covering the offer and sale of the Common Stock in the aggregate amount of
at least ten million dollars ($10,000,000). However, the Market Stand-Off shall
continue to remain in full force and effect following the lapse of the First
Refusal Right.

 

F.                         MARITAL DISSOLUTION

 

For a period of six (6) months
from the time written notice is received of the marital dissolution of any
employee of the Corporation who is a shareholder, the Corporation may give
written notice to said employee and said employee’s spouse that it elects to
purchase the interest of said employee’s spouse in the Corporation’s shares for
cash at their market value. The purchase price shall be paid within thirty (30)
days after the market value of the shares is determined hereunder.

 

The market value purchase
price shall be determined by both parties and if they are unable to agree by an
appraiser acceptable to both parties. If the parties are unable to agree on a
price or on an appraiser within thirty (30) days following the date of the
Corporation’s

 

7

 

written notice of election to purchase, each party shall name his own
appraiser. If the lower of the two resulting market value purchase prices
varies from the higher price by more than ten (10%) percent of the higher
price, the original appraisers shall appoint a third, whose determination of
the price shall be final. Otherwise, the purchase price shall be the mean between
the two purchase prices originally determined. The parties shall share equally
the fees and expenses of the appraisers jointly named, but each party shall be
responsible for the fees and expenses of any appraiser named solely by him.
Each party shall bear his own expenses in presenting evidence to the two
appraisers.

 

In determining the market
value purchase price, the appraisers appointed under this Agreement shall
consider all options and relevant evidence submitted to them by the parties, or
otherwise obtained by them, and shall set forth their determination in writing
together with their opinions and the considerations on which the opinions are
based, with a signed counterpart to be delivered to each party within
thirty (30) days of commencing appraisal.

 

G.                       DRAG-ALONG RIGHTS

 

1.                          Drag Along Sale. In the event that the Corporation determines
to accept an offer from any Person to purchase 100% of the outstanding shares
of the Corporation, then each of the shareholders shall sell all Purchased
Shares held by them pursuant to such offer to purchase (the “Drag-Alone Sale”).
All Shareholders in such Drag-Along Sale (i) shall receive the same
consideration per Purchased Share, shall be subject to the same terms and
conditions of sale and shall otherwise be treated equally (other than with
respect to reasonable employment arrangements) or, where appropriate, pro rata
based upon the number of Purchased Shares held by each shareholder and (ii) shall
execute such documents and take such actions as may be reasonably required
to effect the sale of the Purchased Shares.

 

2.                          Liabilities. All shareholders shall share pro rata, based
upon the number of Purchased Shares being sold by each (i) in any
indemnity liabilities to the purchaser in the Drag-Along Sale (other than
representations as to unencumbered ownership of and ability to transfer the
Purchased Shares being sold of any other seller in the Drag-Along Sale, which
shall be the sole responsibility of such other seller) and (ii) in any
escrow for the purpose of satisfying any such indemnity liabilities.

 

3.                          Notice. The Corporation shall promptly provide each
shareholder with written notice (the “Sale Notice”) not more than sixty (60)
nor less than thirty (30) days prior to the date of the Drag-Along Sale (the “Drag-Along
Sale Date”). Each Sale Notice shall set forth: (i) the name and address of
each proposed transferee or purchaser of Purchased Shares in the Drag-Along
Sale; (ii) the proposed amount and form of consideration to be paid
for such Purchased Shares and the terms and conditions of payment offered by
each proposed transferee or purchaser; (iii) confirmation that the
proposed purchaser or transferee has been informed of the “Drag-Along Rights”
provided for herein and has agreed to purchase said Purchased Shares in
accordance with the terms hereof, and (iv) the Drag-Along Sale Date.

 

8

 

H.                       SPECIAL TAX ELECTION

 

1.                          Section 83(b) Election The acquisition of the Purchased Shares may result
in adverse tax consequences which may be avoided or mitigated by filing an
election under Code section 83(b). Such election must be filed within
thirty (30) days after the date of this Agreement. A description of the tax
consequences applicable to the acquisition of the Purchased Shares and the form for
making the Code section 83(b) election are set forth in Exhibit II.

 

2.                          Filing Responsibilities. OPTIONEE SHOULD CONSULT WITH
HIS OR HER TAX ADVISOR TO DETERMINE THE TAX CONSEQUENCES OF ACQUIRING THE
PURCHASED SHARES AND THE ADVANTAGES AND DISADVANTAGES OF FILING THE CODE SECTION 83(b) ELECTION.
OPTIONEE ACKNOWLEDGES THAT IT IS OPTIONEE’S SOLE RESPONSIBILITY, AND NOT THE
CORPORATION’S, TO FILE A TIMELY ELECTION UNDER CODE SECTION 83(b), EVEN IF
OPTIONEE REQUESTS THE CORPORATION OR ITS REPRESENTATIVES TO MAKE THIS FILING ON
HIS OR HER BEHALF.

 

I.                            GENERAL PROVISIONS

 

1.                          Assignment. The Corporation may assign the
Repurchase Right and/or the First Refusal Right to any person or entity
selected by the Board, including (without limitation) one or more shareholders
of the Corporation.

 

2.                          No Employment or Service
Contract. Nothing in this
Agreement or in the Plan shall confer upon Optionee any right to continue in
Service for any period of specific duration or interfere with or otherwise
restrict in any way the rights of the Corporation (or any Parent or Subsidiary
employing or retaining Optionee) or of Optionee, which rights are hereby
expressly reserved by each, to terminate Optionee’s Service at any time for any
reason, with or without cause.

 

3.                          Notices. Any notice required to be given under this
Agreement shall be in writing and shall be deemed effective upon personal
delivery or upon deposit in the U.S. mail, registered or certified, postage
prepaid and properly addressed to the party entitled to such notice at the
address indicated below such party’s signature line on this Agreement or at
such other address as such party may designate by ten (10) days
advance written notice under this paragraph to all other parties to this
Agreement.

 

4.                          No Waiver. The failure of the Corporation in any
instance to exercise the Repurchase Right or the First Refusal Right shall not
constitute a waiver of any other repurchase rights and/or rights of first
refusal that may subsequently arise under the provisions of this Agreement
or any other agreement between the Corporation and Optionee. No waiver of any
breach or condition of this Agreement shall be deemed to be a waiver of any
other or subsequent breach or condition, whether of like or different nature.

 

9

 

5.                          Cancellation of Shares. If the Corporation shall make available, at
the time and place and in the amount and form provided in this Agreement,
the consideration for the Purchased Shares to be repurchased in accordance with
the provisions of this Agreement then from and after such time, the person from
whom such shares are to be repurchased shall no longer have any rights as a
holder of such shares (other than the right to receive payment of such
consideration in accordance with this Agreement). Such shares shall be deemed
purchased in accordance with the applicable provisions hereof, and the
Corporation shall be deemed the owner and holder of such shares, whether or not
the certificates therefor have been delivered as required by this Agreement.

 

J.                         MISCELLANEOUS PROVISIONS

 

1.                          Optionee Undertaking. Optionee hereby agrees to take whatever
additional action and execute whatever additional documents the Corporation may deem
necessary or advisable in order to carry out or effect one or more of the
obligations or restrictions imposed on either Optionee or the Purchased Shares
pursuant to the provisions of this Agreement.

 

2.                          Agreement is Entire Contract. This Agreement constitutes the entire
contract between the parties hereto with regard to the subject matter hereof.
This Agreement is made pursuant to the provisions of the Plan and shall in all
respects be construed in conformity with the terms of the Plan.

 

3.                          Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of California without
resort to that State’s conflict-of-laws rules.

 

4.                          Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.

 

10

 

5.                          Successors and Assigns. The provisions of this Agreement shall inure
to the benefit of, and be binding upon, the Corporation and its successors and
assigns and upon Optionee, Optionee’s permitted assigns and the legal
representatives, heirs and legatees of Optionee’s estate, whether or not any
such person shall have become a party to this Agreement and have agreed in
writing to join herein and be bound by the terms hereof.

 

IN WITNESS WHEREOF, the parties have executed this Agreement
on the day and year first indicated above.

 

	
   

  	
  OBAGI MEDICAL PRODUCTS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Address:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  OPTIONEE

  	
   

  
	
   

  	
   

  
	
   

  	
  Address:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
						

 

11

 

SPOUSAL ACKNOWLEDGMENT

 

The undersigned spouse of
Optionee has read and hereby approves the foregoing Stock Purchase Agreement.
In consideration of the Corporation’s granting Optionee the right to acquire
the Purchased Shares in accordance with the terms of such Agreement, the
undersigned hereby agrees to be irrevocably bound by all the terms of such
Agreement, including (without limitation) the right of the Corporation (or its
assigns) to purchase any Purchased Shares in which Optionee, is not vested at
time of his or her cessation of Service. I hereby consent to such sale, approve
of the provisions of the Agreement, and agree that these shares and my interest
in them are subject to the provisions of the Agreement and that I will take no
action at any time to hinder the operation of the Agreement on those shares or
my interest in them.

 

	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  OPTIONEE’S SPOUSE

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Address:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
					

 

12

 

EXHIBIT I

 

ASSIGNMENT SEPARATE FROM CERTIFICATE

 

FOR VALUE RECEIVED                              
hereby sell(s), assign(s) and transfer(s) unto OBAGI MEDICAL PRODUCTS, INC.
(the “Corporation”),                    
(                  )
shares of the Common Stock of the Corporation standing in his or her name on
the books of the Corporation represented by Certificate No.                
herewith and does hereby irrevocably constitute and appoint                  
Attorney to transfer the said stock on the books of the Corporation with full
power of substitution in the premises.

 

	
  Dated:

  	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Signature

  	
   

  	
   

  

 

Instruction:
Please do not fill in
any blanks other than the signature line. Please sign exactly as you would like
your name to appear on the issued stock certificate. The purpose of this
assignment is to enable the Corporation to exercise the Repurchase Right
without requiring additional signatures on the part of Optionee.

 

13

 

EXHIBIT II

 

FEDERAL INCOME TAX CONSEQUENCES AND

SECTION 83(b) TAX ELECTION

 

I.                            Federal Income Tax
Consequences and Section 83(b) Election for Exercise of Non-Statutory
Option. If the Purchased Shares are acquired pursuant
to the exercise of a Non-Statutory Option, as specified in the Grant Notice,
then under Code section 83, the excess of the Fair Market Value of the
Purchased Shares on the date any forfeiture restrictions applicable to such
shares lapse over the Exercise Price paid for such shares will be reportable as
ordinary income on the lapse date. For this purpose, the term “forfeiture
restrictions” includes the right of the Corporation to repurchase the Purchased
Shares pursuant to the Repurchase Right. However, Optionee may elect under
Code section 83(b) to be taxed at the time the Purchased Shares are
acquired, rather than when and as such Purchased Shares cease to be subject to
such forfeiture restrictions. Such election must be filed with the Internal
Revenue Service within thirty (30) days after the date of the Agreement. Even
if the Fair Market Value of the Purchased Shares on the date of the Agreement
equals the Exercise Price paid (and thus no tax is payable), the election must
he made to avoid adverse tax consequences in the future. The form for
making this election is attached as part of this exhibit. FAILURE TO MAKE THIS FILING WITHIN THE APPLICABLE
THIRTY (30)-DAY PERIOD WELL RESULT IN THE RECOGNITION OF ORDINARY INCOME BY
OPTIONEE AS THE FORFEITURE RESTRICTIONS LAPSE.

 

II.                        Federal Income Tax
Consequences and Conditional Section 83(b) Election for Exercise of
Incentive Option. If the
Purchased Shares are acquired pursuant to the exercise of an Incentive Option,
as specified in the Grant Notice, then the following tax principles shall be
applicable to the Purchased Shares:

 

(i)                         For regular tax purposes, no taxable income
will be recognized at the time the Option is exercised.

 

(ii)                      The excess of (a) the Fair Market Value
of the Purchased Shares on the date the Option is exercised or (if later) on
the date any forfeiture restrictions applicable to the Purchased Shares lapse
over (b) the Exercise Price paid for the Purchased
Shares Will be includible in Optionee’s taxable income for alternative minimum
tax purposes.

 

(iii)                   If Optionee makes a disqualifying disposition
of the Purchased Shares, then Optionee will recognize ordinary income in the
year of such disposition equal in amount to (he excess of (a) the Fair
Market Value of the Purchased Shares on the date the Option is exercised or (if
later) on the date any forfeiture restrictions applicable to the Purchased
Shares lapse over (b) the Exercise Price paid for the Purchased Shares.
Any additional gain recognized

 

14

 

upon the disqualifying
disposition will be either short-term or long-term capital gain depending upon
the period for which the Purchased Shares are held prior to the disposition.

 

(iv)                  For purposes of the foregoing, the term “forfeiture
restrictions” will include the right of the Corporation to repurchase the
Purchased Shares pursuant to the Repurchase Right. The term “disqualifying
disposition” means any sale or other disposition(1) of the Purchased
Shares within two (2) years after the Grant Date or within one (1) year
after the exercise date of the Option.

 

(v)                     In the absence of final Treasury Regulations
relating to Incentive Options, it is not certain whether Optionee may, in
connection with the exercise of the Option for any Purchased Shares at the time
subject to forfeiture restrictions, file a protective election under Code section 83(b) which
would limit

 

(a)                     Optionee’s alternative minimum taxable income
upon exercise and

 

(b)                    Optionee’s ordinary income upon a
disqualifying disposition to the excess of the Fair Market Value of the
Purchased Shares on the date the Option is exercised over the Exercise Price
paid for the Purchased Shares. Accordingly, such election if properly filed
will only be allowed to the extent the final Treasury Regulations permit such a
protective election. Page 2 of the attached form for making the
election should be filed with any election made in connection with the exercise
of an Incentive Option.

 

(1) Generally, a disposition of shares
purchased under an Incentive Option includes any transfer of legal title,
including a transfer by sale, exchange or gift, but does not include a transfer
to the Optionee’s spouse, a transfer into joint ownership with right of
survivorship if Optionee remains one of the joint owners, a pledge, a transfer
by bequest or inheritance or certain tax free exchanges permitted under the
Code.

 

15

 

SECTION 83(b) ELECTION

 

This statement is being made
under section 83(b) of the Internal Revenue Code, pursuant to Treas.
Reg. section 1.83-2.

 

(1)                     The
taxpayer who performed the services is:

 

Name:

Address:

Taxpayer Ident. No.:

 

(2)                     The
property with respect to which the election is being made is                 
shares of the common stock of Obagi Medical Products, Inc..

 

(3)                     The
property was issued on                  ,
200   .

 

(4)                     The
taxable year in which the election is being made is the calendar year 200   .

 

(5)                     The
property is subject to a repurchase right pursuant to which the issuer has the
right to acquire the property at the original purchase price if for any reason
taxpayer’s service with the issuer terminates. The issuer’s repurchase right
lapses in a series of installments over a four (4)-year period ending on             ,
200   .

 

(6)                     The
fair market value at the time of transfer (determined without regard to any restriction
other than a restriction which by its terms will never lapse) is $          
per share.

 

(7)                     The
amount paid for such property is $            
per share.

 

(8)                     A
copy of this statement was furnished to Obagi Medical Products, Inc. for
whom taxpayer rendered the services underlying the transfer of property.

 

(9)                     This
statement is executed on               ,
200    .

 

	
   

  	
   

  	
   

  	
   

  
	
  Spouse
  (if any)

  	
   

  	
  Taxpayer

  

 

This
election must be filed with the Internal Revenue Service Center with which
taxpayer files his or her Federal income tax returns and must be made within
thirty (30) days after the execution date of the Stock Purchase Agreement. This
filing should be made by registered or certified mail, return receipt
requested. Optionee must retain two (2) copies of the completed form for
filing with his or her Federal and state tax returns for the current tax year
and an additional copy for his or her records.

 

16

 

The property described in the
above section 83(b) election is comprised of shares of common stock
acquired pursuant to the exercise of an incentive stock option under section 422
of the Internal Revenue Code (the “Code”). Accordingly, it is the intent of the
Taxpayer to utilize this election to achieve the following tax results:

 

1.                           The purpose of this election is to have the alternative minimum taxable
income attributable to the purchased shares measured by the amount by which the
fair market value of such shares at the time of their transfer to the Taxpayer
exceeds the purchase price paid for the shares. In the absence of this
election, such alternative minimum taxable income would be measured by the
spread between the fair market value of the purchased shares and the purchase
price which exists on the various lapse dates in effect for the forfeiture
restrictions applicable to such shares. The election is to be effective to the
full extent permitted under the Code.

 

2.                           Section 421(a)(l) of the Code expressly excludes from income any
excess of the fair market value of the purchased shares over the amount paid
for such shares. Accordingly, this election is also intended to be effective in
the event there is a “disqualifying disposition” of the shares, within the
meaning of section 421(b) of the Code, which would otherwise render the
provisions of section 83(a) of the Code applicable at that time.
Consequently, the Taxpayer hereby elects to have the amount of disqualifying
disposition income measured by the excess of the fair market value of the
purchased shares on the date of transfer to the Taxpayer over the amount paid
for such shares. Since section 421(a) presently applies to the shares
which are the subject of this section 83(b) election, no taxable income is
actually recognized for regular tax purposes at this time, and no income taxes
are payable, by the Taxpayer as a result of this election. The election shall
be effective to the fully extent permitted under the Code.

 

THIS PAGE 2
IS TO BE ATTACHED TO ANY SECTION 83(b) ELECTION FILED IN CONNECTION
WITH THE EXERCISE OF AN INCENTIVE STOCK OPTION UNDER THE FEDERAL TAX LAWS.

 

17

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00109-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00109-of-00352.parquet"}]]