COMBICHEM INC
S-8, 1999-05-13
COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH
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<PAGE>   1
      As filed with the Securities and Exchange Commission on May 13, 1999
                                            Registration No. 333-_______________

================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM S-8
                             REGISTRATION STATEMENT
                                      Under
                           The Securities Act of 1933

                                 COMBICHEM, INC.
             (Exact name of registrant as specified in its charter)

            DELAWARE                                      33-0617379
  (State or other jurisdiction                 (IRS Employer Identification No.)
of incorporation or organization)

                9050 CAMINO SANTA FE, SAN DIEGO, CALIFORNIA 92121
               (Address of principal executive offices) (Zip Code)


                                 COMBICHEM, INC.

                            1997 STOCK INCENTIVE PLAN
                              ---------------------
                            (Full title of the Plan)

                             DR. VINCENT ANIDO, JR.
                      PRESIDENT AND CHIEF EXECUTIVE OFFICER
                                 COMBICHEM, INC.
                9050 CAMINO SANTA FE, SAN DIEGO, CALIFORNIA 92121
                     (Name and address of agent for service)
                                 (619) 530-0484
          (Telephone number, including area code, of agent for service)

                         CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
=========================================================================================================================
                                                                   Proposed              Proposed
              Title of                                             Maximum               Maximum
             Securities                       Amount               Offering             Aggregate             Amount of
                to be                         to be                 Price                Offering           Registration
             Registered                   Registered(1)           per Share               Price                  Fee
             ----------                   -------------           ---------             ---------           ------------
<S>                                      <C>                      <C>                   <C>                 <C>    
1997 Stock Incentive Plan
Common Stock, par value $0.001           1,000,000 shares          $3.31(2)             $3,310,000             $920.18
per share
=========================================================================================================================
</TABLE>

(1)      This Registration Statement shall also cover any additional shares of
         Registrant's Common Stock which become issuable under the 1997 Stock
         Incentive Plan by reason of any stock dividend, stock split,
         recapitalization or other similar transaction effected without the
         Registrant's receipt of consideration which results in an increase in
         the number of the Registrant's outstanding shares of Common Stock.

(2)      Calculated solely for purposes of this offering under Rule 457(h) of
         the Securities Act of 1933, as amended, on the basis of the average of
         the high and low selling prices per share of Common Stock of CombiChem,
         Inc. on May 6, 1999, as reported by the Nasdaq national Market.


<PAGE>   2
                                     PART II

               INFORMATION REQUIRED IN THE REGISTRATION STATEMENT

Item 3.  Incorporation of Documents by Reference

                  CombiChem, Inc. (the "Registrant") hereby incorporates by
reference into this Registration Statement the following documents previously
filed with the Securities and Exchange Commission (the "Commission"):

         (a)      The Registrant's Annual Report on Form 10-K for the fiscal
                  year ended December 31, 1998 filed with the Commission on
                  March 31, 1998, pursuant to Section 13 of the Securities
                  Exchange Act of 1934, as amended (the "1934 Act");

         (b)      The Registrant's Prospectus filed April 7, 1998 with the
                  Registrant's Registration Statement No. 333-37981 on Form S-1,
                  as amended, under the Securities Act of 1933, as amended (the
                  "1933 Act"), in which there is set forth audited financial
                  statements for the Registrant's fiscal year ended December 31,
                  1997;

         (c)      The Registrant's Registration Statement on Form 8-A filed with
                  the SEC on May 4, 1998 pursuant to Section 12 of the 1934 Act,
                  in which there is described the terms, rights and provisions
                  applicable to the Registrant's outstanding Common Stock.

                  All reports and definitive proxy or information statements
filed pursuant to Section 13(a), 13(c), 14 or 15(d) of the 1934 Act after the
date of this Registration Statement and prior to the filing of a post-effective
amendment which indicates that all securities offered hereby have been sold or
which de-registers all securities then remaining unsold shall be deemed to be
incorporated by reference into this Registration Statement and to be a part
hereof from the date of filing of such documents. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Registration Statement
to the extent that a statement contained herein or in any subsequently filed
document which also is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Registration Statement.

Item 4.  Description of Securities

                  Not Applicable.

Item 5.  Interests of Named Experts and Counsel

     Faye H. Russell, a partner in the law firm of Brobeck, Phleger & Harrison,
LLP, which provides legal services to the Registrant as regular outside counsel,
serves as Secretary of Registrant.

Item 6.  Indemnification of Directors and Officers

         Section 145 of the Delaware General Corporation Law permits
indemnification of officers and directors of the Company under certain
conditions and subject to certain limitations. Section 145 of the Delaware
General Corporation Law also provides that a corporation has the power to
purchase and maintain insurance on behalf of its officers and directors against
any liability asserted against such person and incurred by him or her in such
capacity, or arising out of his or her status as such, whether or not the
corporation would have the power to indemnify him or her against such liability
under the provisions of Section 145 of the Delaware General Corporation Law.

         Article VII, Section 1 of the Restated Bylaws of the Registrant
provides that the Registrant shall indemnify its directors and executive
officers to the fullest extent not prohibited by the Delaware General
Corporation Law. The rights to indemnify thereunder continue as to a person who
has ceased to be a director, officer, employee or agent and inure to the benefit
of the heirs, executors and administrators of the person. In addition, expenses
incurred by a director or executive officer in defending any civil, criminal,
administrative or investigative action, suit or proceeding by reason of the fact
that he or she is or was a director or officer of the Registrant (or was serving
at the


                                      II-1
<PAGE>   3
Registrant's request as a director or officer of another corporation) shall be
paid by the Registrant in advance of the final disposition of such action, suit
or proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that he or she
is not entitled to be indemnified by the Registrant as authorized by the
relevant section of the Delaware General Corporation Law.

         As permitted by Section 102(b)(7) of the Delaware General Corporation
Law, Article V, Section (A) of the Registrant's Restated Certificate of
Incorporation provides that a director of the Registrant shall not be personally
liable for monetary damages for breach of fiduciary duty as a director, except
for liability (i) for any breach of the director's duty of loyalty to the
Registrant or its stockholders, (ii) for acts or omissions not in good faith or
acts or omissions that involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law or (iv) for
any transaction from which the director derived any improper personal benefit.

         The Registrant has entered into indemnification agreements with each of
its directors and executive officers. Generally, the indemnification agreements
attempt to provide the maximum protection permitted by Delaware law as it may be
amended from time to time. Moreover, the indemnification agreements provide for
certain additional indemnification. Under such additional indemnification
provisions, however, an individual will not receive indemnification for
judgments, settlements or expenses if he or she is found liable to the
Registrant (except to the extent the court determines he or she is fairly and
reasonably entitled to indemnity for expenses), for settlements not approved by
the Registrant or for settlements and expenses if the settlement is not approved
by the court. The indemnification agreements provide for the Registrant to
advance to the individual any and all reasonable expenses (including legal fees
and expenses) incurred in investigating or defending any such action, suit or
proceeding. In order or receive an advance of expenses, the individual must
submit to the Registrant copies of invoices presented to him or her for such
expenses. Also, the individual must repay such advances upon a final judicial
decision that he or she is not entitled to indemnification. The Registrant has
purchased directors' and officers' liability insurance. The Registrant intends
to enter into additional indemnification agreements with each of its directors
and executive officers to effectuate these indemnity provisions.

Item 7.  Exemption from Registration Claimed

                  Not Applicable.

Item 8.  Exhibits

<TABLE>
<CAPTION>
Exhibit Number    Exhibit
- --------------    -------
<S>               <C>
   4.1            Instruments   Defining  the  Rights  of   Stockholders.   Reference  is  made  to   Registrant's
                  Registration  Statement on Form 8-A,  together with the amendments and exhibits  thereto,  which
                  are incorporated herein by reference pursuant to Item 3(c).
   5.1            Opinion and consent of Brobeck, Phleger & Harrison LLP.
   23.1           Consent of Ernst & Young LLP, Independent Accountants.
   23.2           Consent of Brobeck, Phleger & Harrison LLP is contained in Exhibit 5.1.
   24.1           Power of Attorney.  Reference is made to page II-4 of this Registration Statement.
   99.1           CombiChem, Inc. 1997 Stock Incentive Plan.
   99.2+          Form of Notice of Grant of Stock Option (Exhibit 10.48).
   99.3+          Form of Stock Option Agreement (Exhibit 10.49).
   99.4+          Form of Addendum to Stock Option Agreement (Involuntary Termination Following Corporate
                  Transaction/Change in Control) (Exhibit 10.50).
   99.5+          Form of Addendum to Stock Option Agreement (Limited Stock Appreciation Right) (Exhibit 10.51)
   99.6+          Form of Stock Issuance Agreement (Exhibit 10.52).
   99.7+          Form of Addendum to Stock Issuance Agreement (Involuntary Termination Following Corporate
                  Transaction/Change in Control) (Exhibit 10.53).
   99.8+          Form of Notice of Grant of Automatic Stock Option (Initial Grant) (Exhibit 10.54).
   99.9+          Form of Notice of Grant of Automatic Stock Option (Annual Grant) (Exhibit 10.55).
   99.10+         Form of Automatic Stock Option Agreement (Exhibit 10.56).
   99.11+         Form of Stock Purchase Agreement(Exhibit 10.57).
</TABLE>

- -----------------


                                      II-2
<PAGE>   4
+These exhibits were previously filed as part of, and are hereby incorporated by
reference to, the same numbered exhibit (except as otherwise noted) filed with
the Registrant's Amendment No. 2 to Registration Statement on Form S-1
(Commission No. 333-37981) initially filed on December 3, 1997, as amended.


Item 9.  Undertakings

                  A.       The undersigned Registrant hereby undertakes: (1) to
file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement: (i) to include any
prospectus required by Section 10(a)(3) of the 1933 Act, (ii) to reflect in the
prospectus any facts or events arising after the effective date of this
Registration Statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a fundamental change in the
information set forth in this Registration Statement and (iii) to include any
material information with respect to the plan of distribution not previously
disclosed in this Registration Statement or any material change to such
information in this Registration Statement; provided, however, that clauses
(1)(i) and (1)(ii) shall not apply if the information required to be included in
a post-effective amendment by those clauses is contained in periodic reports
filed by the Registrant pursuant to Section 13 or Section 15(d) of the 1934 Act
that are incorporated by reference into this Registration Statement; (2) that
for the purpose of determining any liability under the 1933 Act each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof; and
(3) to remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
1996 Stock Incentive Plan.

                  B.       The undersigned Registrant hereby undertakes that,
for purposes of determining any liability under the 1933 Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
1934 Act that is incorporated by reference into this Registration Statement
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

                  C.       Insofar as indemnification for liabilities arising
under the 1933 Act may be permitted to directors, officers or controlling
persons of the Registrant pursuant to the indemnification provisions summarized
in Item 6 or otherwise, the Registrant has been advised that, in the opinion of
the Commission, such indemnification is against public policy as expressed in
the 1933 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.


                                      II-3
<PAGE>   5
                                   SIGNATURES

                  Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form S-8, and has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of San Diego, State of California on this
13th day of May, 1999.

                                 COMBICHEM, INC.


                                 By:  /s/ Vicente Anido, Jr., Ph.D.
                                      ------------------------------------------
                                      Vicente Anido, Jr., Ph.D.
                                      President and Chief Executive Officer


                                POWER OF ATTORNEY

                  KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Vicente Anido and Peter L.
Myers, and each of them, as such person's true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for such person and
in such person's name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement, and to file same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as such person
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his or her
substitutes, may lawfully do or cause to be done by virtue thereof.

                  Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates
indicated:

<TABLE>
<CAPTION>
Signature                                 Title                                            Date
- ---------                                 -----                                            ----
<S>                                       <C>                                              <C> 
     /s/ Vicente Anido, Jr.               President, Chief Executive                       May 13, 1999
- ----------------------------------        Office and Director                
Vicente Anido, Jr., Ph.D.                 (Principal Executive Officer and   
                                          Principal Financial and Accounting 
                                          Officer)                           
                                          

     /s/ Peter L. Myers                   Vice President, Chief Scientific Officer,        May 13, 1999
- ----------------------------------        Chief Operating Officer and Director
Peter L. Myers, Ph.D.                     

                                          Director                                         May 13, 1999
- ----------------------------------
Philippe O. Chambon, M.D., Ph.D.

     /s/ M. J. Pazzani                    Director                                         May 13, 1999
- ----------------------------------
Michael J. Pazzani, Ph.D.

     /s/ Arthur Reidel                    Director                                         May 13, 1999
- ----------------------------------
Arthur Reidel

     /s/ W.A. Scott                       Director                                         May 13, 1999
- ----------------------------------
William Scott, Ph.D.
</TABLE>


                                      II-4
<PAGE>   6





                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549


                                    EXHIBITS

                                       TO

                                    FORM S-8

                                      UNDER

                             SECURITIES ACT OF 1933


                                 COMBICHEM, INC.


<PAGE>   7
                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit Number    Exhibit
- --------------    -------
<S>               <C>
   4.1            Instruments   Defining  the  Rights  of   Stockholders.   Reference  is  made  to   Registrant's
                  Registration  Statement on Form 8-A,  together with the amendments and exhibits  thereto,  which
                  are incorporated herein by reference pursuant to Item 3(c).
   5.1            Opinion and consent of Brobeck, Phleger & Harrison LLP.
   23.1           Consent of Ernst & Young LLP, Independent Auditors.
   23.2           Consent of Brobeck, Phleger & Harrison LLP is contained in Exhibit 5.
   24.1           Power of Attorney.  Reference is made to page II-4 of this Registration Statement.
   99.1           CombiChem, Inc. 1997 Stock Incentive Plan.
   99.2+          Form of Notice of Grant of Stock Option (Exhibit 10.48).
   99.3+          Form of Stock Option Agreement (Exhibit 10.49).
   99.4+          Form of Addendum to Stock Option Agreement (Involuntary Termination Following Corporate
                  Transaction/Change in Control) (Exhibit 10.50).
   99.5+          Form of Addendum to Stock Option Agreement (Limited Stock Appreciation Right) (Exhibit 10.51)
   99.6+          Form of Stock Issuance Agreement (Exhibit 10.52).
   99.7+          Form of Addendum to Stock Issuance Agreement (Involuntary Termination Following Corporate
                  Transaction/Change in Control) (Exhibit 10.53).
   99.8+          Form of Notice of Grant of Automatic Stock Option (Initial Grant) (Exhibit 10.54).
   99.9+          Form of Notice of Grant of Automatic Stock Option (Annual Grant) (Exhibit 10.55).
   99.10+         Form of Automatic Stock Option Agreement (Exhibit 10.56).
   99.11+         Form of Stock Purchase Agreement(Exhibit 10.57).
</TABLE>
- -----------------

+These exhibits were previously filed as part of, and are hereby incorporated by
reference to, the same numbered exhibit (except as otherwise noted) filed with
the Registrant's Amendment No. 2 to Registration Statement on Form S-1
(Commission No. 333-37981) initially filed on December 3, 1997, as amended.



<PAGE>   1
                                   EXHIBIT 5.1

             OPINION AND CONSENT OF BROBECK, PHLEGER & HARRISON LLP


                                  May 13, 1999


CombiChem, Inc.
9050 Camino Santa Fe
San Diego, California  92121

         Re:      CombiChem, Inc. - Registration Statement for Offering of
                  1,000,000 Shares of Common Stock

Ladies and Gentlemen:

         We have acted as counsel to CombiChem, Inc., a Delaware corporation
(the "Company"), in connection with the registration on Form S-8 (the
"Registration Statement") under the Securities Act of 1933, as amended, of
1,000,000 shares of common stock (the "Shares") under the Company's 1997 Stock
Incentive Plan (the "Incentive Plan").

         This opinion is being furnished in accordance with the requirements of
Item 8 of Form S-8 and Item 601(b)(5)(i) of Regulation S-K.

         We have reviewed the Company's charter documents and the corporate
proceedings taken by the Company in connection with the establishment and
amendment of the Incentive Plan.  Based on such review, we are of the opinion
that if, as and when the Shares are issued and sold (and the consideration
therefor received) in accordance with the Incentive Plan (including any stock
option agreements or stock issuance agreements thereunder) and in accordance
with the Registration Statement, such Shares will be duly authorized, legally
issued, fully paid and nonassessable.

         We consent to the filing of this opinion letter as Exhibit 5 to the
Registration Statement.

         This opinion letter is rendered as of the date first written above and
we disclaim any obligation to advise you of facts, circumstances, events or
developments which hereafter may be brought to our attention and which may
alter, affect or modify the opinion expressed herein. Our opinion is expressly
limited to the matters set forth above and we render no opinion, whether by
implication or otherwise, as to any other matters relating to the Company, the
Incentive Plan, or the Shares issuable under the Incentive Plan.



                                Very truly yours,

                                /s/ BROBECK PHLEGER & HARRISON LLP

                                BROBECK PHLEGER & HARRISON LLP



<PAGE>   1
                                  EXHIBIT 23.1

               CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS


We consent to the incorporation by reference in the Registration Statement (Form
S-8) pertaining to the 1997 Stock Incentive Plan of CombiChem, Inc., of our
report dated January 18, 1999, except for Note 9, as to which the date is March
5, 1999, with respect to the financial statements of CombiChem, Inc. included in
it's Annual Report on Form 10-K 405, filed with the Securities and Exchange
Commission.

                                /s/ ERNST & YOUNG LLP

                                Ernst & Young LLP



San Diego, California
May 10, 1999



<PAGE>   1
                                                                    EXHIBIT 99.1


                                 COMBICHEM, INC.
                            1997 STOCK INCENTIVE PLAN

                                   ARTICLE ONE

                               GENERAL PROVISIONS

      I.    PURPOSE OF THE PLAN

            This 1997 Stock Incentive Plan is intended to promote the interests
of CombiChem, Inc., a Delaware corporation, by providing eligible persons with
the opportunity to acquire a proprietary interest, or otherwise increase their
proprietary interest, in the Corporation as an incentive for them to remain in
the service of the Corporation.

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

      II.   STRUCTURE OF THE PLAN

            A.    The Plan shall be divided into five separate equity programs:

                  -     the Discretionary Option Grant Program under which
eligible persons may, at the discretion of the Plan Administrator, be granted
options to purchase shares of Common Stock,

                  -     the Salary Investment Option Grant Program under which
eligible employees may elect to have a portion of their base salary invested
each year in special option grants,

                  -     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),

                  -     the Automatic Option Grant Program under which eligible
non-employee Board members shall automatically receive option grants at periodic
intervals to purchase shares of Common Stock, and

                  -     the Director Fee Option Grant Program under which
non-employee Board members may elect to have all or any portion of their annual
retainer fee otherwise payable in cash applied to a special option grant.


<PAGE>   2
            B.    The provisions of Articles One and Seven shall apply to all
equity programs under the Plan and shall govern the interests of all persons
under the Plan.

      III.  ADMINISTRATION OF THE PLAN

            A.    The Primary Committee shall have sole and exclusive authority
to administer the Discretionary Option Grant and Stock Issuance Programs with
respect to Section 16 Insiders. Administration of the Discretionary Option Grant
and Stock Issuance Programs with respect to all other persons eligible to
participate in those programs may, at the Board's discretion, be vested in the
Primary Committee or a Secondary Committee, or the Board may retain the power to
administer those programs with respect to all such persons.

            B.    Members of the Primary Committee or any Secondary Committee
shall serve for such period of time as the Board may determine and may be
removed by the Board at any time. The Board may also at any time terminate the
functions of any Secondary Committee and reassume all powers and authority
previously delegated to such committee.

            C.    Each Plan Administrator shall, within the scope of its
administrative functions under the Plan, 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 Discretionary Option Grant and
Stock Issuance Programs and to make such determinations under, and issue such
interpretations of, the provisions of such programs and any outstanding options
or stock issuances thereunder as it may deem necessary or advisable. Decisions
of the Plan Administrator within the scope of its administrative functions under
the Plan shall be final and binding on all parties who have an interest in the
Discretionary Option Grant and Stock Issuance Programs under its jurisdiction or
any option or stock issuance thereunder.

            D.    The Primary Committee shall have the sole and exclusive
authority to determine which Section 16 Insiders and other highly compensated
Employees shall be eligible for participation in the Salary Investment Option
Grant Program for one or more calendar years. However, all option grants under
the Salary Investment Option Grant Program shall be made in accordance with the
express terms of that program, and the Primary Committee shall not exercise any
discretionary functions with respect to the option grants made under that
program.

            E.    Service on the Primary Committee or the Secondary Committee
shall constitute service as a Board member, and members of each such committee
shall accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any option grants or stock issuances under the
Plan.

            F.    Administration of the Automatic Option Grant and Director Fee
Option Grant Programs shall be self-executing in accordance with the terms of
those programs, and no Plan Administrator shall exercise any discretionary
functions with respect to any option grants or stock issuances made under those
programs.


<PAGE>   3
      IV.   ELIGIBILITY

            A.    The persons eligible to participate in the Discretionary
Option Grant and Stock Issuance Programs are as follows:

                        (i)   Employees,

                        (ii)  non-employee members of the Board or 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.    Only Employees who are Section 16 Insiders or other highly
compensated individuals shall be eligible to participate in the Salary
Investment Option Grant Program.

            C.    Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full authority to determine,
(i) with respect to the option grants under the Discretionary Option Grant
Program, which eligible persons are to receive option grants, the time or times
when such option 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 vesting schedule (if any) applicable to the option shares and
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 stock issuances, the time or times when such 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
for such shares.

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

            E     The individuals who shall be eligible to participate in the
Automatic Option Grant Program shall be limited to (i) those individuals serving
as non-employee Board members on the Underwriting Date who have not previously
received a stock option grant from the Corporation, (ii) those individuals who
first become non-employee Board members after the Underwriting Date, whether
through appointment by the Board or election by the Corporation's stockholders,
and (iii) those individuals who continue to serve as non-employee Board members
at one or more Annual Stockholders Meetings held after the Underwriting Date. A
non-employee Board member who has previously been in the employ of the
Corporation (or any Parent or Subsidiary) shall not be eligible to receive an
option grant under the Automatic Option Grant Program at the time he or she
first becomes a non-employee Board member, but shall be eligible to receive
periodic option grants under the Automatic Option Grant Program while he or she
continues to serve as a non-employee Board member.


<PAGE>   4
            F.    All non-employee Board members shall be eligible to
participate in the Director Fee Option Grant 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, including shares repurchased
by the Corporation on the open market. The maximum number of shares of Common
Stock initially reserved for issuance over the term of the Plan shall not exceed
2,072,170 shares of Common Stock. Such share reserve includes an increase of
1,000,000 shares authorized by the Board on March 24, 1999, subject to
stockholder approval at the 1999 Annual Meeting. To the extent any unvested
shares of Common Stock outstanding under the Predecessor Plan as of the Plan
Effective Time are subsequently repurchased by the Corporation, at the option
exercise price paid per share, in connection with the holder's termination of
service prior to vesting in the shares, those repurchased shares shall be added
to the reserve of Common Stock available for issuance under the Plan.


            B.    No one person participating in the Plan may receive options,
separately exercisable stock appreciation rights and direct stock issuances for
more than 500,000 shares of Common Stock in the aggregate per calendar year,
beginning with the 1997 calendar year.

            C.    Shares of Common Stock subject to outstanding options
(including options incorporated into this Plan from the Predecessor Plan) shall
be available for subsequent issuance under the Plan to the extent (i) those
options expire or terminate for any reason prior to exercise in full or (ii) the
options are cancelled in accordance with the cancellation-regrant provisions of
Article Two. Unvested shares issued under the Plan and subsequently cancelled or
repurchased by the Corporation (including unvested shares issued under the
Predecessor Plan and repurchased by the Corporation at or after the Plan
Effective Time), at the original issue price paid per share, 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. However, should the exercise
price of an option under the Plan be paid with shares of Common Stock or should
shares of Common Stock otherwise issuable under the Plan be withheld by the
Corporation in satisfaction of the withholding taxes incurred in connection with
the exercise of an option or the vesting of a stock issuance under the Plan,
then the number of shares of Common Stock available for issuance under the Plan
shall be reduced by the gross number of shares for which the option is exercised
or which vest under the stock issuance, and not by the net number of shares of
Common Stock issued to the holder of such option or stock issuance. Shares of
Common Stock underlying one or more stock appreciation rights exercised under
Section IV of Article Two of the Plan shall NOT be available for subsequent
issuance under the Plan.


<PAGE>   5
            D.    If any change is 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, (ii) the number and/or class of securities for which any one
person may be granted stock options, separately exercisable stock appreciation
rights and direct stock issuances under the Plan per calendar year, (iii) the
number and/or class of securities for which grants are subsequently to be made
under the Automatic Option Grant Program to new and continuing non-employee
Board members, (iv) the number and/or class of securities and the exercise price
per share in effect under each outstanding option under the Plan and (v) the
number and/or class of securities and price per share in effect under each
outstanding option incorporated into this Plan from the Predecessor Plan. Such
adjustments to the outstanding options are to be effected in a manner which
shall preclude the enlargement or dilution of rights and benefits under such
options. The adjustments determined by the Plan Administrator shall be final,
binding and conclusive.


<PAGE>   6
                                   ARTICLE TWO

                       DISCRETIONARY OPTION GRANT PROGRAM

      I.    OPTION TERMS

            Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
shall comply with the terms specified below. Each document 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 but shall not be less than one hundred percent (100%) 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 Six and the documents evidencing the option, be payable in one or more
of the forms specified below:

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

                        (ii)  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

                        (iii) to the extent the option is exercised for vested
      shares, through a special sale and remittance procedure pursuant to which
      the Optionee shall concurrently provide irrevocable instructions to (a) 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) 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. However, no option shall have a term in excess of ten
(10) years measured from the option grant date.

<PAGE>   7
            C.    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)   Any option outstanding at the time of the
      Optionee's cessation of Service for any reason shall remain exercisable
      for such period of time thereafter as shall be determined by the Plan
      Administrator and set forth in the documents evidencing the option, but no
      such option shall be exercisable after the expiration of the option term.

                        (ii)  Any option exercisable in whole or in part by the
      Optionee at the time of death may be subsequently exercised by the
      personal representative of the Optionee's estate or by the person or
      persons to whom the option is transferred pursuant to the Optionee's will
      or in accordance with the laws of descent and distribution.

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

                        (iv)  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 to the extent the option is not otherwise at that
      time exercisable for vested shares.

                  2.    The Plan Administrator shall have complete 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 the Optionee's cessation of Service from
      the limited exercise 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 had the Optionee continued in Service.

            D.    STOCKHOLDER RIGHTS. The holder of an option shall have no
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.


<PAGE>   8
            E.    REPURCHASE RIGHTS. The Plan Administrator shall have the
discretion to grant options which are exercisable for unvested shares of Common
Stock. Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase, at the exercise price paid per
share, any or all of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and
the appropriate vesting schedule for the purchased shares) shall be established
by the Plan Administrator and set forth in the document evidencing such
repurchase right.

            F.    LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the
Optionee, Incentive Options 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. Non-Statutory Options shall be
subject to the same restrictions, except that a Non-Statutory Option may, in
connection with the Optionee's estate plan, be assigned in whole or in part
during the Optionee's lifetime to one or more members of the Optionee's
immediate family or to a trust established exclusively for one or more such
family members. The assigned portion may only be exercised by the person or
persons who acquire a proprietary interest in the option pursuant to the
assignment. The terms applicable to the assigned portion shall be the same as
those in effect for the option immediately prior to such assignment and shall be
set forth in such documents issued to the assignee as the Plan Administrator may
deem appropriate.

      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 Articles One, Two and Seven shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options when
issued under the Plan 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 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% STOCKHOLDER. If any Employee to whom an Incentive Option
is granted is a 10% Stockholder, then the exercise price per share shall not be
less than one hundred ten


<PAGE>   9
percent (110%) of the Fair Market Value per share of Common Stock on the option
grant date, and the option term shall not exceed five (5) years measured from
the option grant date.

      III.  CORPORATE TRANSACTION/CHANGE IN CONTROL

            A.    In the event of any Corporate Transaction, each outstanding
option shall automatically accelerate so that each such option shall,
immediately prior to the effective date of the Corporate Transaction, become
fully exercisable with respect to the total number of shares of Common Stock at
the time subject to such option and may be exercised for any or all of those
shares as fully vested shares of Common Stock. However, an outstanding option
shall NOT become exercisable on such an accelerated basis if and to the extent:
(i) such option is, in connection with the Corporate Transaction, to be assumed
by the 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 at the time of the Corporate Transaction on any
shares for which the option is not otherwise at that time exercisable and
provides for subsequent payout in accordance with the same exercise/vesting
schedule applicable to those 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.    All outstanding repurchase rights shall automatically
terminate, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Corporate Transaction,
except to the extent: (i) those repurchase rights are to be assigned to the
successor corporation (or parent thereof) in connection with such Corporate
Transaction or (ii) such accelerated vesting is precluded by other limitations
imposed by the Plan Administrator at the time the repurchase right is issued.

            C.    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).

            D.    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 to reflect such Corporate Transaction shall also be made
to (i) the exercise price payable per share under each outstanding option,
provided the aggregate exercise price payable for such securities shall remain
the same, (ii) the maximum number and/or class of securities available for
issuance over the remaining term of the Plan and (iii) the maximum number and/or
class of securities for which any one person may be granted stock options,
separately exercisable stock appreciation rights and direct stock issuances
under the Plan per calendar year.

            E.    The Plan Administrator shall have the discretionary authority
to provide for the automatic acceleration of one or more outstanding options
under the Discretionary Option Grant Program upon the occurrence of a Corporate
Transaction, whether or not those options are to be


<PAGE>   10
assumed in the Corporate Transaction, so that each such option shall,
immediately prior to the effect date of such Corporate Transaction, become fully
exercisable with respect to the total number of 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. In addition, the Plan Administrator
shall have the discretionary authority to structure one or more of the
Corporation's repurchase rights under the Discretionary Option Grant Program so
that those rights shall not be assignable in connection with such Corporate
Transaction and shall accordingly terminate upon the consummation of such
Corporate Transaction, and the shares subject to those terminated rights shall
thereupon vest in full.

            F.    The Plan Administrator shall have full power and authority,
exercisable either at the time the option is granted or at any time while the
option remains outstanding, to provide for the automatic acceleration of one or
more outstanding options under the Discretionary Option Grant Program in the
event the Optionee's Service is subsequently terminated by reason of an
Involuntary Termination within a designated period (not to exceed eighteen (18)
months) following the effective date of any Corporate Transaction in which those
options are assumed and do not otherwise accelerate. Any options so accelerated
shall remain exercisable for fully vested shares until the earlier of (i) the
expiration of the option term or (ii) the expiration of the one (1) year period
measured from the effective date of the Involuntary Termination. In addition,
the Plan Administrator may provide that one or more of the Corporation's
outstanding repurchase rights with respect to shares held by the Optionee at the
time of such Involuntary Termination shall immediately terminate, and the shares
subject to those terminated repurchase rights shall accordingly vest in full.

            G.    The Plan Administrator shall have the discretionary authority
to provide for the automatic acceleration of one or more outstanding options
under the Discretionary Option Grant Program upon the occurrence of a Change in
Control so that each such option shall, immediately prior to the effect date of
such Change in Control, become fully exercisable with respect to the total
number of 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.
In addition, the Plan Administrator shall have the discretionary authority to
structure one or more of the Corporation's repurchase rights under the
Discretionary Option Grant Program so that those rights shall terminate
automatically upon the consummation of such Change in Control, and the shares
subject to those terminated rights shall thereupon vest in full. Alternatively,
the Plan Administrator may condition the automatic acceleration of one or more
outstanding options under the Discretionary Option Grant Program and the
termination of one or more of the Corporation's outstanding repurchase rights
under such program upon the subsequent termination of the Optionee's Service by
reason of an Involuntary Termination within a designated period (not to exceed
eighteen (18) months) following the effective date of such Change in Control.
Each option so accelerated shall remain exercisable for fully vested shares
until the earlier of (i) the expiration of the option term or (ii) the
expiration of the one (1) year period measured from the effective date of
Optionee's cessation of Service.

            H.    The portion of any Incentive Option accelerated in connection
with a Corporate Transaction or Change in Control shall remain exercisable as an
Incentive Option only to the


<PAGE>   11
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 Nonstatutory Option under the
Federal tax laws.

            I.    The outstanding options 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.   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 Discretionary Option
Grant Program (including outstanding options incorporated from the Predecessor
Plan) and to grant in substitution 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 grant date.

      V.    STOCK APPRECIATION RIGHTS

            A.    The Plan Administrator shall have full power and authority to
grant to selected Optionees tandem stock appreciation rights and/or limited
stock appreciation rights.

            B.    The following terms shall govern the grant and exercise of
tandem stock appreciation rights:

                        (i)   One or more Optionees may be granted the right,
      exercisable upon such terms as the Plan Administrator may establish, to
      elect between the exercise of the underlying option for shares of Common
      Stock and the surrender of that option in exchange for a distribution from
      the Corporation in an amount equal to the excess of (a) the Fair Market
      Value (on the option surrender date) of the number of shares in which the
      Optionee is at the time vested under the surrendered option (or
      surrendered portion thereof) over (b) the aggregate exercise price payable
      for such shares.

                        (ii)  No such option surrender shall be effective unless
      it is approved by the Plan Administrator, either at the time of the actual
      option surrender or at any earlier time. If the surrender is so approved,
      then the distribution to which the Optionee shall be entitled may be made
      in shares of Common Stock valued at Fair Market Value on the option
      surrender date, in cash, or partly in shares and partly in cash, as the
      Plan Administrator shall in its sole discretion deem appropriate.

                        (iii) If the surrender of an option is not approved by
      the Plan Administrator, then the Optionee shall retain whatever rights the
      Optionee had under the surrendered option (or surrendered portion thereof)
      on the option surrender date and may exercise such rights at any time
      prior to the later of (a) five (5) business days after the receipt of the
      rejection notice or (b) the last day on which the option is otherwise
      exercisable in accordance with the terms


<PAGE>   12
      of the documents evidencing such option, but in no event may such rights
      be exercised more than ten (10) years after the option grant date.

            C.    The following terms shall govern the grant and exercise of
limited stock appreciation rights:

                        (i)   One or more Section 16 Insiders may be granted
      limited stock appreciation rights with respect to their outstanding
      options.

                        (ii)  Upon the occurrence of a Hostile Take-Over, each
      individual holding one or more options with such a limited stock
      appreciation right shall have the unconditional right (exercisable for a
      thirty (30)-day period following such Hostile Take-Over) to surrender each
      such option to the Corporation, to the extent the option is at the time
      exercisable for vested shares of Common Stock. In return for the
      surrendered option, the Optionee shall receive a cash distribution from
      the Corporation in an amount equal to the excess of (A) the Take-Over
      Price of the shares of Common Stock which are at the time vested under
      each surrendered option (or surrendered portion thereof) over (B) the
      aggregate exercise price payable for such shares. Such cash distribution
      shall be paid within five (5) days following the option surrender date.

                        (iii) The grant of such limited stock appreciation right
      shall automatically constitute pre-approval by the Plan Administrator of
      any subsequent exercise of that right in accordance with the terms of this
      Paragraph C. Accordingly, no further approval of the Plan Administrator or
      the Board shall be required at the time of the actual option surrender and
      cash distribution.

                        (iv)  The balance of the option (if any) shall remain
      outstanding and exercisable in accordance with the documents evidencing
      such option.

                                  ARTICLE THREE

                     SALARY INVESTMENT OPTION GRANT PROGRAM

      I.    OPTION GRANTS

            The Primary Committee shall have the sole and exclusive authority to
determine the calendar year or years (if any) for which the Salary Investment
Option Grant Program is to be in effect and to select the Section 16 Insiders
and other highly compensated Employees eligible to participate in the Salary
Investment Option Grant Program for those calendar year or years. Each selected
individual who elects to participate in the Salary Investment Option Grant
Program must, prior to the start of each calendar year of participation, file
with the Plan Administrator (or its designate) an irrevocable authorization
directing the Corporation to reduce his or her base salary for that calendar
year by an amount not less than Ten Thousand Dollars ($10,000.00) nor more than
Fifty Thousand Dollars ($50,000.00). The Primary Committee shall have complete
discretion to determine whether to approve the filed authorization in whole or
in part. To the


<PAGE>   13
extent the Primary Committee approves the authorization, the individual who
filed that authorization shall automatically be granted an option under the
Salary Investment Grant Program on the first trading day in January of the
calendar year for which the salary reduction is to be in effect.

      II.   OPTION TERMS

            Each option shall be a Non-Statutory Option evidenced by one or more
documents in the form approved by the Plan Administrator; provided, however,
that each such document shall comply with the terms specified below.

            A.    EXERCISE PRICE.

                  1.    The exercise price per share shall be thirty-three and
one-third percent (33-1/3%) 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 be payable in one or more of the alternative
forms authorized under the Discretionary Option Grant Program. Except to the
extent the sale and remittance procedure specified thereunder is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.

            B.    NUMBER OF OPTION SHARES. The number of shares of Common Stock
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):

                  X = A / (B x 66-2/3%), where

                  X is the number of option shares,

                  A is the dollar amount of the approved reduction in the
                  Optionee's base salary for the calendar year, and

                  B is the Fair Market Value per share of Common Stock on the
                  option grant date.

            C.    EXERCISE AND TERM OF OPTIONS. The option shall become
exercisable in a series of twelve (12) successive equal monthly installments
upon the Optionee's completion of each calendar month of Service in the calendar
year for which the salary reduction is in effect. Each option shall have a
maximum term of ten (10) years measured from the option grant date.

            D.    EFFECT OF TERMINATION OF SERVICE. Should the Optionee cease
Service for any reason while holding one or more options under this Article
Three, then each such option shall remain exercisable, for any or all of the
shares for which the option is exercisable at the time of such cessation of
Service, until the earlier of (i) the expiration of the ten (10)-year option
term or (ii) the expiration of the three (3)-year period measured from the date
of such cessation of


<PAGE>   14
Service. Should the Optionee die while holding one or more options under this
Article Three, then each such option may be exercised, for any or all of the
shares for which the option is exercisable at the time of the Optionee's
cessation of Service (less any shares subsequently purchased by Optionee prior
to death), by the personal representative of the Optionee's estate or by the
person or persons to whom the option is transferred pursuant to the Optionee's
will or in accordance with the laws of descent and distribution. Such right of
exercise shall lapse, and the option shall terminate, upon the earlier of (i)
the expiration of the ten (10)-year option term or (ii) the three (3)-year
period measured from the date of the Optionee's cessation of Service. However,
the option shall, immediately upon the Optionee's cessation of Service for any
reason, terminate and cease to remain outstanding with respect to any and all
shares of Common Stock for which the option is not otherwise at that time
exercisable.

      III. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE- OVER

            A.    In the event of any Corporate Transaction while the Optionee
remains in Service, each outstanding option held by such Optionee under this
Salary Investment Option Grant Program shall automatically accelerate so that
each such option shall, immediately prior to the effective date of the Corporate
Transaction, become fully exercisable with respect to the total number of shares
of Common Stock at the time subject to such option and may be exercised for any
or all of those shares as fully-vested shares of Common Stock. Each such
outstanding option shall be assumed by the successor corporation (or parent
thereof) in the Corporate Transaction and shall remain exercisable for the
fully-vested shares until the earlier of (i) the expiration of the ten (10)-year
option term or (ii) the expiration of the three (3)-year period measured from
the date of the Optionee's cessation of Service.

            B.    In the event of a Change in Control while the Optionee remains
in Service, each outstanding option held by such Optionee under this Salary
Investment Option Grant Program shall automatically accelerate so that each such
option shall immediately become fully exercisable with respect to the total
number of shares of Common Stock at the time subject to such option and may be
exercised for any or all of those shares as fully-vested shares of Common Stock.
The option shall remain so exercisable until the earlier of (i) the expiration
of the ten (10)-year option term, (ii) the expiration of the three (3)-year
period measured from the date of the Optionee's cessation of Service or (iii)
the surrender of the option in connection with a Hostile Take-Over.

            C.    Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each
outstanding option granted him or her under the Salary Investment Option Grant
Program. The Optionee shall in return be entitled to a cash distribution from
the Corporation in an amount equal to the excess of (i) the Take-Over Price of
the shares of Common Stock at the time subject to the surrendered option
(whether or not the Optionee is otherwise at the time vested in those shares)
over (ii) the aggregate exercise price payable for such shares. Such cash
distribution shall be paid within five (5) days following the surrender of the
option to the Corporation. The Primary Committee shall, at the time the option
with such limited stock appreciation right is granted under the Salary
Investment Option Grant Program, pre-approve any subsequent exercise of that
right in accordance with the terms of


<PAGE>   15
this Paragraph C. Accordingly, no further approval of the Primary Committee or
the Board shall be required at the time of the actual option surrender and cash
distribution.

            D.    The grant of options under the Salary Investment Option Grant
Program 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.

      III.  REMAINING TERMS

            The remaining terms of each option granted under the Salary
Investment Option Grant Program shall be the same as the terms in effect for
option grants made under the Discretionary Option Grant Program.

                                  ARTICLE FOUR

                             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 one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the issuance date.

                  2.    Subject to the provisions of Section I of Article Seven,
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


<PAGE>   16
specified performance objectives. The elements of the vesting schedule
applicable to any unvested shares of Common Stock issued under the Stock
Issuance Program, namely:

                        (i)   the Service period to be completed by the
Participant or the performance objectives to be attained,

                        (ii)  the number of installments in which the shares are
to vest,

                        (iii) the interval or intervals (if any) which are to
lapse between installments, and

                        (iv)  the effect which death, Permanent Disability or
other event designated by the Plan Administrator is to have upon the vesting
schedule,

shall be determined by the Plan Administrator and incorporated into the Stock
Issuance Agreement.

                  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 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 stockholder 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 stockholder 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 the surrendered shares.

                  5.    The Plan Administrator may in its discretion waive the
surrender and cancellation of one or more unvested shares of Common Stock which
would otherwise occur upon the cessation of the Participant's Service or the
non-attainment of the performance


<PAGE>   17
objectives applicable to those 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.

      II.   CORPORATE TRANSACTION/CHANGE IN CONTROL

            A.    All of the Corporation's outstanding repurchase rights under
the Stock Issuance Program shall terminate automatically, and all the shares of
Common Stock subject to those terminated rights shall immediately vest in full,
in the event of any Corporate Transaction, except to the extent (i) those
repurchase rights are to be assigned to the successor corporation (or parent
thereof) in connection with such Corporate Transaction or (ii) such accelerated
vesting is precluded by other limitations imposed in the Stock Issuance
Agreement.

            B.    The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase rights remain outstanding under the Stock Issuance
Program, to provide that those rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights shall
immediately vest, in the event the Participant's Service should subsequently
terminate by reason of an Involuntary Termination within a designated period
(not to exceed eighteen (18) months) following the effective date of any
Corporate Transaction in which those repurchase rights are assigned to the
successor corporation (or parent thereof).

            C.    The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase rights remain outstanding under the Stock Issuance
Program, to provide that those rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights shall
immediately vest, in the event the Participant's Service should subsequently
terminate by reason of an Involuntary Termination within a designated period
(not to exceed eighteen (18) months) following the effective date of any Change
in Control.

      III.  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.

                                  ARTICLE FIVE

                         AUTOMATIC OPTION GRANT PROGRAM

      I.    OPTION TERMS

            A.    GRANT DATES. Option grants shall be made on the dates
specified below:


<PAGE>   18
                  1.    Each individual serving as a non-employee Board member
on the Underwriting Date shall automatically be granted at that time a
Non-Statutory Option to purchase 20,000 shares of Common Stock, provided that
individual has not previously been in the employ of the Corporation or any
Parent or Subsidiary and has not previously received a stock option grant from
the Corporation.

                  2.    Each individual who is first elected or appointed as a
non-employee Board member at any time after the Underwriting Date shall
automatically be granted, on the date of such initial election or appointment, a
Non-Statutory Option to purchase 20,000 shares of Common Stock, provided that
individual has not previously been in the employ of the Corporation or any
Parent or Subsidiary.

                  3.    On the date of each Annual Stockholders Meeting held
after the Underwriting Date, each individual who is to continue to serve as an
Eligible Director, whether or not that individual is standing for re-election to
the Board at that particular Annual Meeting, shall automatically be granted a
Non-Statutory Option to purchase 5,000 shares of Common Stock, provided such
individual has served as a non-employee Board member for at least six (6)
months. There shall be no limit on the number of such 5,000-share option grants
any one Eligible Director may receive over his or her period of Board service,
and non-employee Board members who have previously been in the employ of the
Corporation (or any Parent or Subsidiary) or who have otherwise received a stock
option grant from the Corporation prior to the Underwriting Date shall be
eligible to receive one or more such annual option grants over their period of
continued Board service.

            B.    EXERCISE PRICE.

                  1.    The exercise price per share shall be equal to one
hundred percent (100%) of the Fair Market Value per share of Common Stock on the
option grant date.

                  2.    The exercise price shall be payable in one or more of
the alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.

            C.    OPTION TERM. Each option shall have a term of ten (10) years
measured from the option grant date.

            D.    EXERCISE AND VESTING OF OPTIONS. Each option shall be
immediately exercisable for any or all of the option shares. However, any shares
purchased under the option shall be subject to repurchase by the Corporation, at
the exercise price paid per share, upon the Optionee's cessation of Board
service prior to vesting in those shares. Each initial 20,000-share automatic
option grant shall vest, and the Corporation's repurchase right shall lapse, as
follows: (i) twenty-five percent (25%) upon Optionee's completion of one (1)
year of Board service measured from the grant date and (ii) the balance in a
series of thirty-six (36) successive equal monthly installments upon the
Optionee's completion of each additional month of Board service


<PAGE>   19
over the thirty-six (36)-month period measured from the first anniversary of the
option grant date. Each annual 5,000-share automatic option shall vest, and the
Corporation's repurchase right shall lapse, upon the Optionee's completion of
one (1) year of Board service measured from the grant date.

            E.    TERMINATION OF BOARD SERVICE. The following provisions shall
govern the exercise of any options held by the Optionee at the time the Optionee
ceases to serve as a Board member:

                  (i)   The Optionee (or, in the event of Optionee's death, the
      personal representative of the Optionee's estate or the person or persons
      to whom the option is transferred pursuant to the Optionee's will or in
      accordance with the laws of descent and distribution) shall have a twelve
      (12)-month period following the date of such cessation of Board service in
      which to exercise each such option.

                  (ii)  During the twelve (12)-month exercise period, the option
      may not be exercised in the aggregate for more than the number of vested
      shares of Common Stock for which the option is exercisable at the time of
      the Optionee's cessation of Board service.

                  (iii) Should the Optionee cease to serve as a Board member by
      reason of death or Permanent Disability, then all shares at the time
      subject to the option shall immediately vest so that such option may,
      during the twelve (12)-month exercise period following such cessation of
      Board service, be exercised for all or any portion of those shares as
      fully-vested shares of Common Stock.

                  (iv)  In no event shall the option remain exercisable after
      the expiration of the option term. Upon the expiration of the twelve
      (12)-month 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 Board
      service for any reason other than death or Permanent Disability, terminate
      and cease to be outstanding to the extent the option is not otherwise at
      that time exercisable for vested shares.

      II.   CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER

            A.    In the event of any Corporate Transaction, the shares of
Common Stock at the time subject to each outstanding option but not otherwise
vested 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
such option and may be exercised for all or any portion of those shares as
fully-vested shares of Common Stock. Immediately following the consummation of
the Corporate Transaction, each automatic option grant shall terminate and cease
to be outstanding, except to the extent assumed by the successor corporation (or
parent thereof).


<PAGE>   20
            B.    In connection with any Change in Control, the shares of Common
Stock at the time subject to each outstanding option but not otherwise vested
shall automatically vest in full so that each such option shall, immediately
prior to the effective date of the Change in Control, become fully exercisable
for all of the shares of Common Stock at the time subject to such option and may
be exercised for all or any portion of those shares as fully-vested shares of
Common Stock. Each such option shall remain exercisable for such fully-vested
option shares until the expiration or sooner termination of the option term or
the surrender of the option in connection with a Hostile Take-Over.

            C.    All outstanding repurchase rights shall automatically
terminate, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Corporate Transaction or
Change in Control.

            D.    Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each of
his or her outstanding automatic option grants. The Optionee shall in return be
entitled to a cash distribution from the Corporation in an amount equal to the
excess of (i) the Take-Over Price of the shares of Common Stock at the time
subject to each surrendered option (whether or not the Optionee is otherwise at
the time vested in those shares) over (ii) the aggregate exercise price payable
for such shares. Such cash distribution shall be paid within five (5) days
following the surrender of the option to the Corporation. No approval or consent
of the Board or any Plan Administrator shall be required in connection with such
option surrender and cash distribution.

            E.    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 the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
payable for such securities shall remain the same.

            F.    The grant of options under the Automatic Option Grant Program
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.

      III.  REMAINING TERMS

            The remaining terms of each option granted under the Automatic
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.


<PAGE>   21
                                   ARTICLE SIX

                        DIRECTOR FEE OPTION GRANT PROGRAM

      I.    OPTION GRANTS

            Each non-employee Board member may elect to apply all or any portion
of the annual retainer fee otherwise payable in cash for his or her service on
the Board to the acquisition of a special option grant under this Director Fee
Option Grant Program. Such election must be filed with the Corporation's Chief
Financial Officer prior to first day of the calendar year for which the annual
retainer fee which is the subject of that election is otherwise payable. Each
non-employee Board member who files such a timely election shall automatically
be granted an option under this Director Fee Option Grant Program on the first
trading day in January in the calendar year for which the annual retainer fee
which is the subject of that election would otherwise be payable in cash.

      II.   OPTION TERMS

            Each option shall be a Non-Statutory Option governed by the terms
and conditions specified below.

            A.    EXERCISE PRICE.

                  1.    The exercise price per share shall be thirty-three and
one-third percent (33-1/3%) 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 be payable in one or more of the alternative
forms authorized under the Discretionary Option Grant Program. Except to the
extent the sale and remittance procedure specified thereunder is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.

            B.    NUMBER OF OPTION SHARES. The number of shares of Common Stock
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):

                  X = A / (B x 66-2/3%), where

                  X is the number of option shares,

                  A is the portion of the annual retainer fee subject to the
                  non-employee Board member's election, and

                  B is the Fair Market Value per share of Common Stock on the
                  option grant date.


<PAGE>   22
            C.    EXERCISE AND TERM OF OPTIONS. The option shall become
exercisable in a series of twelve (12) equal monthly installments upon the
Optionee's completion of each month of Board service over the twelve (12)-month
period measured from the grant date. Each option shall have a maximum term of
ten (10) years measured from the option grant date.

            D.    TERMINATION OF BOARD SERVICE. Should the Optionee cease Board
service for any reason (other than death or Permanent Disability) while holding
one or more options under this Director Fee Option Grant Program, then each such
option shall remain exercisable, for any or all of the shares for which the
option is exercisable at the time of such cessation of Board service, until the
earlier of (i) the expiration of the ten (10)-year option term or (ii) the
expiration of the three (3)-year period measured from the date of such cessation
of Board service. However, each option held by the Optionee under this Director
Fee Option Grant Program at the time of his or her cessation of Board service
shall immediately terminate and cease to remain outstanding with respect to any
and all shares of Common Stock for which the option is not otherwise at that
time exercisable.

            E.    DEATH OR PERMANENT DISABILITY. Should the Optionee's service
as a Board member cease by reason of death or Permanent Disability, then each
option held by such Optionee under this Director Fee Option Grant Program shall
immediately become exercisable for all the shares of Common Stock at the time
subject to that option, and the option may be exercised for any or all of those
shares as fully-vested shares until the earlier of (i) the expiration of the ten
(10)-year option term or (ii) the expiration of the three (3)-year period
measured from the date of such cessation of Board service.

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

      III.  CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE- OVER

            A.    In the event of any Corporate Transaction while the Optionee
remains a Board member, each outstanding option held by such Optionee under this
Director Fee Option Grant Program shall automatically accelerate so that each
such option shall, immediately prior to the effective date of the Corporate
Transaction, become fully exercisable with respect to the total number of shares
of Common Stock at the time subject to such option and may be exercised for any
or all of those shares as fully-vested shares of Common Stock. Each such
outstanding option shall be assumed by the successor corporation (or parent
thereof) in the Corporate Transaction and shall remain exercisable for the
fully-vested shares until the earlier of (i) the expiration of the


<PAGE>   23
ten (10)-year option term or (ii) the expiration of the three (3)-year period
measured from the date of the Optionee's cessation of Board service.

            B.    In the event of a Change in Control while the Optionee remains
in Service, each outstanding option held by such Optionee under this Director
Fee Option Grant Program shall automatically accelerate so that each such option
shall immediately become fully exercisable with respect to the total number of
shares of Common Stock at the time subject to such option and may be exercised
for any or all of those shares as fully-vested shares of Common Stock. The
option shall remain so exercisable until the earlier or (i) the expiration of
the ten (10)-year option term or (ii) the expiration of the three (3)-year
period measured from the date of the Optionee's cessation of Service.

            C.    Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each
outstanding option granted him or her under the Director Fee Option Grant
Program. The Optionee shall in return be entitled to a cash distribution from
the Corporation in an amount equal to the excess of (i) the Take-Over Price of
the shares of Common Stock at the time subject to each surrendered option
(whether or not the Optionee is otherwise at the time vested in those shares)
over (ii) the aggregate exercise price payable for such shares. Such cash
distribution shall be paid within five (5) days following the surrender of the
option to the Corporation. No approval or consent of the Board or any Plan
Administrator shall be required in connection with such option surrender and
cash distribution.

            D.    The grant of options under the Director Fee Option Grant
Program 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.   REMAINING TERMS

            The remaining terms of each option granted under this Director Fee
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.

                                  ARTICLE SEVEN

                                  MISCELLANEOUS

      I.    FINANCING

      The Plan Administrator may permit any Optionee or Participant to pay the
option exercise price under the Discretionary Option Grant Program or the
purchase price of shares issued under the Stock Issuance Program by delivering a
full-recourse, interest bearing promissory note payable in one or more
installments. The terms of any such promissory note (including the interest rate
and the terms of repayment) shall be established by the Plan Administrator in
its sole discretion. In no event may the maximum credit available to the


<PAGE>   24
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.   TAX WITHHOLDING

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

            B.    The Plan Administrator may, in its discretion, provide any or
all holders of Non-Statutory Options or unvested shares of Common Stock under
the Plan (other than the options granted or the shares issued under the
Automatic Option Grant or Director Fee Option Grant Program) with the right to
use shares of Common Stock in satisfaction of all or part of the Taxes incurred
by such holders in connection with the exercise of their options or the vesting
of their shares. Such right may be provided to any such holder in either or both
of the following formats:

            Stock Withholding: The election to have the Corporation withhold,
from the shares of Common Stock otherwise issuable upon the exercise of such
Non-Statutory Option or the vesting of such shares, a portion of those shares
with an aggregate Fair Market Value equal to the percentage of the Taxes (not to
exceed one hundred percent (100%)) designated by the holder.

            Stock Delivery: The election to deliver to the Corporation, at the
time the Non-Statutory Option is exercised or the shares vest, one or more
shares of Common Stock previously acquired by such holder (other than in
connection with the option exercise or share vesting triggering the Taxes) with
an aggregate Fair Market Value equal to the percentage of the Taxes (not to
exceed one hundred percent (100%)) designated by the holder.

      III.  EFFECTIVE DATE AND TERM OF THE PLAN

            A.    The Plan shall become effective immediately at the Plan
Effective Time. However, the Salary Investment Option Grant Program shall not be
implemented until such time as the Primary Committee may deem appropriate.
Options may be granted under the Discretionary Option Grant or Automatic Option
Grant Program at any time at or after the Plan Effective Time. However, no
options 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 stockholders. If
such stockholder approval is not obtained within twelve (12) months after the
Plan Effective Time, then all options previously granted under this Plan shall
terminate and cease to be outstanding, and no further options shall be granted
and no shares shall be issued under the Plan.

            B.    The Plan shall serve as the successor to the Predecessor Plan,
and no further option grants or direct stock issuances shall be made under the
Predecessor Plan after the Section 12 Registration Date. All options outstanding
under the Predecessor Plan on the Section 12


<PAGE>   25
            Registration Date shall be incorporated into the Plan at that time
and shall be treated as outstanding options under the Plan. However, each
outstanding option so incorporated shall continue to be governed solely by the
terms of the documents evidencing such option, and no provision of the Plan
shall be deemed to affect or otherwise modify the rights or obligations of the
holders of such incorporated options with respect to their acquisition of shares
of Common Stock.

            C.    One or more provisions of the Plan, including (without
limitation) the option/vesting acceleration provisions of Article Two relating
to Corporate Transactions and Changes in Control, may, in the Plan
Administrator's discretion, be extended to one or more options incorporated from
the Predecessor Plan which do not otherwise contain such provisions.

            D.    The Plan shall terminate upon the earliest to occur of (i)
October 31, 2007, (ii) the date on which all shares available for issuance under
the Plan shall have been issued as fully-vested shares or (iii) the termination
of all outstanding options in connection with a Corporate Transaction. Should
the Plan terminate on October 31, 2007, then all option grants and unvested
stock issuances outstanding at that time shall continue to have force and effect
in accordance with the provisions of the documents evidencing such grants or
issuances.

      IV.   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 stock options or unvested stock issuances at the time outstanding
under the Plan unless the Optionee or the Participant consents to such amendment
or modification. In addition, certain amendments may require stockholder
approval pursuant to applicable laws or regulations.

            B.    Options to purchase shares of Common Stock may be granted
under the Discretionary Option Grant and Salary Investment Option Grant Programs
and shares of Common Stock may be issued under the Stock Issuance Program that
are in each instance in excess of the number of shares 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 stockholder approval of
an amendment sufficiently increasing the number of shares of Common Stock
available for issuance under the Plan. If such stockholder 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.

            C.    On March 24, 1999, the Board amended the Plan to increase the
maximum number of shares of Common Stock authorized for issuance over the term
of the Plan


<PAGE>   26
from 1,072,170 shares to 2,072,170 shares. This amendment is subject to
stockholder approval at the 1999 Annual Meeting. Until such stockholder approval
is obtained, any options granted on the basis of the amendment shall not become
exercisable in whole or in part, and those options shall terminate without ever
becoming exercisable for the option shares. All option grants and direct stock
issuances made prior to the amendment shall remain outstanding in accordance
with the terms and conditions of the respective instruments evidencing those
options or issuances, and nothing in this amendment shall be deemed to modify or
in any way affect those outstanding options or issuances.

      V.    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.

      VI.   REGULATORY APPROVALS

            A.    The implementation of the Plan, the granting of any stock
option under the Plan and the issuance of any shares of Common Stock (i) upon
the exercise of any granted 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 stock
options granted under it and the shares of Common Stock issued pursuant to it.

            B.    No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any stock exchange (or the Nasdaq National Market, if applicable) on which
Common Stock is then listed for trading.

      VII.  NO EMPLOYMENT/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.


<PAGE>   27
                                    APPENDIX

            The following definitions shall be in effect under the Plan:

            A.    AUTOMATIC OPTION GRANT PROGRAM shall mean the automatic option
grant program in effect under the Plan.

            B.    BOARD shall mean the Corporation's Board of Directors.

            C.    CHANGE IN CONTROL shall mean a change in ownership or control
of the Corporation effected through either of the following transactions:

                  (i)   the acquisition, directly or indirectly by any person or
      related group of persons (other than the Corporation or a person that
      directly or indirectly controls, is controlled by, or is under common
      control with, the Corporation), of beneficial ownership (within the
      meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than
      fifty percent (50%) of the total combined voting power of the
      Corporation's outstanding securities pursuant to a tender or exchange
      offer made directly to the Corporation's stockholders, or

                  (ii)  a change in the composition of the Board over a period
      of thirty-six (36) consecutive months or less such that a majority of the
      Board members ceases, by reason of one or more contested elections for
      Board membership, to be comprised of individuals who either (A) have been
      Board members continuously since the beginning of such period or (B) have
      been elected or nominated for election as Board members during such period
      by at least a majority of the Board members described in clause (A) who
      were still in office at the time the Board approved such election or
      nomination.

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

            E.    COMMON STOCK shall mean the Corporation's common stock.

            F.    CORPORATE TRANSACTION shall mean either of the following
stockholder-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.


<PAGE>   28
            G.    CORPORATION shall mean CombiChem, Inc., a Delaware
corporation, and its successors.

            H.    DIRECTOR FEE OPTION GRANT PROGRAM shall mean the special stock
option grant in effect for non-employee Board members under Article Six of the
Plan.

            I.    DISCRETIONARY OPTION GRANT PROGRAM shall mean the
discretionary option grant program in effect under the Plan.

            J.    ELIGIBLE DIRECTOR shall mean a non-employee Board member
eligible to participate in the Automatic Option Grant Program in accordance with
the eligibility provisions of Article One.

            K.    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.

            L.    EXERCISE DATE shall mean the date on which the Corporation
shall have received written notice of the option exercise.

            M.    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 such 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) For purposes of any option grants made on the
      Underwriting Date, the Fair Market Value shall be deemed to be equal to
      the price per share at which the Common Stock is to be sold in the initial
      public offering pursuant to the Underwriting Agreement.

            N.    HOSTILE TAKE-OVER shall mean the acquisition, directly or
indirectly, by any person or related group of persons (other than the
Corporation or a person that directly or indirectly controls, is controlled by,
or is under common control with, the Corporation) of

<PAGE>   29


beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of
securities possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities pursuant to a tender or
exchange offer made directly to the Corporation's stockholders which the Board
does not recommend such stockholders to accept.

            O.    INCENTIVE OPTION shall mean an option which satisfies the
requirements of Code Section 422.

            P.    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 bonus
      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 by the Corporation without the
      individual's consent.

            Q.    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).

            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.    OPTIONEE shall mean any person to whom an option is granted
under the Discretionary Option Grant, Salary Investment Option Grant, Automatic
Option Grant or Director Fee Option Grant Program.

            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


<PAGE>   30
(50%) or more of the total combined voting power of all classes of stock in one
of the other corporations in such chain.

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

            W.    PERMANENT DISABILITY OR PERMANENTLY DISABLED 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 expected to result in death or to be of continuous duration of twelve
(12) months or more. However, solely for purposes of the Automatic Option Grant
and Director Fee Option Grant Programs, Permanent Disability or Permanently
Disabled shall mean the inability of the non-employee Board member to perform
his or her usual duties as a Board member by reason of any medically
determinable physical or mental impairment expected to result in death or to be
of continuous duration of twelve (12) months or more.

            X.    PLAN shall mean the Corporation's 1997 Stock Incentive Plan,
as set forth in this document.

            Y.    PLAN ADMINISTRATOR shall mean the particular entity, whether
the Primary Committee, the Board or the Secondary Committee, which is authorized
to administer the Discretionary Option Grant and Stock Issuance Programs with
respect to one or more classes of eligible persons, to the extent such entity is
carrying out its administrative functions under those programs with respect to
the persons under its jurisdiction.

            Z.    PLAN EFFECTIVE TIME shall mean the time at which the
Underwriting Agreement is executed and finally priced.

            AA.   PREDECESSOR PLAN shall mean the Corporation's pre-existing
Stock Option Plan in effect immediately prior to the Plan Effective Time
hereunder.

            AB.   PRIMARY COMMITTEE shall mean the committee of two (2) or more
non-employee Board members appointed by the Board to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to Section
16 Insiders and to administer the Salary Investment Option Grant Program solely
with respect to the selection of the eligible individuals who may participate in
such program.

            AC.   SALARY INVESTMENT OPTION GRANT PROGRAM shall mean the salary
investment option grant program in effect under the Plan.

            AD.   COMMITTEE shall mean a committee of one or more Board members
appointed by the Board to administer the Discretionary Option Grant and Stock
Issuance Programs with respect to eligible persons other than Section 16
Insiders.


<PAGE>   31
            AE.   SECTION 12 REGISTRATION DATE shall mean the date on which the
Common Stock is first registered under Section 12 of the 1934 Act.

            AF.   SECTION 16 INSIDER shall mean an officer or director of the
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.

            AG.   SERVICE shall mean the performance of services for 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 or stock issuance.

            AH.   STOCK EXCHANGE shall mean either the American Stock Exchange
or the New York Stock Exchange.

            AI.   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.

            AJ.   STOCK ISSUANCE PROGRAM shall mean the stock issuance program
in effect under the Plan.

            AK.   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.

            AL.   TAKE-OVER PRICE shall mean the greater of (i) the Fair Market
Value per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest reported
price per share of Common Stock paid by the tender offeror in effecting such
Hostile Take-Over. However, if the surrendered option is an Incentive Option,
the Take-Over Price shall not exceed the clause (i) price per share.

            AM.   TAXES shall mean the Federal, state and local income and
employment tax liabilities incurred by the holder of Non-Statutory Options or
unvested shares of Common Stock in connection with the exercise of those options
or the vesting of those shares.

            AN.   10% STOCKHOLDER 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).

            AO.   UNDERWRITING AGREEMENT shall mean the agreement between the
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.


<PAGE>   32
            AP.   UNDERWRITING DATE shall mean the date on which the
Underwriting Agreement is executed and priced in connection with an initial
public offering of the Common Stock.



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