APPENDIX "A"
2005 INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN
OF
AMERICAN PHYSICIANS SERVICE GROUP, INC.
A Texas Corporation
I. Purpose of Plan
The purpose of this 2005 Incentive and Non-Qualified Stock Option Plan
(this "Plan") is to strengthen American Physicians Service Group, Inc. a Texas
corporation (the "Corporation"), and its subsidiaries, by providing stock
options as a means to attract, retain and motivate corporate personnel.
II. Administration
This Plan shall be administered by an administrative body (the "Committee")
designated by the Board of Directors of the Corporation (the "Board"). The Board
may designate itself as the Committee or appoint two or more "Non-Employee
Directors" to a committee which shall serve as the Committee. For purposes of
this Plan, "Non-Employee Director" will mean a director who meets the definition
of "non-employee director" under Rule 16b-3 under the Securities Exchange Act of
1934 (as amended, the "1934 Act"), and who qualifies as an "outside director"
within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as
amended (the "Code"), and to the extent applicable, meets the requirements for
an independent director, pursuant to the rules of any securities exchange on
which the stock is listed, or if the stock is not listed, the rules of the
National Association of Securities Dealers, Inc. ("NASD"), if applicable. The
Committee shall have the sole authority to select the persons entitled to
receive Options (as defined below) from among those eligible hereunder (the
"Optionees") and to establish the number of shares that may be issued under each
Option to such persons; provided, however, that, notwithstanding any provision
in this Plan to the contrary, the maximum number of shares of common stock, $.10
par value per share of the Corporation (the "Common Stock"), that may be subject
to Options granted under the Plan to an individual Optionee during any calendar
year may not exceed 150,000 (subject to adjustment in the same manner as
provided in Article VIII hereof to prevent dilution.) The limitation set forth
in the preceding sentence shall be applied in a manner which will permit
compensation generated under the Plan to constitute "performance-based"
compensation for purposes of Section 162(m) of the Code, including, without
limitation, counting against such maximum number of shares, to the extent
required under Section 162(m) of the Code and applicable interpretive authority
thereunder, any shares subject to Options that are canceled or repriced.
All determinations, interpretations and constructions made by the Committee
in good faith will not be subject to review by any person and will be final,
binding and conclusive on all persons. Members of the Committee and any officer
or employee of the Corporation acting at the direction of, or on behalf of, the
Committee will not be personally liable for any action or determination taken or
made in good faith with respect to the Plan, and will, to the extent permitted
by law, be fully indemnified by the Corporation with respect to any such action
or determination.
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III. Grant of Options
The Corporation is authorized to grant incentive stock options ("Incentive
Stock Options") as defined in section 422 of the Code and options that are not
intended to be Incentive Stock Options (hereafter "Non-Qualified Stock Options"
and, together with Incentive Stock Options, the "Options"). Any Option granted
under this Plan shall be granted within 10 years from the date this Plan is
adopted, or the date this Plan is approved by the shareholders pursuant to
Article X, whichever is earlier. No Option granted under this Plan shall be
exercisable by its terms after the expiration of 10 years from the grant of the
Option. Options may be granted only to individuals (a) who are employees
(including officers and directors who are also employees) of the Corporation or
any parent or subsidiary corporation (as defined in section 424 of the Code) of
the Corporation, (b) who are non-employee directors of the Corporation at the
time the Option is granted and who may be granted Options hereunder in
compliance with Rule 16b-3, or (c) consultants and advisors of the Corporation
or any parent or subsidiary corporation of the Corporation who render bona fide
services to the Corporation or any parent or subsidiary corporation of the
Corporation; provided that such services must not be in connection with the
offer or sale of securities in a capital-raising transaction. Options may be
granted to the same individual on more than one occasion.
Incentive Stock Options may not be granted to persons who own stock
possessing more than 10 percent of the total combined voting power of all
classes of stock of the Corporation, or of its parent or subsidiary, if any,
within the meaning of section 422(b)(6) of the Code, unless (i) at the time such
Option is granted the option exercise price is at least 110% of the fair market
value of the Common Stock subject to such Option and (ii) such Option by its
terms is not exercisable after the expiration of five years from the date of the
grant.
To the extent that the aggregate fair market value of Common Stock (as
determined in good faith by the Committee at the time the Incentive Stock Option
is granted), with respect to which Incentive Stock Options are exercisable for
the first time by an individual during any calendar year (under all incentive
stock option plans of the Corporation and any parent or subsidiary corporation)
exceeds $100,000, such excess Incentive Stock Options shall be treated as
Non-Qualified Stock Options. The Committee shall determine, in accordance with
applicable provisions of the Code, Treasury Regulations and other administrative
pronouncements, which of an Optionee's Incentive Stock Options will not
constitute Incentive Stock Options because of such limitation and shall notify
the Optionee of such determination as soon as practicable after such
determination.
IV. Stock Subject to Plan
The aggregate number of shares of Common Stock that may be issued pursuant
to Options granted under this Plan shall not exceed 350,000 shares of Common
Stock (subject to adjustment as provided in Article VIII). Such shares may
consist of authorized but unissued shares of Common Stock or previously issued
shares of Common stock reacquired by the Corporation. Any of such shares which
remain unissued and which are not subject to outstanding Options at the
termination of this Plan shall cease to be subject to this Plan, but, until
termination of this Plan, the Corporation shall at all times make available a
sufficient number of shares to meet the requirements of this Plan. Should any
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Option hereunder expire or terminate prior to its exercise in full, the shares
of Common Stock theretofore subject to such Option may again be subject to an
Option granted under this Plan to the extent permitted under Rule 16b-3. The
aggregate number of shares which may be issued under this Plan shall be subject
to adjustment as provided in Article VIII hereof. Exercise of an Option in any
manner pursuant to the terms of this Plan and the related Option Agreement shall
result in a decrease in the number of shares of Common Stock which may
thereafter be available, for purposes of the Plan, by the number of shares as to
which the Option is exercised. Separate stock certificates shall be issued by
the Corporation for those shares acquired pursuant to the exercise of an
Incentive Stock Option and for those shares acquired pursuant to the exercise of
any Non-Qualified Stock Options.
V. Option Agreements
Each Option shall be evidenced by a written agreement between the
Corporation and the Optionee ("Option Agreement") which shall contain such terms
and conditions as the Committee deems necessary, including, without limitation,
terms and conditions relating to the termination of Options. The terms and
conditions of the respective Option Agreements need not be identical.
VI. Option Price; Payment of Option Price
The purchase price for a share of Common Stock subject to an Incentive
Stock Option granted pursuant to this Plan shall not be less than the fair
market value of the Common Stock subject to such Incentive Stock Option on the
date such Option is granted. The purchase price for a share of the Common Stock
subject to a Non-Qualifying Stock Option granted pursuant to this Plan shall be
not less than 100% of the fair market value of the Common Stock subject to such
Non-Qualifying Stock Option on the date such Option is granted.
For all purposes under the Plan, the fair market value of a share of Common
Stock on a particular date shall be equal to the closing price per share of the
Common Stock (i) reported by the National Market System of NASDAQ on that date
or (ii) if the Common Stock is listed on a national stock exchange, reported on
the stock exchange composite tape on that date. If the Common Stock is traded
over the counter at the time a determination of its fair market value is
required to be made hereunder, its fair market value shall be deemed to be equal
to the average between the reported high and low or closing bid and ask prices
of the Common Stock on the most recent date on which the Common Stock was
publicly traded. In the event the Common Stock is not publicly traded at the
time a determination of its value is required to be made hereunder, the
determination of its fair market value shall be made in good faith by the
Committee in such manner as it deems appropriate.
Notwithstanding the foregoing, an Incentive Stock Option or a
Non-Qualifying Stock Option may be granted with an exercise price less than 100%
of fair market value if such Option is granted pursuant to an assumption or
substitution for another option in a manner satisfying the provisions of Section
424(a) of the Code.
The exercise price of an Option shall be paid in one of the following forms
(or any combination thereof): (a) cash or (b) the transfer to the Company of
already-owned shares of Common Stock; provided, however that the Committee may
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determine that the exercise price be paid only in cash. In addition, Options may
be exercised through such "cashless exercise" procedures that are, from time to
time, deemed acceptable by the Committee and not in violation of applicable law.
Any shares of Common Stock transferred to the Company as payment of the exercise
price (including shares of Common Stock underlying the Option to be exercised
and being used to pay the exercise price therefor pursuant to a cashless
exercise) shall be valued at their fair market value on the trading day
preceding the date of exercise of such Option.
VII. Options Nontransferable
Incentive Stock Options and all rights granted thereunder shall not be
transferable other than by will or the laws of descent and distribution.
Non-Qualified Stock Options and all rights granted thereunder shall not be
transferable other than by will or the laws of descent and distribution, or upon
the express prior written consent of the Committee in each instance so long as
such transfer is to a "family member" as defined under General Instruction
A(1)(a)(5) to the Registration Statement on Form S-8. All Incentive Stock
Options shall be exercisable during the Optionee's lifetime, only by the
Optionee or the Optionee's guardian or legal representative.
VIII. Recapitalization or Reorganization
In the event of a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, an appropriate and
proportionate adjustment shall be made to the maximum number of shares of Common
Stock available for issuance pursuant to Options granted pursuant to this Plan,
as set forth in Article IV hereof, and the maximum number of shares of Common
Stock subject to Options granted to a person during any calendar year, as set
forth in Article II hereof. A corresponding change shall be made to the number
and kind of shares, and the exercise price per share, of unexercised Options.
IX. Change in Control and Other Corporate Transactions
In the event of a Change in Control, dissolution or liquidation of the
Corporation, or any corporate separation or division, including, but not limited
to, a split-up, a split-off or a spin-off, or a sale of substantially all of the
assets of the Corporation (collectively, a "Corporate Transaction"), then the
Corporation, to the extent permitted by applicable law, but otherwise in the
sole discretion of the Committee, may provide for: (i) the continuation of
outstanding Options by the Corporation (if the Corporation is the surviving
entity); (ii) the assumption of the Plan and such outstanding Options by the
surviving entity or its parent; (iii) the substitution by the surviving entity
or its parent of Options with substantially the same terms (including Options to
acquire the same consideration paid to the shareholders in the transaction
described in this Article IX) for such outstanding Options and, if appropriate,
subject to the equitable adjustment provisions of Article VIII hereof; (iv) the
cancellation of such outstanding Options in consideration for a payment equal in
value to the difference between the fair market value and the exercise price for
all shares of Common Stock subject to exercise (i.e., to the extent vested)
under any outstanding Option; or (v) the cancellation of such outstanding
Options without payment of any consideration. Any such payment may be paid in
cash or such other consideration payable to the holders of outstanding shares of
Common Stock of the Corporation in connection with such Corporate Transaction.
If vested Options would be canceled without consideration, the Option holder
shall have the right, exercisable during the later of the ten-day period ending
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on the fifth day prior to such Corporate Transaction or ten days after the
Committee provides the grant holder a notice of cancellation, to exercise such
Options in whole or in part without regard to any installment exercise
provisions in the Option Agreement. In addition, the Committee, in its
discretion, may provide for acceleration of unvested Options in connection with
any of the alternatives described above.
A "Change in Control" shall mean the occurrence of any of the
following:
(a) The "acquisition" by any "Person" (as the term person is used for purposes
of Section 13(d) or 14(d) of the 1934 Act) of "Beneficial Ownership" (within the
meaning of Rule 13d-3 promulgated under the 1934 Act) of any securities of the
Corporation which generally entitles the holder thereof to vote for the election
of directors of the Corporation (the "Voting Securities") which, when added to
the Voting Securities then "Beneficially Owned" by such Person, would result in
such Person either "Beneficially Owning" fifty percent (50%) or more of the
combined voting power of the Corporation's then outstanding Voting Securities or
having the ability to elect fifty percent (50%) or more of the Corporation's
directors; or
(b) The consummation of a merger, consolidation or reorganization involving the
Corporation (a "Business Combination"), unless the stockholders of the
Corporation, immediately before the Business Combination, own, directly or
indirectly immediately following the Business Combination, at least fifty
percent (50%) of the combined voting power of the outstanding voting securities
of the corporation resulting from the Business Combination in substantially the
same proportion as their ownership of the Voting Securities immediately before
the Business Combination; or
(c) The consummation of a merger or consolidation involving the Corporation
where the Corporation is not the surviving entity; or
(d) Any change in the identity of directors constituting a majority of the Board
within a twenty-four month period unless the change was approved by a majority
of the Incumbent Directors, where "Incumbent Director" means a member of the
Board at the beginning of the period in question, including any director who was
not a member of the Board at the beginning of such period but was elected or
nominated to the Board by, or on the recommendation of or with the approval of,
at least two-thirds of the directors who then qualified as Incumbent Directors.
X. Effective Date of Plan
This Plan shall be effective on approval by the affirmative vote of the
holders of a majority of the outstanding shares of capital stock of the
Corporation present or represented and entitled to vote thereon at a duly held
shareholder meeting or by unanimous written consent of the shareholders of the
Corporation in the manner required by Rule 16b-3.
XI. Amendment or Termination of Plan
The Board in its discretion may terminate this Plan at any time with
respect to any shares of Common Stock for which Options have not theretofore
been granted. The Board shall have the right to alter or amend this Plan or any
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part hereof from time to time; provided, that no change in any Option heretofore
granted may be made which would impair the rights of the Optionee without the
consent of such Optionee; and provided, further, that (i) the Board may not make
any alteration or amendment which would decrease any authority granted to the
Committee hereunder in contravention of Rule 16b-3 and (ii) the Board may not
make any alteration or amendment which would materially increase the benefits
accruing to participants under the Plan, increase the aggregate number of shares
which may be issued pursuant to the provisions of the Plan, change the class of
individuals eligible to receive Options under the Plan or extend the term of the
Plan, without the approval of the shareholders of the Corporation.
XII. Compliance with Section 16
With respect to persons subject to Section 16 of the 1934 Act, transactions
under this Plan are intended to comply with all applicable conditions of Rule
16b-3 or its successors under the 1934 Act. To the extent any provision of the
Plan or action by the Committee fails to so comply, it shall be deemed null and
void, to the extent permitted by law and deemed advisable by the Committee.
XIII. Exchange Provisions; Governing Law
The Committee may at any time offer to exchange or buy out any previously
granted Option for a payment in cash, Common Stock or another Option, based on
the terms and conditions the Committee determines and communicates to the Option
holder at the time the offer is made.
This Plan shall be governed by the laws of the State of Texas.
[Signature Page Follows]
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AMERICAN PHYSICIANS SERVICE GROUP, INC.
By: /s/ W.H. Hayes
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W.H. Hayes
Senior Vice President and Secretary