EXHIBIT 10.5
VITAL IMAGES, INC.
INCENTIVE STOCK OPTION ADJUSTMENT PLAN
1. Background; Purpose of Plan.
---------------------------
a. Vital Images, Inc. (the "Company") has entered into that certain
Distribution Agreement, dated as of ___________, 1997 (the
"Distribution Agreement"), between the Company and Bio-Vascular, Inc.,
a Minnesota corporation ("Bio-Vascular"), pursuant to which Bio-
Vascular will distribute (the "Distribution") all of the outstanding
shares of the Company's common stock to Bio-Vascular's shareholders of
record on the Record Date (as defined in the Distribution Agreement).
In connection with the Distribution, each holder of an option to
purchase Bio-Vascular common stock (a "Bio-Vascular Option") as of the
Record Date will be entitled to retain such Bio-Vascular Option,
provided that such Bio-Vascular Option will be adjusted to reflect the
Distribution (an "Adjusted Bio-Vascular Option"). In addition, as of
the Record Date, each holder of a Bio-Vascular Option will also be
entitled to receive an option to purchase Company common stock that
will be adjusted to reflect the Distribution (an "Adjusted Company
Option").
b. Pursuant to the terms and conditions of the applicable plans under
which the Bio-Vascular Options were initially granted, the exercise
price and number of shares covered by each Adjusted Bio-Vascular
Option, as well as the exercise price and number of shares covered by
each Adjusted Company Option, will be determined according to a
formula, set forth in the Employee Benefits Agreement entered into
between Bio-Vascular and the Company, that is based on the relative
fair market trading values of Bio-Vascular common stock and Company
common stock during the first five trading days following the
Distribution Date (as defined in the Distribution Agreement). Pursuant
to this formula, these adjustments will be made in such a manner that
the aggregate "intrinsic value," or difference between fair market
value and exercise price, of the Adjusted Bio-Vascular Option and
Adjusted Company Option will equal the pre-Distribution "intrinsic
value" of the Bio-Vascular Option with respect to which the adjustment
and grant were made.
c. In order to ensure that each Adjusted Company Option is granted
without any additional benefit not provided by the Bio-Vascular Option
with respect to which it is granted, Adjusted Company Options will be
granted under the terms of a corresponding "mirror" plan of the
Company. With respect to Bio-Vascular Options granted under the Bio-
Vascular Incentive Stock Option Plan As Amended, this Vital Images,
Inc. Incentive Stock Option Adjustment Plan (the "Plan") will serve as
such a "mirror" plan. Accordingly, the sole purpose of this Plan is to
provide for the grant of such Adjusted Company Options, and no
additional option grants of any kind will be granted under this Plan.
2. Administration.
--------------
This Plan shall be administered by a Committee appointed by the Board
of Directors of the Company (hereinafter referred to as the "Committee").
The Committee shall consist of two or more directors who are not employees
of the Company and who qualify as "non-employee directors" within the
meaning of Rule 16b-3 promulgated under the Securities Exchange Act of
1934. Committee members shall be appointed from time to time by the Board,
and shall serve at the pleasure of the Board. In the
absence of any such appointment, the Board of Directors of the Company shall
constitute the Committee. Subject to such orders and resolutions not
inconsistent with the provisions of this Plan as may from time to time be issued
or adopted by the Board of Directors, the Committee shall have full power and
authority to interpret the Plan and, to the extent contemplated herein, shall
exercise the discretion granted to it (i) to determine the purchase price of the
shares of Common Stock covered by each option, (ii) to determine the persons to
whom and the time or times at which such options shall be granted and the number
of shares to be subject to each option, (iii) to determine the terms of exercise
of each option, (iv) to interpret the Plan, (v) to prescribe, amend, and rescind
rules and regulations relating to the Plan, (vi) to determine the terms and
provisions (and amendments thereof) of each agreement under this Plan (which
agreements need not be identical), and (vii) to make all other determinations
necessary or advisable for the administration of the Plan.
All decisions, determinations and selections made by the Committee pursuant
to the provisions of the Plan and applicable existing orders and resolutions of
the Board of Directors shall be final. Each option granted shall be evidenced by
a written agreement containing such terms and conditions as may be approved by
the Committee and which shall not be inconsistent with the Plan and the orders
and resolutions of the Board of Directors with respect thereto.
The Committee and the group of individuals (the "Bio-Vascular Committee")
administering the Bio-Vascular Incentive Stock Option Plan As Amended (the "Bio-
Vascular Option Plan") will reasonably cooperate and communicate with each other
to promote the purposes of the Plan.
3. Eligibility and Participation.
-----------------------------
All of the Company's employees shall be eligible to receive options under
the Plan, including officers and members of the Company's Board of Directors who
are full-time employees of the Company. In addition, persons who hold
outstanding Bio-Vascular Options under the Bio-Vascular Option Plan as of the
Record Date will be eligible to participate in the Plan. The Committee shall
allot to such participants options to purchase shares in such amounts as the
Committee shall determine; provided, however, that no participant shall be
allotted an option for any greater number of shares than would result in such
participant owning, directly or indirectly, more than 10% of the total combined
voting power or value of the stock of the Company or any of its subsidiaries
unless the option price is at least 110% of the market value of the stock on the
date of grant, and the option is by its terms not exercisable after five (5)
years from the date of grant.
4. Shares Subject to the Plan.
--------------------------
Subject to adjustments as provided in Section 5 herein, an aggregate of
425,000 shares of common stock, $.01 par value of the Company shall be subject
to this Plan, either from authorized, but unissued shares, or shares reacquired
by the Company, including shares purchased in the open market or any combination
thereof. Such number and kind of shares shall be appropriately adjusted in the
event of any one or more stock splits or stock dividends hereafter paid or
declared with respect to such stock. If, prior to the termination of the Plan,
shares issued pursuant to this Plan are repurchased, such repurchased shares
shall again become available for issuance under the Plan.
Any shares which, after the effective date of this Plan, shall become
subject to valid outstanding options under this Plan may, to the extent of the
release of any such shares for option by termination of expiration of option(s)
without valid exercise, be made the subject of additional options under this
Plan.
5. Adjustments Upon Changes in Capitalization.
------------------------------------------
Notwithstanding any limitations set forth in Section 4 hereof, in the event
of a merger, consolidation, reorganization, stock dividend, stock split, or
other change in corporate structure or capitalization affecting the Common
Shares of the Company occurring after the Distribution Date, such appropriate
adjustments shall be made in the maximum number of shares available under the
Plan or to any one individual and in the number, kind, option price, etc., of
shares subject to options granted under the Plan as may be determined by the
Committee.
6. Terms and Conditions of Options.
-------------------------------
The Committee shall have the power, subject to the limitations contained in
this Plan, to prescribe any terms and conditions in respect of the granting or
exercise of any option under this Plan and, in particular, shall prescribe the
following terms and conditions:
a. Each option shall state the number of shares to which it pertains.
b. Each option shall be granted within ten (10) years of the date the
Bio-Vascular Option Plan was adopted by the Board of Directors of Bio-
Vascular.
c. The Committee, in its sole discretion, except with respect to employees
that own directly or indirectly more than 10% of the total combined voting
power or value of the stock of the Company or any of its subsidiaries, in
which case the option price shall be at least 110% of the market value of
the common stock on the date of grant, shall determine the price at which
shares shall be sold to participants hereunder, provided that such price
shall be payable at the time the shares are sold hereunder in cash or in
equivalent value (determined as of the date tendered) in an amount equal to
100% of the fair market value of the common stock on the date of grant.
If the Company common stock is listed on a national exchange or quoted in
the National Market System, fair market value shall be equal to the closing
price for the Company common stock as reported by the Wall Street Journal
(or other accurate reporter of market activity) for the business day
preceding the day on which the option was issued. If the Company common
stock is reported in the National Association of Securities Dealers
Automated Quotation System, fair market value shall be the average of the
bid and asked prices for the business day preceding the day on which the
option was issued. Except as specifically provided herein, determination of
the price at which shares shall be sold to participants shall be determined
by the Committee with reliance upon such appraisal(s) or other data as the
Committee may deem appropriate. Payment for shares upon exercise of any
option under this Plan with previously acquired shares of the Company shall
be subject to all applicable rules of the federal or state agencies having
appropriate jurisdiction, if any, and such shares shall be valued at fair
market value as of the date of exercise of the option.
d. If so designated by the Committee, options granted pursuant to this Plan
are intended to qualify for long-term capital gains tax treatment under the
provisions of Section 422 of the Internal Revenue Code of 1986, as amended.
Eligibility for such tax treatment requires that the stock be held at least
one (1) year from date of exercise of the option and at least
two (2) years from the date the option is granted.
e. An option shall be exercised when written notice of such exercise has been
given to the Company at its principal business office by the person
entitled to exercise the option and full payment for shares, as defined
herein, with respect to which the option is exercised has been received by
the Company. Until the stock certificates are issued, no right to vote or
receive dividends or any other rights as a shareholder shall exist with
respect to optioned shares notwithstanding the exercise of the Option.
f. Except as provided in this Section, an option may be exercised only by the
optionee while such optionee is, and has continually been, since the date
of the grant of the option, an employee of the Employer or within three (3)
months following termination of employment for reasons other than death,
disability or termination of employment for gross and willful misconduct or
voluntary resignation. If the continuous employment of an optionee
terminates by reason of death, an option granted hereunder held by the
deceased employee which is eligible for exercise as of the death may be
exercised within one (1) year following the date of death, but in no event
later than ten (10) years after the date of grant of such option by the
person or persons to whom the participant's rights under such option shall
have passed by will or by applicable laws of descent and distribution. If
the continuous employment of an optionee terminates by reason of
disability, such option(s) as the disabled employee would be entitled to
exercise as of the date of termination of employment must be exercised
within one (1) year following the date of termination, but in no event
later than ten (10) years after the date of grant of such option. In the
event that an optionee shall cease to be employed by the Employer by reason
of his voluntary resignation or his gross and willful misconduct during the
course of his employment, including but not limited to dishonesty, fraud,
failure to perform his duties, or other conduct adverse to the Company's or
Bio-Vascular's interests as the case may be, the option shall be terminated
as of the termination of employment. The transfer by a participant of
employment or other service from one Employer or its subsidiaries to the
other Employer or its subsidiaries will not be deemed to constitute a
termination of employment or other service for purposes of this Plan.
g. The aggregate fair market value (determined as of the time the option is
granted) of the common stock with respect to which options are exercisable
for the first time by the holder during any calendar year shall not exceed
$100,000.
7. Issuance of Options.
-------------------
Whenever the Committee shall designate a participant for the receipt of an
option, the Secretary (or if the Secretary is himself the recipient, the
President) of the Company shall forthwith send notice thereof to the
participant, in such form as the Committee shall approve, stating the number of
shares optioned to the participant and the price per share thereof. The date of
grant of the option to such participant shall be determined by the Committee, in
its discretion and consistent with the purpose of this Plan. Thereafter, the
Company shall issue to the participant an option instrument in such form as
deemed necessary or appropriate by the Committee.
8. Options Not Transferable.
------------------------
Options under the Plan may not be sold, pledged, assigned or transferred in
any manner, other
than as provided in Section 6(f) and may be exercised during the lifetime of an
optionee only by such optionee.
9. Amendment or Termination of the Plan.
------------------------------------
The Board of Directors of the Company may amend this Plan from time to time
as it may deem advisable. No amendment of the Plan, however, shall, without
shareholder approval, increase the maximum number of shares under the Plan as
provided in Section 4, or decrease the minimum option price provided in Section
6. Except as provided in Section 5, the Board shall not alter or impair any
option theretofore granted under the Plan without the consent of the holder of
the option. The Board of Directors may at any time terminate the Plan, provided
that any such termination of the Plan shall not adversely affect options already
granted and such options shall remain in full force and effect as if the Plan
had not been terminated.
10. Agreement and Representations of Participants.
---------------------------------------------
As a condition to the exercise of any option or portion thereof, the
Company may require the person exercising such option to represent and warrant
at the time of any such exercise that the shares are being purchased only for
investment and without any present intention to sell or distribute such shares
if, in the opinion of counsel for the Company, such a representation is required
under the Securities Act of 1933 or any other applicable law, regulation or rule
of any governmental agency.
In the event legal counsel to the Company renders an opinion to the Company
that shares for options exercised pursuant to this Plan cannot be issued to the
optionee because such action would violate any applicable federal or state
securities laws, then, in that event, the optionee agrees that the Company shall
not be required to issue said shares to the optionee and shall have no liability
to the optionee other than the return to optionee of amounts tendered to the
Company upon exercise of the option.
11. Definitions.
-----------
As used herein the following definitions shall apply:
a. "Continuous employment" shall mean employment without interruption
with the Employer. Employment shall not be considered interrupted in
the case of sick leave, military leave or any other leave of absence
approved by the Employer.
b. "Employer" means the Company if the participant renders employment or
other services to the Company or any subsidiary of the Company and
means Bio-Vascular if the Participant renders employment or other
services to Bio-Vascular or any subsidiary of Bio-Vascular.
c. "Option" shall mean a stock option granted pursuant to the Plan.
d. "Stockholder" shall mean the holders of outstanding shares of the
common stock of the Company.
12. Effective Date and Termination of the Plan.
------------------------------------------
The Plan shall become effective as of the Distribution Date. The Plan
shall terminate on the earlier of:
a. The date when all the common shares available under the Plan shall
have been acquired through the exercise of options granted under the
Plan; or
b. Ten (10) years after the date of adoption by the Board of Directors of
Bio-Vascular, of the Bio-Vascular Option Plan; or
c. Such other date as the Board of Directors of the Company may
determine.
13. Form of Option.
--------------
Options shall be issued in such form as deemed necessary or appropriate by
the Committee.
