Document:

Exhibit 10.1

 

NATIONAL
SEMICONDUCTOR

 

2005
EXECUTIVE OFFICER EQUITY PLAN

 

1.             PURPOSE AND OBJECTIVES

 

The National Semiconductor 2005 Executive Officer
Equity Plan (the “Plan”) is designed to align the interests of Executive
Officers of National Semiconductor Corporation with the interests of the
Company’s stockholders and to provide incentives for such Executive Officers to
exert maximum efforts for the success of the Company.  By extending to Executive Officers the
opportunity to acquire proprietary interests in the Company and to participate
in its success, the Plan may be expected to benefit the Company and its
stockholders by making it possible for the Company to attract and retain the
best available executive talent and by rewarding them for their part in
increasing the value of the Company’s shares.

 

2.             DEFINITIONS

 

Whenever used in this Plan, the following terms
shall have the meaning set forth below:

 

Award:   The grant of any form of
stock, stock option, stock appreciation right, or performance share units
whether granted singly, in combination or in tandem, to a Participant pursuant
to such terms, conditions, performance requirements, limitations and
restrictions as the Committee may establish in order to fulfill the objectives
of the Plan.

 

Award Agreement:   An
agreement between the Company and a Participant that sets forth the terms,
conditions, performance requirements, limitations and restrictions applicable
to an Award.

 

Board:   The board of directors of the
Company.

 

Code:   The Internal Revenue Code of
1986, as amended.

 

Committee:   The committee appointed by
the Board to administer the Plan.

 

Common Stock:   The
Company’s common stock, par value $0.50 per share.

 

Company:   National Semiconductor
Corporation (“NSC”) a Delaware corporation, and any corporation in which NSC
controls directly or indirectly more than fifty percent (50%) of the combined
voting power of voting securities.

 

Disability:   Inability to perform any
services for the Company and eligible to receive disability benefits under the
standards

 

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used by the Company’s disability benefit plans or
any successor plan thereto.

 

Effective Date:   The
date this Plan is approved by the Company’s stockholders.

 

EOIP:   The Company’s Executive
Officer Incentive Plan.

 

Exchange Act:   Securities
Exchange Act of 1934, as amended.

 

Executive Officer:   Employees
of the Company identified as the Company’s executive officers in the Company’s
annual report on Form 10-K filed with the Securities and Exchange Commission.

 

Exercise Price:   Price
at which a share of Common Stock may be purchased by a Participant pursuant to
the exercise of an Option.

 

Fair Market Value:   Opening
price per share of the Common Stock on the New York Stock Exchange on the
relevant date or if the Common Stock is not traded on such date, then on the
immediately preceding trading day on the New York Stock Exchange.  Notwithstanding the foregoing, for federal,
state and local income tax reporting purposes, the Fair Market Value may be
determined by the Committee in accordance with uniform and non-discriminatory
standards adopted by it from time to time.

 

Fiscal Year:   The fiscal year of the
Company.

 

Grant Date:   With respect to an Award, the
date that the Award was granted.

 

Immediate Family:   Parents
(including step-parents), spouses, children (including step-children and
adopted children) and siblings (including step-siblings.)

 

Non-Qualified Stock Option:   Option
to purchase shares of Common Stock that is not intended to be an incentive
stock option, as that term is defined in the Code.

 

Option:   Non-Qualified Stock Option.

 

Participant:   An Executive Officer to whom
an Award has been made under the Plan.

 

Performance Goals:   The
goal(s) (or combined goals) determined by the Committee (in its discretion) to
be applicable to a Participant with respect to an Award.  As determined by the Committee, the
Performance Goals applicable to an Award may provide for a targeted level or
levels of achievement using one or more of the business criteria specified in Section 6.  The Performance Goals may differ from
Participant to Participant and from Award to Award.

 

Performance Share Units:   Awards
to be made under the conditions specified in Section 8.

 

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Retirement:   Permanent termination of
employment with the Company and (a) age is either sixty-five (65) or age is at
least fifty-five (55) and years of service in the employ of the Company is ten
(10) or more, and (b) the terminating employee has certified to the Chief
Financial Officer of the Company that he or she does not intend to engage in a
full-time vocation; provided however, that the Committee may in its discretion
waive the obligation to deliver a certification that the terminating employee
does not intend to engage in a full-time vocation.

 

Secretary:   The Secretary of the Company.

 

Stock Appreciation Right:   Awards
granted to a Participant pursuant to Section 9.

 

3.             ADMINISTRATION

 

3.1           The Committee.  The Plan shall be administered by the
Committee.  The Committee shall consist
of not less than two (2) directors who shall be appointed from time to time by,
and shall serve at the pleasure of, the Board. 
The Committee shall be comprised solely of directors who both are (a) “non-employee
directors” under Rule 16b-3 under the Exchange Act, (b) “outside directors”
under Section 162(m) of the Code; and (c) “independent directors” as
required by the listing standards of the New York Stock Exchange.

 

3.2           Authority of the Committee.  It shall be the duty of the Committee to
administer the Plan in accordance with the Plan’s provisions.  The Committee shall have all powers and
discretion necessary or appropriate to administer the Plan and to control its
operation, including, but not limited to, the power to (a) approve which
Executive Officers shall be granted Awards, (b) prescribe the terms and
conditions of the Awards, (c) interpret the Plan and the Awards, (d) adopt such
procedures and subplans as are necessary or appropriate to permit participation
in the Plan by Executive Officers who are foreign nationals or employed outside
of the United States, (e) adopt rules for the administration, interpretation
and application of the Plan as are consistent therewith and (f) interpret, amend
or revoke any such rules.

 

3.3           Decisions Binding.  All determinations and decisions made by the
Committee and the Board pursuant to the provisions of the Plan shall be final,
conclusive, and binding on all persons, and shall be given the maximum deference
permitted by law.

 

4.             SHARES SUBJECT TO THE PLAN

 

4.1           Number of Shares.  Subject to adjustment as provided in Section 4.3,
the total number of shares available for issuance under the Plan shall not
exceed 3,000,000 which may be unissued shares, or shares acquired by the
Company, either on the market or otherwise. 
The total number of shares of Common Stock that may be delivered upon
exercise of Options that may be granted under this Plan shall not exceed
1,000,000 and the total number

 

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of shares of Common Stock that can be delivered
under the Plan in connection with Performance Share Units and upon settlement
of Stock Appreciation Rights shall not exceed 2,000,000.

 

4.2           Expired Awards.  If an Award is forfeited, cancelled,
terminates, expires, or lapses for any reason, any shares of Common Stock
subject to such Award shall again be available to be the subject of an Award,
except as determined by the Committee. 
Any shares of Common Stock withheld for tax purposes upon payment of an
Award shall not again be available to be subject to an Award.

 

4.3           Adjustments in Awards and Authorized
Shares.  In the event that there is any
change in the shares of the Company through any dividend or other distribution
(whether in the form of cash, shares of Common Stock, other securities, or
other property), recapitalization, stock split, reverse stock split,
reorganization, merger, consolidation, split-up, spin-off, combination,
repurchase, or exchange of shares of Common Stock or other securities of the
Company, then the number of shares of Common Stock that may be delivered under
the Plan, the number, class, and price of shares of Common Stock subject to
outstanding Awards, and the numerical limits of Section 4.1 shall be
appropriately adjusted by the Committee. 
Notwithstanding the preceding, the number of shares of Common Stock
subject to any Award shall always be a whole number.

 

5.             ELIGIBILITY

 

Awards may be granted under the Plan only to
Executive Officers of the Company.  No
Executive Officer shall have the automatic right to receive an Award under this
Plan. Once having been selected to receive an Award, an Executive Officer has
no right to be selected to receive a future Award.

 

6.             PERFORMANCE GOALS

 

Performance Goals shall identify one or more
business criteria, which may include any of the following:

 

Financial Business Criteria:

 

Net income

Debt reduction

Stockholder return

Return on investment

Return on invested capital

Return on equity

Gross operating profit

Return on research and development investment

Margin

Earnings per share

Cash flow

Revenue

Revenue growth

Return on net assets

Profit before tax

Profit after tax

Market capitalization

Total stockholder return

 

Performance Goals based on financial business criteria
may be set on
a pre tax or after tax basis, may be defined by absolute or relative measures,
and may be valued on a growth or fixed basis.

 

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Strategic and Operational Business Criteria:

 

Quality improvements

Cycle time reductions

Manufacturing improvements and/or
efficiencies

Strategic positioning programs

Business/information systems improvements

Infrastructure support programs

Human resource programs

New product releases

Operational and strategic programs

Market Share

Reduction in product returns

Customer satisfaction improvements

Compensation/review program improvements

Expense management Customer request date
performance

New product revenue

Customer programs

Technology development programs

 

7.             STOCK OPTIONS

 

7.1           Grant of Options.  Subject to the terms and provisions of the
Plan, Options may be granted to Executive Officers at any time and from time to
time as determined by the Committee in its sole discretion.  The Committee shall determine the number of
shares of Common Stock subject to each Option, provided, however that no one
individual may receive a grant of more than 250,000 Options in any one Fiscal
Year.

 

7.2           Award Agreement.  Each Option shall be evidenced by an Award
Agreement that shall specify the Exercise Price, the expiration date of the
Option, the number of shares of Common Stock to which the Option pertains, and
such other terms and conditions as the Committee, in its discretion, shall
determine.  The Committee may provide
that Options become exercisable in installments.  The terms of the Award Agreement need not be
identical for all Participants or for each Option granted.

 

7.3           Exercise Price. The Exercise Price for each
Option shall be not less than one hundred percent (100%) of the Fair Market
Value on the Grant Date.

 

7.4           Term. The maximum term of any Option shall be
six years and one day from the Grant Date. 
Subject to these limits, the Committee shall provide in each Award
Agreement when each Option expires and becomes unexercisable.

 

7.5           Performance Requirements. The Committee may
establish performance requirements for exercisability of Options.  Performance requirements may be set based
upon the achievement of Performance Goals or other specific performance
objectives (Company-wide, divisional, or individual.)

 

7.6           Exercisability of Options.

 

7.6.1        Except as provided in Section 10.1.1, an
Option may not exercised to any extent, either by the

 

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person to whom it was granted, the grantee’s
transferee, the grantee’s guardian or legal representative or by any person
after the grantee’s death, unless the person to whom the Option was granted has
remained in the continuous employ of the Company for not less than six months
from the date when the Option was granted. 
Otherwise, each Option shall be exercisable as determined by the
Committee.  Subject to the foregoing,
Options shall be exercisable only after the time vesting requirements specified
in the Option grant have been satisfied and, if applicable, the Committee has
certified in writing that all applicable performance conditions have been met.

 

7.6.2        The Committee has the discretion to determine
whether Options granted shall be transferable without consideration to the
Participant’s Immediate Family members or family trusts for the benefit of the
Participant’s Immediate Family members.

 

7.7           Payment of Purchase Price.

 

7.7.1        Options
shall be exercised by the Participant’s delivery of a notice of exercise to the
Company’s Stock Administration department (or such other designee as the
Company may identify), setting forth the number of shares with respect to which
the Option is to be exercised, accompanied by full payment for the shares. The
notice shall be given in the form and manner specified by the Company from time
to time.

 

7.7.2        Upon the exercise of any Option, the Exercise
Price shall be payable to the Company in full in cash or its equivalent.  The Committee, in its sole discretion, may
also permit exercise by tendering previously acquired shares that have been
held by the Participant for at least six months that have an aggregate Fair
Market Value at the time of exercise equal to the total Exercise Price.  As soon as practicable after receipt of a
notification of exercise and full payment for the shares of Common Stock
purchased, the Company shall deliver to the Participant (or to one of the
Company’s preferred brokers that is designated by the Participant), share
certificates (which may be in book entry form) representing such shares.

 

7.8           Termination of Employment.  An Option shall terminate and may not be
exercised if the Participant to whom it is granted ceases to be continuously employed
by the Company, except

 

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(subject nevertheless to the last sentence of this Section 7.8):
(a) if the Participant’s continuous employment is terminated for any reason
other than (i) Retirement, (ii) Disability, or (iii) death, the Participant or
the Participant’s transferee may exercise the Option to the extent that the
Participant was entitled to exercise such Option at the date of such
termination at any time within a period of three (3) months following the date
of such termination, or if the Participant shall die within the period of three
(3) months following the date of such termination without having exercised such
Option, the Option may be exercised within a period of one year following the
Participant’s death by the Participant’s transferee or the person or persons to
whom the Participant’s rights under the Option otherwise pass by will or by the
laws of descent or distribution but only to the extent exercisable at the date
of such termination; (b) if the Participant’s continuous employment is
terminated by (i) Retirement, (ii) Disability, or (iii) death, the Option may
be exercised in accordance with its terms and conditions at any time within a
period of five (5) years following the date of such termination by the
Participant or the Participant’s transferee, or in the event of the Participant’s
death, by the persons to whom the Participant’s rights under the Option shall
pass by will or by the laws of descent or distribution; (c) if the Participant’s
continuous employment is terminated and within a period of ninety (90) days
thereafter the Participant returns to the active payroll as an employee of the
Company, the Committee may reinstate any portion of the Option previously
granted but not exercised.  Nothing
contained in this Section 7.8 is intended to extend the stated term of the
Option and in no event may an Option be exercised by anyone after the
expiration of its stated term.

 

8.             PERFORMANCE SHARE UNITS

 

8.1           Establishment of Performance Share Unit
Targets.  Subject to the terms and
provisions of the Plan, the Committee, at any time and from time to time, may
establish for the Executive Officers target awards of Performance Share Units
in such amounts as the Committee, in its sole discretion, shall determine.  The Committee shall determine the number of
Performance Share Unit targets to be established for each Participant,
provided, however, that no one individual may have a target of more than
250,000 Performance Share Units established in any one Fiscal Year.

 

8.2           Performance Share Unit Agreement.  Performance Share Units shall be evidenced by
an agreement that shall specify the target number of Performance Share Units
established for the Participant, applicable performance conditions, the
performance period which at a minimum shall be two years, a vesting period
which may or may not run concurrently to the performance period, and such other
terms and conditions as the Committee, in its sole discretion, shall determine.

 

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8.3           Performance Conditions.  The Committee shall set performance conditions
for Performance Share Units in accordance with this Section 8.3.

 

8.3.1        General Performance Conditions.  The Committee may set performance conditions
based upon the achievement of specific performance objectives (Company-wide,
divisional, or individual).

 

8.3.2        Section 162(m) Performance
Conditions.  For purposes of qualifying
Performance Share Units as “performance-based compensation” under Section 162(m)
of the Code, the Committee may set performance conditions based upon the
achievement of Performance Goals.  The
Performance Goals shall be set by the Committee on or before the latest date
permissible to enable the Performance Share Units to qualify as “performance-based
compensation” under Section 162(m) of the Code.  In qualifying Performance Share Units under Section 162(m)
of the Code, the Committee shall follow any procedures determined by it from
time to time to be necessary or appropriate to ensure qualification of the
Performance Share Units under Section 162(m) of the Code (e.g., in
determining the Performance Goals and measuring performance achievement).

 

8.4           Award Determination and Calculation.  Awards will be determined at the end of the
performance period if a threshold performance level on the performance
conditions of 50% has been achieved.  At
the time of Award determination, the actual number of Performance Share Units
earned will be determined, based on achievement of applicable performance
goals.  The Committee must determine the
performance level achieved and certify in writing that the performance ratings
and other applicable conditions have been satisfied before Awards can be
paid.  The actual number of Performance
Share Units that may be earned may range from 50% to 150% of the established
target and may not exceed 375,000 for any one performance period.  Awards will be paid in shares of Common Stock
equal to the number of Performance Share Units that has been earned after the
Committee has approved the Award and any applicable vesting period thereafter
has been satisfied.

 

8.5           Transferability.  Prior to actual payment of Awards,
Participants shall not have the right to sell, transfer, pledge, assign, or
otherwise alienate or hypothecate any rights to Awards.  Any attempted disposition thereof shall be
null and void and of no effect.

 

8.6           Other
Conditions.  The Committee may impose
such other conditions as it may deem advisable or appropriate in accordance
with this Section 8.6.

 

8.6.1        General Conditions.  The Committee may set conditions based on
applicable federal or state securities laws or any other basis determined by
the Committee.

 

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8.6.2        Termination of Employment.  Each Performance Share Unit Agreement shall
provide that any rights to receive shares of Common Stock upon achievement of
performance conditions shall terminate immediately upon termination of
employment for any reason during the applicable performance and vesting
periods; provided, however, that the Committee may provide that no such
termination shall occur in the event of a termination of employment because of
the Participant’s Retirement, Disability or death, in which event the Committee
shall have the discretion to determine whether and in what amount an Award is
payable.  Awards determined by the
Committee to be payable upon the Participant’s termination of employment by
reason of death shall be paid to the person or persons to whom the Participant’s
rights pass by will or by the laws of descent or distribution.  The Committee shall have the discretion to
determine the effect of all matters and questions relating to termination of
employment, including but not by way of limitation, the question of whether a
termination of employment resulted from a discharge for cause, and all
questions of whether particular leaves of absence constitute termination of
employment.

 

9.             STOCK APPRECIATION RIGHTS

 

9.1           Grant of Stock Appreciation Rights.  Subject to the terms and provisions of the
Plan, the Committee, at any time and from time to time, may grant Stock
Appreciation Rights to Executive Officers in such amounts as the Committee, in
its sole discretion, shall determine. 
The Committee shall determine the number of Stock Appreciation Rights to
be granted to each Participant, provided, however that no one individual may
receive a grant of more than 100,000 Stock Appreciation Rights in any one
fiscal year.

 

9.2           Stock Appreciation Right Award
Agreement.  Each Award of Stock
Appreciation Rights shall be evidenced by an Award Agreement that shall specify
the number of Stock Appreciation Rights granted, the term, strike price,
exercisability, performance conditions, and such other terms and conditions as
the Committee, in its sole discretion, shall determine.

 

9.3           Term.  The
Committee shall determine the stated term of each Stock Appreciation Right
granted under the Plan but no Stock Appreciation Right shall be exercisable
more than six years and one day after the Grant Date.

 

9.4           Strike Price. 
Unless provided otherwise by the Committee, the strike price per share
of Common Stock subject to a Stock Appreciation Right shall be determined by
the Committee and set forth in the Award Agreement; provided however, the
strike price shall not be less than the Fair Market Value of the Common Stock
on the Grant Date.

 

9.5           Exercisability.  Stock Appreciation Rights shall be
exercisable at such time or times and subject to such terms and 

 

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conditions as shall be determined by the Committee;
provided however, that except as provided in Section 10.1.1, no Stock
Appreciation Right shall be exercisable until one year after the Grant Date,
and the Committee may provide that Stock Appreciation Rights become exercisable
in installments.

 

9.6           Performance Requirements.  The Committee shall establish performance
requirements for exercisability of Stock Appreciation Rights.  Performance requirements may be set based
upon achievement of specific performance objectives (Company-wide, divisional
or individual.)  For purposes of
qualifying Stock Appreciation Rights as “performance-based compensation” under Section 162(m)
of the Code, the Committee may set performance requirements based on
achievement of Performance Goals.  In
such case, the Performance Goals shall be set by the Committee on or before the
latest date permissible to enable the Stock Appreciation Rights to qualify as “performance-based”
compensation under Section 162(m) of the Code and the Committee shall
follow any procedures determined by it from time to time to be necessary or
appropriate to ensure qualification of the Stock Appreciation Rights under Section 162(m)
of the Code.  Stock Appreciation Rights
will not be exercisable until the Committee has certified in writing that the
performance requirements have been met and vesting requirements have been satisfied.

 

9.7           Settlement. 
Stock Appreciation Rights may be exercised once the Committee has
certified in writing that the applicable performance requirements have been met
and the applicable vesting requirements have been satisfied. If  otherwise exercisable, Stock Appreciation
Rights shall be automatically exercised on the last day of the term of the
Stock Appreciation Right, provided the Fair Market Value of the Common Stock on
the last day of the term exceeds the applicable strike price of the Stock Appreciation
Right. Upon exercise of a Stock Appreciation Right, a Participant shall be
entitled to receive an amount in shares of Common Stock equal to (a) the excess
of the Fair Market Value on the date of exercise of one share of Common Stock
over the applicable strike price multiplied by (b) the number of shares of
Common Stock in respect of which the Stock Appreciation Right shall have been
exercised.  Any amounts that may be due
for fractional shares shall be paid in cash. 
As soon as possible after exercise, the Company shall deliver to the
Participant (or to one of the Company’s preferred brokers that is designated by
the Participant) share certificates (which may be in book entry form)
representing the shares attributable to the amount due.

 

9.8           Transferability.  No Stock Appreciation Right shall be
transferable by a Participant other than by (a) will or by laws of descent and
distribution or (b) if permitted by the Committee, pursuant to a transfer to
the Participant’s Immediate Family member or a trust for the benefit of
Participant’s Immediate Family members. 
All Stock Appreciation Rights shall be exercisable, subject to the terms
of this Plan, only by the Participant, the guardian or legal representative of
the Participant, any person to whom such Stock Appreciation Right is
transferred pursuant to this Section 9.8, or after the

 

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Participant’s death, the person to whom the rights
to the Stock Appreciation Right pass by will or by the laws of descent or
distribution.

 

9.9           Termination of Employment.  A Stock Appreciation Right shall terminate
and may not be exercised if the Participant to whom it is granted ceases to be
continuously employed by the Company, except (subject nevertheless to the last
sentence of this Section 9.9): (a) if the Participant’s continuous
employment is terminated for any reason other than (i) Retirement, (ii)
Disability, or (iii) death, the Participant or the Participant’s transferee may
exercise the Stock Appreciation Right to the extent that the Participant was
entitled to exercise such Stock Appreciation Right at the date of such
termination at any time within a period of three (3) months following the date
of such termination, or if the Participant shall die within the period of three
(3) months following the date of such termination without having exercised such
Stock Appreciation Right, the Stock Appreciation Right may be exercised within
a period of one year following the Participant’s death by the Participant’s
transferee or the person or persons to whom the Participant’s rights under the
Stock Appreciation Right otherwise pass by will or by the laws of descent or
distribution but only to the extent exercisable at the date of such
termination; (b) if the Participant’s continuous employment is terminated by
(i) Retirement, (ii) Disability, or (iii) death, the Stock Appreciation Right
may be exercised in accordance with its terms and conditions at any time within
a period of five (5) years following the date of such termination by the
Participant or the Participant’s transferee, or in the event of the Participant’s
death, by the persons to whom the Participant’s rights under the Stock
Appreciation Right shall pass by will or by the laws of descent or
distribution; (c) if the Participant’s continuous employment is terminated and
within a period of ninety (90) days thereafter the Participant returns to the
active payroll as an employee of the Company, the Committee may reinstate any
portion of the Stock Appreciation Right previously granted but not
exercised.  Nothing contained in this Section 9.9
is intended to extend the stated term of the Stock Appreciation Right and in no
event may a Stock Appreciation Right be exercised by anyone after the
expiration of its stated term.

 

10.           CHANGE-OF-CONTROL PROVISIONS

 

10.1         Impact. 
Notwithstanding any other provision of the Plan to the contrary, unless
otherwise provided in an Award Agreement, in the event of a Change-of-Control:

 

10.1.1      any Options and Stock Appreciation Rights
outstanding as of the date such Change-of-Control occurs, and which are not
then exercisable and vested, shall become fully exercisable and vested;

 

10.1.2      the performance conditions imposed under each
Performance Share Unit Agreement shall lapse, and each Participant shall be
entitled to receive shares of Common Stock equivalent to the target number of
Performance Share Units specified in the Performance Share Unit Award
Agreement.

 

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10.2         Definition of Change-of-Control.  For purposes of the Plan, a “Change-of-Control”
shall mean the happening of any of the following events:

 

10.2.1      The acquisition by any individual, entity or
group (within the meaning of Section 13(d) (3) or 14(d) (2) of the
Exchange Act) (a “Person”) of beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of 35% or more of either (x) the then
outstanding shares of the Company’s Common Stock (the “Outstanding Company
Common Stock”) or (y) the combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in the election of
directors (the “Outstanding Company Voting Securities”); provided, however,
that for purposes of this Section 10.2.1, the following acquisitions shall
not be deemed to result in a Change-of-Control: (i) any acquisition directly
from the Company, (ii) any acquisition by the Company, (iii) any acquisition by
any employee benefit plan (or related trust) sponsored or maintained by the
Company or any corporation controlled by the Company or (iv) any acquisition by
any corporation pursuant to a transaction that complies with clauses (i), (ii)
and (iii) of Section 10.2.3 below; or

 

10.2.2      individuals
who, as of the date hereof, constitute the Board (the “Incumbent Board”) cease
for any reason to constitute at least a majority of the Board; provided,
however, that any individual becoming a director subsequent to the date hereof
whose election, or nomination for election by the Company’s stockholders, was
approved by a vote of at least a majority of the directors then comprising the
Incumbent Board shall be considered as though such individual were a member of
the Incumbent Board, but excluding, for this purpose, any such individual whose
initial assumption of office occurs as a result of an actual or threatened
election contest with respect to the election or removal of directors or other
actual or threatened solicitation of proxies or consents by or on behalf of a
Person other than the Board; or

 

10.2.3      the approval by
the stockholders of the Company of a reorganization, merger or consolidation or
sale or other disposition of all or substantially all of the assets of the
Company or the acquisition of assets of another corporation (“Business
Combination”) or, if consummation of such Business Combination is subject, at
the time of such approval by stockholders, to the consent of any government or
governmental agency, the obtaining of such consent (either explicitly or
implicitly by consummation) unless, following such Business Combination, (i)
all or substantially all of the individuals and entities who were the
beneficial owners of the Outstanding Company Common

 

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Stock and Outstanding Company Voting Securities
immediately prior to such Business Combination beneficially own, directly or
indirectly, more than 60%, respectively, of the then outstanding shares of
common stock and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors, as the case
may be, of the corporation resulting from such Business Combination (including,
without limitation, a corporation that as a result of such transaction owns the
Company or all or substantially all of the Company’s assets either directly or
through one or more subsidiaries) in substantially the same proportions as
their ownership, immediately prior to such Business Combination of the
Outstanding Company Common Stock and Outstanding Company Voting Securities, as
the case may be, (ii) no Person (excluding any corporation resulting from such
Business Combination or any employee benefit plan (or related trust) of the
Company or any corporation resulting from such Business Combination)
beneficially owns, directly or indirectly, 20% or more of, respectively, the
then outstanding shares of common stock of the corporation resulting from such
Business Combination or the combined voting power of the then outstanding
voting securities of such corporation except to the extent that such ownership
existed prior to the Business Combination and (iii) at least a majority of the
members of the board of directors of the corporation resulting from such
Business Combination were members of the Incumbent Board at the time of the
execution of the initial agreement, or of the action of the Board, providing
for such Business Combination; or

 

10.2.4      approval by the
stockholders of the Company of a complete liquidation or dissolution of the
Company.

 

10.3         Change-of-Control Price.  For purposes of the Plan, “Change-of-Control
Price” means the higher of (a) the highest reported sales price of a share of
Common Stock in any transaction reported on the New York Stock Exchange during
the sixty (60) day period prior to and including the date of the Change-of-Control;
or (b) if the Change-of-Control is the result of a tender or exchange offer or
a Business Combination, the highest price per share of Common Stock paid in
such tender or exchange offer or Business Combination.  To the extent that the consideration paid in
any transaction described above consists all or in part of securities or other
noncash consideration, the value of such securities or other noncash
consideration shall be determined by the Board in its sole discretion.

 

11.           FORFEITURE OF AWARDS

 

Notwithstanding anything in the Plan to the
contrary, the Committee may, in its sole discretion, in the event of serious
misconduct by a Participant (including, without limitation, any misconduct
prejudicial to or in conflict with the Company) or any termination of
employment for cause or in the event that a Participant terminates Employment for
Retirement and subsequently

 

13

 

engages in full-time employment, or any activity of
a Participant in competition with the business of the Company, (a) cancel any
outstanding Award granted to such Participant, in whole or in part, whether or
not vested or deferred, or (b) following the exercise or payment of an Award
within a period specified by the Committee, require such Participant to repay
to the Company any gain realized or payment received upon the exercise or
payment of such Award (with such gain or payment valued as of the date of
exercise or payment).  Such cancellation
or repayment obligation shall be effective as of the date specified by the
Committee.  Any repayment obligation may
be satisfied in Common Stock or cash or a combination thereof (based upon the
Fair Market Value of Common Stock on the date of payment), and the Committee
may provide for an offset to any future payments owed by the Company to the
Participant if necessary to satisfy the repayment obligation.  The determination of whether a Participant
has engaged in a serious breach of conduct or any activity in competition with
the business of the Company shall be determined by the Committee in good faith
and in its sole discretion.  This Section 11
shall have no application following a Change-of-Control.

 

12.           TERM; AMENDMENT AND TERMINATION

 

12.1         Term of the Plan.  The Plan shall be effective as of the
Effective Date and shall remain in effect thereafter until terminated by the
Company.  Awards outstanding on the Plan’s
termination date shall not be affected or impaired by the termination of the
Plan.

 

12.2         Amendment. 
The Board may amend, alter, suspend, discontinue or terminate the Plan
or any portion thereof at any time; provided, however, that no such amendment,
alteration, suspension, discontinuation or termination (a) shall be made
without stockholder approval if such approval is required by applicable law,
regulatory requirement or stock exchange or accounting rules, or if the Board
deems it necessary or desirable to qualify for or comply with any tax,
applicable law, stock exchange, accounting or regulatory requirement, (b)
except as required by applicable law or stock exchange or accounting rules,
shall be made without the consent of the affected Participant, if such action
would impair the rights of such Participant under any outstanding Award or (c)
shall cause an Award qualified as performance-based compensation under Section 162(m)
of the Code to cease to qualify as such. 
Notwithstanding anything to the contrary herein, the Committee or Board
may amend or alter the Plan in such manner as may be necessary so as to have
the Plan conform to local rules and regulations in any jurisdiction outside the
United States.

 

13.           GENERAL PROVISIONS

 

13.1         Representation.  The Committee may require each person
purchasing or receiving shares of Common Stock pursuant to an Award to
represent to and agree with the Company in writing that such person is
acquiring the shares without a view to the

 

14

 

distribution thereof.  The certificates for such shares may include
any legend which the Committee deems appropriate to reflect any restrictions on
transfer.

 

13.2         Conditions to Company’s Obligation to Issue
Stock.  Notwithstanding any other
provision of the Plan or agreements made pursuant thereto, the Company shall
not be required to issue or deliver any certificate or certificates for shares
of Common Stock under the Plan prior to fulfillment of all of the following
conditions:

 

13.2.1      Listing or
approval for listing upon notice of issuance, of such shares on the New York
Stock Exchange, Inc., or such other securities exchange as may at the time be
the principal market for the Common Stock;

 

13.2.2      Any registration or other qualification of
such shares of the Company under any state or federal law or regulation, or the
maintaining in effect of any such registration or other qualification which the
Committee shall, in its absolute discretion upon the advice of counsel, deem
necessary or advisable; and

 

13.2.3      Obtaining any other consent, approval, or
permit from any state or federal governmental agency which the Committee shall,
in its absolute discretion after receiving the advice of counsel, determine to
be necessary or advisable.

 

13.3         No Limit on Other Arrangements.  Nothing contained in the Plan shall prevent
the Company from adopting other or additional compensation arrangements for its
Executive Officers.

 

13.4         No
Repricings/Regrants/Exchanges/Modifications. The Committee may not grant new
Options, Performance Share Units, or Stock Appreciation Rights in exchange for
the cancellation of any other Award made under this Plan or any other plan of
the Company.  Other than in connection
with a change in the Company’s capitalization as provided in Section 4.3,
neither the Exercise Price of an Option nor the strike price of a Stock
Appreciation Right may be reduced without approval of the Company’s
stockholders.  No material amendments may
be made to the Plan without the approval of the Company’s stockholders.

 

13.5         No Contract of Employment.  The Plan shall not constitute a contract of
employment, and adoption of the Plan shall not confer upon any Participant or
Executive Officer any right to continued employment, nor shall it interfere in
any way with the right of the Company to terminate the employment of any
Participant or Executive Officer at any time.

 

13.6         Tax Withholding. No later than the date as which an amount
first becomes includible in the gross income of the Participant for federal
income tax purposes with respect to any Award under the Plan, the Participant
shall pay to the Company, or make arrangements satisfactory to the Company
regarding the payment

 

15

 

of, any federal, state, local or foreign taxes of
any kind required by law to be withheld with respect to such amount.  Unless otherwise determined by the Committee,
withholding obligations may be settled with Common Stock, including Common
Stock that is part of the Award that gives rise to the withholding requirement,
cash, shares of Common Stock previously owned by the Participant for at least
six months duly enclosed for transfer to the Company, or in any combination of
the foregoing.  If Common Stock that is
part of the Award is used to settle tax withholding obligations, the value of
such Common Stock may not exceed the maximum withholding rate applicable to the
Award.  The obligations of the Company
under the Plan shall be conditional on such payment or arrangements and the
Company shall, to the extent permitted by law, have the right to deduct any
such taxes from any payment otherwise due to the Participant.  The Committee may establish such procedures
as it deems appropriate for the settlement of withholding obligations with
Common Stock.

 

13.7         Governing Law.  The Plan, all Award Agreements and all Awards
made and actions taken thereunder shall be governed by and construed in
accordance with the laws of the State of Delaware, without reference to
principles of conflict of laws.

 

13.8         Nontransferability.  Except as otherwise provided in Sections
7.6.2 and 9.8, Awards under the Plan are not transferable except by will or by
applicable laws of descent and distribution.

 

13.9         Rights as Stockholder.  No Participant (nor any beneficiary or
transferee) shall have any of the rights or privileges of a stockholder of the
Company with respect to any shares of Common Stock issuable pursuant to an
Award (or exercise thereof), unless and until certificates representing such
shares shall have been issued, recorded on the records of the Company or its
transfer agents or registrars, and delivered to the Participant (or beneficiary
or transferee, as applicable.)

 

13.10       Gender and Number.  Except where otherwise indicated by the
context, any masculine term used herein also shall include the feminine; the
plural shall include the singular and the singular shall include the plural.

 

13.11       Severability. 
In the event any provision of the Plan shall be held illegal or invalid
for any reason, the illegality or invalidity shall not affect the remaining
parts of the Plan, and the Plan shall be construed and enforced as if the
illegal or invalid provision had not been included.

 

16Exhibit 10.1

 

EXECUTIVE COMPENSATION PLAN 2005

 

	
   

  	
   

  	
  EFFECTIVE DATE: JANUARY 1, 2005

  
	
   

  	
   

  	
   

  
	
  SUMMARY OF TERMS

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
  James Lambert

  
	
  Title:

  	
   

  	
  CEO & Co-Chair

  
	
  Base Salary

  	
   

  	
  $400,000

  
	
  On-Plan Bonus Target (as% of Base)

  	
   

  	
  80%

  
	
  Total On-Plan Cash Compensation Target:

  	
   

  	
  $720,000

  

 

PURPOSE

 

The objectives of this Plan are:

 

                        To
maintain focus on retaining revenue related to sales to Sun Microsystems and
the profitability of delivering product to Sun;

                        To
reward for diversification of Dot Hill’s customer base, while maintaining
reasonable margin requirements

                        To
reward for over-achievement of financial goals

 

REPLACEMENT OF EXHIBIT C

 

By signing this Executive Compensation Plan 2005(“Plan”), you hereby
agree that the terms of this Plan shall be in addition to the terms of the
Employment Agreement between you and Dot Hill dated August 2, 1999 (“Employment
Agreement”), and shall replace and supercede the terms of Exhibit C of the
Employment Agreement with respect to your base salary and bonus for the year
2005.  Otherwise, the terms of your
Employment Agreement remain unchanged. 
For any period of time after December 31, 2005, your base salary and
bonus shall be subject to change, as determined by Dot Hill’s Board of
Directors and/or Compensation Committee (“BOD”).

 

BONUS MEASUREMENTS

 

The metrics used to calculate earned bonus are as follows:

 

	
  Bonus
  Component

  	
   

  	
  Overall
  Bonus Weighting

  	
   

  	
  Your
  Bonus Target

  	
   

  
	
  Financial Goals
  Related to Sun Microsystems

  	
   

  	
  50

  	
  %

  	
  $

  	
  160,000

  	
   

  
	
  Financial Goals
  Related to Non-Sun Customers

  	
   

  	
  50

  	
  %

  	
  $

  	
  160,000

  	
   

  
	
  Total

  	
   

  	
  100

  	
  %

  	
  $

  	
  320,000

  	
   

  

 

1

 

Financial Goals Related to Sun Microsystems

 

The below matrix will be used to determine the percentage to be applied
to your bonus target to derive the bonus earned.

 

 

% of Targeted Bonus Paid for Sun Financial Management

 

	
  % of Budgeted Sun

  Revenue Attained

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Above 115%
  

  	
   

  	
  Above

  $262,499

  	
   

  	
  0

  	
  %

  	
  30

  	
  %

  	
  45

  	
  %

  	
  60

  	
  %

  	
  66

  	
  %

  	
  69

  	
  %

  	
  72

  	
  %

  
	
  115%

  	
   

  	
  $262,499

  	
   

  	
  0

  	
  %

  	
  29

  	
  %

  	
  43

  	
  %

  	
  58

  	
  %

  	
  63

  	
  %

  	
  66

  	
  %

  	
  69

  	
  %

  
	
  110%

  	
   

  	
  $251,086

  	
   

  	
  0

  	
  %

  	
  28

  	
  %

  	
  41

  	
  %

  	
  55

  	
  %

  	
  61

  	
  %

  	
  63

  	
  %

  	
  66

  	
  %

  
	
  105%

  	
   

  	
  $239,673

  	
   

  	
  0

  	
  %

  	
  26

  	
  %

  	
  39

  	
  %

  	
  53

  	
  %

  	
  58

  	
  %

  	
  60

  	
  %

  	
  63

  	
  %

  
	
  100%

  	
   

  	
  $228,260

  	
   

  	
  0

  	
  %

  	
  25

  	
  %

  	
  38

  	
  %

  	
  50

  	
  %

  	
  55

  	
  %

  	
  58

  	
  %

  	
  60

  	
  %

  
	
  95%

  	
   

  	
  $216,847

  	
   

  	
  0

  	
  %

  	
  20

  	
  %

  	
  30

  	
  %

  	
  40

  	
  %

  	
  44

  	
  %

  	
  46

  	
  %

  	
  48

  	
  %

  
	
  90%

  	
   

  	
  $205,434

  	
   

  	
  0

  	
  %

  	
  19

  	
  %

  	
  28

  	
  %

  	
  38

  	
  %

  	
  41

  	
  %

  	
  43

  	
  %

  	
  45

  	
  %

  
	
  85%

  	
   

  	
  $194,021

  	
   

  	
  0

  	
  %

  	
  13

  	
  %

  	
  19

  	
  %

  	
  25

  	
  %

  	
  28

  	
  %

  	
  29

  	
  %

  	
  30

  	
  %

  
	
  Below 85%
  

  	
   

  	
  Below

  $194,021

  	
   

  	
  0

  	
  %

  	
  0

  	
  %

  	
  0

  	
  %

  	
  0

  	
  %

  	
  0

  	
  %

  	
  0

  	
  %

  	
  0

  	
  %

  
	
   

  	
   

  	
   

  	
   

  	
  21

  	
  %

  	
  22

  	
  %

  	
  23

  	
  %

  	
  24

  	
  %

  	
  25

  	
  %

  	
  26

  	
  %

  	
  27

  	
  %

  

 

Gross Margin on Sun Revenue

 

 

Financial Goals Not Related to Sun Microsystems

 

As
it is imperative for the long-term success of Dot Hill to diversify its
customer base, this Plan is intended to motivate and reward the executive team
for obtaining new customers.

 

It is also important to manage the margin related to new
customers.  As such, we will use the
following matrix to determine the portion of the bonus

 

 

% of Targeted Bonus Paid for NON-Sun Financial Management

 

	
  % of Budgeted NON Sun

  Revenue Attained

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Above
  115%

  	
   

  	
  Above

  $88,000

  	
   

  	
  0

  	
  %

  	
  50

  	
  %

  	
  75

  	
  %

  	
  100

  	
  %

  	
  125

  	
  %

  	
  150

  	
  %

  	
  200

  	
  %

  
	
  200%

  	
   

  	
  $88,000

  	
   

  	
  0

  	
  %

  	
  38

  	
  %

  	
  56

  	
  %

  	
  75

  	
  %

  	
  94

  	
  %

  	
  113

  	
  %

  	
  150

  	
  %

  
	
  150%

  	
   

  	
  $66,000

  	
   

  	
  0

  	
  %

  	
  35

  	
  %

  	
  53

  	
  %

  	
  70

  	
  %

  	
  88

  	
  %

  	
  105

  	
  %

  	
  140

  	
  %

  
	
  125%

  	
   

  	
  $55,000

  	
   

  	
  0

  	
  %

  	
  31

  	
  %

  	
  47

  	
  %

  	
  63

  	
  %

  	
  78

  	
  %

  	
  94

  	
  %

  	
  125

  	
  %

  
	
  100%

  	
   

  	
  $44,000

  	
   

  	
  0

  	
  %

  	
  25

  	
  %

  	
  38

  	
  %

  	
  50

  	
  %

  	
  63

  	
  %

  	
  75

  	
  %

  	
  100

  	
  %

  
	
  95%

  	
   

  	
  $41,800

  	
   

  	
  0

  	
  %

  	
  20

  	
  %

  	
  30

  	
  %

  	
  40

  	
  %

  	
  50

  	
  %

  	
  60

  	
  %

  	
  80

  	
  %

  
	
  90%

  	
   

  	
  $39,600

  	
   

  	
  0

  	
  %

  	
  19

  	
  %

  	
  28

  	
  %

  	
  38

  	
  %

  	
  47

  	
  %

  	
  56

  	
  %

  	
  75

  	
  %

  
	
  85%

  	
   

  	
  $37,400

  	
   

  	
  0

  	
  %

  	
  13

  	
  %

  	
  19

  	
  %

  	
  25

  	
  %

  	
  31

  	
  %

  	
  38

  	
  %

  	
  50

  	
  %

  
	
  below
  85%

  	
   

  	
  Below

  $37,400

  	
   

  	
  0

  	
  %

  	
  0

  	
  %

  	
  0

  	
  %

  	
  0

  	
  %

  	
  0

  	
  %

  	
  0

  	
  %

  	
  0

  	
  %

  
	
   

  	
   

  	
   

  	
   

  	
  9

  	
  %

  	
  20

  	
  %

  	
  21

  	
  %

  	
  22

  	
  %

  	
  23

  	
  %

  	
  24

  	
  %

  	
  25

  	
  %

  

 

Gross Margin on NON Sun Revenue

 

 

The maximum bonus earnable by participants is 72% (maximum for Sun
related financial results) plus 200% (maximum for non-Sun related financial results), or 272% of the targeted
bonus. 

 

2

 

EXAMPLE

 

(This is a sample only and does not necessarily reflect an actual
situation.  This is used only for
illustrative purposes and the actual Plan wording applies, not this example.)

 

ASSUMPTIONS

 

•                  Incentive Target is $100,000

•                  Sun revenue for the year ending Dec 31, 2005 is $220,000,000

•                  Margin on Sun revenue is 27%

•                  Non-Sun revenue for the year ending Dec 31, 2005 is $50,000,000

•                  Margin on Non-Sun revenue is 21%

 

CALCULATION

 

•                  Using the Sun Financial Results Table, intersection between $220M and
27% is:  44%

•                  Using the Non Sun Financial Results Table, intersection between $50M
and 21% is: 47%

•                  44% + 47% = 91%

•                  $100,000 x 91% = $91,000

 

 

PAYMENT PROCESS AND TIMING

 

The Company must be profitable inclusive of bonus
accrual in order for the bonus to be paid.

 

Bonus is paid annually as soon as practicable after an audit of the
Company’s fiscal year 2005 results has been completed and after the Dot Hill
Board of Directors and/or Compensation Committee (“BOC”) has approved the
payment.

 

CHANGES

 

This Plan is subject to
change at any time at the Company’s sole discretion.  The Company will endeavor to provide
reasonable advance notice, but is no obligation to do so.

 

TERMINATION

 

You must be an employee in good standing on the last day of the fiscal
year to be eligible for bonus payout.

 

ENTIRE AGREEMENT AND GENERAL

 

This Plan is governed by the laws of the State of California, excluding
choice of law principles.  This Agreement
shall be binding upon, and inure to the benefit of, the successors and assigns
of the parties.  If any provision of this
Plan is found to be invalid or unenforceable, this Plan shall be deemed amended
to delete or modify, as necessary, the invalid or unenforceable provision to
render it consistent with the original intent of the parties.  The failure of a party to require performance
of any obligations under this Plan shall not be deemed a waiver and shall not
affect its right to enforce any provision of this Agreement at a subsequent
time.

 

This Plan constitutes the entire understanding and agreement of the
parties with respect to its subject matter and supersedes all prior and
contemporaneous agreements or understandings between the parties.

 

This Plan does not guarantee payment of any actual amount since it is
conditioned on the factors noted above.

 

This Plan does not modify or amend in any manner
the “at-will” status of the Participant and both parties reaffirm that the
employment relationship between the Company and you as the Participant is one
of employment “at-will” with either party having the right to terminate the
relationship at any time with or without cause.

 

3

 

Any term or provision of the Plan may be amended, and the observance of
any term of this Agreement may be waived, only by a writing signed by you and
both the CEO and the Chairman of the Compensation Committee

 

Acknowledged and agreed as the Effective Date.

 

	
  /s/ James Lambert

  	
   

  
	
  James Lambert

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  /s/ Preston Romm

  	
   

  
	
  Preston Romm, VP Finance & CFO

  	
   

  

 

4

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