Exhibit 10.1
EMPLOYMENT AGREEMENT
     This EMPLOYMENT AGREEMENT (this “Agreement”), dated as of February 19,
2007, is by and between ALEXANDER W. SMITH (“Executive”) and Pier 1 Imports,
Inc., a Delaware corporation (the “Company”).
RECITALS
     The Company and Executive desire to set forth the terms and conditions
under which Executive shall be employed, and upon which Executive shall be
compensated by the Company.
     The Company desires to employ Executive as President and Chief Executive
Officer of the Company for the period and upon the terms and conditions
hereinafter set forth.
     Executive desires to serve in such capacities for such period and upon such
terms.
     In consideration of the foregoing recitals, the mutual promises and
agreements hereinafter set forth, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the Company and
Executive agree as follows:
AGREEMENT
     1. EFFECTIVE DATE; TERM OF AGREEMENT. This Agreement shall become effective
as of February 19, 2007 (the “Effective Date”). Executive’s employment shall
continue on the terms provided herein until February 27, 2010 (the “Initial
Term”). Unless earlier terminated as provided herein, the Term automatically
shall renew on February 27, 2010, and on each subsequent February 1 thereafter,
on terms no less favorable to Executive, but, in each such case, if any,
excluding any grant of options as contemplated by Section 4(c) below, for an
additional term of one year (each such one-year period, a “Renewal Term,” or, if
more than one, “Renewal Terms,” and the Initial Term collectively with any
Renewal Term or all Renewal Terms, as the case may be, the “Term”), unless
either Executive or the Company gives the other party written notice at least
sixty (60) days prior to the expiration of the Initial Term or any Renewal Term
that the Term of the Agreement shall not be extended further. The day on which
Executive’s employment with the Company ends, whether at the end of the Term or
on such earlier date as may be provided herein, is hereinafter called the
“Employment Period”).
     2. DEFINITIONS
          (a) Off-Price Family Apparel and/or Off-Price Home Fashions or
Furniture Business. For purposes of this Agreement, the term “Off-Price Family
Apparel and/or Off-Price Home Fashions or Furniture Business” shall mean a
retail business (however organized or conducted, including any on-line
operations) that sells predominantly branded and/or designer merchandise of
third parties consisting of family apparel, home fashions and/or furnishings at
prices significantly less than or discounted from those of specialty stores
and/or department stores and does not operate a conventional or full-markup
business or store. By way of illustration, an “Off-Price Family Apparel and/or
Off-Price Home Fashions or Furniture Business” shall include such businesses as
The TJX Companies, Inc. and Ross Stores, Inc.

 

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          (b) Specialty Home Fashions or Furniture Business. For purposes of
this Agreement, the term “Specialty Home Fashions or Furniture Business” shall
mean a retail business (however organized or conducted, including any on-line
operations) that operates a conventional or full-markup store and sells
predominantly its own branded merchandise consisting of furniture, decorative
accessories, housewares, bed and bath, and seasonal goods, or any other category
of merchandise sold by the Company at the end of the Term that is manufactured
specifically for the business, requires a significant degree of
handcraftsmanship and, in the case of the Company, is mostly imported directly
from foreign suppliers. By way of illustration, a “Specialty Home Fashions or
Furniture Business” shall include such businesses as the Company, Restoration
Hardware, Inc. and Pottery Barn, Inc.
     3. SCOPE OF EMPLOYMENT.
          (a) Nature of Services. Executive shall hold the title of President
and Chief Executive Officer of the Company and shall report to the Board of
Directors of the Company (the “Board”). Executive shall diligently perform the
duties and responsibilities of President and Chief Executive Officer of the
Company and such additional executive duties and responsibilities as shall from
time to time be assigned to Executive by the Board. In addition, Executive will
be elected as a director and as an officer of each subsidiary and affiliate of
the Company designated by the Board, provided that Executive shall not be
obligated to become or remain a director or an officer of any Company subsidiary
or affiliate (i) the organizational documents of which do not provide
indemnification provisions reasonably satisfactory to Executive or (ii) which is
not covered by the Company’s directors’ and officers’ liability insurance
policy. Notwithstanding the foregoing, for a period of two years from the
Effective Date, Executive shall not become a principal, employee, partner,
consultant, investor, officer or director of any business, including the Company
and any subsidiary or affiliate of the Company, which is engaged in an Off-Price
Family Apparel and/or Off-Price Home Fashions or Furniture Business.
          (b) Extent of Services. Except for illnesses and vacation periods,
Executive shall devote substantially all his working time and attention and his
best efforts to the performance of his duties and responsibilities under this
Agreement. However, Executive may (i) make any passive investments where he is
not obligated or required to, and shall not in fact, devote any managerial
efforts, (ii) participate in charitable or community activities or in trade or
professional organizations, or (iii) subject to Board approval (which approval
shall not be unreasonably withheld or withdrawn) and compliance with the
corporate governance policies of the Company, hold directorships in public
companies, except only that the Board shall have the right to limit such
services as a director or such participation whenever the Board shall reasonably
believe that the time spent on such activities infringes in any material respect
upon the time required by Executive for the performance of his duties under this
Agreement or is otherwise incompatible with those duties. Executive will not
take personal advantage of any business opportunities that arise during the
Employment Period that may benefit the Company, its subsidiaries and affiliates.
Executive will promptly report all material facts regarding such opportunities
to the Board. Executive will at all times abide by all of the Company’s Bylaws,
policies, practices, procedures, and rules.

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          (c) Board Membership. As soon as reasonably practicable after the
Effective Date, Executive will be elected by the Board to fill the vacancy on
the Board created by the retirement of the Company’s former chief executive
officer. At all times thereafter during the Employment Period, the Company will
use its reasonable efforts to cause the Board, or an authorized Committee
thereof, to nominate Executive for election to the Board at each annual meeting
of stockholders of the Company held during the Employment Period, and, if
nominated, to cause the Board to recommend his election to the stockholders of
the Company.
     4. COMPENSATION AND BENEFITS.
          (a) Base Salary. Executive will be paid a base salary at the rate
hereinafter specified, such Base Salary to be paid in the same manner and at the
same times as the Company shall pay base salary to other executive employees.
The rate at which Executive’s Base Salary shall be paid shall be $1,000,000 per
year.
          (b) Annual Bonus. For the Company’s fiscal year 2008, Executive’s
bonus will be no less than $500,000 nor more than $750,000, as established by
the Board of Directors in its discretion, taking into account all pertinent
factors. For the Company’s fiscal years 2009 and 2010, Executive will
participate in, and Executive’s bonus will be determined by, the senior
management bonus plan of the Company as adopted by the Board of Directors and
then in effect.
          (c) Stock Options. On the Effective Date, the Company will grant
Executive two stock options (“Option 1” and “Option 2,” and, collectively, the
“Options”), in the forms attached as Exhibits A and B, respectively, to purchase
an aggregate of 3,000,000 shares (collectively, the “Option Shares”) of the
Company’s common stock, par value $1.00 per share (the “Common Stock”). The
Options will be granted as an employment inducement award, and not under any
stock option or other equity incentive plan adopted by the Company.
Notwithstanding any Company policy, practice or agreement to the contrary,
except as expressly provided in Section 7(a) hereof with respect to Option 1,
once vested the Options shall not be subject to forfeiture for any reason nor
shall the exercise period of the Options terminate at any time prior to the end
of the term of the Options (i.e., whether Executive is an employee of the
Company shall have no impact on the period within which Executive may exercise
the Options, provided that such options have vested).
               (i) Option 1. Option 1 will be an option to purchase 1,000,000
shares (collectively, the “Option 1 Shares”) for a period of 10 years following
the date of grant. The exercise price will be the fair market value of the
Company’s Common Stock on the day following the date of grant. Option 1 will
vest in full on the first anniversary of the date of grant.
               (ii) Option 2. Option 2 will be an option to purchase 2,000,000
shares for a period of 10 years following the date of grant. The exercise price
will be the fair market value of the Company’s Common Stock on the day following
the date of grant. Option 2 will be performance-based. Vesting will be
determined by meeting consolidated EBITDA (as hereinafter defined) targets for
the Company to be established by the Board from time to time after the date
hereof for the Company’s fiscal years 2009 and 2010. Option 2 will vest up to
1,000,000 shares on the date of filing of the Company’s Annual Report on Form
10-K (“Form 10-K”) with the Securities and Exchange Commission (the “SEC”) for
the fiscal year

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ending February 28, 2009 (such date, the “2nd Vesting Date”), based upon
achieving a percentage of the fiscal 2009 EBITDA target (the “2009 EBITDA
Target”) as follows:
100% of the 2009 EBITDA Target – 1,000,000 shares;
98% of the 2009 EBITDA Target – 900,000 shares;
96% of the 2009 EBITDA Target – 800,000 shares;
94% of the 2009 EBITDA Target – 700,000 shares;
92% of the 2009 EBITDA Target – 600,000 shares; and
90% of the 2009 EBITDA Target – 500,000 shares.
     Option 2 will vest up to 1,000,000 shares on the date of filing of the
Company’s Form 10-K with the SEC for the fiscal year ending February 27, 2010
(such date, the “3rd Vesting Date”), based upon achieving a percentage of the
fiscal 2010 EBITDA target (the “2010 EBITDA Target”) as follows:
100% of the 2010 EBITDA Target – 1,000,000 shares;
98% of the 2010 EBITDA Target – 900,000 shares;
96% of the 2010 EBITDA Target – 800,000 shares;
94% of the 2010 EBITDA Target – 700,000 shares;
92% of the 2010 EBITDA Target – 600,000 shares; and
90% of the 2010 EBITDA Target – 500,000 shares.
     If, on the 3rd Vesting Date, the Company’s aggregate consolidated EBITDA
for the Company’s fiscal years 2009 and 2010 equals or exceeds the sum of the
2009 EBITDA Target plus the 2010 EBITDA Target, then any Option 2 shares that
did not vest on the 2nd Vesting Date may be earned and shall vest on the 3rd
Vesting Date.
     Notwithstanding any other provision of this Agreement to the contrary, in
the event that Executive is employed by the Company as of the end of any the
fiscal years 2009 and 2010, Employee shall be entitled to the vesting of Options
for that fiscal year, as set forth above, regardless of whether Executive’s
employment terminates prior to the formal determination of vesting (i.e., based
on EBITDA calculations) for such fiscal year, as set forth in this Section 4(c).
               (iii) “EBITDA” Defined. “EBITDA” shall mean the Company’s and its
consolidated entities’ consolidated earnings from continuing operations before
consolidated interest, taxes, depreciation and amortization from continuing
operations, but not including any consolidated unusual or non-recurring items or
consolidated non-cash charges, in each case, as determined under United States
generally accepted accounting principles.

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               (iv) EBITDA Targets. As used in Section 4(c)(ii) above, the 2009
EBITDA Target and the 2010 EBITDA Target refer, in each case, to the EBITDA
targets adopted annually at or near the beginning of each such fiscal year by
the Board from the annual operating plan for the Company’s future performance
prepared and recommended by management, as approved and adopted by the Board, in
its initial and original version before any subsequent amendments during the
year, which is the annual operating plan that will be used in each of fiscal
2009 and fiscal 2010 to set the performance goals for the senior management
bonus plan annual bonuses.
          (d) Additional Benefits. The Company will cause its benefits
consultant, Hewitt Associates, to determine the present value of Executive’s
accrued benefits under the supplemental executive retirement plan in which
Executive presently participates as soon as reasonably practicable following the
Effective Date. The Company will endeavor to include Executive in its existing
1995 supplemental retirement plan (as restated January 1, 2005) in the same
position, and if it is unable to do so, it will provide Executive with a
mutually agreeable substitute of equivalent value. The Company will pay
Executive $500,000 on or before March 15, 2007, as reimbursement for his lost
benefits under the long-range performance incentive plan in which Executive
presently participates, such payment to be reduced by any portion of this
benefit which Executive actually receives from his former employer.
          (e) Benefits; Perquisites. Executive will be eligible to participate
in all welfare and fringe benefit plans (other than the supplemental executive
retirement plan adopted by the Company in 1986, as restated as January 1, 2005)
under which senior executives are currently entitled to participate and receive
benefits, and to receive all perquisites which the Company provides to its
senior executives, in accordance with the terms thereof, including the Company’s
1995 supplemental retirement plan (as restated January 1, 2005). Executive shall
be entitled to indemnification from the Company pursuant to any and all Company
policies (including insurance policies), procedures and/or by-laws to the
maximum extent allowed by law, except as expressly set forth in Section 8 below.
Executive will be entitled to an allowance of $125,000, $25,000 of which shall
be paid in advance, for moving, relocation and related expenses, including,
without limitation, temporary housing, short-term automobile rental or lease
expenses and legal fees. In addition, the Company will pay all travel expenses
for Executive and his spouse for a period of 90 days commencing on the Effective
Date for travel between metropolitan Boston area and the metropolitan Fort
Worth-Dallas area.
     5. REPRESENTATIONS AND WARRANTIES.
          (a) By the Company. The Company represents and warrants to Executive
that (i) the execution of this Agreement, the grant of the Options contemplated
hereby, and the issuance of the Option Shares have been duly authorized by all
requisite corporate action(s) of the Company; (ii) the execution, delivery and
performance of this Agreement by the Company does not and will not violate any
law, regulation, order, judgment or decree or any agreement, plan or corporate
governance document of the Company; (iii) the grant of the Options will be an
employment inducement award made outside any of the Company’s stock option plans
and will be exempt from the requirements of the New York Stock Exchange (“NYSE”)
that shareholder approval is a prerequisite to the issuance of the Options and
the Option Shares pursuant to the exemption set forth in NYSE Rule 303A.08 for
employment inducement awards; (iv) the

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Company has sufficient authorized and unissued shares of Common Stock to issue
the Option Shares upon exercise of the Options, and no approval by the Company’s
shareholders is or will be required in connection with the grant of the Options
or the issuance of the Option Shares upon the exercise thereof; and (v) upon the
execution and delivery of this Agreement by Executive, this Agreement will be
the valid and binding obligation of the Company, enforceable in accordance with
its terms, except to the extent enforceability may be limited by applicable
bankruptcy, insolvency or similar laws affecting the enforcement of creditors’
rights generally and by the effect of general principles of equity (regardless
of whether enforceability is considered in a proceeding in equity or at law);
(vi) as of the date of this Agreement, it does not engage in any Off-Price
Family Apparel and/or Off-Price Home Fashions or Furniture Business; and
(vii) as of the date of this Agreement, it engages in the Specialty Home
Fashions or Furniture Business, but does not engage in the family apparel
business.
          (b) By Executive. Executive represents and warrants to the Company
that (i) Executive has the power, authority, and capacity to execute and deliver
this Agreement and to perform his obligations under this Agreement, and that the
execution and delivery of this Agreement by Executive do not, and the
performance of his obligations under this Agreement will not, violate any law,
regulation, order, judgment or decree, or breach, violate or conflict with any
agreement to which Executive is a party or by which he is bound, (ii) without
limiting the generality of the foregoing, Executive is not bound by or subject
to any employment, noncompetition, nonsolicitation, confidentiality or other
agreement that would materially limit his ability to perform any of his duties
or fulfill any of his obligations under this Agreement, and that the execution
and delivery of this Agreement by Executive do not, and the performance of his
obligations under this Agreement will not, breach, violate or conflict with any
employment, noncompetition, nonsolicitation, confidentiality or other agreement
to which Executive is a party or by which he is bound that would materially
limit his ability to perform any of his duties or fulfill any of his obligations
under this Agreement, and (iii) upon the execution and delivery of this
Agreement by the Company, this Agreement will be the valid and binding
obligation of Executive, enforceable in accordance with its terms, except to the
extent enforceability may be limited by applicable bankruptcy, insolvency or
similar laws affecting the enforcement of creditors’ rights generally and by the
effect of general principles of equity (regardless of whether enforceability is
considered in a proceeding in equity or at law).
     6. TERMINATION OF EMPLOYMENT; IN GENERAL.
          (a) By the Company. The Company shall have the right to remove
Executive from office and discharge Executive as an employee upon written notice
to Executive at any time and for any reason, with or without Cause (as
hereinafter defined). The date on which Executive is discharged as an employee
by the Company shall be the last day of the Employment Period.
          (b) By Executive. Executive shall have the right to resign as an
employee of the Company upon written notice to the Company at any time, with or
without Good Reason (as hereinafter defined). The date on which Executive
resigns as an employee of the Company shall be the last day of the Employment
Period.
          (c) Death, Disability, and Incapacity. The Employment Period shall
terminate upon the death, Disability or Incapacity of Executive.

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               (i) “Disability” shall have the meaning given it in the Company’s
long-term disability plan. Executive’s employment shall be deemed to be
terminated for Disability on the date on which the Disability is determined to
have begun.
               (ii) “Incapacity” shall mean a disability (other than Disability
within the meaning of above) or other impairment of health that renders
Executive unable to perform his duties to the reasonable satisfaction of the
Board which continues for a period of six consecutive months during the
Employment Period. Executive’s employment shall be deemed to be terminated for
Incapacity upon the date of written notice by the Company of such termination,
which written notice shall not be given until after the six-month period for
establishing Incapacity, as set forth above, has lapsed.
          (d) “Cause” Defined. “Cause” shall mean (i) Executive’s conviction of
either (A) a felony (excluding traffic violations) or (B) any crime in
connection with his employment by the Company that causes the Company a
substantial and material financial detriment; (ii) Executive’s commission of any
other act involving dishonesty or fraud with respect to the Company;
(iii) Executive’s substantial and repeated failure to perform duties as
reasonably directed by the Board that are permitted by law and necessary to
implement policies or procedures or other actions adopted, authorized or
approved by the Board, which failure is not cured to the Board’s reasonable
satisfaction within 30 days after written notice thereof is provided to
Executive; (iv) Executive’s gross negligence or willful misconduct with respect
to his performance under this Agreement which results in a substantial and
material financial detriment to the Company; or (v) any material breach by
Executive of this Agreement which is not cured to the Board’s reasonable
satisfaction within 30 days after written notice thereof to Executive from the
Board. For the purposes of this Agreement, any breach of Executive’s
representation and warranty in Section 5(b)(ii) will be deemed for all purposes
to be a material breach of this Agreement. The entry by a court of competent
jurisdiction of any order, including any temporary or permanent injunction or
restraining order, barring or limiting Executive’s ability to perform any of his
duties or to fulfill any of his obligations under this Agreement that stays in
effect for a period of more than 30 days shall be deemed for all purposes of
this Agreement to be a breach of Executive’s representation and warranty in
Section 5(b)(ii).
          (e) “Good Reason” Defined. “Good Reason” shall mean: (i) any reduction
in Executive’s compensation opportunity as set forth in Section 4 of this
Agreement (including but not limited to Base Salary, bonus and the Options);
(ii) the greater than de minimis reduction or material adverse modification of
Executive’s authority or duties, such as a substantial diminution or adverse
modification in Executive’s status or responsibilities, from the authorities
being exercised and duties being performed by Executive as of the Effective Date
(and as such authorities and duties may be increased from time to time after
thereafter), or (iii) any material breach by the Company of this Agreement which
is not cured to Executive’s reasonable satisfaction within 30 days after written
notice thereof to the Board from Executive. Notwithstanding the foregoing, any
of the circumstances described above may not serve as a basis for resignation
for “Good Reason” by Executive unless Executive has provided written notice to
the Company that such circumstance exists within 30 days of Executive’s learning
of such circumstance and the Company has failed to cure such circumstance, if
curable, within 30 days following such notice; and provided further, that
Executive did not previously consent in writing to the action leading to
Executive’s claim of resignation for “Good Reason.” For the

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avoidance of doubt, the failure of the Company to meet or exceed either the 2009
EBITDA Target or the 2010 EBITDA Target, or both, or any percentage of either,
shall be deemed not to be a reduction in Executive’s compensation opportunity as
set forth in Section 4 of this Agreement for the purpose of clause (i) of the
first sentence of this Section 6(e). For the purposes of this Agreement, any
breach of the Company’s representations and warranties in Sections 5(a)(vi) and
5(a)(vii) will be deemed for all purposes to be a material breach of this
Agreement.
          (f) Change in Control. This Agreement cannot be terminated by either
the Company or Executive as a result of a change in control of the Company, and
a change in control of the Company does not constitute a “Good Reason.”
          (g) Required Resignations. Whenever Executive’s employment is
terminated, Executive shall immediately tender his resignation as a director and
as an officer or other position he shall hold with the Company and any
subsidiary or affiliated corporations or entities.
          (h) Notice of Termination. Any termination of employment by the
Company or by Executive shall be communicated by a written Notice of Termination
to the other party in accordance with Section 12 hereof. For purposes of this
Agreement, a “Notice of Termination” shall mean a notice which shall indicate
the specific termination provision in the Agreement relied upon and shall set
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of employment under the provision so indicated.
     7. PAYMENT ON TERMINATION
          (a) By the Company for Cause, By Executive without Good Reason. If
Executive’s employment is terminated by the Company for Cause or by Executive
without Good Reason, Executive’s Base Salary, bonus and other benefits specified
in Section 4 shall cease at the time of such termination, to the extent
permitted by law, and the Options, to the extent not vested, shall terminate and
shall not thereafter be exercisable as to any portion thereof that has not
vested. In addition, if Executive’s employment is terminated by Executive
without Good Reason during the period beginning on the first anniversary of the
date of grant of Option 1 and ending on February 28, 2009, then (i) if Option 1
has not been exercised, the number of Option 1 Shares shall automatically be
reduced from 1,000,000 shares of Common Stock to 500,000 shares of Common Stock,
and, from and after the date of such termination, Executive shall have no right
to exercise Option 1 for more than 500,000 shares of Common Stock; (ii) if
Option 1 has been exercised, Executive shall either (A) return 50% of the Option
1 Shares, up to a maximum of 500,000 Option 1 Shares, purchased upon exercise of
Option 1 to the Company, or (B) alternatively, if Executive has exercised Option
1 in whole or in part and sold some or all of the Option 1 Shares purchased upon
such exercise of Option 1 so that he has less than 50% of the Option 1 Shares,
up to a maximum of 500,000 Option 1 Shares, to return to the Company, Executive
shall pay to the Company the net after-tax proceeds, less commissions, that he
received upon such sale of the Option 1 Shares to the Company so that, after the
payment of such net after-tax proceeds and the return of Option 1 Shares
purchased upon the exercise of Option 1, Executive would in the same position as
if he had purchased no more than 500,000 Option 1 Shares upon exercise of Option
1.

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          (b) By the Company without Cause, or by Executive for Good Reason. If
Executive’s employment is terminated by the Company without Cause or by
Executive for Good Reason, Executive shall be entitled to receive or continue
receiving any and all compensation and benefits, as set forth in Section 4
above, through the date that otherwise would have been the end of the Term,
provided that any portion of the Options which has not vested as of the
termination date shall vest according to the following schedule:
               (i) If the termination date is February 18, 2008 or earlier, then
all of Option 1 shall be vested and shall be fully exercisable by Executive as
of the termination date;
               (ii) If the termination date is on or anywhere in between
February 19, 2008 and February 18, 2009, then all of Option 1 shall be vested
and shall be fully exercisable and 1,000,000 of the shares from Option 2 shall
be vested and shall be fully exercisable by Executive as of the termination
date; and
               (iii) If the termination date is on or after February 19, 2009,
then all of Option 1 and all of Option 2 shall be vested and shall be fully
exercisable by Executive as of the termination date.
          (c) By the Company for Disability or Incapacity. If Executive’s
employment is terminated by the Company by reason of Disability or Incapacity,
Executive shall be entitled to receive or continue receiving any and all
compensation and benefits as set forth in Section 4 of this Agreement for a
period of thirteen (13) weeks following the date on which such Disability or
Incapacity is determined to have begun. Any Option or portion thereof which has
not vested on or before the end of the last day of such thirteen (13) week
period shall terminate and shall not thereafter be exercisable. Executive shall
be entitled to receive all disability or incapacity payments provided to senior
executives under the Company’s then-existing policies of insurance.
          (d) By expiration of the Term. If Executive’s employment is terminated
by reason of the expiration of the Term, the Company shall have no obligation to
continue the compensation and benefits set forth in Section 4 above beyond the
termination date.
     8. DEFENSE AGAINST CLAIMS; COSTS OF DEFENSE. In the event Executive’s
former employer immediately prior to Executive’s entering into this Agreement
threatens or asserts a claim that Executive has breached or violated any
employment, noncompetition, nonsolicitation, confidentiality or other agreement
that would materially limit Executive’s ability to perform any of his duties or
fulfill any of his obligations under this Agreement (collectively “Former
Employer Claims”), the Company will provide Executive with a defense from any
and all such Former Employer Claims with attorneys selected by Executive and
paid by the Company. The Company shall have the right to approve the selection
of counsel, which approval shall not be unreasonably withheld. The Company will
pay all costs and expenses, including legal fees and expenses, in connection
with the defense of any such Former Employer Claims, but shall have no liability
for any arbitration award, judgment or amounts paid in settlement related to any
such Former Employer Claims. Notwithstanding the foregoing, in the event that
any such Former Employer Claims arise from any act(s) (i) taken by the Company’s
Board of Directors; (ii) taken by Executive at the express direction of the
Company’s Board of Directors, or (iii) taken by the Company but not at
Executive’s initiative,

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then, in addition to the rights provided under this Section 8, Executive shall
retain all rights to indemnification pursuant to Section 4(e) of this Agreement.
     9. AGREEMENT NOT TO SOLICIT OR COMPETE.
          (a) Non-solicitation. Upon the termination of employment at any time,
then for a period of one year after the termination of the Employment Period,
Executive shall not under any circumstances employ, solicit the employment of,
or accept unsolicited the services of, any “protected person” or recommend the
employment of any “protected person” to any other business organization. A
“protected person” shall be a person known by Executive to be employed by the
Company or its Subsidiaries (as defined below) or to have been employed by
Company or its Subsidiaries within six months prior to the commencement of
conversations with such person with respect to employment. The term “Subsidiary”
as used in this Section 9 means a corporation or other entity more than
50 percent of whose outstanding securities or interests representing the right,
other than as affected by events of default, to vote for the election of
directors or otherwise select a similar governing body is owned by the Company
and/or one or more of the Company’s other Subsidiaries.
     As to (i) each “protected person” to whom the foregoing applies, (ii) each
limitation on (A) employment, (B) solicitation and (C) unsolicited acceptance of
services, of each “protected person” and (iii) each month of the period during
which the provisions of this Section 9(a) apply to each of the foregoing, the
provisions set forth in this subsection (a) are deemed to be separate and
independent agreements and in the event of unenforceability of any such
agreement, such unenforceable agreement shall be deemed automatically deleted
from the provisions hereof and such deletion shall not affect the enforceability
of any other provision of this Section 9(a) or any other term of this Agreement.
          (b) Non-competition. During the course of his employment, Executive
will have learned many trade secrets of the Company and its Subsidiaries and
will have access to confidential information and business plans for the Company
and its Subsidiaries. Therefore, beginning on the day following the end of the
Employment Period and continuing for a period of one year thereafter, Executive
will not engage, either as a principal, employee, partner, consultant, officer,
director or investor (other than a less-than-1% stock interest in a
corporation), in a business which is a competitor of the Company and its
Subsidiaries. For purposes of this Section 9(b), a business shall be deemed a
“competitor” of the Company and its Subsidiaries only if it engages in the
Specialty Home Fashions or Furniture Business. For purposes of clarity, any
business that engages primarily in the Off-Price Family Apparel and/or Off-Price
Home Fashions or Furniture Business and/or that engages primarily in the family
apparel business (such as Talbot’s, Inc. or The Limited Stores, Inc.), but not
in the Specialty Home Fashions or Furniture Business, shall not be deemed a
“competitor” of the Company and its Subsidiaries. Executive agrees that if, at
any time, pursuant to action of any court, administrative or governmental body
or other arbitral tribunal, the operation of any part of this Section 9(b) shall
be determined to be unlawful or otherwise unenforceable, then the coverage of
this Section 9(b) shall be deemed to be restricted as to duration, geographical
scope or otherwise, as the case may be, to the extent, and only to the extent,
necessary to make this Section 9(b) lawful and enforceable in the particular
jurisdiction in which such determination is made.

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          (c) Return of information. Upon termination of the Employment Period
for any reason other than the death of Executive, Executive shall immediately
return all written trade secrets, confidential information and business plans of
the Company and shall execute a certificate certifying that he has returned all
such items in his possession or under his control.
     10. EXCISE TAX.
          (a) Gross-Up. In the event that the “Total Payments” (defined below)
would be subject to the “Excise Tax” (defined below) the Company shall pay to
Executive an additional amount (the “Gross-Up Payment”) such that after payment
by Executive of all taxes (including any Excise Tax) imposed upon the Gross-Up
Payment and any interest or penalties imposed with respect to such taxes,
Executive retains from the Gross-Up Payment an amount equal to the Excise Tax
imposed upon the Total Payments.
               (i) For purposes of determining whether any of the Total Payments
will be subject to the Excise Tax and the amount of such Excise Tax, (A) all
“excess parachute payments” within the meaning of Section 280G(b)(l) of the
Internal Revenue Code of 1986, as amended (the “Code”) shall be treated as
subject to the Excise Tax unless, in the opinion of Tax Counsel (defined below),
such excess parachute payments (in whole or in part) represent reasonable
compensation for services actually rendered (within the meaning of
Section 280G(b)(4)(B) of the Code) in excess of the base amount (within the
meaning of Section 280G(b)(3) of the Code) allocable to such reasonable
compensation, or are otherwise not subject to the Excise Tax, and (B) the value
of any noncash benefits or any deferred payment or benefit shall be determined
by the Auditor (defined below) in accordance with the principles of
Sections 280G(d)(3) and (4) of the Code. If the Auditor is prohibited by
applicable law or regulation from performing the duties assigned to it
hereunder, then a different auditor, acceptable to both the Company and
Executive, shall be selected. The fees and expenses of Tax Counsel and the
Auditor shall be paid by the Company. For purposes of determining the amount of
the Gross-Up Payment, Executive shall be deemed to pay federal income tax at the
highest marginal rate of federal income taxation in the calendar year in which
the Gross-Up Payment is to be made and state and local income taxes at the
highest marginal rate of taxation in the state and locality of Executive’s
residence on the date of termination (or if there is no date of termination,
then the date on which the Gross-Up Payment is calculated for purposes of this
Section), net of the maximum reduction in federal income taxes which could be
obtained from deduction of such state and local taxes.
               (ii) In the event that the Excise Tax is subsequently determined
to be less than the amount taken into account hereunder in calculating the
Gross-Up Payment, Executive shall repay to the Company, within five (5) business
days following the time that the amount of such reduction in the Excise Tax is
finally determined, the portion of the Gross-Up Payment attributable to such
reduction. In the event that the Excise Tax is determined to exceed the amount
taken into account hereunder in calculating the Gross-Up Payment (including by
reason of any payment the existence or amount of which cannot be determined at
the time of the Gross-Up Payment), the Company shall make an additional Gross-Up
Payment in respect of such excess within five (5) business days following the
time that the amount of such excess is finally determined. Executive and the
Company shall each reasonably cooperate with the other in

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connection with any administrative or judicial proceedings concerning the
existence or amount of liability for Excise Tax with respect to the Total
Payments.
          (b) Other Terms. Executive and the Company shall each reasonably
cooperate with the other in connection with any administrative or judicial
proceeding concerning the existence or amount of liability for Excise Tax with
respect to the Total Payments. Notwithstanding anything herein to the contrary,
this Section 10 shall be interpreted (and, if determined by the Company to be
necessary, reformed) to the extent necessary to fully comply with the
Sarbanes-Oxley Act of 2002; provided that the Company agrees to maintain, to the
maximum extent practicable, the original intent and economic benefit to the
Executive of the applicable provision without violating the provisions of the
Sarbanes-Oxley Act of 2002.
          (c) Definitions. “Total Payments” shall mean the payments and benefits
received or to be received by Executive, whether pursuant to the terms of this
Agreement or any other plan, arrangement or agreement that constitute “parachute
payments” as defined in Section 280G of the Code (excluding the Gross-Up
Payment) (“Parachute Payments”). For this purpose, all of the payments and
benefits received by Executive or to be received by Executive in connection with
a change of control or in connection with Executive’s termination of employment
in respect of a change of control (whether pursuant to the terms of this
Agreement or any other plan, arrangement or agreement with the Company and/or
any person whose actions result in a change of control or any person affiliated
with the Company or such person) shall be treated as Parachute Payments unless,
in the opinion of tax counsel (“Tax Counsel”) reasonably acceptable to Executive
and selected by the accounting firm which was, immediately prior to the change
of control, the Company’s independent auditor (the “Auditor”), such payments or
benefits (in whole or in part) do not constitute Parachute Payments, including
by reason of Section 280G(b)(4)(A) of the Code. “Excise Tax” shall mean the
excise tax imposed under Section 4999 of the Code.
     11. ASSIGNMENT. The rights and obligations of the Company shall inure to
the benefit of and shall be binding upon the successors and assigns of the
Company. The rights and obligations of Executive are not assignable.
     12. NOTICES. All notices and other communications required hereunder shall
be in writing and shall be given by mailing the same by certified or registered
mail, return receipt requested, postage prepaid. If sent to the Company the same
shall be mailed to the Company at 100 Pier 1 Place, Fort Worth, Texas 76102,
Attention: Chairman of the Board, or other such address as the Company may
hereafter designate by notice to Executive; and if sent to Executive, the same
shall be mailed to Executive at his address set forth in the records of the
Company or at such other address as Executive may hereafter designate by notice
to the Company. Notice shall be deemed given on the date shown on the applicable
return receipt.
     13. WITHHOLDING; CERTAIN TAX MATTERS. Anything to the contrary
notwithstanding, (a) all payments required to be made by the Company hereunder
to Executive shall be subject to the withholding of such amounts, if any,
relating to tax and other payroll deductions as the Company may reasonably
determine it should withhold pursuant to any applicable law or regulation, and
(b) to the extent any payment hereunder shall be required to be delayed until
six months following separation from service to comply with the “specified

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employee” rules of Section 409A of the Code, it shall be so delayed (but not
more than is required to comply with such rules).
     14. GOVERNING LAW. This Agreement and the rights and obligations of the
parties hereunder shall be governed by the laws of the State of Texas.
     15. ARBITRATION. In the event that there is any claim or dispute arising
out of or relating to this Agreement, or the breach thereof, and the parties
hereto shall not have resolved such claim or dispute by negotiation or
mediation, then such claim or dispute shall be settled exclusively by binding
arbitration in Fort Worth, Texas, in accordance with the Texas Arbitration Act
and the Employment Arbitration Rules and Mediation Procedures of the American
Arbitration Association then in effect. The arbitration shall be presided over
by a panel of three neutral arbitrators, all three of whom will be selected by
mutual agreement of Executive and the Company, or, in the absence of such
agreement, by a court of competent jurisdiction. Judgment upon the award
rendered by such arbitrators shall be entered by a district court sitting in
Tarrant County, Texas, upon the application of either party. Any issues that
cannot be arbitrated, or any relief that must be sought in any court, will be
brought exclusively in any state district court sitting in Tarrant County,
Texas.
     16. EMPLOYING SUBSIDIARY. Executive understands and agrees that he will, as
are the majority of the administrative services employees of the Company, be an
employee of the Company’s wholly owned subsidiary, Pier 1 Services Company, a
Delaware statutory trust (“Pier 1 Services”), and that all compensation will be
paid from Pier 1 Services. Accordingly, Pier 1 Services is joining as a party to
this Agreement in its limited capacity as being the subsidiary from which all
payments of cash compensation and other cash payments called for under this
Agreement will be made. All references to the Company in Sections 6(a) and 6(b)
above shall be deemed to refer to, in addition to the Company, Pier 1 Services
and to all other subsidiaries of the Company, if any, for which Executive is
serving as an employee.
     17. ENTIRE AGREEMENT. This Agreement represents the entire agreement
between the parties relating to the terms of Executive’s employment by the
Company and supersedes all prior written or oral agreements between them.
     18. EXECUTION OF AGREEMENT. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original copy of this
Agreement and all of which, when taken together, will be deemed to constitute
one and the same agreement. The exchange of copies of this Agreement and of
signature pages by facsimile transmission shall constitute effective execution
and delivery of this Agreement as to the parties and may be used in lieu of the
original Agreement for all purposes. Signatures of the parties transmitted by
facsimile shall be deemed to be their original signatures for all purposes.

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                      EXECUTIVE    
 
                    /s/ Alexander W. Smith                   Alexander W. Smith
   
 
                    PIER 1 IMPORTS, INC.    
 
               
 
  By:   /s/ Tom Thomas                           Tom Thomas             Chairman
of the Executive Committee and Lead Director    
 
                    PIER 1 SERVICES COMPANY    
 
                    By: Pier 1 Holdings, Inc., its managing trustee    
 
               
 
      By:   /s/ Tom Thomas    
 
               
 
          Tom Thomas    
 
          Authorized Signatory    

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