Document:

Exhibit
10.3

 

October 3, 2003

 

Patricia McKay

2301 Northwest 23rd
Way

Boca Raton, FL 
33431

 

Dear Pat:

 

I am pleased to offer you
the position of Chief Financial Officer at Restoration Hardware, Inc. (the
Company). I’m confident that you will find Restoration to be an exciting and
challenging environment in which to work. This letter will confirm the most
important details of our offer to you.

 

	
  Title

  	
   

  	
  Chief Financial Officer reporting to the Chief Executive Officer.

  
	
   

  	
   

  	
   

  
	
  Salary

  	
   

  	
  $350,000 per
  year, paid bi-weekly. Salary to increase to $375,000 per year, effective
  June 2004, then $400,000 per year, effective June 2005.

  
	
   

  	
   

  	
   

  
	
  Bonus

  	
   

  	
  You will be
  guaranteed a minimum bonus of $50,000 for Fiscal 2003, and $125,000 for
  Fiscal 2004. The bonus will be payable when the Company distributes its
  annual incentive bonuses.

  
	
   

  	
   

  	
   

  
	
  Management Incentive Program

  	
   

  	
  You will be
  eligible to participate in the Management Incentive Program. Your eligibility
  range will be up to 50% of your base pay. 
  Your guaranteed bonus amounts for Fiscal 2003 and Fiscal 2004 referred
  to above will be credited against your actual bonus for such years.

  
	
   

  	
   

  	
   

  
	
  Stock Option Grant

  	
   

  	
  250,000 stock options
  at the fair market value of our common stock on the grant date thereof, to
  have a grant date concurrent with your first day of employment with the
  Company.  Stock options will vest at
  25% per year, over a four-year period, and have a ten-year term, with other
  terms being in accordance with the Company’s 1998 Stock Incentive Plan, as
  amended and restated October 9, 2002. 
  Your initial option grant will be an incentive stock option to the
  maximum extent permitted under Section 422 of the Internal Revenue Code.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  In the
  event your employment with the Company is terminated for any reason other
  than death, disability or for Cause, you will have three months following
  your termination of employment to exercise the vested portion of your initial
  option grant.  In the event your
  employment with the Company is terminated for Cause, your initial option
  grant will terminate concurrently with your termination of employment.  In the event your employment with the
  Company is terminated due to your death or disability, you will have twelve
  months following your termination of employment to exercise the vested
  portion of your initial option grant. 
  In no event may your initial option grant be exercised after the
  expiration of its ten-year term.

  

 

 

	
  Stock Option Grant (con’t)

  	
   

  	
  In addition, the
  following will be granted:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •     50,000
  stock options in June, 2004, at the fair market value of our common stock on
  the grant date.  Stock options
  will vest at 25% per year, over a four-year period, and have a ten-year term,
  with other terms being in accordance with the Company’s 1998 Stock Incentive
  Plan, as amended and restated October 9, 2002.  This option grant will be an incentive stock option to the
  maximum extent permitted under Section 422 of the Internal Revenue Code.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  •     Beginning in 2005, you
  will be eligible to receive stock option grants on an annual basis in accordance
  with the Company’s 1998 Stock Incentive Plan, as amended and restated
  October 9, 2002. The number of options will be determined by your
  performance, but the target will be in the range of 20,000 to 40,000 stock
  options.

  
	
   

  	
   

  	
   

  
	
  Severance

  	
   

  	
  Should you be terminated
  Not for Cause (as defined in Attachment A) by the Company, other than
  in connection with a Change of Control (as defined in Attachment B), within the
  first two (2) years of your employment with the Company, you will receive
  salary continuation for a period of two (2) years from your termination date
  and a pro rated bonus based on the greater of (i) your prior year’s
  bonus payment or (ii) your then current year’s incentive target bonus
  amount (the “Bonus Amount”), and you also will receive full vesting of your
  initial stock option grant.  Should
  you be terminated Not for Cause by the Company, other than in connection with
  a Change of Control, after your second full year of employment with the
  Company, you will receive salary continuation for a period of one (1) year
  from your termination date and a pro rated bonus based on the Bonus Amount,
  and you also will receive full vesting of your initial stock option
  grant.  In the event that you resign
  or are terminated by the Company for Cause (as defined in Attachment
  A), you will not be eligible to receive any severance pay or any
  accelerated option vesting.  Your
  entitlement to any severance payments and acceleration of your stock option
  grant will be contingent upon your execution of the Company’s written release
  and expiration of any applicable revocation period to the Company’s written
  release. See
  Attachment A.)

  
	
   

  	
   

  	
   

  
	
  Change of Control

  	
   

  	
  Should there be
  a Change of Control of the Company (See Attachment B) and you, thereafter,
  are subject to an Involuntary Termination (as defined in Attachment B) by the
  Company, you will receive, in lieu of any other severance pursuant to this
  offer letter, a pro rated bonus based on the Bonus Amount and salary
  continuation for a period of two (2) years from your termination date at the
  annual rate of your base salary plus the Bonus Amount; plus a possible
  gross-up payment as set forth in Attachment B.  In addition, your initial stock option grant will vest in full.

  
	
   

  	
   

  	
   

  
	
  Non-Compete Provision

  	
   

  	
  You acknowledge and agree that in your role as Chief Financial
  Officer you shall acquire confidential and proprietary information belonging
  to the Company.  To preserve and
  protect this information and the assets of the Company, and in consideration
  of the severance and benefits provided to you under this offer letter,  you agree not to work in a capacity that
  would compete directly with the Company, or solicit any employees or
  customers of the Company, for a period of one (1) year following the effective date of your resignation from
  or termination by the Company. (See Attachment C.)  In the event that you breach this provision all
  severance and other benefits shall cease.

  

 

2

 

	
  Car Allowance

  	
   

  	
  You will receive
  a car allowance of $500.00 per month..

  
	
   

  	
   

  	
   

  
	
  401(K) Plan

  	
   

  	
  You will be
  eligible to participate in the Company’s 401(K) Plan on the first enrollment
  dates following your date of hire.

  
	
   

  	
   

  	
   

  
	
  Medical Benefits

  	
   

  	
  You will be
  eligible to participate in the Company’s healthcare program per the Company’s
  guidelines.

  
	
   

  	
   

  	
   

  
	
  Vacation

  	
   

  	
  15 days (3
  weeks) per year.

  
	
   

  	
   

  	
   

  
	
  Employee Discount

  	
   

  	
  You will be
  eligible for a 40% associate discount on Restoration merchandise.

  
	
   

  	
   

  	
   

  
	
  Miscellaneous Benefits:

  	
   

  	
  You will be
  eligible for other benefits, if any, to the extent set forth in the
  attachments hereto.

  

 

The
language that follows reflects our standard and legally required offer letter
language. We don’t mean for it to come across as impersonal, but rather, as
sound and necessary information for you to know from the outset of your working
relationship with us. The relationship between you and the Company is called
“at-will employment.” This means that employment with the Company is for no
specific period of time. As a result, either you or the Company is free to terminate
your employment relationship at any time for any reason, with or without Cause.
This is the full and complete agreement between us on this term. Although your
job duties, title, compensation, benefits, or the Company’s policies, practices
and procedures may change from time to time, the “at-will” nature of your
employment may only be changed  in an
express writing signed by you and the Chief Executive Officer of the Company.

 

Finally,
your employment is contingent on you executing a Proprietary Information and
Inventions Agreement and providing the Company with legal proof of your
identity and authorization to work in the United States at time of hire.

 

I am enclosing two copies of this
letter. Please sign and return one copy to me on your first day of work and
keep the other copy for your files.

 

Pat, we are very excited about you joining the “Resto”
team and look forward to your contributions to the growth and success of the
Company.

 

	
  Sincerely,

  
	
   

  
	
  /s/ Gary
  Friedman

  	
   

  
	
   

  
	
  Gary Friedman

  
	
  Chief Executive Officer

  

 

Þ  I understand and agree to the terms of this offer of
employment:

 

 

	
  /s/ Patricia
  McKay

  	
   

  	
  10/6/03

  	
   

  
	
   

  	
   

  
	
  Pat McKay

  	
  Date

  

 

cc:                                 Associate’s
File

 

3

 

Attachment A

 

Severance.  In the event that you are terminated Not for
Cause by the Company within the first two (2) years of your employment with the
Company, other than in connection with a Change of Control (as defined in Attachment B),
you will be eligible to receive severance pay in the form of salary
continuation for a period of twenty-four (24) months from your termination date
with the Company at an annual rate equal to your base salary and a pro rated
bonus based on the greater of (i) your prior year’s bonus payment or
(ii) your then current year’s incentive target bonus amount, less
applicable deductions and withholdings, payable in regular periodic payments in
accordance with the Company’s policy. 
(Insert D1 of Attachment D.).  You also will receive full vesting of your initial stock option
grant only.  Should you be terminated
Not for Cause by the Company after the second full year of your employment with
the Company, other than in connection with a Change of Control (as defined in Attachment B),
you will be eligible to receive severance pay in the form of salary
continuation for a period of twelve (12) months from your termination date with
the Company in an aggregate amount equal to your base salary and a pro rated
bonus based on the greater of (i) your prior year’s bonus payment or (ii) your
then current year’s incentive target bonus amount, less applicable deductions
and withholdings, payable in regular periodic payments in accordance with the
Company’s policy.  (Insert D1 of Attachment D.).
You also will receive full vesting of your initial stock option grant
only.  You acknowledge that except as
expressly provided in this offer letter, you will not receive any additional
compensation, severance or benefits after your termination of employment. You
agree and acknowledge that your right to receive the severance payments shall
be conditioned upon your execution of a release agreement with the Company
containing standard terms and conditions used by the Company at the time for a
general release by a senior officer of all claims arising from the officer’s
relationship with the Company.  In the
event that the Company terminates your employment for Cause, the Company shall
pay you all compensation due and owing through the last day actually worked and
thereafter the obligations of the Company under this offer letter shall cease.

 

Definition of Cause and Not for Cause.  The Company may terminate your employment
for “Cause”.  A termination of
employment is for “Cause” if you have been convicted of a felony involving
fraud or dishonesty, you die or suffer from a Disability (as defined below)
during your continued employment with the Company or the termination is
evidenced by a resolution adopted in good faith by a majority of the Board of
Directors of the Company to the effect that you (i) intentionally and
continually failed substantially to perform your reasonably assigned duties
with the Company (other than a failure resulting from your assignment of duties
that would constitute an Involuntary Termination (as defined in Attachment B)
following a Change of Control (as defined in Attachment B)), which
failure continued for a period of at least thirty (30) days after a written
notice of demand for substantial performance has been delivered to you
specifying the manner in which you have failed substantially to perform, or
(ii) intentionally engaged in conduct which is demonstrably and materially
injurious to the Company; provided, that no termination of your employment
shall be for Cause as set forth in clause (ii) above until there shall have
been delivered to you a copy of a written notice setting forth that you were
guilty of the conduct set forth in clause (ii) and specifying the particulars
thereof in detail. No act, nor failure to act, on your part shall be considered
“intentional” unless you have acted, or failed to act, with a lack of good
faith and with a lack of reasonable belief that your action or failure to act
was in the best interest of the Company.

 

For purposes of this
offer letter, the term “Not for Cause” shall mean termination of your employment
by the Company for reasons other than for “Cause.”

 

Termination by Employee.  In the event that you elect to terminate
your employment for any reason other than in connection with an Involuntary
Termination following a Change of Control, the Company shall pay you all
compensation due and owing through the last day actually worked and thereafter
the obligations of the Company under this offer letter shall cease.

 

Disability.  “Disability” shall mean that you are unable
to carry out the responsibilities and functions of the position held by you by
reason of any physical or mental impairment for more than 120 days in any
twelve-month period.  If you suffer from
a Disability, then, to the extent permitted by law, the Company may terminate
your employment.  The Company shall pay
to you all compensation to which you are entitled up through the date of
termination, and thereafter all obligations of the Company under this offer
letter shall cease.  Nothing in this
offer letter shall affect your rights under any disability plan in which you
are a participant.

 

4

 

Attachment B

 

Definitions:

 

“Involuntary Termination”
shall mean the termination of your employment which occurs by reason of:

 

(i)                   your
involuntary dismissal or discharge by the Company Not for Cause, or

 

(ii)                your
voluntary resignation following

 

(A)
a change in your position with the Company which materially reduces your duties
and responsibilities or the level of management to which you report, (B) a reduction
in your level of compensation (including base salary, fringe benefits and
target bonus under any corporate-performance based bonus or incentive
programs), or (C) a relocation of your place of employment by more than fifty
(50) miles, provided and only if such change, reduction or relocation is
effected by the Company without your consent.

 

“Change
of Control” shall mean any of the following:

 

(a)
An acquisition (other than directly from the Company) of any voting securities
of the Company (the “Voting Securities”) by any Person (as the term “person” is
used for purposes of Section 13 or 14 of the Securities Exchange Act of
1934, as amended (the “1934 Act”)) immediately after which such Person has
Beneficial Ownership (as the term “beneficial ownership” is defined under Rule
13d-3 promulgated under the 1934 Act) of fifty percent (50%) or more of the
combined voting power of the Company’s then outstanding Voting Securities;
provided, that in determining whether a Change of Control has occurred, Voting Securities
which are acquired in a Non-Control Acquisition (as hereinafter defined) shall
not constitute an acquisition which would cause a Change of Control. A
“Non-Control Acquisition” shall mean an acquisition by (i) an employee benefit
plan (or a trust forming a part thereof) maintained by (1) the Company or (2)
any corporation or other Person of which a majority of its voting power or its
equity securities or equity interest is owned directly or indirectly by the
Company (a “Subsidiary”), (ii) the Company or any Subsidiary, or (iii) any
Person in connection with a Non-Control Transaction (as hereinafter defined);

 

(b)
The individuals who, as of date this offer letter, are members of the Board of
Directors of the Company (the “Incumbent Board”), cease for any reason to
constitute at least a majority of the Board of Directors of the Company;
provided, that if the appointment, election or nomination for election by the
Company’s stockholders of any new director was approved by a vote of at least
two-thirds of the Incumbent Board, such new director shall, for purposes of
this offer letter, be considered a member of the Incumbent Board; and provided,
further, that no individual shall be considered a member of the Incumbent Board
if such individual initially assumed office as a result of either an actual or
threatened “Election Contest” (as described in Rule 14a-11 promulgated under
the 1934 Act) or other actual or threatened solicitation of proxies or consents
by or on behalf of a Person other than the Board of Directors of the Company (a
“Proxy Contest”) including by reason of any agreement intended to avoid or
settle any Election Contest or Proxy Contest;

 

(c)
A merger, consolidation or reorganization involving the Company, unless such
merger, consolidation or reorganization satisfies the conditions set forth in
clauses (1) and (2) below (any transaction(s) meeting the requirements of
clauses (1) and (2) below being referred to herein as “Non-Control
Transactions”):

 

5

 

(1)
the stockholders of the Company immediately before such merger, consolidation
or reorganization own, directly or indirectly, immediately following such
merger, consolidation or reorganization, at least fifty percent (50%) of the
combined voting power of the outstanding voting securities of the corporation
resulting from such merger, consolidation or reorganization (the “Surviving
Corporation”) in substantially the same proportion as their ownership of the
Voting Securities immediately before such merger, consolidation or
reorganization; and

 

(2)
the individuals who were members of the Incumbent Board immediately prior to
the execution of the agreement providing for such merger, consolidation or
reorganization constitute at least a majority of the members of the board of
directors of the Surviving Corporation;

 

(d)
A complete liquidation or dissolution of the Company; or

 

(e)
An agreement for the sale or other disposition of all or substantially all of
the assets of the Company to any Person (other than a transfer to a
Subsidiary); and

 

(f)
Any other event that at least two-thirds of the Incumbent Board in its sole
discretion shall determine constitutes a Change of Control.

 

Notwithstanding
the foregoing, a Change of Control shall not be deemed to occur solely because
any Person (the “Subject Person”) acquired Beneficial Ownership of more than
the permitted amount of the outstanding Voting Securities as a result of the
acquisition of Voting Securities by the Company which, by reducing the number
of Voting Securities outstanding, increases the proportional number of shares
Beneficially Owned by the Subject Person; provided, that if a Change of Control
would occur (but for the operation of this sentence) as a result of the
acquisition of Voting Securities by the Company, and after such share
acquisition by the Company the Subject Person becomes the Beneficial Owner of
any additional voting Securities which increases the percentage of the then
outstanding Voting Securities Beneficially Owned by the Subject Person, then a
Change of Control shall occur; provided further that no Change of Control shall
be deemed to have occurred under (a) or (c) above merely because individuals
and entities who, individually, as of the date of the offer letter have
Beneficial Ownership of at least 5% of the Voting Securities have, immediately
after the transaction described in (a) or (c) above, Beneficial Ownership, in
the aggregate, of more than 50% of the Voting Securities of the Company or
successor or parent thereof if both (i) no one such individual or entity has,
immediately after such a transaction, Beneficial Ownership of more than 50% and
(ii) the transaction does not result in the Company or successor or parent
thereof becoming a private company.

 

Notwithstanding
anything contained in this offer letter to the contrary, if your employment is
terminated prior to a Change of Control and the Board of Directors of the
Company determines that such termination (i) was at the request of a third
party who has indicated an intention or taken steps reasonably calculated to
effect a Change of Control and who subsequently effectuates a Change of Control
or (ii) otherwise occurred in connection with, or in anticipation of, a Change
of Control which actually occurs, then, for all purposes of this offer letter,
the date of a Change of Control with respect to you shall mean the date
immediately prior to the date of such termination of your employment.

 

6

 

Excise Tax Payments.

 

(1) In the event that any
payment or benefit (within the meaning of Section 280G(b)(2) of the
Internal Revenue Code of 1986, as amended (the “Code”)) to you or for your
benefit, paid or payable or distributed or distributable pursuant to the terms
of this letter or otherwise in connection with, or arising out of, your
employment with the Company or a Change of Control (a “Payment” or “Payments”),
would be subject to the excise tax imposed by Code Section 4999, or any
interest or penalties are incurred by you with respect to such excise tax (such
excise tax, together with any such interest and penalties, are hereinafter
collectively referred to as the “Excise Tax”), then you will be entitled to
receive an additional payment (a “Gross-Up Payment”) in an amount such that after
payment by you of all taxes (including any interest or penalties (other than
interest and penalties imposed by reason of your failure to file timely a tax
return or pay taxes shown due on your return) imposed with respect to such
taxes and the Excise Tax), including any Excise Tax imposed upon the Gross-Up
Payment, you retain an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments.

 

(2) An initial determination
as to whether a Gross-Up Payment is required pursuant to this letter and the
amount of such Gross-Up Payment shall be made by the Company. The Company shall
provide its determination (the “Determination”), together with detailed
supporting calculations and documentation, to you within fifteen (15) days of
the termination date, if applicable, or such other time as requested by you
(provided you reasonably believe that any of the Payments may be subject to the
Excise Tax). Upon your request, the Company shall furnish you, at the Company’s
expense, with an opinion reasonably acceptable to you from a nationally
recognized certified public accounting firm (or an accounting firm of
equivalent stature reasonably acceptable to you) that there is a reasonable
basis for the Determination. Any Gross-Up Payment determined pursuant to this
Section 2 shall be paid by the Company to you within five (5) days of
receipt of the Determination.

 

(3) As a result of the
uncertainty in the application of Sections 4999 and 280G of the Code, it is
possible that a Gross-Up Payment (or a portion thereof) will be paid which
should not have been paid (an “Excess Payment”) or a Gross-Up Payment (or a
portion thereof) which should have been paid will not have been paid (an
“Underpayment”).

 

(a) An Underpayment shall be
deemed to have occurred (i) upon notice (formal or informal) to you from any
governmental taxing authority that your tax liability (whether in respect of
your current taxable year or in respect of any prior taxable year) may be
increased by reason of the imposition of the Excise Tax on a Payment or
Payments with respect to which the Company has failed to make a sufficient
Gross-Up Payment, (ii) upon a determination by a court, or (iii) by reason of
determination by the Company (which shall include the position taken by the
Company, together with its consolidated group, on its federal income tax
return). If an Underpayment occurs, you shall promptly notify the Company and
the Company shall promptly, but in any event at least five (5) days prior to
the date on which the applicable government taxing authority has requested
payment, pay to you an additional Gross-Up Payment equal to the amount of the
Underpayment plus any interest and penalties (other than interest and penalties
imposed by reason of your failure to file timely a tax return or pay taxes
shown due on your return) imposed on the Underpayment.

 

7

 

(b) An Excess Payment shall
be deemed to have occurred upon a Final Determination (as hereinafter defined)
that the Excise Tax shall not be imposed upon a Payment or Payments (or portion
thereof) with respect to which you had previously received a Gross-Up Payment.
A “Final Determination” shall be deemed to have occurred when you have received
from the applicable government taxing authority a refund of taxes or other
reduction in your tax liability by reason of the Excess Payment and upon either
(i) the date a determination is made by, or an agreement is entered into with,
the applicable governmental taxing authority which finally and conclusively
binds you and such taxing authority, or in the event that a claim is brought
before a court of competent jurisdiction, the date upon which a final
determination has been made by such court and either all appeals have been
taken and finally resolved or the time for all appeals has expired or (ii) the
statute of limitations with respect to your applicable tax return has
expired.  If an Excess Payment is
determined to have been made, you shall promptly pay to the Company the amount
of such refund (together with any interest paid or credited thereon after taxes
applicable thereto).

 

(4) Notwithstanding anything
contained in this letter to the contrary, in the event that, according to the
Determination, an Excise Tax will be imposed on any Payment or Payments, the
Company shall pay to the applicable government taxing authorities, as Excise
Tax withholding, the amount of the Excise Tax that the Company has actually
withheld from the Payment or Payments.

 

8

 

Attachment C

 

Restriction on Competition.  You acknowledge and agree that in your role
as Chief Financial Officer you shall acquire confidential and proprietary
information belonging to the Company. 
To preserve and protect this information and the assets of the Company,
including the goodwill and customers of the Company of which you will have an
interest in your role as an employee and officer of the Company, or its
subsidiaries, and to preserve and protect the goodwill and business interests
of the Company going forward, and in consideration of the severance and
benefits provided to you under the offer letter, you agree that, for a period
of one (1) year from your   termination of employment for any reason (the “Restricted
Period”), you will not directly or indirectly engage in, or have any ownership
interest in, or participate in the financing operation, management or control
of, any person, firm, corporation or business that engages in the Restricted
Business of Restoration Hardware, Inc. 
“Restricted Business of Restoration Hardware, Inc.” is defined as Insert
D2 of Attachment
D.

 

Restrictions on Solicitation after
Termination.  In
consideration of the severance and benefits provided to you under the offer
letter, you agree that, during the Restricted Period, you shall not, without
the prior written consent of the Company, directly or indirectly, including,
without limitation, as a sole proprietor, member of a partnership, stockholder
or investor, officer or director of a corporation, or as an employee, associate,
consultant, independent contractor or agent of any person, partnership,
corporation or other business organization or entity other than the Company (i)
solicit or endeavor to entice away from the Company any person or entity who
is, or during the then most recent 8-month period was, employed by, or had
served as an agent or key consultant of the Company, or (ii) solicit or
endeavor to entice away from the Company any person or entity who is, or was
within the then most recent 8-month period, a customer of the Company; (iii)
attempt to solicit any business that is related to the business of the Company
or any business that is competitive with the Company.  Furthermore, during the Restricted Period, you shall not, for yourself
or for any other entity, hire or employ any person who is, or during the then
most recent 8-month period was, employed by, or had served as an agent or key
consultant of, the Company.

 

9

 

Attachment D

 

D1. Medical
Benefits As Part Of Severance.  You shall be entitled to
continue medical benefit coverage for yourself and your eligible dependents
until the later of the date that you become entitled to medical benefits from
another employer or the end of the period of base salary continuation, subject
to your payment of applicable premiums, if any, at the same rate that would
have applied had you remained an officer of the Company.

 

D2.
Definition of “Restricted Business of Restoration Hardware, Inc.” 
“Restricted Business of Restoration Hardware, Inc.” shall mean (a) a
retail company, including without limitation, a subsidiary or business unit of
such company, where an aggregate of 25% or more of its revenue (including
revenue of any subsidiary or business unit) is derived from the home furnishings
business, including without limitation, lighting, floor covering, furniture,
hardware and tools, or hard goods business or (b) a manufacturer, supplier or
other vendor that has a material vendor relationship with the Company.

 

10Exhibit 10.4

 

RESTORATION HARDWARE, INC.

NOTICE OF GRANT OF STOCK OPTION

 

 

Notice
is hereby given of the following option grant (the “Option”) to purchase shares
of Common Stock of Restoration Hardware, Inc. (the “Corporation”):

 

	
  Optionee:

  	
   

  	
  Patricia McKay

  
	
   

  	
   

  	
   

  
	
  Grant Date:

  	
   

  	
  October 6,
  2003

  
	
   

  	
   

  	
   

  
	
  Vesting
  Commencement Date:

  	
   

  	
  October 6,
  2003

  
	
   

  	
   

  	
   

  
	
  Exercise Price:

  	
   

  	
  $6.85

  
	
   

  	
   

  	
   

  
	
  Number of Option
  Shares:

  	
   

  	
  58,392

  
	
   

  	
   

  	
   

  
	
  Expiration Date:

  	
   

  	
  October 6,
  2013

  
	
   

  	
   

  	
   

  
	
  Type of Option:

  	
   

  	
  Incentive Stock
  Option

  

 

Exercise
Schedule:  The Option
shall become exercisable for twenty-five percent (25%) of the Option Shares
upon Optionee’s completion of each of the four (4) years of Service
measured from and after the Vesting Commencement Date, with the first such
installment to become exercisable on the first anniversary of the Vesting
Commencement Date.  In no event shall
the Option become exercisable for any additional Option Shares after Optionee’s
cessation of Service.

 

Optionee
understands and agrees that the Option is granted subject to and in accordance
with the terms of the Restoration Hardware, Inc. 1998 Stock Incentive Plan
Amended and Restated on October 9, 2002 (the “Plan”).  Optionee further agrees to be bound by the
terms of the Plan and the terms of the Option as set forth in the Stock Option
Agreement attached hereto as Exhibit A.  A copy of the Plan is available upon request made to the
Secretary of the Corporation at the Corporation’s principal offices.

 

No
Employment or Service Contract.  Nothing in this notice or in the attached Stock Option Agreement
or in the Plan shall confer upon Optionee any right to continue in Service for
any period of specific duration or interfere with or otherwise restrict in any
way the rights of the Corporation (or any Parent or Subsidiary employing or
retaining Optionee) or of Optionee, which rights are hereby expressly reserved
by each, to terminate Optionee’s Service at any time for any reason, with or
without cause.

 

 

Definitions.  All capitalized terms in this notice shall
have the meaning assigned to them in this notice or in the attached Stock
Option Agreement.

 

	
  DATED:

  	
  10/6

  	
  , 2003

  	
   

  
	
   

  	
   

  
	
   

  	
  RESTORATION HARDWARE, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Gary
  Friedman

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Title:

  	
  President and
  CEO

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Patricia
  McKay

  
	
   

  	
  Patricia McKay,
  Optionee

  
	
   

  	
   

  
	
   

  	
  Address:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
							

 

 

ATTACHMENTS

Exhibit A - Stock Option Agreement

 

 

RESTORATION HARDWARE, INC.

STOCK OPTION AGREEMENT

 

RECITALS

 

A.  The Board has adopted the Plan for the
purpose of retaining the services of selected Employees, non-employee members
of the Board or of the board of directors of any Parent or Subsidiary and
consultants and other independent advisors who provide services to the
Corporation (or any Parent or Subsidiary).

 

B.  Optionee is to render valuable services to
the Corporation (or a Parent or Subsidiary), and this Agreement is executed
pursuant to, and is intended to carry out the purposes of, the Plan in
connection with the Corporation’s grant of an option to Optionee.

 

C.  All capitalized terms in this Agreement
shall have the meaning assigned to them in the attached Appendix.

 

NOW, THEREFORE, it
is hereby agreed as follows:

 

1.               Grant of
Option.  The Corporation
hereby grants to Optionee, as of the Grant Date, an option to purchase up to
the number of Option Shares specified in the Grant Notice.  The Option Shares shall be purchasable from
time to time during the option term specified in Paragraph 2 below at the
Exercise Price.

 

2.               Option
Term.  This option shall
have a maximum term of ten (10) years measured from the Grant Date and
shall accordingly expire at the close of business on the Expiration Date,
unless sooner terminated in accordance with Paragraph 5 or 6 below.

 

3.               Limited
Transferability.  This
option shall be neither transferable nor assignable by Optionee other than by
will or by the laws of descent and distribution following Optionee’s death and
may be exercised, during Optionee’s lifetime, only by Optionee.  However, if this option is designated a
Non-Statutory Option in the Grant Notice, then this option may, in connection
with the Optionee’s estate plan, be assigned in whole or in part during
Optionee’s lifetime to one or more members of the Optionee’s immediate family
or to a trust established for the exclusive benefit of the Optionee and/or one
or more such family members.  The
assigned portion shall be exercisable only by the person or persons who acquire
a proprietary interest in the option pursuant to such assignment.  The terms applicable to the assigned portion
shall be the same as those in effect for this option immediately prior to such
assignment.

 

4.               Date of
Exercise.  This option
shall become exercisable for the Option Shares in one or more installments as
specified in the Grant Notice.  As the
option becomes exercisable for such installments, those installments shall accumulate
and the option shall remain exercisable for the accumulated installments until
the Expiration Date or sooner termination of the option term under
Paragraph 5 or 6 below.

 

 

5.               Cessation
of Service.  The option
term specified in Paragraph 2 above shall terminate (and this option shall
cease to be outstanding) prior to the Expiration Date should any of the
following provisions become applicable:

 

(a)  Should Optionee cease to remain in Service
for any reason (other than death, Permanent Disability or Cause) while this
option is outstanding, then the period for exercising this option shall be
reduced to a three (3)-month period commencing with the date of such
cessation of Service, but in no event shall this option be exercisable at any
time after the Expiration Date.

 

(b)  Should Optionee die while holding this
option, then the personal representative of Optionee’s estate or the person or
persons to whom the option is transferred pursuant to Optionee’s will or in
accordance with the laws of inheritance shall have the right to exercise this
option.  Such right shall lapse, and
this option shall cease to be outstanding, upon the earlier of
(i) the expiration of the twelve (12)-month period measured from the
date of Optionee’s death or (ii) the Expiration Date.

 

(c)  Should Optionee cease Service by reason of
Permanent Disability while this option is outstanding, then the period for
exercising this option shall be reduced to a twelve (12)-month period
commencing with the date of such cessation of Service, but in no event shall
this option be exercisable at any time after the Expiration Date.

 

(d)   During the limited period of post-Service
exercisability, this option may not be exercised in the aggregate for more than
the number of vested Option Shares for which the option is exercisable at the
time of Optionee’s cessation of Service. 
Upon the expiration of such limited exercise period or (if earlier) upon
the Expiration Date, this option shall terminate and cease to be outstanding
for any otherwise exercisable Option Shares for which the option has not been
exercised.  However, this option shall,
immediately upon Optionee’s cessation of Service for any reason, terminate and
cease to be outstanding with respect to any Option Shares for which this option
is not otherwise at that time exercisable.

 

(e)  Should Optionee’s Service be terminated for
Cause, then this option shall terminate immediately and cease to remain
outstanding.

 

6.               Special
Acceleration of Option.

 

(a)  Change of Control.

 

(i)                                     This
option to the extent outstanding at the time of a Change of Control transaction
but not otherwise fully exercisable, shall automatically accelerate so that
this option shall, immediately prior to the effective date of such Change of
Control, become exercisable for all of the Option Shares at the time subject to
this option and may be exercised for any or all of those Option Shares as fully
vested shares of Common Stock.  However,
this option shall not become exercisable on such an 

 

2

 

accelerated basis if and
to the extent:  (i) this option is,
in connection with the Change of Control, to be assumed by the successor
corporation (or parent thereof) or otherwise continued in full force and effect
pursuant to the terms of the Change of Control transaction; or (ii) this
option is to be replaced with a cash incentive program of the successor
corporation which preserves the spread existing at the time of the Change of
Control on the Option Shares for which this option is not otherwise at that
time exercisable (the excess of the Fair Market Value of those Option Shares
over the aggregate Exercise Price payable for such shares) and provides for
subsequent payout in accordance with the same option exercise/vesting schedule set
forth in the Grant Notice.

 

(ii)                                  Immediately
following the Change of Control, this option shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof) or otherwise continued in full force and effect pursuant to the
terms of the Change of Control transaction.

 

(iii)                               If
this option is assumed in connection with a Change of Control (or otherwise
continued in full force and effect), then this option shall be appropriately
adjusted, immediately after such Change of Control, to apply to the number and
class of securities or other property which would have been issuable to
Optionee in consummation of such Change of Control had the option been
exercised immediately prior to such Change of Control, and appropriate
adjustments shall also be made to the Exercise Price, provided the
aggregate Exercise Price shall remain the same.

 

(b)  Termination of Service Not for Cause.  In the event the Optionee’s Service is
terminated by the Corporation Not for Cause, this option automatically shall
become vested and exercisable for all of the Option Shares at the time
represented by this option.

 

(c)  Involuntary Termination of Service.   Should there be a Change of Control of the
Corporation and the Optionee, thereafter, is subject to an Involuntary
Termination by the Corporation, this option automatically shall become vested
and exercisable for all of the Option Shares at the time represented by this
option.

 

(d)  This Agreement shall not in any way affect
the right of the Corporation to adjust, reclassify, reorganize or otherwise
change its capital or business structure or to merge, consolidate, dissolve,
liquidate or sell or transfer all or any part of its business or assets.

 

7.               Adjustment
in Option Shares.

 

Should
any change be made to Common Stock by reason of any stock split, stock
dividend, recapitalization, combination of shares, exchange of shares or other
change affecting the outstanding Common Stock as a class without the
Corporation’s receipt of consideration, appropriate adjustments shall be made
to (i) the total number and/or class of securities subject to this option
and (ii) the Exercise Price in order to reflect such change and thereby
preclude a dilution or enlargement of benefits hereunder.

 

3

 

8.               Stockholder
Rights.  The holder of
this option shall not have any stockholder rights with respect to the Option
Shares until such person shall have exercised the option, paid the Exercise
Price and become a holder of record of the purchased shares.

 

9.               Manner of
Exercising Option.

 

(a)  In order to exercise this option with
respect to all or any part of the Option Shares for which this option is at the
time exercisable, Optionee (or any other person or persons exercising the
option) must take the following actions:

 

(i)                                     Execute
and deliver to the Corporation a Notice of Exercise for the Option Shares for
which the option is exercised;

 

(ii)                                  Pay
the aggregate Exercise Price for the purchased shares in one or more of the
following forms, subject to Applicable Laws:

 

(A)      Cash or check made payable
to the Corporation; or

 

(B)        Shares of Common Stock
held by Optionee (or any other person or persons exercising the option) for the
requisite period necessary to avoid a charge to the Corporation’s earnings for
financial reporting purposes and valued at their Fair Market Value on the
Exercise Date; or

 

(C)        Through a special sale and
remittance procedure pursuant to which Optionee (or any other person or persons
exercising the option) shall concurrently provide irrevocable instructions
(I) to a Corporation-designated brokerage firm to effect the immediate
sale of the purchased shares and remit to the Corporation, out of the sale
proceeds available on the settlement date, sufficient funds to cover the
aggregate Exercise Price payable for the purchased shares plus all applicable
federal, state and local income and employment taxes required to be withheld by
the Corporation by reason of such exercise and (II) to the Corporation to
deliver the certificates for the purchased shares directly to such brokerage
firm in order to complete the sale.

 

Except to the extent the
sale and remittance procedure is utilized in connection with the option
exercise, payment of the Exercise Price must accompany the Notice of Exercise
delivered to the Corporation in connection with the option exercise;

 

(iii)                               Furnish
to the Corporation appropriate documentation that the person or persons
exercising the option (if other than Optionee) have the right to exercise this
option; and

 

(iv)                              Make
appropriate arrangements with the Corporation (or Parent or Subsidiary
employing or retaining Optionee) for the satisfaction of all federal, state and
local income and employment tax withholding requirements applicable to the
option exercise.

 

4

 

(b)         As soon as practical
after the Exercise Date, the Corporation shall issue to or on behalf of
Optionee (or any other person or persons exercising this option) a certificate
for the purchased Option Shares, with the appropriate legends, if any, affixed
thereto.

 

(c)          In no event may this
option be exercised for any fractional shares of Common Stock.

 

10.         Compliance with Laws and Regulations.

 

(a)  The exercise of this option and the issuance
of the Option Shares upon such exercise shall be subject to compliance by the
Corporation and Optionee with all applicable requirements of law relating
thereto and with all applicable regulations of any stock exchange (or the
Nasdaq National Market, if applicable) on which Common Stock may be listed for
trading at the time of such exercise and issuance.

 

(b)  The inability of the Corporation to obtain
approval from any regulatory body having authority deemed by the Corporation to
be necessary to the lawful issuance and sale of any Common Stock pursuant to
this option shall relieve the Corporation of any liability with respect to the
non-issuance or sale of Common Stock as to which such approval shall not have
been obtained.  The Corporation, however,
shall use its best efforts to obtain all such approvals.

 

11.         Successors and Assigns.  Except to the extent otherwise provided in
Paragraphs 3 and 6 above, the provisions of this Agreement shall inure to
the benefit of, and be binding upon, the Corporation and its successors and
assigns and Optionee, Optionee’s assigns and the legal representatives, heirs
and legatees of Optionee’s estate.

 

12.         Notices.  Any notice required to be given or delivered
to the Corporation under the terms of this Agreement shall be in writing and
addressed to the Corporation at its principal corporate offices.  Any notice required to be given or delivered
to Optionee shall be in writing and addressed to Optionee at the address
indicated below Optionee’s signature line on the Grant Notice.  All notices shall be deemed effective upon
personal delivery or upon deposit in the U.S. mail, postage prepaid and
properly addressed to the party to be notified.

 

13.         Construction.  This Agreement and the option evidenced
hereby are made and granted pursuant to the Plan and are in all respects
limited by and subject to the terms of the Plan.  All decisions of the Plan Administrator with respect to any
question or issue arising under the Plan or this Agreement shall be conclusive
and binding on all persons having an interest in this option.  For purposes of this Agreement, whenever the
context requires, the singular number shall include the plural, and vice versa.

 

14.         Governing Law.  The interpretation, performance and
enforcement of this Agreement shall be governed by the laws of the State of
California without resort to that State’s conflict-of-laws rules.

 

5

 

15.         Excess Shares.  If the Option Shares covered by this
Agreement exceed, as of the Grant Date, the number of shares of Common Stock
which may without stockholder approval be issued under the Plan, then this
option shall be void with respect to those excess shares, unless stockholder
approval of an amendment sufficiently increasing the number of shares of Common
Stock issuable under the Plan is obtained in accordance with the provisions of
the Plan.

 

16.         Additional Terms Applicable to an
Incentive Option.  In the
event this option is designated an Incentive Option in the Grant Notice, the following
terms and conditions shall also apply to the grant:

 

(a)  This option shall cease to qualify for
favorable tax treatment as an Incentive Option if (and to the extent) this
option is exercised for one or more Option Shares:  (A) more than three (3) months after the date Optionee
ceases to be an Employee for any reason other than death or Permanent
Disability; or (B) more than twelve (12) months after the date
Optionee ceases to be an Employee by reason of Permanent Disability.

 

(b)  No installment under this option shall
qualify for favorable tax treatment as an Incentive Option if (and to the
extent) the aggregate Fair Market Value (determined at the Grant Date) of the
Common Stock for which such installment first becomes exercisable hereunder
would, when added to the aggregate value (determined as of the respective date
or dates of grant) of Common Stock or other securities for which this option or
any other Incentive Options granted to Optionee prior to the Grant Date
(whether under the Plan or any other option plan of the Corporation or any
Parent or Subsidiary) first become exercisable during the same calendar year,
exceed One Hundred Thousand Dollars ($100,000) in the aggregate.  Should such One Hundred Thousand Dollar
($100,000) limitation be exceeded in any calendar year, this option shall
nevertheless become exercisable for the excess shares in such calendar year as
a Non-Statutory Option.

 

(c)  Should the exercisability of this option be
accelerated upon a Change in Control transaction, then this option shall
qualify for favorable tax treatment as an Incentive Option only to the extent
the aggregate Fair Market Value (determined at the Grant Date) of Common Stock
for which this option first becomes exercisable in the calendar year in which
the Change in Control occurs does not, when added to the aggregate value
(determined as of the respective date or dates of grant) of the Common Stock or
other securities for which this option or one or more other Incentive Options
granted to Optionee prior to the Grant Date (whether under the Plan or any
other option plan of the Corporation or any Parent or Subsidiary) first become
exercisable during the same calendar year, exceed One Hundred Thousand Dollars
($100,000) in the aggregate.  Should the
applicable One Hundred Thousand Dollar ($100,000) limitation be exceeded in the
calendar year of such Change in Control, the option may nevertheless be
exercised for the excess shares in such calendar year as a Non-Statutory
Option.

 

6

 

(d)  Should Optionee hold, in addition to this
option, one or more other options to purchase Common Stock which become
exercisable for the first time in the same calendar year as this option, then
the foregoing limitations on the exercisability of such options as Incentive
Options shall be applied on the basis of the order in which such options are
granted.

 

7

 

EXHIBIT I

NOTICE OF EXERCISE

 

I
hereby notify Restoration Hardware, Inc. (the “Corporation”) that I elect to
purchase
                             
shares of the Corporation’s common stock (the “Purchased Shares”) at the option
exercise price of
$                                
per share (the “Exercise Price”) pursuant to that certain option (the “Option”)
granted to me on October 6, 2003 under the Corporation’s 1998 Stock
Incentive Plan Amended and Restated on October 9, 2002.

 

Concurrently
with the delivery of this Exercise Notice to the Corporation, I shall hereby
pay to the Corporation the Exercise Price for the Purchased Shares in
accordance with the provisions of my agreement with the Corporation (or other
documents) evidencing the Option and shall deliver whatever additional
documents may be required by such agreement as a condition for exercise.  Alternatively, I may utilize the special
broker-dealer sale and remittance procedure specified in my agreement to effect
payment of the Exercise Price.

 

 

 

	
   

  	
   

  
	
   

  	
  , 20

  	
   

  
	
  Date

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Optionee

  
	
   

  	
   

  
	
   

  	
  Address:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  Print name in
  exact manner it is to appear on the stock certificate:

  	
   

  
	
   

  	
   

  
	
  Address to which
  certificate is to be sent, if different from address

  above:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  Social Security
  Number:

  	
   

  
	
   

  	
   

  
	
  Employee Number:

  	
   

  
				

 

 

APPENDIX

 

The
following definitions shall be in effect under the Agreement:

 

A.                                   Agreement shall mean this Stock Option
Agreement.

 

B.                                     Applicable
Laws shall mean the legal requirements relating to the
administration of stock option plans, if any, under applicable provisions of
federal securities laws, state corporate and securities laws, the Code, the
rules of any applicable stock exchange or national market system, and the rules
of any foreign jurisdiction applicable to the granting of stock options and the
issuance of shares of Common Stock to residents therein.

 

C.                                     Board
shall mean the Corporation’s Board of Directors.

 

D.                                    Cause
shall mean, in connection with the termination of the Optionee’s Service by the
Corporation, (a) the Optionee has been convicted of a felony involving fraud or
dishonesty, (b) the Optionee dies or suffers from a Permanent Disability during
the Optionee’s Service or (c) the termination of Service is evidenced by a
resolution adopted in good faith by a majority of the members of the Board to
the effect that the Optionee (i) intentionally and continually failed
substantially to perform the Optionee’s reasonably assigned duties with the
Corporation (other than a failure resulting from the Optionee’s assignment of
duties that would constitute an Involuntary Termination following a Change of
Control), which failure continued for a period of at least thirty (30) days
after a written notice of demand for substantial performance has been delivered
to the Optionee specifying the manner in which the Optionee has failed
substantially to perform, or (ii) intentionally engaged in conduct which
is demonstrably and materially injurious to the Corporation; provided, that no
termination of the Optionee’s Service shall be for Cause as set forth in clause
(ii) above until there shall have been delivered to the Optionee a copy of a
written notice setting forth that the Optionee was guilty of the conduct set
forth in clause (ii) and specifying the particulars thereof in detail. No act,
nor failure to act, on the Optionee’s part shall be considered “intentional”
unless the Optionee has acted, or failed to act, with a lack of good faith and
with a lack of reasonable belief that the Optionee’s action or failure to act
was in the best interest of the Corporation.

 

E.                                      Change in
Control shall mean any of the following:

 

(a)
An acquisition (other than directly from the Corporation) of any voting
securities of the Corporation (the “Voting Securities”) by any Person (as the
term “person” is used for purposes of Section 13 or 14 of 1934 Act)
immediately after which such Person has Beneficial Ownership (as the term
“beneficial ownership” is defined under Rule 13d-3 promulgated under the 1934
Act) of fifty percent (50%) or more of the combined voting power of the
Corporation’s then outstanding Voting Securities; provided, that in determining
whether a Change of Control has occurred, Voting Securities which are acquired
in a Non-Control Acquisition (as hereinafter defined) shall

 

A-1

 

not constitute an
acquisition which would cause a Change of Control. A “Non-Control Acquisition”
shall mean an acquisition by (i) an employee benefit plan (or a trust forming a
part thereof) maintained by (1) the Corporation or (2) any corporation or other
Person of which a majority of its voting power or its equity securities or
equity interest is owned directly or indirectly by the Corporation (a
“Non-Change Subsidiary”), (ii) the Corporation or any Non-Change Subsidiary, or
(iii) any Person in connection with a Non-Control Transaction (as hereinafter
defined);

 

(b)
The individuals who, as of date the Offer Letter, are members of the Board (the
“Incumbent Board”), cease for any reason to constitute at least a majority of
the Board; provided, that if the appointment, election or nomination for
election by the Corporation’s stockholders of any new director was approved by
a vote of at least two-thirds of the Incumbent Board, such new director shall,
for purposes of this Agreement, be considered a member of the Incumbent Board;
and provided, further, that no individual shall be considered a member of the
Incumbent Board if such individual initially assumed office as a result of
either an actual or threatened “Election Contest” (as described in Rule 14a-11
promulgated under the 1934 Act) or other actual or threatened solicitation of
proxies or consents by or on behalf of a Person other than the Board (a “Proxy
Contest”) including by reason of any agreement intended to avoid or settle any
Election Contest or Proxy Contest;

 

(c)
A merger, consolidation or reorganization involving the Corporation, unless
such merger, consolidation or reorganization satisfies the conditions set forth
in clauses (1) and (2) below (any transaction(s) meeting the requirements of
clauses (1) and (2) below being referred to herein as “Non-Control
Transactions”):

 

(1)
the stockholders of the Corporation immediately before such merger,
consolidation or reorganization own, directly or indirectly, immediately
following such merger, consolidation or reorganization, at least fifty percent
(50%) of the combined voting power of the outstanding voting securities of the
corporation resulting from such merger, consolidation or reorganization (the
“Surviving Corporation”) in substantially the same proportion as their
ownership of the Voting Securities immediately before such merger,
consolidation or reorganization; and

 

(2)
the individuals who were members of the Incumbent Board immediately prior to
the execution of the agreement providing for such merger, consolidation or
reorganization constitute at least a majority of the members of the board of
directors of the Surviving Corporation;

 

(d)
A complete liquidation or dissolution of the Corporation; or

 

(e)
An agreement for the sale or other disposition of all or substantially all of
the assets of the Corporation to any Person (other than a transfer to a
Non-Change Subsidiary); and

 

A-2

 

(f)
Any other event that at least two-thirds of the Incumbent Board in its sole
discretion shall determine constitutes a Change of Control.

 

Notwithstanding
the foregoing, a Change of Control shall not be deemed to occur solely because
any Person (the “Subject Person”) acquired Beneficial Ownership of more than
the permitted amount of the outstanding Voting Securities as a result of the
acquisition of Voting Securities by the Corporation which, by reducing the
number of Voting Securities outstanding, increases the proportional number of
shares Beneficially Owned by the Subject Person; provided, that if a Change of
Control would occur (but for the operation of this sentence) as a result of the
acquisition of Voting Securities by the Corporation, and after such share
acquisition by the Corporation the Subject Person becomes the Beneficial Owner
of any additional Voting Securities which increases the percentage of the then
outstanding Voting Securities Beneficially Owned by the Subject Person, then a
Change of Control shall occur; provided further that no Change of Control shall
be deemed to have occurred under (a) or (c) above merely because individuals
and entities who, individually, as of the date of the Offer Letter have
Beneficial Ownership of at least 5% of the Voting Securities have, immediately
after the transaction described in (a) or (c) above, Beneficial Ownership, in
the aggregate, of more than 50% of the Voting Securities of the Corporation or
successor or parent thereof if both (i) no one such individual or entity has,
immediately after such a transaction, Beneficial Ownership of more than 50% and
(ii) the transaction does not result in the Corporation or successor or parent
thereof becoming a private company.

 

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

 

G.                                     Common
Stock shall mean shares of the Corporation’s common stock.

 

H.                                    Corporation
shall mean Restoration Hardware, Inc., a Delaware corporation.

 

I.                                         Employee
shall mean an individual who is in the employ of the Corporation (or any Parent
or Subsidiary), subject to the control and direction of the employer entity as
to both the work to be performed and the manner and method of performance.

 

J.                                        Exercise
Date shall mean the date on which the option shall have been
exercised in accordance with Paragraph 9 of the Agreement.

 

K.                                    Exercise
Price shall mean the exercise price per Option Share as
specified in the Grant Notice.

 

L.                                      Expiration
Date shall mean the date on which the option expires as
specified in the Grant Notice.

 

M.                                 Fair
Market Value per share of Common Stock on any relevant date
shall be determined in accordance with the following provisions:

 

A-3

 

(a)                                  If
Common Stock is at the time traded on the Nasdaq National Market, then the Fair
Market Value shall be deemed equal to the closing selling price per share of
Common Stock on the date in question, as the price is reported by the National
Association of Securities Dealers on the Nasdaq National Market.  If there is no closing selling price for
Common Stock on the date in question, then the Fair Market Value shall be the
closing selling price on the last preceding date for which a closing selling
price is reported; or

 

(b)                                 If
Common Stock is at the time listed on any Stock Exchange, then the Fair Market
Value shall be deemed equal to the closing selling price per share of Common
Stock on the date in question on the Stock Exchange determined by the Plan
Administrator to be the primary market for Common Stock, as such price is
officially quoted in the composite tape of transactions on such exchange.  If there is no closing selling price for
Common Stock on the date in question, then the Fair Market Value shall be the
closing selling price on the last preceding date for which such quotation
exists.

 

N.                                    Grant
Date shall mean the date of grant of the option as specified in
the Grant Notice.

 

O.                                    Grant
Notice shall mean the Notice of Grant of Stock Option
accompanying the Agreement, pursuant to which Optionee has been informed of the
basic terms of the option evidenced hereby.

 

P.                                      Incentive
Option shall mean an option which satisfies the requirements of
Section 422 of the Code.

 

Q.                                    Involuntary
Termination shall mean the termination of the Optionee’s Service
which occurs by reason of:

 

(a)                                  the
Optionee’s involuntary dismissal or discharge by the Corporation Not for Cause,
or

 

(b)                                 the
Optionee’s voluntary resignation following (i) a change in the Optionee’s
position with the Corporation which materially reduces the Optionee’s duties
and responsibilities or the level of management to which the Optionee reports,
(ii) a reduction in the Optionee’s level of compensation (including base
salary, fringe benefits and target bonus under any corporate-performance based
bonus or incentive programs), or (iii) a relocation of the Optionee’s place of
employment by more than fifty (50) miles, provided and only if such change, reduction
or relocation is effected by the Corporation without the Optionee’s consent.

 

R.                                     1934 Act
shall mean the Securities Exchange Act of 1934, as amended.

 

S.                                      Non-Statutory
Option shall mean an option not intended to satisfy the
requirements of Section 422 of the Code.

 

A-4

 

T.                                     Not for
Cause shall mean termination of the Optionee’s Service by the
Corporation for reasons other than for Cause.

 

U.                                    Notice of
Exercise shall mean the notice of exercise in the form attached
hereto as Exhibit I.

 

V.                                     Offer
Letter shall mean the offer letter entered into between the
Optionee and the Corporation dated October 3, 2003.

 

W.                                Option
Shares shall mean the number of shares of Common Stock subject
to the option as specified in the Grant Notice.

 

X.                                    Optionee
shall mean the person to whom the option is granted as specified in the Grant
Notice.

 

Y.                                     Parent
shall mean any corporation (other than the Corporation) in an unbroken chain of
corporations ending with the Corporation, provided each corporation in the
unbroken chain (other than the Corporation) owns, at the time of the
determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.

 

Z.                                     Permanent
Disability shall mean that the Optionee is unable to carry out
the responsibilities and functions of the position held by the Optionee by
reason of any physical or mental impairment for more than 120 days in any
twelve-month period.

 

AA.                         Plan
shall mean the Corporation’s 1998 Stock Incentive Plan Amended and Restated on
October 9, 2002.

 

BB.                             Plan
Administrator shall mean either the Board or a committee of the
Board acting in its capacity as administrator of the Plan.

 

CC.                             Service
shall mean the Optionee’s performance of services for the Corporation (or any
Parent or Subsidiary) in the capacity of an Employee, a non-employee member of
the board of directors or a consultant or independent advisor.

 

DD.                           Stock
Exchange shall mean the American Stock Exchange or the New York
Stock Exchange.

 

EE.                               Subsidiary
shall mean any corporation (other than the Corporation) in an unbroken chain of
corporations beginning with the Corporation, provided each corporation (other
than the last corporation) in the unbroken chain owns, at the time of the
determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.

 

A-5

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