Document:

Exhibit
10.5

 

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:

  	
  Gary G. Friedman

  
	
   

  	
   

  
	
  Grant Date:

  	
  February 5, 2004

  
	
   

  	
   

  
	
  Vesting Commencement Date:

  	
  February 5, 2004

  
	
   

  	
   

  
	
  Exercise Price:

  	
  $9.00

  
	
   

  	
   

  
	
  Number of Option Shares:

  	
  500,000

  
	
   

  	
   

  
	
  Expiration Date:

  	
  February 4, 2014

  
	
   

  	
   

  
	
  Type of Option:

  	
  Non Statutory 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:
                                                ,
2004

 

	
   

  	
  RESTORATION
  HARDWARE, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
   /s/ Patricia
  McKay

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Title:

  	
  CFO

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Gary G. Friedman

  
	
   

  	
  Gary G. Friedman, 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, 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 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 in Control.

 

(i)            This
option to the extent outstanding at the time of a Change in Control transaction
but not otherwise fully exercisable, shall automatically accelerate so that
this option shall, immediately prior to the effective date of such Change in
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.

 

2

 

(ii)           Immediately
following the Change in 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 in Control transaction.

 

(iii)          If
this option is assumed in connection with a Change in Control (or otherwise
continued in full force and effect), then this option shall be appropriately
adjusted, immediately after such Change in 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 in Control had the option been
exercised immediately prior to such Change in 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 (i) by the Corporation Not for Cause or (ii) by the
Optionee for Good Reason at any time prior to a Change in Control, this option
automatically shall become vested and exercisable immediately prior to such
termination of Service for all of the Option Shares at the time represented by
this option.

 

(c)  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.

 

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;

 

3

 

(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.

 

(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 

 

4

 

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.

 

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.

 

5

 

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 February 5, 2004 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 a termination of Service if the Optionee has been convicted of a
felony involving fraud, dishonesty, or physical harm to any person, or the
termination is evidenced by a resolution adopted in good faith by two-thirds 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 incapacity
due to physical or mental illness or from the Optionee’s assignment of duties
that would constitute Good Reason (as defined below)), 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 employment
shall be for Cause as set forth in clause (ii) above until (a) 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, and (b) the Optionee shall have been
provided an opportunity to be heard in person by the Board (with the assistance
of the Optionee’s counsel if the Optionee so desires). 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 in 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 in 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 February 5, 2004,
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”
(involving a solicitation subject to Rule 14a-1 to Rule 14a-10 under the 1934
Act by any person or group of persons for the purpose of opposing a
solicitation subject to Rule 14a-1 to Rule 14a-10 with respect to the election
or removal of directors at any annual or special meeting of security holders)
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

 

A-2

 

(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

 

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

 

Notwithstanding the foregoing, a Change in 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 in 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 in Control shall occur; provided further that no Change in Control shall
be deemed to have occurred under (a) or (c) above merely because individuals
and entities who, individually, as of the date of February 5, 2004 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.

 

Notwithstanding anything
to the contrary in the Agreement, if the Optionee’s Service is terminated prior
to a Change in Control and the Board 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 in Control and who subsequently
effectuates a Change in Control or (ii) otherwise occurred in connection with,
or in anticipation of, a Change in Control which actually occurs, then, for all
purposes of the Agreement, the date of a Change in Control with respect to the
Optionee shall mean the date immediately prior to the date of such termination
of the Optionee’s Service.

 

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.            Compensation
and Severance Agreement shall mean the compensation and
severance agreement entered into between the Optionee and the Corporation, as
amended and restated effective as of February 5, 2004.

 

A-3

 

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

 

J.             Disability
shall mean as defined in the Compensation and Severance Agreement as of
February 5, 2004 without regard to any subsequent amendment of the
Compensation and Severance Agreement.

 

K.            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.

 

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

 

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

 

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

 

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

 

(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.

 

P.             Good
Reason shall mean as defined in the Compensation and Severance
Agreement as of February 5, 2004 without regard to any subsequent
amendment Compensation and Severance Agreement.

 

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

 

A-4

 

R.            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.

 

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

 

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

 

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

 

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

 

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

 

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

 

BB.          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.

 

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

 

DD.         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-5Exhibit 10.7

 

RESTORATION HARDWARE, INC.
2004 SENIOR EXECUTIVE BONUS PLAN

 

SECTION
1

ESTABLISHMENT AND PURPOSE

 

1.1           Purpose.  Restoration Hardware, Inc. hereby
establishes the Restoration Hardware, Inc. 2004 Senior Executive Bonus Plan
(the “Plan”).  The Plan is intended to
increase stockholder value and the success of the Company by motivating key
executives (a) to perform to the best of their abilities, and (b) to
achieve the Company’s objectives.  The
Plan’s goals are to be achieved by providing such executives with incentive
awards based on the achievement of goals relating to performance of the Company
and its individual business units.  The
Plan is intended to qualify as performance-based compensation under Code
Section 162(m).

 

1.2           Effective
Date.  The Plan shall be
effective upon approval of a majority of the shares of the Company’s common
stock which are present in person or by proxy and entitled to vote at the 2004
Annual Meeting of Stockholders.  As long
as the Plan remains in effect, it shall be resubmitted to stockholders as
necessary to enable the Plan to continue to qualify as performance-based
compensation under Code Section 162(m).

 

SECTION
2

DEFINITIONS

 

The following
words and phrases shall have the following meanings unless a different meaning
is plainly required by the context:

 

2.1           “Actual Award”
means as to any Plan Year, the actual award (if any) payable to a Participant
for the Plan Year.  The Actual Award is
determined by the Payout Formula for the Plan Year, subject to the Committee’s
authority under Section 3.5 to reduce the award otherwise determined by
the Payout Formula.

 

2.2           “Base Salary”
means as to any Plan Year, 100% of the Participant’s annualized salary rate on
the last day of the Plan Year.  Such
Base Salary shall be before both (a) deductions for taxes or benefits, and
(b) deferrals of compensation pursuant to Company-sponsored plans.

 

2.3           Beneficiary shall mean the person(s) or
entity(ies) designated to receive payment of an Actual Award in the event of a
Participant’s death in accordance with Section 4.5 of the Plan.  The Beneficiary designation shall be
effective when it is submitted in writing to and acknowledged by the Committee
during the Participant’s lifetime on the Beneficiary Designation form provided
in Appendix A of the Plan.  The
submission of a new Beneficiary Designation form shall cancel all prior
Beneficiary Designations.

 

2.4           “Board”
means the Company’s Board of Directors.

 

2.5           “Code”
means the Internal Revenue Code of 1986, as amended.  Reference to a specific Section of the Code shall include such
Section, any valid regulation promulgated

 

1

 

thereunder,
and any comparable provision of any future legislation or regulation amending,
supplementing or superseding such Section or regulation.

 

2.6           “Committee”
means the committee appointed by the Board to administer the Plan.  The Committee shall consist of no fewer than
two members of the Board.  The members
of the Committee shall be appointed by, and serve at the pleasure of, the
Board.  Each member of the Committee
shall qualify as an “outside director” under Code Section 162(m).

 

2.7           “Company”
means Restoration Hardware, Inc., a Delaware corporation.

 

2.8           “Determination
Date” means as to any Plan Year, (a) the first day of the Plan
Year, or (b) if later, the latest date possible which will not jeopardize
the Plan’s qualification as performance-based compensation under Code
Section 162(m).

 

2.9           “Disability”
means a permanent and total disability determined in accordance with uniform
and nondiscriminatory standards adopted by the Committee from time to time.

 

2.10         “Maximum
Award” means as to any Participant for any Plan Year,
two million ($2,000,000) dollars. 
The Maximum Award is the maximum amount which may be paid to a
Participant for any Plan Year.

 

2.11         “Participant”
means as to any Plan Year, an officer of the Company who has been selected by
the Committee for participation in the Plan for that Plan Year.

 

2.12         “Payout
Formula” means as to any Plan Year, the formula or payout matrix
established by the Committee pursuant to Section 3.4, below, in order to
determine the Actual Awards (if any) to be paid to Participants.  The formula or matrix may differ from
Participant to Participant.

 

2.13         “Performance Goals” means the goal(s) (or
combined goal(s)) determined by the Committee (in its discretion) to be
applicable to a Participant for a Plan Year. 
As determined by the Committee, the Performance Goals applicable to each
Participant shall provide for a targeted level or levels of achievement using
one or more of the following measures: 
(a) increase in share price, (b) earnings per share, (c) total
stockholder return, (d) operating margin, (e) gross margin, (f) return on equity,
(g) return on assets, (h) return on investment, (i) operating income, (j) net
operating income, (k) pre-tax profit, (l) cash flow, (m) revenue, (n) expenses,
(o) earnings before interest, taxes and depreciation, (p) economic value added
and (q) market share.  The
Performance Goals may be applicable to the Company and/or any of its
subsidiaries or individual business units and may differ from Participant to
Participant.

 

2.14         “Plan Year”
means the fiscal year of the Company beginning in 2005 and each succeeding
fiscal year of the Company.

 

2.15         “Target Award”
means the target award payable under the Plan to a Participant for the Plan
Year, expressed as a percentage of his or her Base Salary or an amount, as
determined by the Committee in accordance with Section 3.3.

 

2

 

SECTION
3

SELECTION OF PARTICIPANTS AND DETERMINATION OF AWARDS

 

3.1           Selection of
Participants.  On or prior to
the Determination Date, the Committee, in its sole discretion, shall select the
officers of the Company who shall be Participants for the Plan Year.  In selecting Participants, the Committee
shall choose officers who are likely to have a significant impact on the
performance of the Company.  Participation
in the Plan is in the sole discretion of the Committee, and on a Plan Year by
Plan Year basis.  Accordingly, an
officer who is a Participant for a given Plan Year in no way is guaranteed or
assured of being selected for participation in any subsequent Plan Year or
Years.

 

3.2           Determination
of Performance Goals.  On or
prior to the Determination Date, the Committee, in its sole discretion, shall
establish the Performance Goals for each Participant for the Plan Year.  Such Performance Goals shall be set forth in
writing.

 

3.3           Determination
of Target Awards.  On or
prior to the Determination Date, the Committee, in its sole discretion, shall
establish a Target Award for each Participant. 
Each Participant’s Target Award shall be determined by the Committee in
its sole discretion, and each Target Award shall be set forth in writing.

 

3.4           Determination
of Payout Formula or Formulae. 
On or prior to the Determination Date, the Committee, in its sole
discretion, shall establish a Payout Formula or Formulae for purposes of
determining the Actual Award (if any) payable to each Participant.  Each Payout Formula shall (a) be in writing,
(b) be based on a comparison of actual performance to the Performance Goals,
(c) provide for the payment of a Participant’s Target Award if the Performance
Goals for the Plan Year are achieved, and (d) provide for an Actual Award
greater than or less than the Participant’s Target Award, depending upon the
extent to which actual performance exceeds or falls below the Performance
Goals.  Notwithstanding the preceding, no
participant’s Actual Award under the Plan may exceed the Maximum Award.

 

3.5           Determination
of Actual Awards.  After the
end of each Plan Year, the Committee shall certify in writing the extent to
which the Performance Goals applicable to each Participant for the Plan Year
were achieved or exceeded.  The Actual
Award for each Participant shall be determined by applying the Payout Formula
to the level of actual performance which has been certified by the
Committee.  Notwithstanding any contrary
provision of the Plan, (a) the Committee, in its sole discretion, may
eliminate or reduce the Actual Award payable to any Participant below that
which otherwise would be payable under the Payout Formula, (b) if a
Participant terminates employment with the Company prior to the date the Actual
Award for the Plan Year is paid, the Committee shall reduce his or her Actual
Award proportionately based on the date of termination (and subject to further
reduction or elimination under clause (a) of this sentence).

 

SECTION
4

PAYMENT OF AWARDS

 

4.1           Right to
Receive Payment.  Each Actual
Award that may become payable under the Plan shall be paid solely from the
general assets of the Company.  Nothing
in this Plan shall

 

3

 

be
construed to create a trust or to establish or evidence any Participant’s claim
of any right other than as an unsecured general creditor with respect to any
payment to which he or she may be entitled.

 

4.2           Timing of
Payment.  Payment of each
Actual Award shall be made within three calendar months after the end of the
Plan Year during which the Award was earned.

 

4.3           Form of
Payment.  Each Actual Award
normally shall be paid in cash (or its equivalent) in a single lump sum.  However, the Committee, in its sole
discretion, may declare any Actual Award, in whole or in part, payable in the
form of a restricted stock bonus granted under the Company’s 1998 Stock
Incentive Plan or successor equity compensation plan.  The number of shares granted shall be determined by dividing the
cash amount of the Actual Award by the fair market value of a share of Company
common stock on the date that the cash payment otherwise would have been
made.  For this purpose, “fair market
value” shall be defined as provided in the Company’s 1998 Stock Incentive Plan
or successor equity compensation plan.

 

4.4           Other
Deferral of Actual Awards.  The
Committee may establish one or more programs under the Plan to permit selected
Participants the opportunity to elect to defer receipt of Actual Awards.  The Committee may establish the election
procedures, the timing of such elections, the mechanisms for payments of, and
accrual of interest or other earnings, if any, on amounts so deferred, and such
other terms, conditions, rules and procedures that the Committee deems
advisable for the administration of any such deferral program.

 

4.5           Payment in the Event of Death.  If a Participant dies prior to the payment
of an Actual Award earned by him or her for a Plan Year, the Actual Award shall
be paid to the Participant’s Beneficiary.  If a Participant fails to designate a
Beneficiary or if each person designated as a Beneficiary predeceases the
Participant or dies prior to distribution of the Participant’s benefits, then
the Committee shall direct the distribution of such benefits to the Participant’s
estate.

 

SECTION
5

ADMINISTRATION

 

5.1           Committee is
the Administrator.  The Plan
shall be administered by the Committee.

 

5.2           Committee
Authority.  The Committee
shall have all discretion and authority necessary or appropriate to administer
the Plan and to interpret the provisions of the Plan, consistent with
qualification of the Plan as performance-based compensation under Code
Section 162(m).  Any determination,
decision or action of the Committee in connection with the construction,
interpretation, administration or application of the Plan shall be final,
conclusive, and binding upon all persons, and shall be given the maximum
deference permitted by law.

 

5.3           Tax
Withholding.  The Company
shall withhold all applicable taxes from any payment, including any non-U.S.,
federal, state, and local taxes.

 

4

 

SECTION
6

GENERAL PROVISION

 

6.1           Nonassignability.  A Participant shall have no right to assign
or transfer any interest under this Plan.

 

6.2           No Effect on
Employment.  The
establishment and subsequent operation of the Plan, including eligibility as a
Participant, shall not be construed as conferring any legal or other rights
upon any Participant for the continuation of his or her employment for any Plan
Year or any other period.  Generally,
employment with the Company is on an at will basis only.  Except as may be provided in an employment
contract with the Participant, the Company expressly reserves the right, which
may be exercised at any time during a Plan Year, to terminate any individual’s
employment without cause and without regard to the effect such termination
might have upon the Participant’s receipt of an Actual Award under the Plan.

 

6.3           No Individual Liability.  In addition to such other rights of indemnification
as they may have as members of the Board or as officers or employees of the
Company, members of the Board and any officers or employees of the Company to
whom authority to act for the Board, the Committee or the Company is delegated
shall be defended and indemnified by the Company to the extent permitted by law
on an after-tax basis against all reasonable expenses, including attorneys’
fees, actually and necessarily incurred in connection with the defense of any
claim, investigation, action, suit or proceeding, or in connection with any
appeal therein, to which they or any of them may be a party by reason of any
action taken or failure to act under or in connection with the Plan and against
all amounts paid by them in settlement thereof (provided such settlement is
approved by the Company) or paid by them in satisfaction of a judgment in any
such claim, investigation, action, suit or proceeding, except in relation to
matters as to which it shall be adjudged in such claim, investigation, action,
suit or proceeding that such person is liable for gross negligence, bad faith
or intentional misconduct; provided, however, that within thirty (30) days
after the institution of such claim, investigation, action, suit or proceeding,
such person shall offer to the Company, in writing, the opportunity at the
Company’s expense to defend the same.

 

6.4           Severability; Governing Law.  If any provision of the Plan is found to be
invalid or unenforceable, such provision shall not affect the other provisions
of the Plan, and the Plan shall be construed in all respects as if such invalid
provision has been omitted.  The
provisions of the Plan shall be governed by and construed in accordance with
the laws of the Sate of California, without giving effect to any choice of law
rule that would cause the application of the laws of any jurisdiction other
than the internal laws of the State of California.

 

6.5           Affiliates
of the Company.  Requirements
referring to employment with the Company or payment of awards may, in the Committee’s
discretion, be performed through the Company or any affiliate of the Company.

 

SECTION
7

AMENDMENT AND TERMINATION

 

7.1           Amendment
and Termination.  The Board
may amend or terminate the Plan at any time and for any reason; provided,
however, that if and to the extent required to ensure the Plan’s

 

5

 

qualification under Code
Section 162(m), any such amendment shall be subject to stockholder approval.

 

6

 

RESTORATION HARDWARE, INC.

2004 SENIOR EXECUTIVE BONUS PLAN

 

APPENDIX
A

 

BENEFICIARY
DESIGNATION FORM

 

Participant’s Name:

 

Spouse’s Name:

 

Address:

 

Plan Year:

 

In the event of my death prior to the payment
of my Actual Award, if any, and in lieu of disposing of my interest(1) in the
Actual Award by my will or the laws of intestate succession, I hereby designate
the following persons as Primary Beneficiary(ies) and Contingent
Beneficiary(ies) of my interest in the Actual Award (please attach additional sheets
if necessary):

 

	
   

  	
  Primary Beneficiary(ies) (Select
  only one of the three alternatives)

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  o  
  (a)    Individuals and/or
  Charities

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  %

  Share

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  1)

  	
  Name

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Address

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2)

  	
  Name

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Address

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  3)

  	
  Name

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Address

  	
   

  	
   

  	
   

  

 

(1)           A married Participant whose Actual Award is community
property may dispose only of his or her own interest in the Actual Award.  In such cases, the Participant’s spouse may
(a) consent to the Participant’s designation by signing the Spousal Consent or
(b) designate the Participant or any other person(s) as the beneficiary(ies) of
his or her interest in the Actual Award on a separate Beneficiary Designation. 

 

1

 

	
   

  	
  o  
  (b)    Residuary Testamentary
  Trust

  	
   

  
	
   

  	
  In trust, to
  the trustee of the trust named as the beneficiary of the residue of my
  probate estate.

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  o  
  (c)    Living Trust

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  The

  	
   

  	
  Trust, dated

  	
   

  	
   

  
	
   

  	
   

  	
  (print name of trust)

  	
   

  	
  (fill in date trust was established)

  	
   

  

 

	
   

  	
  Contingent Beneficiary(ies) (Select
  only one of the three alternatives)

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  o  
  (a)    Individuals and/or
  Charities

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  %

  Share

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  1)

  	
  Name

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Address

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2)

  	
  Name

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Address

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  3)

  	
  Name

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Address

  	
   

  	
   

  	
   

  

 

	
   

  	
  o  
  (b)    Residuary Testamentary
  Trust

  	
   

  
	
   

  	
  In trust, to
  the trustee of the trust named as the beneficiary of the residue of my
  probate estate.

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  o  
  (c)    Living Trust

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  The

  	
   

  	
  Trust, dated

  	
   

  	
   

  
	
   

  	
   

  	
  (print name of trust)

  	
   

  	
  (fill in date trust was established)

  	
   

  

 

Should all the individual Primary
Beneficiary(ies) fail to survive me or if the trust named as the Primary
Beneficiary does not exist at my death (or no will of mine containing a
residuary

 

2

 

trust is admitted to probate
within six months of my death), the Contingent Beneficiary(ies) shall be
entitled to my interest in the Actual Award in the shares indicated.  Should any individual beneficiary fail to
survive me or a charity named as a beneficiary no longer exists at my death,
such beneficiary’s share shall be divided among the remaining named Primary or
Contingent Beneficiaries, as appropriate, in proportion to the percentage
shares I have allocated to them.  This
Beneficiary Designation is effective until I file another such designation with
the Committee and such designation is acknowledged by the Committee during my
lifetime.  Any previous Beneficiary
Designations are hereby revoked.

 

	
  Submitted
  by:

  	
   

  	
  Accepted by:

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  o 
  Participant  o 
  Participant’s Spouse

  	
   

  	
  Restoration Hardware, Inc.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
  (Signature)

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Its:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Date:

  	
   

  	
   

  	
  Date:

  	
   

  	
   

  
								

 

 

Spousal Consent for
any Actual Award that is Community Property (necessary if separate beneficiary
designation is not filed by Spouse):

 

I hereby consent to this Beneficiary Designation and agree that this
designation of beneficiaries provided herein shall apply to my community
property interest in any Actual Award payable to my spouse in connection with
his or her employment with Restoration Hardware, Inc.

 

	
   

  	
   

  	
   

  
	
  (Signature of Spouse)

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Date:

  	
   

  	
   

  	
   

  
				

 

 

Spousal Consent for
any Actual Award that is not Community Property
(necessary
if beneficiary is other than Spouse):

 

I hereby consent to this Beneficiary Designation.

 

	
   

  	
   

  	
   

  
	
  (Signature of Spouse)

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Date:

  	
   

  	
   

  	
   

  
				

 

3

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