CHANGE IN CONTROL SEVERANCE
AGREEMENT
THIS CHANGE IN
CONTROL SEVERANCE AGREEMENT (the “Agreement”) is made
and entered into this 14th day of November, 2006, between INSTEEL
INDUSTRIES, INC. a North Carolina corporation (the
“Company”) and James F. Petelle (the
“Executive”). Certain capitalized terms used in this
Agreement are defined in Section 6.
The Company
acknowledges that Executive is expected to make significant
contributions to the growth and success of the Company. The Company
also acknowledges that there exists the possibility of a Change in
Control of the Company. The Company recognizes that the possibility
of a Change in Control may contribute to uncertainty on the part of
senior management and may result in the departure or distraction of
senior management from their operating responsibilities.
Strong and
competent management of the Company is essential to advancing the
best interests of the Company and its partners and its
shareholders. In the event of a threat or occurrence of a bid to
acquire or change control of the Company or to effect a business
combination, it is particularly important that the business of the
Company be continued with a minimum of disruption. The Company
believes that the objective of securing and retaining strong
management will be achieved if the Company’s key management
employees are given assurances of employment security so that they
will not be distracted by personal uncertainties and risks created
by such circumstances.
NOW, THEREFORE, in
consideration of the mutual covenants and obligations herein the
Company and Executive agree as follows:
1. Effective
Date . The Effective Date of this Agreement is
November 14, 2006 .
2. Term of
Agreement . The Term of this Agreement begins on the Effective
Date and ends on the day before the second anniversary of the
Effective Date. Notwithstanding the preceding sentence, the Term of
this Agreement shall be extended for an additional twelve month
period, as of each anniversary of the Effective Date, unless either
party gives written notice, at least ninety days prior to the
applicable anniversary of the Effective Date, that the Term of this
Agreement will not be extended.
3. Right to
Receive Termination Benefits . Executive shall be entitled to
receive the Termination Benefits described in Section 4 if
(i) a Change in Control occurs during the Term of this
Agreement and (ii) within two years after the Control Change
Date either (x) the Company terminates Executive’s
employment with the Company without Cause or (y) Executive
resigns from the employment of the Company and Executive has Good
Reason to resign from the
Company, and
either (x) or (y), as applicable, constitutes a Separation
from Service with the Company.
No amounts will
be payable under this Agreement unless Executive’s employment
with the Company terminates or is terminated as described in the
foregoing subsection.
4.
Termination Benefits . Upon a termination of
Executive’s employment in accordance with Section 3,
Executive shall be entitled to receive the following payments and
benefits (“Termination Benefits”):
(a) A lump
sum payment of any accrued but unpaid salary from the Company
through the date Executive’s employment
terminates.
(b) A lump
sum payment of any bonus that has been earned from the Company but
which remains unpaid as of Executive’s termination of
employment.
(c) A lump
sum reimbursement for any expenses Executive incurred on behalf of
the Company prior to termination of employment to the extent that
such expenses are reimbursable under the Company’s standard
reimbursement policies but have not been reimbursed as of
Executive’s termination of employment.
(d) Continued
payment of Executive’s base salary, for one year following
Executive’s termination, at the rate in effect on the date of
Executive’s termination of employment or, if greater, at the
rate in effect on the Control Change Date. Except as provided in
Section 19, such payments shall be made in accordance with the
Company’s normal payroll practices beginning with the first
payroll payment date following the Executive’s termination of
employment.
(e) A lump
sum payment equal to one times the average bonus paid to the
Executive for the three -year period prior to the Executive’s
termination of employment; provided, however, that if the Executive
has not been employed for a full three years at the time of his
termination of employment, Executive shall receive, in lieu of the
foregoing amount, a lump sum payment equal to his annual base
salary at the rate in effect on the date of Executive’s
termination of employment or, if greater, at the rate in effect on
the Control Change Date, multiplied by the average bonus percentage
for the immediately preceding three years for the executive
management group of the Company (not including the
Executive).
(f) Reasonable
outplacement services provided by the firm selected by Executive,
the cost of which will be paid by the Company; provided, however,
that the Company’s obligation under this subsection
(f) will not exceed $15,000.
(g) Continued
participation in the “employee welfare benefit plans”
(as defined in Section 3(1) of the Employee Retirement Income
Security Act of 1974, as amended) in which Executive participates
immediately prior to Executive’s date of termination, on such
terms as are then in effect, for one year following the termination
of Executive’s employment with the Company and payment by the
Company of the cost or premium for continued coverage in
the
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Company health
plan for a period of one year following Executive’s
termination of employment. In the event that the continued coverage
of Executive in any such employee welfare benefit plan, including
without limitation the Company health plan, is barred by its terms,
the Company shall pay Executive, for one year following
Executive’s termination of employment, the cash equivalent of
the portion of the insurance premium or other cost charged to the
Company for Executive’s participation in such employee
welfare benefit plan(s), including the entire insurance premium or
other cost for coverage in the Company health plan, prior to
Executive’s termination of employment, plus an additional
amount such that, after payment of the income and employment tax
liability on such payment, Executive retains an amount equal to the
portion of the insurance premium or other cost charged to the
Company for Executive’s participation in such employee
welfare benefit plans, including the entire insurance premium or
other cost for coverage in the Company health plan, prior to
Executive’s termination of employment. Except as provided in
Section 19, such cash payments, in lieu of coverage, shall be
made in accordance with the Company’s normal payroll
practices during such one-year period beginning with the first
payroll payment date following the Executive’s termination of
employment.
(h) All stock
options and any other stock-based awards outstanding immediately
prior to Executive’s termination of employment shall
immediately vest and become exercisable by Executive for the
remainder of the term provided for in the agreement evidencing the
stock option or award in which such options or other stock-based
awards were granted.
(i) Except as
provided in Section 19, lump sum Termination Benefits shall be
payable within 45 days of Executive’s termination of
employment in accordance with Section 3 and the other
Termination Benefits shall be payable as described above. The
payment of the Termination Benefits shall be reduced by amounts
required to be withheld for applicable income and employment
taxes.
5.
Limitation on Parachute Payments . The Termination Benefits
and other payments, distributions and benefits provided by the
Company for Executive’s benefit pursuant to this Agreement
and under other plans, programs, and agreements may constitute
Parachute Payments (as defined in Section 280G(b) of the Internal
Revenue Code of 1986 (the “Code”) that are subject to
the “golden parachute” rules of Code section 280G and
the excise tax of Code section 4999. The Company and Executive
intend to reduce any Parachute Payments (but not any payment,
distribution or other benefit that is not a Parachute Payment) if,
and only to the extent that, a reduction will allow Executive to
receive a greater Net After Tax Amount than he would receive absent
a reduction. The remaining provisions of this Section describe how
that intent will be effectuated.
(a) The
Company will first determine the amount of any Parachute Payments
that are payable to Executive. The Company will also determine the
Net After Tax Amount attributable to total Parachute
Payments.
(b) The
Company will next determine the amount of Executive’s Capped
Parachute Payments. Thereafter, the Company will determine the Net
After Tax Amount attributable to Executive’s Capped Parachute
Payments.
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(c) Executive
shall receive the total Parachute Payments unless the Company
determines that the Capped Parachute Payments will yield Executive
a higher Net After Tax Amount, in which case Executive will receive
the Capped Parachute Payments. If Executive will receive the Capped
Parachute Payments, the total Parachute Payments will be adjusted
by first reducing the amount payable under any other plan, program,
or agreement that, by its terms, requires a reduction to prevent a
“golden parachute” payment under Code section 280G; by
next reducing Executive’s benefit, if any, under this
Agreement, to the extent it is a Parachute Payment; and thereafter
by reducing Parachute Payments payable under other plans and
agreements (with the reductions first coming from cash benefits and
then from noncash benefits). The Company will notify Executive if
it determines that the Parachute Payments must be reduced to the
Capped Parachute Payments and will send Executive a copy of its
detailed calculations supporting that determination. The Company
will pay Executive the Termination Benefits or the reduced
Termination Benefits determined in this Section 5 as described
in Sections 4 and 19.
6. Certain
Definitions . As used in this Agreement, certain terms have the
definitions set forth below.
(a)
Acquiring Person means that a Person, considered
alone or together with all Control Affiliates and Associates of
that Person, is or becomes directly or indirectly the beneficial
owner (as defined in Rule 13d-3 under the Exchange Act) of
securities representing at least twenty five percent (25%) of the
Company’s then outstanding securities entitled to vote
generally in the election of the Board.
(b)
Associate , with respect to any Person, is defined in
Rule 12b-2 under the Exchange Act; provided,
however , that an Associate shall not include the Company or
a majority-owned affiliate of the Company.
(c)
Board means the Board of Directors of the
Company.
(d)
Capped Parachute Payments means the largest amount of
Parachute Payments that may be paid without liability for any
excise tax under Code section 4999.
(e)
Cause means (i) willful, deliberate and
continued failure by Executive (other than for reason of mental or
physical illness) to perform his duties as established by the
Board, or fraud or d
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