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<SEC-DOCUMENT>0000902561-02-000437.txt : 20020930
<SEC-HEADER>0000902561-02-000437.hdr.sgml : 20020930
<ACCEPTANCE-DATETIME>20020930165010
ACCESSION NUMBER: 0000902561-02-000437
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 20020630
FILED AS OF DATE: 20020930
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: ETHAN ALLEN INTERIORS INC
CENTRAL INDEX KEY: 0000896156
STANDARD INDUSTRIAL CLASSIFICATION: WOOD HOUSEHOLD FURNITURE, (NO UPHOLSTERED) [2511]
IRS NUMBER: 061275288
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-11692
FILM NUMBER: 02776844
BUSINESS ADDRESS:
STREET 1: ETHAN ALLEN DR
STREET 2: PO BOX 1966
CITY: DANBURY
STATE: CT
ZIP: 06811
BUSINESS PHONE: 2037438000
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>form10k_sision93020.txt
<DESCRIPTION>FORM 10-K -- ANNUAL REPORT
<TEXT>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended JUNE 30, 2002
-------------------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file Number 1-11692
----------------------------------------------------------
ETHAN ALLEN INTERIORS INC.
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 06-1275288
- ------------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ETHAN ALLEN DRIVE, DANBURY, CT 06811
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 743-8000
------------------------------
Securities registered pursuant to Section 12(b) of the Act: NONE
Name of Each Exchange
Title of Each Class on Which Registered
-------------------------- -----------------------------
Common Stock, $.01 par value New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
NONE
- --------------------------------------------------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [x]Yes [ ]No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [x]
The aggregate market value of Common Stock, par value $.01 per share held by
non-affiliates (based upon the closing sale price on the New York Stock
Exchange) on August 29, 2002 was approximately $1,302,613,482. As of August 29,
2002, there were 37,866,671 shares of Common Stock, par value $.01 outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: The definitive Proxy Statement for the 2002
Annual Shareholders Meeting is incorporated by reference into Part III hereof.
<PAGE>
TABLE OF CONTENTS
ITEM PAGE
PART I
1. Business 3
2. Properties 11
3. Legal Proceedings 12
4. Submission of Matters to a Vote of Security Holders 13
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters 14
6. Selected Financial Data 15
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
7A. Quantitative and Qualitative Disclosure About
Market Risk 25
8. Financial Statements and Supplementary Data 26
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 46
PART III
10. Directors and Executive Officers of the Registrant 47
11. Executive Compensation 47
12. Security Ownership of Certain Beneficial Owners
and Management 47
13. Certain Relationships and Related Transactions 47
PART IV
14. Exhibits, Financial Statement Schedule, and Reports
on Form 8-K 48
Signatures
Certification of Principal Executive Officer and Principal Financial
Officer as Required by Section 302 of the Sarbanes-Oxley Act
of 2002
2
<PAGE>
PART I
ITEM 1. BUSINESS
BACKGROUND
Ethan Allen Interiors Inc. (together with its directly- and
indirectly-owned subsidiaries, "Ethan Allen" or the "Company") is a leading
manufacturer and retailer of quality home furnishings, offering a full range of
furniture products and home accessories. Incorporated in Delaware in 1989, Ethan
Allen designs, manufacturers and markets its own brand of furniture and home
accent items through the country's largest network of home furnishing retail
stores. The Company was founded in 1932 and has sold products under the Ethan
Allen brand name since 1937.
PRODUCTS
Ethan Allen markets three main product lines: (1) case goods (wood
furnishings), consisting primarily of bedroom and dining room furniture, wall
units and tables; (2) upholstered products, consisting primarily of sofas,
loveseats, chairs, and recliners; and (3) home accessories and other, including
carpeting and area rugs, lighting, clocks, wall decor, bedding ensembles,
draperies, decorative accessories and home and garden furnishings. The following
table shows the approximate percentage of wholesale sales of home furnishing
products for each of these product lines during the three most recent fiscal
years:
FISCAL YEARS ENDED JUNE 30,
-------------------------------------
2002 2001 2000
---- ---- ----
Case Goods 56% 56% 56%
Upholstered Products 31 30 29
Home Accessories and Other 13 14 15
--- --- ---
100% 100% 100%
=== === ===
Ethan Allen's product strategy has been to position its brand as a
`preferred' brand with good quality and value. The Company's focus has been on
expanding its reach to a broader consumer base through a larger selection of
product lines at more attractive price points. During 2002, the Company
introduced the Townhouse collection. Townhouse is Ethan Allen's first collection
completely sourced off-shore and is reflective of the Company's continuing
efforts to offer well-valued, stylish home furnishings.
Management believes that the two most important style categories in
home furnishings are the `Classic' and the `Casual' product lifestyles. Each
home furnishing collection includes case goods, upholstered products and home
accessories and each is styled with its own distinct design characteristics.
Home accessories play an important role in Ethan Allen's marketing program as
this enables the Company to provide one-stop shopping to the consumer by
offering a complete home furnishing collection. Ethan Allen's store interiors
are designed for the display of these categories in complete room settings,
which utilize the related collections to project the category lifestyle.
Ethan Allen continuously monitors consumer demand through marketing
research and communication with its dealers and store design consultants who
provide valuable input on consumer tastes and needs. As a result, the Company is
able to react quickly to changing consumer tastes having added or revised ten
major home furnishing collections and discontinuing six home furnishing
collections in the past five years. The Company also refines and enhances its
product lines by adding and redesigning pieces within each collection.
3
<PAGE>
The following is a summary of Ethan Allen's major home furnishing
collections that have been introduced at the wholesale level and which are
currently available:
<TABLE>
<CAPTION>
PRINCIPAL CALENDAR
STYLE HOME FURNISHING PRINCIPAL YEAR OF
CATEGORY CHARACTERISTICS COLLECTIONS WOOD TYPE INTRODUCTION
- -------- --------------- ----------- --------- ------------
<S> <C> <C> <C> <C>
Classic An opulent style, which Georgian Court Cherry 1965
includes English 18th 18th Century Mahogany Mahogany Various
Century and 19th Century Collectors Classics Various Various
Neo-Classic styling. Legacy Maple 1992
British Classics Maple 1995
Country French Birch 1998
Avenue Cherry 1998
Modular Home Office Cherry 2000
Townhouse Various 2001
Casual This style is based on American Impressions Cherry 1991
classic contemporary Country Crossings Maple 1993
design elements. Country Colors Maple 1995
EA Elements Maple 1999
Horizons Ash 1999
Swedish Home Maple 2000
</TABLE>
BUSINESS SEGMENTS
The Company's operations are classified into two business segments:
wholesale and retail. The wholesale segment is principally involved in the
manufacture, sale and distribution of home furnishing products to a network of
independently-owned and Ethan Allen-owned ("Company-owned") stores. The retail
segment sells home furnishing products through a network of Company-owned stores
to consumers.
WHOLESALE:
The wholesale segment is engaged in the design, manufacture, domestic
and off-shore sourcing, and sale of case goods (wood furniture), upholstery, and
home accent items. These products are sold from the wholesale segment to the
Company's retail network, comprised of independent and Company-owned retail
stores. Sales of case good items include, but are not limited to, beds,
dressers, armoires, night tables, dining room chairs and tables, buffets,
sideboards, coffee tables, entertainment units, and home offices. Sales of
upholstery home furnishing items include sleepers, recliners, chairs, sofas,
loveseats, cut fabrics and leather. Skilled craftsmen cut and sew
custom-designed upholstery items having a variety of frame and fabric options.
Home accent items include wall decor, lighting, clocks, wood accents,
bedspreads, decorative accessories, area rugs, and bedding.
THE WHOLESALE SEGMENT. For fiscal years 2002, 2001 and 2000, the wholesale
segment had net sales of $660.8 million, $705.6 million, and $691.1 million,
respectively. The Company has 17 manufacturing facilities consisting of 10 case
goods plants (including 3 sawmill operations), 6 upholstery plants and 1 home
accent plant in the United States. The Company also outsources, domestically and
off-shore, selected case goods, upholstery, and home accessory items.
During the fourth quarter of fiscal year 2002, the Company announced a
consolidation plan to close one manufacturing facility and the rough mill
operation at a separate facility. The sites employed approximately 220
employees. This consolidation plan was necessary in order to manufacture case
good products more competitively and in the most suitable plants in the United
States. The manufacturing facility, located in Randolph, Vermont, ceased
operations in June 2002. The rough mill operation, located in Orleans, Vermont,
is expected to be closed by the end of the first quarter of fiscal year 2003.
Other existing Ethan Allen manufacturing plants will absorb the production from
these facilities. Estimated closing costs of $5.1 million have been recorded as
restructuring and
4
<PAGE>
impairment charges for the year ended June 30, 2002 and relate, primarily, to
severance and related payroll and benefit costs and the write-down of long-lived
assets. Actual cash expenditures are estimated to be $2.0 million.
During the fourth quarter of fiscal year 2001, the Company announced a
consolidation plan to close three manufacturing facilities employing
approximately 350 people. Similar to the charge incurred in the current year,
this consolidation plan was undertaken to improve operational efficiencies. The
three facilities were located in Island Pond, Vermont; Frewsburg, New York; and
Asheville, North Carolina. Estimated closing costs of $6.9 million have been
recorded as restructuring and impairment charges for the year ended June 30,
2001 and relate, primarily, to severance and related payroll and benefit costs
and the write-down of long-lived assets. Actual cash expenditures were
approximately $3.3 million.
RETAIL:
Ethan Allen exclusively sells its products through a network of 316
retail stores. As of June 30, 2002, Ethan Allen owned and operated 103 stores
and independent dealers owned and operated 213 stores; 193 in North America and
20 abroad. In the past five years, Ethan Allen and its independent dealers have
opened 85 new stores, a number of them being relocations. Sales to independent
dealers accounted for approximately 48% of total net sales of the Company in
fiscal year 2002. The ten largest independent dealers own a total of 39 stores
which, based on net orders booked, accounted for approximately 15% of total net
sales in fiscal year 2002.
Ethan Allen encourages further expansion of the Company-owned retail
business by opening new stores and by acquiring stores from existing independent
dealers. In addition, the Company continues to promote the development and
growth of its independent dealers. Independent dealers are required to enter
into license agreements with the Company authorizing the use of certain Ethan
Allen service marks and requiring adherence to certain standards of operation,
including the exclusive sale of Ethan Allen products. Additionally, dealers are
required to enter into warranty service agreements. Ethan Allen is not subject
to any territorial or exclusive dealer agreements in the United States.
COMPANY RETAIL SEGMENT. For fiscal years 2002, 2001 and 2000, the retail segment
had net sales of $459.6 million, $419.3 million, and $372.1 million,
respectively. For fiscal year 2002, net sales for the Company's retail segment
were 52% of the Company's total net sales. As of June 30, 2002, there were 103
Company-owned stores as compared to 84 at the end of the prior fiscal year.
During 2002, the Company acquired 20 stores from independent retailers, sold 1
store to an independent dealer, opened 1 new store, and closed 1 store.
RETAIL STORE CONCEPT AND MARKETING
Ethan Allen's interior and exterior design is dependent on the store's
location and size. Ethan Allen stores are located in busy urban settings,
suburban strip malls and freestanding destination stores, depending upon the
real estate opportunities in a particular market. While stores range in size
from approximately 6,000 square feet to 30,000 square feet, the average size of
a store is about 15,000 square feet.
Ethan Allen maximizes uniformity of store presentation throughout the
retail network through a comprehensive set of operating standards. These
operating standards help each store present the same high quality image and
offer retail customers consistent levels of product selection and service. A
uniform store image was conveyed through Ethan Allen's program to renovate the
exterior of its retail stores with similar and consistent exterior facades. As
of June 30, 2002, this program was essentially completed for all stores,
including Company-owned stores and independent dealers.
5
<PAGE>
Ethan Allen provides display-planning assistance to all Company-owned
stores and independent dealers to support them in updating the interior
projection of their stores and to maintain a consistent image across the
country. In 1997, the Company developed a new interior design format for its
retail stores. This new design format positions Ethan Allen as a specialist in
`Classic' and `Casual' lifestyles and decorative accessory retailing. The
stores' interiors present products in focused vignettes that are easy and
relatively inexpensive to update each season. Information displays also educate
consumers as they travel throughout the store. To date, 119, or 38%, of all
stores have implemented or are currently in the process of implementing this new
interior design. Ethan Allen expects to have essentially all of its
Company-owned retail stores incorporate the new interior look over the next few
years and believes that many of its independent retail stores will also
incorporate the new interior design. Additionally, during fiscal year 2001, the
Company implemented a major re-merchandising effort called `Branding the
Interior' of the stores. This program refers to the Company's plan to feature
the best-selling home accessory items in the most effective display setting
within the store.
The retail network is staffed with a sales force of approximately 3,000
trained design consultants and professionals, who assist customers in decorating
their homes at no additional charge. Ethan Allen believes this design service
provides a competitive advantage over other furniture retailers.
Ethan Allen recognizes the importance of its retail store network to
its long-term success. Accordingly, the Company has established strong
management teams within Company-owned stores and maintains a close ongoing
relationship with independent dealers. The Company also offers services to the
Ethan Allen stores in support of their marketing efforts, including coordinated
national advertising, merchandising and display programs, and extensive training
seminars and educational materials. Ethan Allen believes that the development of
design consultants, sales managers, service and delivery personnel and dealers
is important for the growth of its business. As a result, Ethan Allen has
committed to offer a comprehensive training program that will help to develop
retail managers/owners, design consultants and service and delivery personnel to
their fullest potential.
ADVERTISING
Ethan Allen has developed a highly coordinated, nationwide advertising
and promotional campaign designed to increase consumer awareness of the breadth
of the Company's product offerings. Ethan Allen's in-house staff, working with a
leading advertising firm, has developed and implemented what the Company
believes is the most extensive national television campaign in the home
furnishings industry. This campaign is designed to support selected retail sale
periods and to increase the flow of traffic into stores during these sale
periods. The sale periods run between five and seven weeks throughout the fiscal
year.
Ethan Allen's television advertising is aired approximately 26 weeks
per year. In addition to its national television campaign, the Company utilizes
direct mail, newspaper, and radio advertising. Ethan Allen believes that its
ability to coordinate its advertising efforts for all Ethan Allen stores
provides a competitive advantage over other home furnishing manufacturers and
retailers.
The Ethan Allen Interiors direct mail magazine, which features the
Company's home furnishing collections in lifestyle settings, is one of Ethan
Allen's most important marketing tools. Approximately 59 million copies of the
magazine, which features sale products, were distributed to consumers during the
year. The Company publishes and sells the magazines to its Company-owned and
independent dealers who, with demographic information collected through
independent market research, are able to target potential consumers.
Ethan Allen's television advertising and direct mail efforts are
supported by strong print campaigns in various markets, and in leading home
fashion magazines using advertisements and public relations efforts. The Company
coordinates significant advertisements in major newspapers in its major markets.
The Ethan
6
<PAGE>
Allen Treasury, a complete catalogue of the Ethan Allen home furnishing
collections, which is distributed in the stores, is one of the most
comprehensive home furnishing catalogues in the home furnishings industry.
INTERNET
Ethan Allen is located on the worldwide web at WWW.ETHANALLEN.COM. The
Company's primary goal for the website is to drive additional business into the
retail network through lead generation and information sourcing. Customers may
access the Company's website to review home furnishing collections or to
purchase selected home accessories. On average, approximately 12,000 daily users
logged onto the Ethan Allen website during fiscal year 2002.
The Company has also developed an extranet website which links the
retail stores with consumer information captured on-line such as customer
requests for design assistance and copies of the Company's catalogue. This
medium has become the primary source of communications providing a variety of
information to the entire retail network, including a Company-wide daily news
flash, downloads of current advertising materials, proto-type store display
floor plans and detailed product information.
CUSTOMER SERVICE PROGRAMS
During the past fiscal year, Ethan Allen, in an effort to make shopping
more convenient and enjoyable for consumers, introduced two new customer service
programs.
GIFT CARD. In January 2002, the Ethan Allen Gift Card program was introduced.
Customers can purchase a Gift Card through the Company's website or at any
participating retail store.
WEDDING REGISTRY. In April 2002, the Company introduced its Wedding Registry
program. The primary objectives of this program are to increase customer traffic
in Ethan Allen's network of retail stores (and on-line), capture consumers in
the early stage of their lifecycle, capitalize on the growing trend for
non-traditional registries and promote the Company's complimentary design
service. Ethan Allen believes this program will further strengthen its
competitive advantage by enhancing its current compliment of service offerings
with a national gift registry.
ETHAN ALLEN CONSUMER CREDIT PROGRAMS
Ethan Allen offers its consumers two financing options: an installment
finance plan and a revolving credit plan.
THE INSTALLMENT FINANCE PLAN. The Company currently offers an installment
financing plan for consumers called the Simple Finance Plan. Financing offered
through this program is granted on a non-recourse basis to the Company. The plan
provides credit lines from $2,000 to $50,000 with repayment terms of up to seven
years and standard (non-promotional) interest rates currently ranging from 7.99%
to 9.99% per annum. As of June 30, 2002, total open credit lines approved exceed
$747 million. Consumers may apply for this financing plan at any participating
retail store.
THE REVOLVING CREDIT PLAN. The Company also offers financing to consumers under
a revolving credit card program which, too, is granted on a non-recourse basis
to the Company. This program provides revolving credit lines from $1,500 to
$25,000 at variable interest rates currently ranging from 21.00% to 23.75% per
annum. Consumers may apply for revolving credit at any participating retail
store.
MANUFACTURING
Ethan Allen is one of the largest manufacturers of household furniture
in the United States. The Company manufactures and/or assembles approximately
81% of its
7
<PAGE>
products at 17 manufacturing facilities, including 3 sawmill operations, thereby
maintaining control over cost, quality and service to its consumers. The case
goods facilities are located close to sources of raw materials and skilled
craftsmen, predominantly in the Northeast and Southeast regions of the country.
Upholstery facilities are located across the country in order to reduce shipping
costs to stores and are located at sites where skilled craftsmanship is
available. Management believes that continued investment at its manufacturing
facilities, combined with appropriate outsourcing, will accommodate future sales
growth.
DISTRIBUTION
Ethan Allen distributes its products primarily through a national
network of 6 owned and 2 leased distribution centers strategically located
throughout the United States. These distribution centers hold finished products
received from Ethan Allen's manufacturing facilities and domestic and offshore
vendors for shipment to Ethan Allen's dealers or home delivery service centers.
Ethan Allen stocks case goods and accessories to provide for quick delivery of
in-stock items and to allow for more efficient production runs.
Approximately 40% of all shipments are made to and from the
distribution and home delivery service centers by the Company's fleet of trucks
and trailers. The remaining shipments are subcontracted to independent carriers.
Approximately 83% of the Company's fleet (trucks and trailers) is leased under
two to eight-year leases.
Ethan Allen's policy is to sell its products at the same delivered cost
to all stores nationwide, regardless of their shipping point. The adoption of
this policy has created credibility by offering product at one suggested
national retail price. This policy has also discouraged dealers from carrying
significant inventory in their own warehouses. As a result, Ethan Allen obtains
accurate information regarding sales to better plan production runs and manage
inventory levels.
RAW MATERIALS AND SUPPLIERS
The most important raw materials used by Ethan Allen in furniture
manufacturing are lumber, veneers, plywood, particle board, hardware, glue,
finishing materials, glass, mirrored glass, laminates and fabrics. The various
types of wood used in Ethan Allen's products include cherry, ash, oak, maple,
prima vera, mahogany, birch and pine, substantially all of which are purchased
domestically.
Fabrics and other raw materials are purchased both domestically and
abroad. Ethan Allen has no significant long-term supply contracts, and has
experienced no significant problems in supplying its operations. Ethan Allen
maintains a number of sources for its raw materials which management believes
contribute to its ability to obtain competitive pricing for raw materials.
Lumber prices fluctuate over time based on factors such as weather and demand,
which, in turn, impact availability. Upward trends in prices could have a
short-term impact on margins.
A sufficient inventory of lumber and fabric is usually stocked to
maintain adequate levels of production. Management believes that its sources of
supply for these materials are sufficient and that it is not dependent on any
one supplier.
COMPETITION
The home furnishings industry at the retail level is highly competitive
and fragmented. Although Ethan Allen is among the ten largest furniture
manufacturers, industry estimates indicate that there are over 1,000
manufacturers of all types of furniture in the United States, some of which
produce furniture types not manufactured by Ethan Allen. In addition, the number
of foreign manufacturers, many of which have substantially lower production
costs, including the cost of labor, has increased significantly in recent years.
Certain of these domestic and foreign companies, which compete directly with
Ethan Allen, may have greater financial and other resources than the Company.
8
<PAGE>
Ethan Allen's products are sold primarily through retail stores, all of
which exclusively sell the Company's products. Ethan Allen's effort is focused
primarily upon obtaining and retaining independent dealers, increasing the
volume of such dealer's sales, and expanding the Company-owned retail business
by opening new stores, relocating existing stores and, when appropriate,
acquiring stores from existing independent dealers. The home furnishings
industry competes primarily on the basis of product styling and quality,
personal service, prompt delivery, product availability and price. Ethan Allen
believes that it effectively competes on the basis of each of these factors and
believes that its store format provides it with a competitive advantage because
of the complete home furnishing product selection and service available to the
consumer. Further, as the volume of home furnishing imports into the United
States continues to increase, the Company will evaluate and consider
opportunities to source with foreign manufacturers, as appropriate, in order to
remain competitive.
Furniture Today (a leading industry publication) published a survey of
America's Top 100 Furniture Stores on May 27, 2002. For the third year in a row,
Ethan Allen was the No. 1 single-source store network for home furnishings in
the country. During recent years, the furniture industry and several retailers
have continued to be challenged by changes in economic conditions. As a result,
several competitors of the Company have filed for bankruptcy protection,
announced plans to close their retail stores or undertaken efforts to streamline
production costs by implementing selective plant shutdowns. Ethan Allen has been
able to maintain stability and credibility by managing its growth and balancing
this growth with the ability to service its customers.
TRADEMARKS
The Company currently holds numerous trademarks, service marks and
design patents for the Ethan Allen name, logos and designs in a broad range of
classes for both products and services in the United States and in many foreign
countries. The Company has additional applications for registration pending both
domestically and abroad. Ethan Allen has registered, or has applications
pending, for many of its major collection names as well as certain of its
slogans utilized in connection with retail sales and other services. Ethan Allen
views its trade and service marks as valuable assets and has an ongoing program
to diligently monitor their unauthorized use through appropriate action.
BACKLOG AND NET ORDERS BOOKED
As of June 30, 2002, Ethan Allen had a wholesale backlog of
approximately $47.5 million, compared to a backlog of $51.9 million as of June
30, 2001. The backlog is anticipated to be serviced in the first quarter of
fiscal year 2003. Backlog at any point in time is primarily a result of net
orders booked in prior periods, manufacturing schedules and the timing of
product shipments. Net orders booked at the wholesale level from all Ethan Allen
stores (including all independently-owned and Company-owned stores) for the
twelve months ended June 30, 2002 were $682.1 million as compared to $689.0
million for the twelve months ended June 30, 2001. Net orders booked in any
period are recorded based on wholesale prices and do not reflect the additional
retail margins produced by the Company-owned stores.
EMPLOYEES
Ethan Allen has approximately 7,600 employees as of June 30, 2002, 6%
of which are represented by unions under collective bargaining agreements. The
Company's labor contracts expire at various times in 2005. The Company expects
no significant changes in its relations with these unions and believes it has a
good relationship with all employees.
9
<PAGE>
RECENT DEVELOPMENTS
In October 2001, the Company formed a joint venture with MFI Furniture
Group Plc. ("MFI") to open a chain of retail stores in the United Kingdom. The
initial phase of the agreement, which calls for the two companies to collaborate
on the development of a retail store format that will market their respective
retail concepts, involves up to five stores with approximately 8,000 to 15,000
square feet in each. The first of these stores, located in the London suburb of
Kingston, opened in May 2002 and has been included as a dealer-owned store in
compiling the Company's store count as of June 30, 2002.
In July 2002, the Company increased its percentage ownership in the
operations of 7 Ethan Allen retail stores (and 1 related service center) located
throughout Canada by acquiring the remaining 75% interest in a transaction
accounted for as a purchase business combination. The Company had previously
held a 25% interest in the operations of these stores which it acquired in July
1997.
In September 2002, the Company acquired the assets of 6 Ethan Allen
retail stores (and 1 related service center) located in the greater Chicago
area. This transaction was accounted for as a purchase business combination.
10
<PAGE>
ITEM 2. PROPERTIES
The Company's corporate headquarters, located in Danbury, Connecticut,
consists of one building containing 144,000 square feet, situated on
approximately 17.5 acres of land, all of which is owned by Ethan Allen. Located
adjacent to the corporate headquarters is the Inn at Ethan Allen, a hotel and
conference center containing 195 guestrooms. This hotel, owned by a wholly-owned
subsidiary of Ethan Allen, is used for Ethan Allen functions and in connection
with training programs as well as for accommodations for the general public.
Ethan Allen has 17 manufacturing facilities (including 3 sawmill
operations) located in 10 states. All of these facilities are owned, with the
exception of a leased upholstery plant in California totaling 141,600 square
feet. The Company's 17 facilities consist of 10 case goods manufacturing plants
(including 3 sawmill operations), totaling 3,224,200 square feet; 6 upholstery
furniture plants, totaling 1,403,300 square feet; and 1 plant involved in the
manufacture and assembly of Ethan Allen's home accessory products totaling
295,000 square feet.
In addition, Ethan Allen owns 6 and leases 2 ancillary distribution
warehouses, totaling 1,113,500 square feet, and owns 3 and leases 26 retail
delivery service centers, totaling 1,337,940 square feet. The Company's
manufacturing and distribution facilities are located in North Carolina,
Vermont, Pennsylvania, Virginia, New York, Oklahoma, California, New Jersey,
Indiana, Maine and Massachusetts. The Company's retail service centers are
located throughout the United States and serve to support Ethan Allen's various
sales districts.
There are 103 Company-owned retail stores in United States, of which 38
stores are owned and 65 stores are leased.
Ethan Allen's manufacturing facility in Maiden, North Carolina and the
Inn at Ethan Allen in Danbury, Connecticut were financed with industrial revenue
bonds and the Beecher Falls, Vermont facility was financed in part by the State
of Vermont Economic Development Authority. Ethan Allen believes that all of its
properties are well maintained and in good condition.
Ethan Allen estimates that its manufacturing division is currently
operating at approximately 85% of capacity. Management believes it has
additional capacity at many facilities, which it could utilize with minimal
additional capital expenditures.
11
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Ethan Allen is a party to various legal actions with customers,
employees and others arising in the normal course of its business. Ethan Allen
maintains liability insurance which is deemed to be adequate for its needs and
commensurate with other companies in the home furnishings industry. Ethan Allen
believes that the final resolution of pending actions (including any potential
liability not fully covered by insurance) will not have a material adverse
effect on the Company's financial condition, results of operations, or cash
flows.
ENVIRONMENTAL MATTERS
The Company is a potentially responsible party ("PRP") for the cleanup
of three active sites currently listed or proposed for inclusion on the National
Priorities List ("NPL") under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"). The Company has resolved its
liability at one of the sites by completing remedial action activities. With
regard to the other two sites, the Company does not anticipate incurring
significant cost as it believes that it is not a major contributor based on the
very small volume of waste generated by the Company in relation to total volume
at the site. However, liability under CERCLA may be joint and several.
Additionally, the Company has recently been notified by the State of New York
that it may be a PRP in a separate, unrelated matter. As a result, the extent of
any adverse effect on the Company's financial condition, results of operations,
or cash flows with respect to this matter cannot be reasonably estimated at this
time.
Ethan Allen is subject to other federal, state and local environmental
protection laws and regulations and is involved from time to time in
investigations and proceedings regarding environmental matters. The Company is
regulated under several federal, state and local laws and regulations concerning
air emissions, water discharges, and management of solid and hazardous wastes.
The Company believes that its facilities are in material compliance with all
applicable laws and regulations. Regulations issued under the Clean Air Act
Amendments of 1990 required the Company to reformulate certain furniture
finishes or institute process changes to reduce emissions of volatile organic
compounds. These requirements have been implemented via high solids coating
technology and alternative formulations. Ethan Allen has implemented a variety
of technical and procedural controls, such as reformulating of finishing
materials to reduce toxicity, implementation of high velocity low pressure spray
systems, development of inspections/audit teams including coating emissions
reductions teams at all finishing factories and storm water protection plans and
controls, that have reduced emissions per unit of production. In addition, Ethan
Allen is currently reclassifying its waste as part of the factory waste
minimization programs, developing environment and safety job hazard analysis
programs on the shop floor to reduce emissions and safety risks, and developing
an auditing system to control and ensure consistent protocols and procedures are
applied. The Company will continue to evaluate the best applicable, cost
effective, control technologies for finishing operations and design production
methods which will reduce the use of hazardous materials in manufacturing
processes.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to security holders of the Company
during the fourth quarter of fiscal year 2002:
None.
13
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the New York Stock Exchange
under ticker symbol `ETH'. The following table indicates the high and low stock
prices as reported on the New York Stock Exchange and dividends paid by the
Company:
CLOSING MARKET PRICE
----------------------
HIGH LOW DIVIDENDS PAID
---------------------- --------------
FISCAL 2002
Fourth Quarter $ 41.80 $ 34.85 $ 0.06
Third Quarter 42.75 36.25 0.04
Second Quarter 41.70 27.10 0.04
First Quarter 38.00 26.65 0.04
FISCAL 2001
Fourth Quarter $ 38.01 $ 32.50 $ 0.04
Third Quarter 38.80 30.88 0.04
Second Quarter 33.50 24.69 0.04
First Quarter 30.75 24.81 0.04
As of August 29, 2002, there were approximately 429 shareholders of
record of the Company's Common Stock.
On August 1, 2002, the Company declared a $0.06 per common share
dividend for all holders of record on October 10, 2002 and a payment date of
October 25, 2002. The Company expects to continue to declare quarterly dividends
for the foreseeable future.
14
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth summary consolidated financial
information of the Company for the years and dates indicated (in thousands,
except per share data):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
---------------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $892,288 $904,133 $856,171 $762,233 $679,321
Cost of sales 470,975 490,477 455,561 407,234 363,746
Selling, general and
administrative expenses 286,290 280,703 253,029 221,237 195,216
Restructuring and impairment
charge (1) 5,123 6,906 - - -
-------- -------- -------- -------- --------
Operating income 129,900 126,047 147,581 133,762 120,359
Interest and other (income)
expense, net (2,344) (2,056) 811 1,045 1,829
--------- --------- -------- -------- --------
Income before income tax expense
and extraordinary charge 132,244 128,103 146,770 132,717 118,530
Income tax expense 49,988 48,423 56,200 51,429 46,582
-------- -------- -------- -------- --------
Income before extraordinary
charge 82,256 79,680 90,570 81,288 71,948
Extraordinary charge (net of tax) - - - - (802)(2)
-------- -------- -------- -------- --------
Net income $ 82,256 $ 79,680 $ 90,570 $ 81,288 $ 71,146
======== ======== ======== ======== ========
PER SHARE DATA: (3)
Net income per basic share $ 2.12 $ 2.02 $ 2.25 $ 1.97 $ 1.65
Basic weighted average shares
outstanding 38,828 39,390 40,301 41,278 43,050
Net income per diluted share $ 2.06 $ 1.98 $ 2.20 $ 1.92 $ 1.61
Diluted weighted average shares
outstanding 39,942 40,321 41,198 42,287 44,136
Cash dividends declared $ 0.18 $ 0.16 $ 0.16 $ 0.12 $ 0.09
OTHER INFORMATION:
Depreciation and amortization (4) $ 19,314 $ 20,220 $ 16,975 $ 16,344 $ 15,868
Capital expenditures, including
acquisitions $ 73,481 $ 48,238 $ 54,696 $ 47,792 $ 29,665
Working capital $189,628 $182,223 $127,519 $123,580 $114,287
Current ratio 2.47 2.69 2.18 2.43 2.55
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets $688,755 $619,118 $543,571 $480,622 $433,123
Total debt including capital
lease obligations $ 9,321 $ 9,487 $ 17,907 $ 10,676 $ 13,375
Shareholders' equity $511,189 $464,783 $390,509 $350,535 $314,320
Ratio of debt to equity 1.8 2.0 4.6 3.1 4.3
Footnotes on following page.
</TABLE>
15
<PAGE>
NOTES TO SELECTED FINANCIAL DATA
(1) During the fourth quarter of fiscal year 2002, the Company announced a
consolidation plan to close one manufacturing facility and the rough
mill operation at a separate facility. The sites employed approximately
220 employees. This consolidation plan was necessary in order to
manufacture case good products more competitively and in the most
suitable plants in the United States. The manufacturing facility,
located in Randolph, Vermont, ceased operations in June 2002. The rough
mill operation, located in Orleans, Vermont, is expected to be closed
by the end of the first quarter of fiscal year 2003. Estimated closing
costs of $5.1 million have been recorded as restructuring and
impairment charges for the year ended June 30, 2002 and relate,
primarily, to severance and related payroll and benefit costs and the
write-down of long-lived assets.
During the fourth quarter of fiscal year 2001, the Company announced
its plans to close three manufacturing facilities employing
approximately 350 people. Closure of the facilities located in Island
Pond, Vermont; Frewsburg, New York; and Asheville, North Carolina, all
of which occurred during fiscal year 2002, was necessary in order to
improve operational efficiencies. Estimated closing costs of $6.9
million have been recorded as restructuring and impairment charges for
the year ended June 30, 2001 and relate, primarily, to severance and
related payroll and benefit costs and the write-down of long-lived
assets.
(2) During fiscal 1998, the Company completed its optional early redemption
of all of its $52.4 million then-outstanding 8-3/4% Senior Notes, due
on March 15, 2001, at 101.458% of par value. As a result of the early
redemption, an extraordinary charge of $0.8 million, net of tax
benefit, was recorded. The extraordinary charge included the write-off
of unamortized deferred financing costs associated with the Senior
Notes and the premium related to the early redemption.
(3) Amounts have been retroactively adjusted to reflect the two-for-one
stock split on September 2, 1997 and the three-for-two stock split on
May 21, 1999.
(4) As a result of the Company's adoption of SFAS No. 142, "Goodwill and
Other Intangible Assets", amortization of goodwill and intangible
assets ceased on July 1, 2001. The amount of amortization related to
these assets in 2001, 2000, 1999 and 1998 was $1.8 million, $1.8
million, $1.7 million and $1.6 million, respectively.
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of results of operations and financial
condition is based upon, and should be read in conjunction with, the
Consolidated Financial Statements of the Company and notes thereto included
under Item 8 of this Report.
FORWARD-LOOKING STATEMENTS
Management's discussion and analysis of financial condition and results
of operations and other sections of this annual report contain forward-looking
statements relating to future results of the Company. Such forward-looking
statements are identified by use of forward-looking words such as "anticipates",
"believes", "plans", "estimates", "expects", and "intends" or words or phrases
of similar expression. These forward-looking statements are subject to various
assumptions, risks and uncertainties, including, but not limited to, changes in
political and economic conditions, demand for the Company's products, acceptance
of new products, technology developments affecting the Company's products and to
those matters discussed in the Company's filings with the Securities and
Exchange Commission. Accordingly, actual results could differ materially from
those contemplated by the forward-looking statements.
CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America which requires that certain estimates and assumptions be made that
affect the amounts and disclosures reported in the those financial statements
and the related accompanying notes. Actual results could differ from these
estimates and assumptions. Management uses its best judgment in valuing these
estimates and may, as warranted, solicit external advice. Estimates are based on
current facts and circumstances, prior experience and other assumptions believed
to be reasonable. The following critical accounting policies, some of which are
impacted significantly by judgments, assumptions and estimates, affect the
Company's consolidated financial statements.
RETAIL STORE ACQUISITIONS - The Company accounts for the acquisition of
retail stores and related assets in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 141, "Business Combinations", which requires
application of the purchase method for all business combinations initiated after
June 30, 2001. Accounting for these transactions as purchase business
combinations requires the allocation of purchase price paid to the assets
acquired and liabilities assumed based on their fair values as of the date of
the acquisition. The amount paid in excess of the fair value of net assets
acquired is accounted for as goodwill.
IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL - The Company periodically
evaluates whether events or circumstances have occurred that indicate that
long-lived assets may not be recoverable or that the remaining useful life may
warrant revision. When such events or circumstances are present, the Company
assesses the recoverability of long-lived assets by determining whether the
carrying value will be recovered through the expected undiscounted future cash
flows resulting from the use of the asset. In the event the sum of the expected
undiscounted future cash flows is less than the carrying value of the asset, an
impairment loss equal to the excess of the asset's carrying value over its fair
value is recorded. The long-term nature of these assets requires the estimation
of its cash inflows and outflows several years into the future and only takes
into consideration technological advances known at the time of the impairment
test.
In accordance with SFAS No. 142, "Goodwill and Other Intangible
Assets", which was adopted by the Company on July 1, 2001, goodwill and other
intangible assets are to be evaluated for impairment at the reporting unit level
on an annual basis and between annual tests whenever events or circumstances
indicate that the carrying value of a reporting unit may exceed its fair value.
A discounted cash flow model is used to estimate the fair value of a reporting
unit. This model requires the use of long-term planning forecasts and
assumptions regarding industry-specific economic conditions that are outside the
control of the Company.
17
<PAGE>
ALLOWANCE FOR DOUBTFUL ACCOUNTS - The Company maintains an allowance
for doubtful accounts for estimated losses resulting from the inability of its
customers to make required payments. The allowance for doubtful accounts is
based on a review of specifically identified accounts in addition to an overall
aging analysis. Judgments are made with respect to the collectibility of
accounts receivable based on historical experience and current economic trends.
Actual losses could differ from those estimates.
INVENTORIES - Inventories (finished goods, work in process and raw
materials) are stated at the lower of cost, determined on a first-in, first-out
basis, or market. The Company estimates an inventory reserve for excess
quantities and obsolete items based on specific identification and historical
write-offs, taking into account future demand and market conditions. If actual
demand or market conditions in the future are less favorable than those
estimated, additional inventory write-downs may be required.
REVENUE RECOGNITION - Revenue is recognized when the risks and rewards
of ownership and title to the product have transferred to the buyer. This
generally occurs upon the shipment of goods to independent dealers or, in the
case of Ethan Allen-owned retail stores, upon delivery to the customer. Recorded
sales provide for estimated returns and allowances. The Company permits retail
customers to return defective products and incorrect shipments for credit
against other purchases. Terms offered by the Company are standard for the
industry.
BUSINESS INSURANCE RESERVES - The Company has insurance programs in
place to cover workers' compensation and property/casualty claims. The insurance
programs, which are funded through self-insured retention, are subject to
various stop-loss limitations. The Company accrues estimated losses using
actuarial models and assumptions based on historical loss experience. Although
management believes that the insurance reserves are adequate, the reserve
estimates are based on historical experience, which may not be indicative of
current and future losses. In addition, the actuarial calculations used to
estimate insurance reserves are based on numerous assumptions, some of which are
subjective. The Company adjusts insurance reserves, as needed, in the event that
future loss experience differs from historical loss patterns.
OTHER LOSS RESERVES - The Company has a number of other potential loss
exposures incurred in the ordinary course of business such as environmental
claims, product liability, litigation, restructuring charges, and the
recoverability of deferred income tax benefits. Establishing loss reserves for
these matters requires management's estimate and judgment with regard to maximum
risk exposure and ultimate liability or realization. As a result, these
estimates are often developed with the Company's counsel, or other appropriate
advisors, and are based on management's current understanding of the underlying
facts and circumstances. Because of uncertainties related to the ultimate
outcome of these issues or the possibilities of changes in the underlying facts
and circumstances, additional charges related to these issues could be required
in the future.
BASIS OF PRESENTATION
Ethan Allen Interiors Inc. has no material assets other than its
ownership of the capital stock of Ethan Allen Inc. and conducts all significant
transactions through Ethan Allen Inc.; therefore, substantially all of the
financial information presented herein is that of Ethan Allen Inc.
RESULTS OF OPERATIONS
Ethan Allen's revenues are comprised of wholesale sales to dealer-owned
and Company-owned retail stores and retail sales of Company-owned stores. See
Note 16 to the Company's Consolidated Financial Statements for the year ended
June 30, 2002. The components of consolidated revenues and operating income are
as follows (in millions):
18
<PAGE>
FISCAL YEARS ENDED JUNE 30,
----------------------------------
2002 2001 2000
--------- --------- ---------
REVENUE:
Wholesale segment $ 660.8 $ 705.6 $ 691.1
Retail segment 459.6 419.3 372.1
Elimination of inter-segment sales (228.1) (220.8) (207.0)
------ ------ ------
Consolidated Revenue $ 892.3 $ 904.1 $ 856.2
====== ====== ======
OPERATING INCOME:
Wholesale segment (1) $ 110.1 $ 100.5 $ 132.5
Retail segment 23.1 23.1 20.5
Eliminations (3.3) 2.4 (5.4)
------ ------ -------
Consolidated Operating Income $ 129.9 $ 126.0 $ 147.6
====== ====== ======
(1) The Wholesale segment includes pre-tax restructuring and impairment
charges of $5.1 million and $6.9 million in fiscal years 2002 and
2001, respectively.
FISCAL 2002 COMPARED TO FISCAL 2001
Consolidated revenue for fiscal year 2002 was $892.3 million, a
decrease of $11.8 million, or 1.3%, from fiscal year 2001 consolidated revenue
of $904.1 million. The decrease in revenues was the result of a general decline
in consumer spending throughout most of the year, partially offset by a
selective price increase effective April 2001 and continued expansion of the
retail segment.
Total wholesale revenue for fiscal year 2002 was $660.8 million as
compared to $705.6 million in fiscal year 2001. This represents a decrease of
$44.8 million, or 6.4%, from fiscal year 2001. The decrease in wholesale revenue
was due, primarily, to softening demand as a result of a general decline in
consumer spending during the last twelve months and, to a lesser extent, one
less production day in the current fiscal year as compared to the prior year.
Total retail revenue from Ethan Allen-owned stores for fiscal year 2002
increased by $40.3 million, or 9.6%, to $459.6 million from $419.3 million in
the prior year. The increase in retail sales by Ethan Allen-owned stores was
comprised of a $9.5 million (or 2.4%) decrease in comparable store sales, an
increase in sales generated by newly opened or acquired stores of $57.6 million,
and a decrease resulting from sold and closed stores, which generated $7.8
million fewer sales in fiscal year 2002 compared to fiscal year 2001. The number
of Ethan Allen-owned stores increased to 103 as of June 30, 2002 as compared to
84 as of June 30, 2001. During the last twelve months, the Company acquired 20
stores from independent dealers, sold 1 to an independent dealer, opened 1 new
store, and closed 1 store. Of the stores acquired during fiscal 2002, 6 stores
were purchased from Mr. Edward Teplitz, who subsequently joined the Company as
Vice President of Finance (see Part II, Item 5 of the Form 10-Q filed on
November 15, 2001). In August 2002, Mr. Teplitz was named Chief Financial
Officer of the Company.
Comparable stores are those which have been operating for at least 15
months. Minimal net sales, derived from the delivery of customer ordered
product, are generated during the first three months of operations of newly
opened stores. Stores acquired from dealers by Ethan Allen are included in
comparable store sales in their 13th full month of Ethan Allen-owned operations.
Booked orders for the year ended June 30, 2002 were slightly higher
than the same period in the prior year by 2.0%, reflecting further expansion of
the Company's retail segment, offset by softening wholesale demand and a general
decline in consumer spending. During fiscal 2001, booked orders declined 1.4%
from fiscal 2000 levels. Total booked orders include wholesale orders and
written orders of Company-owned retail stores.
Gross profit for fiscal year 2002 increased $7.6 million, or 1.8%, to
$421.3 million from $413.7 million in fiscal year 2001. The increase in gross
profit was primarily attributable to (i) a higher proportionate share of retail
sales to total sales (52% in fiscal 2002 compared to 46% in fiscal 2001), (ii)
lower manufacturing
19
<PAGE>
costs resulting from favorable pricing of raw materials, (iii) efficiencies
gained as a result of plant shutdowns undertaken in fiscal 2001 and (iv) the
impact of a selective price increase effective April 2001. These factors were
partially offset by lower wholesale sales volume. Consolidated gross margin
increased to 47.2% for the year ended June 30, 2002 from 45.8% in the prior
year. The gross margin was positively impacted as a result of the factors
identified previously, offset partially by sales volume associated with products
sold at lower margins.
The Company recorded pre-tax restructuring and impairment charges of
$5.1 million and $6.9 million in the fourth quarter of fiscal 2002 and 2001,
respectively, relating to the consolidation of certain manufacturing facilities.
The 2002 consolidation plan involved the closure of one manufacturing facility
as well as the rough mill operation of a separate facility. Closure of these
facilities resulted in the elimination of approximately 220 employees; 150
employees effective June 29, 2002, and 70 employees expected to be terminated
during the first quarter of fiscal 2003. In 2001, the Company announced the
closure of three of its manufacturing facilities and the elimination of
approximately 350 employees effective August 6, 2001. The closing costs recorded
in both periods consist, primarily, of severance and related payroll and benefit
costs and the write-down of long-lived assets.
Including the restructuring and impairment charges of $5.1 million and
$6.9 million in fiscal 2002 and 2001, respectively, operating expenses increased
to $291.4 million, or 32.7% of net sales, for the year ended June 30, 2002 from
$287.6 million, or 31.8% of net sales, for the year ended June 30, 2001. This
increase is primarily attributable to further growth within the retail segment
and the higher proportionate share of retail sales to total sales experienced in
2002. The addition of 19 net new Company-owned stores since June 2001 has
resulted in higher costs associated with delivery and warehousing, occupancy,
advertising, healthcare and design consultant salaries. These increases were
partially offset by a decrease in distribution costs resulting from a decline in
the volume of wholesale shipments.
Including the restructuring and impairment charges of $5.1 million and
$6.9 million in fiscal 2002 and 2001, respectively, operating income was $129.9
million, or 14.6% of net sales, for the year ended June 30, 2002 compared to
$126.0 million, or 13.9% of net sales, for the year ended June 30, 2001. This
represents an increase of $3.9 million, or 3.1%, which is primarily attributable
to the higher gross margin noted above, partially offset by increased operating
expenses resulting from the continued expansion of the retail segment.
Including the restructuring and impairment charges of $5.1 million and
$6.9 million in fiscal 2002 and 2001, respectively, total wholesale operating
income was $110.1 million, or 16.7% of wholesale net sales, for the year ended
June 30, 2002 compared to $100.5 million, or 14.2% of wholesale net sales, for
the year ended June 30, 2001. Wholesale operating income increased $9.6 million,
or 9.6%, in fiscal year 2002 due, primarily, to (i) lower manufacturing costs
resulting from favorable pricing of raw materials, (ii) efficiencies gained from
plant shutdowns undertaken in fiscal 2001 and (iii) the impact of a selective
price increase effective April 2001, partially offset by lower wholesale sales
volume and one less production day in the current fiscal year as compared to the
prior year.
Operating income for the retail segment remained relatively unchanged
at $23.1 million, representing 5.0% and 5.5% of net retail sales in fiscal years
2002 and 2001, respectively. The level of retail operating income generated by
Company-owned stores is primarily attributable to a 2.4% decline in comparable
store sales and higher operating expenses related to the addition of 19 net new
stores, offset by improved operational efficiencies, increased sales volume
associated with new stores and a selective price increase effective April 2001.
Interest and other miscellaneous income of $3.0 million in fiscal year
2002 increased $0.2 million from $2.8 million in fiscal year 2001 due,
primarily, to an increase in interest income associated with the Company's
investment portfolio.
20
<PAGE>
Interest expense, including the amortization of deferred financing
costs, decreased $0.2 million to $0.6 million in fiscal 2002 compared to $0.8
million in fiscal 2001 due to a decline in the Company's outstanding borrowings.
Income tax expense of $50.0 million was recorded for the twelve months
ended June 30, 2002 as compared to $48.4 million for the twelve months ended
June 30, 2001. The Company's effective tax rate was 37.8% for both periods.
For fiscal year 2002, the Company recorded net income of $82.3 million,
an increase of 3.3%, compared to $79.7 million in fiscal year 2001. Earnings per
diluted share for fiscal year 2002 amounted to $2.06, an increase of $0.08 per
diluted share, or 4.0%, from $1.98 per diluted share in the prior year.
Excluding the restructuring and impairment charges recorded in each period, net
income for fiscal year 2002 was $85.4 million (or $2.14 per diluted share)
compared to $84.0 million (or $2.08 per diluted share) for fiscal year 2001
representing an increase of $0.06 per diluted share, or 2.9%.
FISCAL 2001 COMPARED TO FISCAL 2000
Consolidated revenue for fiscal year 2001 of $904.1 million increased
by $47.9 million, or 5.6%, from fiscal year 2000 consolidated revenue of $856.2
million. Overall, sales growth resulted from new product offerings, a selective
price increase effective February 2000 and growth in the retail segment.
Total wholesale revenue for fiscal year 2001 was $705.6 million as
compared to $691.1 million in fiscal year 2000. This represents a $14.5 million,
or 2.1%, increase over fiscal year 2000. The increase in wholesale revenue was
due to a selective price increase effective February 2000 and sales volume
generated from new product introductions at more affordable price points. These
increases were partially offset by three fewer production days in the current
fiscal year as compared to the prior year.
Total retail revenue from Ethan Allen-owned stores for fiscal year 2001
increased by $47.2 million, or 12.7%, to $419.3 million from $372.1 million in
the prior year. The increase in retail sales by Ethan Allen-owned stores was
attributable to a 10.0%, or $34.7 million, increase in comparable store sales,
an increase in sales generated by newly opened or acquired stores of $25.1
million, partially offset by sold and closed stores, which generated $12.6
million less sales in fiscal year 2001 as compared to fiscal year 2000. The
number of Ethan Allen-owned stores increased to 84 as of June 30, 2001 as
compared to 82 as of June 30, 2000. The Company acquired 1 store from an
independent dealer, sold 4 to independent dealers, relocated 1 store, and opened
5 new stores.
Booked orders for the year ended June 30, 2001 were slightly lower than
the same period in the prior year by 1.4%, reflecting slower economic growth.
The prior year's increase in booked orders was 16.0%. Total orders include
wholesale orders and written business of Company-owned retail stores.
Gross profit for fiscal year 2001 increased $13.1 million, or 3.3%, to
$413.7 million from $400.6 million in fiscal year 2000. The $13.1 million
increase in gross profit was mainly due to higher sales volume, a selective
price increase effective February 2000 and a higher percentage of retail sales
to total sales. These increases were offset by a decline in the gross margin to
45.8% for the year ended June 30, 2001 from 46.8% in the prior year. The gross
margin was negatively impacted by changes in production scheduling mainly due to
new product introductions and from the sale of more affordably priced products
manufactured at lower margins. Gross margins were also negatively impacted by
higher costs incurred due to plant expansions, including the start-up of the new
case goods manufacturing facility in Dublin, Virginia and from other plant
expansions initiated to increase production capacity and improve efficiencies.
The Company recorded a pre-tax restructuring and impairment charge of
$6.9 million in the fourth quarter of fiscal year 2001 relating to the
consolidation of three manufacturing facilities in the fourth quarter of fiscal
year 2001.
21
<PAGE>
Including the restructuring and impairment charge of $6.9 million in
2001, operating expenses increased $34.6 million to $287.6 million, or 31.8% of
net sales, in fiscal year 2001 from $253.0 million, or 29.6% of net sales, in
fiscal year 2000. This increase is primarily attributable to the expansion of
the retail segment and from increased employee benefits, energy and utility
costs.
Including the restructuring and impairment charge of $6.9 million in
2001, operating income was $126.0 million, or 13.9% of net sales, compared to
$147.6 million, or 17.2% of net sales, in fiscal year 2000. This represents a
decrease of $21.6 million, or 14.6%, primarily attributable to a lower gross
margin noted above, higher operating expenses resulting from the growth of the
retail segment and an increase in employee benefit, energy and utility costs,
partially offset by higher sales volumes and a higher percentage of retail sales
to total sales.
Including the restructuring and impairment charge of $6.9 million in
2001, total wholesale operating income was $100.5 million, or 14.2% of wholesale
net sales, compared to $132.5 million, or 19.2% of wholesale net sales, in
fiscal year 2000. Wholesale operating income decreased $32.0 million, or 24.2%,
in fiscal year 2001. This decrease was attributable to three fewer production
days in the twelve month period ending June 30, 2001 and from a lower gross
margin noted above.
Operating income for the retail segment increased by $2.6 million, or
12.7%, to $23.1 million, or 5.5% of net retail sales, from $20.5 million, or
5.5% of net retail sales, in fiscal year 2000. The increase in retail operating
income by Ethan Allen-owned stores is primarily attributable to increased sales
volume and a selective price increase effective February 2000, partially offset
by higher operating expenses related to the addition of new stores and higher
compensation costs necessary to strengthen the staffing of the retail segment.
Interest and other miscellaneous income of $2.8 million increased $2.4
million from $0.4 million in fiscal year 2000 mainly due to the gain recorded on
a real property transaction and from an increase in investment income.
Interest expense, including the amortization of deferred financing
costs, for fiscal year 2001 decreased by $0.5 million to $0.8 million, due to
lower debt balances and lower amortization of deferred financing costs.
Income tax expense of $48.4 million was recorded for the twelve months
ended June 30, 2001 as compared to $56.2 million for the twelve months ended
June 30, 2000. The Company's effective tax rate was 37.8% in fiscal year 2001
and 38.3% in fiscal year 2000. The decline in the effective income tax rate for
the year was the result of the implementation of various tax planning
strategies.
In fiscal year 2001, the Company recorded net income of $79.7 million,
a decrease of 12.0%, compared to $90.6 million in fiscal year 2000. Earnings per
diluted share of $1.98 decreased 10.0%, or $0.22 per diluted share, from $2.20
per diluted share in the prior year.
FINANCIAL CONDITION AND LIQUIDITY
The Company's principal sources of liquidity are cash flow from
operations and borrowing capacity under a revolving credit facility. Net cash
provided by operating activities totaled $125.3 million for fiscal year 2002 as
compared to $87.6 million in fiscal year 2001 and $104.9 million in fiscal year
2000. The increase in net cash provided by operating activities resulted,
principally, from lower inventory levels and an increase in customer deposits
offset, partially, by changes in other working capital balances during the
twelve months ended June 30, 2002 as compared to the same period in the prior
year. The majority of the decrease in inventory levels resulted from temporary
plant shutdowns during the last twelve months and reductions made in on-hand raw
materials. The increase in customer deposits resulted from retail store
acquisitions completed during the year.
22
<PAGE>
During fiscal year 2002, capital spending, exclusive of acquisitions,
totaled $31.1 million as compared to $38.5 million and $42.1 million in fiscal
2001 and 2000, respectively. The current level of capital spending is
principally attributable to a decline in manufacturing expansion and technology
improvements, partially offset by increased costs associated with new store
development and renovation. Capital expenditures in fiscal year 2003, exclusive
of acquisitions, are anticipated to be approximately $35.0 million. In addition,
the Company expects to incur expenditures for retail and other acquisitions
totaling $35.0 million during fiscal year 2003. The Company anticipates that
cash from operations will be sufficient to fund such capital expenditures and
acquisitions.
Net cash used in financing activities totaled $29.3 million in fiscal
year 2002 as compared to $15.0 million in fiscal year 2001 and $47.0 million in
fiscal year 2000. The increase in net cash used in financing activities during
fiscal 2002 is the result of an increase in payments to acquire treasury stock
and the absence of borrowing and repayment activity under the Company's
revolving credit facility. Total debt outstanding at June 30, 2002 was $9.3
million. At June 30, 2002 there were no revolving loans outstanding and $19.5
million of trade and standby letters of credit outstanding under the credit
facility. The Company had $105.5 million available under its revolving credit
facility at June 30, 2002.
In June 2002, Standard & Poor's ("S&P") raised its corporate and senior
unsecured credit ratings on Ethan Allen to "A-" from "BBB+". S&P citied the
Company's solid business position and operating performance, both stemming from
a well-known brand name, the effectiveness of its distribution through Ethan
Allen galleries, a strong product portfolio, efficient manufacturing and
low-cost position, as the primary factors considered in arriving at the rating
change.
The Company has been authorized by its Board of Directors to repurchase
its common stock from time to time, either directly or through agents, in the
open market at prices and on terms satisfactory to the Company. The Company also
repurchases shares of common stock from terminated or retiring employee's
accounts in the Ethan Allen Retirement Savings Plan and retires shares of
unvested restricted stock. All of the Company's common stock repurchases and
retirements are recorded as treasury stock and result in a reduction of
shareholders' equity. During fiscal years 2002, 2001 and 2000, the Company
repurchased and/or retired the following shares of its common stock:
2002 2001(1) 2000
----------- ---------- -----------
Common shares repurchased 1,059,226 61,006 1,928,350
Cost to repurchase common shares $31,865,423 $1,069,587 $49,605,555
Average price per share $30.08 $17.53 $25.72
(1) Includes the repurchase of 28,000 shares at $.01 per share previously
issued under the Company's Restricted Stock Award Plan. Excluding the
effect of these repurchases, the average price per share was $32.40.
The Company funded its purchases through cash from operations and
through revolver loan borrowings under its existing credit facility. As of June
30, 2002, the Company had a remaining Board authorization to purchase 1.7
million shares.
As of June 30, 2002, aggregate scheduled maturities of long-term debt
for each of the next five fiscal years are $0.1 million, $0.1 million, $4.7
million, $0.1 million and $0.1 million, respectively. Management believes that
its cash flow from operations, together with its other available sources of
liquidity, will be adequate to make all required payments of principal and
interest on its debt, to permit anticipated capital expenditures and to fund
working capital and other cash requirements. As of June 30, 2002, the Company
had working capital of $189.6 million and a current ratio of 2.47 to 1.
23
<PAGE>
IMPACT OF INFLATION
The Company does not believe that inflation has had a material impact
on its profitability during the last three fiscal years. In the past, the
Company has generally been able to increase prices to offset increases in
operating costs and effectively manage its working capital.
INCOME TAXES
At June 30, 2002, the Company has approximately $10.7 million of net
operating loss carryovers ("NOL's") for federal income tax purposes. The
Recapitalization in 1993 triggered an "ownership change" of the Company, as
defined in Section 382 of the Internal Revenue Code of 1986, as amended,
resulting in an annual limitation on the utilization of the NOL's by the Company
of approximately $3.9 million.
NEW ACCOUNTING PRONOUNCEMENTS
In October 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. While Statement 144 supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", it retains the fundamental provisions of that Statement. In
addition, the standard provides guidance on estimating cash flows when
performing a recoverability test, requires that a long-lived asset to be
disposed of, other than by sale, be classified as "held and used" until it is
disposed of and establishes more restrictive criteria to classify an asset as
"held for sale". SFAS No. 144 also supercedes Accounting Principles Bulletin
("APB") Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions", regarding the disposal of a
SEGMENT OF A BUSINESS (as previously defined in that Opinion), and amends
Accounting Research Bulletin ("ARB") No. 51, "Consolidated Financial
Statements", to eliminate the exception to consolidation for a subsidiary for
which control is likely to be temporary. Statement 144 was adopted by the
Company on July 1, 2002. The Company does not anticipate that adoption of the
standard will have a material effect on its financial position or results of
operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". The standard rescinds Statement 4 which required all gains and
loses from extinguishment of debt to be aggregated and, when material,
classified as an extraordinary item net of related income tax effect. Statement
145 also amends Statement 13 to require that certain lease modifications having
economic effects similar to sale-leaseback transactions be accounted for in the
same manner as sale-leaseback transactions. The Company adopted the provisions
of the standard related to the rescission of Statement 4 on July 1, 2002. The
provisions of the standard related to Statement 13 were adopted for transactions
occurring after May 15, 2002. The Company does not expect this Statement will
have a material effect on its financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" which addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force ("EITF") Issue 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". The standard
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. Examples of costs covered by the standard include lease
termination costs and certain employee severance costs that are associated with
a restructuring, discontinued operation, plant closing, or other exit or
disposal activity. The provisions of this Statement are required to be applied
to exit or disposal activities that are initiated after December 31, 2002. The
Company does not expect this Statement will have a material effect on its
financial position or results of operations.
24
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to interest rate risk primarily through its
borrowing activities. The Company's policy has been to utilize United States
dollar denominated borrowings to fund its working capital and investment needs.
Short-term debt, if required, is used to meet working capital requirements and
long-term debt is generally used to finance long-term investments. There is
inherent rollover risk for borrowings as they mature and are renewed at current
market rates. The extent of this risk is not quantifiable or predictable because
of the variability of future interest rates and the Company's future financing
requirements. At June 30, 2002, the Company had $0.1 million of short-term debt
outstanding and $9.2 million of total long-term debt outstanding.
The Company has one debt instrument outstanding with a variable
interest rate. This debt instrument has a principal balance of $4.6 million and
matures in 2004. Based on the principal outstanding in 2002, a one-percentage
point increase in the variable interest rate would not have had a significant
impact on the Company's 2002 interest expense.
Currently, the Company does not enter into financial instrument
transactions for trading or other speculative purposes or to manage interest
rate exposure.
25
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors and Shareholders
Ethan Allen Interiors Inc.:
We have audited the accompanying consolidated balance sheets of Ethan Allen
Interiors Inc. and Subsidiary (the "Company") as of June 30, 2002 and 2001, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the years in the three-year period ended June 30, 2002.
In connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule listed in the index under Item No.
14. The consolidated financial statements and financial statement schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on the consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Ethan Allen
Interiors Inc. and Subsidiary as of June 30, 2002 and 2001, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 2002, in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/ KPMG LLP
Stamford, Connecticut
August 7, 2002
26
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND 2001
(In thousands, except share data)
<TABLE>
<CAPTION>
2002 2001
--------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 75,688 $ 48,112
Accounts receivable, less allowance for
doubtful accounts of $2,019 at June 30,
2002 and $2,679 at June 30, 2001 32,845 33,055
Inventories, net (note 3) 174,147 176,036
Prepaid expenses and other current assets 18,731 18,085
Deferred income taxes (note 11) 17,345 14,789
-------- --------
Total current assets 318,756 290,077
Property, plant and equipment, net (note 4) 293,626 268,659
Intangible assets, net (note 5) 69,708 52,863
Other assets 6,665 7,519
-------- --------
Total assets $ 688,755 $ 619,118
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and
capital lease obligations (notes 6 and 7) $ 107 $ 131
Customer deposits 42,966 35,790
Accounts payable 38,027 27,998
Accrued compensation and benefits 30,190 27,766
Accrued expenses 17,838 16,169
-------- --------
Total current liabilities 129,128 107,854
Long-term debt (note 6) 9,214 9,356
Other long-term liabilities 2,066 2,712
Deferred income taxes (note 11) 37,158 34,413
-------- --------
Total liabilities 177,566 154,335
Shareholders' equity (notes 8, 9 and 10):
Class A common stock, par value $.01, 150,000,000
shares authorized, 45,252,880 shares issued at
June 30, 2002 and 45,138,046 shares issued at
June 30, 2001 453 451
Preferred stock, par value $.01, 1,055,000 shares
authorized, no shares issued and outstanding at
June 30, 2002 and 2001 - -
Additional paid-in capital 277,694 274,645
-------- --------
278,147 275,096
Less:
Treasury stock (at cost), 6,794,510 shares at
June 30, 2002 and 5,735,284 shares at June 30,
2001 (161,428) (129,562)
Retained earnings 394,470 319,249
-------- --------
Total shareholders' equity 511,189 464,783
-------- --------
Total liabilities and shareholders' equity $ 688,755 $ 619,118
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000
(In thousands, except per share data)
<TABLE>
<CAPTION>
2002 2001 2000
-------- -------- --------
<S> <C> <C> <C>
Net sales $892,288 $904,133 $856,171
Cost of sales 470,975 490,477 455,561
-------- -------- --------
Gross profit 421,313 413,656 400,610
Operating expenses:
Selling 163,122 160,394 144,327
General and administrative 123,168 120,309 108,702
Restructuring and impairment charge (note 2) 5,123 6,906 -
-------- -------- --------
Total operating expenses 291,413 287,609 253,029
-------- -------- --------
Operating income 129,900 126,047 147,581
Interest and other miscellaneous
income, net 2,984 2,814 443
Interest and other related financing
costs 640 758 1,254
-------- -------- --------
Income before income taxes 132,244 128,103 146,770
Income tax expense (note 11) 49,988 48,423 56,200
-------- -------- --------
Net income $ 82,256 $ 79,680 $ 90,570
======= ======= =======
Per share data (notes 8 and 9):
Net income per basic share $ 2.12 $ 2.02 $ 2.25
======= ======= =======
Basic weighted average common shares 38,828 39,390 40,301
Net income per diluted share $ 2.06 $ 1.98 $ 2.20
======= ======= =======
Diluted weighted average common shares 39,942 40,321 41,198
Dividends declared per common share $ 0.18 $ 0.16 $ 0.16
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000
(In thousands)
<TABLE>
<CAPTION>
2002 2001 2000
-------- -------- --------
<S> <C> <C> <C>
Operating activities:
Net income $ 82,256 $ 79,680 $ 90,570
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 19,314 20,220 16,975
Restructuring and impairment charge 4,134 6,356 -
Compensation expense related to
restricted stock award 140 552 898
Provision for deferred income taxes 189 (3,339) (1,806)
Other non-cash (benefit) charge (1,103) (2,289) (424)
Change in assets and liabilities, net of the
effects of acquired and divested businesses:
Accounts receivable (2,390) 1,334 (783)
Inventories 16,641 (18,964) (9,243)
Prepaid and other current assets 1,364 (1,665) (3,181)
Other assets 401 (1,528) (973)
Customer deposits 7,176 (6,732) 11,312
Income taxes and accounts payable (4,074) 5,760 (5,857)
Accrued expenses 1,921 7,083 7,140
Other liabilities (646) 1,119 223
------- ------- -------
Net cash provided by operating activities 125,323 87,587 104,851
------- ------- -------
Investing activities:
Proceeds from the disposal of property,
plant, and equipment 4,873 9,214 1,112
Capital expenditures (31,078) (38,516) (42,065)
Acquisitions (42,403) (9,722) (12,631)
Other 143 532 805
------- ------- -------
Net cash used in investing activities (68,465) (38,492) (52,779)
------- ------- -------
Financing activities:
Borrowings on revolving credit facility - 1,500 78,000
Payments on revolving credit facility - (9,500) (70,000)
Other payments on long-term debt and
capital leases (166) (420) (768)
Payments to acquire treasury stock (24,668) (1,069) (49,606)
Net proceeds from issuance of common stock 1,753 759 2,351
Increase in deferred financing costs - - (524)
Dividends paid (6,201) (6,277) (6,469)
------- -------- -------
Net cash used in financing activities (29,282) (15,007) (47,016)
------- ------- -------
Net increase in cash and cash equivalents 27,576 34,088 5,056
Cash and cash equivalents - beginning of year 48,112 14,024 8,968
------- ------- -------
Cash and cash equivalents - end of year $ 75,688 $ 48,112 $ 14,024
======= ======= =======
Supplemental disclosure:
Cash payments for:
Income taxes $ 44,815 $ 50,365 $ 61,319
Interest 522 618 980
See accompanying notes to consolidated financial statements.
</TABLE>
29
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000
(In thousands, except share data)
<TABLE>
<CAPTION>
Additional
Common Paid-in Treasury Retained
Stock Capital Stock Earnings Total
------ ---------- -------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1999 $ 447 $267,286 $(78,887) $161,689 $350,535
Issuance of 414,593 shares of
common stock upon the exercise
of stock options and restricted
stock award compensation (note 10) 4 3,245 - - 3,249
Purchase of 1,928,350 shares of
treasury stock (note 8) - - (49,606) - (49,606)
Dividends declared on common stock - - - (6,418) (6,418)
Tax benefit associated with the
exercise of employee stock
options and warrants - 2,179 - - 2,179
Net income - - - 90,570 90,570
---- ------- ------ ------- -------
Balance at June 30, 2000 451 272,710 (128,493) 245,841 390,509
Issuance of 56,662 shares of
common stock upon the exercise
of stock options and restricted
stock award compensation (note 10) - 1,311 - - 1,311
Purchase of 61,006 shares of
treasury stock (note 8) - - (1,069) - (1,069)
Dividends declared on common stock - - - (6,272) (6,272)
Tax benefit associated with the
exercise of employee stock
options and warrants - 624 - - 624
Net income - - - 79,680 79,680
---- ------- ------- ------- -------
Balance at June 30, 2001 451 274,645 (129,562) 319,249 464,783
Issuance of 114,834 shares of
common stock upon the exercise
of stock options and restricted
stock award compensation (note 10) 2 1,891 - - 1,893
Purchase of 1,059,226 shares of
treasury stock - - (31,866) - (31,866)
Dividends declared on common stock - - - (7,035) (7,035)
Charge for early vesting of stock
options - 137 - - 137
Tax benefit associated with the
exercise of employee stock
options and warrants (note 8) - 1,021 - - 1,021
Net income - - - 82,256 82,256
---- ------- ------- ------- -------
Balance at June 30, 2002 $ 453 $277,694 $(161,428) $394,470 $511,189
==== ======= ======= ======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
30
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Ethan Allen Interiors Inc. (the "Company") is a Delaware corporation
incorporated on May 25, 1989. The consolidated financial statements
include the accounts of the Company, its wholly-owned subsidiary Ethan
Allen Inc. ("Ethan Allen") and Ethan Allen's subsidiaries. All
intercompany accounts and transactions have been eliminated in the
consolidated financial statements. All of Ethan Allen's capital stock
is owned by the Company. The Company has no other assets or operating
results other than those associated with its investment in Ethan Allen.
NATURE OF OPERATIONS
The Company, through its wholly-owned subsidiary, is a leading
manufacturer and retailer of quality home furnishings and sells a full
range of furniture products and decorative accessories through an
exclusive network of 316 retail stores, of which 103 are Ethan
Allen-owned and 213 are independently owned. The Company's retail
stores are primarily located in North America, with 20 additional
stores located abroad. Ethan Allen has 17 manufacturing facilities,
including 3 sawmill operations, located throughout the United States.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years' financial
statements in order to conform to the current year's presentation.
These changes did not have a material impact on previously reported
results of operations or shareholders' equity.
CASH EQUIVALENTS
The Company considers all highly liquid cash investments with original
maturities of three months or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation of plant
and equipment is provided over the estimated useful lives of the
respective assets on a straight-line basis. Estimated useful lives of
the respective assets generally range from twenty to forty years for
buildings and improvements and from three to twenty years for machinery
and equipment.
31
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RETAIL STORE ACQUISITIONS
The Company accounts for the acquisition of retail stores and related
assets in accordance with SFAS No. 141, "Business Combinations", which
requires application of the purchase method for all business
combinations initiated after June 30, 2001. Accounting for these
transactions as purchase business combinations requires the allocation
of purchase price paid to the assets acquired and liabilities assumed
based on their fair values as of the date of the acquisition. The
amount paid in excess of the fair value of net assets acquired is
accounted for as goodwill.
INTANGIBLE ASSETS
The Company's intangible assets are comprised, primarily, of goodwill,
which represents the excess of cost over the fair value of net assets
acquired, product technology, and trademarks. On July 1, 2001, the
Company adopted the provisions of SFAS No. 142, "Goodwill and Other
Intangible Assets". In re-assessing the useful lives of its goodwill
and other intangible assets upon adoption of the standard, the Company
determined these assets to have indefinite useful lives. Accordingly,
amortization of these assets ceased on that date. Prior to July 1,
2001, these assets were amortized on a straight-line basis over forty
years.
Statement 142 requires that the Company annually perform an impairment
analysis to assess the recoverability of the recorded balance of
goodwill and other intangible assets. The provisions of the Statement
indicate that the impairment test should be conducted more frequently
if events occur or circumstances change that would more likely than not
reduce the fair value of a reporting unit (as defined) below its
carrying value. The Company performed an initial impairment analysis
upon adoption of the standard. No impairment losses were recorded as a
result of that analysis.
FINANCIAL INSTRUMENTS
The carrying value of the Company's financial instruments approximates
fair value.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
REVENUE RECOGNITION
Sales are recorded to dealers when goods are shipped, at which point
title has passed. Sales made through Ethan Allen-owned stores are
recognized when delivery is made to the customer.
SHIPPING AND HANDLING COSTS
Ethan Allen's policy is to sell its products at the same delivered cost
to all retailers nationwide, regardless of their shipping point. Costs
incurred to deliver finished goods to the consumer are expensed and
recorded in selling, general and administrative expenses. Shipping and
handling costs were $60.4 million, $59.8 million, and $54.4 million for
fiscal years 2002, 2001, and 2000, respectively.
32
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ADVERTISING COSTS
Advertising costs are expensed when first aired or distributed.
Advertising costs for the fiscal years 2002, 2001 and 2000, were $44.2
million, $45.9 million, and $44.4 million, respectively. Prepaid
advertising costs at June 30, 2002 and 2001 were $4.2 million and $4.3
million, respectively.
CLOSED STORE EXPENSES
Future expenses, such as rent and real estate taxes, net of expected
lease or sublease recovery, which will be incurred subsequent to
vacating a closed Ethan Allen-owned store, are charged to operations
upon a formal decision to close the store.
EARNINGS PER SHARE
The Company computes basic earnings per share by dividing net income by
the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflect the potential dilution that
could occur if all potentially dilutive common shares were exercised.
STOCK COMPENSATION
As permitted by SFAS No. 123 "Accounting for Stock Based Compensation",
the Company follows the provisions of APB No. 25, "Accounting for Stock
Issued to Employees", and related interpretations, in accounting for
compensation expense related to the issuance of stock options.
COMPREHENSIVE INCOME
The Company does not have any components of comprehensive income as
defined under SFAS No. 130, "Reporting Comprehensive Income".
DERIVATIVE INSTRUMENTS
The Company adopted SFAS No. 133, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities" and SFAS No. 138, which
later amended Statement 133, in fiscal year 2001. Upon review of its
current contracts, the Company has determined that it has no derivative
instruments as defined under these standards.
NEW ACCOUNTING STANDARDS
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" which addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets. While Statement 144 supercedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of", it retains the fundamental provisions of that Statement.
In addition, the standard provides guidance on estimating cash flows
when performing a recoverability test, requires that a long-lived asset
to be disposed of, other than by sale, be classified as "held and used"
until it is disposed of and establishes more restrictive criteria to
classify an asset as "held for sale". SFAS No. 144 also supercedes APB
Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions", regarding
the disposal of a SEGMENT OF A BUSINESS (as previously defined in that
Opinion), and amends ARB No. 51, "Consolidated Financial Statements",
to eliminate the exception to consolidation for a subsidiary for which
control is likely to be temporary. Statement 144 was adopted by the
Company on July 1, 2002. The Company does not anticipate that adoption
of the standard will have a material effect on its financial position
or results of operations.
33
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections". The standard rescinds Statement 4 which
required all gains and loses from extinguishment of debt to be
aggregated and, when material, classified as an extraordinary item net
of related income tax effect. Statement 145 also amends Statement 13 to
require that certain lease modifications having economic effects
similar to sale-leaseback transactions be accounted for in the same
manner as sale-leaseback transactions. The Company adopted the
provisions of the standard related to the rescission of Statement 4 on
July 1, 2002. The provisions of the standard related to Statement 13
were adopted for transactions occurring after May 15, 2002. The Company
does not expect this Statement will have a material effect on its
financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" which addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF Issue 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". The
standard requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. Examples of costs covered by
the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. The
provisions of this Statement are required to be applied to exit or
disposal activities that are initiated after December 31, 2002. The
Company does not expect this Statement will have a material effect on
its financial position or results of operations.
(2) RESTRUCTURING AND IMPAIRMENT CHARGE
During each of the last two fiscal years, the Company developed and
executed plans to consolidate its manufacturing operations as part of
an overall strategy to maximize production efficiencies and maintain
its competitive advantage. In the fourth quarter of fiscal 2002, the
Company initiated a plan which involved the closure of one of its
manufacturing facilities as well as the rough mill operation of a
separate facility. Closure of these facilities resulted in the
elimination of approximately 220 employees; 150 employees effective
June 29, 2002, and 70 employees expected to be terminated during the
first quarter of fiscal 2003. A pre-tax restructuring and impairment
charge of $5.1 million was recorded for costs associated with these
plant closings, of which $2.0 million principally relates to employee
severance and benefits costs and plant exit costs, and $3.1 million
relates to a fixed asset impairment charge, primarily for properties
and machinery and equipment of the closed facilities.
In the fourth quarter of fiscal 2001, the Company announced the closure
of three of its manufacturing facilities and the elimination of
approximately 350 employees effective August 6, 2001. A pre-tax
restructuring and impairment charge of $6.9 million was recorded for
costs associated with the plant closings, of which $3.3 million
principally relates to employee severance and benefits costs and plant
exit costs, and $3.6 million relates to a fixed asset impairment
charge, primarily for properties and machinery and equipment of the
closed facilities.
As of June 30, 2002, restructuring reserves totaling $1.2 million were
included in the Consolidated Balance Sheets as an accrued expense in
current liabilities. In addition, total impairment charges of $6.7
million ($3.1 million and $3.6 million in 2002 and 2001, respectively)
were recorded to reduce certain property, plant and equipment to net
realizable value.
34
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Activity in the Company's restructuring reserves is summarized as
follows (in thousands):
<TABLE>
<CAPTION>
FISCAL 2002 RESTRUCTURING
Original Cash Non-cash
Charges Payments Utilized Total
-------- -------- -------- ------
<S> <C> <C> <C> <C>
Employee severance and
other related payroll
and benefit costs $ 1,847 $ (989) $ - $ 858
Plant exit costs and other 171 - - 171
Write-down of long-lived
assets 3,105 - (3,105) -
------ ------ ------ ------
Balance as of June 30, 2002 $ 5,123 $ (989) $(3,105) $ 1,029
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
FISCAL 2001 RESTRUCTURING
Original Cash Non-cash
Charges Payments Utilized Total
-------- -------- -------- ------
<S> <C> <C> <C> <C>
Employee severance and
other related payroll
and benefit costs $ 2,974 $(2,916) $ - $ 58
Plant exit costs and other 332 (258) - 74
Write-down of long-lived
assets 3,600 - (3,600) -
------ ------ ------ ------
Balance as of June 30, 2002 $ 6,906 $(3,174) $(3,600) $ 132
====== ====== ====== ======
</TABLE>
(3) INVENTORIES
Inventories at June 30 are summarized as follows (in thousands):
2002 2001
-------- --------
Finished goods $123,906 $115,661
Work in process 15,418 19,521
Raw materials 34,823 40,854
------- -------
$174,147 $176,036
======= =======
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at June 30 are summarized as follows
(in thousands):
2002 2001
-------- --------
Land and improvements $ 54,771 $ 41,382
Buildings and improvements 230,089 214,972
Machinery and equipment 152,860 146,193
------- -------
437,720 402,547
Less: accumulated depreciation (144,094) (133,888)
------- -------
$293,626 $268,659
======= =======
(5) INTANGIBLE ASSETS
On July 1, 2001, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets". As of June 30, 2002, the Company had goodwill,
including product technology, (net of accumulated amortization) of
$50.0 million and other identifiable intangible assets (net of
accumulated amortization) of $19.7 million. Comparable balances as of
June 30, 2001 were $33.1 million and $19.7 million, respectively.
Goodwill in the wholesale and retail segments was $27.5 million and
$22.5 million, respectively, at June 30, 2002 and $26.1 million and
$7.0 million, respectively, at June 30, 2001. The wholesale segment, at
both dates, includes additional intangible assets of $19.7 million.
These assets consist of Ethan Allen trade names which were formerly
being amortized over 40 years. The Company has re-assessed the useful
lives of goodwill and other intangible
35
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
assets and both were determined to have indefinite useful lives. As
such, amortization of these assets ceased on July 1, 2001. No
impairment losses were recorded on these intangible assets due to the
adoption of Statement 142.
The following table reconciles the Company's reported net income and
earnings per share with pro forma balances from previous periods
adjusted to exclude goodwill amortization, which is no longer required
under Statement 142. The current year's net income and earnings per
share are presented for comparative purposes only (in thousands, except
per share data):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------
2002 2001 2000
------- ------- -------
<S> <C> <C> <C>
Net Income:
Reported net income $82,256 $79,680 $90,570
Add back: Goodwill amortization,
after-tax - 694 651
Add back: Intangible asset
amortization, after-tax - 439 435
------ ------ ------
Adjusted net income $82,256 $80,813 $91,656
====== ====== ======
Basic Earnings per Share:
Reported earnings per share $ 2.12 $ 2.02 $ 2.25
Goodwill amortization - 0.02 0.02
Intangible asset amortization - 0.01 0.01
------ ------ ------
Adjusted earnings per share $ 2.12 $ 2.05 $ 2.28
====== ====== ======
Diluted Earnings per Share:
Reported earnings per share $ 2.06 $ 1.98 $ 2.20
Goodwill amortization - 0.02 0.02
Intangible asset amortization - 0.01 0.01
------ ------ ------
Adjusted earnings per share $ 2.06 $ 2.01 $ 2.23
====== ====== ======
</TABLE>
(6) BORROWINGS
Total debt obligations at June 30 consist of the following (in
thousands):
2002 2001
------- -------
Revolving Credit Facility $ - $ -
Industrial Revenue Bonds, 2.45% -
7.50%, maturing at various dates
through 2011 8,455 8,455
Other 866 1,032
------ ------
Total debt 9,321 9,487
Less: current maturities and short-
term capital lease obligations 107 131
------ ------
Long-term debt $ 9,214 $ 9,356
====== ======
The Company has a $125.0 million unsecured Revolving Credit Facility
(the "Credit Agreement") with J. P. Morgan Chase & Co. as
administrative agent and Fleet Bank, NA and Wachovia Bank, NA as
co-documentation agents. The Credit Agreement includes sub-facilities
for trade and standby letters of credit of $25.0 million and swingline
loans of $3.0 million. Revolving loans under the Credit Agreement bear
interest at J. P. Morgan Chase & Co.'s Alternative Base Rate, or
adjusted LIBOR plus 0.625%, and is subject to adjustment arising from
changes in the credit rating of Ethan Allen's senior unsecured debt.
The Credit Agreement provides for the payment of a commitment fee equal
to 0.15% per annum on the average daily unused amount of the revolving
credit commitment. The Company is also required to pay a fee equal to
0.75% per annum on the average daily letters of credit outstanding. At
June 30, 2002 there were no revolving loans outstanding and $19.5
million of trade and standby letters of credit outstanding under the
Credit Agreement. Remaining available borrowing capacity under the
Credit Agreement was $105.5 million at
36
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002. For fiscal years ended June 30, 2002, 2001 and 2000 the
weighted-average interest rates were 4.45%, 5.55%, and 6.22%,
respectively.
The Credit Agreement matures in August of 2004 and there are no minimum
repayments required during the term of the facility. The revolving
loans may be borrowed, repaid and reborrowed over the term of the
facility until final maturity.
The Credit Agreement contains various covenants which limit the ability
of the Company and its subsidiaries to incur debt, engage in mergers
and consolidations, make restricted payments, sell certain assets, make
investments and issue stock. The Company is also required to meet
certain financial covenants including consolidated net worth, fixed
charge coverage and leverage ratios. As of June 30, 2002, the Company
had satisfactorily complied with all covenants related to the Credit
Agreement.
The Company has loan commitments in the aggregate amount of
approximately $1.0 million related to the modernization of its Beecher
Falls, Vermont manufacturing facility. Loans made pursuant to these
commitments bear interest at rates ranging from 3.0% to 5.5% and have
maturities of 10 to 30 years. The loans have a first and second lien in
respect of equipment financed by such loans and a first and second
mortgage interest in respect of the building, the construction of which
was financed by such loans.
Aggregate scheduled maturities of long-term debt for each of the five
fiscal years subsequent to June 30, 2002, and thereafter are as follows
(in thousands):
FISCAL YEAR ENDING JUNE 30:
---------------------------
2003 . . . . . . . . . . . . $ 107
2004 . . . . . . . . . . . . 61
2005 . . . . . . . . . . . . 4,662
2006 . . . . . . . . . . . . 64
2007 . . . . . . . . . . . . 66
Subsequent to 2007 . . . . . 4,361
(7) LEASES
Ethan Allen leases real property and equipment under various operating
lease agreements expiring through 2027. Leases covering retail outlets
and equipment generally require, in addition to stated minimums,
contingent rentals based on retail sales and equipment usage.
Generally, the leases provide for renewal for various periods at
stipulated rates.
Future minimum payments by year, and in the aggregate, under
non-cancelable operating leases consisted of the following at June 30,
2002 (in thousands):
FISCAL YEAR ENDING JUNE 30:
---------------------------
2003 $ 22,093
2004 20,235
2005 18,565
2006 16,219
2007 14,436
Subsequent to 2007 46,438
-------
Total minimum lease payments $137,986
=======
The above amounts will be offset in the aggregate by minimum future
rentals from subleases of $14.6 million.
37
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Total rent expense for the fiscal years ended June 30 was as follows
(in thousands):
2002 2001 2000
-------- -------- --------
Basic rentals under operating
leases $ 21,890 $ 18,496 $ 16,102
Contingent rentals under
operating leases 729 895 1,972
------- ------- -------
22,619 19,391 18,074
Less: sublease rent 3,307 3,084 3,314
------- ------- -------
$ 19,312 $ 16,307 $ 14,760
======= ======= =======
(8) SHAREHOLDERS' EQUITY
The Company's authorized capital stock consists of (a) 150,000,000
shares of Common Stock, par value $.01 per share, (b) 600,000 shares of
Class B Common Stock, par value $.01 per share, and (c) 1,055,000
shares of Preferred Stock, par value $.01 per share, of which (i)
30,000 shares have been designated Series A Redeemable Convertible
Preferred Stock, (ii) 30,000 shares have been designated Series B
Redeemable Convertible Preferred Stock, (iii) 155,010 shares have been
designated as Series C Junior Participating Preferred Stock, and (iv)
the remaining 839,990 shares may be designated by the Board of
Directors with such rights and preferences as they determine (all such
preferred stock, collectively, the "Preferred Stock"). As of June 30,
2002 and 2001, there were no shares of Preferred Stock or Class B
Common Stock issued or outstanding.
The Company has been authorized by its Board of Directors to repurchase
its common stock from time to time, either directly or through agents,
in the open market at prices and on terms satisfactory to the Company.
The Company also repurchases shares of common stock from terminated or
retiring employee's accounts in the Ethan Allen Retirement Savings Plan
and retires shares of unvested restricted stock. All of the Company's
common stock repurchases and retirements are recorded as treasury stock
and result in a reduction of shareholders' equity. During fiscal years
2002, 2001 and 2000 the Company repurchased and/or retired the
following shares of its common stock:
<TABLE>
<CAPTION>
2002 2001(1) 2000
----------- ------------ -----------
<S> <C> <C> <C>
Common shares repurchased 1,059,226 61,006 1,928,350
Cost to repurchase common shares $31,865,423 $1,069,587 $49,605,555
Average price per share $30.08 $17.53 $25.72
(1) Includes the repurchase of 28,000 shares at $.01 per share
previously issued under the Company's Restricted Stock Award
Plan. Excluding the effect of these repurchases, the average
price per share was $32.40.
</TABLE>
The Company funded its purchases through cash from operations and
through revolver loan borrowings under the Credit Agreement. As of June
30, 2002, the Company had a remaining Board authorization to purchase
1.7 million shares.
On May 20, 1996, the Board of Directors adopted a Stockholder Rights
Plan and declared a dividend of one Right for each outstanding share of
common stock as of July 10, 1996. Each Right entitles its holder, under
certain circumstances, to purchase one one-hundredth of a share of the
Company's Series C Junior Participating Preferred Stock at a price of
$41.67 on a post split basis. The Rights may not be exercised until 10
days after a person or group acquires 15% or more of the Company's
common stock, or 15 days after the commencement or the announcement of
the intent to commence a tender offer which, if consummated, would
result in a 15% or more ownership of the Company's common stock. Until
then, separate Rights certificates will not be issued, nor will the
Rights be traded separately from the stock.
38
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Should an acquirer become the beneficial owner of 15% of the Company's
common stock, and under certain additional circumstances, the Company's
stockholders (other than the acquirer) would have the right to receive
in lieu of the Series C Junior Participating Preferred Stock, a number
of shares of the Company's common stock, or in stock of the surviving
enterprise if the Company is acquired, having a market value equal to
two times the purchase price per share. The Rights will expire on May
31, 2006, unless redeemed prior to that date. The redemption price is
$0.01 per Right. The Board of Directors may redeem the Rights at its
option any time prior to the announcement that a person or group has
acquired 15% or more of the Company's common stock.
(9) EARNINGS PER SHARE
The following table sets forth the calculation of weighted average
shares for the fiscal years ended June 30 (in thousands):
2002 2001 2000
------ ------ ------
Weighted average common shares outstanding
for basic calculation 38,828 39,390 40,301
Add: Dilutive effect of stock options and
warrants 1,114 931 897
------ ------ ------
Weighted average common shares outstanding,
adjusted for diluted calculation 39,942 40,321 41,198
====== ====== ======
In 2002 and 2000, stock options to purchase 67,825 and 986,600 shares,
respectively, had exercise prices which exceeded the average market
price for each corresponding period. These options have been excluded
from the respective diluted earnings per share calculation as their
impact is anti-dilutive. No such anti-dilutive stock options existed in
2001.
(10) EMPLOYEE STOCK PLANS
The Company has reserved 7,419,699 shares of Common Stock for issuance
pursuant to the Company's stock option and warrant plans as follows:
1992 STOCK OPTION PLAN
The 1992 Stock Option Plan provides for the grant of options to
employees and non-employee directors to purchase shares of Common Stock
that are either qualified or non-qualified under Section 422 of the
Internal Revenue Code, as well as stock appreciation rights on such
options. The awarding of such options is determined by the Compensation
Committee of the Board of Directors after consideration of
recommendations proposed by the Chief Executive Officer. The options
awarded to employees vest 25% per year over a four-year period and are
exercisable at the market value of the Common Stock at the date of
grant. The maximum number of shares of Common Stock reserved for
issuance under the 1992 Stock Option Plan is 5,490,597 shares.
In connection with the 1992 Stock Option Plan, the following two stock
award plans have also been established:
RESTRICTED STOCK AWARD
As of July 1, 1994 and for each successive year through July 1, 1998,
an annual award of 30,000 shares of restricted stock was granted to Mr.
Kathwari, the President and Chief Executive Officer, with the vesting
based on performance of the Company's stock price during the three-year
period after grant as compared to the Standard and Poors 500 index.
Under the discretion of the Compensation Committee, Mr. Kathwari has
been deemed vested in 92,000 shares as of June 30, 2002.
39
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCK UNIT AWARD
During fiscal year 1998, the Company established a book account for Mr.
Kathwari, which will be credited with 21,000 Stock Units as of July 1
of each year, commencing July 1, 1997, for a total of up to 105,000
Stock Units, over the term of Mr. Kathwari's employment agreement, with
an additional 21,000 Stock Units to be credited in connection with each
of the two one-year extensions. Following the termination of Mr.
Kathwari's employment, Mr. Kathwari will receive shares of Common Stock
equal to the number of Stock Units credited to the account.
INCENTIVE STOCK OPTION PLAN
In 1991, pursuant to the Incentive Stock Option Plan, the Company
granted to members of management options to purchase 829,542 shares of
Common Stock at an exercise price of $5.50 per share. These options
vested twenty percent per year over a five-year period.
MANAGEMENT WARRANTS
Warrants to purchase 699,560 shares of Common Stock were granted to
certain key members of management during fiscal years 1991 and 1992.
The warrants have been fully earned and were exercisable at $1.23 per
share.
Stock option and warrant activity during fiscal years 2002, 2001 and
2000 was as follows:
NUMBER OF SHARES
---------------------------------------------
92 Stock Incentive Management
Option Plan Options Warrants
----------- --------- ----------
Options Outstanding
at June 30, 1999 3,109,475 295,857 44,688
Granted in 2000 395,290 - -
Exercised in 2000 (88,063) (281,850) (44,680)
Canceled in 2000 (33,112) (7) (8)
--------- -------- -------
Options Outstanding
at June 30, 2000 3,383,590 14,000 -
Granted in 2001 35,225 - -
Exercised in 2001 (67,882) (6,000) -
Canceled in 2001 (55,658) - -
--------- -------- -------
Options Outstanding
at June 30, 2001 3,295,275 8,000 -
Granted in 2002 94,625 - -
Exercised in 2002 (106,846) (8,000) -
Canceled in 2002 (16,073) - -
--------- -------- -------
Options Outstanding
at June 30, 2002 3,266,981 - -
========= ======== =======
The following table summarizes the stock awards outstanding at June
30, 2002:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Range of Options Remaining Exercise
Prices Outstanding Life Price
---------------- ------------ --------- --------
<S> <C> <C> <C> <C>
1992 Stock Option Plan $ 6.00 to $ 6.50 1,089,075 2.7 yrs $ 6.36
$14.50 to $18.21 90,355 4.7 yrs $15.14
$21.17 to $25.00 1,009,856 5.8 yrs $22.06
$26.25 to $28.31 860,126 5.5 yrs $27.42
$29.23 to $33.78 137,744 7.3 yrs $31.44
$38.00 to $41.59 79,825 9.7 yrs $39.17
---------
3,266,981
=========
</TABLE>
40
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the number of shares exercisable at
June 30, 2002:
Weighted
Number of Average
Range of Shares Exercise
Prices Exercisable Price
---------------- ----------- ---------
1992 Stock Option Plan $ 6.00 to $ 6.50 986,217 $ 6.37
$14.50 to $18.21 90,355 $15.14
$21.17 to $25.00 893,858 $21.68
$26.25 to $28.31 826,851 $27.44
$29.23 to $33.78 76,167 $31.70
$38.00 to $41.59 125 $41.59
---------
2,873,573
=========
Had compensation costs related to the issuance of stock options under
the Company's 1992 Stock Option Plan been determined based on the
estimated fair value at the grant dates for awards under SFAS No. 123,
the Company's net income end earnings per share for the fiscal years
ended June 30, 2002, 2001 and 2000 would have been reduced to the pro
forma amounts listed below, (in thousands, except per share data):
2002 2001 2000
------- -------- -------
NET INCOME
As reported $82,256 $79,680 $90,570
Pro forma 81,017 78,517 86,630
NET INCOME PER BASIC SHARE
As reported $2.12 $2.02 $2.25
Pro forma 2.09 1.99 2.15
NET INCOME PER DILUTED SHARE
As reported $2.06 $1.98 $2.20
Pro forma 2.03 1.95 2.10
The per share weighted average fair value of stock options granted
during fiscal 2002, 2001 and 2000 was $16.06, $13.60, and $12.24,
respectively. The fair value of each stock option grant was estimated
on the date of grant using the Black-Scholes option-pricing model with
the following assumptions: weighted average risk-free interest rates of
4.50%, 5.39%, and 6.22% for fiscal 2002, 2001 and 2000, respectively;
dividend yield of 0.48%, 0.53%, and 0.61% for fiscal 2002, 2001 and
2000, respectively; expected volatility of 43.9%, 45.0%, and 45.9% in
fiscal 2002, 2001 and 2000, respectively; and expected lives of five
years for each.
(11) INCOME TAXES
Total income taxes were allocated as follows (in thousands):
2002 2001 2000
------- -------- -------
Income from operations $ 49,988 $ 48,423 $ 56,200
Stockholders' equity (1,021) (624) (2,179)
------- ------- -------
$ 48,967 $ 47,799 $ 54,021
======= ======= =======
The income taxes credited to stockholders' equity relate to the tax
benefit arising from the exercise of employee stock options.
41
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income tax expense (benefit) attributable to income from operations
consists of the following for the fiscal years ended June 30 (in
thousands):
2002 2001 2000
-------- -------- --------
Current:
Federal $ 44,548 $ 46,513 $ 49,934
State 5,251 5,249 8,072
------- ------- -------
Total current 49,799 51,762 58,006
------- ------- -------
Deferred:
Federal 180 (3,157) (1,650)
State 9 (182) (156)
------- ------- -------
Total deferred 189 (3,339) (1,806)
------- ------- -------
Income tax expense $ 49,988 $ 48,423 $ 56,200
======= ======= =======
The following is a reconciliation of expected income taxes (computed by
applying the Federal statutory rate to income before taxes) to actual
income tax expense (in thousands):
2002 2001 2000
-------- -------- --------
Computed "expected" income
tax expense $ 46,285 $ 44,836 $ 51,370
State income taxes, net of
federal income tax benefit 3,126 3,162 5,247
Goodwill amortization 109 265 143
Other, net 468 160 (560)
------- ------- -------
Actual income tax expense $ 49,988 $ 48,423 $ 56,200
======= ======= =======
The significant components of the deferred tax expense (benefit) are
as follows (in thousands):
2002 2001 2000
-------- -------- --------
Deferred tax expense (benefit) $ (1,268) $ (4,795) $ (3,309)
Utilization of net operating
loss carryforwards 1,457 1,456 1,503
------- ------- -------
Total deferred tax expense (benefit) $ 189 $ (3,339) $ (1,806)
======= ======= =======
The components of the net deferred tax liability as of June 30 are as
follows (in thousands):
2002 2001
-------- --------
Deferred tax assets:
Accounts receivable $ 923 $ 1,194
Inventories 4,407 3,154
Other liabilities and reserves 12,015 10,441
Net operating loss carryforwards 4,076 5,533
------- -------
Total deferred tax asset 21,421 20,322
------- -------
Deferred tax liabilities:
Property, plant and equipment 23,192 24,202
Intangible assets other than goodwill 13,354 13,327
Non-deductible temporary differences
arising as a result of Section 481a
changes in accounting methods 4,102 1,050
Other 586 1,367
------- -------
Total deferred tax liability 41,234 39,946
------- -------
Net deferred tax liability $ 19,813 $ 19,624
======= =======
The Company has tax operating loss carryforwards of approximately $10.7
million at June 30, 2002, of which $0.1 million expires in 2007 and
$10.6 million expires in 2008. Pursuant to Section 382 of the Internal
Revenue Code, the Company's utilization of the net operating loss
carryforwards is subject to an annual limitation of approximately $3.9
million.
Management believes that the results of future operations will generate
sufficient taxable income to realize the deferred tax assets.
42
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) EMPLOYEE RETIREMENT PROGRAMS
THE ETHAN ALLEN RETIREMENT SAVINGS PLAN
The Ethan Allen Retirement Savings Plan (the "Plan") is a defined
contribution plan which is offered to substantially all employees of
the Company who have completed three consecutive months of service
regardless of hours worked.
Ethan Allen may, at its discretion, make a matching contribution to the
401(k) portion of the Plan on behalf of each participant, provided the
contribution does not exceed the lesser of 50% of the participant's
contribution or $1,000 per participant per Plan year. Total profit
sharing and 401(k) company match expense was $5.1 million in 2002, $5.5
million in 2001, and $3.2 million in 2000.
OTHER RETIREMENT PLANS AND BENEFITS
Ethan Allen provides additional benefits to selected members of senior
and middle management in the form of previously entered deferred
compensation arrangements and a management cash bonus and other
incentive program. The total cost of these benefits was $4.2 million,
$5.0 million, and $4.4 million in 2002, 2001 and 2000, respectively.
(13) LITIGATION
The Company has been named as a potentially responsible party ("PRP")
for the cleanup of three active sites currently listed or proposed for
inclusion on the National Priorities List ("NPL") under the
Comprehensive Environmental Response, Compensation and Liability Act of
1980 ("CERCLA"). The Company has resolved its liability at one of the
sites by completing remedial action activities. With regard to the
other two sites, the Company does not anticipate incurring significant
cost as it believes that it is not a major contributor based on the
very small volume of waste generated by the Company in relation to
total volume at the site. However, liability under CERCLA may be joint
and several. Additionally, the Company has recently been notified by
the State of New York that it may be a PRP in a separate, unrelated
matter. As a result, the extent of any adverse effect on the Company's
financial condition, results of operations, or cash flows with respect
to this matter cannot be reasonably estimated at this time.
(14) RELATED PARTY TRANSACTIONS
On August 31, 2001, the Company acquired certain assets associated with
the retail operations of 6 Ethan Allen Home Interiors stores in the
Pittsburgh and Cleveland metropolitan areas from two entities owned and
controlled by Mr. Edward Teplitz. The total purchase price for the
assets was $10.1 million, net of the assumption of certain liabilities
and subject to post-closing adjustments. Approximately $3.5 million of
the purchase price was allocated to two real estate properties acquired
in the transaction with the remaining $6.6 million allocated to other
assets. The purchase price was determined by mutual negotiation, based
upon the fair value of net assets acquired and supported, as
appropriate, by independent third-party appraisals. Subsequent to the
closing, Mr. Teplitz joined the Company as Vice President of Finance.
In August 2002, Mr. Teplitz was named Chief Financial Officer of the
Company.
(15) SUBSEQUENT EVENT
In July 2002, the Company increased its percentage ownership in the
operations of 7 Ethan Allen retail stores (and 1 related service
center) located throughout Canada by acquiring the remaining 75%
interest in a transaction accounted for as a purchase business
combination. The Company had previously held a 25% interest in the
operations of these stores which it acquired in July 1997.
43
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In September 2002, the Company acquired the assets of 6 Ethan Allen
retail stores (and 1 related service center) located in the greater
Chicago area. This transaction was accounted for as a purchase business
combination.
(16) SEGMENT INFORMATION
The Company's reportable segments are strategic business areas that are
managed separately and offer different products and services. The
Company's operations are classified into two main segments: wholesale
and retail.
The wholesale segment is principally involved in the manufacture, sale
and distribution of home furnishing products to a network of
independently-owned and Ethan Allen-owned stores. Wholesale
profitability includes the wholesale gross margin, which is earned on
wholesale sales to all retail stores, including Ethan Allen-owned
stores.
The retail segment sells home furnishing products through a network of
Ethan Allen-owned stores. Retail profitability includes the retail
gross margin, which represents the difference between retail sales
price and the cost of goods purchased from the wholesale segment.
The Company evaluates performance of the respective segments based upon
revenues and operating income. Inter-segment eliminations primarily
comprise the wholesale sales and profit on the transfer of inventory
between segments. Inter-segment eliminations also include items not
allocated to reportable segments.
During the third quarter of 2001, the Company re-evaluated its
operating segments and as a result changed its segment reporting format
from five segments (case goods, upholstery, home accessories, retail,
and other) to two segments (wholesale and retail). This change reflects
how management currently manages its operations, resulting in part,
from the growth in the Company's retail business. The following table
presents segment information for the fiscal years ended June 30, 2002,
2001, and 2000 (in thousands):
<TABLE>
<CAPTION>
2002 2001 2000
------- ------- -------
<S> <C> <C> <C>
NET SALES:
Wholesale segment $660,818 $705,651 $691,076
Retail segment 459,640 419,322 372,058
Elimination of inter-company sales (228,170) (220,840) (206,963)
-------- ------- -------
Consolidated Total $892,288 $904,133 $856,171
======= ======= =======
OPERATING INCOME:
Wholesale segment (1) $110,078 $100,503 $132,553
Retail segment 23,125 23,142 20,457
Elimination (2) (3,303) 2,402 (5,429)
------- ------- -------
Consolidated Total $129,900 $126,047 $147,581
======= ======= =======
CAPITAL EXPENDITURES:
Wholesale segment $ 13,601 $ 22,147 $ 22,393
Retail segment 17,477 16,369 19,672
Acquisitions (3) 42,403 9,722 12,631
------- ------- -------
Consolidated Total $ 73,481 $ 48,238 $ 54,696
======= ======= =======
TOTAL ASSETS:
Wholesale segment $459,311 $453,650 $385,421
Retail segment 259,770 190,067 186,160
Inventory profit elimination (4) (30,326) (24,599) (28,010)
------- ------- -------
Consolidated Total $688,755 $619,118 $543,571
======= ======= =======
</TABLE>
(1) Operating income for the wholesale segment includes pre-tax
restructuring and impairment charges of $5.1 million and $6.9
million recorded in the fourth quarter of fiscal years 2002
and 2001, respectively.
44
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) The adjustment reflects the change in the elimination entry for
profit in ending inventory.
(3) Acquisitions include the purchase of 20 retail stores in 2002,
one retail store and the Dublin, Virginia manufacturing facility
in 2001, and 8 retail stores in 2000.
(4) Inventory profit elimination reflects the embedded wholesale
profit in the Company-owned store inventory that has not been
realized. These profits will be recorded when shipped to the
retail customer.
There are 30 independent retail stores located outside the United
States. Approximately 2.0% of the Company's net sales are derived from
sales to these retail stores.
(17) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Tabulated below are certain data for each quarter of the fiscal years
ended June 30, 2002, 2001, and 2000 (in thousands, except per share
data):
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
------------ ----------- -------- -------
<S> <C> <C> <C> <C>
FISCAL 2002:
------------
Net sales $206,725 $222,857 $227,917 $234,789
Gross profit 93,969 103,380 108,436 115,528
Net income 16,731 21,195 22,969 21,361
Net income per basic
share 0.43 0.55 0.59 0.55
Net income per diluted
share 0.42 0.53 0.58 0.54
Dividend declared per
common share 0.04 0.04 0.04 0.06
FISCAL 2001:
------------
Net sales $211,231 $232,667 $233,791 $226,444
Gross profit 99,709 107,737 103,511 102,699
Net income 20,700 23,107 20,030 15,843
Net income per basic
share 0.53 0.59 0.51 0.40
Net income per diluted
share 0.52 0.58 0.50 0.39
Dividend declared per
common share 0.04 0.04 0.04 0.04
FISCAL 2000:
------------
Net sales $189,592 $217,486 $220,300 $228,793
Gross profit 88,521 103,899 103,148 105,042
Net income 18,733 24,833 23,171 23,833
Net income per basic
share 0.46 0.61 0.58 0.60
Net income per diluted
share 0.45 0.59 0.57 0.59
Dividend declared per
common share 0.04 0.04 0.04 0.04
</TABLE>
45
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No changes in, or disagreements with, accountants on accounting or
financial disclosure occurred during fiscal years 2002, 2001 or 2000.
46
<PAGE>
PART III
Part III is omitted as the Company intends to file with the Commission
within 120 days after the end of the Company's fiscal year a definitive proxy
statement pursuant to Regulation 14A which will involve the election of
directors.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See reference to definitive proxy statement under Part III.
ITEM 11. EXECUTIVE COMPENSATION
See reference to definitive proxy statement under Part III.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See reference to definitive proxy statement under Part III.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See reference to definitive proxy statement under Part III.
47
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
I. Listing of Documents
(1) FINANCIAL STATEMENTS. The Company's Consolidated Financial
Statements, included in Item 8 hereof, as required at June 30,
2002 and 2001, and for the years ended June 30, 2002, 2001 and
2000, consist of the following:
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Consolidated Statements of Shareholders' Equity
Notes to Consolidated Financial Statements
(2) FINANCIAL STATEMENT SCHEDULE. Financial Statement Schedule of the
Company appended hereto, as required for the years ended June 30,
2002, 2001 and 2000, consist of the following:
Valuation and Qualifying Accounts
The schedules listed in Reg. 210.5-04, except those listed
above, have been omitted because they are not applicable or
the required information is shown in the financial statements
or notes thereto.
(3) The following Exhibits are filed as part of this report on Form
10-K:
Exhibit
NUMBER EXHIBIT
------ ------------------------------------------------------
*2(a) Agreement and Plan of Merger, dated May 20, 1989,
among the Company, Green Mountain Acquisition
Corporation ("Merger Sub"), INTERCO Incorporated,
Interco Subsidiary, Inc. and Ethan Allen
*2(b) Restructuring Agreement, dated March 1, 1991, among
Green Mountain Holding Corporation, Ethan Allen,
Chemical Bank, General Electric Capital Corporation,
Smith Barney Inc. and the stockholder's name on the
signature page thereof
*2(c) Purchase and Sale Agreement, dated March 28, 1997,
between the Company and Carriage House Interiors of
Colorado, Inc.
*3(a) Restated Certificate of Incorporation for Green
Mountain Holding Corporation
*3(b) Restatedand Amended By-Laws of Green Mountain Holding
Corporation
*3(c) Restated Certificate of Incorporation of the Company
*3(c)-1 Certificate of Designation relating to the Series C
Junior Participating Preferred Stock
*3(c)-2 Certificate of Amendment to Restated Certificate of
Incorporation as of August 5, 1997
*3(c)-3 Second Certificate of Amendment to Restated
Certificate of Incorporation as of March 27, 1998
*3(c)-4 Third Certificate of Amendment to Restated Certificate
of Incorporation as of April 28, 1999
*3(d) Amended and Restated By-laws of the Company
*3(e) Certificate of Designation relating to the New
Convertible Preferred Stock
*3(e)-1 Certificate of Designation relating to the Series C
Junior Participating Preferred Stock
*3(f) Certificate of Incorporation of Ethan Allen Finance
Corporation
*3(g) By-Laws of Ethan Allen Finance Corporation
*3(h) Certificate of Incorporation of Ethan Allen
Manufacturing Corporation
*3(i) By-Laws of Ethan Allen Manufacturing Corporation
48
<PAGE>
Exhibit
NUMBER EXHIBIT
------ ------------------------------------------------------
*4(a) First Amendment to Management Non-Qualified Stock
Option Plan
*4(b) Second Amendment to Management Non-Qualified Stock
Option Plan
*4(c) 1992 Stock Option Plan
*4(c)-1 First Amendment to 1992 Stock Option Plan
*4(c)-2 Amended and Restated 1992 Stock Option Plan
*4(c)-3 First Amendment to Amended and Restated 1992 Stock
Option Plan
*4(c)-4 Second Amendment to Amended and Restated 1992 Stock
Option Plan
*4(d) Management Letter Agreement among the Management
Investors and the Company
*4(e) Management Warrant, issued by the Company to members
of the Management of Ethan Allen
*4(f) Form of Dealer Letter Agreement among Dealer Investors
and the Company
*4(g) Form of Kathwari Warrant, dated June 28, 1989
*4(j) Form of Indenture relating to the Senior Notes
*4(j)-1 First Supplemental Indenture, dated March 23, 1995,
between Ethan Allen and the First National Bank of
Boston for $75,000,000 8-3/4% Senior Notes due 2007
*4(k) Credit Agreement among the Company, Ethan Allen and
Bankers Trust Company
*4(k)-1 Amended Credit Agreement among the Company, Ethan
Allen and Bankers Trust Company
*4(k)-2 110,000,000 Senior Secured Revolving Credit Facility
dated March 10, 1995 between Ethan Allen and J. P.
Morgan Chase & Co.
*4(k)-3 Amended and Restated Credit Agreement as of December
4, 1996 between Ethan Allen Inc. and the J. P. Morgan
Chase & Co.
*4(k)-4 First Amendment to Amended and Restated Credit
Agreement as of August 27, 1997 between Ethan Allen
Inc. and the J. P. Morgan Chase & Co.
*4(k)-5 Second Amendment to Amended and Restated Credit
Agreement as of October 20, 1998 between Ethan Allen
Inc. and the J. P. Morgan Chase & Co.
*4(l) Catawba County Industrial Facilities Revenue Bond
*4(l)-1 Trust Indenture dated as of October 1, 1994 securing
$4,600,000 Industrial Development Revenue Refunding
Bonds, Ethan Allen Inc. Series 1994 of the Catawba
County Industrial Facilities and Pollution Control
Financing Authority
*4(m) Lease for 2700 Sepulveda Boulevard Torrance,
California
*4(n) Amended and Restated Warrant Agreement, dated March 1,
1991, among Green Mountain Holding Corporation and
First Trust National Association
*4(o) Exchange Notes Warrant Transfer Agreement
*4(p) Warrant (Earned) to purchase shares of the Company's
Common Stock dated March 24, 1993
*4(q) Warrant (Earned-In) to purchase shares of the
Company's Common Stock, dated March 23, 1993
*4(r) Recapitalization Agreement among the Company, General
Electric Capital Corporation, Smith Barney Inc.,
Chemical Fund Investments, Inc., Legend Capital Group,
Inc., Legend Capital International Ltd., Castle
Harlan, Inc., M. Farooq Kathwari, the Ethan Allen
Retirement Program and other stockholders named on the
signature pages thereto, dated March 24, 1993
*4(s) Preferred Stock and Common Stock Subscription
Agreement, dated March 24, 1993, among the Company,
General Electric Capital Corporation, and Smith Barney
Inc.
*4(t) Security Agreement, dated March 10, 1995, between
Ethan Allen Inc. and J. P. Morgan Chase & Co.
*4(u) Rights Agreement, dated July 26, 1996, between the
Company and Harris Trust and Savings Bank
*4(v) Registration Rights Agreement, dated March 28, 1997,
between the Company and Carriage House Interiors of
Colorado, Inc.
*4(w) Credit Agreement, dated August 24, 1999, by and among
Ethan Allen Inc., Ethan Allen Interiors Inc., the J.
P. Morgan Chase & Co., Fleet Bank, N.A. and Wachovia
Bank, N.A.
49
<PAGE>
Exhibit
NUMBER EXHIBIT
------ ------------------------------------------------------
*10(b) Employment Agreement, dated June 29, 1989, among Mr.
Kathwari, the Company and Ethan Allen
*10(c) Employment Agreement, dated July 27, 1994, among Mr.
Kathwari, the Company and Ethan Allen
*10(d) Restated Directors Indemnification Agreement dated
March 1993, among the Company and Ethan Allen and
their Directors
*10(e) Registration Rights Agreement, dated March 1993, by
and among Ethan Allen, General Electric Capital
Corporation and Smith Barney Inc.
*10(f) Form of Management Bonus Plan, dated October 30, 1991
*10(g) Ethan Allen Profit Sharing and 401(k) Retirement Plan
*10(h) General Electric Capital Corporation Credit Card
Program Agreement dated August 25, 1995
*10(h)-1 First Amendment to Credit Card Program Agreement dated
February 22, 2000
*10(i) Employment Agreement, dated October 28, 1997, between
Mr. Kathwari and Ethan Allen Interiors, Inc.
*10(j) Sales Finance Agreement, dated June 25, 1999, between
the Company and MBNA America Bank, N.A.
*10(k) Amended and Restated Consumer Credit Card Program
Agreement, dated February 22, 2000, by and among the
Company and Monogram Credit Card Bank of Georgia
*10(k)-2 Second Amendment to Amended and Restated Consumer
Credit Card Program Agreement, dated February 1, 2002,
by and among the Company and Monogram Credit Card Bank
of Georgia
10(l) Employment Agreement, dated August 1, 2002, between
Mr. Kathwari and Ethan Allen Interiors, Inc.
*21 List of wholly-owned subsidiaries of the Company
23 Consent of KPMG LLP
* Incorporated by reference to the exhibits filed with:
the Registration Statement on Form S-1 of the Company
and Ethan Allen Inc. filed with the Security Exchange
Commission (the "SEC") on March 16, 1993; the
Registration Statement on Form S-3 of the Company
filed with the SEC on May 21, 1997; the Annual Report
on Form 10-K of the Company and Ethan Allen Inc. filed
with the SEC on September 24, 1993; the Current Report
on Form 8-K of the Company and Ethan Allen Inc. filed
with the SEC on July 3, 1996; the Quarterly Report on
Form 10-Q of the Company and Ethan Allen Inc. filed
with the SEC on February 13, 1997; the Quarterly
Report on Form 10-Q of the Company and Ethan Allen
Inc. filed with the SEC on November 14, 1997; the
Quarterly Report on Form 10-Q of the Company and Ethan
Allen Inc. filed with the SEC on February 12, 1999;
the Quarterly Report on Form 10-Q of the Company and
Ethan Allen Inc. filed with the SEC on May 13, 1999;
the Quarterly Report on Form 10-Q of the Company and
Ethan Allen Inc. filed with the SEC on February 14,
2000; the Annual Report on Form 10-K of the Company
and Ethan Allen Inc. filed with the SEC on September
13, 2000; the Quarterly Report on Form 10-Q of the
Company and Ethan Allen Inc. filed with the SEC on May
13, 2002; and the Registration Statement on Form S-3
of the Company, Ethan Allen, Ethan Allen Manufacturing
Corporation, Ethan Allen Finance Corporation and
Andover Wood Products Inc. filed with the SEC on
October 23, 1994 and all supplements thereto.
50
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING
ACCOUNTS AS OF AND FOR THE FISCAL YEARS ENDED JUNE 30,
2002, 2001 AND 2000
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS ADJUSTMENTS BALANCE AT
BEGINNING CHARGED TO AND/OR END OF
OF PERIOD INCOME DEDUCTIONS ADJUSTMENTS
<S> <C> <C> <C> <C>
Accounts Receivable
Sales discounts, sales returns and
allowance for doubtful accounts:
June 30, 2002 $ 2,679 $ (660) $ - $ 2,019
June 30, 2001 $ 2,751 $ (22) $ (50) $ 2,679
June 30, 2000 $ 2,460 $ 439 $ (148) $ 2,751
</TABLE>
51
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ETHAN ALLEN INTERIORS INC.
(Registrant)
By /S/ M. FAROOQ KATHWARI
-----------------------------------------
(M. Farooq Kathwari)
Chairman, Chief Executive Officer
and Director
52
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
/S/ M. FAROOQ KATHWARI Chairman, Chief Executive
- ----------------------------------------------------- Officer and Director
(M. Farooq Kathwari)
/S/ CLINTON A. CLARK Director
- -----------------------------------------------------
(Clinton A. Clark)
/S/ KRISTIN GAMBLE Director
- -----------------------------------------------------
(Kristin Gamble)
/S/ HORACE MCDONELL Director
- -----------------------------------------------------
(Horace McDonell)
/S/ EDWARD H. MEYER Director
- -----------------------------------------------------
(Edward H. Meyer)
/S/ WILLIAM W. SPRAGUE Director
- ------------------------------------------------------
(William W. Sprague)
/S/ FRANK G. WISNER Director
- ------------------------------------------------------
(Frank G. Wisner)
/S/ EDWARD D. TEPLITZ Chief Financial Officer
- --------------------------------------------------
(Edward D. Teplitz)
53
<PAGE>
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AS REQUIRED BY SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, M. Farooq Kathwari, do hereby certify that:
(1) I have reviewed the June 30, 2002 annual report on Form 10-K filed by Ethan
Allen Interiors Inc. (the "Company");
(2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
(3) Based on my knowledge, the financial statements and other financial
information included in this annual report fairly present, in all material
respects, the financial condition, results of operations and cash flows of
the Company as of and for the periods presented in this annual report.
/S/ M. FAROOQ KATHWARI Chairman, Chief Executive
- ----------------------------------------------------- Officer and Director
(M. Farooq Kathwari)
54
<PAGE>
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER AS REQUIRED BY SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Edward D. Teplitz, do hereby certify that:
(1) I have reviewed the June 30, 2002 annual report on Form 10-K filed by Ethan
Allen Interiors Inc. (the "Company");
(2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
(3) Based on my knowledge, the financial statements and other financial
information included in this annual report fairly present, in all material
respects, the financial condition, results of operations and cash flows of
the Company as of and for the periods presented in this annual report.
/S/ EDWARD D. TEPLITZ Chief Financial Officer
- --------------------------------------------------
(Edward D. Teplitz)
55
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>3
<FILENAME>form10k_ex10-lsison93002.txt
<DESCRIPTION>EXHIBIT 10(L)
<TEXT>
EXHIBIT 10 (l)
<PAGE>
EMPLOYMENT AGREEMENT
This Agreement (this "Agreement"), dated as of August 1, 2002, and
effective as of July 1, 2002, is made by and between Ethan Allen Interiors Inc.,
a Delaware corporation (the "Corporation") and its subsidiary, Ethan Allen Inc.,
a Delaware corporation and a wholly owned subsidiary of the Corporation (the
"Subsidiary") and M. Farooq Kathwari (the "Executive").
RECITALS
1. The Executive is Chairman of the Board of Directors of the
Corporation and of the Subsidiary, and is currently employed as the Chief
Executive Officer and the President of the Corporation and the Subsidiary.
2. The employment of the Executive by the Corporation was previously
subject to an employment agreement dated July 27, 1994 (the "1994 Agreement"),
and is currently subject to an employment agreement dated October 28, 1997 (the
"1997 Employment Agreement").
3. The Corporation desires to continue the services of the Executive as
Chairman of the Board of Directors of the Corporation and the Subsidiary and the
employment of the Executive with the Corporation and the Subsidiary and to enter
into a new agreement embodying the terms of those continued relationships.
4. The Executive is willing to continue to serve as Chairman of the
Board of Directors of the Corporation and the Subsidiary and is willing to
accept continued employment by each of the Corporation and the Subsidiary on the
terms set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, and other good and valuable consideration, the Corporation and
the Executive hereby agree as follows.
1. DEFINITIONS.
1.1. "Affiliate" means any person or entity controlling, controlled by
or under common control with the Corporation.
1.2. "Board" means the Board of Directors of the Corporation.
1.3. "Cause" means (a) the Executive is convicted of a felony
involving actual dishonesty as against the Corporation or the Subsidiary, or (b)
the Executive, in carrying out his duties and responsibilities under this
Agreement, is guilty of gross neglect or gross misconduct resulting, in either
case, in material economic harm to the Corporation and/or the Subsidiary, and
such conduct is not cured within thirty (30) days of the Corporation providing
written notice to Executive, unless such act, or failure to act, was believed by
the Executive in good faith to be in the best interests of the Corporation
and/or the Subsidiary.
<PAGE>
1.4. "Commencement Date" has the meaning assigned to it in Section 3.
1.5. "Date of Termination" means (a) in the case of a termination for
which a Notice of Termination is required, the date of actual receipt of such
Notice of Termination or, if later, the date specified therein, as the case may
be, and (b) in all other cases, the actual date on which the Executive's
employment terminates during the Term of Employment.
1.6. "Disability" means the Executive's inability to render, for a
period of six consecutive months, services hereunder by reason of permanent
disability, as determined by the written medical opinion of an independent
medical physician mutually acceptable to the Executive and the Corporation. If
the Executive and the Corporation cannot agree as to such an independent medical
physician each shall appoint one medical physician and those two physicians
shall appoint a third physician who shall make such determination.
1.7. "Good Reason" means and shall be deemed to exist if, without the
prior express written consent of the Executive, (a) the Executive is assigned
any duties or responsibilities inconsistent in any material respect with the
scope of the duties or responsibilities associated with the Executive's titles
or positions, as set forth and described in Section 4 of this Agreement; (b) the
Executive suffers a reduction in the duties, responsibilities or effective
authority associated with his titles and positions as set forth and described in
Section 4 of this Agreement; (c) the Executive is not appointed to, or is
removed from, the offices or positions provided for in Section 4.1 of this
Agreement; (d) the Corporation fails to substantially perform any material term
or provision of this Agreement; (e) the Executive's compensation provided for
hereunder is decreased; (f) the Executive's office location is changed to a
location more than 50 miles from its location on the date hereof in Danbury,
Connecticut; (g) the Corporation fails to obtain the full assumption of this
Agreement by a successor entity in accordance with Section 11.2 of this
Agreement; (h) the Corporation continually fails to reimburse the Executive for
business expenses in accordance with Section 5.3 of this Agreement; (i) the
Corporation purports to terminate the Executive's employment for Cause and such
purported termination of employment is not effected in accordance with the
requirements of this Agreement; (j) the Executive shall cease to serve as a
director and Chairman of the Board of Directors of any of the Corporation and
the Subsidiary; (k) the Board or the shareholders of the Corporation or the
Subsidiary, either or both, as may be required to authorize the same, shall
approve (i) any liquidation of the Corporation or the Subsidiary, or the sale of
substantially all of the assets of the Corporation and the Subsidiary taken as a
whole, or (ii) any merger, consolidation and/or other business combination
involving the Corporation or the Subsidiary or any combination of any such
transactions (a "Transaction"), other than a Transaction (A) involving only the
Corporation and the Subsidiary, or (B) immediately after which the shareholders
of the Corporation who were shareholders immediately prior to the transaction
continue to own beneficially, directly or indirectly, in substantially similar
proportions to those in effect immediately prior to such transaction more than
50% of the then outstanding voting securities of the Corporation or the
survivor, as applicable; (l) any Person (as defined below) or group (as such
term is defined in Rule 13d-5 of the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) of related Persons which is not an Affiliate of the
Corporation or the Subsidiary as of the Commencement Date shall beneficially
own, directly or indirectly, more than 50% of the then outstanding voting stock
of the Corporation or the Subsidiary (for purposes of this Agreement,
"Person(s)" means any individual, entity, or other person, as defined in Section
3(a)(9) of the Exchange Act, and as
-2-
<PAGE>
used in Sections 13(d) and 14(d) thereof); or (m) the Board or the Corporation
shall authorize, approve or engage in any Business Combination with an
Interested Person, each as defined in Article Fifth of the Corporation's
Restated Certificate of Incorporation; provided that, notwithstanding the
foregoing, Good Reason shall not include or be deemed to exist, with regard to
the circumstances described in clause (k), (l) or (m), if, with the express
prior written consent of Executive, Executive immediately after the occurrence
of the circumstances or transactions described in clause (k), (l) or (m) becomes
Chairman, Chief Executive Officer and President of the parent corporation or
person that owns or controls the Corporation or its successor immediately after
such circumstances or transaction. If, at the annual meeting in calendar year
2002 (including any adjournment thereof), the shareholders of the Corporation
fail to approve the provisions of this Agreement which are contingent on
shareholder approval pursuant to Section 5.2(a)(vii), and the Corporation fails
to offer to the Executive, within 45 days following such annual meeting, an
amendment of this Agreement which is acceptable to the Executive, then the
Executive may resign at any time during the period between the 61st day
following such annual meeting and the 150th day following such annual meeting,
and such resignation shall be treated as having been for "Good Reason".
1.8. "Retirement" means the termination of the Executive's employment
with the Corporation for any reason at any time after (a) the Executive attains
age 65 or (b) the Executive meets the requirements for early or regular
retirement under the Corporation's retirement policy, assuming for this purpose
that he was a participant in such plan.
1.9. "Term of Employment" has the meaning assigned to it in Section 3.
2. EMPLOYMENT. Subject to the terms and provisions set forth in this
Agreement, the Corporation hereby employs the Executive during the Term of
Employment as the Chief Executive Officer and President of the Corporation,
agrees to use its best efforts to cause Executive to be elected by the
Corporation's shareholders as a director and Chairman of the Board of the
Corporation, and to cause the Executive to be a director and Chairman of the
Board of Directors of the Subsidiary during the Term of Employment and agrees to
cause the Subsidiary at all times during the Term of Employment to employ the
Executive as Chief Executive Officer and President of the Subsidiary, and the
Executive hereby accepts such employment. However, nothing in this Agreement
shall be construed to require that the Executive be elected as a director of the
Corporation's Board of Directors on any date if he is not employed by the
Corporation on the election date.
3. COMMENCEMENT DATE AND TERM OF EMPLOYMENT.
(a) The term of employment under this Agreement shall commence
retroactively as of July 1, 2002 (the "Commencement Date"), and shall,
unless extended as hereinafter provided, terminate on the fifth (5th)
anniversary of such date (the "Term of Employment").
(b) On the fifth (5th) anniversary of the Commencement Date and on the
sixth (6th) anniversary of the Commencement Date, the Term of
Employment shall automatically be extended for an additional one year
period unless, not later than twelve months prior to any such
anniversary, either party to this Agreement shall have given written
notice to the other that the Term of Employment shall not be extended
or further extended beyond its then already automatically extended
term, if any.
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4. POSITIONS, RESPONSIBILITIES AND DUTIES.
4.1. POSITIONS. During the Term of Employment, the Executive shall be
employed as, and the Corporation shall at all times cause the Executive to be,
the Chief Executive Officer and President of the Corporation and the Subsidiary.
In addition to such positions, the Corporation shall use its best efforts to
ensure that the Executive is elected by the shareholders of the Corporation to
serve as a director of the Corporation during the Term of Employment for a
minimum of two successive, staggered three-year terms, as provided in the
Corporation's Certificate of Incorporation, and shall use its best efforts to
ensure that Executive is the Chairman of the Board of Directors. In such
positions, the Executive shall have the duties, responsibilities and authority
normally associated with the office and position of chairman, director, chief
executive officer and president of a substantial, publicly traded corporation,
but in no event shall the Executive's duties, responsibilities and/or effective
authority with respect to the Corporation and/or the Subsidiary be less than the
duties, responsibilities and effective authority the Executive possessed
immediately prior to the date of this Agreement. No other employee of the
Corporation or the Subsidiary shall have authority and responsibilities that are
equal to or greater than those of the Executive. The Executive shall report
solely and directly to the Board and all other officers and other employees of
the Subsidiary shall report directly to the Executive or the Executive's
designees. No provision of this Section 4.1, however, shall preclude the Board
from soliciting information from any officer or employee of the Corporation.
4.2. DUTIES. During the Term of Employment, the Executive shall devote
such time as is reasonably necessary to perform the duties associated with his
offices and positions as set forth in Section 4.1 and shall use his best efforts
to perform faithfully and efficiently the duties and responsibilities
contemplated by this Agreement; PROVIDED, HOWEVER, that the Executive shall not
be required to perform any duties and responsibilities which would be likely to
result in a non-compliance with or violation or breach of any applicable law or
regulation. Notwithstanding the foregoing provisions of this Section 4.2, during
the Term of Employment, the Executive may devote reasonable time to activities
other than those required under this Agreement, including the supervision of his
personal investments, and activities involving professional, charitable,
educational, religious and similar types of organizations, speaking engagements,
membership on the boards of directors of other organizations, and similar type
activities, to the extent that such other activities do not inhibit or prohibit
the performance of the Executive's duties under this Agreement, or conflict in
any material way with the business of the Corporation or the Subsidiary;
provided, however, that the Executive shall not serve on the board of any
business, or hold any other position with any business without the consent of
the Board.
4.3. NON-DISPARAGEMENT. The Executive agrees that, while he is employed
by the Corporation, and after his Date of Termination, he shall not make any
false, defamatory or disparaging statements about the Corporation, the
Subsidiary, any Affiliate, or the officers or directors of the Corporation, the
Subsidiary or any Affiliate that are reasonably likely to cause material damage
to the Corporation, the Subsidiary, any Affiliate, or the officers or directors
of the Corporation, the Subsidiary, or the Affiliates. While the Executive is
employed by the Corporation, and after his Date of Termination, the Corporation
agrees, on behalf of itself,
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the Subsidiary and the Affiliates, that neither the Corporation, the Subsidiary,
the Affiliates, nor the officers or directors of the Corporation, the
Subsidiary, or any of the Affiliates shall make any false, defamatory or
disparaging statements about the Executive that are reasonably likely to cause
material damage to the Executive.
5. COMPENSATION AND OTHER BENEFITS.
5.1. BASE SALARY. During the Term of Employment, the Executive shall
receive a base salary ("Base Salary"), payable in equal bi-weekly installments,
of, prior to first anniversary of the Commencement Date, $850,000 per annum. On
each anniversary of the Commencement Date, such Base Salary shall be reviewed
for increase (but not decrease) in the sole discretion of the Compensation
Committee of the Board; PROVIDED, HOWEVER, that such Base Salary shall in any
event be increased as of each anniversary of this Agreement, at a rate equal to
the percentage increase in the consumer price index for the New York-Northern
New Jersey-Long Island, NY-NJ-CT metropolitan local area as reported by the
United States Department of Labor (the "CPI") of the year then ended as compared
to the consumer price index for the immediately preceding year. Such increased
Base Salary shall then constitute the "Base Salary" for purposes of this
Agreement.
5.2. INCENTIVE PAYMENTS. During the Term of Employment, the Executive
will be entitled to be paid an incentive bonus (the "Incentive Bonus") and other
benefits as described in this Section 5.2.
(a) The Executive shall be entitled to Incentive Bonus payments in
accordance with the following:
(i) For the fiscal year ending June 30, 2002, the Executive shall be
entitled to an Incentive Bonus determined in accordance with the
provisions of Section 5.2 of the 1997 Agreement.
(ii) For the fiscal year ending June 30, 2003, and for each subsequent
fiscal year, the Corporation shall pay the Executive an Incentive Bonus
equal to two percent (2%) of the amount by which the Corporation's
operating income for the year exceeds the Threshold Amount (as defined
below).
(iii) For the fiscal year ending June 30, 2003, the "Threshold Amount"
shall be $80,000,000 (eighty million dollars). For fiscal years ending
after June 30, 2003, the Threshold Amount shall be 110% of the
Threshold Amount for the preceding fiscal year.
(iv) For fiscal years ending after June 30, 2002, the Corporation's
operating income for the fiscal year shall be as set forth in the
Corporation's financial statements, adjusted by adding thereto the
charges, expenses or accruals, if any, charged against such operating
income for (1) non-recurring or extraordinary items, (2) Incentive
Bonuses under this Agreement, (3) the issuance to the Corporation's
executives, managers, employees, dealers and other business associates
of capital stock of the Corporation, or the issuance or exercise to or
by such persons of options, warrants or other rights to acquire capital
stock of the Corporation, or stock appreciation rights of the
Corporation or similar equity equivalents, including in respect of the
Restricted Stock Agreement and the Option
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Agreements contemplated by this Agreement, and (4) any increased
depreciation, amortization or other changes resulting from purchase
accounting adjustments (provided, however, that no such adjustments
shall be made under this clause (4) with respect to acquisitions
occurring prior to the Commencement Date). The calculation of operating
income will be confirmed by the Corporation's independent public
accountants or any other independent, recognized financial or
accounting expert retained by the Compensation Committee.
(v) Notwithstanding the foregoing provisions of this Section 5.2, if
the Corporation effects a major acquisition during any fiscal year, the
Executive and the Corporation shall negotiate in good faith an
appropriate revision to the Threshold Amount set forth in this Section
5.2 to implement the purpose of the Incentive Bonus.
(vi) The Incentive Bonus in respect of any particular fiscal year will
be paid upon the earlier to occur of the fifth business day following
public filing or disclosure of the Corporation's financial statements
for such fiscal year or the 120th day following the end of such fiscal
year.
(vii) Notwithstanding the foregoing provisions of this Section 5.2, the
Executive's right to any Incentive Bonus amounts under this Agreement
for fiscal years beginning on or after the Commencement Date shall be
contingent on the Incentive Bonus payments being approved by the
shareholders of the Corporation at the Corporation's annual shareholder
meeting in calendar year 2002 (including any adjournment thereof);
provided, however, that if such Incentive Bonus arrangement is not so
approved, the Corporation will offer other additional compensation to
the Executive that provides an earnings opportunity that is comparable
to that offered by the Incentive Bonus, and the Corporation and the
Executive shall negotiate in good faith regarding the structure of such
additional compensation and the revisions to this Agreement reflecting
such compensation. The failure of the Corporation to offer such
replacement compensation within 45 days following the shareholder's
vote of non-approval of the Incentive Bonus shall be treated as a
decrease in the Executive's compensation under Section 1.7(e).
(b) Effective as of July 1, 2002, 2003, 2004, 2005 and 2006, the
Corporation and Executive shall enter into, execute and deliver the
Restricted Stock Agreement, in substantially the form of Exhibit A
hereto (as amended from time to time in accordance with its terms, the
"Restricted Stock Agreement") pursuant to which the Corporation shall
grant to the Executive, effective as of each of July 1, 2002, 2003,
2004, 2005 and 2006, 10,500 shares of the Corporation's common stock,
par value $.01 per share ("Common Stock"), for a total of 52,500
shares, under the Corporation's 1992 Stock Option Plan (as amended from
time to time in accordance with its terms, the "Plan"), in accordance
with the Restricted Stock Agreement in substantially the form set forth
in Exhibit A, which shares of Common Stock will be "restricted stock"
subject to the Restricted Stock Agreement. Shares of Common Stock under
the Restricted Stock Agreement are referred to as the "Restricted
Stock" for purposes of this Agreement. For this purpose, Exhibit A-1
hereto is the form of Restricted Stock Agreement for 2002, and Exhibit
A-2 hereto is the form of Restricted Stock Agreement for years
thereafter.
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(c) The Executive shall be entitled to stock option rights in accordance
with the following:
(i) Concurrently with the execution and delivery of this Agreement, the
Corporation and Executive shall enter into, execute and deliver the
stock option agreements between the Corporation and the Executive, and
substantially in the form of Exhibits B, C, and D hereto (the
agreements set forth in Exhibits B, C, and D are referred to as the
"Option Agreements") pursuant to which the Corporation shall issue to
Executive stock options pursuant to this Section 5.2(c) to purchase a
total of 1,200,000 shares of Common Stock under the Plan, with the
exercise price of a share of stock for the options described in this
sentence to be determined in accordance with the applicable Option
Agreement. The options issued under this Section 5.2(c)(i) are referred
to as the "Options."
(ii) Options to purchase Common Stock to be granted to the Executive by
the Corporation under this Agreement will permit the deferred delivery
of shares of stock following exercise, as elected by the Executive,
pursuant to a deferral arrangement established by the Corporation.
(d) The number of shares subject to any stock awards under this Agreement
are specified as of August 1, 2002, and such numbers are to be adjusted
for stock splits, stock dividends, reclassifications, recapitalizations
and similar events in respect of the Common Stock occurring after that
date.
5.3. EXPENSE REIMBURSEMENT. During the Term of Employment, the
Executive shall be entitled to receive prompt reimbursement for all usual,
customary, and reasonable business-related expenses incurred by the Executive in
performing his duties and responsibilities hereunder in accordance with the
practices and procedures of the Corporation as in effect and applied immediately
prior to the Commencement Date, including without limitation an automobile and
driver allowance and/or reimbursement in accordance with past practices, or, if
more favorable to the Executive, as in effect at any time thereafter with
respect to the Executive or other executives of the Corporation or the
Subsidiary.
5.4. VACATION AND FRINGE BENEFITS.
(a) During the Term of Employment, the Corporation shall maintain a $7
million key man life and disability insurance in respect of the
Executive for the benefit of Executive and/or his estate, and shall
maintain such insurance so long as the Executive remains a senior
executive officer of the Corporation, PROVIDED that the aggregate
amount of such insurance coverage shall be reduced if and to the extent
necessary to reduce the aggregate annual premium payable by the
Corporation to $35,000. The Executive agrees to cooperate with the
Corporation in obtaining such policies and in maintaining the same in
full force and effect throughout the Term of Employment.
(b) During the Term of Employment, the Executive shall also be entitled to
such paid vacation, fringe benefits and perquisites as provided to the
Executive by the Corporation and/or the Subsidiary immediately prior to
the Commencement Date or, if more favorable to the Executive, as
provided by the Corporation or the Subsidiary at any time thereafter.
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(c) To the extent that the Executive's rights to compensation or benefits
under the applicable plan, agreement or other governing document are to
be determined based on the Term of Employment under the Prior
Employment Agreement, the Term of Employment under this Agreement shall
be deemed to be substituted for the Term of Employment under the Prior
Employment Agreement.
5.5. OFFICE AND SUPPORT STAFF. Unless the Executive otherwise agrees
in writing, during the Term of Employment the Executive shall be entitled to
executive secretarial and other administrative assistance of a type and extent,
and to an office or offices (with furnishings and other appointments) of a type
and size, at least equal to that provided to the Executive immediately prior to
the date of this Agreement.
6. TERMINATION.
6.1. TERMINATION DUE TO DEATH OR DISABILITY. The Corporation may
terminate the Executive's employment hereunder due to Disability. In the event
of the Executive's death or a Termination of the Executive's employment by the
Corporation due to Disability, the Executive, his estate or his legal
representative, as the case may be, shall be entitled to receive:
(a) Base Salary continuation at the rate in effect (as provided for by
Section 5.1 of this Agreement) on the Date of Termination through the
end of the full fiscal year in which the Date of Termination occurs;
(b) an Incentive Bonus in respect of the full fiscal year in which the Date
of Termination occurs;
(c) any deferred compensation not yet paid to the Executive (including,
without limitation, interest or other credits on such deferred
amounts), any accrued vacation pay and insurance proceeds;
(d) reimbursement for expenses incurred but not yet paid prior to such
death or Disability;
(e) insurance policy payments or proceeds in respect of the life and
Disability insurance referred to in Section 5.4(a); and
(f) any other compensation or benefits which may be owed or provided to the
Executive in accordance with the terms and provisions of any applicable
agreements, plans and programs of or made by the Corporation and/or the
Subsidiary.
Anything in this Agreement to the contrary notwithstanding, (x) in the
event of the termination of the Executive's employment pursuant to this Section
6.1, the Corporation will not, from and after the Date of Termination, be
obligated to issue any Restricted Stock or Options, but any vesting or service
requirements under any outstanding Options or Restricted Stock granted to the
Executive prior to his termination of employment that are associated with the
Executive's employment by the Corporation (and any Prior Options, Prior
Restricted Stock, and Prior Stock Units, as those terms are defined in Section
12.8) will be deemed to be fully satisfied upon such termination, and (y) the
Executive's family shall be entitled to receive benefits at least equal to the
most favorable benefits provided by the Corporation to surviving families of
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employees of the Corporation under such plans, programs, practices and policies
relating to family death benefits, if any, in accordance with the most favorable
plans, programs, practices and policies of the Corporation in effect on the date
of the Executive's death with respect to other key employees of the Corporation
and their families. Anything in this Agreement to the contrary notwithstanding,
the Executive shall be entitled after the Date of Termination due to Disability
to receive disability and other benefits at least equal to the most favorable of
those provided by the Corporation to disabled employees and/or their families in
accordance with such plans, programs, practices and policies relating to
disability, if any, in effect at any time during the 90-day period immediately
preceding the Date of Termination due to Disability with respect to other key
employees of the Corporation and their families.
6.2. TERMINATION BY THE CORPORATION FOR CAUSE. The Corporation may
terminate the Executive's employment hereunder for Cause as provided in this
Section 6.2. If the Corporation terminates the Executive's employment hereunder
for Cause, the Executive shall be entitled to receive:
(a) Base Salary at the rate in effect (as provided for by Section 5.1 of
this Agreement) at the time of such termination through the Date of
Termination;
(b) a prorated Incentive Bonus in respect of the fiscal year in which the
Date of Termination occurs, equal to such Incentive Bonus multiplied by
a fraction, the numerator of which is the number of days in the current
fiscal year through the Date of Termination, and the denominator of
which is 365;
(c) any deferred compensation (including, without limitation, interest or
other credits on such deferred amounts) and any accrued vacation pay;
(d) reimbursement for expenses incurred, but not yet paid prior to such
termination of employment; and
(e) any other compensation or benefits which may be owed or provided to the
Executive in accordance with the terms and provisions of any applicable
agreements, plans and programs of or made by the Corporation and/or the
Subsidiary.
In any case described in this Section 6.2, the Executive shall be given
written notice authorized by a vote of at least a majority of the members of the
Board that the Corporation intends to terminate the Executive's employment for
Cause. Such written notice, given in accordance with Section 6.7 of this
Agreement, shall specify the particular act or acts, or failure to act, which is
or are the basis for the decision to so terminate the Executive's employment for
Cause. The Executive shall be given the opportunity within 30 calendar days of
the receipt of such notice to meet with the Board to defend such act or acts, or
failure to act, and, if such act or failure to act is correctable, the Executive
shall be given 30 business days after such meeting to correct such act or
failure to act. If such act or failure to act is not correctable or upon failure
of the Executive, within such latter 30 day period, to correct such act or
failure to act, the Executive's employment by the Corporation shall
automatically be terminated under this Section 6.2 for Cause as of the date
determined in Section 1.5 of this Agreement. Anything herein to the contrary
notwithstanding, if, following a termination of the Executive's employment by
the
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Corporation for Cause based upon the conviction of the Executive for a felony
involving actual dishonesty as against the Corporation or the Subsidiary, such
conviction is overturned on appeal, the Executive shall be entitled to the
payments and benefits that the Executive would have received as a result of a
termination of the Executive's employment by the Corporation without Cause.
Anything in this Agreement to the contrary notwithstanding, in the event of the
termination of the Executive's employment pursuant to this Section 6.2, the
Corporation will not, from and after the Date of Termination, be obligated to
issue any Restricted Stock or Options, although any outstanding Restricted Stock
or Options will not be affected thereby, except as expressly provided in the
Restricted Stock Agreement and the Option Agreements.
6.3. TERMINATION WITHOUT CAUSE OR TERMINATION FOR GOOD REASON. The
Corporation shall be permitted to terminate the Executive's employment hereunder
without Cause and the Executive shall be permitted to terminate his employment
hereunder for Good Reason. For purposes of this Agreement, such a termination of
employment by the Executive shall constitute a "Termination for Good Reason"
only if effected in accordance with the notice provisions of Section 6.7(b). If
the Corporation terminates the Executive's employment hereunder without Cause,
other than due to death or Disability, or if the Executive effects a Termination
for Good Reason, the Executive shall be entitled to receive:
(a) Base Salary at the rate in effect (as provided for by Section 5.1 of
this Agreement) on the Date of Termination through the end of the Term
of Employment (which Term of Employment shall include extensions
thereof in accordance with Section 3 only to the extent that the
deadline for canceling the extension or extensions occurred prior to
the date on which the applicable written termination notice was
provided, with no cancellation of extension notice filed in accordance
with Section 3(b));
(b) an aggregate amount equal to the two largest Incentive Bonuses or other
annual bonuses previously received by Executive from the Corporation
not to exceed $1 million in the aggregate;
(c) any deferred compensation (including, without limitation, interest or
other credits on the deferred amounts) and any accrued vacation pay;
(d) reimbursement for expenses incurred, but not paid prior to such
termination of employment; and
(e) any other compensation or benefits which may be owed or provided to the
Executive in accordance with the terms and provisions of any applicable
agreements, plans and programs of or made by the Corporation and/or the
Subsidiary.
Anything in this Agreement to the contrary notwithstanding, in the
event of the termination of Executive's employment pursuant to this Section 6.3,
(x) the Corporation's obligation to issue Restricted Stock under this Agreement
and in accordance with the Restricted Stock Agreement will not be terminated or
otherwise affected, as if the Term of Employment continued without giving effect
to such termination, and any vesting or service requirements under any
outstanding Restricted Stock granted to the Executive prior to, at the time of,
or after his termination of employment that are associated with the Executive's
employment by the
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Corporation (and any Prior Restricted Stock and Prior Stock Units) will be
deemed to be fully satisfied upon such termination or, if later, at the time of
grant, and (y) any vesting or service requirements under any outstanding Options
granted to the Executive prior to his termination of employment or any Options
granted on or after his Date of Termination, that are associated with the
Executive's employment by the Corporation (and any Prior Options) will be deemed
to be fully satisfied upon such termination or if later, at the time such option
is granted, and the options issued to and exercisable by Executive will be
exercisable at any time during the three years following such Date of
Termination or, for Options granted as of a date after the Date of Termination,
three years following the date of grant.
Anything in this Agreement to the contrary notwithstanding, if the
Executive is employed by the Corporation through the end of the Term of
Employment, and his employment terminates by reason of a failure to extend the
Term of Employment (regardless of whether such failure to extend occurs by
reason of a notice from either the Executive or the Corporation that the
Agreement will not be extended in accordance with Section 3(b) or by reason of a
failure of the parties to further extend the Agreement following the end of the
Term of Employment as set forth in Section 3), the Executive shall be treated as
having completed any service required for full vesting under any outstanding
Options, Restricted Stock, Prior Options, Prior Restricted Stock, Prior Stock
Units, as well as any other compensation accrued prior to the termination of
employment if the right to such compensation is contingent on completion of
service for vesting. Nothing in the preceding sentence shall be construed to
require the vesting in compensation for the Executive if the written terms of
the compensation provide for a different vesting schedule and such compensation
is not required to be provided by this Agreement, the 1997 Agreement, or the
1994 Agreement.
6.4. VOLUNTARY TERMINATION. The Executive may effect a Voluntary
Termination of his employment hereunder. A "Voluntary Termination" shall mean a
termination of employment upon prior written notice to the Corporation in
accordance with Section 6.7(c) by the Executive on his own initiative other than
(a) a termination due to Disability, (b) a Termination for Good Reason, or (c) a
termination due to Retirement. A Voluntary Termination shall not be, nor shall
it be deemed to be, a breach of this Agreement and shall entitle the Executive
to all of the rights and benefits to which the Executive would be entitled in
the event of a termination of his employment by the Corporation for Cause.
6.5. TERMINATION DUE TO RETIREMENT. The Executive may terminate his
employment hereunder as a result of Retirement. If the Executive's employment
hereunder is terminated due to Retirement, the Executive shall be entitled to
receive:
(a) Base Salary at the rate in effect (as provided for by Section 5.1 of
this Agreement) at the time of such termination through the date of
Retirement;
(b) a prorated Incentive Bonus in respect of the fiscal year in which the
Date of Termination occurs, equal to such Incentive Bonus multiplied by
a fraction, the numerator of which is the number of days in the current
fiscal year through the Date of Termination, and the denominator of
which is 365;
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(c) any deferred compensation not yet paid to the Executive (including,
without limitation, any interest on credits on such deferred amounts)
and any accrued vacation pay;
(d) reimbursement for expenses incurred but not yet paid prior to the date
of Retirement; and
(e) any other compensation or benefits which may be owed or provided to the
Executive in accordance with the terms and provisions of any applicable
agreements, plans and programs of or made by the Corporation and/or the
Subsidiary.
Anything in this Agreement to the contrary notwithstanding, in the event of the
termination of the Executive's employment pursuant to this Section 6.5, the
Corporation will not, from and after the Date of Termination, be obligated to
issue any Restricted Stock or Options, although any outstanding Restricted Stock
or Options will not be affected thereby, except as expressly provided in the
Restricted Stock Agreement and the Option Agreements.
6.6. NO MITIGATION; NO OFFSET. In the event of any termination of
employment under this Section 6, the Executive shall be under no obligation to
seek other employment and there shall be no offset against any amounts due the
Executive under this Agreement on account of any remuneration attributable to
any subsequent employment that the Executive may obtain. Any amounts due under
this Section 6 are in the nature of severance payments, or liquidated damages,
or both, and are not in the nature of a penalty.
6.7. NOTICE OF TERMINATION. Any termination of the Executive's
employment by the Corporation for Cause, any Termination for Good Reason, and
any termination of employment by the Executive in connection with a Voluntary
Termination shall be communicated by a notice of termination to the other party
hereto given in accordance with Section 12.3 of this Agreement (the "Notice of
Termination"). The Notice of Termination shall be given (a) in the case of a
termination for Cause, within 90 business days after a director of the
Corporation (excluding the Executive) has actual knowledge of the events giving
rise to such purported termination, (b) in the case of a Termination for Good
Reason, within 180 days of the Executive's having actual knowledge of the event
or events constituting Good Reason; and (c) in the case of Voluntary
Termination, not later than 150 days prior to the date of termination specified
in such notice. Such notice shall (x) indicate the specific termination
provision in this Agreement relied upon, (y) set forth in reasonable detail the
facts and circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated, as applicable, and (z)
if the termination date is other than the date of receipt of such notice,
specify the date on which the Executive's employment is to be terminated (which
date shall not be earlier than the date on which such notice is actually given).
6.8. CERTAIN FURTHER PAYMENTS BY THE CORPORATION.
6.8.1. TAX REIMBURSEMENT PAYMENT. Anything in this Agreement to the
contrary notwithstanding, in the event that any amount or benefit paid, payable,
or to be paid, or distributed, distributable, or to be distributed to or with
respect to the Executive by the Corporation, the Subsidiary or any other
Affiliate, including Base Salary, Incentive Bonuses, Restricted Stock, Options
and any other amounts payable in respect of this Agreement (collectively, the
"Covered Payments"), is or becomes, at any time, as a result of (a) any Internal
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Revenue Service claims or assertions, or (b) Section 6.8.2 below or otherwise,
subject to the excise tax imposed by or under Section 4999 of the Code (or any
similar tax that may hereafter be imposed), and/or any interest or penalties
with respect to such excise tax (such excise tax, together with such interest
and penalties, are hereinafter collectively, referred to as the "Excise Tax"),
the Corporation shall pay to the Executive at the time specified in Section 6.9
below an additional amount (the "Tax Reimbursement Payment") equal to the sum of
(a) the amount of the Excise Tax imposed upon the Covered Payments, and (b) an
amount equal to the product of (i) any deductions disallowed for federal, state
or local income tax purposes because of the inclusion of the Tax Reimbursement
Payment in the Executive's adjusted gross income, and (ii) the highest
applicable marginal rate of federal, state or local income taxation,
respectively, for the calendar year in which the Tax Reimbursement Payment is
made or is to be made. However, the Tax Reimbursement Payment will not include
any Excise Tax or other tax imposed on or attributable to the Tax Reimbursement
Payment itself.
6.8.2. DETERMINING EXCISE TAX. Except as otherwise provided in Section
6.8.1(a), for purposes of determining whether any of the Covered Payments will
be subject to the Excise Tax and the amount of such Excise Tax,
(a) such Covered Payments will be treated as "parachute payments" (within
the meaning of Section 280G(b)(2) of the Code) and such payments in
excess of the Code Section 280G(b)(3) "base amount" shall be treated as
subject to the Excise Tax, unless, and except to the extent that, the
Corporation's independent certified public accountants (the
"Accountants") or legal counsel reasonably acceptable to the Executive,
deliver timely, upon the Executive's request, a written opinion,
reasonably satisfactory to the Executive's legal counsel, to the
Executive that the Executive has a reasonable basis to claim that the
Covered Payments (in whole or in part) (i) do not constitute "parachute
payments", (ii) represent reasonable compensation for services actually
rendered (within the meaning of Section 280G(b)(4) of the Code) in
excess of the "base amount" allocable to such reasonable compensation,
or (iii) such "parachute payments" are otherwise not subject to such
Excise Tax (with appropriate legal authority, detailed analysis and
explanation provided therein by the Accountants); and
(b) the value of any Covered Payments which are non-cash benefits or
deferred payments or benefits shall be determined by the Accountants in
accordance with the principles of Section 280G of the Code.
6.8.3. APPLICABLE TAX RATES AND DEDUCTIONS. For purposes of determining
the amount of the Tax Reimbursement Payment, the Executive shall be deemed:
(a) to pay federal, state and/or local income taxes at the highest
applicable marginal rate of income taxation for the calendar year in
which the Tax Reimbursement Payment is made or is to be made, and
(b) to have otherwise allowable deductions for federal, state and local
income tax purposes at least equal to those disallowed due to the
inclusion of the Tax Reimbursement Payment in the Executive's adjusted
gross income.
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<PAGE>
6.8.4. SUBSEQUENT EVENTS. If, pursuant to a written opinion, reasonably
satisfactory to the Executive, of the Accountants (or legal counsel reasonably
acceptable to the Executive) delivered to the Executive, the Excise Tax is
subsequently determined on a reasonable basis and in good faith (other than as a
result of a tax contest) to be less than the amount taken into account hereunder
in calculating any Tax Reimbursement Payment made, the Executive shall repay to
the Corporation the portion of any prior Tax Reimbursement Payment that would
not have been paid if such redetermined Excise Tax had been applied in
calculating such Tax Reimbursement Payment, plus interest on the amount of such
repayment at the mid-term discount rate provided in Section 1274(b)(2)(B) of the
Code. Notwithstanding the immediately preceding sentence, if any portion of the
Tax Reimbursement Payment to be refunded to the Corporation has been paid to any
federal, state or local tax authority, repayment thereof shall not be required
until an actual refund or credit of such portion has been made to or obtained by
the Executive from such tax authority, and any interest payable to the
Corporation shall not exceed the interest received or credited to the Executive
by any such tax authority. The Executive shall be fully indemnified by the
Corporation for any out-of-pocket costs, expenses or fees attributable to the
filing of any refund or other claim. The Executive and the Corporation shall
mutually agree upon the course of action to be pursued (and the method of
allocating the expenses thereof) if any good faith claim for refund or credit
from such tax authority made by the Executive is denied.
Notwithstanding the immediately preceding paragraph, if, in the written
opinion of the Executive's tax advisors delivered to the Accountants and the
Corporation, the Excise Tax is later determined to exceed the amount taken into
account by the Accountants or legal counsel, as the case may be, hereunder at
the time any Tax Reimbursement Payment is made by reason of (i) manifest error,
(ii) any payment the existence or amount of which could not be or was not
determined or known about at the time of any Tax Reimbursement Payment, or (iii)
any determination, claim or assertion made by any tax authority that the Excise
Tax is or should be greater than the amount of such Excise Tax taken into
account previously by the Accountants or legal counsel, as the case may be, or
as otherwise previously determined, the Corporation shall make an additional Tax
Reimbursement Payment in respect of such excess Excise Tax (which Tax
Reimbursement Payment shall include, without limitation, any interest or
penalties payable with respect to such excess Excise Tax) at the time specified
in Section 6.9 below. With respect to this Section 6.8.4, if any such tax
authority makes such a determination, the Executive shall notify the Corporation
of such occurrence. If the Corporation obtains (at the Corporation's sole
expense) an opinion of legal counsel reasonably satisfactory to the Executive
that it is more likely than not that the Executive would succeed in disputing
such claim, assertion or determination of such tax authority, the Executive
shall, at the sole expense of the Corporation, make a good faith effort to
contest such claim, assertion or determination of such tax authority in all
relevant administrative proceedings with such tax authority and in any related
judicial proceeding (excluding any appeals thereof); PROVIDED, HOWEVER, that if
the Executive determines in good faith that the continued contest of any such
claim, assertion or determination with such tax authority would have an adverse
impact on his overall tax position (which good faith determination shall take
into account the magnitude of the amounts involved), then, upon receipt of
notice by the Corporation from the Executive to that effect, the Executive
shall, without forgoing any right to receive any Tax Reimbursement Payment
described in this Section 6.8, have no further obligation to pursue any such
contest with any such tax authority. The Executive may, as a condition to
pursuing or commencing any contest described in this Section 6.8.4 in any
judicial proceedings (which proceedings shall be in a forum chosen at the sole
discretion of the
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<PAGE>
Executive), require the Corporation to advance any amount of tax required to be
paid in order to pursue such contest. In conducting any contest described in
this Section 6.8.4, the Executive shall use his best efforts to keep the
Corporation advised and will permit the Corporation to prepare and suggest
appropriate responses and actions that may be reasonably made or taken by the
Executive. Notwithstanding the above, the decisions as to such response or
actions shall be solely that of the Executive and the Executive shall have the
sole right to control the proceeding. The Corporation shall bear all expenses of
any proceeding relating to any contest described in this Section 6.8.4, whether
incurred by the Corporation or the Executive, including, without limitation, all
fees and disbursements of attorneys, accountants and expert witnesses and any
additional interest or penalties applicable. Nothing contained in this Agreement
shall under any circumstances give the Corporation any right to examine the tax
returns or any other records of the Executive.
6.8.5. ELECTION TO ACCELERATE. For purposes of Code sections 280G and
4999, the Executive, in his sole discretion, may elect to have any amounts
treated as received in the year of a change in ownership or control or, if
later, the first year in which the payment (or payments) are certain to be made
without regard to the year in which the payment (or payments) are includible in
income or otherwise received to the extent provided in Prop. Treas. Reg. section
1.280G-1, Q/A-11(c) (issued February 20, 2002) or any successor provision. If
the Executive makes any such election, the determination of the Executive's
rights to payments under this Section 6.8 and Section 6.9 shall be determined
after taking into account such election.
6.9. PAYMENT. Except as otherwise provided in this Agreement, and
except with respect to continued payment of Base Salary in accordance with any
provisions of this Agreement, any payments to which the Executive shall be
entitled under this Section 6 shall be made as promptly as possible following
(a) the Date of Termination, (b) the payment of any Covered Payments, or (c) the
delivery of the opinion of the Executive's tax advisors, in accordance with
Section 6.8.4. If the amount of any payment due to the Executive cannot be
finally determined within 90 days after the Date of Termination, such amount
shall be estimated on a good faith basis by the Corporation and the estimated
amount shall be paid no later than 90 days after such Date of Termination. As
soon as practicable thereafter, the final determination of the amount due shall
be made and any adjustment requiring a payment to or from the Executive shall be
made as promptly as practicable.
7. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent
or limit the Executive's continuing or future participation in any bonus or
incentive plan or program provided or maintained by the Corporation, the
Subsidiary or any other Affiliate and for which the Executive may qualify or be
selected, nor shall anything herein limit or otherwise prejudice such rights as
the Executive may have under any other existing or future agreements with the
Corporation, the Subsidiary or any Affiliate, including, without limitation, any
change of control agreements or any stock option, restricted stock, or stock
unit agreements, including the Restricted Stock Agreement and the Option
Agreements. Except as otherwise expressly provided for in this Agreement,
amounts which are vested benefits or which the Executive is otherwise entitled
to receive under any plans or programs of the Corporation, the Subsidiary or any
other Affiliate at or subsequent to the Date of Termination shall be payable in
accordance with such plans or programs.
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<PAGE>
8. FULL SETTLEMENT. The Corporation's obligation to make the payments
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any circumstances, including, without
limitation, any set-off, counterclaim, recoupment, defense or other right which
the Corporation may have against the Executive or others.
9. COSTS OF ENFORCEMENT. The following provisions of this Section 9
shall apply if it becomes necessary or desirable for the Executive to retain
legal counsel or incur other costs and expenses in connection with either
enforcing any and all of his rights under this Agreement or defending against
any allegations by the Corporation of breach of this Agreement by the Executive:
(a) The Executive shall be entitled to recover from the Corporation
reasonable attorneys' fees, costs and expenses incurred by him in
connection with such enforcement or defense.
(b) Payments required under this Section 9 shall be made by the Corporation
to the Executive (or directly to the Executive's attorney) promptly
following submission to the Corporation of appropriate documentation
evidencing the incurrence of such attorneys' fees, costs, and expenses.
(c) The Executive shall be entitled to select his legal counsel; provided,
however, that such right of selection shall not affect the requirement
that any costs and expenses reimbursable under this Section 9 be
reasonable.
(d) The Executive's rights to payments under this Section 9 shall not be
affected by the final outcome of any dispute with the Corporation;
provided, however, that to the extent that the court shall determine
that under the circumstances recovery by the Executive of all or a part
of any such fees and costs and expenses would be unjust or
inappropriate, the Executive shall not be entitled to such recovery;
and to the extent that such amounts have been recovered by the
Executive previously, the Executive shall repay such amounts to the
Corporation.
In addition, the Corporation will reimburse the Executive for the reasonable
attorney fees incurred in connection with the preparation and negotiation of
this Agreement.
10. CONFIDENTIAL INFORMATION AND NONCOMPETITION.
10.1. CONFIDENTIAL INFORMATION. The Executive shall not, during the
Term of Employment and thereafter, without the prior express written consent of
the Corporation or the Subsidiary, disclose any confidential information,
knowledge or data relating to the Corporation, the Subsidiary or any other
Affiliate and their respective businesses, which (a) was obtained by the
Executive in the course of the Executive's employment with the Corporation, and
(b) which is not information, knowledge or data otherwise in the public domain
(other than by reason of a breach of this provision by the Executive), unless
required to do so by a court of law or equity or by any governmental agency or
other authority. In no event shall an asserted violation of this Section 10.1
constitute a basis for delaying or withholding the payment of any amounts
otherwise payable to the Executive under this Agreement.
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<PAGE>
10.2. NONCOMPETITION. If the Executive terminates his employment
hereunder pursuant to Section 6.4 of this Agreement, then the Corporation, by
written notice given to the Executive within 30 days after the Executive
delivers a Notice of Termination in connection with a Voluntary Termination, may
require that this Section 10.2 apply. If the Corporation gives notice to the
Executive as provided in the preceding sentence, then the Executive, without the
express written consent of the Corporation, shall not, for the twelve month
period following the Date of Termination, engage in any business, whether as an
employee, consultant, partner, principal, agent, representative or stockholder
(other than as a stockholder of less than a 5% equity interest) or in any other
corporate or representative capacity, if it involves engaging in, or rendering
services or advice pertaining to, any lines of business the Corporation or the
Subsidiary was actively conducting on the Date of Termination. The obligation of
the Executive to abide by the restrictions set forth in the preceding sentence
shall be conditioned upon the Corporation continuing payment of the Executive's
Base Salary for the 12-month period during which such restriction shall be in
effect. Such Base Salary shall be paid at the rate in effect (as provided for in
Section 5.1 of this Agreement) on the Date of Termination. If the Corporation
shall institute any action or proceeding to enforce the provisions of this
Section 10.2, or shall file any claim in any proceeding to enforce such
provisions, the Executive hereby waives the claim or defense that the
Corporation has an adequate remedy at law and waives the requirement that the
Corporation post a bond in securing equitable relief, and the Executive shall
not contend in any such action or proceeding the claim or defense that an
adequate remedy at law exists.
11. SUCCESSORS.
11.1. THE EXECUTIVE. This Agreement is personal to the Executive and,
without the prior express written consent of the Corporation, shall not be
assignable by the Executive, except that the Executive's rights to receive any
compensation or benefits under this Agreement may be transferred or disposed of
pursuant to testamentary disposition, interstate succession or pursuant to a
domestic relations order of a court of competent jurisdiction. This Agreement
shall inure to the benefit of and be enforceable by the Executive's heirs,
beneficiaries and/or legal representatives.
11.2. THE CORPORATION. This Agreement shall inure to the benefit of and
be binding upon the Corporation and its successors and assigns. The Corporation
shall require any successor to all or substantially all of the business and/or
assets of the Corporation or the Subsidiary, whether direct or indirect, by
purchase, merger, consolidation, acquisition of stock, or otherwise, by an
agreement in form and substance satisfactory to the Executive, expressly to
assume and agree to perform this Agreement in the same manner and to the same
extent as the Corporation would be required to perform if no such succession had
taken place.
12. MISCELLANEOUS.
12.1. APPLICABLE LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York, applied without reference
to principles of conflict of laws.
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<PAGE>
12.2. AMENDMENTS. This Agreement may not be amended or modified
otherwise than by a written agreement executed by the parties hereto or their
respective successors and legal representatives.
12.3. NOTICES. All notices and other communications hereunder shall be
in writing and shall be given by hand-delivery to the other party or by
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Executive:
c/o Ethan Allen Drive
Danbury, Connecticut 06813
If to the Corporation:
c/o Ethan Allen Drive
Danbury, Connecticut 06813
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notices and communications shall be effective
when actually received by the addressee.
12.4. WITHHOLDING. The Corporation may withhold from any amounts
payable under this Agreement such federal, state or local income taxes as shall
be required to be withheld pursuant to any applicable law or regulation. If, at
any time on or after the Commencement Date, the Executive will recognize taxable
income with respect to the awards from the Corporation of Common Stock
(regardless of when such awards are made), the Executive may elect to have the
Corporation withhold from the shares to be delivered shares sufficient to
satisfy all or a portion of such tax withholding requirements.
12.5. SEVERABILITY. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement.
12.6. CAPTIONS. The captions of this Agreement are not part of the
provisions hereof and shall have no force or effect.
12.7. BENEFICIARIES/REFERENCES. The Executive shall be entitled to
select (and change) a beneficiary or beneficiaries to receive any compensation
or benefit payable hereunder following the Executive's death, and may change
such election, in either case by giving the Corporation written notice thereof.
In the event of the Executive's death or a judicial determination of his
incompetence, reference in this Agreement to the Executive shall be deemed,
where appropriate, to refer to other beneficiary(ies), estate or his legal
representative(s).
12.8. ENTIRE AGREEMENT.
(a) Upon the commencement of the Term of Employment, this Agreement will
contain the entire agreement between the parties concerning the subject
matter hereof and will supersede all prior agreements (including
without limitation the 1997 Agreement, except
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as otherwise specifically provided in this Agreement), understandings,
discussions, negotiations and undertakings, whether written or oral,
between the parties with respect to the subject matter hereof,
excluding: (i) the Restated Director Indemnification Agreement by and
between the Corporation and the Executive; (ii) the Option Agreements
and the Restricted Stock Agreement; and (iii) the agreements governing
the following awards associated with the Executive's employment by the
Corporation that were granted to the Executive prior to Commencement
Date: stock options (the "Prior Options"), restricted stock (the "Prior
Restricted Stock"), and stock units (the "Prior Stock Units").
(b) This Agreement shall not affect the Executive's rights to benefits
accrued prior to July 1, 2002 and the Executive's rights with respect
to Prior Options, Prior Restricted Stock, and Prior Stock Units shall
be governed by the respective stock option, restricted stock, and stock
unit agreements relating thereto. Notwithstanding the preceding
sentence, (i) the Executive's rights with respect to the Prior Options,
Prior Restricted Stock, and Prior Stock Units following the Executive's
Date of Termination shall be governed by the provisions of Section 6 of
this Agreement to the extent such provisions do not adversely affect
the Executive's rights under those awards, and (ii) the expiration of
the Agreement Term as defined in the 1997 Agreement shall not result in
vesting of any Prior Options, Prior Restricted Stock, or Prior Stock
Units pursuant to the last paragraph of Section 6.3 of the 1997
Agreement.
12.9. REPRESENTATION. The Corporation represents and warrants that it
is fully authorized and empowered to enter into this Agreement and that the
performance of its obligations under this Agreement will not violate any
agreement between the Corporation and any other person, firm or organization or
any applicable laws or regulations.
12.10. SURVIVORSHIP. The respective rights and obligations of the
parties hereunder shall survive any termination of this Agreement or the
Executive's employment hereunder to the extent necessary to the intended
preservation of such rights and obligations.
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IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and the Corporation has caused this Agreement to be executed in its name on its
behalf, and its corporate seal to be hereunto affixed and attested by its
Secretary, all as of the day and year first above written.
EXECUTIVE
/s/ M. Farooq Kathwari
-----------------------------------------
M. Farooq Kathwari
ETHAN ALLEN INTERIORS INC.
By: /s/ Edward Meyer
--------------------------------------
Edward Meyer
Its: Chairman, Compensation Committee
<PAGE>
Exhibit A-1
- -----------
2002 RESTRICTED STOCK AGREEMENT
THIS AGREEMENT, dated as of August 1, 2002 (the "Grant Date"), by and
between Ethan Allen Interiors, Inc. (the "Company") and M. Farooq Kathwari (the
"Executive").
WITNESSETH THAT:
WHEREAS, the Company and Executive have entered into an Employment
Agreement, dated as of August 1, 2002 (as amended in accordance with its terms,
the "Employment Agreement"); and
WHEREAS, the Company maintains the Ethan Allen Interiors Inc. 1992
Stock Option Plan (the "Plan"); and
WHEREAS, the Participant has been selected by the Compensation
Committee of the Board of Directors of the Company (the "Committee") to receive
an award under the Plan in accordance with the Employment Agreement, and this
Restricted Stock Agreement is being entered into pursuant to Section 5.2(b)
thereof;
NOW THEREFORE, IT IS AGREED between the Company and the Executive as
follows:
1. AWARD. Pursuant to Section 5.2(b) of the Employment Agreement, and
subject to the terms of this Agreement and the Employment Agreement, the
Executive is granted 10,500 shares of common stock, par value $.01 per share
("Common Stock") as of the Grant Date (all such shares, collectively, the
"Restricted Stock"). The award is subject to Section 6 of the Employment
Agreement. Such shares of Restricted Stock may consist, either in whole or in
part, of the Company's authorized and unissued Common Stock or shares of the
Company's authorized and issued Common Stock reacquired by the Company and held
in its Treasury.
2. RESTRICTIONS ON SHARES. During the Restricted Period (as described
in paragraph 4):
(a) Shares of Restricted Stock may not be sold, assigned, transferred,
pledged or otherwise encumbered.
(b) The certificate representing such shares shall be registered in the
name of the Executive shall be deposited with the Company, together
with a stock power (in such form as the Company may determine) and
shall be imprinted with a legend as referred to in paragraph 4.
(c) Subject to paragraph (d) below, the Executive shall be treated as a
stockholder with respect to shares of Restricted Stock, including the
right to vote such shares; provided, however, the Executive shall not
be entitled to vote shares of Restricted Stock with respect to record
dates occurring on or after the date, if any, on which the Executive
has forfeited such shares pursuant to paragraph 4.
<PAGE>
(d) As of each dividend record date for Company Common Stock occurring on
or after the date of grant of shares of Restricted Stock under this
Agreement and prior to the date such shares become vested or are
forfeited (i) no dividends shall be currently payable to the Executive
with respect to such shares; and (ii) an account established by the
Company for the benefit of the Executive shall be credited with the
amount of dividends which would have been paid with respect to such
shares in the absence of clause (i) above). Amounts credited to the
account shall be credited with interest at the rate of 5% per year
until distribution. The Executive shall be fully vested in all amounts
credited to the account balance (regardless of the subsequent vesting
or forfeiture of the shares). The balance credited to the Executive's
account shall be distributed to the Executive in cash as soon as
practicable after the Executive's termination of employment with the
Company and its affiliates for any reason.
3. TRANSFERS AT TERMINATION OF RESTRICTED PERIOD. At the end of the
Restricted Period, the certificate representing such share shall be transferred
to the Executive (or the Executive's legal representative or heir) free of all
legends and restrictions referred to in this Agreement.
4. VESTING AND FORFEITURES. The Restricted Period shall begin on the
Grant Date, and end on the third anniversary thereof (the "Vesting Date"). As of
the Vesting Date, the amount of such Restricted Stock which will vest will be
determined by reference to the Company's TRS Percentile (as defined below) for
the three-year period preceding such Vesting Date in accordance with the
following schedule:
======================================================== ==================
Company's TRS Percentile for Three-Year Period Prior to Shares Vested on
Vesting Date Such Vesting Date
- -------------------------------------------------------- ------------------
70% or Higher 10,500
Above 60% to 70% 8,400
Above 50% to 60% 6,300
Above 40% to 50% 4,200
40% and below 0
======================================================= ==================
For purposes of the foregoing schedule, "TRS Percentile" means, for the period
in question, the total return to the holders of Common Stock of the Company
(including dividends and distributions, and assuming they are reinvested) as
compared to the total return to holders of common stock of the companies
(including dividends and distributions, and assuming they are reinvested) which
comprise the Standard & Poor's 500 during such period, as determined in
accordance with recognized financial practices and pursuant to publicly
available sources. For this purpose, the price of Ethan Allen Common Stock (but
not the price of the stock of other companies which comprise the Standard &
Poor's 500) at the beginning and the end of such period shall be equal to the
average Fair Market Value (as that term is defined in the Plan) of a share of
Common Stock for the days on which the Common Stock is traded on the New York
Stock Exchange during the 60-calendar-day periods ending on the Grant Date and
the third anniversary of the Grant Date, respectively.
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Any shares of Restricted Stock which do not vest on the Vesting Date
shall be immediately forfeited by the Executive, and returned and released to
the Company, and the Executive thereafter shall have no further rights with
respect to such shares.
During the Restricted Period, all certificates evidencing the
Restricted Stock will be imprinted will the following legend: "The securities
evidenced by this certificate are subject to the transfer restrictions,
forfeitures and other provisions of the Restricted Stock Agreement, dated as of
August 1, 2002, between Ethan Allen Interiors, Inc. and M. Farooq Kathwari."
5. CHANGE IN CONTROL. Notwithstanding the provisions of paragraph 4, the
Restricted Period for all shares of Restricted Stock will end not later than the
date of a Change in Control, if the Executive is then employed by the Company
and such shares were not previously forfeited in accordance with paragraph 4.
For purposes of this Agreement, a "Change in Control" shall occur upon the
occurrence of any of the following:
(a) the Board or the shareholders of the Company or Ethan Allen Inc., a
Delaware corporation and a wholly owned subsidiary of the Company (the
"Subsidiary"), either or both, as may be required to authorize the
same, shall approve (i) any liquidation of the Company or the
Subsidiary, or the sale of substantially all of the assets of the
Company and the Subsidiary taken as a whole, or (ii) any merger,
consolidation and/or other business combination involving the Company
or the Subsidiary or any combination of any such transactions (a
"Transaction"), other than a Transaction (A) involving only the Company
and the Subsidiary, or (B) immediately after which the shareholders of
the Company who were shareholders immediately prior to the transaction
continue to own beneficially, directly or indirectly, in substantially
similar proportions to those in effect immediately prior to such
transaction more than 50% of the then outstanding voting securities of
the Company or the survivor or any parent thereof, as applicable;
(b) any Person (as defined below) or group (as such term is defined in Rule
13d-5 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) of related Persons (other than the Company, an employee benefit
plan sponsored by the Company or the Subsidiary, or a corporation owned
directly or indirectly by the stockholders of the Company in
substantially the same proportion as their ownership of the stock of
the Company) shall beneficially own, directly or indirectly, more than
50% of the then outstanding voting stock of the Company or the
Subsidiary (for purposes of this Agreement, "Person(s)" means any
individual, entity, or other person, as defined in Section 3(a)(9) of
the Exchange Act, and as used in Sections 13(d) and 14(d) thereof; or
(c) the Board or the Company shall authorize, approve or engage in any
Business Combination with an Interested Person, each as defined in
Article Fifth of the Company's Restated Certificate of Incorporation.
6. ADJUSTMENTS TO NUMBER OF SHARES. Subject to the following provisions
of this paragraph 6 in the event of any change in the outstanding shares of
common stock of the Company by reason of any stock dividend, split, spinoff,
recapitalization or other similar change, the terms and the number of shares of
any outstanding Restricted Stock shall be equitably adjusted by the Company to
the extent that such adjustment is necessary to preserve the benefit of this
Agreement for the Executive and the Company.
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<PAGE>
7. AGREEMENT NOT CONTRACT OF EMPLOYMENT. This Agreement does not
constitute a contract of employment, and does not give the Executive the right
to be retained in the employ of the Company.
8. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon, and
inure to the benefit of, the Company and its successors and assigns, and upon
any person acquiring, whether by merger, consolidation, purchase of assets or
otherwise, all or substantially all of the Company's assets and business.
9. APPLICABLE LAW. The provisions of this Agreement shall be construed
in accordance with the laws of the State of New York, without giving effect to
choice of law principles. Notwithstanding any other provision of this Agreement
to the contrary, the Company may subject shares of stock transferred pursuant to
this Agreement to such conditions, limitations or restrictions as the Company
determines to be necessary or desirable to comply with any applicable law or
regulation.
10. AMENDMENT. This Agreement may be amended by written agreement of
the Executive and the Company, without the consent of any other person.
11. PLAN AMENDMENT. The Plan is hereby amended to permit the award set
forth in this agreement, and the officers of the Company are authorized to
modify the Plan language to reflect such amendment.
IN WITNESS WHEREOF, the Executive has hereunto set his hand and the
Company has caused these presents to be executed in its name and on its behalf,
all as of the Grant Date.
/s/ M. Farooq Kathwari
-----------------------------------------
M. Farooq Kathwari
ETHAN ALLEN INTERIORS INC.
/s/ Edward Meyer
-----------------------------------------
By: Edward Meyer
Its: Chairman, Compensation Committee
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<PAGE>
Exhibit A-2
- -----------
RESTRICTED STOCK AGREEMENT
THIS AGREEMENT, dated as of July 1, 2003 (the "Agreement Date"), by and
between Ethan Allen Interiors, Inc. (the "Company") and M. Farooq Kathwari (the
"Executive").
WITNESSETH THAT:
WHEREAS, the Company and Executive have entered into an Employment
Agreement, dated as of August 1, 2002 (as amended in accordance with its terms,
the "Employment Agreement"); and
WHEREAS, the Company maintains the Ethan Allen Interiors Inc. 1992
Stock Option Plan (the "Plan"); and
WHEREAS, the Participant has been selected by the Compensation
Committee of the Board of Directors of the Company (the "Committee") to receive
an award under the Plan in accordance with the Employment Agreement, and this
Restricted Stock Agreement is being entered into pursuant to Section 5.2(b)
thereof;
NOW THEREFORE, IT IS AGREED between the Company and the Executive as
follows:
1. AWARD. Pursuant to Section 5.2(b) of the Employment Agreement, and
subject to the terms of this Agreement and the Employment Agreement, the
Executive is granted as of July 1, 2003 (the "Grant Date"), 10,500 shares of
common stock, par value $.01 per share ("Common Stock") as of the Grant Date
(all such shares, collectively, the "Restricted Stock"). The award is subject to
Section 6 of the Employment Agreement. Such shares of Restricted Stock may
consist, either in whole or in part, of the Company's authorized and unissued
Common Stock or shares of the Company's authorized and issued Common Stock
reacquired by the Company and held in its Treasury.
2. RESTRICTIONS ON SHARES. During the Restricted Period (as described
in paragraph 4):
(a) Shares of Restricted Stock may not be sold, assigned, transferred,
pledged or otherwise encumbered.
(b) The certificate representing such shares shall be registered in the
name of the Executive shall be deposited with the Company, together
with a stock power (in such form as the Company may determine) and
shall be imprinted with a legend as referred to in paragraph 4.
(c) Subject to paragraph (d) below, the Executive shall be treated as a
stockholder with respect to shares of Restricted Stock, including the
right to vote such shares; provided, however, the Executive shall not
be entitled to vote shares of Restricted Stock with respect to record
dates occurring on or after the date, if any, on which the Executive
has forfeited such shares pursuant to paragraph 4.
<PAGE>
(d) As of each dividend record date for Company Common Stock occurring on
or after the date of grant of shares of Restricted Stock under this
Agreement and prior to the date such shares become vested or are
forfeited (i) no dividends shall be currently payable to the Executive
with respect to such shares; and (ii) an account established by the
Company for the benefit of the Executive shall be credited with the
amount of dividends which would have been paid with respect to such
shares in the absence of clause (i) above). Amounts credited to the
account shall be credited with interest at the rate of 5% per year
until distribution. The Executive shall be fully vested in all amounts
credited to the account balance (regardless of the subsequent vesting
or forfeiture of the shares). The balance credited to the Executive's
account shall be distributed to the Executive in cash as soon as
practicable after the Executive's termination of employment with the
Company and its affiliates for any reason.
3. TRANSFERS AT TERMINATION OF RESTRICTED PERIOD. At the end of the
Restricted Period, the certificate representing such share shall be transferred
to the Executive (or the Executive's legal representative or heir) free of all
legends and restrictions referred to in this Agreement.
4. VESTING AND FORFEITURES. The Restricted Period shall begin on the
Grant Date, and end on the third anniversary thereof (the "Vesting Date"). As of
the Vesting Date, the amount of such Restricted Stock which will vest will be
determined by reference to the Company's TRS Percentile (as defined below) for
the three-year period preceding such Vesting Date in accordance with the
following schedule:
======================================================== ==================
Company's TRS Percentile for Three-Year Period Prior to Shares Vested on
Vesting Date Such Vesting Date
------------------------------------------------------- ------------------
70% or Higher 10,500
Above 60% to 70% 8,400
Above 50% to 60% 6,300
Above 40% to 50% 4,200
40% and below 0
======================================================= =================
For purposes of the foregoing schedule, "TRS Percentile" means, for the period
in question, the total return to the holders of Common Stock of the Company
(including dividends and distributions, and assuming they are reinvested) as
compared to the total return to holders of common stock of the companies
(including dividends and distributions, and assuming they are reinvested) which
comprise the Standard & Poor's 500 during such period, as determined in
accordance with recognized financial practices and pursuant to publicly
available sources. For this purpose, the price of Ethan Allen Common Stock (but
not the price of the stock of other companies which comprise the Standard &
Poor's 500) at the beginning and the end of such period shall be equal to the
average Fair Market Value (as that term is defined in the Plan) of a share of
Common Stock for the days on which the Common Stock is traded on the New York
Stock Exchange during the 60-calendar-day periods ending on the Grant Date and
the third anniversary of the date of the Grant Date, respectively.
-2-
<PAGE>
Any shares of Restricted Stock which do not vest on the Vesting Date
shall be immediately forfeited by the Executive, and returned and released to
the Company, and the Executive thereafter shall have no further rights with
respect to such shares.
During the Restricted Period, all certificates evidencing the
Restricted Stock will be imprinted will the following legend: "The securities
evidenced by this certificate are subject to the transfer restrictions,
forfeitures and other provisions of the Restricted Stock Agreement, dated as of
August 1, 2002, between Ethan Allen Interiors, Inc. and M. Farooq Kathwari."
5. CHANGE IN CONTROL. Notwithstanding the provisions of paragraph 4,
the Restricted Period for all shares of Restricted Stock will end not later than
the date of a Change in Control, if the Executive is then employed by the
Company and such shares were not previously forfeited in accordance with
paragraph 4. For purposes of this Agreement, a "Change in Control" shall occur
upon the occurrence of any of the following:
(a) the Board or the shareholders of the Company or Ethan Allen Inc., a
Delaware corporation and a wholly owned subsidiary of the Company (the
"Subsidiary"), either or both, as may be required to authorize the
same, shall approve (i) any liquidation of the Company or the
Subsidiary, or the sale of substantially all of the assets of the
Company and the Subsidiary taken as a whole, or (ii) any merger,
consolidation and/or other business combination involving the Company
or the Subsidiary or any combination of any such transactions (a
"Transaction"), other than a Transaction (A) involving only the Company
and the Subsidiary, or (B) immediately after which the shareholders of
the Company who were shareholders immediately prior to the transaction
continue to own beneficially, directly or indirectly, in substantially
similar proportions to those in effect immediately prior to such
transaction more than 50% of the then outstanding voting securities of
the Company or the survivor or any parent thereof, as applicable;
(b) any Person (as defined below) or group (as such term is defined in Rule
13d-5 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) of related Persons (other than the Company, an employee benefit
plan sponsored by the Company or the Subsidiary, or a corporation owned
directly or indirectly by the stockholders of the Company in
substantially the same proportion as their ownership of the stock of
the Company) shall beneficially own, directly or indirectly, more than
50% of the then outstanding voting stock of the Company or the
Subsidiary (for purposes of this Agreement, "Person(s)" means any
individual, entity, or other person, as defined in Section 3(a)(9) of
the Exchange Act, and as used in Sections 13(d) and 14(d) thereof; or
(c) the Board or the Company shall authorize, approve or engage in any
Business Combination with an Interested Person, each as defined in
Article Fifth of the Company's Restated Certificate of Incorporation.
6. ADJUSTMENTS TO NUMBER OF SHARES. Subject to the following provisions
of this paragraph 6 in the event of any change in the outstanding shares of
common stock of the Company by reason of any stock dividend, split, spinoff,
recapitalization or other similar change, the terms and the number of shares of
any outstanding Restricted Stock shall be equitably adjusted by the Company to
the extent that such adjustment is necessary to preserve the benefit of this
Agreement for the Executive and the Company.
-3-
<PAGE>
7. AGREEMENT NOT CONTRACT OF EMPLOYMENT. This Agreement does not
constitute a contract of employment, and does not give the Executive the right
to be retained in the employ of the Company.
8. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon, and
inure to the benefit of, the Company and its successors and assigns, and upon
any person acquiring, whether by merger, consolidation, purchase of assets or
otherwise, all or substantially all of the Company's assets and business.
9. APPLICABLE LAW. The provisions of this Agreement shall be construed
in accordance with the laws of the State of New York, without giving effect to
choice of law principles. Notwithstanding any other provision of this Agreement
to the contrary, the Company may subject shares of stock transferred pursuant to
this Agreement to such conditions, limitations or restrictions as the Company
determines to be necessary or desirable to comply with any applicable law or
regulation.
10. AMENDMENT. This Agreement may be amended by written agreement of
the Executive and the Company, without the consent of any other person.
11. PLAN AMENDMENT. The Plan is hereby amended to permit the award set
forth in this agreement, and the officers of the Company are authorized to
modify the Plan language to reflect such amendment.
IN WITNESS WHEREOF, the Executive has hereunto set his hand and the
Company has caused these presents to be executed in its name and on its behalf,
all as of the Grant Date.
/s/ M. Farooq Kathwari
-----------------------------------------
M. Farooq Kathwari
ETHAN ALLEN INTERIORS INC.
/s/ Edward Meyer
-----------------------------------------
By: Edward Meyer
Its: Chairman, Compensation Committee
-4-
<PAGE>
Exhibit A-3
- ------------
RESTRICTED STOCK AGREEMENT
THIS AGREEMENT, dated as of July 1, 2004 (the "Agreement Date"), by and
between Ethan Allen Interiors, Inc. (the "Company") and M. Farooq Kathwari (the
"Executive").
WITNESSETH THAT:
WHEREAS, the Company and Executive have entered into an Employment
Agreement, dated as of August 1, 2002 (as amended in accordance with its terms,
the "Employment Agreement"); and
WHEREAS, the Company maintains the Ethan Allen Interiors Inc. 1992 Stock
Option Plan (the "Plan"); and
WHEREAS, the Participant has been selected by the Compensation
Committee of the Board of Directors of the Company (the "Committee") to receive
an award under the Plan in accordance with the Employment Agreement, and this
Restricted Stock Agreement is being entered into pursuant to Section 5.2(b)
thereof;
NOW THEREFORE, IT IS AGREED between the Company and the Executive as
follows:
1. AWARD. Pursuant to Section 5.2(b) of the Employment Agreement, and
subject to the terms of this Agreement and the Employment Agreement, the
Executive is granted as of July 1, 2004 (the "Grant Date"), 10,500 shares of
common stock, par value $.01 per share ("Common Stock") as of the Grant Date
(all such shares, collectively, the "Restricted Stock"). The award is subject to
Section 6 of the Employment Agreement. Such shares of Restricted Stock may
consist, either in whole or in part, of the Company's authorized and unissued
Common Stock or shares of the Company's authorized and issued Common Stock
reacquired by the Company and held in its Treasury.
2. RESTRICTIONS ON SHARES. During the Restricted Period (as described in
paragraph 4):
(a) Shares of Restricted Stock may not be sold, assigned, transferred,
pledged or otherwise encumbered.
(b) The certificate representing such shares shall be registered in the
name of the Executive shall be deposited with the Company, together
with a stock power (in such form as the Company may determine) and
shall be imprinted with a legend as referred to in paragraph 4.
(c) Subject to paragraph (d) below, the Executive shall be treated as a
stockholder with respect to shares of Restricted Stock, including the
right to vote such shares; provided, however, the Executive shall not
be entitled to vote shares of Restricted Stock with respect to record
dates occurring on or after the date, if any, on which the Executive
has forfeited such shares pursuant to paragraph 4.
<PAGE>
(d) As of each dividend record date for Company Common Stock occurring on
or after the date of grant of shares of Restricted Stock under this
Agreement and prior to the date such shares become vested or are
forfeited (i) no dividends shall be currently payable to the Executive
with respect to such shares; and (ii) an account established by the
Company for the benefit of the Executive shall be credited with the
amount of dividends which would have been paid with respect to such
shares in the absence of clause (i) above). Amounts credited to the
account shall be credited with interest at the rate of 5% per year
until distribution. The Executive shall be fully vested in all amounts
credited to the account balance (regardless of the subsequent vesting
or forfeiture of the shares). The balance credited to the Executive's
account shall be distributed to the Executive in cash as soon as
practicable after the Executive's termination of employment with the
Company and its affiliates for any reason.
3. TRANSFERS AT TERMINATION OF RESTRICTED PERIOD. At the end of the
Restricted Period, the certificate representing such share shall be transferred
to the Executive (or the Executive's legal representative or heir) free of all
legends and restrictions referred to in this Agreement.
4. VESTING AND FORFEITURES. The Restricted Period shall begin on the
Grant Date, and end on the third anniversary thereof (the "Vesting Date"). As of
the Vesting Date, the amount of such Restricted Stock which will vest will be
determined by reference to the Company's TRS Percentile (as defined below) for
the three-year period preceding such Vesting Date in accordance with the
following schedule:
======================================================== ====================
Company's TRS Percentile for Three-Year Period Prior to Shares Vested on
Vesting Date Such Vesting Date
- -------------------------------------------------------- --------------------
70% or Higher 10,500
Above 60% to 70% 8,400
Above 50% to 60% 6,300
Above 40% to 50% 4,200
40% and below 0
======================================================= ====================
For purposes of the foregoing schedule, "TRS Percentile" means, for the period
in question, the total return to the holders of Common Stock of the Company
(including dividends and distributions, and assuming they are reinvested) as
compared to the total return to holders of common stock of the companies
(including dividends and distributions, and assuming they are reinvested) which
comprise the Standard & Poor's 500 during such period, as determined in
accordance with recognized financial practices and pursuant to publicly
available sources. For this purpose, the price of Ethan Allen Common Stock (but
not the price of the stock of other companies which comprise the Standard &
Poor's 500) at the beginning and the end of such period shall be equal to the
average Fair Market Value (as that term is defined in the Plan) of a share of
Common Stock for the days on which the Common Stock is traded on the New York
Stock Exchange during the 60-calendar-day periods ending on the Grant Date and
the third anniversary of the date of the Grant Date, respectively.
-2-
<PAGE>
Any shares of Restricted Stock which do not vest on the Vesting Date
shall be immediately forfeited by the Executive, and returned and released to
the Company, and the Executive thereafter shall have no further rights with
respect to such shares.
During the Restricted Period, all certificates evidencing the
Restricted Stock will be imprinted will the following legend: "The securities
evidenced by this certificate are subject to the transfer restrictions,
forfeitures and other provisions of the Restricted Stock Agreement, dated as of
August 1, 2002, between Ethan Allen Interiors, Inc. and M. Farooq Kathwari."
5. CHANGE IN CONTROL. Notwithstanding the provisions of paragraph 4,
the Restricted Period for all shares of Restricted Stock will end not later than
the date of a Change in Control, if the Executive is then employed by the
Company and such shares were not previously forfeited in accordance with
paragraph 4. For purposes of this Agreement, a "Change in Control" shall occur
upon the occurrence of any of the following:
(a) the Board or the shareholders of the Company or Ethan Allen Inc., a
Delaware corporation and a wholly owned subsidiary of the Company (the
"Subsidiary"), either or both, as may be required to authorize the
same, shall approve (i) any liquidation of the Company or the
Subsidiary, or the sale of substantially all of the assets of the
Company and the Subsidiary taken as a whole, or (ii) any merger,
consolidation and/or other business combination involving the Company
or the Subsidiary or any combination of any such transactions (a
"Transaction"), other than a Transaction (A) involving only the Company
and the Subsidiary, or (B) immediately after which the shareholders of
the Company who were shareholders immediately prior to the transaction
continue to own beneficially, directly or indirectly, in substantially
similar proportions to those in effect immediately prior to such
transaction more than 50% of the then outstanding voting securities of
the Company or the survivor or any parent thereof, as applicable;
(b) any Person (as defined below) or group (as such term is defined in Rule
13d-5 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) of related Persons (other than the Company, an employee benefit
plan sponsored by the Company or the Subsidiary, or a corporation owned
directly or indirectly by the stockholders of the Company in
substantially the same proportion as their ownership of the stock of
the Company) shall beneficially own, directly or indirectly, more than
50% of the then outstanding voting stock of the Company or the
Subsidiary (for purposes of this Agreement, "Person(s)" means any
individual, entity, or other person, as defined in Section 3(a)(9) of
the Exchange Act, and as used in Sections 13(d) and 14(d) thereof; or
(c) the Board or the Company shall authorize, approve or engage in any
Business Combination with an Interested Person, each as defined in
Article Fifth of the Company's Restated Certificate of Incorporation.
6. ADJUSTMENTS TO NUMBER OF SHARES. Subject to the following provisions
of this paragraph 6 in the event of any change in the outstanding shares of
common stock of the Company by reason of any stock dividend, split, spinoff,
recapitalization or other similar change, the terms and the number of shares of
any outstanding Restricted Stock shall be equitably adjusted by the Company to
the extent that such adjustment is necessary to preserve the benefit of this
Agreement for the Executive and the Company.
-3-
<PAGE>
7. AGREEMENT NOT CONTRACT OF EMPLOYMENT. This Agreement does not
constitute a contract of employment, and does not give the Executive the right
to be retained in the employ of the Company.
8. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon, and
inure to the benefit of, the Company and its successors and assigns, and upon
any person acquiring, whether by merger, consolidation, purchase of assets or
otherwise, all or substantially all of the Company's assets and business.
9. APPLICABLE LAW. The provisions of this Agreement shall be construed
in accordance with the laws of the State of New York, without giving effect to
choice of law principles. Notwithstanding any other provision of this Agreement
to the contrary, the Company may subject shares of stock transferred pursuant to
this Agreement to such conditions, limitations or restrictions as the Company
determines to be necessary or desirable to comply with any applicable law or
regulation.
10. AMENDMENT. This Agreement may be amended by written agreement of
the Executive and the Company, without the consent of any other person.
11. PLAN AMENDMENT. The Plan is hereby amended to permit the award set
forth in this agreement, and the officers of the Company are authorized to
modify the Plan language to reflect such amendment.
IN WITNESS WHEREOF, the Executive has hereunto set his hand and the
Company has caused these presents to be executed in its name and on its behalf,
all as of the Grant Date.
/s/ M. Farooq Kathwari
-----------------------------------------
M. Farooq Kathwari
ETHAN ALLEN INTERIORS INC.
/s/ Edward Meyer
-----------------------------------------
By: Edward Meyer
Its: Chairman, Compensation Committee
-4-
<PAGE>
Exhibit A-4
- -----------
RESTRICTED STOCK AGREEMENT
THIS AGREEMENT, dated as of July 1, 2005 (the "Agreement Date"), by and
between Ethan Allen Interiors, Inc. (the "Company") and M. Farooq Kathwari (the
"Executive").
WITNESSETH THAT:
WHEREAS, the Company and Executive have entered into an Employment
Agreement, dated as of August 1, 2002 (as amended in accordance with its terms,
the "Employment Agreement"); and
WHEREAS, the Company maintains the Ethan Allen Interiors Inc. 1992
Stock Option Plan (the "Plan"); and
WHEREAS, the Participant has been selected by the Compensation
Committee of the Board of Directors of the Company (the "Committee") to receive
an award under the Plan in accordance with the Employment Agreement, and this
Restricted Stock Agreement is being entered into pursuant to Section 5.2(b)
thereof;
NOW THEREFORE, IT IS AGREED between the Company and the Executive as
follows:
1. AWARD. Pursuant to Section 5.2(b) of the Employment Agreement, and
subject to the terms of this Agreement and the Employment Agreement, the
Executive is granted as of July 1, 2005 (the "Grant Date"), 10,500 shares of
common stock, par value $.01 per share ("Common Stock") as of the Grant Date
(all such shares, collectively, the "Restricted Stock"). The award is subject to
Section 6 of the Employment Agreement. Such shares of Restricted Stock may
consist, either in whole or in part, of the Company's authorized and unissued
Common Stock or shares of the Company's authorized and issued Common Stock
reacquired by the Company and held in its Treasury.
2. RESTRICTIONS ON SHARES. During the Restricted Period (as described
in paragraph 4):
(a) Shares of Restricted Stock may not be sold, assigned, transferred,
pledged or otherwise encumbered.
(b) The certificate representing such shares shall be registered in the
name of the Executive shall be deposited with the Company, together
with a stock power (in such form as the Company may determine) and
shall be imprinted with a legend as referred to in paragraph 4.
(c) Subject to paragraph (d) below, the Executive shall be treated as a
stockholder with respect to shares of Restricted Stock, including the
right to vote such shares; provided, however, the Executive shall not
be entitled to vote shares of Restricted Stock with respect to record
dates occurring on or after the date, if any, on which the Executive
has forfeited such shares pursuant to paragraph 4.
<PAGE>
(d) As of each dividend record date for Company Common Stock occurring on
or after the date of grant of shares of Restricted Stock under this
Agreement and prior to the date such shares become vested or are
forfeited (i) no dividends shall be currently payable to the Executive
with respect to such shares; and (ii) an account established by the
Company for the benefit of the Executive shall be credited with the
amount of dividends which would have been paid with respect to such
shares in the absence of clause (i) above). Amounts credited to the
account shall be credited with interest at the rate of 5% per year
until distribution. The Executive shall be fully vested in all amounts
credited to the account balance (regardless of the subsequent vesting
or forfeiture of the shares). The balance credited to the Executive's
account shall be distributed to the Executive in cash as soon as
practicable after the Executive's termination of employment with the
Company and its affiliates for any reason.
3. TRANSFERS AT TERMINATION OF RESTRICTED PERIOD. At the end of the
Restricted Period, the certificate representing such share shall be transferred
to the Executive (or the Executive's legal representative or heir) free of all
legends and restrictions referred to in this Agreement.
4. VESTING AND FORFEITURES. The Restricted Period shall begin on the
Grant Date, and end on the third anniversary thereof (the "Vesting Date"). As of
the Vesting Date, the amount of such Restricted Stock which will vest will be
determined by reference to the Company's TRS Percentile (as defined below) for
the three-year period preceding such Vesting Date in accordance with the
following schedule:
======================================================== ==================
Company's TRS Percentile for Three-Year Period Prior to Shares Vested on
Vesting Date Such Vesting Date
- -------------------------------------------------------- ------------------
70% or Higher 10,500
Above 60% to 70% 8,400
Above 50% to 60% 6,300
Above 40% to 50% 4,200
40% and below 0
======================================================= ==================
For purposes of the foregoing schedule, "TRS Percentile" means, for the period
in question, the total return to the holders of Common Stock of the Company
(including dividends and distributions, and assuming they are reinvested) as
compared to the total return to holders of common stock of the companies
(including dividends and distributions, and assuming they are reinvested) which
comprise the Standard & Poor's 500 during such period, as determined in
accordance with recognized financial practices and pursuant to publicly
available sources. For this purpose, the price of Ethan Allen Common Stock (but
not the price of the stock of other companies which comprise the Standard &
Poor's 500) at the beginning and the end of such period shall be equal to the
average Fair Market Value (as that term is defined in the Plan) of a share of
Common Stock for the days on which the Common Stock is traded on the New York
Stock Exchange during the 60-calendar-day periods ending on the Grant Date and
the third anniversary of the date of the Grant Date, respectively.
-2-
<PAGE>
Any shares of Restricted Stock which do not vest on the Vesting Date
shall be immediately forfeited by the Executive, and returned and released to
the Company, and the Executive thereafter shall have no further rights with
respect to such shares.
During the Restricted Period, all certificates evidencing the
Restricted Stock will be imprinted will the following legend: "The securities
evidenced by this certificate are subject to the transfer restrictions,
forfeitures and other provisions of the Restricted Stock Agreement, dated as of
August 1, 2002, between Ethan Allen Interiors, Inc. and M. Farooq Kathwari."
5. CHANGE IN CONTROL. Notwithstanding the provisions of paragraph 4,
the Restricted Period for all shares of Restricted Stock will end not later than
the date of a Change in Control, if the Executive is then employed by the
Company and such shares were not previously forfeited in accordance with
paragraph 4. For purposes of this Agreement, a "Change in Control" shall occur
upon the occurrence of any of the following:
(a) the Board or the shareholders of the Company or Ethan Allen Inc., a
Delaware corporation and a wholly owned subsidiary of the Company (the
"Subsidiary"), either or both, as may be required to authorize the
same, shall approve (i) any liquidation of the Company or the
Subsidiary, or the sale of substantially all of the assets of the
Company and the Subsidiary taken as a whole, or (ii) any merger,
consolidation and/or other business combination involving the Company
or the Subsidiary or any combination of any such transactions (a
"Transaction"), other than a Transaction (A) involving only the Company
and the Subsidiary, or (B) immediately after which the shareholders of
the Company who were shareholders immediately prior to the transaction
continue to own beneficially, directly or indirectly, in substantially
similar proportions to those in effect immediately prior to such
transaction more than 50% of the then outstanding voting securities of
the Company or the survivor or any parent thereof, as applicable;
(b) any Person (as defined below) or group (as such term is defined in Rule
13d-5 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) of related Persons (other than the Company, an employee benefit
plan sponsored by the Company or the Subsidiary, or a corporation owned
directly or indirectly by the stockholders of the Company in
substantially the same proportion as their ownership of the stock of
the Company) shall beneficially own, directly or indirectly, more than
50% of the then outstanding voting stock of the Company or the
Subsidiary (for purposes of this Agreement, "Person(s)" means any
individual, entity, or other person, as defined in Section 3(a)(9) of
the Exchange Act, and as used in Sections 13(d) and 14(d) thereof; or
(c) the Board or the Company shall authorize, approve or engage in any
Business Combination with an Interested Person, each as defined in
Article Fifth of the Company's Restated Certificate of Incorporation.
6. ADJUSTMENTS TO NUMBER OF SHARES. Subject to the following provisions
of this paragraph 6 in the event of any change in the outstanding shares of
common stock of the Company by reason of any stock dividend, split, spinoff,
recapitalization or other similar change, the terms and the number of shares of
any outstanding Restricted Stock shall be equitably adjusted by the Company to
the extent that such adjustment is necessary to preserve the benefit of this
Agreement for the Executive and the Company.
-3-
<PAGE>
7. AGREEMENT NOT CONTRACT OF EMPLOYMENT. This Agreement does not
constitute a contract of employment, and does not give the Executive the right
to be retained in the employ of the Company.
8. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon, and
inure to the benefit of, the Company and its successors and assigns, and upon
any person acquiring, whether by merger, consolidation, purchase of assets or
otherwise, all or substantially all of the Company's assets and business.
9. APPLICABLE LAW. The provisions of this Agreement shall be construed
in accordance with the laws of the State of New York, without giving effect to
choice of law principles. Notwithstanding any other provision of this Agreement
to the contrary, the Company may subject shares of stock transferred pursuant to
this Agreement to such conditions, limitations or restrictions as the Company
determines to be necessary or desirable to comply with any applicable law or
regulation.
10. AMENDMENT. This Agreement may be amended by written agreement of
the Executive and the Company, without the consent of any other person.
11. PLAN AMENDMENT. The Plan is hereby amended to permit the award set
forth in this agreement, and the officers of the Company are authorized to
modify the Plan language to reflect such amendment.
IN WITNESS WHEREOF, the Executive has hereunto set his hand and the
Company has caused these presents to be executed in its name and on its behalf,
all as of the Grant Date.
/s/ M. Farooq Kathwari
-----------------------------------------
M. Farooq Kathwari
ETHAN ALLEN INTERIORS INC.
/s/ Edward Meyer
-----------------------------------------
By: Edward Meyer
Its: Chairman, Compensation Committee
-4-
<PAGE>
Exhibit A-5
- -----------
RESTRICTED STOCK AGREEMENT
THIS AGREEMENT, dated as of July 1, 2006 (the "Agreement Date"), by and
between Ethan Allen Interiors, Inc. (the "Company") and M. Farooq Kathwari (the
"Executive").
WITNESSETH THAT:
WHEREAS, the Company and Executive have entered into an Employment
Agreement, dated as of August 1, 2002 (as amended in accordance with its terms,
the "Employment Agreement"); and
WHEREAS, the Company maintains the Ethan Allen Interiors Inc. 1992
Stock Option Plan (the "Plan"); and
WHEREAS, the Participant has been selected by the Compensation
Committee of the Board of Directors of the Company (the "Committee") to receive
an award under the Plan in accordance with the Employment Agreement, and this
Restricted Stock Agreement is being entered into pursuant to Section 5.2(b)
thereof;
NOW THEREFORE, IT IS AGREED between the Company and the Executive as
follows:
1. AWARD. Pursuant to Section 5.2(b) of the Employment Agreement, and
subject to the terms of this Agreement and the Employment Agreement, the
Executive is granted as of July 1, 2006 (the "Grant Date"), 10,500 shares of
common stock, par value $.01 per share ("Common Stock") as of the Grant Date
(all such shares, collectively, the "Restricted Stock"). The award is subject to
Section 6 of the Employment Agreement. Such shares of Restricted Stock may
consist, either in whole or in part, of the Company's authorized and unissued
Common Stock or shares of the Company's authorized and issued Common Stock
reacquired by the Company and held in its Treasury.
2. RESTRICTIONS ON SHARES. During the Restricted Period (as described
in paragraph 4):
(a) Shares of Restricted Stock may not be sold, assigned, transferred,
pledged or otherwise encumbered.
(b) The certificate representing such shares shall be registered in the
name of the Executive shall be deposited with the Company, together
with a stock power (in such form as the Company may determine) and
shall be imprinted with a legend as referred to in paragraph 4.
(c) Subject to paragraph (d) below, the Executive shall be treated as a
stockholder with respect to shares of Restricted Stock, including the
right to vote such shares; provided, however, the Executive shall not
be entitled to vote shares of Restricted Stock with respect to record
dates occurring on or after the date, if any, on which the Executive
has forfeited such shares pursuant to paragraph 4.
<PAGE>
(d) As of each dividend record date for Company Common Stock occurring on
or after the date of grant of shares of Restricted Stock under this
Agreement and prior to the date such shares become vested or are
forfeited (i) no dividends shall be currently payable to the Executive
with respect to such shares; and (ii) an account established by the
Company for the benefit of the Executive shall be credited with the
amount of dividends which would have been paid with respect to such
shares in the absence of clause (i) above). Amounts credited to the
account shall be credited with interest at the rate of 5% per year
until distribution. The Executive shall be fully vested in all amounts
credited to the account balance (regardless of the subsequent vesting
or forfeiture of the shares). The balance credited to the Executive's
account shall be distributed to the Executive in cash as soon as
practicable after the Executive's termination of employment with the
Company and its affiliates for any reason.
3. TRANSFERS AT TERMINATION OF RESTRICTED PERIOD. At the end of the
Restricted Period, the certificate representing such share shall be transferred
to the Executive (or the Executive's legal representative or heir) free of all
legends and restrictions referred to in this Agreement.
4. VESTING AND FORFEITURES. The Restricted Period shall begin on the
Grant Date, and end on the third anniversary thereof (the "Vesting Date"). As of
the Vesting Date, the amount of such Restricted Stock which will vest will be
determined by reference to the Company's TRS Percentile (as defined below) for
the three-year period preceding such Vesting Date in accordance with the
following schedule:
========================================================= =================
Company's TRS Percentile for Three-Year Period Prior to Shares Vested on
Vesting Date Such Vesting Date
- --------------------------------------------------------- -----------------
70% or Higher 10,500
Above 60% to 70% 8,400
Above 50% to 60% 6,300
Above 40% to 50% 4,200
40% and below 0
========================================================= =================
For purposes of the foregoing schedule, "TRS Percentile" means, for the period
in question, the total return to the holders of Common Stock of the Company
(including dividends and distributions, and assuming they are reinvested) as
compared to the total return to holders of common stock of the companies
(including dividends and distributions, and assuming they are reinvested) which
comprise the Standard & Poor's 500 during such period, as determined in
accordance with recognized financial practices and pursuant to publicly
available sources. For this purpose, the price of Ethan Allen Common Stock (but
not the price of the stock of other companies which comprise the Standard &
Poor's 500) at the beginning and the end of such period shall be equal to the
average Fair Market Value (as that term is defined in the Plan) of a share of
Common Stock for the days on which the Common Stock is traded on the New York
Stock Exchange during the 60-calendar-day periods ending on the Grant Date and
the third anniversary of the date of the Grant Date, respectively.
-2-
<PAGE>
Any shares of Restricted Stock which do not vest on the Vesting Date
shall be immediately forfeited by the Executive, and returned and released to
the Company, and the Executive thereafter shall have no further rights with
respect to such shares.
During the Restricted Period, all certificates evidencing the
Restricted Stock will be imprinted will the following legend: "The securities
evidenced by this certificate are subject to the transfer restrictions,
forfeitures and other provisions of the Restricted Stock Agreement, dated as of
August 1, 2002, between Ethan Allen Interiors, Inc. and M. Farooq Kathwari."
5. CHANGE IN CONTROL. Notwithstanding the provisions of paragraph 4,
the Restricted Period for all shares of Restricted Stock will end not later than
the date of a Change in Control, if the Executive is then employed by the
Company and such shares were not previously forfeited in accordance with
paragraph 4. For purposes of this Agreement, a "Change in Control" shall occur
upon the occurrence of any of the following:
(a) the Board or the shareholders of the Company or Ethan Allen Inc., a
Delaware corporation and a wholly owned subsidiary of the Company (the
"Subsidiary"), either or both, as may be required to authorize the
same, shall approve (i) any liquidation of the Company or the
Subsidiary, or the sale of substantially all of the assets of the
Company and the Subsidiary taken as a whole, or (ii) any merger,
consolidation and/or other business combination involving the Company
or the Subsidiary or any combination of any such transactions (a
"Transaction"), other than a Transaction (A) involving only the Company
and the Subsidiary, or (B) immediately after which the shareholders of
the Company who were shareholders immediately prior to the transaction
continue to own beneficially, directly or indirectly, in substantially
similar proportions to those in effect immediately prior to such
transaction more than 50% of the then outstanding voting securities of
the Company or the survivor or any parent thereof, as applicable;
(b) any Person (as defined below) or group (as such term is defined in Rule
13d-5 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) of related Persons (other than the Company, an employee benefit
plan sponsored by the Company or the Subsidiary, or a corporation owned
directly or indirectly by the stockholders of the Company in
substantially the same proportion as their ownership of the stock of
the Company) shall beneficially own, directly or indirectly, more than
50% of the then outstanding voting stock of the Company or the
Subsidiary (for purposes of this Agreement, "Person(s)" means any
individual, entity, or other person, as defined in Section 3(a)(9) of
the Exchange Act, and as used in Sections 13(d) and 14(d) thereof; or
(c) the Board or the Company shall authorize, approve or engage in any
Business Combination with an Interested Person, each as defined in
Article Fifth of the Company's Restated Certificate of Incorporation.
6. ADJUSTMENTS TO NUMBER OF SHARES. Subject to the following provisions
of this paragraph 6 in the event of any change in the outstanding shares of
common stock of the Company by reason of any stock dividend, split, spinoff,
recapitalization or other similar change, the terms and the number of shares of
any outstanding Restricted Stock shall be equitably adjusted by the Company to
the extent that such adjustment is necessary to preserve the benefit of this
Agreement for the Executive and the Company.
-3-
<PAGE>
7. AGREEMENT NOT CONTRACT OF EMPLOYMENT. This Agreement does not
constitute a contract of employment, and does not give the Executive the right
to be retained in the employ of the Company.
8. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon, and
inure to the benefit of, the Company and its successors and assigns, and upon
any person acquiring, whether by merger, consolidation, purchase of assets or
otherwise, all or substantially all of the Company's assets and business.
9. APPLICABLE LAW. The provisions of this Agreement shall be construed
in accordance with the laws of the State of New York, without giving effect to
choice of law principles. Notwithstanding any other provision of this Agreement
to the contrary, the Company may subject shares of stock transferred pursuant to
this Agreement to such conditions, limitations or restrictions as the Company
determines to be necessary or desirable to comply with any applicable law or
regulation.
10. AMENDMENT. This Agreement may be amended by written agreement of
the Executive and the Company, without the consent of any other person.
11. PLAN AMENDMENT. The Plan is hereby amended to permit the award set
forth in this agreement, and the officers of the Company are authorized to
modify the Plan language to reflect such amendment.
IN WITNESS WHEREOF, the Executive has hereunto set his hand and the
Company has caused these presents to be executed in its name and on its behalf,
all as of the Grant Date.
/s/ M. Farooq Kathwari
-----------------------------------------
M. Farooq Kathwari
ETHAN ALLEN INTERIORS INC.
/s/ Edward Meyer
-----------------------------------------
By: Edward Meyer
Its: Chairman, Compensation Committee
-4-
<PAGE>
Exhibit B - August 1, 2002 Grant Date
- -------------------------------------
STOCK OPTION AGREEMENT
THIS AGREEMENT, dated as of August 1, 2002 (the "Agreement Date") and
entered into by and between Ethan Allen Interiors Inc. (the "Company") and M.
Farooq Kathwari (the "Participant").
WITNESSETH THAT:
---------------
WHEREAS, the Company and Executive have entered into an Employment
Agreement, dated as of August 1, 2002 (as amended in accordance with its terms,
the "Employment Agreement"); and
WHEREAS, the Company maintains the Ethan Allen Interiors Inc. 1992
Stock Option Plan (the "Plan"); and
WHEREAS, the Participant has been selected by the Compensation
Committee of the Board of Directors of the Company (the "Committee") to receive
an award under the Plan in accordance with the Employment Agreement, and this
Stock Option Agreement is being entered into pursuant to Section 5.2(c)(i)
thereof;
WHEREAS, to the extent not specified in the Plan, the terms of the
award have been determined by the Committee and in accordance with the
Employment Agreement and are set forth in this Agreement;
NOW THEREFORE, IT IS AGREED between the Company and the Participant as
follows:
1. AWARD; OPTION PRICE. Subject to the terms of this Agreement, the
Participant is granted, as of the date of this Agreement (the "Grant Date"), a
"Stock Option" to purchase 600,000 shares of Common Stock, which is the number
of the "Covered Shares," at a per share exercise price equal to the Fair Market
Value (as that term is defined in the Plan) of a share of Common Stock on the
New York Stock Exchange as of the Grant Date.
2. VESTING; FORFEITURES. Subject to the limitations of this Agreement,
each Installment of Covered Shares of the Stock Option shall be exercisable on
and after the Vesting Date for such Installment as described in the following
schedule (but, subject to the terms of the Employment Agreement, only if the
Date of Termination has not occurred before the Vesting Date):
------------------------------- --------------------------------------------
Installment Vesting Date applicable to that Installment
------------------------------- --------------------------------------------
33 1/3% of Covered Shares First Anniversary of Grant Date
33 1/3% of Covered Shares Second Anniversary of Grant Date
33 1/3% of Covered Shares Third Anniversary of Grant Date
------------------------------- --------------------------------------------
Notwithstanding the foregoing provisions of this paragraph 2, the Stock Option
shall become vested and exercisable not later than the time or times provided by
the Employment Agreement. Except as otherwise provided in the Employment
Agreement, the Stock Option may be exercised
<PAGE>
on or after the Date of Termination only as to that portion of the Covered
Shares for which it was exercisable immediately prior to the Date of
Termination, or became exercisable upon the Date of Termination.
3. CHANGE IN CONTROL. Notwithstanding the provisions of paragraph 2,
the Stock Option will become immediately exercisable upon the occurrence of a
Change in Control, if the Executive is then employed by the Company and such
options have not previously been forfeited in accordance with paragraph 2. For
purposes of this Agreement, a "Change in Control" shall occur upon the
occurrence of any of the following:
(a) the Board or the shareholders of the Company or Ethan Allen Inc., a
Delaware corporation and a wholly owned subsidiary of the Company (the
"Subsidiary"), either or both, as may be required to authorize the
same, shall approve (i) any liquidation of the Company or the
Subsidiary, or the sale of substantially all of the assets of the
Company and the Subsidiary taken as a whole, or (ii) any merger,
consolidation and/or other business combination involving the Company
or the Subsidiary or any combination of any such transactions (a
"Transaction"), other than a Transaction (A) involving only the Company
and the Subsidiary, or (B) immediately after which the shareholders of
the Company who were shareholders immediately prior to the transaction
continue to own beneficially, directly or indirectly, in substantially
similar proportions to those in effect immediately prior to such
transaction more than 50% of the then outstanding voting securities of
the Company or the survivor or any parent thereof, as applicable;
(b) any Person (as defined below) or group (as such term is defined in Rule
13d-5 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) of related Persons (other than the Company, an employee benefit
plan sponsored by the Company or the Subsidiary, or a corporation owned
directly or indirectly by the stockholders of the Company in
substantially the same proportion as their ownership of the stock of
the Company) shall beneficially own, directly or indirectly, more than
50% of the then outstanding voting stock of the Company or the
Subsidiary (for purposes of this Agreement, "Person(s)" means any
individual, entity, or other person, as defined in Section 3(a)(9) of
the Exchange Act, and as used in Sections 13(d) and 14(d) thereof; or
(c) the Board or the Company shall authorize, approve or engage in any
Business Combination with an Interested Person, each as defined in
Article Fifth of the Company's Restated Certificate of Incorporation.
4. EXERCISE. Subject to the terms of this Agreement and the Plan, the
Stock Option may be exercised in accordance with the following:
(a) To the extent that it is exercisable, the Stock Option may be exercised
in whole or in part at any time prior to the Expiration Date (as
defined in paragraph 5); provided however that the Stock Option may
only be exercised with respect to whole shares of Common Stock.
-2-
<PAGE>
(b) The Stock Option may be exercised with respect to no less than 100
shares of Common Stock, or if less than 100 shares are then
exercisable, the number of whole shares then exercisable.
(c) Payment of the Option Price shall be by cash or by check payable to the
Company. All or a portion of the Option Price may be paid by the
Participant by delivery of shares of Stock owned by the Participant
having an aggregate Fair Market Value (valued as of the date of
exercise) that is equal to the amount of cash that would otherwise be
required. Except as otherwise provided by the Committee, payments made
with shares of Common Stock in accordance with the preceding sentence
shall be limited to shares held by the Participant for not less than
six months prior to the payment date.
(d) All deliveries and distributions under this Agreement are subject to
withholding of all applicable taxes. At the election of the
Participant, and subject to such rules and limitations as may be
established by the Committee from time to time, such withholding
obligations may be satisfied through the surrender of shares of Stock
which the Participant already owns, or to which the Participant is
otherwise entitled under the Plan; provided, however, that such shares
may be used to satisfy not more than the Company's minimum statutory
withholding obligation (based on minimum statutory withholding rates
for Federal and state tax purposes, including payroll taxes, that are
applicable to such supplemental taxable income).
(e) Pursuant to rules established by the Committee, the Participant may
elect to pay the Option Price upon the exercise of an Stock Option by
irrevocably authorizing a broker to sell shares of Common Stock (or a
sufficient portion of the shares) acquired upon exercise of the Stock
Option and remit to the Company a sufficient portion of the sale
proceeds to pay the entire Option Price and any tax withholding
resulting from such exercise. The Participant may elect to have the
broker sell additional shares up to the full number of shares subject
to the Stock Option exercise. Following the broker's delivery to the
Company of the proceeds necessary to satisfy the Option Price and the
tax withholding obligation and any additional proceeds, the Company
will deliver to the broker the number of shares previously sold by the
broker at the Participant's direction, and the Company will deliver any
remaining amount to the Participant.
5. EXPIRATION DATE. For purposes of this Agreement, the "Expiration
Date" shall be the close of business on the earlier of the following dates (or
if such date is not a business day, the last business day preceding such date):
(a) the date which is 10 years from Grant Date; or
(b) the date which is 90 days after the Date of Termination, subject to
Section 6 of the Employment Agreement; provided, however, that if the
Participant's employment with the Company terminates by reason of
"Retirement" as defined in Section 1.8 of the Employment Agreement, the
date determined under this paragraph (b) shall be not earlier than the
three-year anniversary of the date of the Executive's Retirement.
-3-
<PAGE>
6. DEFINED TERMS; TERMS OF PLAN. Unless the context clearly indicates
otherwise, defined terms as used in this Agreement shall have the same meaning
as ascribed to those terms under the Plan. For purposes of this Agreement, the
term "Date of Termination" shall have the meaning ascribed to it in the
Employment Agreement. Notwithstanding any other provision of this Agreement, the
terms of the Plan shall govern and the Stock Option shall be subject, in all
respects, to the terms and conditions of the Plan.
IN WITNESS WHEREOF, the Participant has hereunto set his hand and the
Company has caused these presents to be executed in its name and on its behalf,
all as of the Agreement Date.
/s/ M. Farooq Kathwari
-----------------------------------------
M. Farooq Kathwari
ETHAN ALLEN INTERIORS INC.
/s/ Edward Meyer
-----------------------------------------
By: Edward Meyer
Its: Chairman, Compensation Committee
-4-
<PAGE>
Exhibit C - August 1, 2003 Grant Date
- -------------------------------------
STOCK OPTION AGREEMENT
THIS AGREEMENT, dated as of August 1, 2003 (the "Agreement Date") and
entered into by and between Ethan Allen Interiors Inc. (the "Company") and M.
Farooq Kathwari (the "Participant").
WITNESSETH THAT:
---------------
WHEREAS, the Company and Executive have entered into an Employment
Agreement, dated August 1, 2002 (as amended in accordance with its terms, the
"Employment Agreement"); and
WHEREAS, the Company maintains the Ethan Allen Interiors Inc. 1992
Stock Option Plan (the "Plan"); and
WHEREAS, the Participant has been selected by the Compensation
Committee of the Board of Directors of the Company (the "Committee") to receive
an award under the Plan in accordance with the Employment Agreement, and this
Stock Option Agreement is being entered into pursuant to Section 5.2(c)(i)
thereof;
WHEREAS, to the extent not specified in the Plan, the terms of the
award have been determined by the Committee and in accordance with the
Employment Agreement and are set forth in this Agreement;
NOW THEREFORE, IT IS AGREED between the Company and the Participant as
follows:
1. AWARD; OPTION PRICE. Subject to the terms of this Agreement, the
Participant is granted, as of August 1, 2003 (the "Grant Date"), a "Stock
Option" to purchase 400,000 shares of Common Stock, which is the number of the
"Covered Shares," at a per share exercise price equal to the Fair Market Value
(as that term is defined in the Plan) of a share of Common Stock on the New York
Stock Exchange as of the Grant Date.
2. VESTING; FORFEITURES. Subject to the limitations of this Agreement,
each Installment of Covered Shares of the Stock Option shall be exercisable on
and after the Vesting Date for such Installment as described in the following
schedule (but, subject to the terms of the Employment Agreement, only if the
Date of Termination has not occurred before the Vesting Date):
---------------------------- ---------------------------------------------
Installment Vesting Date applicable to that Installment
---------------------------- ---------------------------------------------
50% of Covered Shares First Anniversary of Grant Date
50% of Covered Shares Second Anniversary of Grant Date
---------------------------- ---------------------------------------------
Notwithstanding the foregoing provisions of this paragraph 2, the Stock Option
shall become vested and exercisable not later than the time or times provided by
the Employment Agreement. Except as otherwise provided in the Employment
Agreement, the Stock Option may be exercised on or after the Date of Termination
only as to that portion of the Covered Shares for which it was
<PAGE>
exercisable immediately prior to the Date of Termination, or became exercisable
upon the Date of Termination.
3. CHANGE IN CONTROL. Notwithstanding the provisions of paragraph 2,
the Stock Option will become immediately exercisable upon the occurrence of a
Change in Control, if the Executive is then employed by the Company and such
options have not previously been forfeited in accordance with paragraph 2. For
purposes of this Agreement, a "Change in Control" shall occur upon the
occurrence of any of the following:
(a) the Board or the shareholders of the Company or Ethan Allen Inc., a
Delaware corporation and a wholly owned subsidiary of the Company (the
"Subsidiary"), either or both, as may be required to authorize the
same, shall approve (i) any liquidation of the Company or the
Subsidiary, or the sale of substantially all of the assets of the
Company and the Subsidiary taken as a whole, or (ii) any merger,
consolidation and/or other business combination involving the Company
or the Subsidiary or any combination of any such transactions (a
"Transaction"), other than a Transaction (A) involving only the Company
and the Subsidiary, or (B) immediately after which the shareholders of
the Company who were shareholders immediately prior to the transaction
continue to own beneficially, directly or indirectly, in substantially
similar proportions to those in effect immediately prior to such
transaction more than 50% of the then outstanding voting securities of
the Company or the survivor or any parent thereof, as applicable;
(b) any Person (as defined below) or group (as such term is defined in Rule
13d-5 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) of related Persons (other than the Company, an employee benefit
plan sponsored by the Company or the Subsidiary, or a corporation owned
directly or indirectly by the stockholders of the Company in
substantially the same proportion as their ownership of the stock of
the Company) shall beneficially own, directly or indirectly, more than
50% of the then outstanding voting stock of the Company or the
Subsidiary (for purposes of this Agreement, "Person(s)" means any
individual, entity, or other person, as defined in Section 3(a)(9) of
the Exchange Act, and as used in Sections 13(d) and 14(d) thereof; or
(c) the Board or the Company shall authorize, approve or engage in any
Business Combination with an Interested Person, each as defined in
Article Fifth of the Company's Restated Certificate of Incorporation.
4. EXERCISE. Subject to the terms of this Agreement and the Plan, the
Stock Option may be exercised in accordance with the following:
(a) To the extent that it is exercisable, the Stock Option may be exercised
in whole or in part at any time prior to the Expiration Date (as
defined in paragraph 5); provided however that the Stock Option may
only be exercised with respect to whole shares of Common Stock.
(b) The Stock Option may be exercised with respect to no less than 100
shares of Common Stock, or if less than 100 shares are then
exercisable, the number of whole shares then exercisable.
-2-
<PAGE>
(c) Payment of the Option Price shall be by cash or by check payable to the
Company. All or a portion of the Option Price may be paid by the
Participant by delivery of shares of Stock owned by the Participant
having an aggregate Fair Market Value (valued as of the date of
exercise) that is equal to the amount of cash that would otherwise be
required. Except as otherwise provided by the Committee, payments made
with shares of Common Stock in accordance with the preceding sentence
shall be limited to shares held by the Participant for not less than
six months prior to the payment date.
(d) All deliveries and distributions under this Agreement are subject to
withholding of all applicable taxes. At the election of the
Participant, and subject to such rules and limitations as may be
established by the Committee from time to time, such withholding
obligations may be satisfied through the surrender of shares of Stock
which the Participant already owns, or to which the Participant is
otherwise entitled under the Plan; provided, however, that such shares
may be used to satisfy not more than the Company's minimum statutory
withholding obligation (based on minimum statutory withholding rates
for Federal and state tax purposes, including payroll taxes, that are
applicable to such supplemental taxable income).
(e) Pursuant to rules established by the Committee, the Participant may
elect to pay the Option Price upon the exercise of an Stock Option by
irrevocably authorizing a broker to sell shares of Common Stock (or a
sufficient portion of the shares) acquired upon exercise of the Stock
Option and remit to the Company a sufficient portion of the sale
proceeds to pay the entire Option Price and any tax withholding
resulting from such exercise. The Participant may elect to have the
broker sell additional shares up to the full number of shares subject
to the Stock Option exercise. Following the broker's delivery to the
Company of the proceeds necessary to satisfy the Option Price and the
tax withholding obligation and any additional proceeds, the Company
will deliver to the broker the number of shares previously sold by the
broker at the Participant's direction, and the Company will deliver any
remaining amount to the Participant.
5. EXPIRATION DATE. For purposes of this Agreement, the "Expiration
Date" shall be the close of business on the earlier of the following dates (or
if such date is not a business day, the last business day preceding such date):
(a) the date which is 10 years from Grant Date; or
(b) the date which is 90 days after the Date of Termination, subject to
Section 6 of the Employment Agreement; provided, however, that if the
Participant's employment with the Company terminates by reason of
"Retirement" as defined in Section 1.8 of the Employment Agreement, the
date determined under this paragraph (b) shall be not earlier than the
three-year anniversary of the date of the Executive's Retirement.
6. DEFINED TERMS; TERMS OF PLAN. Unless the context clearly indicates
otherwise, defined terms as used in this Agreement shall have the same meaning
as ascribed to those terms under the Plan. For purposes of this Agreement, the
term "Date of Termination" shall have the meaning ascribed to it in the
Employment Agreement. Notwithstanding any other provision of
-3-
<PAGE>
this Agreement, the terms of the Plan shall govern and the Stock Option shall be
subject, in all respects, to the terms and conditions of the Plan.
IN WITNESS WHEREOF, the Participant has hereunto set his hand and the
Company has caused these presents to be executed in its name and on its behalf,
all as of the Agreement Date.
-----------------------------------------
M. Farooq Kathwari
ETHAN ALLEN INTERIORS INC.
By:
--------------------------------------
Its: Chairman, Compensation Committee
-4-
<PAGE>
Exhibit D - August 1, 2004 Grant Date
- -------------------------------------
STOCK OPTION AGREEMENT
THIS AGREEMENT, dated as of August 1, 2004 (the "Agreement Date") and
entered into by and between Ethan Allen Interiors Inc. (the "Company") and M.
Farooq Kathwari (the "Participant").
WITNESSETH THAT:
---------------
WHEREAS, the Company and Executive have entered into an Employment
Agreement, dated as of August 1, 2002 (as amended in accordance with its terms,
the "Employment Agreement"); and
WHEREAS, the Company maintains the Ethan Allen Interiors Inc. 1992
Stock Option Plan (the "Plan"); and
WHEREAS, the Participant has been selected by the Compensation
Committee of the Board of Directors of the Company (the "Committee") to receive
an award under the Plan in accordance with the Employment Agreement, and this
Stock Option Agreement is being entered into pursuant to Section 5.2(c)(i)
thereof;
WHEREAS, to the extent not specified in the Plan, the terms of the
award have been determined by the Committee and in accordance with the
Employment Agreement and are set forth in this Agreement;
NOW THEREFORE, IT IS AGREED between the Company and the Participant as
follows:
1. AWARD; OPTION PRICE. Subject to the terms of this Agreement, the
Participant is granted, as of August 1, 2004 (the "Grant Date"), a "Stock
Option" to purchase 200,000 shares of Common Stock, which is the number of the
"Covered Shares," at a per share exercise price equal to the Fair Market Value
(as that term is defined in the Plan) of a share of Common Stock on the New York
Stock Exchange as of the Grant Date.
2. VESTING; FORFEITURES. Subject to the limitations of this Agreement,
the Covered Shares of the Stock Option shall be exercisable on and after the
Vesting Date which shall be the one year anniversary of the Grant Date, (but,
subject to the terms of the Employment Agreement, only if the Date of
Termination has not occurred before the Vesting Date). Notwithstanding the
foregoing provisions of this paragraph 2, the Stock Option shall become vested
and exercisable not later than the time or times provided by the Employment
Agreement. Except as otherwise provided in the Employment Agreement, the Stock
Option may be exercised on or after the Date of Termination only as to that
portion of the Covered Shares for which it was exercisable immediately prior to
the Date of Termination, or became exercisable upon the Date of Termination.
3. CHANGE IN CONTROL. Notwithstanding the provisions of paragraph 2,
the Stock Option will become immediately exercisable upon the occurrence of a
Change in Control, if the
<PAGE>
Executive is then employed by the Company and such options have not previously
been forfeited in accordance with paragraph 2. For purposes of this Agreement, a
"Change in Control" shall occur upon the occurrence of any of the following:
(a) the Board or the shareholders of the Company or Ethan Allen Inc., a
Delaware corporation and a wholly owned subsidiary of the Company (the
"Subsidiary"), either or both, as may be required to authorize the
same, shall approve (i) any liquidation of the Company or the
Subsidiary, or the sale of substantially all of the assets of the
Company and the Subsidiary taken as a whole, or (ii) any merger,
consolidation and/or other business combination involving the Company
or the Subsidiary or any combination of any such transactions (a
"Transaction"), other than a Transaction (A) involving only the Company
and the Subsidiary, or (B) immediately after which the shareholders of
the Company who were shareholders immediately prior to the transaction
continue to own beneficially, directly or indirectly, in substantially
similar proportions to those in effect immediately prior to such
transaction more than 50% of the then outstanding voting securities of
the Company or the survivor or any parent thereof, as applicable;
(b) any Person (as defined below) or group (as such term is defined in Rule
13d-5 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) of related Persons (other than the Company, an employee benefit
plan sponsored by the Company or the Subsidiary, or a corporation owned
directly or indirectly by the stockholders of the Company in
substantially the same proportion as their ownership of the stock of
the Company) shall beneficially own, directly or indirectly, more than
50% of the then outstanding voting stock of the Company or the
Subsidiary (for purposes of this Agreement, "Person(s)" means any
individual, entity, or other person, as defined in Section 3(a)(9) of
the Exchange Act, and as used in Sections 13(d) and 14(d) thereof; or
(c) the Board or the Company shall authorize, approve or engage in any
Business Combination with an Interested Person, each as defined in
Article Fifth of the Company's Restated Certificate of Incorporation.
4. EXERCISE. Subject to the terms of this Agreement and the Plan, the
Stock Option may be exercised in accordance with the following:
(a) To the extent that it is exercisable, the Stock Option may be exercised
in whole or in part at any time prior to the Expiration Date (as
defined in paragraph 5); provided however that the Stock Option may
only be exercised with respect to whole shares of Common Stock.
(b) The Stock Option may be exercised with respect to no less than 100
shares of Common Stock, or if less than 100 shares are then
exercisable, the number of whole shares then exercisable.
(c) Payment of the Option Price shall be by cash or by check payable to the
Company. All or a portion of the Option Price may be paid by the
Participant by delivery of shares of Stock owned by the Participant
having an aggregate Fair Market Value (valued as of the date of
exercise) that is equal to the amount of cash that would otherwise be
required.
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<PAGE>
Except as otherwise provided by the Committee, payments made with
shares of Common Stock in accordance with the preceding sentence shall
be limited to shares held by the Participant for not less than six
months prior to the payment date.
(d) All deliveries and distributions under this Agreement are subject to
withholding of all applicable taxes. At the election of the
Participant, and subject to such rules and limitations as may be
established by the Committee from time to time, such withholding
obligations may be satisfied through the surrender of shares of Stock
which the Participant already owns, or to which the Participant is
otherwise entitled under the Plan; provided, however, that such shares
may be used to satisfy not more than the Company's minimum statutory
withholding obligation (based on minimum statutory withholding rates
for Federal and state tax purposes, including payroll taxes, that are
applicable to such supplemental taxable income).
(e) Pursuant to rules established by the Committee, the Participant may
elect to pay the Option Price upon the exercise of an Stock Option by
irrevocably authorizing a broker to sell shares of Common Stock (or a
sufficient portion of the shares) acquired upon exercise of the Stock
Option and remit to the Company a sufficient portion of the sale
proceeds to pay the entire Option Price and any tax withholding
resulting from such exercise. The Participant may elect to have the
broker sell additional shares up to the full number of shares subject
to the Stock Option exercise. Following the broker's delivery to the
Company of the proceeds necessary to satisfy the Option Price and the
tax withholding obligation and any additional proceeds, the Company
will deliver to the broker the number of shares previously sold by the
broker at the Participant's direction, and the Company will deliver any
remaining amount to the Participant.
5. EXPIRATION DATE. For purposes of this Agreement, the "Expiration
Date" shall be the close of business on the earlier of the following dates (or
if such date is not a business day, the last business day preceding such date):
(a) the date which is 10 years from Grant Date; or
(b) the date which is 90 days after the Date of Termination, subject to
Section 6 of the Employment Agreement; provided, however, that if the
Participant's employment with the Company terminates by reason of
"Retirement" as defined in Section 1.8 of the Employment Agreement, the
date determined under this paragraph (b) shall be not earlier than the
three-year anniversary of the date of the Executive's Retirement.
6. DEFINED TERMS; TERMS OF PLAN. Unless the context clearly indicates
otherwise, defined terms as used in this Agreement shall have the same meaning
as ascribed to those terms under the Plan. For purposes of this Agreement, the
term "Date of Termination" shall have the meaning ascribed to it in the
Employment Agreement. Notwithstanding any other provision of this Agreement, the
terms of the Plan shall govern and the Stock Option shall be subject, in all
respects, to the terms and conditions of the Plan.
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<PAGE>
IN WITNESS WHEREOF, the Participant has hereunto set his hand and the
Company has caused these presents to be executed in its name and on its behalf,
all as of the Agreement Date.
-----------------------------------------
M. Farooq Kathwari
ETHAN ALLEN INTERIORS INC.
-----------------------------------------
By: Edward Meyer
Its: Chairman, Compensation Committee
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</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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