SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement [ ] Confidential, for
[ ] Definitive Proxy Statement Use of Commission Only
[ ] Definitive Additional Materials (as permitted by Rule
[ ] Soliciting Material Pursuant to 14a-6(e)(2))
Rule 14a-11(c) or Rule 14a-12
ETHAN ALLEN INTERIORS INC.
(Name of Registrant as Specified in its Charter)
ETHAN ALLEN INTERIORS INC.
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
<PAGE>
ETHAN ALLEN INTERIORS INC.
Ethan Allen Drive
Danbury, Connecticut 06811
October 2, 1998
Dear Shareholder:
You are cordially invited to attend the 1998 Annual Meeting of Shareholders
of Ethan Allen Interiors Inc. This meeting will be held at the Ethan Allen Home
Interiors Store at 2046 West Main Street, Stamford, Connecticut 06902 at 8:30
A.M. local time, on Monday, November 16, 1998.
You will find information about the meeting in the enclosed Notice and
Proxy Statement.
Your vote is very important and we hope you will be able to attend the
meeting. To ensure your representation at the meeting, even if you anticipate
attending in person, we urge you to mark, sign, date and return the enclosed
proxy card. If you attend, you will, of course be entitled to vote in person.
Sincerely,
M. Farooq Kathwari
Chairman of the Board,
Chief Executive Officer and
President
<PAGE>
ETHAN ALLEN INTERIORS INC.
Ethan Allen Drive
Danbury, Connecticut 06811
NOTICE OF 1998 ANNUAL MEETING OF SHAREHOLDERS
TO THE SHAREHOLDERS OF
ETHAN ALLEN INTERIORS INC.
The annual meeting of the shareholders of Ethan Allen Interiors Inc. will
be held at the Ethan Allen Home Interiors Store at 2046 West Main Street,
Stamford, Connecticut 06902 on Monday, November 16, 1998 at 8:30 A.M., local
time, for the purpose of considering and acting upon the following:
1. The election of directors;
2. Ratification of the appointment of KPMG Peat Marwick LLP as
independent auditors for the 1999 fiscal year;
3. Approval of an Amendment to the 1992 Stock Option Plan to award
options to purchase 3,000 shares of Common Stock to the Independent
Directors;
4. Approval of an Amendment to the Certificate of Incorporation to
increase the number of authorized shares of Common Stock from
70,000,000 to 150,000,000; and
5. Such other business as may properly come before the meeting.
The Board of Directors has fixed September 25, 1998 as the record date for
determining shareholders entitled to notice of and to vote at the meeting.
Shareholders are requested to mark, sign, date and return the enclosed proxy
card. An envelope is provided requiring no postage for mailing in the United
States. Your prompt response will be appreciated.
Roxanne Khazarian
Secretary
October 2, 1998
Ethan Allen Interiors Inc.
Ethan Allen Drive
Danbury, Connecticut 06811
<PAGE>
ETHAN ALLEN INTERIORS INC.
Ethan Allen Drive
Danbury, Connecticut 06811
PROXY STATEMENT
The Proxy Statement is furnished in connection with the solicitation by the
Board of Directors (the "Board of Directors") of Ethan Allen Interiors Inc., a
Delaware corporation ("Company"), of proxies for use at the 1998 Annual Meeting
of Shareholders of the Company to be held on November 16, 1998 and any
adjournment thereof (the "Annual Meeting"). The Proxy Statement and accompanying
form of proxy are first being mailed to shareholders on or about October 2,
1998.
VOTING SECURITIES; PROXIES; REQUIRED VOTE
Voting Securities
The Board of Directors has fixed the close of business on September 25,
1998 as the record date (the "Record Date") for the determination of
shareholders entitled to notice of, and to vote at, the Annual Meeting. As of
the Record Date, the Company had outstanding ____________ shares of common
stock, par value $.01 per share (the "Common Stock"). The holders of Common
Stock are entitled to notice of and to vote at the Annual Meeting. Holders of
Common Stock are entitled to one vote per share.
Proxies
M. Farooq Kathwari, Horace G. McDonell and Edward H. Meyer, the persons
named as proxies on the proxy card accompanying this Proxy Statement, were
selected by the Board of Directors of the Company to serve in such capacity.
Each properly executed and returned proxy will be voted in accordance with the
directions indicated thereon, or if no direction is indicated, such proxy will
be voted in accordance with the recommendations of the Board of Directors
contained in this Proxy Statement. Each shareholder giving a proxy has the power
to revoke it at any time before the shares it represents are voted. Revocation
of a proxy is effective upon receipt of the Secretary of the Company of either
(i) an instrument revoking the proxy or (ii) a duly executed proxy bearing a
later date. Additionally, a shareholder may change or revoke a previously
executed proxy by voting in person at the Annual Meeting.
Required Vote
The Holders of at least one third of the outstanding shares of Common Stock
represented in person or by proxy will constitute a quorum at the Annual
Meeting. At the Annual Meeting, the vote of a majority in interest of the
shareholders present in person or by proxy and entitled to vote thereon is
required to elect directors, ratify the appointment of KPMG Peat Marwick LLP as
the independent auditors of the Company's consolidated financial statements for
the fiscal year ending June 30, 1999, amend the 1992 Stock Option Plan and amend
the Certificate of Incorporation.
The election inspectors appointed for the meeting will tabulate the votes
cast in person or by proxy at the Annual Meeting and will determine whether or
not a quorum is present. The election inspectors will treat abstentions as
shares that are present and entitled to vote for purposes of determining the
presence of a quorum but as unvoted for purposes of determining the approval of
any matter submitted to the shareholders for a vote. If a broker indicates on
the proxy that it does not have discretionary authority as to certain shares to
vote on a particular matter, those shares will not be considered as present and
entitled to vote with respect to that matter.
<PAGE>
PROPOSAL 1
ELECTION OF DIRECTORS
The Board of Directors is presently composed of six members. There is
currently a vacancy on the Board of Directors as Mr. Steven A. Galef passed away
during 1998. The Restated Certificate of Incorporation of the Company divides
the Board of Directors into three classes, as nearly equal in size as possible,
with one class of Directors elected each year for a three-year term. The term of
the Director in one class, which is composed of one Director, expires as of the
Annual Meeting.
Three Directors, Clinton A. Clark, Kristin Gamble and Edward H. Meyer, are
nominated for election at the Annual Meeting, each to a term as Director for
three years. If for any reason any nominee becomes unable or unwilling to serve
at the time of the meeting, the persons named in the enclosed proxy card will
have discretionary authority to vote for a substitute nominee. It is not
anticipated that any nominee will be unavailable for election.
The following sets forth information as to the nominees for election at the
Annual Meeting and each Director continuing in office, including his or her age,
present principal occupation, other business experience during the last five
years, directorships in other publicly held companies, membership on committees
of the Board of Directors and period of service as a Director of the Company.
Nominees for Election at this Meeting to a Term Expiring in 2001
Clinton A. Clark, 56, was elected as a director of the Company on June 30,
1989. He was Chairman, President and Chief Executive Officer of Long John
Silver's Restaurants, Inc. from 1990 through September 30, 1993. He is President
and sole stockholder of Ironwood Equity Inc., a private investment company,
since he founded the company in 1990. He has been the President and sole
stockholder of CAC Investments, Inc., a private investment company, since he
founded the company in January 1986. Prior to founding CAC Investments, Inc.,
Mr. Clark was President and Chief Executive Officer of The Children's Place, a
retail chain selling children's apparel, which he founded in 1968. He is a
director of Silver Diner Development Inc., and Kerkendall, Krouse and Clark,
Inc. He is a member of the Audit Committee.
Kristin Gamble, 52, was elected as a director of the Company on July 28,
1992. Since 1984, she has been President of Flood, Gamble Associates, Inc.,
which is an investment counseling firm. Ms. Gamble was Senior Vice President
responsible for equity strategy and economic research with Manufacturers Hanover
Trust Company from 1981 to 1984 and prior to that held various management
positions with Manufacturers Hanover (1977-1981), Foley, Warendorf & Co., a
brokerage firm (1976-1977), Rothschild, Inc. (1971-1976) and Merrill, Lynch,
Pierce, Fenner & Smith (1968-1971). Since May 10, 1995, she has served as a
member of the Board of Trustees of Federal Realty Investment Trust. She is a
member of the Audit Committee and the Compensation Committee.
Edward H. Meyer, 71, was elected as a director of the Company on May 30,
1991. He is President, Chairman of the Board, and Chief Executive Officer of
Grey Advertising Inc. Mr. Meyer joined Grey Advertising in 1956 and in 1964 was
appointed Executive Vice President for Account Services. He was elected
President in 1968 and Chief Executive Officer and Chairman of Grey Advertising
in 1970. Grey Advertising performs advertising services for Ethan Allen. See
"Certain Transactions". Mr. Meyer is a Director of a number of outside business
and financial organizations, including The May Department Stores Company, Bowne
& Co., Inc., Harman International Industries, Inc. and 35 mutual funds advised
by Merrill Lynch Asset Management, Inc. He is chairman of the Compensation
Committee.
Directors Whose Present Term will Continue Until 1999
M. Farooq Kathwari, 54, was elected as a director of Ethan Allen in 1981,
was appointed President and Chief Operating Officer in 1985 and was appointed to
the additional position of Chairman and Chief Executive Officer of the Company
2
<PAGE>
and Ethan Allen in September 1988. In 1973, Mr. Kathwari formed a joint venture
company called KEA International Inc. with Ethan Allen to develop home
furnishings product programs such as lighting, floor coverings, decorative
accessories and other related programs. In 1980, KEA International Inc. merged
with Ethan Allen and Mr. Kathwari joined Ethan Allen as a Vice President
responsible for merchandising and international operations. He was promoted to
Senior Vice President in 1981, to Executive Vice President in 1983, and to
President in 1985. From 1968 to 1973 he was Vice President of Rothschild, Inc.
Mr. Kathwari is currently a director of the National Retail Federation.
Horace G. McDonell, 69, was elected as a director of the Company on May 30,
1991. He retired as Chairman and Chief Executive Officer of the Perkin-Elmer
Corporation in November 1990. Mr. McDonell served in a number of marketing and
executive positions in that company. He was elected President in 1980, Chief
Executive Officer in 1984, and Chairman in 1985. He is a past Chairman of the
American Electronics Association and a past director of Danbury Health Systems.
He presently serves as a director of Hubbell Inc. He is Chairman of the Audit
Committee.
Directors Whose Present Term will Continue Until 2000
William W. Sprague, 39, was initially elected as a director of the Company
on June 30, 1989. He was previously designated as a Preferred Stock Director of
the Company until the Company redeemed its Preferred Stock. In February 1996,
Mr. Sprague founded Crest International Holdings, LLC, a private investment firm
focusing on the media and telecommunications industries. Prior to that, he was a
managing Director of Smith Barney Inc. from 1991, and a Vice President since
April 1989. Prior to April 1989, Mr. Sprague was a Vice President of Kidder,
Peabody & Co., Incorporated, which he joined in September 1984. Mr. Sprague is
also a Director of CS Wireless Systems, Inc. and several other private
businesses. He is a member of the Audit Committee.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF THE NOMINEE
FOR DIRECTOR NAMED ABOVE, WHICH IS DESIGNATED AS PROPOSAL NO. 1 ON THE ENCLOSED
PROXY CARD.
Meetings and Committees of The Board of Directors
During fiscal year 1998, there were four regularly scheduled meetings of
the Board of Directors. Average attendance at the aggregate number of Board and
Committee meetings was 92% in fiscal 1998 and no director attended fewer than
75% of the aggregate number of meetings of the Board of Directors and committees
on which he or she served.
The Board of Directors has established two standing committees: the Audit
Committee and the Compensation Committee. Committee memberships of each nominee
and continuing director are set forth in their biographical information above.
Audit Committee
The Audit Committee recommends the appointment of a firm of independent
public accountants to audit the Company's financial statements, as well as
reviews and approves the scope, purpose and type of audit services to be
performed by the external auditors. The Audit Committee reviews internal
auditing and internal controls. No member of the Audit Committee may be an
employee of the Company or of Ethan Allen Inc. The Audit Committee held ______
meetings during fiscal 1998.
Compensation Committee
The duties of the Compensation Committee are to (i) review and make
determinations with regard to the employment arrangements, and compensation for
the Chief Executive Officer, President and Chief Financial Officer or Treasurer
and (ii) consider and accept, modify or reject the Chief Executive Officer's
recommendations as to incentive compensation for executives and employees. No
3
<PAGE>
member of the Compensation Committee may be an employee of the Company or of
Ethan Allen Inc. The Compensation Committee held two meetings in fiscal 1998.
Director Compensation
For Fiscal Year 1998, all independent directors (meaning directors who are
not executives or employees of the Company or associated with any "interested
person" as referred to in Article Fifth of the Certificate of Incorporation)
received $8,000 per annum and $2,500 per meeting of the Board of Directors. Each
Chairman of a Committee who is an independent director received an additional
$6,000 per annum. Each independent director received $1,000 for each committee
meeting of the Board of Directors held on a date on which a meeting of the Board
of Directors was not held. In addition, independent directors are eligible for
awards of options and stock appreciation rights under the Company's 1992 Stock
Option Plan. Pursuant to such plan _____ options were awarded in fiscal 1998.
For fiscal year 1999, all independent directors will receive $8,000 per
annum and $2,500 per meeting of the Board of Directors. Each Chairman of a
Committee who is an independent director will receive an additional $6,000 per
annum. Each independent director will receive $1,000 for each committee meeting
of the Board of Directors held on a date on which a meeting of the Board of
Directors is not held. In addition, independent directors will be eligible for
awards of options and stock appreciation rights under the Company's 1992 Stock
Option Plan.
Certain Transactions
Kristin Gamble, Steven Galef (since deceased) and Edward Meyer served as
members of the Compensation Committee of the Board of Directors of the Company
for fiscal year 1998. Clinton Clark, Kristin Gamble, Horace G. McDonell and
William W. Sprague served as members of the Audit Committee of the Board of
Directors of the Company for fiscal year 1997. Mr. Meyer is Chairman and
President of Grey Advertising, which received approximately $1,039,800 for the
performance of advertising services for Ethan Allen in fiscal 1998.
The Company is party to indemnification agreements with each of the members
of the Board of Directors pursuant to which the Company has agreed to indemnify
and hold harmless each director from liabilities incurred as a result of such
director's status as a director of the Company, subject to certain limitations.
Executive Officers
Set forth below is a description of the business experience of each
executive officer, other than Mr. Kathwari, of the Company:
Thomas Swanston, 65, joined the Company as Vice President-Business
Development in July 1993. Mr. Swanston, who has over 30 years of experience in
the home furnishings industry, is responsible for Ethan Allen's dealer
relationships, store development and international marketing. Mr. Swanston
operated his own managerial consulting firm prior to joining Ethan Allen and has
held various management positions with home furnishings manufacturing companies
including Ethan Allen, where he previously served as Vice President of Marketing
from 1970 to 1975.
Lenora W. Kirkley, 41, serves as Vice President of Corporate Communications
and Advertising. She is responsible for the Advertising, Public Relations,
Consumer Finance, and Retail Services and Education divisions of the Company.
Ms. Kirkley joined the Company as Retail Advertising Manager in May 1988. Prior
to joining the Company, she held various account management positions with Grey
Advertising Inc., and Doyle Dane Bernbach, Inc., New York Advertising Agencies.
Craig W. Stout, 48, was appointed Vice President, Merchandising and Product
Development in 1995. He is responsible for the product management and
design/development of wood furniture products and the hard accent programs. Mr.
4
<PAGE>
Stout joined Ethan Allen in 1972 and has held various marketing, merchandising
and product development positions.
Margaret McLinden, 46, joined the company in 1977 as a designer in Store
Planning. She was appointed Vice President of Store Planning in 1993. She has
been responsible for the overall design supervision of all New Stores and
Remodeling of Ethan Allen stores worldwide. She was also appointed Vice
President of International Marketing Services in 1995 and Vice President of
Upholstery/Softgoods Merchandising in 1997.
Security Ownership of Common Stock of Certain Owners and Management
The following table sets forth, as of June 30, 1998, except as otherwise
noted, information with respect to beneficial ownership of the Common Stock on a
fully-diluted basis in respect of (i) each director and executive officer of the
Company named in the table below under "Executive Compensation - Summary
Compensation Table", (ii) all directors and executive officers of the Company as
a group and (iii) based on information available to the Company and a review of
statements filed with the SEC pursuant to Section 13(d) and 13(g) of the
Securities Act of 1934, as amended (the "Exchange Act"), each person or entity
that beneficially owned (directly or together with affiliates) more than 5% of
the Common Stock. The Company believes that each individual or entity named has
sole investment and voting power with respect to shares of Common Stock
indicated as beneficially owned by them, except as otherwise noted.
Name and Address of Shares Common Stock
Beneficial Owner Beneficially Owned(1) Percentage Ownership(1)
---------------- --------------------- -----------------------
Directors and Executive Officers:
M. Farooq Kathwari(2)............. 4,019,796 14.3%
Horace G. McDonell(3)............. 29,000 *
Margaret McLinden(4).............. 24,952 *
Kristin Gamble(5)................. 22,200 *
Craig W. Stout(6)................. 19,186 *
Edward H. Meyer(7)................ 17,000 *
Lenora W. Kirkley(8).............. 15,500 *
William W. Sprague(9)............. 14,266 *
Thomas R. Swanston(10)............ 5,500 *
Clinton A. Clark(11).............. 4,000 *
5
<PAGE>
All officers and executive directors as a
group(2)(3)(4)(5)(6)(7)(8)(9)(10)(11)..... _________ _____%
Other Principal Stockholders:
Nicholas-Applegate Capital
Management(12)............................ 1,852,049 6.4%
Valenzuela Capital Partners Inc. (13)...... 1,438,600 5.0
- -----------------
*Indicates beneficial ownership of less than 1% of shares of Common Stock
(1) Information presented herein reflects share ownership on a fully-diluted
basis and assumes the outstanding Management Warrants, Incentive Options
and options granted under the 1992 Stock Option Plan are exercised, whether
or not currently vested, earned or exercisable.
(2) Includes (a) 1,278,344 shares owned by Mr. Kathwari (b) (i) 37,671 shares
issued to managers, (ii) 56,363 shares issuable upon exercise of the
Management Warrants issued to managers and (iii) 218,737 shares issuable
upon exercise of Incentive Options issued to managers, (c) 360,301 shares
of the Ethan Allen Retirement Plan which are also subject to proxies
granted to Mr. Kathwari; and (d) 2,068,380 shares issuable upon exercise of
stock options granted under the Incentive Option and the 1992 Stock Option
Plans, all of which are subject to proxies granted pursuant to the
Management Letter Agreements. Mr. Kathwari has also been granted 28,000
Stock Units thus far under the New Employment Agreement. See "Executive
Compensation -- Compensation for the Chief Executive Officer for Fiscal
1998."
(3) Includes options and warrants to purchase 17,000 shares of Common Stock.
Such shares of Common Stock are subject to the control of Mr. Kathwari. See
Footnote 2. Mr. McDonnell's address is Ethan Allen Drive, Danbury,
Connecticut 06811.
(4) Includes options and warrants to purchase 20,752 shares of Common Stock.
Such shares of Common Stock are subject to the control of Mr. Kathwari. See
Footnote 2. Ms. McLinden's address is Ethan Allen Drive, Danbury,
Connecticut 06811.
(5) Includes options and warrants to purchase 17,000 shares of Common Stock.
Such shares of Common Stock are subject to the control of Mr. Kathwari. See
Footnote 2. Ms. Gamble's address is Ethan Allen Drive, Danbury, Connecticut
06811.
(6) Includes options and warrants to purchase 19,186 shares of Common Stock.
Such shares of Common Stock are subject to the control of Mr. Kathwari. See
Footnote 2. Mr. Stout's address is Ethan Allen Drive, Danbury, Connecticut
06811.
(7) Includes options and warrants to purchase 17,000 shares of Common Stock.
Such shares of Common Stock are subject to the control of Mr. Kathwari. See
Footnote 2. Mr. Meyer's address is Ethan Allen Drive, Danbury, Connecticut
06811.
(8) Includes options and warrants to purchase 15,500 shares of Common Stock.
Such shares of Common Stock are subject to the control of Mr. Kathwari. See
Footnote 2. Ms. Kirkley's address is Ethan Allen Drive, Danbury,
Connecticut 06811.
(9) Includes options and warrants to purchase 4,000 shares of Common Stock.
Such shares of Common Stock are subject to the control of Mr. Kathwari. See
Footnote 2. Mr. Sprague's address is Ethan Allen Drive, Danbury,
Connecticut 06811.
6
<PAGE>
(10) Includes options and warrants to purchase 5,500 shares of Common Stock.
Such shares of Common Stock are subject to the control of Mr. Kathwari. See
Footnote 2. Mr. Swanston's address is Ethan Allen Drive, Danbury,
Connecticut 06811.
(11) Includes options and warrants to purchase 4,000 shares of Common Stock.
Such shares of Common Stock are subject to the control of Mr. Kathwari. See
Footnote 2. Mr. Clark's address is Ethan Allen Drive, Danbury, Connecticut
06811.
(12) As of February 3, 1998, Nicholas-Applegate Capital Management ("NACM"),
beneficially owned 1,852,049 shares of Common Stock as a result of acting
as investment adviser to various investment companies registered under
Section 8 of the Investment Company Act of 1940. As to the shares of Common
Stock, NACM has: (i) sole voting power with respect to 1,246,311 shares of
Common Stock, (ii) shared voting power with respect to 4,825 shares of
Common Stock and (iii) no voting power with respect to 600,913 shares of
Common Stock. NACM has sole dispositive power with respect to 1,852,049
shares of Common Stock. The address of NACM is 600 West Broadway, Suite
2900, San Diego, California 92101.
(13) As of February 4, 1998, Valenzuela Capital Partners Inc. ("VCPI"),
beneficially owned 1,438,600 shares of Common Stock as a result of acting
as investment adviser to various investment companies registered under
Section 8 of the Investment Company Act of 1940. As to the shares of Common
Stock, VCPI has: (i) sole voting power with respect to 565,400 shares of
Common Stock, and (ii) no voting power with respect to 873,200 shares of
Common Stock. VCPI has sole dispositive power with respect to 1,438,600
shares of Common Stock. The address of VCPI is 1270 Avenue of the Americas,
Suite 508, New York, New York 10020.
PROPOSAL 2
RATIFICATION OF THE APPOINTMENT OF AUDITORS
-------------------------------------------
Subject to shareholder ratification, the Board of Directors has appointed
KPMG Peat Marwick LLP as the independent auditors of the Company for the fiscal
year ending June 30, 1999. KPMG were the independent auditors for the Company
for the fiscal year ended June 30, 1998. Representatives of KPMG will be present
at the Annual Meeting and will be given the opportunity to make a statement if
they so desire. They will also be available to respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION OF THE
APPOINTMENT OF KPMG PEAT MARWICK LLP AS INDEPENDENT AUDITORS FOR THE COMPANY FOR
THE FISCAL YEAR ENDING JUNE 30, 1999, WHICH IS DESIGNATED AS PROPOSAL NO.2 ON
THE ENCLOSED PROXY CARD.
EXECUTIVE COMPENSATION
Summary Compensation Table
- --------------------------
The following table sets forth, as to the Chief Executive Officer and the
four most highly compensated officers other than the Chief Executive Officer,
information concerning all cash compensation paid or accrued for services
rendered in all capacities to the Company during the fiscal years ended June 30,
1998, 1997 and 1996. For a description of the terms of employment agreements,
option and restricted stock grants for the listed officers, see pages 8 through
13.
7
<PAGE>
<TABLE>
<CAPTION>
Long Term All Other
Annual Compensation Compensation Awards(2) Compensation(1)
------------------- ---------------------- ---------------
Restricted Securities Underlying
Name and Principal Position Year Salary Bonus Stock Awards Options/Warrants Granted
- --------------------------- ---- ------ ----- ------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
M. Farooq Kathwari 1998 $700,000 $1,670,000 20,000 1,000,000 $637,189
Chairman of the Board of Directors, 1997 550,000 819,000 20,000 - 63,452
President and Chief Executive Officer 1996 475,000 500,000 20,000 480,000 17,793
Thomas Swanston 1998 153,077 55,000 - 2,500 2,440
Vice President and General Manager 1997 140,038 50,000 - 2,000 1,713
Business Development 1996 140,000 35,000 - 3,000 2,379
Lenora W. Kirkley 1998 147,115 55,000 - 3,500 6,206
Vice President, Corporate 1997 133,076 50,000 - 2,000 4,452
Communications and Advertising 1996 122,885 35,000 - 3,000 3,205
Craig W. Stout 1998 124,615 55,000 - 1,500 9,281
Vice President, Merchandising and 1997 114,038 35,000 - 2,000 7,041
Product Development 1996 102,692 25,000 - 2,000 2,260
Margaret McLinden 1998 120,192 55,000 - 3,000 20,744
Vice President, Int'l Marketing Services 1997 98,077 40,000 - 2,000 13,576
and Upholstery/Softgoods Merchandising 1996 88,539 25,000 - 2,000 4,871
</TABLE>
- -------------------
(1) Includes contributions by Ethan Allen of up to $600 each pursuant to Ethan
Allen's 401(k) Savings Plan plus amounts accruing to each individual as a
participant in the Company's Retirement Program. In addition, Mr.
Kathwari's compensation includes: (a) $556,800 from the vesting of shares
of restricted stock granted on July 27, 1994, (b) $78,249 from the Ethan
Allen Profit Sharing Plan and (c) $1,540 from dividends on Stock Units
granted on July 1, 1997.
Incentive Stock Option Grants During Fiscal Year 1998
- -----------------------------------------------------
The following table sets forth information concerning grants of incentive
options to the named executive officers during the fiscal year ended June 30,
1998.
<TABLE>
<CAPTION>
Individual Grants (1)
---------------------------------------------------------
Potential
Realized Value
% of Total At Assumed Annual
Number Options Rates of Stock Price
of Shares Awarded to Exercise Appreciation for
Underlying Employees or Base Option Term
Securities Options in Fiscal Price per Expiration --------------------
Awarded to Awarded Year share Date(2) 5% 10%
- ---------- ------------ ---------- --------- ----------- -- ---
<S> <C> <C> <C> <C> <C> <C>
M. Farooq Kathwari 500,000 46.57% 31.7500 9/17/07 $8,752,335 $21,557,420
500,000 46.57% 41.2750 9/17/07 3,989,835 16,794,920
Thomas Swanston 1,000 0.09% 27.3125 8/06/07 15,054 37,083
1,500 0.14% 49.0000 6/15/08 40,523 99,809
Lenora W. Kirkley 2,000 0.19% 27.3125 8/06/07 30,109 74,166
1,500 0.14% 49.0000 6/15/08 40,523 99,809
Craig W. Stout 1,500 0.14% 49.0000 6/15/08 40,523 99,809
Margaret McLinden 1,500 0.14% 27.3125 8/06/07 22,581 55,625
1,500 0.14% 49.0000 6/15/08 40,523 99,809
</TABLE>
- --------------------
(1) All stock options reported in this table were granted pursuant to the 1992
Stock Option Plan - see "Employee Stock Plans".
(2) Expires the earlier of the date indicated or 90 days after the
participants' employment with the Company is terminated for any reason.
8
<PAGE>
Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year-End Options/Warrants Value Table
- ---------------------------------------------------
The following table sets forth information concerning the number of
unexpired Incentive Options, 1992 Stock Options and Management Warrants
outstanding as of the end of fiscal 1998, and the value of any unexercised
in-the-money Incentive Options, 1992 Stock Options and Management Warrants
outstanding at such time (assuming a stock price of $49.875 per share at June
30, 1998), held by the named executive officers. In connection with an initial
public offering and recapitalization in 1993 ("Recapitalization").
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of
Unexercised Incentive Options Unexercised In-the-Money
Management Warrants Incentive Options, Management
and 1992 Stock Options Warrants and 1992 Stock Options
Shares Acquired Value at June 30, 1998 at June 30, 1998
on Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
----------- -------- ---------------------------- -------------------------------
<S> <C> <C> <C> <C>
M. Farooq Kathwari
Exercisable - - 550,159 $22,577,606
Unexercisable - - 1,257,143 23,873,214
Thomas Swanston
Exercisable 10,000 $503,375 1,125 40,828
Unexercisable - - 4,375 85,797
Lenora W. Kirkley
Exercisable 533 16,057 8,500 336,375
Unexercisable - - 7,000 169,250
Craig W. Stout
Exercisable 1,800 53,843 14,436 615,242
Unexercisable - - 4,750 113,969
Margaret McLinden
Exercisable 7,800 324,293 14,752 620,966
Unexercisable - - 6,000 113,969
</TABLE>
Employee Stock Plans
The Company has issued options to purchase shares of Common Stock pursuant
to the 1992 Stock Option Plan and an Incentive Stock Option Plan and has issued
warrants to purchase shares of Common Stock to certain key members of
management. See note 8 to "Notes to Consolidated Financial Statements." The
Company has registered shares of Common Stock issuable upon exercise of such
options and warrants in the near future.
Retirement and 401(k) Savings Plan
Ethan Allen established the Ethan Allen Profit Sharing and 401(k)
Retirement Plan (the "Plan"), effective July 1, 1994 as a result of the merger
of the Profit Sharing and 401(k) Plans. The Plan covers all employees who have
completed at least one year of service.
The 401(k) aspect of the Plan allows participants to defer up to 15% of
their compensation, subject to certain statutory limitations. The Company
contributes $0.50 for each $1.00 of a participant's before tax contribution, up
to a maximum of $1,000 (effective January 1, 1998) annually. During fiscal year
1997, the Company made a contribution of $600 (as of December 31, 1997) to the
401(k) aspect of the Plan for each of the above named executive officers.
The Profit Sharing portion of the Plan is a defined contribution plan.
Contributions to the Plan can only be made by the Company and are at the
discretion of the Company. Contributions are allocated among all members in the
same ratio as their covered remuneration bears to that of all members.
The Plan is the primary vehicle for providing retirement income to Ethan
Allen employees.
9
<PAGE>
Prior to July 1, 1996, members in the Profit Sharing portion of the Plan
who were under the age of 55 vested annually in 20% increments starting upon
their third year of service and continuing until the end of the seventh year of
service when they become fully vested. All Plan members age 55 and over were
100% vested regardless of their years of service. Effective July 1, 1996, all
Plan members are 100% vested in their Profit Sharing balances. Plan members
continue to be 100% vested in their 401(k) accounts.
The Plan is administered by Ethan Allen Inc. with American Century
Services, Inc. as Investment Manager and Recordkeeper. Investments offered
include a capital preservation fund, five mutual funds, three strategic
allocation funds, employer common stock and a personal choice option. The
investments are employee directed and qualify under Section 404c.
As of June 30, 1998, the estimated net present aggregate value of
contributions to the retirement programs for the above named executive officers
were: M. Farooq Kathwari $__________, Thomas Swanston $6,774, Lenora W. Kirkley
$17,421, Craig W. Stout $37,886 and Margaret McLinden $53,775.
Report of the Compensation Committee of the Board of Directors
The Compensation Committee of the Board of Directors is responsible for (i)
reviewing and making determinations with regard to the employment arrangements,
and compensation for the Chief Executive Officer, President and Chief Financial
Officer or Treasurer and (ii) considering and accepting, modifying or rejecting
the Chief Executive Officer's recommendations as to incentive compensation for
executives and employees. The Compensation Committee met two times in fiscal
1998. The Compensation Committee reviews and approves the remuneration
arrangements for the officers and directors of the Company, and reviews and
recommends new executive compensation or stock plans in which the officers
and/or directors are eligible to participate, including the granting of stock
options and restricted stock awards. The members of the Compensation Committee
are Mr. Edward H. Meyer and Ms. Kristin Gamble. Prior to his passing away, Mr.
Steven A. Galef also served on the Compensation Committee.
General Policies Regarding Compensation of Executive Officers
The Compensation Committee's goals in establishing compensation levels and
administering executive compensation plans are (1) to attract and retain high
quality managerial and executive talent, (2) to reward executives for superior
performance and (3) to structure appropriate incentives for executives to
produce sustained superior performance in the future. The Company's compensation
structure consists of base salary, annual cash bonuses, stock options and
restricted stock awards. Generally, in formulating the compensation arrangements
for executives other than the Chief Executive Officer, the Compensation
Committee solicits recommendations from its Chief Executive Officer, which it
considers, modifies and/or approves.
Salary
The Compensation Committee establishes base salaries at levels that reflect
the Compensation Committee's subjective assessment of prevailing salary levels
among the companies with which it believes the Company competes for executive
talent, as well as companies in the Company's industry generally.
Bonuses
For fiscal 1998, the Company's Compensation Committee observed a cash bonus
program (the "Bonus Program") for managerial employees of the Company. The Bonus
Program had two components: (i) an aggregate of $1,858,000 in cash to be
distributed to managerial employees other than Mr. Kathwari in amounts
recommended by Mr. Kathwari, and (ii) as to Mr. Kathwari an amount determined in
accordance with the New Employment Agreement. In light of the Company's
performance for fiscal year 1998, the Committee recommended and agreed to a
bonus of $1,670,000.
10
<PAGE>
Stock Options and Restricted Stock Awards
Stock options granted at 100% of the stock's market value on the date of
grant are currently the Company's sole long term compensation vehicle. The
Compensation Committee believes that stock options align the interest of
management with those of the Company's stockholders and provide appropriate
incentives to motivate executives to provide increased returns for stockholders.
In determining the size of individual option grants, and restricted stock
awards, the Compensation Committee considers the aggregate number of shares
available, which is in turn a function of the levels of stockholders' dilution,
the number of shares previously authorized by stockholders remaining available
for grants of options and awards and the number of individuals to whom it wishes
to award stock options and restricted stock awards. The Compensation Committee
also considers the range of potential compensation levels that may be yielded by
the options. Furthermore, the Compensation Committee considers the size of
option grants awarded by those companies with which it believes the Company
competes for executives, especially within the home furnishings industry. The
Compensation Committee reserves the discretion to consider any factors it
considers relevant, and to give all factors considered the relative weight it
considers appropriate under the circumstances then prevailing, in reaching its
determination regarding the size and timing of option grants and restricted
stock awards.
Compensation for the Chief Executive Officer for Fiscal 1998
As of July 1, 1994, Mr. Kathwari and the Company entered into an employment
agreement (the "Prior Employment Agreement"), which was revised and extended as
of July 1, 1997 (as revised, the "New Employment Agreement"). Pursuant to the
New Employment Agreement, the Company has agreed to employ Mr. Kathwari as
Chairman, Chief Executive Officer and President of the Company and Ethan Allen
for a period of five years commencing July 1997 with two one-year extensions
exercisable with the agreement of Mr. Kathwari and the Company. Pursuant to the
terms of the New Employment Agreement, Mr. Kathwari will receive a base salary
of $700,000 per year, subject to increase annually upon the review and
recommendation of the Compensation Committee, with automatic annual
cost-of-living increases.
Under the terms of the Prior Employment Agreement, Mr. Kathwari was
entitled to an annual incentive bonus based on the Company's EBITDA (as
described in the Prior Employment Agreement). For the first twelve month period
of Mr. Kathwari's Prior Employment Agreement, if the Company's EBITDA was less
than $53 million, he received no incentive bonus. If the Company's EBITDA
equaled $53 million, he was paid an incentive bonus of $135,000. If the
Company's EBITDA exceeded $53 million, his incentive bonus was increased
proportionately up to an amount equivalent to his base salary, payable when
EBITDA equaled or exceeded $90 million; however, his incentive bonus did not
exceed $450,000 for the first twelve month period. This incentive bonus and
bonus ceiling arrangement were subject to modification annually based upon the
Company's EBITDA projections or upon agreement of the Compensation Committee and
Mr. Kathwari. For fiscal 1997, an aggregate bonus of $819,000 was paid to Mr.
Kathwari, as agreed to by Mr. Kathwari and the Compensation Committee.
Pursuant to the terms of the New Employment Agreement, Mr. Kathwari will be
entitled to an annual incentive bonus based upon the Company's Operating Income
(as described in the New Employment Agreement). If the Company's Operating
Income is $40 million or less, he will receive no incentive bonus. If the
Company's Operating Income exceeds $40 million, his incentive bonus will be
equal to 2% of the amount by which Operating Income exceeds $40 million. This
Operating Income threshold will be increased after fiscal 1998 by 10% each year.
In addition, in the event the Company consummates a major acquisition, the
Company and Mr. Kathwari have agreed that they will negotiate in good faith for
an appropriate revision to this threshold in order to properly implement its
purposes.
11
<PAGE>
Under the Prior Employment Agreement, Mr. Kathwari was to receive during
the term of employment ten-year stock options to acquire 60,000 shares at an
exercise price equal to the then current market price, resulting in total stock
options to Mr. Kathwari to acquire 300,000 shares of Common Stock during the
term of the Prior Employment Agreement. Generally, one-third of each stock
option was to vest each year following the grant. Pursuant to action of the
Compensation Committee on August 8, 1995, that grant has been amended so that
all remaining stock options were granted as of that date at an exercise price
equal to the market price as of August 8, 1995. Generally, one seventh of the
total original grant shall vest as of July 27, 1994 and each of the next six
years. Pursuant to the two-for-one split of the Company's Common Stock on
September 2, 1997, this option was converted to an option to purchase 600,000
shares. Pursuant to the New Employment Agreement, Mr. Kathwari was granted, as
of September 19, 1997, an option to purchase 1,000,000 additional shares, of
which the option to purchase 500,000 shares will be exercisable at the then
current market price for the Common Stock at the date of grant and the option to
purchase the remaining 500,000 shares will be exercisable at a 30% premium to
the then current market price for the Common Stock at the date of grant. The
option to purchase 500,000 shares which has an exercise price equal to the value
of the stock on September 19, 1997, and the option to purchase 500,000 shares
which has an exercise price equal to 130% of the value of the stock on September
19, 1997, will each vest at a rate of one-third each year following the grant.
The options are granted pursuant to the Company's 1992 Stock Option Plan.
Under the Prior Employment Agreement, Mr. Kathwari received during the term
thereof each year as of July 27, 1994, and each successive July 1, up to and
including July 1, 1997, 10,000 shares of "restricted" stock, and he received on
July 1, 1998, pursuant to the two-for-one split of the Company's Common Stock on
September 2, 1997, 20,000 shares of "restricted" stock, for a total of up to
100,000 shares (as adjusted for the stock split) under the Prior Employment
Agreement. Pursuant to the New Employment Agreement, the Company will establish
a book account for Mr. Kathwari, which will be credited with 14,000 Stock Units
as of July 1 of each year, commencing July 1, 1997, for a total of up to 70,000
Stock Units over the term of the New Employment Agreement, with an additional
14,000 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. During the period in which Stock Units are credited to the
account, Mr. Kathwari will receive dividend equivalent payments in cash equal to
the dividends payable on the shares of Common Stock represented by the Stock
Units. The options and the restricted stock will become fully vested upon the
occurrence of a Change in Control of the Company (as defined in the New
Employment Agreement).
In the event Mr. Kathwari's employment with the Company is terminated by
reason of death or disability, he (or his estate) will receive his base salary
plus his bonus through the end of the year, along with any deferred
compensation, unreimbursed expenses, insurance proceeds and other payments in
accordance with Company practices. If Mr. Kathwari's employment is terminated by
the Company without "cause" or by Mr. Kathwari "for good reason", he will
receive the same his base salary through the end of the term of the agreement, a
payment equal to the lesser of $1 million or the bonus payments for two years
calculated by reference to the highest bonus previously paid to him, and he will
be entitled to settlement of the Stock Unit awards in Common Stock through the
remainder of the full term of the New Employment Agreement and stock options,
exercisable within three years after termination. If Mr. Kathwari's employment
is terminated by the Company for "cause" or voluntarily by Mr. Kathwari, he will
receive his base salary and bonus prorated through the date of termination,
along with any deferred compensation, unreimbursed expenses or any other payment
in accordance with Company practices. In connection with each of the foregoing
termination payments, Mr. Kathwari will be reimbursed for certain excise and
other taxes he is required to pay in respect of such payments. In fiscal 1998,
Mr. Kathwari received $700,000 in base salary, which represented a $150,000
increase from the prior fiscal year and was consistent with the terms of the New
Employment Agreement. Mr. Kathwari also received an annual incentive bonus in
fiscal 1998 of $1,670,000 and dividend income of $1,540 from the Stock Units.
The incentive
12
<PAGE>
bonus and dividend income from the Stock Units were paid pursuant to the terms
of the New Employment Agreement and the recommendation of the Compensation
Committee as described in the paragraph entitled "Bonuses" above. In fiscal
1997, Mr. Kathwari received $550,000 in base salary, which represented a $75,000
increase from the prior fiscal year and was the increase required under the
terms of the Prior Employment Agreement. Mr. Kathwari also received an annual
incentive bonus in fiscal 1997 of $819,000. The incentive bonus was paid
pursuant to the terms of the Prior Employment Agreement and calculated based on
the formula set out in the paragraph entitled "Bonuses" above.
The New Employment Agreement is effective through June 30, 2002, although
it may be extended for two additional one-year terms at the mutual agreement of
Mr. Kathwari and the Company. To assist in developing the terms of the New
Employment Agreement, the Compensation Committee retained an independent
compensation consultant, and met with such consultant over a period of three
months. In determining the level of compensation appropriate for Mr. Kathwari,
the Compensation Committee reviewed employment contracts of chief executive
officers in companies in the home furnishings industry of a size and complexity
comparable to the Company. In addition, the Compensation Committee and Mr.
Kathwari agreed to include a substantial incentive component in the New
Employment Agreement. As a result, the large part of Mr. Kathwari's potential
compensation is in the form of incentive stock options, restricted stock awards,
and a bonus based on the Company's performance.
Tax Policy
Section 162(m) of the Code limits deductibility of annual compensation in
excess of $1 million paid to the Company's Chief Executive Officer and any of
the four other highest paid officers. However, compensation is exempt from this
limit if it qualifies as "performance based compensation." The Company is
submitting the amendment of the Company's 1992 Stock Option Plan to
stockholders, to allow awards thereunder to qualify under the "performance-based
compensation" requirements. The Company is also submitting the Incentive
Performance Bonus Provisions of the New Employment Agreement to stockholders to
allow the bonus to comply with the "performance-based compensation"
requirements. Finally, the stock unit awards under the New Employment Agreement
are being structured to satisfy the requirements for deductibility.
Although the Compensation Committee will continue to consider deductibility
under Section 162(m) with respect to future compensation arrangements with
executive officers, deductibility will not be the sole factor used in
determining appropriate levels or methods of compensation. Since Company
objectives may not always be consistent with the requirements for full
deductibility, the Company may enter into compensation arrangements under which
payments are not deductible under Section 162(m).
Conclusion
The Compensation Committee believes that long-term stockholder value is
enhanced by corporate and individual performance achievements. Through the plans
described above, a significant portion of the Company's executive compensation
is based on corporate and individual performance, as well as competitive pay
practices. The Compensation Committee believes equity compensation, in the form
of stock options, restricted stock, and stock units is vital to the long-term
success of the Company. The Compensation Committee remains committed to this
policy, recognizing that the competitive market for talented executives and the
cyclical nature of the Company's business may result in highly variable
compensation for a particular time period.
EDWARD H. MEYER
KRISTIN GAMBLE
13
<PAGE>
Comparative Company Performance
The following line graph compares cumulative total shareholder return for
the Company with a performance indicator of the overall stock market, the
Standard & Poor's 500 Index, and an industry index, the Peer Issuer Group Index,
assuming $100 was invested on March 16, 1993. Ameriwood Industries International
Corp., a company whose stock was part of the Peer Issuer Group Index, has been
excluded because its stock is no longer listed on a U.S. stock exchange.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
AMONG ETHAN ALLEN INTERIORS INC.,
THE S&P 500 INDEX AND A PEER GROUP
[COMPARATIVE COMPANY PERFORMANCE GRAPH]
3/16/93 6/30/94 6/30/95 6/30/96 6/30/97 6/30/98
------- ------- ------- ------- ------- -------
Standard & Poor's 500 Index 100 101 128 161 217 282
Peer Issuer Group 100 102 101 124 172 207
Ethan Allen Interiors Inc. 100 107 93 129 299 526
ASSUMES $100 INVESTED ON MARCH 16, 1993 IN COMPANY COMMON STOCK, STANDARD &
POOR'S 500 INDEX (1), AND PEER ISSUER GROUP INDEX (2), AND REINVESTMENT OF
DIVIDENDS
- ---------------
(1) Standard & Poor's 500 Index
(2) Peer Issuer Group which includes Bassett Furniture Industries, Inc.; Bush
Industries, Inc.; Chromcraft Revington, Inc.; DMI Furniture, Inc.; Flexsteel
Industries, Inc.; Furniture Brands International, Inc.; Haverty Furniture
Companies, Inc.; Heilig-Meyers Co.; La-Z Boy Inc.; LADD Furniture Inc.; Legett &
Platt, Inc.; Pier 1 Imports Inc.; and Pulaski Furniture Corp.
The returns of each company have been weighted according to each Company's
market capitalization.
14
<PAGE>
PROPOSAL 3
AMENDMENT TO THE 1992 STOCK OPTION PLAN
---------------------------------------
General
Since the Company's adoption of the 1992 Stock Option Plan (the "Stock
Option Plan") on March 23, 1993, and as of the Record Date, the Company has
granted 2,278,900 stock options to employees and directors of the Company,
2,068,380 of which remain outstanding. As of the Record Date, there were
1,381,498 shares of Common Stock available for grant under the Stock Option
Plan. Accordingly, in order to continue to implement the Company's policy of
providing equity incentives to its employees and directors and to provide
greater flexibility in making awards under the Stock Option Plan, the Board of
Directors has approved an amendment to the Stock Option Plan to provide for an
additional Formula Option (as defined in the Stock Option Plan) for 1500 shares
of Common Stock to each Independent Director (as defined in the Stock Option
Plan). Approval of this amendment requires the affirmative vote of a majority of
the shares of Common Stock issued and outstanding and entitled to vote on the
election of directors, and if the amendment does not receive such approval, it
will not take effect.
Purpose
Stock options and SARs are awarded under the Stock Option Plan for the
purpose of increasing stockholder value, advancing the interests of the Company,
strengthening the Company's ability to attract and retain the services of
experienced and knowledgeable independent directors, enhancing the Company's
ability to attract, retain and motivate employees, and providing such directors
and employees with an opportunity to acquire an equity interest in the Company.
Shares Subject to the Stock Option Plan
Subject to adjustment in the event of certain transactions involving the
Company, up to 580,199 shares of Common Stock were reserved for issuance under
the Stock Option Plan on the date of its inception, an additional 600,000 shares
of Common Stock were reserved for issuance on November 4, 1996 and an additional
1,300,000 shares of Common Stock were reserved for issuance on November 18,
1997, for a total of 3,660,398 shares of Common Stock, after giving effect to
the two-for-one split of the Company's Common Stock on September 2, 1997. As of
the Record Date, there were 1,381,498 shares of Common Stock available for grant
under the Stock Option Plan. If an award granted under the Stock Option Plan
expires or is terminated without having been exercised in full, the shares of
Common Stock subject to the award but not delivered are available again for
awards under the Stock Option Plan.
Who May Participate in the Stock Option Plan
Directors and employees of the Company are eligible to receive awards
pursuant to the terms of the amended Stock Option Plan. Each Independent
Director of the Company is currently entitled to receive Formula Options to
purchase 2,500 shares of Common Stock upon his or her appointment to the Board
of Directors, subject to the terms and conditions contained in the Stock Option
Plan. The number of options and SARs granted to directors and employees under
the Stock Option Plan is determined by the Committee. The Committee determines
which individuals will be granted options and SARs, the number of shares to be
optioned and other terms and conditions applicable to the grants.
The stockholders are being asked to approve a provision which will provide
for an additional Formula Option (the "New Options") for 3,000 shares of Common
Stock to each Independent Director. The New Options would be granted at an
exercise price of $41.025, the closing price of the Common Stock on August 5,
1998, when the New Options were considered by the Board of Directors. The other
terms of the New Options would be substantially the same as the existing Formula
Options. The New Options would have a term of ten years from the date of grant,
subject to earlier termination in the event the Independent Director's service
to the Company is terminated, and would vest 50% on the first anniversary of the
grant and 50% on the second anniversary of the grant.
15
<PAGE>
Options granted under the Stock Option Plan may be either incentive stock
options as defined in Section 422 of the Code or non-qualified stock options.
Incentive stock options may be granted only to employees of the Company and its
subsidiaries (as described in the Stock Option Plan) and are subject to the
limitation that the aggregate fair market value (determined as of the time the
option is granted) of stock with respect to which incentive stock options are
exercisable for the first time by an optionee during any calendar year (under
all option plans of the Company) will not exceed $100,000. Options that do not
meet these requirements will be treated as non-qualified stock options.
The purpose of this amendment to the Stock Option Plan is to promote the
interests of the Company and its stockholders by increasing the proprietary and
vested interest of Independent Directors in the Company.
Exercise of Awards; Exercise Price; Termination of Awards
Awards granted pursuant to the Stock Option Plan are evidenced by
agreements in such form as the Committee may from time to time establish.
Generally, each agreement states the number of shares covered thereby, the
exercise price (which will not be less than the closing price of the Common
Stock on the NYSE on the date of grant of the options), the time or times during
which each award is exercisable, the expiration date of the award, the form of
payment which may be used upon exercise of a stock option and whether a stock
option is an incentive stock option or a non-qualified stock option. Options
granted under the Stock Option Plan vest at a rate determined by the Committee.
Formula options vest at a rate of 50% on each anniversary of the date of the
grant. On the Record Date, the closing price of the Common Stock on the NYSE was
$___________ per share.
An award may be exercised in whole or in part (but for the purchase of
whole shares only) from time to time by written notice to the Chief Executive
Officer of the Company or his appointees which states the number of shares being
exercised. Subject to the terms of the option agreement executed by the holder,
payment of the option price may be made in cash, check or in outstanding shares
of Common Stock (valued as of the date of exercise) or in a combination of such
methods and must accompany the exercise notice. The exercise date of an option
is the date elected by the optionee, but not earlier than the date on which the
Company receives the notice from the optionee.
Neither an optionee nor any person holding an SAR has any privileges as a
stockholder of the Company with respect to any shares of Common Stock subject to
an award under the Stock Option Plan until the date of issuance of a stock
certificate.
Awards under the Stock Option Plan expire the earlier of 10 years from the
date of grant or 90 days after termination of employment, except as otherwise
provided by the terms of the award.
All outstanding options and SARs become immediately exercisable if a
Business Combination (as defined in Article Fifth of the Company's Certificate
of Incorporation) occurs and is consummated and the disinterested directors of
the Company either do not approve such Business Combination in accordance with
Article Fifth, or do approve such Business Combination and so authorize such
immediate exercisability in connection with such Business Combination.
Duration of the Stock Option Plan; Amendment; Certain Transactions
The Stock Option Plan will remain in effect as long as any awards that were
made under it remain outstanding. However, no awards could be granted under the
Stock Option Plan after October 24, 2007. The Stock Option Plan may be amended
or terminated by the Board at any time, except that no such amendment or
termination may alter or impair the rights of a participant under any award made
prior to such amendment or termination without the consent of the participant.
If the Common Stock is changed by reason of a Stock Split, stock dividend
or recapitalization, or converted into or exchanged for other securities as a
result of a merger, consolidation or reorganization, the Committee will make
such adjustments in the number and class of shares of stock with respect to
which awards
16
<PAGE>
may be granted under the Stock Option Plan as will be equitable and appropriate
in order to make such awards, as nearly as may be practicable, equivalent to
such awards immediately prior to such change. A corresponding adjustment
changing the number and class of shares allocated to, and the exercise price of,
each award or portion thereof outstanding at the time of such change will
likewise be made. In the case of incentive stock options, no adjustment will be
made if such adjustment (i) would constitute a modification, extension or
renewal of such incentive stock options within the meaning of Sections 422 and
425 of the Code, or (ii) would, under Section 422 of the Code, be considered as
the adoption of a new plan requiring stockholder approval.
Administration
The Stock Option Plan is to be administered by the Compensation Committee,
or such other committee of the Board of Directors as the Board may determine
(the "Committee"). Subject to the provisions of the Stock Option Plan, the
Committee has all powers with respect to the administration of the Stock Option
Plan, including without limitation, full power and authority to interpret the
provisions of the Stock Option Plan and any agreement executed thereunder and to
resolve all questions arising under the Stock Option Plan.
Assignment; Death of Holder
The Stock Option Plan provides that, except as otherwise provided by the
Committee, an award is exercisable only by the holder and is not assignable or
transferable during the lifetime of a holder. If the holder dies, his or her
award is thereafter exercisable (during the period specified in "Exercise of
Awards; Exercise Price; Termination of Awards" above) by his or her executors or
administrators to the full extent to which such award was exercisable by the
holder at the time of his or her death.
Options and SARs Granted
During the period from the inception of the Stock Option Plan through the
Record Date, Mr. Kathwari, Mr. Swanston, Ms. Kirkley, Mr. Stout and Ms. McLinden
have been granted __________, __________, __________, __________, and __________
stock options, respectively; all current executive officers, as a group, have
been granted __________ stock options; all current directors who are not
executive officers, as a group, have been granted __________ stock options; and
all employees, including all current officers who are not executive officers, as
a group, have been granted __________ stock options. No SARs have been awarded
under the Stock Option Plan. A total of 67,926 stock options have been
forfeited.
Certain Federal Income Tax Consequences
The following summarizes the federal income tax consequences to
participants who may receive awards under the Stock Option Plan. This
description of tax consequences is based upon present federal tax laws and
regulations.
Non-Qualified Stock Options. The grant of a non-qualified stock option to
an optionee will not itself be a taxable event, and the optionee will not be
subject to any income tax consequences with respect to such option unless and
until the option is exercised. Upon the exercise of a non-qualified stock
option, the optionee will generally recognize ordinary compensation income equal
to the "spread" between the exercise price and the fair market value of the
Common Stock on the date of exercise, and the Company generally will be entitled
to a corresponding deduction. Upon a subsequent disposition of the Common Stock,
the optionee will recognize a short-term or long-term capital gain or loss equal
to the difference between the fair market value of the shares on the date of
exercise and the fair market value at disposition, depending on the length of
time the shares are held.
Incentive Stock Options. The grant of an incentive stock option to an
employee will not itself be a taxable event. However, in contrast to the
exercise of a non-qualified stock option, the exercise of an incentive stock
option will not cause an optionee to recognize taxable income for regular income
tax purposes. If the optionee holds the shares acquired upon exercise of the
incentive stock option
17
<PAGE>
for a minimum of two years from the date of the grant of the incentive stock
option and for at least one year after exercise, any gain realized by the
optionee on the subsequent sale of such shares will be treated as long-term
capital gain. Under such circumstances, the Company will not be entitled to any
deduction for federal income tax purposes. If the shares are sold or otherwise
disposed of prior to the expiration of such periods, then the optionee will
recognize ordinary income in an amount equal to the difference between the fair
market value of the Common Stock on the date of exercise over the amount paid
for such shares, and the Company generally will be entitled to a corresponding
deduction. Any loss recognized upon a taxable disposition of the shares
generally would be characterized as a capital loss.
The excess of the fair market value on the date of exercise of an incentive
stock option over the exercise price is an adjustment which increases
alternative minimum taxable income, the base upon which alternative minimum tax
is computed. In determining the amount of gain or loss recognized on the later
disposition of stock acquired pursuant to the exercise of an incentive stock
option, the tax basis of the stock for alternative minimum tax purposes (but not
regular tax purposes) is increased by the excess of the fair market value of the
stock over the option price at the time of exercise.
Stock Appreciation Rights. An employee will not realize taxable income at
the time of the grant of an SAR. Upon exercise, however, the employee will
generally realize ordinary income in the amount that the fair market value of
the Common Stock on the date of exercise exceeds its fair market value on the
date of grant. The Company generally will be entitled to a corresponding
deduction in the year of exercise.
THIS SUMMARY OF THE STOCK OPTION PLAN AND THE AMENDMENTS THERETO IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE COMPLETE TEXT OF THE STOCK OPTION
PLAN AS SET FORTH IN EXHIBIT A, WHICH IS MARKED TO SHOW THE PROPOSED REVISIONS
TO BE EFFECTED BY THE AMENDMENT.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE AMENDMENTS
TO THE STOCK OPTION PLAN, WHICH IS DESIGNATED AS PROPOSAL NO. 3 ON THE ENCLOSED
PROXY CARD.
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PROPOSAL 4
INCREASE IN NUMBER OF AUTHORIZED SHARES OF COMMON STOCK
-------------------------------------------------------
The Board of Directors has approved, subject to stockholder approval at the
1998 Annual Meeting of Stockholders, an increase in the number of authorized
shares of common stock, par value $0.01 per share ("Common Stock"), from
70,000,000 to 150,000,000. The Company's Certificate of Incorporation currently
authorizes the issuance of 70,000,000 shares of Common Stock. As of September
25, 1998, the record date for the 1998 Annual Meeting, _____________ shares of
Common Stock were outstanding and _____________ shares of Common Stock were
reserved for issuance under the Company's stock option plans and warrant
agreements.
The Board has proposed the authorization of an additional 80,000,000 shares
of Common Stock for a variety of corporate purposes including: to obtain
financing and consummate acquisitions and other programs to facilitate expansion
and growth, stock splits or dividends, the Shareholder Rights Plan and stock
options and other employee benefit plans. Currently, there are no plans for the
use of any of the additional authorized shares in the immediate future. If this
proposal is not approved and the need arises in the future to issue additional
common stock, there may not be sufficient time to call a stockholders' meeting
to approve an amendment to the Certificate of Incorporation.
Authorized but unissued shares may be issued at such time or times, to such
person or persons and for such consideration as the Board of Directors
determines to be in the best interests of the Company, without further
authorization from the stockholders except as may be required by the rules of
the NYSE or any stock exchange on which the Common Stock is listed. The
authorization of additional shares of Common Stock will not, by itself, affect
the rights of holders of existing shares. Depending on the circumstances,
issuance of additional shares of Common Stock could affect the existing holders
of shares by diluting the voting power of the outstanding shares. The
stockholders do not have pre-emptive rights to purchase additional shares of
Common Stock, nor will they as a result of this proposal.
The Board of Directors has unanimously adopted a resolution authorizing the
amendment of the Certificate of Incorporation to increase the authorized shares
and directing that the amendment be submitted to the stockholders for their
consideration. The affirmative vote of the holders of a majority of the shares
of Common Stock outstanding on September 25, 1998 will be required to approve
the amendment.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE PROPOSAL
TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK TO 150,000,000 WHICH
IS DESIGNATED AS PROPOSAL NO. 4 ON THE ENCLOSED PROXY CARD.
OTHER MATTERS
Proxy Solicitation Expense
The expense of the proxy solicitation will be paid by the Company. In
addition to the solicitation of proxies by use of the mails, solicitation also
may be made by telephone, telegraph or personal interview by directors, officers
and regular employees of the Company, none of whom will receive additional
compensation for any such solicitation. The Company has engaged Morrow &
Company, a professional proxy solicitation firm, to provide customary
solicitation services for a fee of $5,000 plus expenses. The Company does not
anticipate that the costs and expenses incurred in connection with this proxy
solicitation will exceed those normally expended for a proxy solicitation for
those matters to be voted on in the Annual Meeting. The Company will, upon
request, reimburse brokers, banks and similar organizations for out-of-pocket
and reasonable clerical expenses incurred in forwarding proxy material to their
principals.
Stockholder Proposals
Proposals of stockholders must be received in writing by the Secretary of
the Company no later than 120 days in advance of the first anniversary of the
date of the mailing of this proxy statement in order to be considered for
inclusion in the
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Company's proxy statement and form of proxy relating to the 1999 Annual Meeting
of Stockholders.
If a stockholder desires to submit a proposal for consideration at the 1999
Annual Meeting of Stockholders, written notice of such stockholder's intent to
make such a proposal must be given and received by the Secretary of the Company
at the principal executive offices of the Company either by personal delivery or
by United States mail not later than June 3, 1999. Each notice must describe the
proposal in sufficient detail for the proposal to be summarized on the agenda
for the Annual Meeting of Stockholders and must set forth: (i) the name and
address, as it appears on the books of the Company, of the stockholder who
intends to make the proposal; (ii) a representation that the stockholder is a
holder of record of stock of the Company entitled to vote at such meeting and
intends to appear in person or by proxy at such meeting to present such
proposal; and (iii) the class and number of shares of the Company which are
beneficially owned by the stockholder. In addition the notice must set forth the
reasons for conducting such proposed business at the Annual Meeting of
Stockholders and any material interest of the stockholder in such business. The
presiding officer of the Annual Meeting of Stockholders will, if the facts
warrant, refuse to acknowledge a proposal not made in compliance with the
foregoing procedure, and any such proposal not properly brought before the
Annual Meeting of Stockholders will not be considered.
Other Business
The Board of Directors is not aware of any matters to be presented at the
Annual Meeting other than those enumerated in the Company's Notice enclosed
herewith. If any other matters do come before the meeting, it is intended that
the holders of the proxies will vote thereon in their discretion. Any such other
matters will require for its approval the affirmative vote of the majority in
interest of the stockholders present in person or by proxy at the Annual Meeting
where a quorum is present, or such greater vote as may be required by the
Company's Amended and Restated Certificate of Incorporation, the Company's
Amended and Restated By-laws or the General Corporation Law of the State of
Delaware.
By order of the Board of Directors,
Roxanne Khazarian
Secretary
Ethan Allen Interiors Inc.
Ethan Allen Drive
Danbury, Connecticut 06811
October 2, 1998
Each stockholder, whether or not he or she expects to be present in person at
the Annual Meeting, is requested to MARK, SIGN, DATE and RETURN THE ENCLOSED
PROXY CARD in the accompanying envelope as promptly as possible. A stockholder
may revoke his or her proxy at any time prior to voting.
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