SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
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Check the appropriate box:
[X] Preliminary Proxy Statement [ ] Confidential, for Use of
[ ] Definitive Proxy Statement Commission Only (as
[ ] Definitive Additional permitted by Rule
Materials 14a-6(e)(2))
[ ] Soliciting Material Pursuant
to 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.
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1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
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pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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[ ] 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:
ETHAN ALLEN INTERIORS INC.
Ethan Allen Drive
Danbury, Connecticut 06811
October 7, 2002
Dear Shareholder:
You are cordially invited to attend the 2002 Annual Meeting of Shareholders
of Ethan Allen Interiors Inc. This meeting will be held at the Ethan Allen
International Corporate Headquarters, Ethan Allen Drive, Danbury, Connecticut
06811 at 9:00 A.M. local time, on Thursday, November 21, 2002.
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
ETHAN ALLEN INTERIORS INC.
Ethan Allen Drive
Danbury, Connecticut 06811
NOTICE OF 2002 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 International Corporate Headquarters on Thursday,
November 21, 2002 at 9:00 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 LLP as independent auditors
for the 2003 fiscal year;
3. Approval of the Incentive Performance Bonus provisions of the New
Employment Agreement effective as of July 1, 2002 for Mr. M. Farooq
Kathwari - Chairman of the Board, Chief Executive Officer and
President; and
4. Such other business as may properly come before the meeting.
The Board of Directors has fixed September 24, 2002 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.
Pamela A. Banks-Neill
Secretary
October 7, 2002
Ethan Allen Interiors Inc.
Ethan Allen Drive
Danbury, Connecticut 06811
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 2002 Annual
Meeting of Shareholders of the Company to be held on November 21, 2002 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 7, 2002.
VOTING SECURITIES; PROXIES; REQUIRED VOTE
VOTING SECURITIES
The Board of Directors has fixed the close of business on September 24,
2002 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 37,767,667 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 by 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 LLP as the
independent auditors of the Company's consolidated financial statements for
the fiscal year ending June 30, 2003 and approve the Incentive Performance
Bonus provisions of the New Employment Agreement for Mr. Kathwari.
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.
PROPOSAL 1
ELECTION OF DIRECTORS
The Board of Directors is presently composed of seven members. 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
Directors in one class, which is composed of two Directors, expires as of the
Annual Meeting.
Two directors, M. Farooq Kathwari and Horace G. McDonell are nominated for
election at the Annual Meeting, to terms as Directors 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 of
the nominees 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 2005
M. FAROOQ KATHWARI, 58, 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
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 a director of Hon Industries, Inc. as well as several non-profit
organizations, including the American Furniture Manufacturer's Association and
the National Retail Federation.
HORACE G. MCDONELL, 73, 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, Hubbell Incorporated, Silicon Valley Group Incorporated and ETEC
Incorporated. He is Chairman of the Audit Committee and a member of the
Nominations/Corporate Governance Committee.
-2-
DIRECTORS WHOSE PRESENT TERM WILL CONTINUE UNTIL 2003
William W. Sprague, 44, was initially elected as a director of the Company
on June 30. 1989. In February 1996, Mr. Sprague founded Crest Communications
Holdings, LLC, a private advisory and investment firm focusing on the media and
telecommunications industries. Prior to that, he was a Managing Director of
Smith Barney Inc. Prior to April 1989, Mr. Sprague was a Vice President of
Kidder, Peabody & Co., Incorporated, which he joined in September 1984. He is a
member of the Audit Committee.
FRANK G. WISNER, 64, was elected as a director of the Company on July 23,
2001. He is Vice Chairman, External Affairs, of American International Group
("AIG"), the leading United States-based international insurance organization.
Mr. Wisner is also on the board of directors of EDG Resources. Prior to joining
AIG, he was the United States Ambassador to India from July 1994 through July
1997. He retired from the United States Government with the rank of Career
Ambassador, the highest grade in the Foreign Service. Mr. Wisner joined the
State Department as a Foreign Service Officer in 1961 and served in a variety of
overseas and Washington positions during his 36-year career. Among his other
positions, Mr. Wisner served successively as United States Ambassador to Zambia,
Egypt and the Philippines. Before being named United States Ambassador to India,
his most recent assignment was as Under Secretary of Defense for Policy. Prior
to that he was Under Secretary of State for International Security Affairs. He
is the Chairman of the Nominations/Corporate Governance Committee.
DIRECTORS WHOSE PRESENT TERM WILL CONTINUE UNTIL 2004
Clinton A. Clark, 60, 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 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. Mr. Clark is also an investor and director of several private companies.
He is a member of the Audit Committee and the Compensation Committee.
Kristin Gamble, 57, 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.
-3-
EDWARD H. MEYER, 75, 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 Global Group Inc. Mr. Meyer joined Grey Worldwide 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 Worldwide in
1970. Grey Global Group Inc. performs advertising services for Ethan Allen. See
"Certain Transactions". Mr. Meyer is a Director of a number of outside business
and financial organizations, including Harman International Industries, Inc. He
is Chairman of the Compensation Committee and a member of the
Nominations/Corporate Governance Committee.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF THE NOMINEES FOR
DIRECTORS 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 2002, there were four regularly scheduled meetings of
the Board of Directors. Average attendance at the aggregate number of Board and
Committee meetings was 94% in fiscal year 2002 and no director attended fewer
than 94% of the aggregate number of meetings of the Board of Directors and
committees on which he or she served.
Prior to fiscal year 2002, the Board of Directors had established two
standing committees, the Audit Committee and the Compensation Committee, and has
recently established a Nominations/Corporate Governance 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 and reviews and
approves the scope, purpose and type of audit services to be performed by the
external auditors. The Audit Committee also reviews the scope and findings of
the Company's internal auditors. In accordance with SEC regulations, the Audit
Committee has approved an Audit Committee Charter, describing the activities of
the Audit Committee. No member of the Audit Committee may be an employee of the
Company or of Ethan Allen Inc.
REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
The Audit Committee oversees the Company's financial reporting process on
behalf of the Board of Directors. Management has the primary responsibility for
the financial statements and the reporting process including the system of
internal control. In fulfilling its oversight responsibilities, the Committee
reviewed the audited financial statements in the Annual Report with management
including a discussion of the quality, not just the acceptability, of the
accounting principles, the reasonableness of significant judgments, and the
clarity of disclosures in the financial statements.
-4-
The Committee reviewed with the independent auditors, who are responsible
for expressing an opinion on conformity of those audited financial statements
with accounting principles generally accepted in the United States of America,
their judgments as to the quality, not just the acceptability, of the Company's
accounting principles and such other matters as are required to be discussed
with the Committee under auditing standards generally accepted in the United
States of America and the Codification of Statements on Auditing Standards AU
380. In addition, the Committee has discussed with the independent auditors the
auditors' independence from management and the Company.
The Committee discussed with the Company's internal and independent
auditors the overall scope and plans for their respective audits. The Committee
met with the internal and independent auditors, with and without management
present, to discuss the results of their examinations, their evaluations of the
Company's system of internal control and the overall quality of the Company's
financial reporting. The Committee held six meetings during fiscal year 2002,
which included, but were not limited to, the review of the quarterly 10-Q
filings and annual 10-K filing.
In reliance on the reviews and discussions referred to above, the
Committee recommended to the Board of Directors (and the Board has approved)
that the audited financial statements be included in the Annual Report on Form
10-K for the year ended June 30, 2002 for filing with the Securities and
Exchange Commission. The Committee has also recommended, subject to Board and
shareholder approval, the selection of the Company's independent auditors.
HORACE G. McDONELL, CHAIRMAN
CLINTON A. CLARK
KRISTIN GAMBLE
WILLIAM W. SPRAGUE
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
member of the Compensation Committee may be an employee of the Company or of
Ethan Allen Inc. The Compensation Committee held twelve meetings, ten of which
were telephonic, in fiscal year 2002.
NOMINATIONS/CORPORATE GOVERNANCE COMMITTEE
The duties of the Nominations/Corporate Governance Committee are to (i)
nominate individuals to serve on the Board of Directors and (ii) review and
monitor the Company's corporate governance policies, including the Company's
trading policy for its directors and executive officers. The
Nominations/Corporate Governance Committee will not consider nominees
recommended by the stockholders of the Company. No member of the
Nominations/Corporate Governance Committee may be an employee of the Company or
of Ethan Allen Inc. The Nominations/Corporate Governance Committee has held an
organizational meeting, but has not otherwise transacted any business at this
time.
-5-
DIRECTOR COMPENSATION
For fiscal year 2002, 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 2,000 options were awarded in fiscal year
2002 to each independent director.
For fiscal year 2003, all independent directors will receive $16,000 per
annum and $2,500 per meeting of the Board of Directors if attended in person
($500 per meeting if attended by telephone). 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 if attended in person ($500 per meeting if attended by telephone)
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 and Edward Meyer served as members of the Compensation
Committee of the Board of Directors of the Company for fiscal year 2002. 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 2002. Mr. Meyer is Chairman and President of Grey Global Group Inc.,
which received a fee of approximately $1,094,000 for the performance of
advertising services for Ethan Allen in fiscal year 2002.
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;
SANDRA LAMENZA, 54, has served as Vice President and General Manager,
Retail Division since April 1999. She is responsible for the supervision of the
Company operated retail stores. Ms. Lamenza started in the training department
of Ethan Allen in 1988 and has held various marketing positions.
-6-
Craig W. Stout, 52, has served as Vice President, Design and Product
Development since August 1995. He is responsible for the design and development
of products sold by the Company. Mr. Stout joined Ethan Allen in 1972 and has
held various marketing, merchandising and product development positions.
EDWARD TEPLITZ, 41, has served as Chief Financial Officer since August
2002. He is responsible for all financial aspects of the Company. Mr. Teplitz
joined the Company in 2001 and prior to that was an Ethan Allen licensee in
Pittsburgh, Pennsylvania and Cleveland, Ohio. Prior to that Mr. Teplitz worked
in the corporate finance department of E.F. Hutton & Company and FLIC (USA),
Inc. Mr. Teplitz holds an MBA in Finance from Columbia Business School and a
B.S. in Accounting from Wharton School of Finance.
LENORA W. KIRKLEY, 45, has served as Vice President, Advertising and
Corporate Communications since February 1993. She is responsible for the
Advertising, Public Relations, and Consumer Finance 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
Worldwide Inc., and Doyle Dane Bernbach, Inc., New York Advertising Agencies.
SECURITY OWNERSHIP OF COMMON STOCK OF CERTAIN OWNERS AND MANAGEMENT
The following table sets forth, as of June 30, 2002, 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.
Shares Common Stock
Name and Address of Beneficially Percentage
Beneficial Owner Owned(1) Ownership(1)
- ---------------------------------- ------------ ------------
DIRECTORS AND EXECUTIVE OFFICERS:
Mr. Farooq Kathwari(2)....................... 4,616,413 11.06%
Edward H. Meyer(3)........................... 75,860 *
Horace G. McDonell(4)........................ 59,000 *
Kristin Gamble(5)............................ 38,800 *
Lenora W. Kirkley(6)......................... 28,462 *
Craig W. Stout(7)............................ 23,581 *
William W. Sprague(8)........................ 21,674 *
Sandra Lamenza(9)............................ 20,497 *
Clinton A. Clark(10)......................... 16,500 *
Edward Teplitz (11) ......................... 7,000 *
Frank G. Wisner(12).......................... 2,000 *
-7-
All executive officers and directors as a
group(2)(3)(4)(5)(6)(7)(8)(9)(10)(11)(12).... 5,032,250 12.06%
OTHER PRINCIPAL STOCKHOLDERS:
Ruane, Cunniff & Co., Inc.(13)............... 5,852,654 14.03%
Baron Capital Group, Inc.(14)................ 3,424,100 8.21%
___________
* 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 options granted
under the 1992 Stock Option Plan are exercised, whether or not
currently vested, earned or exercisable.
(2) Includes (a) 1,692,928 shares owned directly by Mr. Kathwari;
(b) options to purchase 2,475,050 shares of Common Stock;
(c) 235,954 shares issued upon the exercise of stock options, which
are included in Mr. Kathwari's direct holdings, but as to which
delivery of the shares has been deferred; (d) 4,431 shares held
directly by Mr. Kathwari in the Ethan Allen Retirement Plan;
(e) 152,686 shares owned by the Irfan Kathwari Foundation, of which
Mr. Kathwari disclaims beneficial ownership; and (f) 55,364
shares owned by immediate family members, of which Mr. Kathwari
disclaims beneficial ownership. Mr. Kathwari's address is Ethan
Allen Drive, Danbury, Connecticut 06811.
(3) Includes (a) 39,860 shares owned directly by Mr. Meyer and (b)
options to purchase 36,000 shares of Common Stock. Mr. Meyer's
address is Ethan Allen Drive, Danbury, Connecticut 06811.
(4) Includes (a) 23,000 shares owned directly by Mr. McDonell and
(b) options to purchase 36,000 shares of Common Stock. Mr.
McDonell's address is Ethan Allen Drive, Danbury, Connecticut
06811.
(5) Includes (a) 10,300 shares owned directly by Ms. Gamble and (b)
options to purchase 28,500 shares of Common Stock. Ms. Gamble's
address is Ethan Allen Drive, Danbury, Connecticut 06811.
(6) Includes (a) options to purchase 28,300 shares of Common Stock
and (b) 162 shares held directly by Ms. Kirkley in the Ethan
Allen Retirement Plan. Ms. Kirkley's address is Ethan Allen
Drive, Danbury, Connecticut 06811.
(7) Includes (a) options to purchase 23,050 shares of Common Stock
and (b) 531 shares held directly by Mr. Stout in the Ethan Allen
Retirement Plan. Mr. Stout's address is Ethan Allen Drive,
Danbury Connecticut 06811.
(8) Includes (a) 18,674 shares owned directly by Mr. Sprague and
(b) options to purchase 3,000 shares of Common Stock. Mr. Sprague's
address is Ethan Allen Drive, Danbury, Connecticut 06811.
(9) Includes (a) 583 shares owned directly owned by Ms. Lamenza;
(b) options to purchase 19,800 shares of Common Stock; and
(c) 114 shares held directly by Ms. Lamenza in the Ethan Allen
Retirement Plan. Ms. Lamenza's address is Ethan Allen Drive,
Danbury, Connecticut 06811.
-8-
(10) Includes options to purchase 16,500 shares of Common Stock.
Mr. Clark's address is Ethan Allen Drive, Danbury, Connecticut 06811.
(11) Includes options to purchase 7,000 shares of Common Stock.
Mr. Teplitz's address is Ethan Allen Drive, Danbury, Connecticut 06811
(12) Includes options to purchase 2,000 shares of Common Stock.
Mr. Wisner's address is Ethan Allen Drive, Danbury, Connecticut 06811.
(13) As of February 14, 2002, Ruane, Cunniff & Co., Inc. ("RCC"), a
broker/dealer registered under the Exchange Act and an investment
advisor registered under the Investment Advisors Act of 1940
(the "1940 Act"), beneficially owned 5,852,654 shares of Common Stock.
RCC has (i) sole voting power with respect to 3,713,495 shares of
Common Stock, (ii) sole dispositive power with respect to 5,852,654
shares of Common Stock and (iii) shared dispositive power with respect
to none of the shares of Common Stock. The address of RCC is
767 Fifth Avenue, New York, New York 10153.
(14) As of February 8, 2002, Baron Capital Group, Inc. ("BCG") and
Ronald Baron ("RB"), each a parent holding company, in accordance
with Section 13d-1(b)(ii)(G) of the Exchange Act, beneficially owned
3,424,100 shares of Common Stock. Such shares are held by their
controlled entities or the investment advisory clients thereof.
BCG and RB have (i) sole voting power with respect to 280,000 shares
of Common Stock, (ii) shared voting power with respect to 3,144,100
shares of Common Stock, (iii) sole dispositive power with respect to
280,000 shares of Common Stock and (iv) shared dispositive power with
respect to 3,144,100 shares of Common Stock. The address of BCG and
RB is 767 Fifth Avenue, New York, New York 10153.
PROPOSAL 2
RATIFICATION OF THE APPOINTMENT OF AUDITORS
Subject to shareholder ratification, the Board of Directors has
appointed KPMG LLP as the independent auditors of the Company for the fiscal
year ending June 30, 2003. KPMG LLP were the independent auditors for the
Company for the fiscal year ended June 30, 2002. Representatives of KPMG LLP
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.
For fiscal year 2002, the Company incurred and/or paid approximately
$428,650 in fees and expenses to its independent auditors. Of that amount,
$379,250 related to the audit of the year end financial statements and
quarterly reviews. The remaining $49,400 related to the performance of tax
and other services, including the audit of the Company's Retirement Savings
Plan. There were no fees incurred related to financial information design
and implementation.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION OF THE
APPOINTMENT OF KPMG LLP AS INDEPENDENT AUDITORS FOR THE COMPANY FOR THE
FISCAL YEAR ENDING JUNE 30, 2003, WHICH IS DESIGNATED AS PROPOSAL NO. 2 ON
THE ENCLOSED PROXY CARD.
-9-
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, 2002, 2001 and 2000. For a description of the terms of
employment agreements, option and restricted stock grants for the listed
officers, see pages 10 through 17.
LONG TERM
COMPENSATION AWARDS
-------------------------------
SECURITIES
ANNUAL COMPENSATION RESTRICTED UNDERLYING
--------------------------------- STOCK OPTIONS/WARRANTS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARDS GRANTED COMPENSATION(1)
- --------------------------- ---- -------- ----------- ---------- ----------------- ---------------
M. Farooq Kathwari............. 2002 $770,559 $1,575,000 -- -- $ 19,900
Chairman of the Board of 2001 747,780 1,642,000 12,000 -- 404,440
Directors, President and 2000 726,823 2,027,000 2,000 -- 59,080
Chief Executive Officer
Sandra Lamenza................. 2002 190,769 105,000 -- 3,000 1,000
Vice President and General 2001 180,673 70,000 -- -- 1,000
Manager, Retail Division 2000 154,346 70,000 -- 2,500 1,000
Craig W. Stout................. 2002 185,000 85,000 -- 1,500 1,000
Vice President, Design and 2001 180,673 70,000 -- -- 1,000
Product Development 2000 156,769 70,000 -- 2,000 1,000
Edward Teplitz (2)............. 2002 144,711 100,000 -- 7,000 --
Chief Financial Officer 2001 -- -- -- -- --
2000 -- -- -- -- --
Lenora W. Kirkley.............. 2002 185,000 55,000 -- 1,500 1,000
Vice President, Advertising 2001 182,404 70,000 -- -- 1,000
and Corporate 2000 168,385 70,000 -- 2,000 1,000
Communications
________
(1) Includes contributions by Ethan Allen of $1,000 each pursuant to Ethan
Allen's 401(k) Savings Plan for fiscal years 2002, 2001, and 2000. In
addition, Mr. Kathwari's compensation for fiscal year 2002 includes
$18,900 from dividends on Stock Units.
(2) Mr. Teplitz joined the Company during fiscal year 2002 and thus no
information is available for fiscal years 2001 and 2000.
INCENTIVE STOCK OPTION GRANTS DURING FISCAL YEAR 2002
The following table sets forth information concerning grants of
incentive options to the named executive officers during the fiscal year ended
June 30, 2002.
-10-
INDIVIDUALS GRANTS (1) POTENTIAL REALIZABLE
------------------------------------------------------- VALUE AT ASSUMED
% OF TOTAL ANNUAL
NUMBER OPTIONS RATES OF STOCK PRICE
OF SHARES AWARDED TO APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OR OPTION TERM
OPTIONS IN FISCAL BASE PRICE EXPIRATION ----------------------
SECURITIES AWARDED TO AWARDED YEAR PER SHARE DATE(2) 5% 10%
- --------------------- ---------- ------------ ------------ ----------- -------- --------
M. Farooq Kathwari......... 0 0% N/A N/A $0 $0
Sandra Lamenza............. 3,000 3.170% 38.79 4/18/12 64,158 158,024
Craig W. Stout............. 1,500 1.585% 38.79 4/18/12 32,079 79,012
Edward Teplitz............. 7,000 7.398% 29.23 9/17/11 112,807 277,853
Lenora W. Kirkley.......... 1,500 1.585% 38.79 4/18/12 32,079 79,012
_________
(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.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTIONS/WARRANTS VALUES
The following table sets forth information concerning the number of
unexpired Incentive Options and 1992 Stock Options outstanding as of the end of
fiscal year 2002, and the value of any unexercised in-the-money Incentive
Options and 1992 Stock Options outstanding at such time (assuming a stock price
of $34.85 per share at June 28, 2002), held by the named executive officers.
NUMBER OF VALUE OF
SECURITIES UNDERLYING UNEXERCISED IN-THE-
UNEXERCISED INCENTIVE MONEY INCENTIVE
OPTIONS AND 1992 STOCK OPTIONS AND 1992 STOCK
SHARES ACQUIRED VALUE OPTIONS AT JUNE 30, 2002 OPTIONS AT JUNE 30, 2002
ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
--------------- --------- -------------------------- --------------------------
M. Farooq Kathwari
Exercisable............. ___ ___ 2,475,025 $43,535,721
Unexercisable........... ___ ___ 25 246
Sandra Lamenza
Exercisable............. ___ ___ 14,962 287,142
Unexercisable........... ___ ___ 4,838 17,400
Craig W. Stout
Exercisable............. 4,000 155,040 19,587 682,607
Unexercisable........... ___ ___ 3,463 18,163
Edward Teplitz
Exercisable............. ___ ___ 0 0
Unexercisable........... ___ ___ 7,000 39,340
Lenora W. Kirkley
Exercisable............. ___ ___ 20,150 496,521
Unexercisable........... ___ ___ 3,650 19,771
-11-
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 10 to "Notes to Consolidated Financial Statements" in the
Company's Annual Report as of June 30, 2002 filed on Form 10-K. The Company has
registered shares of Common Stock issuable upon exercise of such options and
warrants in the near future.
THE ETHAN ALLEN RETIREMENT SAVINGS PLAN
Ethan Allen established the Ethan Allen Profit Sharing and 401(k)
Retirement Plan (the "Plan"), now known as the Ethan Allen Retirement Savings
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 three
months of service.
The 401(k) aspect of the Plan allows participants to defer up to 100%
of their compensation, subject to certain statutory limitations. The Company
may, at its discretion, fully match the first $500 of a participant's before tax
contribution and one-half of the next $1,000 of a participant's before tax
contribution, up to a maximum of $1,000 each year. During each of the fiscal
years 2002, 2001, and 2000, the Company made a contribution of $1,000 to the
401(k) aspect of the Plan for each of the above named executive officers, other
than Mr. Teplitz. Participant contributions and employer 401(k) contributions
are immediately and fully vested.
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.
The Plan is administered by Ethan Allen Inc. with J.P. Morgan/American
Century Services, Inc. as Investment Manager and Recordkeeper. Investments
offered include a stable asset fund, six 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, 2002, the estimated net present aggregate value of
contributions to the retirement programs for the above named executive officers
were: M. Farooq Kathwari $346,823.03, Sandra Lamenza $9,786.23, Craig W. Stout
$41,607.16, Edward Teplitz $0.00, and Lenora W. Kirkley $19,381.83.
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
held twelve meetings, ten of which were telephonic, in fiscal year 2002. 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 for the fiscal year
ending June 30, 2002 were Mr. Edward H. Meyer and Ms. Kristin Gamble.
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.
The Compensation Committee began negotiating with Mr. Kathwari on the
terms of the New Employment Agreement in August 2001. The Compensation Committee
retained an outside consultant and separate counsel to advise it on the
appropriate compensation levels and terms and conditions of employment for chief
executive officers of comparable, similarly situated companies. The consultant
made a full and complete presentation to the full Board of Directors, who voted
unanimously to approve the New Employment Agreement.
SALARY
The Compensation Committee assesses base salaries of the Chief
Executive Officer and Chief Financial Officer or Treasurer 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 year 2002, the Company's Compensation Committee maintained a
cash bonus program (the "Bonus Program") for managerial employees of the
Company. The Bonus Program had two components: (i) an aggregate of $2,539,500 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
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determined in accordance with the Prior Employment Agreement (as defined below).
In light of the Company's performance for fiscal year 2002 and in accordance
with the bonus formula in the Prior Employment Agreement, the Committee approved
a bonus of $1,575,000 for Mr. Kathwari.
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 primary 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
As of July 1, 2002, Mr. Kathwari and the Company entered into a new
employment agreement (the "New Employment Agreement"), which replaces the
employment agreement, dated as of July 1, 1997, between Mr. Kathwari and the
Company (the "Prior Employment Agreement"). Pursuant to the New Employment
Agreement, the Company has agreed to continue to employ Mr. Kathwari as
Chairman, Chief Executive Officer and President of the Company and Ethan Allen,
Inc. for a period of five years commencing July 1, 2002, with two automatic
one-year extensions commencing on each of July 1, 2007, and July 1, 2008 (each,
an "Anniversary Date"), unless notice is given by either Mr. Kathwari or the
Company not later than 12 months prior to an Anniversary Date. Pursuant to the
terms of the New Employment Agreement, Mr. Kathwari will receive a base salary
of $850,000 per year, subject to increase annually upon the review and
recommendation of the Compensation Committee, with automatic annual
cost-of-living increases.
Pursuant to the terms of the New Employment Agreement, Mr. Kathwari is
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 for the fiscal year ending June 30, 2003, is $80 million (the
"Threshold") or less, he will receive no incentive bonus. If the Company's
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Operating Income for the fiscal year ending June 30, 2003, exceeds the
Threshold, his incentive bonus will be equal to 2% of the amount by which
Operating Income exceeds the Threshold. The Threshold will be increased 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 the Threshold in order to properly
implement its purposes.
Pursuant to the New Employment Agreement, Mr. Kathwari was granted (i)
as of August 1, 2002, ten-year stock options to purchase 600,000 shares of
Common Stock, at an exercise price of $31.02 per share (the price of a share of
Common Stock on the New York Stock Exchange as of such date), which vest at a
rate of 200,000 each year following the date of grant, up to and including
August 1, 2005, (ii) as of August 1, 2003, ten-year stock options to purchase
400,000 shares of Common Stock, at an exercise price per share equal to the
price of a share of Common Stock on the New York Stock Exchange as of such date,
which vest at a rate of 200,000 each year following the date of grant, up to and
including August 1, 2005, and (iii) as of August 1, 2004, ten-year stock options
to purchase 200,000 shares of Common Stock, at an exercise price per share equal
to the price of a share of Common Stock on the New York Stock Exchange as of
such date, which vest on August 1, 2005. Under the Prior Employment Agreement,
Mr. Kathwari received ten-year stock options to purchase 900,000 shares of
Common Stock, which have all vested. All options were granted pursuant to the
1992 Stock Option Plan. All options will become fully vested upon the occurrence
of a Change in Control of the Company (as defined in the New Employment
Agreement) or in the event that Mr. Kathwari's employment is terminated by the
Company without "cause" or by Mr.
Kathwari "for good reason."
Pursuant to the New Employment Agreement, Mr. Kathwari received on July
1, 2002, and will receive during the term thereof as of each successive July 1,
up to and including July 1, 2006, 10,500 shares of restricted stock. The shares
of restricted stock vest on the third anniversary of the grant date in
accordance with a tiered vesting schedule tied to the Company's total return to
its stockholders as compared to the total return to holders of common stock of
the companies which comprise the Standard & Poor's 500. Any shares which do not
vest will be forfeited. As of each dividend record date for the Common Stock
occurring on or after the date of any grant of shares of restricted stock, but
prior to the date such shares become vested or are forfeited, an account
established by the Company for the benefit of Mr. Kathwari shall be credited
with the amount of dividends which would otherwise have been paid with respect
to such shares. Amounts credited to the account shall be credited with interest
at the rate of 5% per year until distribution. Mr. Kathwari shall be fully
vested in all amounts credited to the account, regardless of the subsequent
vesting or forfeiture of the shares. The balance credited to Mr. Kathwari's
account shall be distributed to him in cash as soon as practicable after the
termination of his employment. Under the Prior Employment Agreement, Mr.
Kathwari received 150,000 shares of restricted stock, of which 92,000 shares
have vested and of which no additional shares are eligible for vesting. All
shares of restricted stock will become fully vested upon the occurrence of a
Change in Control of the Company or in the event that Mr. Kathwari's employment
is terminated by the Company without "cause" or by Mr. Kathwari "for good
reason."
-15-
Under the Prior Employment Agreement, the Company established a book
account for Mr. Kathwari, which has been credited with 105,000 Stock Units (the
"Stock Units"). 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 were credited to
the account, Mr. Kathwari received dividend equivalent payments in cash equal to
the dividends payable on the shares of Common Stock represented by the Stock
Units.
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 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 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 year 2002, Mr. Kathwari received $770,559 in base salary,
which represented a $22,779 increase from the prior fiscal year and was
consistent with the terms of the Prior Employment Agreement. Mr. Kathwari also
received an annual incentive bonus in fiscal year 2002 of $1,575,000 and
dividend income of $18,900 from the Stock Units, each as granted pursuant to the
terms of the Prior Employment Agreement. The payment of the incentive bonus and
the dividend income were in accordance with the recommendation and action of the
Compensation Committee and the terms of the Prior Employment Agreement. In
fiscal year 2001, Mr. Kathwari received $747,780 in base salary, which
represented a $20,957 increase from the prior fiscal year and was consistent
with the terms of the Prior Employment Agreement. Mr. Kathwari also received an
annual incentive bonus in fiscal year 2001 of $1,642,000, dividend income of
$13,440 from the Stock Units and was deemed to have received $390,000 from the
vesting of restricted stock, each as granted pursuant to the terms of the Prior
Employment Agreement. The payment of the incentive bonus and the dividend
income, and the deemed vesting of restricted stock, were in accordance with the
recommendation and action of the Compensation Committee and the terms of the
Prior Employment Agreement. In fiscal year 2000, Mr. Kathwari received $726,823
in base salary, which represented a $15,210 increase from the prior fiscal year
and was consistent with the terms of the Prior Employment Agreement. Mr.
Kathwari also received an annual incentive bonus in fiscal year 2000 of
$2,027,000, dividend income of $10,080 from the Stock Units and was deemed to
have received $48,000 from the vesting of restricted stock, each as granted
pursuant to the terms of the Prior Employment Agreement. The payment of the
incentive bonus and the dividend income, and the deemed vesting of restricted
stock, were in accordance with the recommendation and action of the Compensation
Committee and the terms of the Prior Employment Agreement.
-16-
The New Employment Agreement is effective through June 30, 2007,
although it may be extended for two automatic one-year extensions commencing on
each Anniversary Date, unless notice is given by either Mr. Kathwari or the
Company not later than 12 months prior to an Anniversary Date. 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 six 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 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." In 2001, the Company
submitted an 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 has also submitted the incentive performance bonus
provisions of the New Employment Agreement to its stockholders to allow the
bonus to comply with the "performance-based compensation" requirements.
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
-17-
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 June 30, 1997.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG ETHAN ALLEN INTERIORS INC., THE S & P 500 INDEX
AND A PEER GROUP
D 250-|---------------------------------------------------|
| |
O 200-|---------------------------------------------------|
| |
L 150-|--------------[GRAPHIC OMMITTED]-------------------|
| |
L 100-|---------------------------------------------------|
| |
A 50-|---------------------------------------------------|
| |
R 0-|----|--------|-------|------|-------|------|-------|
6/97 6/98 6/99 6/100 6/01 6/02
S
_______________________________________________________
| [KEY TO GRAPHIC OMMITTED] |
|_____________________________________________________|
-18-
6/30 6/30 6/30 6/30 6/30 6/30
1997 1998 1999 2000 2001 2002
Ethan Allen Interiors Inc......... 100 176 200 128 175 188
Peer Group........................ 100 128 132 84 115 143
Standard & Poor's 500 Index....... 100 130 160 171 146 120
* $100 INVESTED ON 6/30/97 IN STOCK OR INDEX--INCLUDING 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., La-Z Boy Inc., Legett & Platt, Inc.,
and Pier 1 Imports Inc.
The returns of each company have been weighted according to each Company's
market capitalization.
PROPOSAL 3
APPROVAL OF INCENTIVE PERFORMANCE BONUS PROVISIONS
OF THE NEW EMPLOYMENT AGREEMENT
The Company's stockholders are being asked to approve the Incentive
Performance Bonus Provisions (the "Bonus Provisions") in the New Employment
Agreement. The Board approved the New Employment Agreement unanimously, subject
to stockholder approval of the Bonus Provisions.
The Company has had a longstanding practice of linking key employees'
compensation to corporate performance. This increases employee motivation to
improve stockholder value as the employees' reward is directly related to the
Company's success. A performance-based incentive arrangement rewards key
employees for achieving objectives for the financial performance of the Company
and its business units. The purposes of the Bonus Provisions in the New
Employment Agreement are to motivate Mr. Kathwari to further improve stockholder
value by linking a portion of his cash compensation to the Company's financial
performance, reward Mr. Kathwari for greatly improving the Company's financial
performance and help retain the services of Mr. Kathwari.
Under the New Employment Agreement, commencing in fiscal year 2003, Mr.
Kathwari will be entitled to an annual incentive bonus based upon the Company's
Operating Income (as described in the New Employment Agreement). Mr. Kathwari's
incentive bonus will be equal to 2% of the amount by which the Company's
Operating Income exceeds $80 million (the "Threshold"). The Threshold will be
-19-
increased after fiscal year 2003 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 the
Threshold in order to properly implement its purposes.
Under Section 162(m) of the Code, the federal income tax deductibility
of compensation paid to the Company's Chief Executive Officer and to each of its
next four most highly compensated executive officers may be limited to the
extent that it exceeds $1,000,000 in any one year. The Company can deduct
compensation in excess of that amount if it qualifies as "performance-based
compensation" under Section 162(m) of the Code. For bonus compensation paid
under the New Employment Agreement to qualify as "performance-based
compensation" the Bonus Provisions of the New Employment Agreement must be
approved by stockholders. The New Employment Agreement is intended to permit the
Company to pay incentive compensation which qualifies as "performance-based
compensation", thereby permitting the Company to receive a federal income tax
deduction for the payment of such incentive compensation.
If approved by stockholders, the Bonus Provisions will be effective for
the year ending June 30, 2003 and for the six following years, assuming the two
one-year extensions are exercised, unless the New Employment Agreement is sooner
terminated. If, however, the stockholders do not approve the Bonus Provisions,
the Company is required to offer other additional compensation to Mr. Kathwari
that provides an earnings opportunity that is comparable to that offered by the
incentive bonus, and the Company and Mr. Kathwari shall negotiate in good faith
regarding the structure of such additional compensation.
THIS SUMMARY OF THE BONUS PROVISIONS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO THE COMPENSATION COMMITTEE REPORT CONCERNING THE NEW EMPLOYMENT AGREEMENT.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE INCENTIVE
PERFORMANCE BONUS PROVISIONS OF THE NEW EMPLOYMENT AGREEMENT, WHICH IS
DESIGNATED AS PROPOSAL NO. 3 ON THE ENCLOSED PROXY CARD.
-20-
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 $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 Company's proxy statement and form of proxy relating to the
2003 Annual Meeting of Stockholders.
If a stockholder desires to submit a proposal for consideration at the
2003 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 1, 2003. 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
-21-
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,
Pamela A. Banks-Neill
Secretary
Ethan Allen Interiors Inc.
Ethan Allen Drive
Danbury, Connecticut 06811
October 7, 2002
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.
-22-