EXHIBIT 10(h)
EMPLOYMENT AGREEMENT
This Agreement (this "Agreement"), dated as of
November 13, 2007, and effective as of October 1, 2007, is made by
and between Ethan Allen Interiors Inc., a Delaware corporation (the
" Corporation") and its subsidiary, Ethan Allen Global,
Inc., a Delaware corporation and a wholly owned subsidiary of the
Corporation (the "Subsidiary") and M. Farooq Kathwari (the
" Executive").
Recitals
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1.
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The Executive is Chairman of the Board of Directors
of the Corporation and of the Subsidiary, and is currently employed
as the Chief Executive Officer and the President of the Corporation
and the Subsidiary.
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2.
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The employment of the Executive by the Corporation
was previously subject to employment agreements dated July 27, 1994
(the "1994 Agreement"), October 28, 1997 (the "1997 Employment
Agreement"), and is currently subject to an employment agreement
dated August 1, 2002, as amended by the First Amendment dated as of
November 1, 2002 and subject to the Assignment of Employment
Agreement assigning the interests and obligations of Ethan Allen
Retail Inc. (formerly known as Ethan Allen Inc.) to Ethan Allen
Global, Inc. effective as of July 1, 2005 (collectively, the
“2002 Agreement”).
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3.
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The Corporation desires to continue the services of
the Executive as Chairman of the Board of Directors of the
Corporation and the Subsidiary and the employment of the Executive
with the Corporation and the Subsidiary and to enter into a new
agreement embodying the terms of those continued
relationships.
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4.
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The Executive is willing to continue to serve as
Chairman of the Board of Directors of the Corporation and the
Subsidiary and is willing to accept continued employment by each of
the Corporation and the Subsidiary on the terms set forth
herein.
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Agreement
NOW, THEREFORE, in consideration of the premises and
mutual covenants herein contained, and other good and valuable
consideration, the Corporation and the Executive hereby agree as
follows.
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1.1.
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"Affiliate" means any person or entity controlling,
controlled by or under common control with the
Corporation.
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1.2.
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"Board" means the Board of Directors of the
Corporation.
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1.3.
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"Cause" means (a) the Executive is convicted of a
felony involving actual dishonesty as against the Corporation or
the Subsidiary, or (b) the Executive, in carrying out his duties
and responsibilities under this Agreement, is guilty of gross
neglect or gross misconduct resulting, in either case, in material
economic harm to the Corporation and/or the Subsidiary, and such
conduct is not cured within thirty (30) days of the Corporation
providing written notice to Executive, unless such act, or failure
to act, was believed by the Executive in good faith to be in the
best interests of the Corporation and/or the Subsidiary. Actions
taken, or failures to act, based upon advice of counsel or advice
of certified public accountant(s) shall conclusively be presumed to
be in good faith.
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1.4.
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"Commencement Date" has the meaning assigned to it
in Section 3.
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1.5.
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"Date of Termination" means (a) in the case of a
termination for which a Notice of Termination is required, the date
of actual receipt of such Notice of Termination or, if later, the
date specified therein, as the case may be, and (b) in all other
cases, the actual date on which the Executive's employment
terminates during the Term of Employment.
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1.6.
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"Disability" means the Executive's inability to
render, for a period of twelve (12) consecutive months, services
hereunder by reason of permanent disability, as determined by the
written medical opinion of an independent medical physician
mutually acceptable to the Executive and the Corporation. If the
Executive and the
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[1]
Corporation cannot agree as to such an independent
medical physician each shall appoint one medical physician and
those two physicians shall appoint a third physician who shall make
such determination.
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1.7.
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"Good Reason" means and shall be deemed to exist if,
without the prior express written consent of the Executive, (a) the
Executive is assigned any duties or responsibilities inconsistent
in any material respect with the scope of the duties or
responsibilities associated with the Executive's titles or
positions, as set forth and described in Section 4 of this
Agreement; (b) the Executive suffers a reduction in the duties,
responsibilities or effective authority associated with his titles
and positions as set forth and described in Section 4 of this
Agreement; (c) the Executive is not appointed to, or is removed
from, the offices or positions provided for in Section 4.1 of this
Agreement; (d) the Corporation fails to substantially perform any
material term or provision of this Agreement; (e) the Executive's
compensation provided for hereunder is decreased; (f) the
Executive's office location is changed to a location more than 50
miles from its location on the date hereof in Danbury, Connecticut;
(g) the Corporation fails to obtain the full assumption of this
Agreement by a successor entity in accordance with Section 11.2 of
this Agreement; (h) the Corporation continually fails to reimburse
the Executive for business expenses in accordance with Section 5.3
of this Agreement; (i) the Corporation purports to terminate the
Executive's employment for Cause and such purported termination of
employment is not effected in accordance with the requirements of
this Agreement; (j) the Executive shall cease to serve as a
director and Chairman of the Board of Directors of any of the
Corporation and the Subsidiary; (k) the Board or the shareholders
of the Corporation or the Subsidiary, either or both, as may be
required to authorize the same, shall approve (i) any liquidation
of the Corporation or the Subsidiary, or the sale of substantially
all of the assets of the Corporation and the Subsidiary taken as a
whole, or (ii) any merger, consolidation and/or other business
combination involving the Corporation or the Subsidiary or any
combination of any such transactions (a "Transaction"), other than
a Transaction (A) involving only the Corporation and the
Subsidiary, or (B) immediately after which the shareholders of the
Corporation who were shareholders immediately prior to the
transaction continue to own beneficially, directly or indirectly,
in substantially similar proportions to those in effect immediately
prior to such transaction more than 50% of the then outstanding
voting securities of the Corporation or the survivor, as
applicable; (1) any Person (as defined below) or group (as such
term is defined in Rule 13d-5 of the Securities Exchange Act of
1934, as amended (the "Exchange Act")) of related Persons which is
not an Affiliate of the Corporation or the Subsidiary as of the
Commencement Date shall beneficially own, directly or indirectly,
more than 50% of the then outstanding voting stock of the
Corporation or the Subsidiary (for purposes of this Agreement,
"Person(s)" means any individual, entity, or other person, as
defined in Section 3(a)(9) of the Exchange Act, and as used in
Sections 13(d) and 14(d) thereof); or (m) the Board or the
Corporation shall authorize, approve or engage in any Business
Combination with an Interested Person, each as defined in Article
Fifth of the Corporation's Restated Certificate of
Incorporation; provided
that, notwithstanding the foregoing, Good Reason
shall not include or be deemed to exist, with regard to the
circumstances described in clause (k), (1) or (m), if, with the
express prior written consent of Executive, Executive immediately
after the occurrence of the circumstances or transactions described
in clause (k), (1) or (m) becomes Chairman, Chief Executive Officer
and President of the parent corporation or person that owns or
controls the Corporation or its successor immediately after such
circumstances or transaction. If, at the annual meeting in calendar
year 2007 (including any adjournment thereof), the shareholders of
the Corporation fail to approve the provisions of this Agreement
which are contingent on shareholder approval pursuant to Section
5.2(a)(vi), and the Corporation fails to offer to the Executive,
within 45 days following such annual meeting, an amendment of this
Agreement which is acceptable to the Executive, then the Executive
may resign at any time during the period between the 61st day
following such annual meeting and the 150th day following such
annual meeting, and such resignation shall be treated as having
been for "Good Reason".
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1.8.
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"Retirement" means the termination of the
Executive's employment with the Corporation for any reason at any
time after (a) the Executive attains age 70 or (b) the Executive
meets the requirements for early or regular retirement under the
Corporation's retirement policy, assuming for this purpose that he
was a participant in such plan.
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1.9.
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"Term of Employment" has the meaning assigned to it
in Section 3.
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Subject to the terms and provisions set forth in
this Agreement, the Corporation hereby employs the Executive during
the Term of Employment as the Chief Executive Officer and President
of the Corporation, agrees to use its best efforts to cause
Executive to be elected by the Corporation's shareholders as a
director and Chairman of the Board of the Corporation, and to cause
the Executive to be a director and Chairman of the Board of
Directors of the Subsidiary during
[2]
the Term of Employment and agrees to cause the
Subsidiary at all times during the Term of Employment to employ the
Executive as Chief Executive Officer and President of the
Subsidiary, and the Executive hereby accepts such employment.
However, nothing in this Agreement shall be construed to require
that the Executive be elected as a director of the Corporation's
Board of Directors on any date if he is not employed by the
Corporation on the election date.
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3.
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Commencement Date and Term of
Employment.
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3.1.
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The term of employment under this Agreement shall
commence retroactively as of October 1, 2007 (the " Commencement Date"), and shall, unless
extended as hereinafter provided, terminate June 30, 2012 (the
"Term of Employment").
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3.2.
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On July 1, 2012 and on July 1, 2013, the Term of
Employment shall automatically be extended for an additional one
year period unless, not later than nine months prior to any such
anniversary, either party to this Agreement shall have given
written notice to the other that the Term of Employment shall not
be extended or further extended beyond its then already
automatically extended term, if any.
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4.
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Positions, Responsibilities and
Duties.
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4.1.
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Positions. During the
Term of Employment, the Executive shall be employed as, and the
Corporation shall at all times cause the Executive to be, the Chief
Executive Officer and President of the Corporation and the
Subsidiary. In addition to such positions, the Corporation shall
use its best efforts to ensure that the Executive is elected by the
shareholders of the Corporation to serve as a director of the
Corporation during the Term of Employment for a minimum of two
successive, staggered three-year terms, as provided in the
Corporation's Certificate of Incorporation, and shall use its best
efforts to ensure that Executive is the Chairman of the Board of
Directors. In such positions, the Executive shall have the duties,
responsibilities and authority normally associated with the office
and position of chairman, director, chief executive officer and
president of a substantial, publicly traded corporation, but in no
event shall the Executive's duties, responsibilities and/or
effective authority with respect to the Corporation and/or the
Subsidiary be less than the duties, responsibilities and effective
authority the Executive possessed immediately prior to the date of
this Agreement. No other employee of the Corporation or the
Subsidiary shall have authority and responsibilities that are equal
to or greater than those of the Executive. The Executive shall
report solely and directly to the Board and all other officers and
other employees of the Subsidiary shall report directly to the
Executive or the Executive's designees. No provision of this
Section 4.1, however, shall preclude the Board from soliciting
information from any officer or employee of the
Corporation.
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4.2.
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Duties. During the Term
of Employment, the Executive shall devote such time as is
reasonably necessary to perform the duties associated with his
offices and positions as set forth in Section 4.1 and shall use his
best efforts to perform faithfully and efficiently the duties and
responsibilities contemplated by this Agreement;
provided, however, that the Executive shall not
be required to perform any duties and responsibilities which would
be likely to result in non-compliance with or violation or breach
of any applicable law or regulation. Notwithstanding the foregoing
provisions of this Section 4.2, during the Term of Employment, the
Executive may devote reasonable time to activities other than those
required under this Agreement, including the supervision of his
personal investments, and activities involving professional,
charitable, educational, religious and similar types of
organizations, speaking engagements, membership on the boards of
directors of other organizations, and similar type activities, to
the extent that such other activities do not inhibit or prohibit
the performance of the Executive's duties under this Agreement, or
conflict in any material way with the business of the Corporation
or the Subsidiary; provided, however, that the Executive shall not
serve on the board of any business, or hold any other position with
any business without the consent of the Board.
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4.3.
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Non-Disparagement. The
Executive agrees that, while he is employed by the Corporation, and
after his Date of Termination, he shall not make any false,
defamatory or disparaging statements about the Corporation, the
Subsidiary, any Affiliate, or the officers or directors of the
Corporation, the Subsidiary or any Affiliate that are reasonably
likely to cause material damage to the Corporation, the Subsidiary,
any Affiliate, or the officers or directors of the Corporation, the
Subsidiary, or the Affiliates. While the Executive is employed by
the Corporation, and after his Date of Termination, the Corporation
agrees, on behalf of itself, the Subsidiary and the Affiliates,
that neither the Corporation, the Subsidiary, the Affiliates, nor
the officers or directors of the Corporation, the Subsidiary, or
any of the Affiliates shall make any false, defamatory or
disparaging statements about the Executive that are reasonably
likely to cause material damage to the Executive.
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[3]
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5.
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Compensation and Other Benefits.
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5.1.
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Base Salary. During the
Term of Employment and prior to July 1, 2008, the Executive shall
receive a base salary ("Base Salary"), payable in equal bi-weekly
installments, of $1,127,500 per annum. On
each July 1 thereafter, Executive shall receive an increase (but in
no event any decrease) to such Base Salary based on the
Company’s Operating Income (as defined Section 5.2(a)(iii)
below) divided by reported sales (“Operating Margin”), for the most
recently ended fiscal year according to the following
formula:
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Annual Percentage
Increase to Base Salary
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Operating Margin
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0%
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Less than 10%
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2%
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> 10% but <
11%
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4%
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> 11% but <
13%
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5%
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> 13%
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Any increase to Base Salary shall then constitute
the "Base Salary" for purposes of this Agreement.
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5.2.
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During the Term of Employment, the Executive will be
entitled to be paid the following incentive
compensation:
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(a)
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Annual Incentive Bonus. The Executive will be entitled to be paid an annual incentive
bonus (the "Incentive Bonus") as described in this Section
5.2(a).
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(i)
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The annual Incentive Bonus for a particular fiscal
year will be based upon the amount by which the Company’s
Operating Income for the fiscal year (defined below) exceeds the
applicable Threshold Amount specified below, except that the Incentive Bonus for
fiscal year 2008 shall be based upon the Company’s Operating
Income during the period beginning October 1, 2007 and ending June
30, 2008.
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Fiscal Year
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Threshold
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2008
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$75 Million
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2009
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$105 Million
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2010
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$110 Million
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2011
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$115 Million
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2012
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$120 Million
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2013
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$125 Million
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2014
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$130 Million
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(ii)
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The amount of the Incentive Bonus payment will be
equal to
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(A)
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1.25% of the first $20 million (or portion thereof)
by which the Operating Income exceeds the applicable
Threshold;
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(B)
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2.25% of the second $20 million (or portion thereof)
by which the Operating Income exceeds the applicable
Threshold;
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(C)
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2.75% of the third $20 million (or portion thereof)
by which the Operating Income exceeds the applicable Threshold,
and
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(D)
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3.25% of any amount greater than $60 million by
which the Operating Income exceeds the applicable
Threshold.
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(iii)
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The Corporation's Operating Income for each fiscal
year shall be as set forth in the Corporation's financial
statements, adjusted by adding thereto the charges, expenses or
accruals, if any, charged against such operating income for (1)
non-recurring or extraordinary items, (2) Incentive Bonuses under
this Agreement, (3) the issuance to the Corporation's executives,
managers, employees, dealers and other business associates of
capital stock of the Corporation, or the issuance or exercise to or
by such persons of options, warrants or other
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[4]
rights to acquire capital stock of the Corporation,
or stock appreciation rights of the Corporation or similar equity
equivalents, including in respect of the Restricted Stock Agreement
and the Stock Option Agreements contemplated by this Agreement, and
(4) any increased depreciation, amortization or other charges
resulting from purchase accounting adjustments (
provided , however,
that no such adjustments shall be made under this clause (iii) with
respect to acquisitions occurring prior to the Commencement Date).
The calculation of Operating Income will be confirmed by the
Corporation's independent public accountants or any other
independent, recognized financial or accounting expert retained by
the Compensation Committee.
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(iv)
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Notwithstanding the foregoing provisions of this
Section 5.2(a), if the Corporation effects a major acquisition
during any fiscal year, the Executive and the Corporation shall
negotiate in good faith an appropriate revision to the Threshold
Amount set forth in this Section 5.2(a) to implement the purpose of
the Incentive Bonus.
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(v)
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The Incentive Bonus in respect of any particular
fiscal year will be paid upon the earlier to occur of the fifth
business day following public filing or disclosure of the
Corporation's financial statements for such fiscal year or the
120th day following the end of such fiscal year.
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(vi)
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Notwithstanding the foregoing provisions of this
Section 5.2(a), the Executive's right to any Incentive Bonus
amounts under this Agreement for fiscal years beginning on or after
the Commencement Date shall be contingent on the Incentive Bonus
payments being approved by the shareholders of the Corporation at
the Corporation's annual shareholder meeting in calendar year 2007
(including any adjournment thereof); provided , however, that if such
Incentive Bonus arrangement is not so approved, the Corporation
will offer other additional compensation to the Executive that
provides an earnings opportunity that is comparable to that offered
by the Incentive Bonus, and the Corporation and the Executive shall
negotiate in good faith regarding the structure of such additional
compensation and the revisions to this Agreement reflecting such
compensation. The failure of the Corporation to offer such
replacement compensation within 45 days following the shareholder's
vote of non-approval of the Incentive Bonus shall be treated as a
decrease in the Executive's compensation under Section
1.7(e).
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(b)
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Restricted Stock Awards. The Executive shall be awarded shares of the Corporation's
common stock, par value $.01 per share ("Common Stock") as
restricted stock under the Corporation's 1992 Stock Option Plan (as
amended from time to time in accordance with its terms, the "Stock
Option Plan") and subject to the terms of the restricted stock
agreements in substantially the form of Exhibit A hereto. Such
shares are referred to as “Restricted Stock" for purposes of
this Agreement.
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(i)
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The Executive will receive 20,000 shares of
Restricted Stock as of the date the shareholders approve the
incentive compensation components of this Agreement (the
“Approval Date”), and will receive an additional 20,000
shares of Restricted Stock on each of July 1, 2008 and July 1,
2009.
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(ii)
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The Executive will receive an additional 15,000
shares of Restricted Stock as of the date the shareholders approve
the amendment to the Stock Option Plan.
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(iii)
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Each award of Restricted Stock will be subject to
the Executive’s execution and delivery of the Restricted
Stock Agreements in substantially the form of Exhibit A hereto (as
amended from time to time in accordance with its terms) which
agreements shall include the requirements for vesting of each award
of Restricted Stock.
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(c)
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Stock Options. The
Executive shall be granted options to purchase shares of the
Company’s Common Stock under the Stock Option Plan and
subject to the terms of the stock option agreements in
substantially the form of Exhibit B hereto. Such stock options are
referred to as “Options " for purposes of this
Agreement.
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[5]
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(i)
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As of October 10, 2007, the Executive shall be
granted Options to purchase 150,000 shares of Common Stock; as of
July 1, 2008, the Executive shall be granted Options to purchase
90,000 shares of Common Stock; and as of July 1, 2009, the
Executive shall be granted Options to purchase 60,000 shares of
Common Stock.
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(ii)
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Each grant of Options will be subject to the
Executive’s execution and delivery of the Stock Option
Agreements in substantially the form of Exhibit B hereto (as
amended from time to time in accordance with its terms) which
agreements shall include the requirements for vesting of each grant
of Options.
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(iii)
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Each Stock Option Agreement shall provide that the
Executive may transfer all or part of the Options to a family trust
or to immediate family members that is considered to be related to
the Executive for purposes of Treasury Regulation section
1.83-7(a).
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(iv)
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The number of shares subject to any stock awards
under this Agreement is specified as of October 10, 2007, and such
numbers are to be adjusted for stock splits, stock dividends,
reclassifications, recapitalizations and similar events in respect
of the Common Stock occurring after that date.
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5.3.
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Expense Reimbursement. During the Term of Employment, the Executive shall be entitled
to receive prompt reimbursement for all usual, customary, and
reasonable business-related expenses incurred by the Executive in
performing his duties and responsibilities hereunder in accordance
with the practices and procedures of the Corporation as in effect
and applied immediately prior to the Commencement Date, including
without limitation an automobile and driver allowance and/or
reimbursement in accordance with past practices, or, if more
favorable to the Executive, as provided by the Corporation or the
subsidiary at any time thereafter. Up to 10% of the use of the
Company-provided automobile may be for personal use.
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5.4.
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Vacation and Fringe Benefits.
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(a)
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During the Term of Employment, the Corporation shall
maintain a life and disability insurance in respect of the
Executive for the benefit of Executive and/or his estate, and shall
maintain such insurance so long as the Executive remains a senior
executive officer of the Corporation. The aggregate amount of such
insurance coverage shall be determined by the premium cost; the
Corporation shall pay an aggregate annual premium of $50,000 for
such coverage. The Executive agrees to cooperate with the
Corporation in obtaining such policies and in maintaining the same
in full force and effect throughout the Term of
Employment.
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(b)
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During the Term of Employment, the Executive shall
also be entitled to such paid vacation, fringe benefits and
perquisites as provided to the Executive by the Corporation and/or
the Subsidiary immediately prior to the Commencement Date or, if
more favorable to the Executive, as provided by the Corporation or
the Subsidiary at any time thereafter.
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(c)
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To the extent that the Executive's rights to
compensation or benefits under the applicable plan, agreement or
other governing document are to be determined based on the Term of
Employment under the Prior Employment Agreement, the Term of
Employment under this Agreement shall be deemed to be substituted
for the Term of Employment under the Prior Employment
Agreement.
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5.5.
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Office and Support Staff. Unless the Executive otherwise agrees in writing, during the
Term of Employment the Executive shall be entitled to executive
secretarial and other administrative assistance of a type and
extent, and to an office or offices (with furnishings and other
appointments) of a type and size, at least equal to that provided
to the Executive immediately prior to the date of this
Agreement.
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6.1.
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Termination Due to Death or
Disability. The Corporation may terminate
the Executive's employment hereunder due to Disability. In the
event of the Executive's death or a Termination of the Executive's
employment by the Corporation due to Disability, the Executive, his
estate or his legal representative, as the case may be, shall be
entitled to receive:
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[6]
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(a)
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Base Salary continuation at the rate in effect (as
provided for by Section 5.1 of this Agreement) on the Date of
Termination through the end of the full fiscal year in which the
Date of Termination occurs;
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(b)
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an Incentive Bonus in respect of the full fiscal
year in which the Date of Termination occurs;
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(c)
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any deferred compensation not yet paid to the
Executive (including, without limitation, interest or other credits
on such deferred amounts), any accrued vacation pay and insurance
proceeds;
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(d)
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reimbursement for expenses incurred but not yet paid
prior to such death or Disability;
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(e)
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insurance policy payments or proceeds in respect of
the life and Disability insurance referred to in Section
5.4(
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