SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended June 30, 1999
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or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
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Commission file Number 1-11692
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Ethan Allen Interiors Inc.; Ethan Allen Inc.; Ethan Allen Marketing Corporation;
Ethan Allen Manufacturing Corporation
(Exact name of registrant as specified in its charter)
Delaware 06-1275288
- ------------------------------- --------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Ethan Allen Drive, Danbury, CT 06811
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 743-8000
Securities registered pursuant to Section 12(b) of the Act: None
Name of Each Exchange
Title of Each Class On Which Registered
---------------------------- ----------------------------
Common Stock, $.01 par value New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
None
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [x]Yes [ ]No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [x]
The aggregate market value of Common Stock, par value $.01 per share held by
non-affiliates (based upon the closing sale price on the New York Stock
Exchange) on August 27, 1999 was approximately $1,182,707,754.
As of August 27, 1999, there were 40,783,026 shares of Common Stock, par value
$.01 outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive Proxy Statement for the 1999 Annual Shareholders Meeting
is incorporated by reference into Part III hereof.
TABLE OF CONTENTS
Item Page
- ---- ----
PART I
1. Business 2
2. Properties 8
3. Legal Proceedings 9
4. Submission of Matters to a Vote of Security Holders 10
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters 11
6. Selected Financial Data 12
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
7A. Quantitative and Qualitative Disclosure About
Market Risk 21
8. Financial Statements and Supplementary Data 22
9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 43
PART III
10. Directors and Executive Officers of the Registrant 44
11. Executive Compensation 44
12. Security Ownership of Certain Beneficial Owners
and Management 44
13. Certain Relationships and Related Transactions 44
PART IV
14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 45
Signatures
PART I
Item 1. Business
- ----------------
Ethan Allen Inc. ("Ethan Allen") is a leading manufacturer and retailer
of quality home furnishings, offering a full range of furniture products and
accessories. Ethan Allen was founded in 1932 and has sold products since 1937
under the Ethan Allen brand name. Ethan Allen Interiors Inc. (the "Company") is
a Delaware corporation, incorporated in 1989.
Ethan Allen manufactures and distributes three principal product lines:
(i) case goods (wood furnishings), consisting primarily of bedroom and dining
room furniture, wall units and tables; (ii) upholstered products, consisting
primarily of sofas, loveseats, chairs, and recliners; and (iii) home
accessories, and other, including carpeting and area rugs, lighting products,
clocks, wall decor, bedding ensembles, draperies, decorative accessories and
indoor\outdoor furnishings. The following table shows the approximate percentage
of wholesale sales of home furnishing products for each of these product lines
during the three most recent fiscal years:
Fiscal Year Ended June 30:
--------------------------
1999 1998 1997
---- ---- ----
Case Goods 57% 58% 58%
Upholstered Products 28 28 30
Home Accessories 15 14 12
--- --- ---
100% 100% 100%
=== === ===
Ethan Allen's product strategy has been to expand its home furnishings
collections to appeal to a broader consumer base while providing good quality
and value. Ethan Allen continuously monitors consumer demands through marketing
research and through consultation with its dealers and store designers who
provide valuable input on consumer tastes and needs. As a result, the Company is
able to react quickly to changing consumer tastes and has added or revised six
major new home furnishing collections in the past five years. In addition, Ethan
Allen continuously refines and enhances each collection by adding new pieces
and, as appropriate, discontinuing or redesigning pieces. Approximately 90% of
the Company's products have been redesigned over the last six years. This allows
the Company to maintain focused lines within each style category which enhances
efficiencies. In fiscal year 1999, the Company's focus was on introducing the
Avenue and Ethan Allen Kids lines of home furnishings. These products have
recently been introduced at the retail level and revenues to date have not been
significant. Also, in fiscal year 1999, the Company initiated its Internet
distribution strategy, which is expected to be launched in the second quarter of
fiscal year 2000.
Current products are positioned in terms of selection, quality and
value. Management believes that the two most important style categories in home
furnishings today are Classic and Casual. Ethan Allen's products are grouped
into collections within these two lifestyle categories. Each collection includes
case goods, upholstered products and accessories, each styled with distinct
design characteristics. Accessories, including lighting, floor covering, wall
decor, draperies and textiles, play an important role in Ethan Allen's marketing
program as this enables the Company to provide a complete home furnishings
collection. Ethan Allen's store concept allows for the display of these
categories in complete room settings which utilize the related collections to
project the category lifestyle.
2
The following is a summary of Ethan Allen's major categories of home
furnishing collections that have been introduced at the wholesale level:
PRINCIPAL
STYLE HOME FURNISHING CASE GOOD YEAR OF
CATEGORY CHARACTERISTICS COLLECTIONS WOOD TYPE INTRODUCTION
-------- --------------- --------------- --------- ------------
Classic An opulent style, which Georgian Court Cherry 1965
includes English 18th 18th Century Mahogany 1987
Century and 19th Century Medallion Cherry 1990
Neo-Classic styling. Avenue Cherry 1998
Collectors Classics Various Various
Legacy Collection Maple 1992
British Classics Maple 1995
Country French Birch 1998
Casual This style is based American Impressions Cherry 1991
on classic contemporary American Dimensions Maple 1992
design elements. Radius Prima Vera 1994
Farmhouse Pine Pine 1988
Country Crossings Maple 1993
Country Colors Maple 1995
American Artisan Oak 1998
Industry Segments
The Company's operations are classified into two main businesses:
wholesale and retail home furnishings. The wholesale home furnishings business
is principally involved in the manufacture, sale and distribution of home
furnishing products to a network of independently-owned and Ethan Allen-owned
stores. The wholesale business primarily consists of three operating segments;
case goods (wood furniture), upholstery, and home accessories. The retail home
furnishings business sells home furnishing products through a network of Ethan
Allen-owned stores.
The retail business exclusively sells Ethan Allen's products though a
network of 309 retail stores. As of June 30, 1999, Ethan Allen owned and
operated 73 stores and independent retailers owned and operated 215 North
American stores and 21 stores abroad. In the past six years, Ethan Allen and its
independent retailers have opened over 130 new stores, many of them relocations.
Sales to independent dealer-owned stores accounted for approximately 60% of
total net sales of the Company in fiscal 1999. The ten largest independent
dealers own a total of 42 stores, which accounted for approximately 22% of net
orders booked in fiscal 1999.
Ethan Allen desires to maintain independent ownership of most of its
retail stores and has an active program to identify and develop new independent
dealers. Independent dealers are required to enter into license agreements with
Ethan Allen authorizing the use of certain Ethan Allen service marks and
requiring adherence to certain standards of operation. These standards include
the exclusive sale of Ethan Allen products. Additionally, dealers are required
to enter into warranty service agreements. Ethan Allen is not subject to any
territorial or exclusive dealer agreements in the United States.
Wholesale Home Furnishings:
Case Good Business. For 1999, the Company's case good business had net
sales of $352.2 million (57% of the Company's wholesale net sales). The case
good segment is engaged in the manufacture and sale of wood furniture to
independent and company-owned retailers. The Company currently has 12 case good
locations which includes 3 sawmill operations. Sales of wood furniture include
home furnishing items such as, beds, dressers, armoires, night tables, dining
room chairs and tables, buffets, sideboards, coffee tables, entertainment units,
and home offices.
Upholstery Business. For 1999, the upholstery segment had net sales of
$174.6 million (28% of the Company's wholesale net sales). The Upholstery
segment is involved in the manufacture and sale of upholstered frames, and cut
fabrics and leathers. Skilled craftsmen cut and sew custom-designed upholstery
items having a variety of frame and fabric options. Sales of upholstery home
furnishing items include sleepers, recliners, sofas and cut fabrics.
3
Home Accessory Business. For 1999, home accessories had net sales of
$90.1 million (14% of the Company's wholesale net sales). The home accessory
segment primarily sells home accent items such as wall decor, lighting, clocks,
wood accents, bedspreads, decorative accessories, area rugs, and bedding.
Retail Home Furnishings:
Company Retail Business. For 1999, the retail segment had net sales of
$294.7 million (39% of the Company's net sales). As of June 30, 1999, the
Company-owned stores consisted of 73 locations as compared to 67 at the end of
the prior fiscal year. During 1999, the Company acquired 5 stores from
independent retailers, opened 4 new stores, relocated 3 stores and closed an
additional 3 stores.
For further information regarding operating segments, see Note 14 to
the Company's Consolidated Financial Statements for the year ended June 30,
1999.
Retail Store Concept. Ethan Allen's retail concept is flexible in size
and format depending on the limits of real estate and the retail environment.
Although stores range in size from approximately 6,000 square feet to 30,000
square feet, the average size of a store is about 15,000 square feet. Depending
on the opportunity in the market, stores are located in busy urban settings,
suburban strip malls and free-standing destination stores.
Ethan Allen maximizes uniformity of store presentation throughout the
retail network through uniform standards of operation. These standards of
operation help each store present the same high quality image and offer retail
customers consistent levels of product selection and service. The stores are
staffed with a sales force consisting of approximately 2,400 trained designers,
who assist customers at no additional charge in decorating their homes. Ethan
Allen believes this design service gives it an unusual competitive advantage
over other furniture retailers.
In 1992, Ethan Allen instituted a new image and logo program.
Additionally, Ethan Allen undertook a program to renovate the exterior of its
stores. As of June 30, 1999, this renovation program has been substantially
completed with 297 or 96% of all stores (including dealer-owned and Ethan
Allen-owned stores) having either implemented new exteriors or are currently
under renovation. Ethan Allen also provides display planning assistance to
dealers to support them in updating the interior projection of their stores. In
May 1997, the Company unveiled a 30,000 square foot prototype store in Stamford,
Connecticut. The store is divided into three-stores-in-one and positions Ethan
Allen as specialists in casual styles, classic designs and decorative accessory
retailing. It features two fully designed show homes to inspire consumers and
show them how product could look in their homes. In addition, it presents
products in focused vignettes that are easy and relatively inexpensive to update
each season. Information displays educate consumers as they travel throughout
the store. In the fall of 1997, the Company adapted this concept into a smaller
15,000 - 20,000 square foot format and presented the new format to the Company's
retail network. To date, 68 or 22% of all stores have incorporated or are
currently in the process of incorporating this new interior design. Consumer
response has been strong and Ethan Allen expects to have essentially all of its
Company-owned retail stores incorporate the new interior look over the next few
years and believes that many of its independent retail stores will also
incorporate this new strategy.
Ethan Allen recognizes the importance of its store network to its
long-term success and has developed and maintains a close ongoing relationship
with its dealers. Ethan Allen offers substantial services to the Ethan Allen
stores in support of their marketing efforts, including coordinated national
advertising, merchandising and display programs, and extensive dealer training
seminars and educational materials. Ethan Allen believes that the development of
designers, sales managers, service and delivery personnel and dealers is
important for the growth of its business. Ethan Allen has, therefore, committed
to offer to all dealers a comprehensive training program that will help to
develop retail managers/owners, designers and service and delivery personnel to
their fullest potential. Ethan Allen has offered dealers various assistance
programs, including long-term financial assistance in connection with the
financing of their inventory,
4
the opening of new stores and the renovation of stores in accordance with Ethan
Allen's image and logo program.
Advertising and Promotion
Ethan Allen has developed a highly coordinated, nationwide advertising
and promotional campaign designed to increase consumer awareness of the breadth
of Ethan Allen's product offerings. Ethan Allen launched an expanded national
television campaign in January 1997 to increase the Company's projection at the
national level. In addition to its national television campaign, Ethan Allen
utilizes direct mail, magazine, newspaper and radio advertising. Ethan Allen
believes that its ability to coordinate its advertising efforts with those of
its dealers provides a competitive advantage over other home furnishing
manufacturers and retailers.
Ethan Allen's in-house staff, working with a leading advertising firm,
has developed and implemented what the Company believes is the most extensive
national television campaign in the home furnishings industry. This campaign is
designed to support the eight annual sale periods and to increase the flow of
traffic into stores during the sale periods. Ethan Allen television advertising
is aired approximately 27 weeks per year.
The Ethan Allen Interiors magazine, which features Ethan Allen's home
furnishing collections, is one of Ethan Allen's most important marketing tools.
Over 58 million copies of the magazine, which features sale products, are
distributed to consumers during the eight sale periods. The Company publishes
and sells the magazines to its dealers who, with demographic information
collected through independent market research, are able to target potential
consumers.
Ethan Allen's television advertising and direct mail efforts are
supported by strong print campaigns in various markets, and in leading home
fashion magazines using advertisements and public relations efforts. The Company
coordinates significant advertisements in major newspapers in its major markets.
The Ethan Allen Treasury, a complete catalogue of the Ethan Allen home
collection which is distributed in the stores, is one of the most comprehensive
home furnishing catalogues in the industry.
Manufacturing
Ethan Allen is one of the ten largest manufacturers of household
furniture in the United States. Ethan Allen manufactures and/or assembles
approximately 90% of its products at 21 manufacturing facilities which includes
3 saw mills, thereby maintaining control over cost, quality and service to its
consumers. The case goods facilities are located close to sources of raw
materials and skilled craftsmen, predominantly in the Northeast and Southeast
regions of the country. Upholstery facilities are located across the country in
order to reduce shipping costs to stores and are located at sites where skilled
craftsmanship is available. Management believes that its manufacturing
facilities with reasonable investments are currently well positioned to
accommodate future sales growth.
Distribution
Ethan Allen distributes its products primarily through eight regional
distribution centers and terminals strategically located throughout the United
States. These distribution centers and terminals hold finished products received
from Ethan Allen's manufacturing facilities for shipment to Ethan Allen's
dealers or home delivery service centers. Ethan Allen stocks case goods and
accessories to provide for quick delivery of in-stock items and to allow for
more efficient production runs.
Approximately 35% of shipments are made to and from the distribution
and home delivery service centers by the Company's fleet of trucks and trailers.
The balance of Ethan Allen's shipments are subcontracted to independent
carriers. Approximately 80% of Ethan Allen-owned delivery vehicles are leased
under two to eight-year leases.
5
Ethan Allen's policy is to sell its products at the same delivered cost
to all dealers nationwide, regardless of their shipping point. The adoption of
this policy has discouraged dealers from carrying significant inventory in their
own warehouses. As a result, Ethan Allen obtains accurate information regarding
sales to dealers to better plan production runs and manage inventory. Having one
national landed cost has permitted Ethan Allen to provide one national suggested
retail price which, in turn, helps facilitate a national advertising program.
Raw Materials and Suppliers
The most important raw materials used by Ethan Allen in furniture
manufacturing are lumber, veneers, plywood, particle board, hardware, glue,
finishing materials, glass, mirrored glass, laminates and fabrics. The various
types of wood used in Ethan Allen's products include cherry, oak, maple, prima
vera, mahogany, birch and pine, substantially all of which are purchased
domestically. Fabrics and other raw materials are purchased both domestically
and abroad. Ethan Allen has no long-term supply contracts, and has experienced
no significant problems in supplying its operations. Ethan Allen maintains a
number of sources for its raw materials which management believes contribute to
its ability to obtain competitive pricing for raw materials. Lumber prices
fluctuate over time depending on factors such as weather and demand, which
impact availability. Upward trends in prices could have a short-term impact on
margins. A sufficient inventory of lumber and fabric is usually stocked to
maintain approximately 10 to 19 weeks of production. Management believes that
its sources of supply for these materials are adequate and that it is not
dependent on any one supplier.
Competition
The home furnishings industry at the retail level is highly competitive
and fragmented. Although Ethan Allen is among the ten largest furniture
manufacturers, industry estimates indicate that there are over 1,000
manufacturers of all types of furniture in the United States. Some of these
manufacturers produce furniture types not manufactured by Ethan Allen. Certain
of the companies which compete directly with Ethan Allen may have greater
financial and other resources than the Company.
Recently, additional competition has entered the industry in the form
of Internet retailers. The Company estimates that these start-up companies have
received funding in excess of $150.0 million.
Since Ethan Allen's products are sold primarily through stores which
sell exclusively Ethan Allen products, Ethan Allen's effort is focused primarily
upon obtaining and retaining independent dealers and upon increasing the volume
of such dealers' retail sales and opening new Ethan Allen-owned stores. The home
furnishings industry competes primarily on the basis of product styling and
quality, personal service, prompt delivery, product availability and price.
Ethan Allen believes that it effectively competes on the basis of each of these
factors and believes that its store format provides it with a competitive
advantage because of the complete home furnishing product selection and service
available to the consumer.
Furniture Today (a leading industry publication) published a survey of
America's Top 100 Furniture Retailers for 1999. Ethan Allen was ranked No. 2 in
terms of furniture, beddings and accessary sales for dealer-owned and
company-owned stores and was ranked No. 1 as the largest single-source store
network for home furnishings in the country. According to the survey, the
nation's 100 largest furniture retailers accounted for 48% of all furniture
sales in the United States in 1998. Sales for the top 10 retailers grew 11.9% to
approximately $8.0 billion which represents a 21% share of all furniture stores.
Trademarks
Ethan Allen currently holds numerous trademarks, service marks and
design patents for the Ethan Allen name, logos and designs in a broad range of
classes for both products and services. Ethan Allen also holds international
registrations for Ethan Allen trademarks in forty foreign countries and has
applications for registration pending in thirty-one other foreign countries.
Ethan Allen has
6
registered or has applications pending for many of its major collection names as
well as certain of its slogans coined for use in connection with retail sales
and other services. Ethan Allen views its trade and service marks as valuable
assets and has an ongoing program to diligently monitor their unauthorized use
through appropriate action.
Backlog and Net Orders Booked
As of June 30, 1999, Ethan Allen had a wholesale backlog of
approximately $56.9 million, compared to a backlog of $68.6 million as of June
30, 1998. The backlog is anticipated to be serviced in the first quarter of
fiscal 2000. Backlog at any point in time is primarily a result of net orders
booked in prior periods, manufacturing schedules and the timing of product
shipments. Net orders booked at the wholesale level from all Ethan Allen stores
(including all independently-owned and Ethan Allen-owned stores) for the twelve
months ended June 30, 1999 were $618.5 million, resulting in an increase of 5.6%
for fiscal year 1999. The fiscal year 1999 orders were negatively impacted by
the absence of a spring conference, adjusting for this event, orders for the
year would have increased 8.0%. Net orders booked in any period are recorded
based on wholesale prices and do not reflect the additional retail margins
produced by the Ethan Allen-owned stores.
Employees
Ethan Allen has 7,514 employees as of June 30, 1999. Approximately 7.8%
of the employees are represented by unions under collective bargaining
agreements. Ethan Allen believes it has good relations with its employees and
there have been no work stoppages during the last three years.
7
Item 2. Properties
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The corporate headquarters of Ethan Allen, located in Danbury,
Connecticut, consists of one building containing 144,000 square feet, situated
on approximately 17.5 acres of land, all of which is owned by Ethan Allen.
Located adjacent to the corporate headquarters is the Ethan Allen Inn, a hotel
containing 195 guest rooms. This hotel, owned by a wholly-owned subsidiary of
Ethan Allen, is used for Ethan Allen functions and in connection with training
programs as well as for accommodations for the general public.
Ethan Allen has 21 manufacturing facilities, which includes 3 saw mills
located in 11 states, all of which are owned, with the exception of a leased
upholstery plant in California, totaling 122,300 square feet. These facilities
consist of 12 case goods manufacturing plants, totaling 3,019,500 square feet
(including three sawmills), six upholstered furniture plants, totaling 1,384,000
square feet and three plants involved in the manufacture and assembly of Ethan
Allen's non-furniture coordinates totaling 413,200 square feet. In addition,
Ethan Allen owns five and leases three distribution warehouses, totaling 863,900
square feet, and leases two home delivery service centers aggregating 102,800
square feet. The Company's manufacturing and distribution facilities are located
in North Carolina, Vermont, Pennsylvania, Virginia, New York, Oklahoma,
California, New Jersey, Georgia, Indiana, Maine, and Massachusetts.
Ethan Allen operates 73 Ethan Allen stores in the United States, of
which 21 stores are owned and 52 stores are leased.
Certain store properties are subject to mortgage loan agreements. In
addition, Ethan Allen's Maiden, North Carolina facility was financed with an
industrial revenue bond. Ethan Allen believes that all of its properties are
well maintained and in good condition.
Ethan Allen estimates that its case goods, upholstery, and home
accessories operating segments are currently operating at approximately 85% of
capacity. Management believes it has significant additional capacity at many
facilities, which it could utilize with minimal additional capital expenditures
by adding multiple shift operations. Ethan Allen considers its present
manufacturing capacity to be sufficient for its foreseeable needs.
8
Item 3. Legal Proceedings
- --------------------------
Ethan Allen is a party to various legal actions with customers,
employees and others arising in the normal course of its business. Ethan Allen
maintains liability insurance which Ethan Allen believes is adequate for its
needs and commensurate with other companies in the home furnishings industry.
Ethan Allen believes that the final resolution of pending actions (including any
potential liability not fully covered by insurance) will not have a substantial
adverse effect on the Company's results of operations and financial position.
Environmental Matters
The Company has been named as a potentially responsible party ("PRP")
for the cleanup of three sites currently listed or proposed for inclusion on the
National Priorities List ("NPL") under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"). The Company is also a
settling defendant for remedial design and construction activities at one of the
sites. Numerous other parties have been identified as PRP's at these sites. The
Company believes its share of waste contributed to these sites is small in
relation to the total; however, liability under CERCLA may be joint and several.
The Company has total reserves of $500,000 applicable to these sites, which the
Company believes would be sufficient to cover any resulting liability. With
respect to all of these sites, the Company believes that it is not a major
contributor based on the very small volume of waste generated by the Company in
relation to total volume at the site. The Company has concluded its involvement
with one site and settled as a de-minimis party. For two of the sites, the
remedial investigation is ongoing. A volume based allocation of responsibility
among the parties has been prepared.
Ethan Allen is subject to other federal, state and local environmental
protection laws and regulations and is involved from time to time in
investigations and proceedings regarding environmental matters. The Company is
regulated under several federal, state and local laws and regulations concerning
air emissions, water discharges, and management of solid and hazardous wastes.
The Company believes that its facilities are in material compliance with all
applicable laws and regulations. Regulations issued under the Clean Air Act
Amendments of 1990 required the Company to reformulate certain furniture
finishes or institute process changes to reduce emissions of volatile organic
compounds. These requirements have been implemented via high solids coating
technology and alternative formulations. Ethan Allen has implemented a variety
of technical and procedural controls, such as reformulating of finishing
materials to reduce toxicity, implementation of high velocity low pressure spray
systems, development of inspections/audit teams including coating emissions
reductions teams at all finishing factories and storm water protection plans and
controls, that have reduced emissions per unit of production. In addition, Ethan
Allen is currently reclassifying its waste as part of the factory waste
minimization programs, developing environment and safety job hazard analysis
programs on the shop floor to reduce emissions and safety risks, and developing
an auditing system to control and ensure consistent protocols and procedures are
applied. The Company will continue to evaluate the best applicable, cost
effective, control technologies for finishing operations and design hazardous
materials out of the manufacturing processes.
9
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
The following matters were submitted to security holders of the Company
in fiscal 1999:
o Proposal for the election of Clinton A. Clark, Kristin Gamble
and Edward H. Meyer as Directors.
o Proposal for ratification of KPMG LLP as Independent Auditors
for fiscal year 2000.
o Proposal of an amendment to the 1992 Stock Option Plan to
award options to purchase 3,000 shares of stock to each of the
Independent Directors.
o Proposal for an amendment to the Certificate of Incorporation
to increase the number of authorized shares of common stock
from 70,000,000 to 150,000,000.
10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------------------
The Company's Common Stock is traded on the New York Stock Exchange.
The following table indicates the high and low sales prices of the Company's
Common Stock as reported on the New York Stock Exchange Composite Tape, as
adjusted for the three-for-two stock split:
Market Price
-----------------------
High Low
---- ---
Fiscal 1999
-----------
Fourth Quarter $ 37 3/4 $ 24 21/32
Third Quarter 33 13/16 25 1/2
Second Quarter 29 15 3/4
First Quarter 34 3/4 20
Fiscal 1998
-----------
Fourth Quarter $ 43 $ 30 1/4
Third Quarter 44 13/32 22 7/8
Second Quarter 28 9/16 20
First Quarter 25 3/16 16 1/2
As of August 27, 1999, there were approximately 451 share holders of
record of the Company's Common Stock.
On August 5, 1999, the Company declared a $0.04 per common share
dividend for all holders of record on October 8, 1999 and payment date of
October 22, 1999. The Company expects to continue to declare quarterly dividends
for the foreseeable future.
11
Item 6. Selected Financial Data
- -------------------------------
The following table sets forth summary consolidated financial
information of the Company for the years and dates indicated (dollars in
thousands, except per share data):
Fiscal Years Ended June 30,
----------------------------------------------------------
1999 1998 1997 1996 1995
--------- -------- -------- -------- --------
Statement of Operations Data:
Net sales $762,233 $679,321 $571,838 $509,776 $476,111
Cost of sales 407,234 363,746 323,600 304,650 291,038
Selling, general and
administrative expenses 222,107 195,885 162,389 149,559 137,387
Expenses related to business
reorganization and write-down
of assets held for sale (1) - - - - 1,550
-------- -------- -------- -------- ---------
0perating income 132,892 119,690 85,849 55,567 46,136
Interest and other
miscellaneous income, net 1,707 3,449 1,272 1,039 1,766
-------- -------- -------- -------- ---------
Income before interest expense,
income taxes, extraordinary
charge and cumulative effect
of accounting change 134,599 123,139 87,121 56,606 47,902
Interest expense (2) 1,882 4,609 6,427 9,616 11,937
Income tax expense 51,429 46,583 31,954 18,845 13,233 (3)
-------- -------- -------- -------- --------
Income before extraordinary
charge and cumulative
effect of accounting
change 81,288 71,948 48,740 28,145 22,732
Extraordinary charge (net of tax) - (802)(7) - - (2,073)(4)
Cumulative effect of
accounting change (net of tax) - - - - 1,467 (5)
-------- -------- -------- -------- ---------
Net income $ 81,288 $ 71,146 $ 48,740 $ 28,145 $ 22,126
======== ======== ======== ======== =========
Per Share Data: (6)
Net income per basic share $ 1.97 $ 1.65 $ 1.13 $ 0.66 $ 0.51
Basic weighted average shares
outstanding 41,278 43,050 43,190 42,936 42,996
Net income per diluted share $ 1.92 $ 1.61 $ 1.11 $ 0.64 $ 0.50
Diluted weighted average
shares outstanding 42,287 44,136 43,815 43,692 43,869
Cash dividends declared $ 0.12 $ 0.09 $ 0.07 $ 0.03 $ -
Other information:
Depreciation and amortization $ 16,100 $ 15,504 $ 15,848 $ 16,761 $ 16,098
Capital expenditures 40,628 29,665 23,383 13,314 11,244
Balance Sheet Data (at end of period):
Total assets $480,622 $433,123 $427,784 $395,981 $408,288
Long-term debt including
capital lease obligations 9,919 12,496 66,766 82,681 127,032
Shareholders' equity $350,535 $314,320 $265,434 $220,293 $193,098
Footnotes on following page.
12
Notes to Selected Financial Data
(Dollars in thousands)
(1) Included in the $1.6 million charge in fiscal 1995 are fees associated
with the business reorganization and the write-down of property and
plants held for sale to fair market value.
(2) Interest expense includes a non-cash component relating to the
amortization of deferred financing costs. Amortization expense included
in each fiscal year is presented below:
1999 1998 1997 1996 1995
------- ------- ------ ------ --------
$ 243 $ 364 $ 490 $ 596 $ 1,160
(3) Includes a $1.7 million credit to income tax expense, resulting from
the restatement of deferred taxes to reflect the Company's expected
future effective tax rate upon the completion of the business
reorganization.
(4) During fiscal 1995, the Company entered into a bank credit agreement to
provide up to $110.0 million of senior secured debt. As a result of the
repayment of debt, an extraordinary charge of $3.4 million in the
aggregate, $2.1 million net of tax benefit or $0.05 a share (adjusted
for the two-for-one and three-for-two stock splits) was recorded
relating to the write-off of unamortized deferred financing costs
associated with the existing bank financing.
(5) As of July 1, 1994, the Company changed its method of accounting for
packaging costs to better match revenue with expenses. This change
resulted in a cumulative adjustment of $2.4 million ($1.4 million net
of tax or $0.03 a share adjusted for the two-for one and three-for-two
stock splits) which represents the capitalization of packaging costs
into finished goods and retail inventories.
(6) Amounts have been retroactively adjusted to reflect the two-for-one
stock split on September 2, 1997 and the three-for-two stock split on
May 21, 1999.
(7) During fiscal 1998, the Company completed its optional early redemption
of all of its $52.4 million then-outstanding 8-3/4% Senior Notes, due
on March 15, 2001, at 101.458% of par value. As a result of the early
redemption, an extraordinary charge of $0.8 million, net of tax
benefit, was recorded. The extraordinary charge included the write-off
of unamortized deferred financing costs associated with the Senior
Notes and the premium related to the early redemption.
13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- ------------------------------------------------------------------------
The following discussion of results of operations and financial
condition is based upon and should be read in conjunction with the Consolidated
Financial Statements of the Company and notes thereto included under Item 8 of
this Report.
Forward-Looking Statements
Management's discussion and analysis of financial condition and results
of operations and other sections of this annual report contain forward-looking
statements relating to future results of the Company. Such forward-looking
statements are identified by use of forward-looking words such as "anticipates",
"believes", "plans", "estimates", "expects", and "intends" or words or phrases
of similar expression. These forward-looking statements are subject to various
assumptions, risks and uncertainties, including but not limited to, changes in
political and economic conditions, demand for the Company's products, acceptance
of new products, technology developments affecting the Company's products and to
those discussed in the Company's filings with the Securities and Exchange
Commission. Accordingly, actual results could differ materially from those
contemplated by the forward-looking statements.
Basis of Presentation
The Company has no material assets other than its ownership of Ethan
Allen's capital stock and conducts all significant transactions through Ethan
Allen; therefore, substantially all of the financial information presented
herein is that of Ethan Allen.
Results of Operations:
Ethan Allen's revenues are comprised of wholesale sales to dealer-owned
and company-owned retail stores and retail sales of company-owned stores. The
Company's wholesale sales are mainly derived from its three reportable operating
segments; case goods, upholstery, and home accessories. See Note 14 to the
Company's Consolidated Financial Statements for the year ended June 30, 1999.
The components of consolidated revenues are as follows (dollars in millions):
Fiscal Years Ended June 30,
------------------------------------------
1999 1998 1997
------- ------ ------
Revenue:
Wholesale Revenue:
Case goods $352.2 $328.6 $279.1
Upholstery 174.6 160.1 145.5
Home Accessories 90.1 71.4 59.6
Other 13.7 9.0 4.8
------- ------ ------
Total Wholesale Revenue 630.6 569.1 489.0
Total Retail Revenue 294.7 235.2 175.8
Other 6.4 6.7 5.9
Elimination of inter-segment sales (169.5) (131.7) (98.9)
------ ------ ------
Consolidated Revenue $762.2 $679.3 $571.8
====== ====== ======
Operating Income:
Wholesale Operating Income:
Case goods $127.5 $120.3 $95.1
Upholstery 53.2 51.2 44.4
Home Accessories 29.2 22.9 18.0
Unallocated Corporate Expenses (87.8) (86.4) (74.7)
------- ------ -----
Total Wholesale Operating Income 122.1 108.0 82.8
Total Retail Operating Income 15.1 13.8 7.4
Other 1.4 1.7 1.2
Eliminations (5.7) (3.8) (5.6)
------- ------ -----
Consolidated Operating Income $132.9 $119.7 $85.8
====== ====== =====
14
Fiscal 1999 Compared to Fiscal 1998
Consolidated revenue for fiscal year 1999 increased by $82.9 million or
12.2% from fiscal year 1998 to $762.2 million. Overall sales growth resulted
from new product offerings, new and relocated stores and growth in the retail
segment.
Total wholesale revenue for fiscal year 1999 increased by $61.5 million
or 10.8% to $630.6 million from $569.1 million in fiscal year 1998. Case goods
revenue increased $23.6 million or 7.2% to $352.2 million in fiscal year 1999 as
compared to the prior year of $328.6 million mainly due to new product offerings
and the benefit of a selected price increase effective December 1, 1998.
Upholstery revenue increased $14.5 million or 9.1% to $174.6 million in
fiscal year 1999 as compared to $160.1 in fiscal year 1998. The increase in
revenue of $14.5 million was primarily attributable to new fabric introductions
and the impact of expanded national television advertising.
Home accessory revenue increased $18.7 million or 26.2% to $90.1
million in fiscal year 1999. This increase resulted from enhanced merchandising
strategies, new product introductions, and an improved in-stock inventory
position which reduced customer lead time.
Total retail revenue from Ethan Allen-owned stores during fiscal year
1999 increased by $59.5 million or 25.3% to $294.7 million from $235.2 million
in fiscal year 1998. The increase in retail sales by Ethan Allen-owned stores is
attributable to a 14.3% or $30.9 million increase in comparable store sales, and
an increase in sales generated by newly opened or acquired stores of $35.2
million, partially offset by closed stores, which generated $6.6 million less
sales in fiscal year 1999 as compared to fiscal year 1998. The number of Ethan
Allen-owned stores increased to 73 as of June 30, 1999 as compared to 67 as of
June 30, 1998. The Company acquired 5 stores from independent retailers, opened
4 new stores, relocated 3 stores and closed an additional 3 stores.
Comparable stores are those which have been operating for at least 15
months. Minimal net sales, derived from the delivery of customer ordered
product, are generated during the first three months of operations of newly
opened stores. Stores acquired from dealers by Ethan Allen are included in
comparable store sales in their 13th full month of Ethan Allen-owned operations.
During fiscal year 1999, the Company and its independent retailers
opened 20 new stores, of which 9 stores represented relocations. At June 30,
1999, there were 309 total stores, of which 236 were dealer-owned stores. The
Company's objective is to continue the expansion of both the dealer-owned and
Ethan Allen-owned stores.
Gross profit for fiscal year 1999 increased by $39.4 million or 12.5%
from fiscal year 1998 to $355.0 million. This increase is attributable to higher
sales volume, combined with an increase in gross margin from 46.5% in fiscal
1998 to 46.6% in fiscal 1999. Gross margins have been favorably impacted by
higher sales volumes, greater manufacturing efficiencies, improvements in
manufacturing technology, a selected case good price increase effective December
1, 1998, and a higher percentage of retail sales to total sales. These factors
are partially offset by higher raw material and labor costs.
Operating expenses increased $26.2 million from $195.9 million or 28.8%
of net sales in fiscal 1998 to $222.1 million or 29.1% of net sales, in fiscal
1999. This increase is attributable to an increase in operating expenses in the
Company's retail division of $23.1 million due the expansion of the retail
segment resulting in the addition of 7 new Ethan Allen-owned stores in 1999.
Consolidated operating income for fiscal year 1999 was $132.9 million
or 17.4% of net sales compared to $119.7 million or 17.6% of net sales in fiscal
year 1998. This represents an increase of $13.2 million or 11.0%. This increase
is primarily attributable to higher sales volume, partially offset by a lower
wholesale and retail gross margin and higher operating expenses related to the
higher retail volume.
15
Total wholesale operating income for fiscal year 1999 was $122.1
million or 19.4% of net sales compared to $108.0 million or 19.0% of net sales
in fiscal year 1998. Wholesale operating income increased $14.1 million or
13.1%. Case goods operating income increased $7.2 million or 6.0% to $127.5
million in fiscal year 1999 over the prior year mainly due to higher sales
volume and a selected price increase, offset by a slight reduction in gross
margin to 39.4%.
Upholstery operating income increased $2.0 million or 3.9% to $53.2
million in fiscal year 1999 as compared to $51.2 in fiscal year 1998. The
increase resulted from increased volume and continued management of expenses.
These factors are partially offset by a reduction in gross margin to 32.9% in
fiscal year 1999 as compared to 34.5% in the prior fiscal year.
Home accessory operating income increased $6.3 million or 27.5% to
$29.2 million in fiscal year 1999. This increase resulted from higher volume and
lower operating expenses, slightly offset by a 0.6% reduction in gross margin
to 33.2%.
Operating income from the retail segment increased by $1.3 million or
9.4% to $15.1 million or 5.1% of net sales from $13.8 million or 5.8% of net
sales in fiscal year 1998. The increase in retail operating income by Ethan
Allen-owned stores is primarily attributable to increased volume, slightly
offset by a reduction in gross margin from 44.6% in fiscal year 1998 to 44.0% in
fiscal year 1999 and a higher composition of expenses related to the start-up of
7 retail stores and the acquisition of 5 additional stores from independent
retailers in fiscal year 1999.
Interest expense, including the amortization of deferred financing
costs, for fiscal 1999 decreased by $2.7 million to $1.9 million, due to lower
debt balances and lower amortization of deferred financing costs.
Income tax expense of $51.4 million was recorded in fiscal year 1999.
The Company's effective tax rate was 38.8% in 1999 as compared to 39.3% in 1998.
The decline in the effective income tax rate in 1999 as compared to 1998 has
resulted from planning strategies initiated by the Company during fiscal year
1999.
During the year ended June 30, 1998, the Company recorded a $0.8
million extraordinary charge (net of tax benefit) related to the early
retirement of its 8-3/4% Senior Notes due 2001. The extraordinary charge
included the write-off of unamortized deferred financing costs and the premium
paid related to the early redemption.
In fiscal year 1999, the Company recorded net income of $81.3 million,
an increase of 14.3%, compared to $71.1 million in fiscal year 1998.
Fiscal 1998 Compared to Fiscal 1997
Consolidated revenue for fiscal year 1998 increased by $107.5 million
or 18.8% from fiscal year 1997 to $679.3 million. Overall sales growth resulted
from an enhanced national advertising program, product introductions, the
addition of new and relocated stores in the retail segment, improved
effectiveness in existing retail stores, and the benefit of a case good price
increase effective January 1, 1997.
Total wholesale revenue for fiscal year 1998 increased by $80.1 million
or 16.4% to $569.1 million from $489.0 million in fiscal year 1997. Case goods
revenue increased $49.5 million or 17.7% to $328.6 million in fiscal year 1998
from $279.1 million in fiscal year 1997 due to strong product introductions, and
an enhanced national television advertising campaign.
Upholstery revenue increased $14.6 million or 10.0% to $160.1 million
in fiscal year 1998 as compared to $145.5 million in fiscal year 1997. The
increase in revenue of $14.6 million was primarily attributable to the
advertising focus placed on the upholstery product lines.
16
Home accessory revenue increased $11.8 million or 19.8% to $71.4
million in fiscal year 1998 from $59.6 million in fiscal year 1997. This
increase resulted from a re-merchandising focus on product lines and price
points.
Total retail revenue from Ethan Allen-owned stores increased $59.4
million or 33.8% in fiscal year 1998 to $235.2 million from $175.8 million in
fiscal year 1997. The increase in retail sales by Ethan Allen-owned stores is
attributable to a 33.6% or $56.7 million increase in comparable store sales, and
an increase in sales generated by newly opened or acquired stores of $5.8
million, partially offset by closed stores, which generated $3.1 million less
sales in fiscal year 1998 as compared to fiscal 1997. The number of Ethan
Allen-owned stores increased to 67 at June 1998 as compared to 65 at June 1997.
During fiscal year 1998, the Company and its independent retailers
opened 21 new stores, of which 3 stores represented relocations. At June 30,
1998, there were 310 total stores, of which 243 were dealer-owned stores.
Gross profit for fiscal year 1998 increased by $67.4 million or 27.1%
from fiscal year 1997 to $315.6 million. This increase is attributable to higher
sales volume, combined with an increase in gross margin from 43.4% in fiscal
1997 to 46.5% in fiscal 1998. Gross margins have been favorably impacted by
higher sales volumes, greater manufacturing efficiencies, improvements in
manufacturing technology, and a higher percentage of retail sales to total
sales. These factors are partially offset by higher lumber and other raw
materials cost.
Operating expenses increased $33.5 million from $162.4 million or 28.4%
of net sales in fiscal year 1997 to $195.9 million or 28.8% of net sales, in
fiscal year 1998. This increase is attributable to an increase in operating
expenses due to higher sales volume and the addition of 21 new Ethan Allen-owned
stores. Operating expenses also increased due to a $10.4 million rise in the
Company's advertising expense resulting from additional national television
costs. The Company implemented a new national television campaign on January 1,
1997.
Consolidated operating income for fiscal year 1998 was $119.7 million
or 17.6% of net sales as compared to $85.8 million or 15.0% of net sales in
fiscal year 1997. This represents an increase of $33.9 million or 39.4%. The
increase is attributable to higher sales volumes, increased gross margins
reflecting, in part, improved efficiencies, the benefit of a selected case good
price increase effective January 1, 1997 and continued monitoring of expenses,
partially offset by higher operating expenses related to higher retail volumes.
Total wholesale operating income for fiscal year 1998 amounted to
$108.0 million or 19.0% of net sales from $82.8 million or 16.9% of net sales in
fiscal year 1997. Case goods operating income increased $25.2 million or 26.5%
to $120.3 million in fiscal year 1998 from $95.1 million in fiscal year 1997 due
to higher volumes and continued manufacturing efficiencies, resulting in an
improvement in gross margin from 37.6% in fiscal year 1997 to 39.8% in fiscal
year 1998.
Upholstery operating income increased $6.8 million or 15.3% to $51.2
million in fiscal year 1998 as compared to $44.4 million in fiscal year 1997.
Upholstery gross margin improved to 34.5% in fiscal year 1998 as compared to
33.5% in fiscal year 1997. The increase in income from operations was primarily
attributable to higher sales volume and lower manufacturing costs per unit due
to higher production volumes.
Home accessory operating income increased $4.9 million or 27.2% to
$22.9 million in fiscal year 1998 from $18.0 million in fiscal year 1997. This
increase resulted from higher volumes and an improvement in gross margin to
33.8% in fiscal year 1998 as compared to 32.0% in the prior fiscal year.
Total retail income from operations increased $6.4 million or 86.5% in
fiscal year 1998 to $13.8 million or 5.8% of net sales from $7.4 million or 4.2%
of net sales in fiscal year 1997. The increase in retail operating income by
Ethan Allen-owned stores is attributable to increased volume and lower operating
expenses.
17
Interest expense, including the amortization of deferred financing
costs, for fiscal 1998 decreased by $1.8 million to $4.6 million, due to lower
debt balances and lower amortization of deferred financing costs. Interest
expense excludes the accelerated write-off of the deferred financing cost
related to the Senior Note redemption, which was reported separately as an
extraordinary charge, net of tax benefit.
Income tax expense of $46.6 million was recorded in fiscal year 1998.
The Company's effective tax rate for fiscal year 1998 was 39.3% as compared to
39.6% in fiscal year 1997.
During the year ended June 30, 1998, the Company recorded an $0.8
million extraordinary charge (net of tax benefit) related to the early
retirement of its 8-3/4% Senior Notes due 2001. The extraordinary charge
included the write-off of unamortized deferred financing costs and the premium
paid related to the early redemption.
In fiscal year 1998, the Company recorded net income of $71.1 million,
an increase of 46.0%, compared to $48.7 million in fiscal year 1997.
Financial Condition and Liquidity
The Company's principal sources of liquidity are cash flow from
operations and borrowing capacity under a revolving credit facility. Net cash
provided by operating activities totaled $86.7 million for fiscal 1999 as
compared to $87.6 million in fiscal 1998 and $78.3 million in fiscal 1997. The
1999 decrease in net cash provided by operating activities principally resulted
from a $25.0 million increase in inventory in fiscal year 1999 as compared to a
$6.8 million increase in fiscal year 1998, offset by, an increase of $10.1
million in net income, an increase in accrued expenses of $4.0 million during
fiscal year 1999 as compared to a $0.4 million increase in fiscal year 1998, and
a $1.2 million decrease in accounts receivable in fiscal year 1999, as compared
to a $3.3 million increase in accounts receivable in 1998. The $25.0 million
increase in inventory in fiscal year 1999 was attributable to an $11.4 million
increase in Company-owned store inventory and a $13.6 million increase in
finished goods. These increases reflect the expansion of the business and an
improvement in the in-stock inventory position, thereby reducing lead times. At
June 30, 1999 and 1998, the Company's working capital was $123.6 million and
$114.3 million, respectively. The current ratio was 2.43 to 1 in 1999 and 2.55
to 1 in 1998.
During fiscal 1999, capital spending totaled $40.6 million as compared
to $29.7 million and $23.4 million in fiscal 1998 and 1997, respectively.
Capital expenditures in fiscal 2000 are anticipated to be approximately $50.0
million. The Company anticipates that cash from operations will be sufficient to
fund this level of capital expenditures. The increased level of capital
spending, which is attributable to new store openings and relocations and
expanding manufacturing capacity, is expected to continue for the foreseeable
future.
Total debt outstanding at June 30, 1999 was $10.7 million. At June 30,
1999, there were no revolving loans outstanding under the Credit Agreement. The
Company had $84.6 million available under its revolving credit facility at June
30, 1999. Trade and standby letters of credit of $15.4 million were outstanding
as of June 30, 1999.
During fiscal 1998, the Company completed an optional early redemption
of all of its $52.4 million outstanding 8-3/4% Senior Notes, due on March 15,
2001, at 101.458% of par value. As a result of the early redemption, an
extraordinary charge of $.8 million, net of tax benefit, was recorded. The
extraordinary charge included the write-off of unamortized deferred financing
costs associated with the Senior Notes and the premium related to the early
redemption. During fiscal 1998 and 1997, $0.1 million and $9.5 million,
respectively, principal amount of Senior Notes were repurchased.
The Company may also, from time to time, either directly or through
agents, repurchase its common stock in the open market through negotiated
purchases or
18
otherwise, at prices and on terms satisfactory to the Company. On August 5,
1999, the Board of Directors authorized the Company to repurchase up to
2,000,000 shares. Through August 27, 1999, the Company repurchased 153,757
shares at an average price of $27.07 per share. Depending on market prices and
other conditions relevant to the Company, such purchases may be discontinued at
any time. During fiscal 1999 and 1998, the Company purchased 1,921,784 shares of
its stock at an average price of $23.49 per share and 774,096 shares at an
average price of $30.11, respectively.
As of June 30, 1999, aggregate scheduled maturities of long-term debt
for each of the next five fiscal years are $0.4 million for fiscal year 2000 and
$0.1 million for each of the four subsequent fiscal years. Management believes
that its cash flow from operations, together with its other available sources of
liquidity, will be adequate to make all required payments of principal and
interest on its debt, to permit anticipated capital expenditures and to fund
working capital and other cash requirements.
Impact of Inflation
The Company does not believe that inflation has had a material impact
on its profitability during the last three fiscal years. In the past, the
Company has generally been able to increase prices to offset increases in
operating costs.
Income Taxes
At June 30, 1999, the Company has approximately $22.3 million of net
operating loss carryovers ("NOL's") for federal income tax purposes. The
Recapitalization in 1995 triggered an "ownership change" of the Company, as
defined in Section 382 of the Internal Revenue Code of 1986, as amended,
resulting in an annual limitation on the utilization of the NOL's by the Company
of approximately $3.9 million.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133 "Accounting for
Derivative Instruments and Hedging Activities" and No. 137 "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133". SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including derivative instruments embedded
in other contracts, and for hedging activities. This pronouncement requires that
an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
SFAS No. 137 has deferred the effective date of SFAS No. 133 until the fiscal
year beginning after June 15, 2000. The Company will adopt SFAS No. 133 in
fiscal year 2001. However, the Company does not expect this pronouncement to
have a material impact on its financial results.
Year 2000
The Company expects to implement the systems and programming changes
necessary to address Year 2000 issues and does not believe the cost of such
actions has or will have a material effect on the Company's results of
operations or financial condition. However, there is no guarantee that the
Company, its suppliers or other third parties will be able to make all of the
modifications necessary to address Year 2000 issues on a timely basis. This
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company views all of its retail,
wholesale and manufacturing applications as mission critical. The Company
recently converted its retail, wholesale and a portion of its manufacturing
applications onto one single mid range computer, utilizing newly acquired
integrated software. The newly implemented software is substantially compliant,
with all date fields expanded to four digits. The Company formed a redundant
environment and has rolled the date forward to the year 2000 and has completed
testing all of its business transactions.
19
Concurrently with the aforementioned project, the Company has been
remediating its pre-existing manufacturing systems. This process is complete in
the Company's wood and upholstery manufacturing facilities. Substantial progress
has been made in the Company's accessory manufacturing systems. The accessory
systems are expected to be fully compliant by September 30, 1999.
Investments have been made in the Company's peripheral hardware. These
investments were necessitated by the retail and wholesale systems conversion.
The Company compiled a comprehensive data base of hardware and associated
software that is currently in service. The Company expects all hardware to be
remediated or replaced by September 30, 1999. To date, the Company has expended
less than $1.0 million in capital expenditures related to Year 2000 remediation.
The Company's vertical integrated structure might to some degree
mitigate the impact of third parties' Year 2000 issues to adversely affect the
Company. However, the Company anticipates the possibility that not all of its
vendors, retailers and other third parties will have taken the necessary steps
to adequately address their respective Year 2000 issues on a timely basis. In
order to minimize the impact on the Company, a project team has been formed to
monitor the activities of third parties, including sending out inquiries and
evaluating responses.
Notwithstanding the progress the Company has made thus far in
remediating its existing systems and implementing new systems, the Company is
proceeding in finalizing its formal contingency plan, including monitoring its
independent retailers. The Company intends to continue monitoring the progress
of others in order to determine whether adequate services will be provided to
run the Company's operations in the Year 2000.
20
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
- ------------------------------------------------------------------
The Company is exposed to interest rate risk primarily through its
borrowing activities. The Company's policy has been to utilize United States
dollar denominated borrowings to fund its working capital and investment needs.
Short term debt, if required, is used to meet working capital requirements and
long term debt is generally used to finance long term investments. There is
inherent roll-over risk for borrowings as they mature and are renewed at current
market rates. The extent of this risk is not quantifiable or predictable because
of the variability of future interest rates and the Company's future financing
requirements. At June 30, 1999, the Company had $0.8 million of short term debt
outstanding and $9.9 million of total long term debt outstanding.
The Company has one debt instrument outstanding with a variable
interest rate. This debt instrument has a principal balance of $4.6 million
which matures in 2004. Based on the principal outstanding in 1999, a one
percentage point increase in the variable interest rate would not have had a
significant impact on the Company's 1999 interest expense.
Currently, the Company does not enter into financial instruments
transactions for trading or other speculative purposes or to manage interest
rate exposure.
21
Item 8. Financial Statements and Supplementary Data
- ------- -------------------------------------------
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Ethan Allen Interiors Inc.:
We have audited the accompanying consolidated balance sheets of Ethan Allen
Interiors Inc. and Subsidiary (the "Company") as of June 30, 1999 and 1998, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the years in the three-year period ended June 30, 1999.
In connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule listed in the index under Item No.
14. The consolidated financial statements and financial statement schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on the consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Ethan Allen
Interiors Inc. and Subsidiary as of June 30, 1999 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1999, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG LLP
Stamford, Connecticut
August 4, 1999, except for Note 16,
which is as of August 25, 1999
22
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Consolidated Balance Sheets
June 30, 1999 and 1998
(Dollars in thousands)
1999 1998
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 8,968 $ 19,380
Accounts receivable, less allowance of
$2,460 and $1,962 at June 30, 1999 and
1998, respectively 34,302 35,640
Notes receivable, current portion, less
allowance of $79 and $27 at
June 30, 1999 and 1998, respectively 640 686
Inventories 144,045 114,364
Prepaid expenses and other current assets 14,088 10,735
Deferred income taxes 7,783 7,094
--------- ---------
Total current assets $ 209,826 $ 187,899
--------- ---------
Property, plant and equipment, net 214,492 188,171
Property held for sale 484 1,129
Notes receivable, net of current portion,
less allowance of $92 and $259 at
June 30, 1999 and 1998, respectively 1,407 1,790
Intangibles, net 51,598 50,773
Deferred financing costs, net of amortization of
$952 and $709 at June 30, 1999 and 1998,
respectively 444 632
Other assets 2,371 2,729
--------- ---------
Total assets $ 480,622 $ 433,123
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and
capital lease obligations $ 757 $ 879
Accounts payable 59,378 51,135
Accrued expenses 9,174 5,863
Accrued compensation and benefits 16,937 15,735
--------- ---------
Total current liabilities 86,246 73,612
--------- ---------
Long-term debt, less current maturities 9,611 11,480
Obligations under capital leases, less current
maturities 308 1,016
Other long-term liabilities 1,370 812
Deferred income taxes 32,552 31,883
--------- ---------
Total liabilities $ 130,087 $ 118,803
--------- ---------
Commitments and contingencies - -
Shareholders' equity:
Class A common stock, par value $.01, 150,000,000
shares authorized, 44,666,791 shares issued
at June 30, 1999, 44,504,205 shares issued
at June 30, 1998 447 445
Preferred stock, par value $.01, 1,055,000 shares
authorized, no shares issued and outstanding
at June 30, 1999 and 1998 - -
Additional paid-in capital 267,286 262,313
--------- ---------
267,733 262,758
Less:
Treasury stock (at cost) 3,745,928 shares
at June 30, 1999 and 1,824,144 shares at
June 30, 1998 (78,887) (33,750)
--------- ---------
188,846 229,008
Retained earnings 161,689 85,312
--------- ---------
Total shareholders' equity 350,535 314,320
--------- ---------
Total liabilities and shareholders' equity $ 480,622 $ 433,123
========= =========
See accompanying notes to consolidated financial statements.
23
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Consolidated Statements of Operations
For the years ended June 30, 1999, 1998 and 1997
(Dollars in thousands, except per share data)
1999 1998 1997
--------- --------- ----------
Net sales $ 762,233 $ 679,321 $ 571,838
Cost of sales 407,234 363,746 323,600
--------- --------- ---------
Gross profit 354,999 315,575 248,238
Operating expenses:
Selling 123,742 110,240 85,927
General and administrative 98,365 85,645 76,462
--------- --------- ---------
Operating income 132,892 119,690 85,849
--------- --------- ---------
Interest and other miscellaneous
income, net 1,707 3,449 1,272
Interest and other related financing
costs:
Interest expense 1,639 4,245 5,864
Amortization of deferred
financing costs 243 364 563
--------- --------- ---------
Total interest and other related
financing costs 1,882 4,609 6,427
--------- --------- ---------
Income before income taxes
and extraordinary charge 132,717 118,530 80,694
Income tax expense 51,429 46,582 31,954
--------- --------- ---------
Income before extraordinary
charge 81,288 71,948 48,740
Extraordinary charge from early
retirement of debt, net of
income tax benefit of $527 - 802 -
--------- --------- ---------
Net income $ 81,288 $ 71,146 $ 48,740
========= ========= =========
Per share data:
Net income per basic share:
Income before extraordinary charge $ 1.97 $ 1.67 $ 1.13
Extraordinary charge - (0.02) -
--------- --------- ---------
Net income per basic share $ 1.97 $ 1.65 $ 1.13
========= ========= =========
Net income per diluted share:
Income before extraordinary charge $ 1.92 $ 1.63 $ 1.11
Extraordinary charge - (0.02) -
--------- --------- ---------
Net income per diluted share $ 1.92 $ 1.61 $ 1.11
========= ========= =========
Dividends declared per common share $ 0.12 $ 0.09 $ 0.07
========= ========= =========
See accompanying notes to consolidated financial statements.
24
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the years ended June 30, 1999, 1998 and 1997
(Dollars in thousands)
1999 1998 1997
--------- --------- ----------
Operating activities:
Net income $ 81,288 $ 71,146 $ 48,740
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 16,344 15,868 16,411
Compensation expense related to
restricted stock award 1,819 2,136 891
Provision for deferred
income taxes (20) 683 575
Extraordinary charge - 802 -
Other non-cash benefit 251 77 498
Change in assets and liabilities:
Accounts receivable 1,222 (3,340) 1,822
Inventories (25,040) (6,839) 2,726
Prepaid and other current assets (3,353) (4,011) 653
Other assets (1,065) (891) 137
Accounts payable 10,652 11,576 5,099
Accrued expenses 4,023 414 973
Other long-term liabilities 558 (3) (221)
--------- --------- ---------
Net cash provided by operating
activities 86,680 87,618 78,304
--------- --------- ---------
Investing activities:
Proceeds from the disposal of property,
plant, and equipment 1,721 827 110
Proceeds from the disposal of property
held for sale - - 1,945
Capital expenditures (40,628) (29,665) (23,383)
Acquisition of businesses (7,164) - -
Payments received on long-term notes
receivable 799 1,538 1,152
Disbursements made for long-term notes
receivable (255) (302) (1,077)
Redemption of short term securities - 30,270 -
Investments in short term securities - (12,295) (17,975)
--------- --------- ---------
Net cash used in investing activities (45,527) (9,627) (39,228)
--------- --------- ---------
Financing activities:
Borrowings on revolving credit facilities 81,500 - 14,500
Payments on revolving credit facilities (81,500) - (21,500)
Redemption of Senior Notes - (52,543) (9,457)
Premium paid on Senior Note redemption - (461) -
Other payments on long-term debt and
capital leases (2,717) (2,079) (2,134)
Other borrowings on long-term debt 18 111 794
Payments to acquire treasury stock (45,137) (23,310) (7,249)
Net proceeds from issuance of common stock 747 1,255 1,235
Increase in deferred financing costs (55) - (173)
Dividends paid (4,421) (3,450) (2,304)
-------- -------- --------
Net cash used in financing activities (51,565) (80,477) (26,288)
-------- -------- --------
Net (decrease)/increase in cash and cash
equivalents (10,412) (2,486) 12,788
Cash and cash equivalents
at beginning of year 19,380 21,866 9,078
--------- --------- --------
Cash and cash equivalents at end of year $ 8,968 $ 19,380 $ 21,866
========= ========= ========
Supplemental disclosure:
Cash payments for:
Income taxes $ 50,331 $ 45,382 $ 28,116
Interest 1,637 5,585 6,138
Non cash transactions:
Additions to obligations under
capitalized leases - - 504
Acquisition of stores with treasury stock - - 3,327
See accompanying notes to consolidated financial statements.
25
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Consolidated Statements of Shareholders Equity
For the years ended June 30, 1999, 1998 and 1997
(Dollars in thousands)
Retained
Additional Earnings/
Common Paid-in Notes Teasury (Accumulated
Stock Capital Receivable Stock Deficit) Total
------ ---------- ---------- ------- ------------- -----
Balance at June 30, 1996 $ 292 $254,825 $ (51) $(5,371) $ (29,402) $220,293
Adjustment for restatement
resulting from three-for-two
stock split 148 (148) - - - -
----- -------- ------ ------- ---------- --------
Adjusted balance June 30, 1996 440 254,677 (51) (5,371) (29,402) 220,293
Issuance of common stock 2 2,124 - - - 2,126
Payment received on note receivable - - 51 - - 51
Increase in vested management
warrants - 71 - - - 71
Purchase of 499,944 shares of
treasury stock - - - (7,249) - (7,249)
Shares issued in connection
with acquisition - 1,147 - 2,180 - 3,327
Dividends declared - (1,152) - - (1,442) (2,594)
Tax benefit associated with the
exercise of employee stock
options and warrants - 669 - - - 669
Net income - - - - 48,740 48,740
----- -------- ------ -------- ---------- --------
Balance at June 30, 1997 442 257,536 - (10,440) 17,896 265,434
Issuance of common stock 3 3,388 - - - 3,391
Purchase of 774,096 shares of
treasury stock - - - (23,310) - (23,310)
Dividends declared - - - - (3,730) (3,730)
Tax benefit associated with the
exercise of employee stock
options and warrants - 1,389 - - - 1,389
Net income - - - - 71,146 71,146
----- -------- ------ -------- --------- --------
Balance at June 30, 1998 445 262,313 - (33,750) 85,312 314,320
----- -------- ------ -------- --------- --------
Issuance of common stock 2 2,564 - - - 2,566
Purchase of 1,921,784 shares of
treasury stock - - - (45,137) - (45,137)
Dividends declared - - - - (4,911) (4,911)
Tax benefit associated with the
exercise of employee stock
options and warrants - 2,409 - - - 2,409
Net income - - - - 81,288 81,288
----- -------- ------ --------- -------- --------
Balance at June 30, 1999 $ 447 $267,286 $ - $(78,887) $161,689 $350,535
===== ======== ====== ========= ======== ========
See accompanying notes to consolidated financial statements.
26
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Basis of Presentation
Ethan Allen Interiors Inc. (the "Company") is a Delaware corporation
incorporated on May 25, 1989. The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiary
Ethan Allen Inc. ("Ethan Allen") and Ethan Allen's subsidiaries. All
intercompany accounts and transactions have been eliminated in the
consolidated financial statements. All of Ethan Allen's capital stock is
owned by the Company. The Company has no other assets or operating
results other than those associated with its investment in Ethan Allen.
Nature of Operations
The Company, through its wholly-owned subsidiary, is a leading
manufacturer and retailer of quality home furnishings and sells a full
range of furniture products and decorative accessories through an
exclusive network of 309 retail stores, of which 73 are Ethan
Allen-owned and 236 are independently owned. The Company's retail stores
are primarily located in North America, with 21 located abroad. Ethan
Allen has 21 manufacturing facilities and 3 sawmills throughout the
United States.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash Equivalents
Cash equivalents of $4,999,000 at June 30, 1998, consisted of overnight
repurchase agreements and commercial paper with an initial term of less
than three months. For the purposes of the statements of cash flows, the
Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation of plant
and equipment is provided over the estimated useful lives of the
respective assets on a straight-line basis. Estimated useful lives of
the respective assets generally range from twenty to forty years for
buildings and improvements and from three to twenty years for machinery
and equipment.
Property Held for Sale
Property held for sale is recorded at net realizable value. The Company
continues to actively market the properties.
27
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies (continued)
Intangible Assets
Intangible assets primarily represent goodwill, trademarks and product
technology which will be amortized on a straight-line basis over forty
years. Goodwill represents the excess of cost of the Company over the
fair value of net identifiable assets acquired. The Company continuously
assesses the recoverability of these intangible assets by evaluating
whether the amortization of the intangible asset balances over the
remaining lives can be recovered through expected future results.
Expected future results are based on projected undiscounted operating
results before the effects of intangible amortization. Product
technology is measured based upon wholesale operating income, while
goodwill and trademarks are assessed based upon total wholesale and
retail operating income. The amount of impairment, if any, is measured
based on the fair value or projected discounted future results.
Notes Receivable
Notes receivable represent financing arrangements under which Ethan
Allen has made loans to certain of its dealers. These loans primarily
have terms ranging from five to eight years and are generally secured by
the assets of the borrower. Interest is charged on outstanding balances
at a rate which generally approximates the prime rate plus an additional
rate which may be adjustable over the loan term.
Financial Instruments
The carrying value of the Company's financial instruments approximates
fair market value.
Deferred Financing Costs
Debt financing costs are deferred and amortized, using the straight-line
method, over the term of the related debt.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Revenue Recognition
Sales are recorded when goods are shipped to dealers, with the exception
of shipments under Ethan Allen's Home Delivery Service Center Program.
These sales are recognized as revenue when goods are shipped to the Home
Delivery Service Centers, at which point title has passed to the
dealers. Ethan Allen, through its Home Delivery Service Centers,
provides preparation and delivery services for its dealers for a fee
which is recognized as revenue upon delivery of goods to the retail
customer. Sales made through Ethan Allen-owned stores are recognized
when delivery is made to the customer.
28
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies (continued)
Advertising Costs
Advertising costs are expensed when first aired or distributed.
Advertising costs for the fiscal years 1999, 1998, and 1997 were
$43,215,000, $40,035,000, and $27,712,000, respectively. Prepaid
advertising costs at June 30, 1999 and 1998 were $2,806,000 and
$3,021,000, respectively.
Closed Store Expenses
Future expenses, such as rent and real estate taxes, net of expected
lease or sublease recovery, which will be incurred subsequent to
vacating a closed Ethan Allen-owned store, are charged to operations
upon a formal decision to close the store.
Earnings Per Share
The Company presents earnings per share as set forth in Statement of
Financial Accounting Standard ("SFAS") No. 128, "Earnings per Share".
This statement requires dual presentation of basic and diluted earnings
per share. Basic earnings per share is computed by dividing net income
by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that
could occur if all dilutive potential common shares were exercised.
Stock Compensation
In fiscal 1997, the Company adopted SFAS No. 123, "Accounting for Stock
Based Compensation". As permitted by SFAS 123, the Company will continue
to follow the provisions of APB No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for compensation
expense related to the issuance of stock options.
Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", effective for fiscal years beginning after December 15, 1997.
SFAS No. 130 established standards for the reporting and display of
comprehensive income in financial statements. The Company does not have
any components of comprehensive income as defined in the pronouncement.
Segment Reporting
In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." SFAS No. 131
established standards for the reporting of information related to
operating segments. The Company has revised its disclosure with regards
to its operating segments and has restated prior year amounts in order
to conform with the current year presentation.
(2) Inventories
Inventories at June 30 are summarized as follows (dollars in thousands):
1999 1998
-------- --------
Retail Merchandise $ 49,742 $ 38,329
Finished products 42,562 28,931
Work in process 16,143 15,707
Raw materials 35,598 31,397
-------- --------
$144,045 $114,364
======== ========
29
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) Property, Plant and Equipment
Property, plant and equipment at June 30 are summarized as follows
(dollars in thousands):
1999 1998
-------- --------
Land and improvements $ 30,849 $ 26,941
Buildings and improvements 201,543 182,437
Machinery and equipment 93,576 80,294
-------- --------
325,968 289,672
Less accumulated depreciation (111,476) (101,501)
-------- --------
$214,492 $188,171
======== =========
(4) Intangibles
Intangibles at June 30 are summarized as follows (dollars in thousands):
1999 1998
-------- --------
Product technology $ 25,950 $ 25,950
Trademarks 28,200 28,200
Goodwill 13,855 11,333
Other 350 350
-------- --------
68,355 65,833
Less accumulated amortization (16,757) (15,060)
-------- -------
$ 51,598 $ 50,773
======== ========
(5) Borrowings
Long-term debt at June 30 consists of the following (dollars in
thousands):
1999 1998
-------- --------
Long term debt:
9.75% mortgage note payable $ - $ 1,552
Industrial Revenue Bonds,
2.45%-7.50%, maturing at
various dates through 2011 8,455 8,455
Other 1,527 1,627
------- --------
Total debt 9,982 11,634
Less current maturities 371 154
------- --------
$ 9,611 $ 11,480
======= ========
During fiscal year 1999, the Company repaid its outstanding indebtedness
of $1.6 million on its 9.75% mortgage note collateralized by the Ethan
Allen Inn which was due in 2015.
During fiscal year 1998, the Company completed its optional early
redemption of all of its then-outstanding $52.4 million 8-3/4% Senior
Notes, due on March 15, 2001, at 101.458% of par value. As a result of
the early redemption, an extraordinary charge of $0.8 million or $0.02 a
share, net of tax benefit, was recorded. The extraordinary charge
included the write-off of unamortized deferred financing costs
associated with the Senior Notes and the premium related to the early
redemption. During fiscal 1998 and 1997, $0.1 million and $9.5 million,
respectively, of Senior Notes were repurchased at 102.19% and 101.48% of
face value, respectively.
During 1995, the Company had completed a five year financing arrangement
to provide up to $110.0 million of senior secured debt under a revolving
credit facility pursuant to a Credit Agreement with Chase Manhattan
Bank, as agent, proceeds of which were used to repay existing senior
secured debt.
30
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) Borrowings (continued)
The revolving credit facility includes a $40.0 million sub-facility for
trade and standby letters of credit availability and a $3.0 million
swingline loan sub-facility. Loans under the revolving credit facility
bear interest at Chase Manhattan Bank's Alternative Base Rate, or
adjusted LIBOR plus 0.5%, which is subject to adjustment arising from
changes in the credit rating of Ethan Allen's senior secured debt. For
fiscal years ended June 30, 1999, 1998 and 1997 the weighted-average
interest rates were 6.17%, 8.13% and 7.37%, respectively. There are no
minimum repayments required during the term of the facility.
During 1997, the Company amended its Credit Agreement which it had
originally entered into during 1995, with Chase Manhattan Bank as agent.
Amendments to the Credit Agreement include: (1) the reduction of the
commitment of senior secured debt under a revolving credit facility to
$100.0 million; (2) reduction of the Eurodollar spread used in
determining adjusted LIBOR which is subject to adjustment arising from
changes in the credit rating of Ethan Allen's senior secured debt or
Fixed Charge Ratio; (3) elimination of a lien on certain fixed assets as
collateral and (4) amendment of certain additional debt and restricted
payment limitations. At June 30, 1999 and 1998, there were no revolving
loans outstanding under the Credit Agreement.
The Credit Agreement is secured by a first lien in respect of Ethan
Allen's accounts receivable, inventory, trademarks, patents and the
Company's shares of Ethan Allen's capital stock. The Company has
guaranteed Ethan Allen's obligation under the Credit Agreement and has
pledged all the outstanding capital stock of Ethan Allen to secure its
guarantee.
The Credit Agreement contains covenants requiring the maintenance of
certain defined tests and ratios and limit the ability of Ethan Allen
and the Company to incur debt, engage in mergers and consolidations,
make restricted payments, make asset sales, make investments and issue
stock. The Credit Agreement requires the Company to meet certain
financial covenants including Consolidated Net Worth, Fixed Charge
Coverage and Leverage ratios. The Company is currently in compliance
with all covenants under the Credit Agreement.
In June 1996, the Company closed on loan commitments in the aggregate
amount of approximately $1.4 million related to the modernization of its
Beecher Falls manufacturing facility. Loans made pursuant to these
commitments bear interest at rates ranging from 3.0% to 5.5% and have
maturities of 10 to 30 years. The loans have a first and second lien in
respect of equipment financed by such loans and a first and second
mortgage interest in respect of a building, the construction of which
was financed by such loans.
Aggregate scheduled maturities of long-term debt for each of the five
fiscal years subsequent to June 30, 1999, and thereafter are as follows
(dollars in thousands):
2000 . . . . . . . . . . . . $ 371
2001 . . . . . . . . . . . . 124
2002 . . . . . . . . . . . . 131
2003 . . . . . . . . . . . . 141
2004 . . . . . . . . . . . . 61
Subsequent to 2004 . . . . . 9,154
(6) Leases
Ethan Allen leases real property and equipment under various operating
and capital lease agreements expiring through the year 2028. Leases
covering retail outlets and equipment generally require, in addition to
stated minimums, contingent rentals based on retail sales and equipment
usage.
31
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) Leases (continued)
Generally, the leases provide for renewal for various periods at
stipulated rates.
Future minimum payments by year and in the aggregate, under the capital
leases and non-cancelable operating leases, with initial or remaining
terms of one year or more consisted of the following at June 30, 1999
(dollars in thousands):
Capital Operating
Fiscal Year Ending June 30: Leases Leases
-------------------------- ------- ---------
2000 $ 420 $ 13,550
2001 337 12,228
2002 15 11,726
2003 8 10,529
2004 - 8,726
Subsequent to 2004 - 31,395
----- --------
Total minimum lease payments 780 $ 88,154
========
Amounts representing interest 86
-----
Present value of future minimum
lease payments 694
Less amounts due in one year 386
-----
Long-term obligations under
capital leases $ 308
=====
The above amounts will be offset by minimum future rentals from
subleases of $17,709,000 on operating leases.
Total rent expense for the fiscal years ended June 30 was as follows
(dollars in thousands):
1999 1998 1997
-------- ------- --------
Basic rentals under operating
leases $ 16,761 $ 14,997 $ 14,578
Contingent rentals under
operating leases 1,509 977 1,028
-------- -------- --------
18,270 15,974 15,606
Less sublease rent 2,812 2,173 1,923
-------- -------- --------
$ 15,458 $ 13,801 $ 13,683
======== ======== ========
(7) Shareholders' Equity
On April 28, 1999, the Company declared a three-for-two stock split to
be distributed on May 21, 1999 to shareholders of record on May 7, 1999.
On August 6, 1997, the Company declared a two-for-one stock split to be
distributed on September 2, 1997 to shareholders of record on August 18,
1997. All related amounts have been retroactively adjusted to reflect
the stock splits.
During fiscal 1997, the Company acquired a number of retail stores and
used 146,224 treasury shares with a fair value of $3.3 million as part
of the consideration of the transaction.
32
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) Shareholders' Equity (continued)
On May 20, 1996, the Board of Directors adopted a Stockholder Rights
Plan and declared a dividend of one Right for each outstanding share of
common stock as of July 10, 1996. Each Right entitles its holder, under
certain circumstances, to purchase one one-hundredth of a share of the
Company's Series C Junior Participating Preferred Stock at a price of
$41.67 on a post split basis. The Rights may not be exercised until 10
days after a person or group acquires 15% or more of the Company's
common stock, or 15 days after the commencement or the announcement of
the intent to commence a tender offer which, if consummated, would
result in a 15% or more ownership of the Company's common stock. Until
then, separate Rights certificates will not be issued, nor will the
Rights be traded separately from the stock.
Should an acquirer become the beneficial owner of 15% of the Company's
common stock, and under certain additional circumstances, the Company's
stockholders (other than the acquirer) would have the right to receive
in lieu of the Series C Junior Participating Preferred Stock, a number
of shares of the Company's common stock, or in stock of the surviving
enterprise if the Company is acquired, having a market value equal to
two times the Purchase Price per share.
The Rights will expire on May 31, 2006, unless redeemed prior to that
date. The redemption price is $0.01 per Right. The Board of Directors
may redeem the Rights at its option any time prior to the announcement
that a person or group has acquired 15% or more of the Company's common
stock.
The Company's authorized capital stock consists of (a) 150,000,000
shares of Common Stock, par value $.01 per share, (b) 600,000 shares of
Class B Common Stock, par value $.01 per share, (c) 1,055,000 shares of
Preferred Stock, par value $.01 per share of which (i) 30,000 shares
have been designated Series A Redeemable Convertible Preferred Stock,
(ii) 30,000 shares have been designated Series B Redeemable Convertible
Preferred Stock, (iii) 155,010 shares have been designated as Series C
Junior Participating Preferred Stock, and (iv) the remaining 839,990
shares may be designated by the Board of Directors with such rights and
preferences as they determine (all such preferred stock, collectively,
the "Preferred Stock"). As of June 30, 1999, no shares of Preferred
Stock or shares of Class B Common Stock were issued or outstanding.
The Company has been authorized by its Board of Directors to repurchase
up to an additional 2,000,000 shares of its Class A Common Stock from
time to time in the open market. During fiscal 1999, the Company
repurchased 1,921,784 shares of its Common Stock for $45.1 million or an
average of $23.49 per share. The Company funded its purchases through
cash from operations and through revolver loan borrowings under the
Credit Agreement.
(8) Earnings per Share
The following table sets forth the calculation of weighted average
shares based upon the provisions of SFAS No. 128 (amounts in thousands):
1999 1998 1997
------- ------ ------
Weighted average common shares
outstanding for basic
calculation 41,278 43,050 43,190
Add: Effect of stock options
and warrants 1,009 1,086 625
------ ------ -------
Weighted average common shares
outstanding, adjusted for
diluted calculation 42,287 44,136 43,815
====== ====== ======
32
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) Employee Stock Plans
The Company has reserved 7,419,699 shares of Common Stock for issuance
pursuant to the Company's stock option and warrant plans as follows:
1992 Stock Option Plan
The 1992 Stock Option Plan provides for the grant of options to key
employees and non-employee directors to purchase shares of Common Stock
that are either qualified or non-qualified under Section 422 of the
Internal Revenue Code, as well as stock appreciation rights on such
options. The awarding of such options is determined by the Compensation
Committee of the Board of Directors after consideration of
recommendations proposed by the Chief Executive Officer. The options
awarded to employees vest 25% per year over a four-year period and are
exercisable at the market value of the Common Stock at the date of
grant. The maximum number of shares of Common Stock reserved for
issuance under the 1992 Stock Option Plan is 5,490,597 shares. Through
June 30, 1998, options covering 138,000 shares, which are exercisable at
prices ranging from $6.00 to $21.17, were awarded to independent
directors and will vest 50% on each of the first two anniversary dates
of the grant. During fiscal year 1999, options to purchase 22,500 shares
at an exercise price of $27.37 per share were granted to the independent
directors. Options to purchase 180,000 shares were awarded to Mr.
Kathwari, Chairman of the Board, Chief Executive Officer, and President
of Ethan Allen Interiors Inc., during fiscal year 1995 and an additional
720,000 options to purchase shares were awarded to Mr. Kathwari during
1996. These options are exercisable at $6.50 and $6.33 per share,
respectively and will vest over seven years commencing with the first
vesting date of July 27, 1994, and each of the next six years. During
fiscal year 1998, Mr. Kathwari was awarded options to purchase 750,000
shares at an exercise price of $21.17 and options to purchase 750,000
shares at an exercise price of $27.52. These options will vest over
three years from the date of grant. Through June 30, 1998, options to
purchase 880,350 shares were issued to other employees with exercise
prices ranging from $6.33 to $32.67 per share. Options to purchase
82,200 shares were issued to certain key employees at an exercise price
of $26.25 per share in fiscal year 1999.
Incentive Stock Option Plan
Pursuant to the Incentive Stock Option Plan, the Company has granted to
members of management options to purchase 829,542 shares of Common Stock
at an exercise price of $5.50 per share. Such options vest twenty
percent per year over a five-year period.
Management Warrants
Warrants to purchase 699,560 shares of Common Stock were granted to
certain key members of management during fiscal 1991 and 1992. The
warrants are currently exercisable at $1.23 per share.
Earn-In Warrants
Earn-In Warrants have been fully earned and 400,000 shares have been
allocated to Ethan Allen's managers and employees. Earn-In warrants were
exercisable at $0.13 per share.
Restricted Stock Award
Commencing in 1994 and for each of the four subsequent years, annual
awards of 30,000 shares of restricted stock were granted to Mr. Kathwari
with the vesting based on performance of the Company's stock price
during the three year period after grant as compared to the Standard and
Poors 500 index. As of June 30, 1999, 60,000 shares have vested.
34
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) Employee Stock Plans (continued)
Stock Unit Award
During fiscal year 1998, pursuant to his New Employment Agreement, the
Company established a book account for Mr. Kathwari, which will be
credited with 21,000 Stock Units as of July 1 of each year, commencing
July 1, 1997, for a total of up to 105,000 Stock Units over the term of
the New Employment Agreement, with an additional 21,000 Stock Units to
be credited in connection with each of the two one-year extensions.
Following the termination of Mr. Kathwari's employment, Mr. Kathwari
will receive shares of Common Stock equal to the number of Stock Units
credited to the account.
Stock option and warrant activity during 1999, 1998 and 1997 is as
follows:
Number of
shares
--------------------------------------------------------------
92 Stock Incentive Management Earn-In
Option Plan Options Warrants Warrants
----------- ------- -------- --------
Options Outstanding
at June 30, 1996 1,520,175 485,277 262,029 211,467
Granted in 1997 209,850 - - -
Exercised in 1997 (91,662) (98,601) (69,177) (202,467)
Canceled in 1997 (26,664) (3,345) (18) (9,000)
--------- ------- ------- --------
Options Outstanding
at June 30, 1997 1,611,699 383,331 192,834 -
Granted in 1998 1,610,400 - - -
Exercised in 1998 (112,629) (55,210) (108,274) -
Canceled in 1998 (6,900) (15) (15) -
--------- ------- -------- -------
Options Outstanding
at June 30, 1998 3,102,570 328,106 84,545 -
Granted in 1999 104,700 - - -
Exercised in 1999 (64,034) (32,247) (37,756) -
Canceled in 1999 (33,761) (2) (2,101) -
--------- ------- ------- -------
Options Outstanding
at June 30, 1999 3,109,475 295,857 44,688 -
========= ======== ======= ========
The following tables summarize information about stock awards
outstanding at June 30, 1999:
Weighted Weighted
Average Average
Range of Number Remaining Exercise
Prices Outstanding Life Prices
------ ----------- -------- --------
1992 Stock Option Plan $ 6.00 to $ 6.50 1,235,825 5.6 yrs $ 6.36
$14.50 to $21.17 978,000 8.1 yrs $19.97
$26.25 to $32.67 895,650 8.4 yrs $27.64
---------
3,109,475
Incentive Options $5.50 295,857 0.5 yrs $5.50
Management Warrants $1.23 44,688 0.5 yrs $1.23
35
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) Employee Stock Plans (continued)
Weighted
Number of Average
Range of Shares Exercise
Prices Exercisable Prices
------ ----------- ------
1992 Stock Option Plan $ 6.00 to $ 6.50 821,460 $ 6.30
$14.50 to $21.17 341,575 $19.80
$26.25 to $32.67 259,450 $27.70
---------
1,422,485
Incentive Options $ 5.50 95,857 $ 5.50
Management Warrants $ 1.23 44,688 $ 1.23
Had compensation costs related to the issuance of stock options under the
Company's 1992 Stock Option Plan been determined based on the estimated fair
value at the grant dates for awards under SFAS No. 123, the Company's net income
end earnings per share for the fiscal years ended June 30, 1999, 1998 and 1997
would have been reduced to the proforma amounts listed below, (dollars in
thousands, except per share data):
1999 1998 1997
------- ------- ------
Net Income
----------
As reported $81,288 $71,146 $48,740
Proforma 77,840 67,945 48,350
Net Income per Basic Share
--------------------------
As reported $ 1.97 $ 1.65 $ 1.13
Proforma 1.89 1.58 1.12
Net Income per Diluted Share
----------------------------
As reported $ 1.92 $ 1.61 $ 1.11
Proforma 1.84 1.54 1.10
The per share weighted average fair value of stock options granted during fiscal
1999, 1998 and 1997 was $11.98, $8.59, and $6.02, respectively. The fair value
of each stock option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions; weighted
average risk-free interest rates of 5.15%, 5.99%, and 6.35% for fiscal 1999,
1998 and 1997, respectively, dividend yield of 0.60%, 0.67%, and 0.83% for
fiscal 1999, 1998 and 1997, respectively, expected volatility of 46.8%, 43.3%,
and 39.8% in fiscal 1999, 1998 and 1997, respectively, and expected lives of
five years for each.
(10) Income Taxes
Total income taxes were allocated as follows (dollars in thousands):
1999 1998 1997
-------- --------- --------
Income from operations $ 51,429 $ 46,582 $ 31,954
Extraordinary charge - (527) -
Stockholders' equity (2,409) (1,389) (669)
-------- ------- --------
$ 49,020 $ 44,666 $ 31,285
======== ======== ========
36
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) Income Taxes (continued)
The income taxes credited to stockholders' equity relate to the tax
benefit arising from the exercise of employee stock options.
Income tax expense attributable to income from operations consists of
the following for the fiscal years ended June 30 (dollars in thousands):
1999 1998 1997
-------- -------- --------
Current:
Federal $ 44,478 $ 37,205 $ 25,434
State 6,971 8,694 5,945
-------- -------- --------
Total current 51,449 45,899 31,379
-------- -------- --------
Deferred:
Federal (17) 625 595
State (3) 58 (20)
-------- -------- --------
Total deferred (20) 683 575
-------- -------- --------
Income tax expense
on income before
extraordinary charge $ 51,429 $ 46,582 $ 31,954
======== ======== ========
The following is a reconciliation of expected income taxes (computed by
applying the Federal statutory rate to income before taxes and
extraordinary charge) to actual income tax expense (dollars in
thousands):
1999 1998 1997
-------- -------- --------
Computed "expected" income
tax expense $ 46,451 $ 41,486 $ 28,243
State income taxes, net of
federal income tax benefit 4,529 4,786 3,163
Goodwill amortization 117 99 99
Other, net 332 211 449
-------- --------- --------
Income tax expense on income
before extraordinary charge $ 51,429 $ 46,582 $ 31,954
======== ======== ========
The significant components of the deferred tax expense (benefit) are as
follows (dollars in thousands):
1999 1998 1997
-------- -------- --------
Deferred tax (benefit) $ (1,503) $ (825) $ (933)
Utilization of net operating
loss carryforwards 1,483 1,508 1,508
--------- -------- ---------
$ (20) $ 683 $ 575
======== ======== =========
The components of the net deferred tax liability as of June 30 are as
follows (dollars in thousands):
1999 1998
-------- ------
Deferred tax assets:
Accounts receivable $ 1,045 $ 901
Inventories 2,430 2,483
Other liabilities and reserves 4,308 3,710
Net operating loss carryforwards 8,737 10,243
-------- --------
Total deferred tax asset 16,520 17,337
-------- --------
Deferred tax liabilities:
Property, plant and equipment 24,335 25,423
Intangible assets other
than goodwill 14,697 15,186
Miscellaneous 2,257 1,517
-------- --------
Total deferred tax liability 41,289 42,126
-------- --------
Net deferred tax liability $ 24,769 $ 24,789
======== ========
37
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) Income Taxes (continued)
The Company has tax operating loss carryforwards of approximately $22.3
million at June 30, 1999, of which $0.5 million expires in 2006, $11.3
million expires in 2007 and $10.5 million expires in 2008. Pursuant to
Section 382 of the Internal Revenue Code, the Company's utilization of
the net operating loss carryforwards are subject to an annual limitation
of approximately $3.9 million.
During fiscal 1997, Ethan Allen received a $5.2 million investment tax
credit from the State of Vermont. The credit may be utilized to offset
80% of current and future years tax liability and may be carried forward
up to 10 years. Ethan Allen does not expect to be able to utilize the
entire credit. The estimated net realizable credit of $2.0 million is
being accounted for under the deferral method, with amortization over
the average life of the related assets.
Management believes that the results of future operations will generate
sufficient taxable income to realize the deferred tax assets.
(11) Employee Retirement Programs
The Ethan Allen Retirement Savings Plan
The Ethan Allen Retirement Savings (the "Plan") is a defined
contribution plan which is offered to substantially all employees of the
Company who have completed both one year and 1,000 hours of service
during the Plan year.
Ethan Allen, may at its discretion, make a matching contribution to the
401(k) portion of the Plan on behalf of each participant, provided the
contribution does not exceed the lesser of 50% of the participant's
contribution or $1,000 per participant per Plan year. Contributions to
the profit sharing portion of the Plan are made at the discretion of
management. Total profit sharing and 401(k) company match expense was
$2,578,356 in 1999, $2,287,549 in 1998, and $1,595,099 in 1997.
Other Retirement Plans and Benefits
Ethan Allen provides additional benefits to selected members of senior
and middle management in the form of previously entered deferred
compensation arrangements and a management incentive program. The total
cost of these benefits was $3,806,708, $3,105,000, and $1,567,000 in
1999, 1998 and 1997, respectively.
(12) Wholly-Owned Subsidiary
The Company owns all of the outstanding stock of Ethan Allen and has no
material assets other than its ownership of Ethan Allen stock and
conducts all significant operating transactions through Ethan Allen. The
Company has guaranteed Ethan Allen's obligation under the Credit
Agreement and has pledged all the outstanding capital stock of Ethan
Allen to secure its guarantee.
The condensed balance sheets of Ethan Allen as of June 30 are as follows
(dollars in thousands):
1999 1998
---- ----
Assets
Current assets $ 209,768 $ 187,677
Non-current assets 357,237 282,874
--------- ---------
Total assets $ 567,005 $ 470,551
========= =========
Liabilities
Current liabilities $ 84,500 $ 72,380
Non-current liabilities 43,841 45,191
--------- ---------
Total liabilities $ 128,341 $ 117,571
========= =========
38
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) Wholly-Owned Subsidiary (continued)
A summary of Ethan Allen's operating activity for each of the years in
the three-year period ended June 30, 1999, is as follows:
1999 1998 1997
-------- -------- --------
Net sales $762,233 $679,321 $571,838
Gross profit 354,999 315,575 248,238
Operating income 133,060 119,845 85,943
Interest expense 1,639 4,245 5,864
Amortization of deferred
financing costs 243 364 563
Income before income
taxes and extraordinary
charge 132,885 118,685 80,787
Net income $ 81,456 $ 71,301 $ 48,833
(13) Litigation
The Company has been named as a potentially responsible party ("PRP")
for the cleanup of three sites currently listed or proposed for
inclusion on the National Priorities List ("NPL") under the
Comprehensive Environmental Response, Compensation and Liability Act of
1980 ("CERCLA"). The Company is also a settling defendant for remedial
design and construction activities at one of the sites. Numerous other
parties have been identified as PRP's at these sites. The Company
believes its share of waste contributed to these sites is small in
relation to the total; however, liability under CERCLA may be joint and
several. The Company has total reserves of $500,000 applicable to these
sites, which the Company believes would be sufficient to cover any
resulting liability. With respect to all of these sites, the Company
believes that it is not a major contributor based on the very small
volume of waste generated by the Company in relation to total volume at
the site. The Company has concluded its involvement with one site and
settled as a de-minimis party. For two of the sites, the remedial
investigation is ongoing. A volume based allocation of responsibility
among the parties has been prepared.
(14) Segment Information
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" which changes the financial
disclosure requirements for operating segments. Segment information
presented for 1998 and 1997 has been restated to reflect the
requirements of the new pronouncement. The Company's reportable segments
are strategic business areas that are managed separately and offer
different products and services. The Company's operations are classified
into two main businesses: wholesale and retail home furnishings. The
wholesale home furnishings business is principally involved in the
manufacture, sale and distribution of home furnishing products to a
network of independently-owned and Ethan Allen-owned stores. The
wholesale business consists of three operating segments; case goods,
upholstery, and home accessories. Wholesale profitability includes the
wholesale gross margin which is earned on wholesale sales to all retail
stores, including Ethan Allen-owned stores.
The retail home furnishings business sells home furnishing products
through a network of Ethan Allen-owned stores. Retail profitability
includes the retail gross margin which is earned based on purchases from
the wholesale business.
39
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) Segment Information (continued)
The accounting policies of the operating segments are the same as those
described in Note 1, Summary of Significant Accounting Policies. The
Company evaluates performance of the respective segments based upon
revenues and operating income. Inter-segment eliminations primarily
comprise the wholesale sales and profit on the transfer of inventory
between segments. Inter-segment eliminations also include items not
allocated to reportable segments.
The following table presents segment information for the fiscal years
ended June 30, 1999, 1998, and 1997 (dollars in thousands):
1999 1998 1997
-------- -------- ---------
Net Sales:
----------
Case Goods $352,203 $328,637 $279,119
Upholstery 174,599 160,058 145,537
Home Accessories 90,130 71,411 59,615
Other (1) 13,712 9,039 4,768
------- -------- ---------
Wholesale Net Sales 630,644 569,145 489,039
Retail 294,701 235,230 175,825
Other (2) 6,392 6,722 5,962
Eliminations (169,504) (131,776) (98,988)
-------- -------- --------
Consolidated Total $762,233 $679,321 $571,838
======== ======== ========
Operating Income:
-----------------
Case Goods $127,514 $120,277 $ 95,111
Upholstery 53,250 51,150 44,435
Home accessories 29,166 22,966 17,979
Unallocated corporate expenses (3) (87,788) (86,371) (74,730)
-------- -------- --------
Wholesale Operating Income 122,142 108,022 82,795
Retail 15,146 13,747 7,419
Other (2) 1,365 1,692 1,239
Eliminations (5,761) (3,771) (5,604)
-------- -------- --------
Consolidated Total $132,892 $119,690 $ 85,849
======== ======== ========
Total Assets:
-------------
Case Goods $107,556 $ 90,403 $ 84,139
Upholstery 30,861 27,820 24,821
Home accessories 7,033 5,521 5,682
Corporate (4) 255,125 245,697 257,744
-------- -------- ---------
Wholesale Total Assets 400,575 369,441 372,386
Retail 97,419 76,365 65,310
Other (2) 5,773 5,096 4,919
Inventory Profit Elimination (5) (23,145) (17,779) (14,831)
-------- -------- --------
Consolidated Total $480,622 $433,123 $427,784
======== ======== ========
Capital Expenditures:
---------------------
Case Goods $ 17,498 $ 8,263 $ 6,768
Upholstery 3,073 1,814 1,530
Home accessories 459 21 229
Other (1) 15,542 16,778 11,359
-------- -------- --------
Wholesale Capital Expenditures 36,572 26,876 19,886
Retail 2,893 2,390 3,338
Other (2) 1,163 399 159
Eliminations - - -
-------- -------- --------
Consolidated Total $ 40,628 $ 29,665 $ 23,383
======== ======== ========
40
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) Segment Information (continued)
(1) The Other category included in the wholesale business consists of
the operating activity for indoor/outdoor furniture and the corporate
holding company.
(2) The Other category includes miscellaneous operating activities.
(3) Unallocated corporate expenses primarily consist of corporate
advertising costs, unreimbursed training costs, system development
costs, and other corporate administrative charges.
(4) Corporate assets primarily include receivables from third party
retailers, finished goods inventory, deferred tax assets, and the
Company's distribution operations.
(5) Inventory profit elimination reflects the embedded wholesale profit
in the Company-owned store inventory that has not been realized. These
profits will be recorded when shipments are made to the retail
customer.
There are 21 independent dealers located abroad. Less than 3% of the
Company's total revenue is derived from sales to these dealers.
(15) Selected Quarterly Financial Data (Unaudited)
Tabulated below are certain data for each quarter of the fiscal years
ended June 30, 1999 and 1998 (dollar amounts in thousands, except per
share data).
Quarter Ended
--------------------------------------------------------------
September 30 December 31 March 31 June 30
------------ ----------- -------- -------
1999 Quarters:
Net Sales $166,226 $193,674 $194,571 $207,762
Gross Profit 77,004 89,756 91,064 97,175
Income before
extraordinary charge 16,209 21,186 21,174 22,719
Net income 16,209 21,186 21,174 22,719
Net income per basic
share 0.39 0.51 0.52 0.56
Net income per diluted
share 0.38 0.50 0.50 0.54
Dividend declared per
common share 0.03 0.03 0.03 0.04
1998 Quarters:
--------------
Net Sales $152,494 $172,743 $171,434 $182,650
Gross Profit 70,766 80,713 80,404 83,692
Income before
extraordinary charge 14,034 19,091 18,793 20,030
Net income 14,034 19,091 17,991 20,030
Net income per basic
share 0.33 0.44 0.41 0.47
Net income per diluted
share 0.32 0.43 0.41 0.45
Dividend declared per
common share 0.02 0.02 0.03 0.03
1997 Quarters:
--------------
Net sales $132,355 $138,330 $144,719 $156,434
Gross profit 54,578 59,921 63,308 70,431
Net income 8,783 12,227 12,849 14,881
Net income per basic
share $ 0.21 $ 0.28 $ 0.30 $ 0.35
Net income per diluted
share 0.20 $ 0.28 $ 0.29 $ 0.34
Dividend declared per
common share 0.01 $ 0.01 $ 0.02 $ 0.02
41
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(16) Subsequent Event
On August 25, 1999, the Company entered into a new $125.0 million
unsecured revolving credit facility with Chase Manhattan Bank as agent.
Proceeds from the Credit Agreement may be used for working capital
purposes or general corporate purposes.
The revolving credit facility includes a sub-facility for trade and
standby letters of credit of $25.0 million and a swingline loan
sub-facility of $3.0 million. Loans under the revolving credit facility
bear interest at Chase Manhattan Bank's Alternative Base Rate ("ABR"),
or adjusted LIBOR plus .625%, which is subject to adjustment arising
from changes in the credit rating of Ethan Allen's senior unsecured
debt. The Credit Agreement provides for the payment of a commitment fee
equal to the ABR per annum on the average daily unused amount of the
revolving credit commitment. The Company is also required to pay a fee
equal to the ABR per annum plus a .125% per annum fee on the average
daily letters of credit outstanding.
The credit facility matures in five years and there are no minimum
repayments required during the term of the facility. The revolving loans
may be borrowed, repaid and reborrowed over the term of the facility
until final maturity.
The revolving credit facility contains various covenants which limit
the ability of the Company and its subsidiaries to incur debt, engage
in mergers and consolidations, make restricted payments, make asset
sales, make investments and issue stock. The Company is required to
meet certain financial covenants including consolidated net worth,
fixed charge coverage and leverage ratios.
42
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
---------------------
No changes in or disagreements with accountants on accounting or
financial disclosure occurred in fiscal years 1999, 1998 and 1997.
43
PART III
Part III is omitted as the Company intends to file with the Commission
within 120 days after the end of the Company's fiscal year a definitive proxy
statement pursuant to Regulation 14A which will involve the election of
directors.
ITEM 10. Directors and Executive Officers of the Registrant
- -------- --------------------------------------------------
See reference to definitive proxy statement under Part III.
ITEM 11. Executive Compensation
- -------- ----------------------
See reference to definitive proxy statement under Part III.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
- -------- --------------------------------------------------------------
See reference to definitive proxy statement under Part III.
ITEM 13. Certain Relationships and Related Transactions
- -------- ----------------------------------------------
See reference to definitive proxy statement under Part III.
44
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- -------- ----------------------------------------------------------------
(a) Listing of Documents
(1) Financial Statements. The Company's Consolidated Financial
Statements included in Item 8 hereof, as required at June 30,
1999 and 1998, and for the years ended June 30, 1999, 1998 and
1997, consist of the following:
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Consolidated Statements of Shareholders' Equity
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules. Financial Statement Schedules of
the Company appended hereto, as required for the years ended
June 30, 1999, 1998 and 1997, consist of the following:
II. Valuation and Qualifying Accounts
The schedules listed in Reg. 210.5-04, except those listed above, have
been omitted because they are not applicable or the required information
is shown in the financial statements or notes thereto.
(3) The following Exhibits are filed as part of this report on Form
10-K:
Exhibit
Number Exhibit
------ -------
*2(a) Agreement and Plan of Merger, dated May 20, 1989
among the Company, Green Mountain Acquisition
Corporation ("Merger Sub"), INTERCO Incorporated,
Interco Subsidiary, Inc. and Ethan Allen
*2(b) Restructuring Agreement, dated as March 1, 1991,
among Green Mountain Holding Corporation, Ethan
Allen, Chemical Bank, General Electric Capital
Corporation, Smith Barney Inc. and the stockholder's
name on the signature page thereof
*2(c) Purchase and Sale Agreement, dated March 28, 1997,
between the Company and Carriage House Interiors of
Colorado, Inc.
*3(a) Restated Certificate of Incorporation for Green
Mountain Holding Corporation
*3(b) Restated and Amended By-Laws of Green Mountain
Holding Corporation
*3(c) Restated Certificate of Incorporation of the Company
*3(c)-1 Certificate of Designation relating to the Series C
Junior Participating Preferred Stock
*3(d) Amended and Restated By-laws of the Company
*3(e) Certificate of Designation relating to the New
Convertible Preferred Stock
*3(e)-1 Certificate of Designation relating to the Series C
Junior Participating Preferred Stock
*3(f) Certificate of Incorporation of Ethan Allen Finance
Corporation
*3(g) By-Laws of Ethan Allen Finance Corporation
*3(h) Certificate of Incorporation of Ethan Allen
Manufacturing Corporation
*3(i) By-Laws of Ethan Allen Manufacturing Corporation
*4(a) First Amendment to Management Non-Qualified Stock
Option Plan
*4(b) Second Amendment to Management Non-Qualified Stock
Option Plan
*4(c) 1992 Stock Option Plan
*4(c)-1 First Amendment to 1992 Stock Option Plan
*4(c)-2 Amended and Restated 1992 Stock Option Plan
45
Exhibit
Number Exhibit
------ -------
*4(d) Management Letter Agreement among the Management
Investors and the Company
*4(e) Management Warrant, issued by the Company to members
of the Management of Ethan Allen
*4(f) Form of Dealer Letter Agreement among Dealer
Investors and the Company
*4(g) Form of Kathwari Warrant, dated June 28, 1989
*4(j) Form of Indenture relating to the Senior Notes
*4(j)-1 First Supplemental Indenture dated as of March 23,
1995 between Ethan Allen and the First National Bank
of Boston for $75,000,000 8-3/4% Senior Notes due
2007
*4(k) Credit Agreement among the Company, Ethan Allen and
Bankers Trust Company
*4(k)-1 Amended Credit Agreement among the Company,
Ethan Allen and Bankers Trust Company
*4(k)-2 110,000,000 Senior Secured Revolving Credit Facility
dated March 10, 1995 between Ethan Allen and Chase
Manhattan Bank
*4(k)-3 Amended and Restated Credit Agreement as of December
4, 1996 between Ethan Allen Inc. and the Chase
Manhattan Bank
*4(k)-4 Credit Agreement, as of August 25, 1999, among the
Company, Ethan Allen and the Chase Manhattan Bank
*4(l) Catawba County Industrial Facilities Revenue Bond
*4(l)-1 Trust Indenture dated as of October 1, 1994 securing
$4,6000,000 Industrial Development Revenue Refunding
Bonds, Ethan Allen Inc. Series 1994 of the Catawba
County Industrial Facilities and Pollution Control
Financing Authority
*4(m) Lease for 2700 Sepulveda Boulevard Torrance,
California
*4(n) Amended and Restated Warrant Agreement, dated March
1, 1991, among Green Mountain Holding Corporation and
First Trust National Association
*4(o) Exchange Notes Warrant Transfer Agreement
*4(p) Warrant (Earned) to purchase shares of the Company's
Common Stock dated March 24, 1993
*4(q) Warrant (Earned-In) to purchase shares of the
Company's Common Stock, dated March 23, 1993
*4(r) Recapitalization Agreement among the Company, General
Electric Capital Corporation, Smith Barney Inc.,
Chemical Fund Investments, Inc., Legend Capital
Group, Inc., Legend Capital International Ltd.,
Castle Harlan, Inc., M. Farooq Kathwari, the Ethan
Allen Retirement Program and other stockholders named
on the signature pages thereto, dated as of March 24,
1993
*4(s) Preferred Stock and Common Stock Subscription
Agreement, dated March 24, 1993, among the Company,
General Electric Capital Corporation, and Smith
Barney Inc.
*4(t) Security Agreement, dated as of March 10, 1995,
between Ethan Allen Inc. and Chase Manhattan Bank
*4(u) Rights Agreement, dated as of July 26, 1996,
between the Company and Harris Trust and Savings Bank
*4(v) Registration Rights Agreement, dated March 28, 1997,
between the Company and Carriage House Interiors of
Colorado, Inc.
*10(b) Employment Agreement, dated June 29, 1989, among Mr.
Kathwari, the Company and Ethan Allen
*10(c) Employment Agreement dated July 27, 1994 among Mr.
Kathwari, the Company and Ethan Allen
*10(d) Restated Directors Indemnification Agreement, dated
March 1993, among the Company and Ethan Allen and
their Directors
*10(e) Registration Rights Agreement, dated March 1993, by
and among Ethan Allen, General Electric Capital
Corporation and Smith Barney Inc.
*10(f) Form of Management Bonus Plan, dated October 30, 1991
*10(g) Ethan Allen Profit Sharing and 401(k) Retirement Plan
*10(h) General Electric Capital Corporation Credit Card
Agreement
*10(i) Employment Agreement dated October 28, 1997 between
Mr. Kathwari and Ethan Allen Interiors, Inc.
46
Exhibit
Number Exhibit
------ -------
*21 List of wholly-owned subsidiaries of the Company
23 Consent of KPMG LLP
27 Financial Data Schedule
- -----------
* Incorporated by reference to the exhibits filed with the Registration
Statement on Form S-1 of the Company and Ethan Allen Inc. filed with the
Securities and Exchange Commission on March 16, 1993 (Commission File No.
33-57216) and the Registration Statement on Form S-3 of the Company filed
with the Securities and Exchange Commission on May 21, 1997 (Commission
File No. 333-37545) and the exhibits filed with the Annual Report on Form
10-K of the Company and Ethan Allen Inc. filed with the Securities and
Exchange Commission on September 24, 1993 (Commission File No. 1-11806),
the Current Report on Form 8-K of the Company and Ethan Allen Inc. filed
with the Securities and Exchange Commission on July 3, 1996 (Commission
File No. 1-11806), the Quarterly Report on Form 10-Q of the Company and
Ethan Allen Inc. filed with the Securities and Exchange Commission on
February 13, 1997 (Commission File No. 1-11806) and the Quarterly Report on
Form 10-Q of the Company and Ethan Allen Inc. filed with the Securities and
Exchange Commission on November 14, 1997 (Commission File No. 1-11806) and
the Registration Statement on Form S-3 of the Company, Ethan Allen, Ethan
Allen Manufacturing Corporation, Ethan Allen Finance Corporation and
Andover Wood Products Inc. filed with the Securities and Exchange
Commission on October 23, 1994 (Commission File No. 33-85578-01) and all
supplements thereto.
47
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
As of and for the Fiscal Years Ended June 30, 1999, 1998 and 1997
(Dollars in thousands)
Balance at Additions Balance at
Beginning Charged to End of
of Period Income Adjustments Period
--------- ------ ----------- ------
Notes and Accounts Receivable:
Allowance for doubtful accounts:
June 30, 1999 $ 2,248 $ 622 $ (239) $ 2,631
June 30, 1998 $ 2,122 $ 312 $ (186) $ 2,248
June 30, 1997 $ 2,975 $ 328 $ (1,181) $ 2,122
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ETHAN ALLEN INTERIORS INC.
(Registrant)
By /s/ M. Farooq Kathwari
-----------------------------------------
Chairman, Chief Executive Officer
and Director
ETHAN ALLEN INC.
(Registrant)
By /s/ M. Farooq Kathwari
-----------------------------------------
Chairman, Chief Executive Officer
and Director
49
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
/s/ M. Farooq Kathwari Chairman, Chief Executive
- ----------------------------- Officer and Director
(M. Farooq Kathwari)
/s/ Clinton A. Clark Director
- -----------------------------
(Clinton A. Clark)
/s/ Kristin Gamble Director
- -----------------------------
(Kristin Gamble)
/s/ Horace McDonell Director
- -----------------------------
(Horace McDonell)
/s/ Edward H. Meyer Director
- -----------------------------
(Edward H. Meyer)
/s/ William W. Sprague Director
- -----------------------------
(William W. Sprague)
/s/ Gerardo Burdo Vice President & Treasurer
- -----------------------------
(Gerardo Burdo)
/s/ Michele Bateson Corporate Controller
- -----------------------------
(Michele Bateson)
50