UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(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, 1998
-----------------------------------------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from_________________________to______________________
Commission file Number 1-11806
---------------------------------------------------------
Ethan Allen Interiors Inc.; Ethan Allen Inc.; Ethan Allen Finance 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
- --------------------------------------------------------------------------------
(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:
Name of Each Exchange
Title of Each Class On Which Registered
---------------------------- -----------------------------
Common Stock, $.01 par value New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
None
- --------------------------------------------------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[x] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
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 28, 1998 was approximately $1,039,610,901. As of August 28,
1998, there were 28,192,838 shares of Common Stock, par value $.01 outstanding.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
The definitive Proxy Statement for the 1998 Annual Shareholders Meeting is
incorporated by reference into Part III hereof.
<PAGE>
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 15
8. Financial Statements and Supplementary Data 21
9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 47
PART III
10. Directors and Executive Officers of the Registrant 48
11. Executive Compensation 48
12. Security Ownership of Certain Beneficial Owners
and Management 48
13. Certain Relationships and Related Transactions 48
PART IV
14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 49
Signatures
<PAGE>
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.
Industry Segments
The Company's operations are classified into two business segments:
wholesale and retail home furnishings. The wholesale home furnishings segment is
principally involved in the manufacture, sale and distribution of home
furnishing products to a network of independently-owned and Ethan Allen-owned
stores. The retail home furnishings segment sells home furnishing products
through a network of Ethan Allen-owned stores. These products consist of case
goods (wood furniture), upholstered products, indoor/outdoor furniture, and home
accessories. Refer to the information appearing in the section captioned
"Segment Information" in the Company's Financial Statements on page 38.
Narrative Description of Business
Ethan Allen manufactures and distributes four 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; (iii) home furnishing
accessories including carpeting and area rugs, lighting products, clocks, wall
decor, bedding ensembles, draperies and decorative accessories: and (iv)
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:
--------------------------
1998 1997 1996
---- ---- ----
Case Goods 58% 58% 58%
Upholstered
Products 28 30 30
Home Furnishing
Accessories 13 12 12
Indoor/Outdoor
Furniture 1 - -
--- --- ---
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 seven
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 1998, the Company's focus was on introducing its Home
and Garden line of indoor/outdoor furniture, and updating its Country French
collection.
Current products are positioned in terms of selection, quality and value
within what management believes are the four most important style categories in
home furnishings today: Formal, American Country, Casual Contemporary, and
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Classic Elegance.
Ethan Allen's products are grouped into collections within these four
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 stores concept
allows for the display of these categories in complete room settings which
utilize the related collections to project the category lifestyle.
The following is a summary of Ethan Allen's major categories of home
furnishing collections:
<TABLE>
<CAPTION>
PRINCIPAL
STYLE HOME FURNISHING CASE GOOD YEAR OF
CATEGORY CHARACTERISTICS COLLECTIONS WOOD TYPE INTRODUCTION
-------- --------------- ----------- --------- ------------
<S> <C> <C> <C> <C>
Formal 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. Regents Park Cherry 1995
American Updated country style. Farmhouse Pine Pine 1988
Country Country Crossings Maple 1993
Country Colors Maple 1995
American Artisan Oak 1998
Casual This style is based American Impressions Cherry 1991
Contemporary on classic contemporary American Dimensions Maple 1992
design elements. Radius Prima 1994
Vera
Classic A relaxed yet sophisticated Collectors Classics Various Various
Elegance mix of furnishings inspired Legacy Collection Maple 1992
by designs found in the British Classics Maple 1995
countryside of Europe. Country French Birch Revised 1998
</TABLE>
Ethan Allen Store Network
Ethan Allen Stores. Ethan Allen's products are sold by a network of 310
Ethan Allen stores which exclusively sell Ethan Allen's products. As of June 30,
1998, Ethan Allen owned and operated 67 stores and independent dealers owned and
operated 223 North American stores and 20 stores abroad. In the past six years,
Ethan Allen has opened over 140 new stores, many of them relocations. Sales to
independent dealer-owned stores accounted for approximately 63% of total net
sales of the Company in fiscal 1998. The ten largest independent dealers own a
total of 44 stores, which accounted for approximately 22% of net orders booked
in fiscal 1998.
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.
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
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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, 1998, this renovation program has been substantially
completed with 273 or 88% 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. In less than a year, thirty-five stores have incorporated or are
currently in the process of incorporating this new interior design. Consumer
response has been strong and Ethan Allen hopes to have its entire retail network
incorporate the new interior look in the next few years.
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, 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 28 weeks per year.
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Ethan Allen Interiors magazine, which features Ethan Allen's home
furnishing collections, is one of Ethan Allen's most important marketing tools.
Over 55 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 based upon the availability of
skilled craftsmen. Management believes that its manufacturing facilities with
reasonable investments are currently well positioned to accommodate sales
growth.
Distribution
Ethan Allen distributes its products primarily through seven 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 sub-contracted to independent
carriers. Approximately 85% of Ethan Allen-owned delivery vehicles are leased
under three to five-year leases.
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 domesti
cally. 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
5
<PAGE>
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. Management believes however, such increases in cost would be
substantially offset by further improvements in manufacturing efficiencies. 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.
6
<PAGE>
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.
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 1997 which ranked Ethan Allen's retail
network 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 41% of all furniture sales in the United States in 1996. The
September 15, 1997 issue of Home Furnishings News noted that Ethan Allen ranked
as the highest home furnishings brand that has a vertically integrated
structure.
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 thirty-four foreign countries and
has applications for registration pending in thirty-seven other foreign
countries. Ethan Allen has 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 on-going program to diligently
police their unauthorized use through institution of legal action.
Backlog and Net Orders Booked
As of June 30, 1998, Ethan Allen had a wholesale backlog of
approximately $68.6 million, compared to a backlog of $43.3 million as of June
30, 1997. The backlog is anticipated to be serviced in the first quarter of
fiscal 1999. 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 three
months and twelve months ended June 30, 1998 were $148.9 million and $585.6
million, respectively, resulting in an increase of 23.7% and 19.3% for the three
months ended June 30, 1998 and for the fiscal year 1998, respectively. 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 7,018 employees as of June 30, 1998. Approximately 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
<PAGE>
Item 2. Properties
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 1,361,500
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 two distribution warehouses, totaling 860,400
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 67 Ethan Allen stores in the United States, of
which 19 stores are owned and 48 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 accessory
divisions are currently operating at approximately 90% 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
<PAGE>
Item 3. Legal Proceedings
Ethan Allen is a party to various legal actions with customers,
employees and others arising in the normal course of its business. Ethan Allen
maintains liability insurance which 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 four 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"). 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.
With respect to the fourth site, a consent decree to finally resolve the matter
with the EPA has been signed.
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.
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Item 4. Submission of Matters to a Vote of Security Holders
The following matters were submitted to security holders of the Company in
fiscal 1998:
o Election of William W. Sprague as Director
o Proposal for ratification of KPMG Peat Marwick LLP as Independent
Auditors for the 1998 fiscal year.
o Proposal to approve amendment to the 1992 Stock Option Plan to
increase by 1,300,000 the authorized shares reserved for use in
connection with the Stock Option Plan.
o Proposal to approve the Incentive Performance Bonus Provisions of
the New Employment Agreement as of July 1, 1997 for M. Farooq
Kathwari, Chairman of the Board, Chief Executive Officer and
President.
o Approval of an Amendment to the Certificate of Incorporation to
increase the number of authorized shares of common stock from
35,000,000 to 70,000,000.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock is traded on the New York Stock Exchange.
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 two-for-one stock split:
Market Price
------------
High Low
---- ---
Fiscal 1998
-----------
Fourth Quarter 64 1/2 45 3/8
Third Quarter 66 5/8 34 5/16
Second Quarter 42 7/8 30
First Quarter 37 13/16 24 25/32
Fiscal 1997
-----------
Fourth Quarter 29 3/16 19 5/8
Third Quarter 25 7/16 18 1/2
Second Quarter 19 1/2 14 11/16
First Quarter 15 3/4 10 1/2
As of August 28, 1998, there were approximately 413 share holders of
record of the Company's Common Stock.
On April 30, 1998, the Company declared a $.04 per common share
dividend for all holders of record on July 10, 1998 and payment date of July 24,
1998. The Company expects to continue to declare quarterly dividends for the
foreseeable future.
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Item 6. Selected Financial Data
The following table sets forth summary consolidated financial
information of the Company for the years and dates indicated (dollars in
thousands, except per share data):
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Net sales $679,321 $571,838 $509,776 $476,111 $437,286
Cost of sales 363,746 323,600 304,650 291,038 266,504
Selling, general and
administrative expenses 195,885 162,389 149,559 137,387 120,569
Expenses related to business
reorganization and write-down
of assets held for sale (1) - - - 1,550 -
------- ------- ------- ------- -------
Operating income 119,690 85,849 55,567 46,136 50,213
Interest and other
miscellaneous income, net 3,449 1,272 1,039 1,766 1,732
------- ------- ------- ------- -------
Income before interest expense,
income taxes, extraordinary
charge and cumulative effect
of accounting change 123,139 87,121 56,606 47,902 51,945
------- ------- ------- ------- -------
Interest expense (2) 4,609 6,427 9,616 11,937 13,327
Income tax expense 46,582 31,954 18,845 13,233(3) 16,047
------- ------- ------- ------- ------
Income before extraordinary
charge and cumulative
effect of accounting
change 71,948 48,740 28,145 22,732 22,571
Extraordinary charge (net of tax) (802)(8) - - (2,073)(4) -
Cumulative effect of
accounting change - - - 1,467(5) -
------- ------- ------- ------- -------
Net income $ 71,146 $ 48,740(6) $ 28,145 $ 22,126 $ 22,571
======= ======= ======= ====== =======
Other information:
Depreciation and amortization $ 15,504 $ 15,848 $ 16,761 $ 16,098 $ 15,859
Per Share Data: (7)
Net income per basic share $ 2.48 $ 1.69 $ 0.98 $ 0.77 $ 0.81(6)
Basic weighted average shares
outstanding 28,700 28,793 28,624 28,664 27,940
Net income per diluted share $ 2.42 $ 1.67 $ 0.97 $ 0.76 $ 0.80(6)
Diluted weighted average
shares outstanding 29,424 29,210 29,128 29,246 28,282
Cash dividends declared $ 0.14 $ 0.10 $ 0.04 $ - $ -
</TABLE>
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<TABLE>
<CAPTION>
Balance Sheet Data (at End of Period):
<S> <C> <C> <C> <C> <C>
Working capital $114,287 $131,421 $109,147 $122,681 $103,709
Property, plant and
equipment, net 188,171 171,406 159,634 161,115 164,615
Total assets 433,123 427,784 395,981 408,288 413,287
Long-term debt including
capital lease obligations 12,496 66,766 82,681 127,032 139,175
Shareholders' equity 314,320 265,434 220,293 193,098 171,166
</TABLE>
Footnotes on following page.
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Notes to Selected Financial Data
(Dollars in thousands)
(1) Included in the $1,550 charge in fiscal 1995 are fees associated with
the business reorganization (refer to note 12 of the Consolidated
Financial Statements) 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. Amount for each fiscal year
is presented as follows:
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
$ 364 $ 490 $ 596 $1,160 $1,384
(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 $110,000 of senior secured debt. As a result of the
repayment of debt, an extraordinary charge of $3,484 in the aggregate,
$2,073 net of tax benefit or $.07 a share (adjusted for the two-for-one
stock split) 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 $2,466 ($1,467 net of tax or
$.05 a share adjusted for the two-for one stock split) which represents
the capitalization of packaging costs into finished goods and retail
inventories.
(6) Net income per common share in fiscal 1994 is adjusted for dividend
requirements on the redeemable preferred stock and for the write-off of
fees in connection with the redemption of the preferred stock.
(7) Amounts have been retroactively adjusted to reflect the two-for-one
stock split on September 2, 1997.
(8) 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 $.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.
14
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion of results of operations and financial condition
is based upon and should be read in conjunction with the Consolidated Financial
Statements of the Company and notes thereto included under Item 8 of this
Report.
Forward-Looking Statements
Management's discussion and analysis of financial condition and results of
operations and other sections of this annual report contain forward-looking
statements relating to future results of the Company. Such forward-looking
statements are identified by use of forward-looking words such as "anticipates",
"believes", "plans", "estimates", "expects", and "intends" or words or phrases
of similar expression. These forward-looking statements are subject to various
assumptions, risks and uncertainties, including but not limited to, changes in
political and economic conditions, demand for the Company's products, acceptance
of new products, technology developments affecting the Company's products and to
those 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
stores and retail sales of Ethan Allen-owned stores as follows (dollars in
millions):
Fiscal Years Ended June 30,
---------------------------
1998 1997 1996
---- ---- ----
Revenues:
Net wholesale sales to
dealer-owned stores $425.5 $374.6 $330.8
Net retail sales of Ethan
Allen-owned stores 235.2 175.8 155.6
Other revenues 18.6 21.4 23.4
------ ------ ------
Total $679.3 $571.8 $509.8
====== ====== ======
Fiscal 1998 Compared to Fiscal 1997
Sales in fiscal 1998 increased by $107.5 million or 18.8% from fiscal 1997
to $679.3 million. Net sales to dealer-owned stores increased by 13.6% to $425.5
million and net retail sales by Ethan Allen-owned stores increased by 33.8% to
$235.2 million. Sales growth has resulted from increased sales from relocated
and new stores, improved effectiveness of existing stores, the full benefit of
the 3.5% wholesale price increase effective January 1, 1997, new product
offerings, and expanded national television advertising. During fiscal 1998, the
Company 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.
The Company's objective is to continue the expansion of both the dealer-owned
and Ethan Allen-owned stores.
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 1998
as compared to fiscal 1997. The number of Ethan Allen-owned stores has increased
to 67 at June 1998 as compared to 65 at June 1997.
15
<PAGE>
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.
Gross profit for fiscal 1998 increased by $67.4 million or 27.1% from
fiscal 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 1997 to $195.9 million or 28.8% of net sales, in fiscal
1998. This increase is attributable to an increase in operating expenses in the
Company's retail division of $19.9 million due to higher sales volume and
additional Ethan Allen-owned stores. Additionally, wholesale operating expenses
increased due to a $10.4 million rise in the Company's advertising expense
primarily due to additional national television costs. The Company implemented a
new national television campaign on January 1, 1997.
Operating income for fiscal 1998 was $119.7 million, an increase of $33.9
million or 39.4%, as compared to fiscal 1997. Wholesale operating income was
$108.0 million in fiscal 1998, an increase of $25.2 million or 30.5% as compared
to the prior year. This increase is attributable to higher sales volumes,
increased gross margins reflecting, in part, improved efficiencies, the full
benefit of the 3.5% price increase effective January 1, 1997 and continued
monitoring of expenses. Retail operating income was $13.7 million in fiscal
1998, an improvement of $6.3 million or 85.3% as compared to fiscal 1997. This
increase is attributable to higher retail sales volume, partially offset by
higher operating expenses related to the higher volumes.
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 1998. The
Company's effective tax rate for fiscal 1998 was 39.3% as compared to 39.6% in
fiscal 1997.
During the year ended June 30, 1998, the Company recorded an $.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 1998, the Company recorded net income of $71.1 million, an
increase of 46.0%, compared to $48.7 million in fiscal 1997.
Fiscal 1997 Compared to Fiscal 1996
Sales in fiscal 1997 increased by $62.0 million or 12.2% from fiscal 1996
to $571.8 million. Net sales to dealer-owned stores increased by 13.2% to $374.6
million and net retail sales by Ethan Allen-owned stores increased by 13.0% to
$175.8 million. Sales growth has resulted from increased sales from relocated
and new stores, improved effectiveness of existing stores, a 3.5% wholesale
price increase effective January 1, 1997, new product offerings, and expanded
national television advertising. During fiscal 1997, the Company opened 22 new
stores, of which 3 stores represented relocations. At June 30, 1997, there were
299 total stores, of which 234 were dealer-owned stores.
16
<PAGE>
The increase in retail sales by Ethan Allen-owned stores is attributable
to a 9.4% or $13.6 million increase in comparable store sales and an increase in
sales generated by newly opened or acquired stores of $11.6 million, partially
offset by closed stores, which generated $5.0 million less sales in fiscal 1997
as compared to fiscal 1996. The number of Ethan Allen-owned stores has increased
to 65 at June 1997 as compared to 60 at June 1996.
Gross profit for fiscal 1997 increased by $43.1 million, or 21.0%, from
fiscal 1996 to $248.2 million. This increase is attributable to a higher sales
volume, combined with an increase in gross margin from 40.2% in fiscal 1996 to
43.4% in fiscal 1997. Gross margins have been favorably impacted by greater
manufacturing efficiencies, improvements in manufacturing technology, a 3.5%
wholesale price increase and lower employee benefit costs. These factors are
partially offset by higher lumber and other raw material cost.
Operating expenses increased $12.8 million from $149.6 million or 29.3% of
net sales in fiscal 1996 to $162.4 million or 28.4% of net sales in fiscal 1997.
This increase is attributable to an increase in operating expenses in the
Company's retail division of $5.3 million, due to higher sales volume, and
additional Ethan Allen-owned stores. Additionally, wholesale operating expenses
increased due to a $7.6 million increase in the Company's advertising expense
due to the expanded national television campaign effective January 1, 1997.
Operating income for fiscal 1997 was $85.8 million, an increase of $30.2
million or 54.5%, as compared to fiscal 1996. Wholesale operating income was
$52.7 million in fiscal 1996. Wholesale operating income was $82.8 million in
fiscal 1997, an increase of $30.1 million or 57.0% as compared to the prior
year. This increase is attributable to higher sales volumes, increased gross
margins reflecting, in part, improved efficiencies, and continued monitoring of
expenses. Retail operating income was $7.4 million in fiscal 1997, an
improvement of $3.3 million as compared to fiscal 1996. This increase is
attributable to higher retail sales volumes, partially offset by higher
operating expenses related to higher volumes.
Interest expense, including the amortization of deferred financing costs,
for fiscal 1997 decreased by $3.2 million to $6.4 million, due to lower debt
balances and lower amortization of deferred financing costs.
Income tax expense of $32.0 million was recorded in fiscal 1997. The
Company's effective tax rate for fiscal 1997 was 39.6% as compared to 40.1% in
fiscal 1996.
In fiscal 1997, the Company recorded net income of $48.7 million, an
increase of 73.1%, compared to $28.1 million in fiscal 1996.
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 $87.6 million for fiscal 1998 as compared to $78.3
million in fiscal 1997 and $61.1 million in fiscal 1996. The 1998 increase is
due principally to an increase in net income of $22.4 million and an increase in
accounts payable of $11.6 million in fiscal 1998 as compared to a $5.1 million
increase in fiscal 1997. These amounts are partially offset by a $6.8 million
increase in inventory in fiscal 1998 as compared to a $2.7 million reduction in
inventory in fiscal 1997, combined with a $3.3 million increase in accounts
receivable in fiscal 1998, as compared to a $1.8 million reduction in accounts
receivable in 1997. Net cash provided by operating activities was also
negatively impacted in fiscal 1998 by a $4.0 million increase in prepaids and
other current assets as compared to a $.7 million reduction in the prepaid and
other current assets balance in fiscal 1997. At June 30, 1998, the Company had
working capital of $114.3 million and a current ratio of 2.55 to 1.
During fiscal 1998, capital spending totaled $29.7 million as compared to
$23.4 million and $13.3 million in fiscal 1997 and 1996, respectively. Capital
expenditures in fiscal 1999 are anticipated to be approximately $50.0 million.
17
<PAGE>
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 expanding manufacturing
capacity, is expected to continue for the foreseeable future.
Total debt outstanding at June 30, 1998 is $13.4 million. At June 30,
1998, there are no outstanding revolving loans under the Credit Agreement. The
Company had $85.4 million available under its revolving credit facility at June
30, 1998. Trade and standby letters of credit of $14.6 million were outstanding
as of June 30, 1998. During fiscal 1998, the Company completed its 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, 1997 and 1996, $.1 million,
$9.5 million and $6.0 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 otherwise, at prices and on terms satisfactory to the
Company. The Company is currently authorized to repurchase a total of 1,500,000
shares. Depending on market prices and other conditions relevant to the Company,
such purchases may be discontinued at any time. During fiscal 1998 and 1997, the
Company purchased 516,064 shares of its stock at an average price of $45.17 per
share and 333,296 shares at an average price of $21.75, respectively.
As of June 30, 1998, aggregate scheduled maturities of long-term debt for
each of the next five fiscal years are $0.2 million, $0.4 million, $0.2 million,
$0.2 million and $0.2 million, respectively. Management believes that its cash
flow from operations, together with its other available sources of liquidity,
will be adequate to make all required payments of principal and interest on its
debt, to permit anticipated capital expenditures and to fund working capital and
other cash requirements.
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, 1998, the Company has approximately $26.0 million of net
operating loss carryovers ("NOL's") for federal income tax purposes. The
Recapitalization 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.
Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 130 "Reporting
Comprehensive Income" and No. 131 "Disclosures about Segments of an Enterprise
and Related Information". SFAS No. 130 requires companies to report
comprehensive income and SFAS No. 131 requires companies to report segment
information as it is used internally to evaluate segment performance. These
statements merely provide for additional disclosure requirements. The Company is
required to adopt these new standards in fiscal 1999.
During 1998, the American Institute of Certified Public Accountants
("AICPA") released its statement of Position No. 98-1 ("SOP 98-1") "Accounting
for the costs of Computer Software Developed or Obtained for Internal Use" and
Statement of Position No. 98-5 ("SOP 98-5") "Reporting on the Costs of Start-Up
Activities", both of which are effective for fiscal years beginning after
December 15, 1998. SOP 98-1 requires that certain costs related to the
development or purchase of internal-use software be capitalized and amortized
18
<PAGE>
over the estimated useful life of the software. SOP 98-1 also requires that the
costs related to the preliminary project stage and the post-implementation stage
of an internal-use computer software development project be expensed as
incurred. SOP 98-5 requires that the costs of start-up activities be expensed as
incurred.
Currently, the Company defers all costs incurred prior to the opening of a new
Ethan Allen-owned store and amortizes these costs over the store's first twelve
months of operations. SOP 98-5 requires companies to report the initial
application of the standard as a cumulative effect of an accounting change. The
Company is not required to adopt these standards until fiscal 2000. Management
believes that the adoption of these standards will not have a material effect on
the Company's 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 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 has set up a redundant environment and has
rolled the date forward to the year 2000 and is testing all of its business
transactions. The testing of these recently implemented applications is expected
to be completed by December 31, 1998.
Concurrently with the aforementioned project, the Company has been
remediating its pre-existing manufacturing systems. This process is complete in
the Company's wood manufacturing facilities. Substantial progress has been made
in the Company's upholstered and accessory manufacturing systems. These systems
are expected to be fully compliant by December 31, 1998.
Investments have been made in the Company's peripheral hardware. These
investments were necessitated by the retail and wholesale systems conversion.
The Company is currently compiling a list of hardware and associated software
that has not been recently replaced. The Company expects all hardware to be
remediated or replaced by June 30, 1999.
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
drafting a formal contingency plan. 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.
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
19
<PAGE>
variability of future interest rates and the Company's future financing
requirements. At June 30, 1998, the Company had no short term debt outstanding
and total long term debt outstanding of $11.5 million. Currently, the Company
has outstanding only one debt instrument (principal amount of $4.6 million)
which has a variable interest rate. Using a yield to maturity analysis and
assuming an increase in the interest rate on this debt of 36 basis points (10%
fluctuation in the rate), interest rate variability on this debt would not have
a material effect on the Company's financial results.
Currently, the Company does not enter into financial instruments transactions
for trading or other speculative purposes or to manage interest rate exposure.
20
<PAGE>
Item 8. Financial Statements and Supplementary Data
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Ethan Allen Interiors Inc.:
We have audited the accompanying consolidated balance sheets of Ethan Allen
Interiors Inc. and Subsidiary (the "Company") as of June 30, 1998 and 1997, 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, 1998.
In connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule listed in the index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these 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, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1998, 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 PEAT MARWICK LLP
Stamford, Connecticut
August 5, 1998
21
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Consolidated Balance Sheets
June 30, 1998 and 1997
(Dollars in thousands)
ASSETS 1998 1997
------ ---- ----
Current assets:
Cash and cash equivalents $ 19,380 $ 21,866
Short term investments -- 17,975
Accounts receivable, less allowance of
$2,022 and $1,903 at June 30, 1998 and
1997, respectively 35,640 32,232
Notes receivable, current portion, less
allowance of $27 and $74 at
June 30, 1998 and 1997, respectively 686 1,056
Inventories (note 2) 114,364 107,525
Prepaid expenses and
other current assets 10,735 6,724
Deferred income taxes (note 9) 7,094 7,353
-------- --------
Total current assets $187,899 $194,731
-------- --------
Property, plant and equipment, net (note 3) 188,171 171,406
Property held for sale 1,129 1,135
Notes receivable, net of current portion,
less allowance of $259 and $145 at
June 30, 1998 and 1997,
respectively 1,790 2,725
Intangibles, net (note 4) 50,773 52,419
Deferred financing costs, net of amortization of
$2,280 and $1,916 at June 30, 1998 and 1997,
respectively 632 1,560
Other assets 2,729 3,808
-------- --------
Total assets $433,123 $427,784
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current maturities of long-term debt and
capital lease obligations (notes 5 and 6) $ 879 $ 1,119
Accounts payable 51,135 41,172
Accrued expenses 5,863 8,036
Accrued compensation and benefits 15,735 12,983
------- -------
Total current liabilities 73,612 63,310
------- -------
Long-term debt, less current maturities (note 5) 11,480 64,066
Obligations under capital leases, less current
maturities (note 6) 1,016 2,700
22
<PAGE>
Other long-term liabilities, principally long-term
compensation, environmental and legal reserves 812 815
Deferred income taxes (note 9) 31,883 31,459
--------- ---------
Total liabilities $ 118,803 $ 162,350
--------- ---------
Commitments and contingencies (notes 5 and 13) -- --
Shareholders' equity (notes 7 and 8):
Class A common stock, par value $.01, 70,000,000
shares authorized, 29,669,470 shares issued
at June 30, 1998, 29,465,400 shares issued
at June 30, 1997 296 294
Preferred stock, par value $.01, 1,055,000 shares
authorized, no shares issued and outstanding
at June 30, 1998 and 1997 -- --
Additional paid-in capital 262,462 257,684
--------- ---------
$ 262,758 257,978
Less:
Treasury stock (at cost) 1,216,096 shares
at June 30, 1998 and 700,032 shares at
June 30, 1997 (33,750) (10,440)
--------- ---------
229,008 247,538
Retained earnings 85,312 17,896
--------- ---------
Total shareholders' equity 314,320 265,434
Total liabilities and shareholders' equity $ 433,123 $ 427,784
========= =========
See accompanying notes to consolidated financial statements.
23
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Consolidated Statements of Operations
Years ended June 30, 1998, 1997, and 1996
(Dollars in thousands, except per share data)
1998 1997 1996
---- ---- ----
Net sales $ 679,321 $ 571,838 $ 509,776
Cost of sales 363,746 323,600 304,650
--------- --------- ---------
Gross profit 315,575 248,238 205,126
Operating expenses:
Selling 110,240 85,927 74,582
General and administrative 85,645 76,462 74,977
--------- --------- ---------
Operating income 119,690 85,849 55,567
--------- --------- ---------
Interest and other miscellaneous
income, net 3,449 1,272 1,039
Interest and related expense:
Interest 4,245 5,864 8,882
Amortization of deferred
financing costs 364 563 734
--------- --------- ---------
4,609 6,427 9,616
--------- --------- ---------
Income before income
taxes and extraordinary
charge 118,530 80,694 46,990
Income tax expense (note 9) 46,582 31,954 18,845
--------- --------- ---------
Income before extraordinary
charge 71,948 48,740 28,145
Extraordinary charge from early
retirement of debt, net of
income tax benefit of $527
(note 5) 802 -- --
--------- --------- ---------
Net income $ 71,146 $ 48,740 $ 28,145
========= ========= =========
Per share data (notes 1 and 7):
Net income per basic share
before extraordinary charge $ 2.51 $ 1.69 $ 0.98
Extraordinary charge (note 5) (0.03) -- --
--------- --------- ---------
Net income per basic share $ 2.48 $ 1.69 $ 0.98
========= ========= =========
Net income per diluted share
before extraordinary charge $ 2.45 $ 1.67 $ 0.97
Extraordinary charge (note 5) (0.03) -- $ --
--------- --------- ---------
Net income per diluted share $ 2.42 $ 1.67 $ 0.97
========= ========= =========
Dividends declared per common share $ 0.14 $ 0.10 $ 0.04
========= ========= =========
See accompanying notes to consolidated financial statements.
24
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended June 30, 1998, 1997 and 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Operating activities:
Net income $ 71,146 $ 48,740 $ 28,145
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 15,868 16,411 17,495
Compensation expense related to
restricted stock award 2,136 891 180
Provision for deferred
income taxes 683 575 622
Extraordinary charge 802 - -
Other non-cash benefit (charges) 77 498 (64)
Change in:
Accounts receivable (3,340) 1,822 1,407
Inventories (6,839) 2,726 6,891
Prepaid and other current assets (4,011) 653 745
Other assets (891) 137 (271)
Accounts payable 11,576 5,099 4,333
Accrued expenses 414 973 1,621
Other long-term liabilities (221) (36) (3)
------- ------- -------
Net cash provided by operating
activities 87,618 78,304 61,068
------- ------- -------
Investing activities:
Proceeds from the disposal of property,
plant, and equipment 827 110 1,216
Proceeds from the disposal of property
held for sale - 1,945 -
Capital expenditures (29,665) (23,383) (13,314)
Payments received on long-term notes
receivable 1,538 1,152 2,559
Disbursements made for long-term notes
receivable (302) (1,077) (935)
Redemption of short term securities 30,270 - -
Investments in short term securities (12,295) (17,975) -
------- ------- -------
Net cash used in investing activities ( 9,627) (39,228) (10,474)
------- ------- -------
Financing activities:
Borrowings on revolving credit facilities - 14,500 56,500
Payments on revolving credit facilities - (21,500) (95,500)
Redemption of Senior Notes (52,543) (9,457) (6,000)
Premium paid on Senior Note redemption (461) - -
Other payments on long-term debt and
capital leases (2,079) (2,134) (1,823)
Other borrowings on long-term debt 111 794 500
Payments to acquire treasury stock (23,310) (7,249) (3,895)
Net proceeds from issuance of common stock 1,255 1,235 1,294
25
<PAGE>
Increase
in deferred financing costs -- (173) (138)
Dividends paid (3,450) (2,304) --
-------- -------- --------
Net cash used in financing activities (80,477) (26,288) (49,062)
-------- -------- --------
Net (decrease)/increase in cash and cash
equivalents (2,486) 12,788 1,532
Cash and cash equivalents
at beginning of year 21,866 9,078 7,546
-------- -------- --------
Cash and cash equivalents
at end of year $ 19,380 $ 21,866 $ 9,078
======== ======== ========
Supplemental disclosure:
Cash payments for:
Income taxes $ 45,382 $ 28,116 $ 12,515
Interest 5,585 6,138 9,073
Non cash transactions:
Additions to obligations under
capitalized leases -- 504 1,107
Acquisition of stores with treasury stock -- 3,327 --
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Consolidated Statements of Shareholders' Equity
Years ended June 30, 1998, 1997 and 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
Retained
Additional
Earnings/
Common Paid-in Notes Treasury (Accumulated
Stock Capital Receivable Stock Deficit) Total
----- ------- ---------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995 288 252,425 (592) (1,476) (57,547) 193,098
Issuance of common
stock 4 1,470 -- -- -- 1,474
Payments received on
notes receivable -- -- 541 -- -- 541
Increase in vested
management warrants
(note 8) -- 304 -- -- -- 304
Purchase of 358,564 shares
of treasury stock -- -- -- (3,895) -- (3,895)
Dividend declared -- (574) -- -- -- (574)
Tax benefit associated with the
exercise of employee stock
options and warrants -- 1,200 -- -- -- 1,200
Net income -- -- -- -- 28,145 28,145
--------- --------- --------- --------- --------- ---------
Balance at June 30, 1996 $ 292 $ 254,825 $ (51) $ (5,371) $ (29,402) $ 220,293
Issuance of common stock 2 2,124 -- -- -- 2,126
Payments received
on notes receivable -- -- 51 -- -- 51
Increase in vested
management warrants
(note 8) -- 71 -- -- -- 71
Purchase of 333,296 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 $ 294 $ 257,684 $ -- $ (10,440) $ 17,896 $ 265,434
Issuance of common stock 2 3,389 -- -- -- 3,391
27
<PAGE>
Purchase of 516,064 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 $ 296 $ 262,462 $ -- $ (33,750) $ 85,312 $ 314,320
========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Basis of Presentation
---------------------
Ethan Allen Interiors Inc. (the "Company") is a Delaware corporation
incorporated on May 25, 1989. The consolidated financial statements
include the accounts of the Company 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 310 retail stores, of which 67 are Ethan
Allen-owned and 243 are independently owned. Retail stores are
primarily located in North America, with 20 located abroad. Ethan Allen
has 21 manufacturing facilities and 3 sawmills throughout the United
States.
Cash Equivalents
----------------
Cash equivalents of $4,999,000 and $9,754,000 at June 30, 1998, and
1997, respectively, consist 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.
Short Term Investments
----------------------
Short term investments consist primarily of certificates of deposits
and debt securities and have been classified as held-to-maturity,
having maturities of one year or less. Because of the short maturity of
the short term investments, the carrying amount approximates fair
value.
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 values. The
Company continues to actively market the properties.
29
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 of 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.
Advertising Costs
-----------------
Advertising costs are expensed when first aired or distributed.
30
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Advertising costs for the fiscal years 1998, 1997, and 1996 were
$40,035,000, $27,712,000 and $21,289,000, respectively. Prepaid
advertising costs for the fiscal years 1998 and 1997 were $3,021,000,
and $1,497,000.
Pre-opening Expenses
--------------------
All costs incurred prior to the opening of a new Ethan Allen-owned
store are deferred and amortized over the respective store's first
twelve months of operations.
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
------------------
Effective December 1997, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 128, "Earnings per Share". The
statement sets forth guidance on the presentation of earnings per share
and requires dual presentation of basic and diluted earnings per share
on the face of the statement of operations. 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. All earnings per share amounts
have been restated to reflect this new standard.
Stock Options
-------------
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.
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.
(2) Inventories
-----------
Inventories at June 30 are summarized as follows (dollars in
thousands):
1998 1997
---- ----
Retail Merchandise $ 38,329 $ 34,478
Finished products 28,931 32,665
Work in process 15,707 13,333
Raw materials 31,397 27,049
------- -------
$114,364 $107,525
======== ========
31
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(3) Property, Plant and Equipment
Property, plant and equipment at June 30 are summarized as follows
(dollars in thousands):
1998 1997
---- ----
Land and improvements $ 26,941 22,624
Buildings and improvements 182,437 168,990
Machinery and equipment 80,294 70,288
-------- -------
289,672 261,902
Less accumulated depreciation (101,501) (90,496)
-------- -------
$ 188,171 $171,406
======== =======
(4) Intangibles
Intangibles at June 30 are summarized as follows (dollars in
thousands):
1998 1997
---- ----
Product technology $ 25,950 $ 25,950
Trademarks 28,200 28,200
Goodwill 11,333 11,333
Other 350 350
-------- --------
65,833 65,833
Less accumulated amortization (15,060) (13,414)
-------- --------
$ 50,773 $ 52,419
======== ========
(5) Borrowings
Long-term debt at June 30 consists of the following (dollars in
thousands):
1998 1997
---- ----
8.75% Senior Notes due 2001 $ -- $52,543
Other Debt:
9.75% mortgage note payable in
monthly installments through 2015
collateralized by Ethan Allen Inn 1,552 1,589
Industrial Revenue Bonds, 4.0% - 8.0%,
maturing at various dates through
2011 8,455 8,455
Other 1,627 1,626
------- -------
Total debt 11,634 64,213
Less current maturities 154 147
------- -------
$11,480 $64,066
======= =======
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 $.8 million or $0.03 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, 1997, and 1996, $.1 million, $9.5
million, and $6.0 million, respectively, of Senior Notes were
repurchased at 102.19%, 101.48%, and 101.25% of face value,
respectively.
32
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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. 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 .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,
1998, 1997 and 1996 the weighted-average interest rates were 8.13%,
7.37% and 6.81%, 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, 1998 and 1997, there were
no outstanding revolving loans 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 contains various customary events of
default. Ethan Allen satisfied the requirements of the covenants in the
Credit Agreement at June 30, 1998.
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 of 3% to 8% and have maturities of 7
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, 1998, are as follows (dollars in
thousands):
1999 . . . . . . . . . . . $ 154
2000 . . . . . . . . . . . 411
2001 . . . . . . . . . . . 168
2002 . . . . . . . . . . . 180
2003 . . . . . . . . . . . 195
33
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(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. Generally, the leases provide for renewal for various periods at
stipulated rates.
Property, plant and equipment include the following amounts for leases
which have been capitalized at June 30 (dollars in thousands):
1998 1997
---- ----
Land and improvements $ 103 $ 103
Buildings and improvements 911 911
Machinery and equipment 11,131 11,131
-------- --------
12,145 12,145
Less accumulated depreciation (11,744) (10,732)
-------- --------
$ 401 $ 1,413
======== ========
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, 1998
(dollars in thousands):
Capital Operating
Fiscal Year Ending June 30: Leases Leases
--------------------------- ------ ------
1999 $ 841 $10,036
2000 635 9,332
2001 425 8,256
2002 33 7,922
2003 12 7,464
Subsequent to 2003 9 24,928
------- -------
Total minimum lease payments 1,955 $67,938
=======
Amounts representing interest 214
Present value of future minimum -------
lease payments 1,741
Less amounts due in one year 725
-------
Long-term obligations under capital leases $ 1,016
=======
The above amounts will be offset by minimum future rentals from
subleases of $13,000,129 on operating leases.
Total rent expense for the fiscal years ended June 30 was as follows
(dollars in thousands):
1998 1997 1996
-------- -------- --------
Basic rentals under operating
leases $ 14,997 $ 14,578 $14,419
Contingent rentals under
operating leases 977 1,028 1,082
-------- ------- ------
15,974 15,606 15,501
34
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Less sublease rent 2,173 1,923 1,782
-------- -------- --------
$ 13,801 $ 13,683 $ 13,719
======== ======== ========
35
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(7) Shareholders' Equity
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 split.
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.
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
$62.50 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.
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) 70,000,000
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, 1998, no shares of Preferred
Stock or shares of Class B Common Stock were issued or outstanding.
36
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Basic and diluted earnings per share are calculated based upon the
provisions of SFAS 128, using the following share data (in thousands):
1998 1997 1996
---- ---- ----
Weighted average common shares
outstanding for basic
calculation 28,700 28,793 28,624
Add: Effect of stock options 724 417 504
------ ------ ------
Weighted average common shares
outstanding, adjusted for
diluted calculation 29,424 29,210 29,128
====== ====== ======
(8) Employee Stock Plans
The Company has reserved 4,946,466 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
3,660,398 shares. Through June 30, 1997, options covering
68,000 shares, which are exercisable at prices ranging from
$9.00 to $9.75, were awarded to independent directors and will
vest 50% on each of the first two anniversary dates of the
grant. During fiscal 1998, options to purchase 24,000 shares
at an exercise price of $31.75 per share were granted to the
independent directors. Options to purchase 120,000 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 480,000
options to purchase shares were awarded to Mr. Kathwari during
1996. These options are exercisable at $9.75 and $9.50 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 1998, Mr. Kathwari was awarded
options to purchase 500,000 shares at an exercise price of
$31.75 and options to purchase 500,000 shares at an exercise
price of $41.28. These options will vest over three years from
the date of grant. Through June 30, 1997, options to purchase
537,300 shares were issued to other employees with exercise
prices ranging from $9.50 to $21.75 per share and options to
purchase 49,600 shares were issued to certain key employees in
fiscal 1998 and are exercisable at prices ranging from $27.31
to $49.00 per share.
Incentive Stock Option Plan
---------------------------
Pursuant to the Incentive Stock Option Plan, the Company has
granted to members of management options to purchase 553,028
shares of Common Stock at an exercise price of $8.25 per
share. Such options vest twenty percent per year over a
five-year period.
37
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Management Warrants
-------------------
Warrants to purchase 466,374 shares of Common Stock were
granted to certain key members of management during fiscal
1991 and 1992. The warrants are currently exercisable at
$1.838 per share.
Earn-In Warrants
----------------
Earn-In Warrants have been fully earned and 266,666 shares
have been allocated to Ethan Allen's managers and employees.
Earn-In warrants were exercisable at $.188 per share.
Restricted Stock Award
----------------------
Commencing in 1994 and for each of the four subsequent years,
annual awards of 20,000 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.
Stock Unit Award
----------------
During fiscal 1998, pursuant to his New Employment Agreement,
the Company has established a book account for Mr. Kathwari,
which will be credited with 14,000 Stock Units as of July 1 of
each year, commencing July 1, 1997, for a total of up to
70,000 Stock Units over the term of the New Employment
Agreement, with an additional 14,000 Stock Units to be
credited in connection with each of the two one-year
extensions. Following the termination of Mr. Kathwari's
employment, Mr. Kathwari will receive shares of Common Stock
equal to the number of Stock Units credited to the account.
Stock option and warrant activity during 1998, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
Number of
shares
----------------------------------------------------
1992 Stock Incentive Management Earn-In
Option Plan Options Warrants Warrants
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Outstanding at June 30, 1995 453,400 479,968 241,558 240,902
---------- ---------- ---------- ----------
Granted in 1996 591,400 -- -- --
Exercised in 1996 (5,900) (134,700) (60,638) (87,992)
Canceled in 1996 (25,450) (21,750) (6,234) (11,932)
---------- ---------- ---------- ----------
Outstanding at June 30, 1996 1,013,450 323,518 174,686 140,978
Granted in 1997 139,900 -- -- --
Exercised in 1997 (61,108) (65,734) (46,118) (134,978)
Canceled in 1997 (17,776) (2,230) (12) (6,000)
---------- ---------- ---------- ----------
Outstanding at June 30, 1997 1,074,466 255,554 128,556 --
Granted in 1998 1,073,600 -- -- --
Exercised in 1998 (75,086) (36,807) (72,183) --
Canceled in 1998 (4,600) (10) (10) --
---------- ---------- ---------- ----------
Outstanding at June 30, 1998 2,068,380 218,737 56,363 --
========== ========== ========== ==========
</TABLE>
38
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The following tables summarize information about stock awards outstanding at
June 30, 1998:
<TABLE>
<CAPTION>
Options Outstanding
Weighted Weighted
Average Average
Range of Number Remaining Exercise
Prices Outstanding Life Prices
--------------- ------------ --------- --------
<S> <C> <C> <C> <C>
1992 Stock Option Plan $9.50 to 9.75 866,180 6.2 yrs. $9.53
$21.75 to 31.75 673,600 9.1 yrs. $29.70
$41.28 to 49.00 528,600 9.2 yrs. $41.69
-------
2,068,380
Incentive Options $8.25 218,737 1.5 yrs. $8.25
Management Warrants $1.838 56,363 1.5 yrs. $1.838
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable
Weighted
Number of Average
Range of Shares Exercise
Prices Exercisable Prices
--------------- ------------ ---------
<S> <C> <C> <C>
1992 Stock Option Plan $9.50 to 9.75 465,548 $9.54
$21.75 to 31.75 23,675 $21.75
-------
489,223
Incentive Options $8.25 218,737 $8.25
Management Warrants $1.838 56,363 $1.838
</TABLE>
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 123, the Company's net income end
earnings per share for the fiscal years ended June 30, 1998, 1997 and 1996 would
have been reduced to the proforma amounts listed below, (dollars in thousands,
except per share data):
1998 1997 1996
------- ------- --------
Net Income
----------
As reported $ 71,146 $ 48,740 $ 28,145
Proforma 67,945 48,350 27,925
Basic Earnings Per Share
------------------------
As reported $ 2.48 $ 1.69 $ 0.98
Proforma 2.37 1.68 0.97
Diluted Earning Per Share
-------------------------
As reported $ 2.42 $ 1.67 $ 0.97
Proforma 2.31 1.66 0.96
The per share weighted average fair value of stock options granted during fiscal
1998, 1997 and 1996 was $13.14, $8.90, and $3.78, 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 5.99%, 6.35% and 6.09% for fiscal 1998, 1997
and 1996, respectively, dividend yield of .5%, 1%, and 1% for fiscal 1998, 1997
and 1996,
39
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
respectively, expected volatility of 43.3%, 39.8% and 38.7% in fiscal 1998, 1997
and 1996, respectively, and expected lives of five years for each.
(9) Income Taxes
Total income taxes were allocated as follows (dollars in thousands):
1998 1997 1996
-------- -------- -------
Income from operations $46,582 $31,954 $18,845
Extraordinary charge (527) - -
Stockholders' equity (1,389) (669) (1,200)
------- ------- -------
$44,666 $31,285 $17,645
======= ======= =======
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):
1998 1997 1996
-------- -------- --------
Current:
Federal $ 37,205 $ 25,434 $ 14,445
State 8,694 5,945 3,778
------ ------- -------
Total current 45,899 31,379 18,223
------ ------- -------
Deferred:
Federal 625 595 517
State 58 (20) 105
------ ------- -------
Total deferred 683 575 622
------ ------- -------
Income tax expense
on income before
extraordinary charge $ 46,582 $ 31,954 $ 18,845
======= ======= =======
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):
1998 1997 1996
-------- -------- --------
Computed "expected"
income tax expense $ 41,486 $ 28,243 $ 16,447
State income taxes,
net of federal income
tax benefit 4,786 3,163 2,016
Goodwill amortization 99 99 99
Other, net 211 449 283
------- ------- ------
Income tax expense
on income before
extraordinary charge $ 46,582 $ 31,954 $ 18,845
======= ======= =======
40
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The significant components of the deferred tax expense (benefit) are as
follows (dollars in thousands):
1998 1997 1996
-------- -------- --------
Deferred tax (benefit)
exclusive of the
component below $ (825) $ (933) $ (885)
Utilization of net operating
loss carryforwards 1,508 1,508 1,507
-------- ------- -------
$ 683 $ 575 $ 622
======== ======= =======
The components of the net deferred tax liability as of June 30 are as
follows (dollars in thousands):
1998 1997
-------- ------
Deferred tax assets:
Accounts receivable $ 901 $ 853
Inventories 2,483 2,774
Other liabilities and reserves 3,710 3,726
Net operating loss carryforwards 10,243 11,750
------ ------
Total deferred tax asset 17,337 19,103
------ ------
Deferred tax liabilities:
Property, plant and equipment 25,423 26,811
Intangible assets other than
goodwill 15,186 15,681
Miscellaneous 1,517 717
------- -------
Total deferred tax liability 42,126 43,209
------- -------
Net deferred tax liability $24,789 $24,106
======= =======
The Company has tax operating loss carryforwards of approximately $26.0
million at June 30, 1998, of which $4.1 million expires in 2006, $11.3
million expires in 2007 and $10.6 million expires in 2008. Pursuant to
Section 382 of the Internal Revenue Code, the Company's utilization of
the net operating loss carryforwards 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
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.
(10) Retirement Programs - Employee Benefits
The Ethan Allen Profit Sharing and 401(k) Retirement Plan
---------------------------------------------------------
The Ethan Allen Profit Sharing and 401(k) Retirement Plan (the "Plan")
was formed effectively July 1, 1994 with the merger of the Retirement
Program of Ethan Allen Inc. ("Retirement Program") into the Ethan Allen
401(k) Employee Savings Plan. As a result of the merger on July 1,
1994, all participant investments in the Retirement Program (except for
the Ethan Allen Restricted stock which was transferred directly) were
liquidated and the proceeds were transferred into the Plan and
allocated to participant accounts at each participant's request.
41
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The Plan 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
$2,287,549 in 1998, $1,595,099 in 1997, and $2,866,000 in 1996.
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 $3,105,000, $1,567,000, and $2,047,000 in
1998, 1997 and 1996, respectively.
(11) 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):
Assets 1998 1997
------ -------- --------
Current assets $187,677 $194,704
Non-current assets 282,874 244,880
-------- --------
Total assets $470,551 $439,584
======== ========
Liabilities
Current liabilities $ 72,380 $ 62,398
Non-current liabilities 45,191 99,040
-------- -------
Total liabilities $117,571 $161,438
======== =======
A summary of Ethan Allen's operating activity for each of the years in
the three-year period ended June 30, 1998, is as follows:
1998 1997 1996
-------- -------- --------
Net sales $679,321 $571,838 $509,776
Gross profit 315,575 248,238 205,126
Operating income 119,845 85,943 55,677
Interest expense 4,245 5,864 8,882
Amortization of deferred
financing costs 364 563 734
Income before income
taxes and extraordinary
charge 118,685 80,787 47,095
Net income $ 71,301 $ 48,833 $ 28,250
42
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(12) Business Reorganization
The Company implemented a business reorganization ("Reorganization")
effective July 1, 1995, which permitted a separation of manufacturing
operations from distribution and store operations. The Company believes
that the separation of manufacturing operations from distribution and
store operations provides for improved measures of performance
including profitability of operations and return on assets, by allowing
the Company to more easily allocate income, expenses and assets to the
separate operations of the Company's business. The Reorganization
consisted principally of the following elements: (i) the contribution
of Ethan Allen's manufacturing equipment to Ethan Allen Manufacturing
Corporation ("EAMC"), which is a wholly owned subsidiary of Ethan Allen
(ii) EAMC entered into operating lease arrangements with Ethan Allen
for real property used in manufacturing operations (iii) the
contribution by Ethan Allen of certain of Ethan Allen's trademarks and
service marks, design patents and related assets to Ethan Allen Finance
Corporation ("EAFC") which is a wholly owned subsidiary of Ethan Allen,
(iv) the full and unconditional guarantee on a senior unsecured basis
of Ethan Allen's obligations under Ethan Allen's Credit Agreement and
Senior Notes by each of EAMC and EAFC and Andover Woods Products Inc.
("Andover"), a wholly owned subsidiary of Ethan Allen (v) the amendment
of the Company's existing guarantee of Ethan Allen's obligations under
the Senior Notes which were repurchased in March 1998 (refer to Note 5)
to include a guarantee of each Guarantor Subsidiary's obligations under
its Subsidiary Guarantee, (vi) the execution of a management agreement
and a service mark licensing agreement between Ethan Allen and EAFC
(vii) the execution of a management agreement and a trademark licensing
agreement between EAMC and EAFC and (viii) the execution of a
manufacturing agreement between Ethan Allen and EAMC. Ethan Allen
continues to own its headquarters building in Danbury, Connecticut, the
real property associated with EAMC's manufacturing operations and the
assets and liabilities associated with the current Ethan Allen-owned
retail operations and Ethan Allen's distribution, service and home
delivery operations.
The summarized historical combined balance sheet information for EAMC,
EAFC, and Andover (the "Guarantor Subsidiaries") at June 30, 1998 and
1997 is as follows (dollars in thousands):
Assets 1998 1997
------ --------- --------
Current assets $ 134,188 $ 85,355
Non-current assets 174,427 168,540
-------- --------
Total assets $ 308,615 $ 253,895
======== ========
Liabilities
-----------
Current liabilities $ 37,040 $ 28,160
Non-current liabilities 16,316 16,893
-------- --------
Total liabilities $ 53,356 $ 45,053
======== ========
43
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Summarized historical combined operating activity of the Guarantor
Subsidiaries for each of the years in the three-year period ended June
30, 1998 is as follows (dollars in thousands):
1998 1997 1996
---- ---- ----
Net sales $ 408,884 $ 357,470 $ 317,563
Gross profit 91,596 75,278 57,227
Operating income 72,537 57,113 39,324
Income before
income taxes 76,871 61,475 43,636
Net income $ 43,430 $ 37,131 $ 26,400
The summarized historical financial information for the Guarantor
Subsidiaries above has been derived from the financial statements of
the Company.
(13) Litigation
The Company has been named as a potentially responsible party ("PRP")
for the cleanup of four 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"). 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. With
respect to the fourth site, a consent decree to finally resolve the
matter with the EPA has been signed.
(14) Segment Information
The Company's operations are classified into two business segments:
wholesale and retail home furnishings. The wholesale home furnishings
segment is principally involved in the manufacture, sale and
distribution of home furnishing products to a network of
independently-owned and Ethan Allen-owned stores. The retail home
furnishings segment sells home furnishing products through a network of
Ethan Allen-owned stores. These products consist of case goods (wood
furniture), upholstered products, home accessories and indoor/outdoor
furniture.
Wholesale profitability includes the wholesale gross margin which is
earned on wholesale sales to all retail stores, including Ethan
Allen-owned stores. Retail profitability includes the retail gross
margin which is earned based on purchases from the wholesale business.
Inter-segment eliminations primarily comprise the wholesale sales and
profit on the transfer of inventory between segments. Operating
earnings by business segment are defined as sales less operating costs
and expenses. Income and expense items, such as corporate operating
expenses, are included in the applicable segment. Identifiable assets
are those assets used exclusively in the operations of each business
segment. Corporate assets principally comprise cash, deferred financing
costs, and deferred income taxes.
44
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The following table shows sales, operating earnings and other financial
information by respective business segment for the fiscal years ended
June 30, 1998, 1997, and 1996 (dollars in thousands):
<TABLE>
<CAPTION>
Inter-Segment
1998 Wholesale Retail Eliminations Consolidated
---- --------- ------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $575,867 $235,230 $(131,776) $679,321
Operating income 109,714 13,747 (3,771) 119,690
Interest and other
income 3,159 290 - 3,449
Interest expense - - ( 4,609)
-------
Income before income
tax expense and
extraordinary charge 118,530
Depreciation and
amortization 13,753 1,751 - 15,504
Identifiable assets 336,210 69,807 - 406,017
Cash 19,380
Deferred income taxes 7,094
Deferred financing costs 632
-------
Total assets 433,123
Capital expenditures 14,895 14,770 - 29,665
Inter-Segment
1997 Wholesale Retail Eliminations Consolidated
---- --------- ------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $495,001 $175,825 $ (98,988) $571,838
Operating income 84,034 7,419 (5,604) 85,849
Interest and other
income 974 298 - 1,272
Interest expense - - - (6,427)
-------
Income before income
tax expense 80,694
Depreciation and
amortization 14,235 1,613 - 15,848
Identifiable assets 335,260 61,745 - 397,005
Cash 21,866
Deferred income taxes 7,353
Deferred financing costs 1,560
-------
Total assets 427,784
Capital expenditures 9,990 13,393 - 23,383
Inter-Segment
1996 Wholesale Retail Eliminations Consolidated
---- --------- ------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $433,886 $155,601 $(79,711) $509,776
Operating income 53,745 4,059 (2,237) 55,567
Interest and other
income 663 376 - 1,039
Interest expense - - - (9,616)
-------
Income before income tax
expense and extraordinary
charge 46,990
Depreciation and
amortization 15,199 1,562 - 16,761
Identifiable assets 327,371 48,350 - 375,721
Cash 9,078
Deferred income taxes 9,305
Deferred financing costs 1,877
-------
Total assets 395,981
Capital expenditures 7,421 5,893 - 13,314
</TABLE>
45
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(15) Selected Quarterly Financial Data (Unaudited)
Tabulated below are certain data for each quarter of the fiscal years
ended June 30, 1998 and 1997 (dollar amounts in thousands, except per
share data).
Quarter Ended
----------------------------------------------
September 30 December 31 March 31 June 30
------------ ----------- -------- -------
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 $ 0.49 $ 0.66 $ 0.62 $ 0.70
Net income per diluted
share $ 0.48 $ 0.65 $ 0.61 $ 0.68
Dividend declared per
common share $ 0.03 $ 0.03 $ 0.04 $ 0.04
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 $ 0.31 $ 0.42 $ 0.45 $ 0.52
Net income per diluted
share $ 0.30 $ 0.42 $ 0.44 $ 0.51
Dividend declared per
common share $ 0.02 $ 0.02 $ 0.03 $ 0.03
46
<PAGE>
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 1998, 1997 and 1996.
47
<PAGE>
PART III
--------
Part III is omitted as the Company intends to file with the Commission
within 120 days after the end of the Company's fiscal year a definitive proxy
statement pursuant to Regulation 14A which will involve the election of
directors.
ITEM 10. Directors and Executive Officers of the Registrant
- -------- --------------------------------------------------
See reference to definitive proxy statement under Part III.
ITEM 11. Executive Compensation
- -------- ----------------------
See reference to definitive proxy statement under Part III.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
- -------- --------------------------------------------------------------
See reference to definitive proxy statement under Part III.
ITEM 13. Certain Relationships and Related Transactions
- -------- ----------------------------------------------
See reference to definitive proxy statement under Part III.
48
<PAGE>
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, 1998
and 1997, and for the years ended June 30, 1998, 1997 and 1996,
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, 1998, 1997 and 1996, 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 stockholders named 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
49
<PAGE>
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(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.
*21 List of wholly-owned subsidiaries of the Company
*23(a) Consent of KPMG Peat Marwick LLP.
50
<PAGE>
*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.
51
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
As of and for the Fiscal Years Ended June 30, 1998, 1997 and 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
Balance at Additions Balance at
Beginning Charged to End of
of Period Income Adjustments Period
--------- ------ ----------- ----------
Receivables:
Allowance for doubtful accounts:
<S> <C> <C> <C> <C>
June 30, 1998 $ 2,122 $ 312 $ (186) $ 2,248
June 30, 1997 $ 2,975 $ 328 $ (1,181) $ 2,122
June 30, 1996 $ 4,567 $ 47 $ (1,639) $ 2,975
</TABLE>
52
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ETHAN ALLEN INTERIORS INC.
(Registrant)
By /s/ M. Farooq Kathwari
----------------------------------
Chairman, Chief Executive Officer
and Director
ETHAN ALLEN INC.
(Registrant)
By /s/ M. Farooq Kathwari
----------------------------------
Chairman, Chief Executive Officer
and Director
53
<PAGE>
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 &
- ---------------------------------- Corporate Controller
(Gerardo Burdo)
/s/ Mary Beth Walsh Assistant Corporate
- ---------------------------------- Controller
(Mary Beth Walsh)
54
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains financial information extracted from the consolidated
financial statements of Ethan Allen Interiors, Inc. for the year ended June
30,1998 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0000896156
<NAME> ETHAN ALLEN INTERIORS INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1 <F1>
<CASH> 19,380
<SECURITIES> 0
<RECEIVABLES> 35,640 <F2>
<ALLOWANCES> 0
<INVENTORY> 114,364
<CURRENT-ASSETS> 187,899 <F3>
<PP&E> 289,672
<DEPRECIATION> 101,501
<TOTAL-ASSETS> 433,123 <F4>
<CURRENT-LIABILITIES> 73,612 <F5>
<BONDS> 12,496 <F6>
0
0 <F7>
<COMMON> 296 <F8>
<OTHER-SE> 314,024 <F9>
<TOTAL-LIABILITY-AND-EQUITY> 433,123
<SALES> 679,321
<TOTAL-REVENUES> 679,321 <F10>
<CGS> 363,746
<TOTAL-COSTS> 363,746
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,609 <F11>
<INCOME-PRETAX> 118,530
<INCOME-TAX> 46,582
<INCOME-CONTINUING> 71,948
<DISCONTINUED> 0
<EXTRAORDINARY> 802 <F12>
<CHANGES> 0
<NET-INCOME> 71,146
<EPS-PRIMARY> 2.48 <F13>
<EPS-DILUTED> 2.42 <F14>
<FN>
<F1>
Not applicable. All figures for Ethan Allen Interiors, Inc. are in U.S. dollars.
<F2>
Figure for receivables is net of allowances for doubtful accounts of $2,022.
<F3>
Includes prepaid expenses of $10,735.
<F4>
Includes goodwill of $8,783 (net of amortization).
<F5>
Includes current portion of long-term debt of $879 as of June 30, 1998.
<F6>
Includes long-term debt of $11,480 (net of the current portion of long-term
debt) and capitalized leases of $1,016 (net of the current portion of
capitalized leases). As of June 30, 1998, outstanding long-term debt of Ethan
Allen on a consolidated basis consisted of (i) 9.75% mortgage note of $1,513
(net of current portion), (ii) industrial revenue bonds of $8,455, and (iii)
other of $1,512 (net of current portion). For a description of the terms of
Ethan Allen's long-term debt, see Footnote 5 to Ethan Allen's fiscal 1998
Consolidated Financial Statements.
<F7>
As of June 30, 1998, Ethan Allen had no shares of preferred stock, $.01 par
value per share, outstanding. For a description of Ethan Allen's preferred stock
as of June 30, 1998, see Ethan Allen's fiscal 1998 Consolidated Statement of
Stockholders' Equity and Footnote 8 to Ethan Allen's fiscal 1998 Notes to
Consolidated Financial Statements.
<F8>
As of June 30, 1998, Ethan Allen had 29,669,470 shares of common stock, $.01 par
value per share, issued. For a description of Ethan Allen's common stock as of
June 30, 1998, see Ethan Allen's fiscal 1998 Consolidated Statement of
Stockholders' Equity and Footnote 8 of Ethan Allen's fiscal 1998 Consolidated
Financial Statements.
<F9>
Consists of $262,462 of additional paid in capital, $85,312 of retained
earnings, and ($33,750) of treasury stock.
<F10>
For the year ended June 30, 1998, Ethan Allen's revenues were derived from sales
generated by its wholesale and retail operations.
<F11>
Consists of $4,245 of interest expense and $364 of amortization of deferred
costs during fiscal 1998.
<F12>
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 $.8 million or $0.03 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.
<F13>
Basic earnings per share for the year June 30, 1998, was $2.48. For information
on Ethan Allen's earnings per share, see Ethan Allen's Consolidated Financial
Statements for the year ended June 30, 1998.
<F14>
Diluted earnings per share for the year ended June 30, 1998, was $2.42.
</FN>
</TABLE>
