SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
-------------------------------------------------
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: 1-11692
---------------------------------------------------------
Ethan Allen Interiors Inc.; Ethan Allen Inc.;
Ethan Allen Marketing Corporation; Ethan Allen Manufacturing
Corporation; Andover Wood Products Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1275288
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer ID No.)
incorporation or organization)
Ethan Allen Drive, Danbury, Connecticut 06811
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(203) 743-8000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former
fiscal year, if changed since last report)
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
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
[ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
40,885,175 at March 31, 1999
<PAGE>
ETHAN ALLEN INTERIORS INC.
AND SUBSIDIARY
INDEX
PAGE
Part I. Financial Information:
Item 1. Consolidated Financial Statements as of;
March 31, 1999 (unaudited) and June 30, 1998
and for the three and nine months ended
March 31, 1999 (unaudited):
Consolidated Balance Sheets 2
Consolidated Statements of Operations 3
Consolidated Statements of Cash Flows 4
Consolidated Statements of Shareholders'
Equity 5
Notes to Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 10
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 14
Part II. Other Information: 15
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of
Security Holders
Item 5. Other Information
Item 6. Exhibits and reports on Form 8-K
Signatures
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31,
1999 June 30,
(unaudited) 1998
----------- -----------
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 13,236 $ 19,380
Accounts receivable, less allowances of $2,478
and $2,022 at March 31, 1999 and June 30, 1998 34,244 35,640
Notes receivable, current portion, less
allowances of $97 and $27 at March 31, 1999
and June 30, 1998, respectively 657 686
Inventories (note 3) 141,446 114,364
Prepaid expenses and other current assets 16,382 10,735
Deferred income taxes 8,202 7,094
--------- ---------
Total current assets 214,167 187,899
--------- ---------
Property, plant and equipment, net 207,445 188,171
Property held for sale 484 1,129
Notes receivable, net of current portion, less
allowances of $94 and $259 at March 31, 1999
and June 30, 1998, respectively 1,529 1,790
Intangibles, net of amortization of $16,330 and
$15,060 at March 31, 1999 and June 30, 1998,
respectively 51,925 50,773
Deferred financing costs, net of amortization of
$2,466 and $2,280 at March 31, 1999
and June 30, 1998, respectively 446 632
Other assets 2,997 2,729
--------- ---------
Total assets $ 478,993 $ 433,123
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and
capital lease obligations $ 15,395 $ 879
Accounts payable 66,671 51,135
Accrued expenses 8,459 5,863
Accrued compensation and benefits 15,874 15,735
--------- ---------
Total current liabilities 106,399 73,612
--------- ---------
Long-term debt, less current maturities 9,641 11,480
Obligations under capital leases, less current
maturities 308 1,016
Other long-term liabilities, principally long-term
compensation, environmental and legal reserves 1,408 812
Deferred income taxes 32,482 31,883
--------- ---------
Total liabilities 150,238 118,803
--------- ---------
Commitments and Contingencies (note 4)
Shareholders' equity (note 5):
Class A common stock, par value $.01, 70,000,000
shares authorized, 44,619,918 and 44,504,205
shares issued and outstanding at March 31, 1999
and June 30, 1998, respectively 446 445
Additional paid-in capital 266,226 262,313
--------- ---------
266,672 262,758
Less: Treasury stock (at cost) 3,734,744 shares
at March 31, 1999 and 1,824,144 shares at
June 30, 1998, respectively (78,528) (33,750)
--------- ---------
188,144 229,008
Retained earnings 140,611 85,312
---------
Total shareholders' equity 328,755 314,320
--------- ---------
Total liabilities and shareholders' equity $ 478,993 $ 433,123
========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended March 31, Ended March 31,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 194,571 $ 171,434 $ 554,471 $ 496,671
Cost of sales 103,507 91,030 296,647 264,788
--------- --------- --------- ---------
Gross profit 91,064 80,404 257,824 231,883
Operating expenses:
Selling 31,887 28,338 90,351 81,232
General and administrative 24,456 20,743 71,335 63,255
--------- --------- --------- ---------
Operating income 34,721 31,323 96,138 87,396
Interest and other miscellaneous
income, net 320 1,084 1,138 2,886
Interest and related expense:
Interest expense 484 1,166 1,374 3,960
Amortization of deferred
financing costs 71 95 186 306
--------- --------- --------- ---------
555 1,261 1,560 4,266
--------- --------- --------- ---------
Income before income taxes and
extraordinary charge 34,486 31,146 95,716 86,016
Income tax expense 13,312 12,353 37,147 34,098
--------- --------- --------- ---------
Income before extraordinary
charge 21,174 18,793 58,569 51,918
Extraordinary charge, net of tax (note 6) -- 802 -- 802
--------- --------- --------- ---------
Net income $ 21,174 $ 17,991 $ 58,569 $ 51,116
========= ========= ========= =========
Per share data (note 7):
Basic earnings per common share:
- --------------------------------
Net income before extraordinary
charge $ 0.52 $ 0.44 $ 1.41 $ 1.20
Extraordinary charge, net of tax -- (0.02) -- (0.02)
--------- --------- --------- ---------
Net income $ 0.52 $ 0.42 $ 1.41 $ 1.18
========= ========= ========= =========
Basic weighted average common
shares outstanding 40,986 43,107 41,403 43,097
Diluted earnings per common share:
- ----------------------------------
Net income before extraordinary
charge $ 0.50 $ 0.42 $ 1.38 $ 1.18
Extraordinary charge, net of tax -- (0.02) -- (0.02)
--------- --------- --------- ---------
Net income $ 0.50 $ 0.40 $ 1.38 $ 1.16
========= ========= ========= =========
Diluted weighted average common
shares outstanding 42,015 44,393 42,368 44,135
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Nine Months
Ended March 31,
1999 1998
--------- ---------
Operating activities:
Net income $ 58,569 $ 51,116
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 11,893 11,945
Provision for deferred income taxes (509) 408
Other non-cash charges 205 56
Extraordinary charge, net of tax -- 341
Change in:
Accounts receivable 1,300 (1,218)
Inventories (23,099) (8,239)
Prepaid and other current assets (5,647) (2,424)
Other assets (1,078) (865)
Accounts payable 17,945 10,886
Accrued expenses 2,796 313
Other long-term liabilities 596 (37)
--------- ---------
Net cash provided by operating activities 62,971 62,282
--------- ---------
Investing activities:
Proceeds from the disposal of property, plant
and equipment 135 812
Capital expenditures (28,591) (20,431)
Acquisition of business - inventory (3,983) --
Excess of purchase price over cost (2,423) --
Payments received on long-term notes receivable 639 1,352
Disbursements made for long-term notes receivable (255) (77)
Redemptions of short term securities -- 30,270
Investments in short term securities -- (12,295)
--------- ---------
Net cash used in investing activities (34,478) (369)
--------- ---------
Financing activities:
Payments on revolving credit facilities (56,000) --
Borrowings on revolving credit facilities 70,500 --
Redemption of senior notes -- (52,543)
Other long-term borrowings 18 111
Payments on long-term debt, including current
maturities (1,639) (112)
Payments under capital leases (911) (1,226)
Issuance of capital stock 1,504 2,636
Payment of dividends (3,331) (2,587)
Payments to acquire treasury stock (44,778) (5,149)
--------- ---------
Net cash used in financing activities (34,637) (58,870)
--------- ---------
Net (decrease) increase in cash and cash
equivalents (6,144) 3,043
Cash and cash equivalents at
beginning of period 19,380 21,866
--------- ---------
Cash and cash equivalents at
at end of period $ 13,236 $ 24,909
========= =========
See accompanying notes to consolidated financial statements.
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Consolidated Statements of Shareholders' Equity
Nine Months Ended March 31, 1999
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Additional
Common Paid-in Treasury Retained
Stock Capital Stock Earnings Total
--------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1998 $ 445 $ 262,313 $ (33,750) $ 85,312 $ 314,320
Issuance of common stock 1 1,504 -- -- 1,505
Purchase of 1,910,600 shares
of treasury stock -- -- (44,778) -- (44,778)
Tax benefit associated with the
exercise of employee options
and warrants -- 2,409 -- -- 2,409
Dividends on common stock -- -- -- (3,270) (3,270)
Net income -- -- -- 58,569 58,569
--------- --------- --------- --------- ---------
Balance at March 31, 1999 $ 446 $ 266,226 $ (78,528) $ 140,611 $ 328,755
========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
(1) 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 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.
(2) Interim Financial Presentation
All significant intercompany accounts and transactions have been eliminated
in the consolidated financial statements.
In the opinion of the Company, all adjustments, consisting only of normal
recurring accruals necessary for fair presentation, have been included in
the financial statements. The results of operations for the three and nine
months ended March 31, 1999, are not necessarily indicative of results for
the fiscal year. It is suggested that the interim consolidated financial
statements be read in conjunction with the consolidated financial
statements and notes included in the Company's Annual Report on From 10-K
for the year ended June 30, 1998.
(3) Inventories
Inventories at March 31, 1999 and June 30, 1998 are summarized as follows
(dollars in thousands):
March 31, June 30,
1999 1998
-------- --------
Retail merchandise $ 48,162 $ 38,329
Finished products 41,791 28,931
Work in process 16,303 15,707
Raw materials 35,190 31,397
-------- --------
$141,446 $114,364
======== ========
(4) Contingencies
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. Liability under
CERCLA may be joint and several. Included in Other long-term liabilities is
approximately $500,000 applicable to these sites, which the Company
believes is 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 two sites and has settled as a de-minimis party for both
sites. For one 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. The Company believes there
may be some delay in resolution due to objections of a non-signatory to the
consent decree.
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
(5) Stockholder's Equity
Since July 1, 1998, 86,463 shares of common stock of the Company have been
issued to employees upon exercise of non-qualified stock options and
warrants under the Company's stock option plan. The increase in additional
paid-in capital from June 30, 1998 to March 1999 represents i) the
difference between the exercise price for the stock options or warrants and
the par value of the common stock issued to option holders of $0.5 million,
ii) the income tax benefit of $2.4 million realized on the exercise of
these stock options and warrants and iii) $1.0 million recorded for
restricted stock during the period.
The Company has been authorized by its Board of Directors to repurchase its
common stock from time to time, either directly or through agents, in the
open market at prices and on terms satisfactory to the Company. The
Company's common stock repurchases are recorded as treasury stock and
result in a reduction of stockholder's equity. As of March 31, 1999, the
Company had repurchased 3,734,744 shares of its common stock for $78.5
million.
(6) Extraordinary Charge
On March 15, 1998, the Company completed its optional early redemption of
all of its then outstanding $52.4 million 8-3/4% Senior Notes, due on March
15, 2001, at 101.458% of par value. As a result of the early redemption, an
extraordinary charge of $0.8 million, net of tax, or $0.02 per diluted
share, was recorded. The extraordinary charge included the write-off of
unamortized deferred financing costs and the premium related to the early
redemption.
(7) Earnings Per Share
Basic and diluted earnings per share are calculated based on the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings
Per Share", using the following share data (dollars in thousands, except
per share data):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
March 31, March 31,
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Weighted average common
shares outstanding for
basic calculation 40,986 43,107 41,403 43,097
Add: Effect of stock options
and warrants 1,029 1,286 965 1,038
------ ------ ------ ------
Weighted average common
shares outstanding for
diluted calculation 42,015 44,393 42,368 44,135
====== ====== ====== ======
</TABLE>
(8) 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 furnishings products to a network of independently-owned and Ethan
Allen-owned stores. The retail home furnishings segment sells home
furnishings 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.
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
(8) Segment Information (continued)
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 margin which is earned
based on purchases from the wholesale business. Inter-segment elimination
primarily comprises 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.
The following table presents revenue and operating earnings by respective
business segment for the three and nine months ended March 31, 1999 and
1998 (in thousands):
<TABLE>
<CAPTION>
Three Months ended March 31, 1999:
Inter-Segment
Wholesale Retail Elimination Consolidated
--------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net sales $162,290 $ 75,957 $(43,676) $194,571
Operating income 32,440 4,101 (1,820) 34,721
Interest and other income 266 54 -- 320
Interest expense 372 112 -- 484
Amortization deferred
financing costs 52 19 -- 71
Income before income tax
expense $ 32,282 $ 4,024 $ (1,820) $ 34,486
Three Months ended March 31, 1998:
Inter-Segment
Wholesale Retail Elimination Consolidated
--------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net sales $147,225 $ 58,373 $(34,164) $171,434
Operating income 29,225 3,527 (1,429) 31,323
Interest and other income 1,032 52 -- 1,084
Interest expense 885 281 -- 1,166
Amortization deferred
financing costs 70 25 -- 95
Income before income tax
expense and extraordinary
charge $ 29,302 $ 3,273 $ (1,429) $ 31,146
Nine Months ended March 31, 1999:
Inter-Segment
Wholesale Retail Elimination Consolidated
--------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 463,799 $ 213,401 $(122,729) $ 554,471
Operating income 89,514 10,757 (4,133) 96,138
Interest and other income 921 217 -- 1,138
Interest expense 1,059 315 -- 1,374
Amortization deferred
financing costs 137 49 -- 186
Income before income
tax expense $ 89,239 $ 10,610 $ (4,133) $ 95,716
Nine Months ended March 31, 1998:
Inter-Segment
Wholesale Retail Elimination Consolidated
--------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net sales $421,463 $172,009 $(96,801) $496,671
Operating income 80,247 10,236 (3,087) 87,396
Interest and other income 2,718 168 -- 2,886
Interest expense 2,994 966 -- 3,960
Amortization deferred
financing costs 225 81 -- 306
Income before income tax
expense and extraordinary
charge $ 79,746 $ 9,357 $ (3,087) $ 86,016
</TABLE>
<PAGE>
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
9) Wholly-Owned Subsidiary
The Company owns all of the outstanding stock of Ethan Allen, 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 obligations under its Credit Agreement and has
pledged all the outstanding capital stock of Ethan Allen to secure its
guarantee under its Credit Agreement.
The condensed balance sheets of Ethan Allen as of March 31, 1999 and June
30, 1998 are as follows (dollars in thousands):
March 31, June 30,
1999 1998
-------- --------
Assets
-----------
Current assets $214,106 $187,677
Non-current assets 350,056 282,874
-------- --------
Total assets $564,162 $470,551
======== ========
Liabilities
-----------
Current liabilities $105,213 $ 72,380
Non-current liabilities 43,839 45,191
-------- --------
Total liabilities $149,052 $117,571
======== ========
A summary of Ethan Allen's operating activity for the three and nine months
ended March 31, 1999 and 1998, are as follows (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended March 31, Ended March 31,
1999 1998 1999 1998
-------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net sales $194,571 $171,434 $554,471 $496,671
Gross profit 91,064 80,404 257,824 231,883
Operating income 34,765 31,373 96,253 87,487
Interest expense 484 1,166 1,374 3,960
Amortization of deferred
financing costs 71 95 186 306
Income before income
tax expense and
extraordinary charge 34,530 31,196 95,831 86,107
Extraordinary charge
(net of tax) -- 802 -- 802
Net income $ 21,218 $ 18,041 $ 58,684 $ 51,207
</TABLE>
10) Subsequent Event
On April 28, 1999 the Board of Directors authorized a three-for-two stock
split to shareholders on record as of May 7, 1999, whereby additional
common shares arising from the stock split will be distributed on May 21,
1999. All references in the consolidated financial statements referring to
shares, share prices, per share amounts and stock plans have been adjusted
retroactively for the three-for-two stock split.
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussions set forth in this form 10-Q should be read in conjunction
with the financial information included herein and the Company's Annual Report
on Form 10-K for the year ended June 30, 1998. Management's discussion and
analysis of financial condition and results of operations and other sections of
this 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, risk and
uncertainties, including but not limited to, changes in political and economic
conditions, demand for the Company's products, acceptance of new products,
conditions in the various real estate markets where the Company does business,
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.
Results of Operations
Ethan Allen's revenues are primarily comprised of wholesale sales to
dealer-owned stores and retail sales of Ethan Allen-owned stores as follows
(dollars in millions):
Three Months Nine Months
Ended Ended
March 31, March 31,
1999 1998 1999 1998
-------- -------- -------- --------
Revenues:
---------------------------
Net wholesale sales to
dealer-owned stores $ 116.6 $ 108.7 $ 334.1 $ 310.7
Net retail sales of Ethan
Allen-owned stores 76.0 58.3 213.4 172.0
Other revenues 2.0 4.4 7.0 14.0
-------- -------- -------- --------
Total $ 194.6 $ 171.4 $ 554.5 $ 496.7
======== ======== ======== ========
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
Sales for the three months ended March 31, 1999 increased by $23.2 million
or 13.5%, over the corresponding period in the prior year to $194.6 million. Net
wholesale sales to dealer-owned stores increased by 7.3% to $116.6 million, and
net retail sales by Ethan Allen-owned stores increased by 30.4% to $76.0
million. The increase in wholesale sales to dealer-owned stores has resulted
from increased distribution through new and relocated stores, improved
effectiveness of existing stores, and new product offerings. As of March 31,
1999, there were a total of 314 stores, of which 242 were dealer-owned stores,
as compared to a total of 309 stores, of which 243 were dealer-owned, at March
31, 1998.
The increase in retail sales by Ethan Allen-owned stores of $17.7 million
is attributable to a 14.4% or $7.9 million, increase in comparable store sales,
and an increase in sales generated by newly opened or acquired stores of $11.9
million, partially offset by closed stores, which generated $2.1 million less in
sales for the three months ended March 31, 1999, as compared to the three months
ended March 31, 1998. The number of Ethan Allen-owned stores has increased to 72
at March 31, 1999, as compared to 66 at March 31, 1998.
<PAGE>
Comparable stores are stores that, if newly opened, have been open for at
least 15 months. Ethan Allen's retail business is principally special order and
minimal net sales 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 thirteenth full month of Ethan Allen-owned
operations.
Gross profit for the three months ended March 31, 1999 increased by $10.7
million or 13.3% from the three months ended March 31, 1998 to $91.1 million due
to higher sales volume, while gross margin declined slightly to 46.8% from 46.9%
for the three months ended March 31, 1998. This decline reflects lower price
points on newer product offerings and increased material and labor costs, offset
in part by the leverage benefit of higher volumes, a higher proportionate level
of retail sales to total sales and gains in manufacturing efficiencies.
Selling, general and administrative expenses increased $7.3 million from
$49.1 million or 28.6% of sales in the three months ended March 31, 1998 to
$56.3 million or 29.0% of sales in the three months ended March 31, 1999. The
increase in operating expenses for the quarter is attributable to an increase in
the retail division's expenses resulting from new store openings and higher
sales volumes from existing Ethan Allen-owned stores.
Operating income for the three months ended March 31, 1999 was $34.7
million, or 17.8% of sales, as compared to $31.3 million, or 18.3% of sales in
the prior year quarter. Wholesale operating income was $32.4 million for the
three months ended March 31, 1999, compared to $29.2 million in the
corresponding prior year quarter. Higher sales favorably impacted wholesale
operating income. Retail operating income was $4.1 million for the three months
ended March 31, 1999, compared to $3.5 million from the corresponding period in
the prior year.
Interest expense, including the amortization of deferred financing costs,
for the three months ended March 31, 1999, decreased by $0.7 million to $0.6
million from $1.3 million in the three months ended March 31, 1998. The lower
interest expense reflects lower debt balances outstanding resulting from the
early retirement of the Company's 8-3/4% Senior Notes due 2001 in March of 1998.
In connection with the early retirement of the 8-3/4% Senior Notes, the
Company recorded an $0.8 million extraordinary charge (net of tax benefit)
during the quarter ended March 31, 1998. The extraordinary charge included the
write-off of unamortized deferred financing costs and the premium paid related
to the early redemption.
Income tax expense of $13.3 million or an effective tax rate of 38.6%, was
recorded for the three months ended March 31, 1999 compared to $12.4 million or
an effective tax rate of 39.7%, in the prior year quarter.
For the three months ended March 31, 1999, the Company reported net income
of $21.2 million, as compared to net income for the three months ended March 31,
1998, of $18.0 million.
Nine Months Ended March 31, 1999 Compared to Nine Months Ended March 31, 1998
Sales for the nine months ended March 31, 1999 increased by $57.8 million
or 11.6%, to $554.5 million. Net wholesale sales to dealer-owned stores
increased by $23.4 million or 7.5% to $334.1 million and net retail sales by
Ethan Allen-owned stores increased by $41.4 million or 24.1% to $213.4 million.
The increase in wholesale sales to dealer-owned stores has resulted from
increased distribution through new and relocated stores, a selective wholesale
price increase on orders taken after December 1, 1998, increased effectiveness
of existing stores and new product offerings.
<PAGE>
The increase in retail sales by Ethan Allen-owned stores is attributable to
a 15.2% or $24.5 million increase in comparable store sales, and an increase in
sales generated by newly opened or acquired stores of $21.9 million, partially
offset by closed stores which generated $5.0 million less in sales in the nine
months ended March 31, 1999, as compared to the nine months ended March 31,
1998.
Gross profit for the nine months ended March 31, 1999, increased by $25.9
million from the nine months ended March 31, 1998 to $257.8 million. This
increase is primarily attributable to higher sales volume. Gross margin
decreased to 46.5% for the nine months ended March 31, 1999 from 46.7% in the
prior period. The decline in gross margin is due to higher material and labor
costs and lower price points on newer product offerings, offset in part by the
leverage benefit of higher volumes, a higher proportionate level of retail sales
to total sales and gains in manufacturing efficiencies.
Selling, general and administrative expenses increased $17.2 million from
$144.5 million or 29.1% of sales, in the fiscal 1998 period to $161.7 million or
29.2% of sales in the fiscal 1999 period. This increase is mainly attributable
to an increase in the number of Ethan Allen-owned stores and an increase in
operating expenses of the Company's retail division resulting from higher sales
volumes.
Operating income for the nine months ended March 31, 1999 was $96.1 million
or 17.3% of sales, as compared to $87.4 million or 17.6% of sales for the nine
months ended March 31, 1998. Wholesale operating income was $89.5 million for
the nine months ended March 31, 1999, an increase of $9.3 million or 11.6% as
compared to the prior year. This increase is attributable to higher sales
volumes, partially offset by higher selling, general and administrative
expenses. Retail operating income was $10.8 million for the nine months ended
March 31, 1999, as compared to $10.2 million for the nine months ended March 31,
1998.
Interest expense, including the amortization of deferred financing costs,
for the nine months ended March 31, 1999 decreased by $2.7 million to $1.6
million from $4.3 million in the prior year period, due to lower debt balances
outstanding resulting from the early retirement of the Company's 8-3/4% Senior
Notes due 2001 in March of 1998.
Income tax expense of $37.1 million or an effective rate of 38.8%, was
recorded for the nine months ended March 31, 1999 as compared to $34.1 million
or an effective rate of 39.6%, in the prior year period.
For the nine months ended March 31, 1999, the Company recorded net income
of $58.6 million, compared to net income for the nine months ended March 31,
1998 of $51.1 million.
Financial Condition and Liquidity
Principal sources of liquidity are cash flow from operations and additional
borrowing capacity under the revolving credit facility. Through March 1999, the
Company used cash provided by operating activities of $63.0 million, net
borrowings of $14.5 million from its revolving credit facility, proceeds of $1.5
million from common stock issuances, payments of $0.4 million received on
long-term notes, $0.1 million of proceeds from asset sales, and a decrease in
cash balances of $6.1 million to fund acquisitions of treasury stock of $44.8
million, capital expenditures of $28.6 million, store acquisitions of $6.4
million, dividend payments of $3.3 million, and payments of $2.5 million on
long-term debt and capital leases.
<PAGE>
During the nine months ended March 31, 1999, capital spending totaled $28.6
million as compared to $20.4 million in the nine months ended March 31, 1998.
Capital expenditures for fiscal year 1999 are expected to be approximately $40.0
million. The Company anticipates that cash from operations will be sufficient to
fund this level of capital expenditures. The current level of anticipated
capital spending, which is attributable primarily to manufacturing efficiency
improvements and new store openings, is expected to continue for the foreseeable
future.
Total debt outstanding at March 31, 1999 was $25.3 million. There were
$14.5 million of revolving loans outstanding under the Credit Agreement and
$15.4 million of trade and standby letters of credit outstanding as of March 31,
1999.
As of March 31, 1999, aggregate scheduled maturities of long-term debt for
each of the next five fiscal years are $0.4 million, $0.1 million, $0.1 million,
$0.1 million and $0.1 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. At March 31, 1999, the Company had working capital of
$107.8 million and a current ratio of 2.01 to 1.
The Company may 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. Depending on
market prices and other conditions relevant to the Company, such purchases may
be discontinued at any time. During the nine months ended March 31, 1999, the
Company purchased 1,910,600 shares of its stock on the open market at an average
price of $23.44 per share, after share adjustment for the stock split.
On March 15, 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.
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 June 30, 1999. To date, all programs tested are compliant.
<PAGE>
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 June 30, 1999.
Investments have been made in the Company's peripheral hardware. These
investments were necessitated by the retail and wholesale systems conversion.
The Company has compiled 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 finalizing 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 3. Quantitative and Qualitative Disclosure about Market Risk
The Company is exposed to interest rate risk primarily through its
borrowing activities. The Company's policy has been to utilize United States
dollar denominated borrowings to fund its working capital and investment needs.
Short term debt, if required, is used to meet working capital requirements and
long term debt is generally used to finance long term investments. There is
inherent roll-over risk for borrowings as they mature and are renewed at current
market rates. The extent of this risk is not quantifiable or predictable because
of the variability of future interest rates and the Company's future financing
requirements. 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.
<PAGE>
PART II. OTHER INFORMATION
Item 1. - Legal Proceedings
There has been no change to matters discussed in Business-Legal Proceedings
in the Company's Form 10-K as filed with the Securities and Exchange Commission
on September 18, 1998.
Item 2. - Changes in Securities and Use of Proceeds
There has been no change to matters discussed in Description and Ownership
of Capital Stock in the Company's Form 10-K as filed with the Securities and
Exchange Commission on September 18, 1998.
Item 3. - Defaults Upon Senior Securities
None.
Item 4. - Submission of Matters to a Vote of Security Holders
None.
Item 5. - Other Information
On April 28, 1999, the Board of Directors authorized a three-for-two stock
split to shareholders on record as of May 7, 1999, whereby additional common
shares arising from the stock split will be distributed on May 21, 1999. All
references in this Form 10-Q referring to shares, share prices, per share
amounts and stock plans have been adjusted retroactively for the three-for-two
stock split.
Item 6. - Exhibits and Reports on Form 8-K
3(c)-2. Certificate of Amendment to Restated Certificate of Incorporation
as of August 5, 1997
3(c)-3. Second Certificate of Amendment to Restated Certificate of
Incorporation as of March 27, 1998
3(c)-4. Third Certificate of Amendment to Restated Certificate of
Incorporation as of April 28, 1999
27. Edgar Financial Data Schedule
<PAGE>
SIGNATURES
Pursuant to the requirements 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)
DATE: 5/13/99 BY: /s/ M. Farooq Kathwari
-----------------------------------
M. Farooq Kathwari
Chairman of the Board
President and Chief
Executive Officer
(Principal Executive Officer)
DATE: 5/13/99 BY: /s/ Gerardo Burdo
-----------------------------------
Gerardo Burdo
Vice President / Treasurer
(Principal Financial Officer)
DATE: 5/13/99 BY: /s/ Michele Bateson
-----------------------------------
Michele Bateson
Corporate Controller
(Principal Accounting Officer)
EXHIBIT 3(c)-2
CERTIFICATE OF AMENDMENT
OF THE
RESTATED CERTIFICATE OF INCORPORATION
OF
ETHAN ALLEN INTERIORS INC.
The undersigned, being the President and Chief Executive Officer and
Secretary, respectively, of Ethan Allen Interiors Inc., a Delaware corporation
(the "Company"), pursuant to Section 242 of the General Corporation Law of the
State of Delaware (the "GCL"), do hereby certify as follows:
1. At a duly called meeting of the board of directors of the Company,
the board adopted resolutions to amend the Company's Restated Certificate of
Incorporation (the "Amending Resolutions"), a declared said Amending Resolutions
to be advisable, and directed that the Amending Resolutions be considered at the
Company's Annual Meeting of Stockholders held on November 18, 1994 (the "Annual
Meeting");
2. At the Annual Meeting, called and held upon notice in accordance
with Section 222 of the GCL, the requisite number of shares of the Company's
common stock, par value $.01 per share, voted in favor of the Amending
Resolutions; and
3. The Amending Resolutions were duly adopted in accordance with
Section 242 of the GCL.
NOW, THEREFORE, to effect the Amending Resolutions, the first paragraph
of Article FOURTH of the Company's Restated Certificate of Incorporation shall
be deleted in its entirety and replaced as follows:
"FOURTH. The total number of shares of capital stock which the
Corporation shall have authority to issue is 36,655,000 shares,
consisting of 35,000,000 shares of Common Stock, par value $.01 per
share (the "Common Stock"), 600,000 shares of Class B Common Stock, par
value $.01 per share (the "Class B Common Stock"), 1,055,000 shares of
Preferred Stock, par value $0.01 per share (the "Preferred Stock").
Except as specifically set forth herein, the remaining paragraphs of Article
FOURTH of the Company's Restated Certificate of Incorporation shall not be
amended, modified or otherwise altered.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Certificate of
Amendment of the Restated Certificate of Incorporation to be signed by M. Farooq
Kathwari, its President and Chief Executive Officer, and attested by Roxanne
Khazarian, its Secretary, this 14th day of March, 1995.
ETHAN ALLEN INTERIORS INC.
By: /s/ M. Farooq Kathwari
Name: M. Farooq Kathwari
Title: President and
Chief Executive Officer
ATTEST:
/s/ Roxanne Khazarian
Name: Roxanne Khazarian
Title: Secretary
EXHIBIT 3(c)-3
SECOND
CERTIFICATE OF AMENDMENT
OF THE
RESTATED CERTIFICATE OF INCORPORATION
OF
ETHAN ALLEN INTERIORS INC.
The undersigned, being the President and Chief Executive Officer and
Secretary, respectively, of Ethan Allen Interiors Inc., a Delaware corporation
(the "Company"), pursuant to Section 242 of the General Corporation Law of the
State of Delaware (the "GCL"), do hereby certify as follows:
1. At a duly called meeting of the board of directors of the Company,
the board adopted resolutions to amend the Company's Restated Certificate of
Incorporation (the "Amending Resolutions"), a declared said Amending Resolutions
to be advisable, and directed that the Amending Resolutions be considered at the
Company's Annual Meeting of stockholders held on November 18, 1997 (the "Annual
Meeting");
2. At the Annual Meeting, called and held upon notice in accordance
with Section 222 of the GCL, the requisite number of shares of the Company's
common stock, par value $.01 per share, voted in favor of the Amending
Resolutions; and
3. The Amending Resolutions were duly adopted in accordance with
Section 242 of the GCL.
NOW, THEREFORE, to effect the Amending Resolutions, the first paragraph
of Article FOURTH of the Company's Amended and Restated Certificate of
Incorporation shall be deleted in its entirety and replaced as follows:
"FOURTH. The total number of shares of capital stock which the
Corporation shall have authority to issue is 71,655,000 shares,
consisting of 70,000,000 shares of Common Stock, par value $.01 per
share (the "Common Stock"), 600,000 shares of Class B Common Stock, par
value $.01 per share (the "Class B Common Stock"), 1,055,000 shares of
Preferred Stock, par value $0.01 per share (the "Preferred Stock").
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Certificate of
Amendment of the Restated Certificate of Incorporation to be signed by M. Farooq
Kathwari, its President and Chief Executive Officer, and attested by Roxanne
Khazarian, its Secretary, this 17th day of March, 1998.
ETHAN ALLEN INTERIORS INC.
By: /s/ M. Farooq Kathwari
Name: M. Farooq Kathwari
Title: President and
Chief Executive Officer
ATTEST:
/s/ Roxanne Khazarian
Name: Roxanne Khazarian
Title: Secretary
Exhibit 3(c)-4
THIRD
CERTIFICATE OF AMENDMENT
OF THE
RESTATED CERTIFICATE OF INCORPORATION
OF
ETHAN ALLEN INTERIORS INC.
The undersigned, being the President and Chief Executive Officer and
Secretary, respectively, of Ethan Allen Interiors Inc., a Delaware corporation
(the "Company"), pursuant to Section 242 of the General Corporation Law of the
State of Delaware (the "GCL"), do hereby certify as follows:
1. At a duly called meeting of the board of directors of the Company,
the board adopted resolutions to amend the Company's Restated Certificate of
Incorporation (the "Amending Resolutions"), declared said Amending Resolutions
to be advisable, and directed that the Amending Resolutions be considered at the
Company's Annual Meeting of Stockholders held on November 16, 1998 (the "Annual
Meeting");
2. At the Annual Meeting, called and held upon notice in accordance
with Section 222 of the GCL, the requisite number of shares of the Company's
common stock, par value $.01 per share, voted in favor of the Amending
Resolutions; and
3. The Amending Resolutions were duly adopted in accordance with
Section 242 of the GCL.
NOW, THEREFORE, to effect the Amending Resolutions, the first paragraph
of Article FOURTH of the Company's Second Certificate of Amendment of the
Restated Certificate of Incorporation shall be deleted in its entirety and
replaced as follows:
"FOURTH. The total number of shares of capital stock which the
Corporation shall have authority to issue is 151,655,000 shares,
consisting of 150,000,000 shares of Common Stock, par value $.01 per
share (the "Common Stock"), 600,000 shares of Class B Common Stock, par
value $.01 per share (the "Class B Common Stock"), and 1,055,000 shares
of Preferred Stock, par value $0.01 per share (the "Preferred Stock").
Except as specifically set forth herein, the remaining paragraphs of Article
FOURTH of the Company's Restated Certificate on Incorporation shall not be
amended, modified or otherwise altered.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Certificate of
Amendment of the Restated Certificate of Incorporation to be signed by M. Farooq
Kathwari, its President and Chief Executive Officer, and attested by Roxanne
Khazarian, its Secretary, this 27th day of April, 1999.
ETHAN ALLEN INTERIORS INC.
By: /s/ M. Farooq Kathwari
Name: M. Farooq Kathwari
Title: President and Chief
Executive Officer
ATTEST:
/s/ Roxanne Khazarian
Name: Roxanne Khazarian
Title: Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of Ethan Allen Interiors, Inc. for the quarter
ended March 31, 1999 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> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1 <F1>
<CASH> 13,236
<SECURITIES> 0
<RECEIVABLES> 34,244 <F2>
<ALLOWANCES> 0
<INVENTORY> 141,446
<CURRENT-ASSETS> 214,167 <F3>
<PP&E> 315,901
<DEPRECIATION> 108,456
<TOTAL-ASSETS> 478,993 <F4>
<CURRENT-LIABILITIES> 106,399 <F5>
<BONDS> 9,949 <F6>
0
0 <F7>
<COMMON> 446 <F8>
<OTHER-SE> 328,309 <F9>
<TOTAL-LIABILITY-AND-EQUITY> 478,993
<SALES> 194,571
<TOTAL-REVENUES> 194,571 <F10>
<CGS> 103,507
<TOTAL-COSTS> 103,507
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 555 <F11>
<INCOME-PRETAX> 34,486
<INCOME-TAX> 13,312
<INCOME-CONTINUING> 21,174
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,174
<EPS-PRIMARY> 0.52 <F12>
<EPS-DILUTED> 0.50 <F13>
<FN>
<F1> Not applicable. All figures for Ethan Allen Interiors, Inc. are in U.S.
dollars.
<F2> Figure for receivables is net of allances for doubtful accounts of
$2,478.
<F3> Includes prepaid expenses of $16,382.
<F4> Includes goodwill of $10,957 (net of amortization).
<F5> Includes current portion of long-term debt of $15,395 as of March 31,
1999.
<F6> Includes long-term debt of $9,641 (net of the current portion of
long-term debt) and capitalized leases of $308 (net of the current
portion of capitalized leases). As of march 31, 1999 outstanding
long-term debt of Ethan Allen on a consolidated basis consisted of (i)
industrial revenue bonds of $8,455, and (ii) other of $1,540 (net of
current portion). For a description of the terms of Ethan Allen's
long-term debt, see the Company's Consolidated Financial Statements and
Notes to the Annual Report on Form 10-K for fiscal year ended June 30,
1998.
<F7> Not applicable.
<F8> As of March 31, 1999, Ethan Allen had 44,619,918 shares of common stock,
$0.1 par value per share, issued. For a description of Ethan Allen's
common stock, see the Company's Consolidated Statement of Stockholders'
Equity and Consolidated Financial Statements in the Annual Report on Form
10-K for fiscal year 1998.
<F9> Consists of $266,226 of additional paid in capital, $140,611 of retained
earnings, and ($78,528) of treasury stock.
<F10> For the quarter ended March 31, 1999, Ethan Allen's revenues were derived
from sales generated by its wholesale and retail operations.
<F11> Consists of $484 of interest expense and $71 of deferred amortization
costs.
<F12> Basic earnings per share for the quarter ended March 31, 1999, was $0.52.
<F13> Diluted earnings per share for the quarter ended March 31, 1999, was
$0.50.
</FN>
</TABLE>
