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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended June 30, 2000
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or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
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Commission file Number 1-11692
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Ethan Allen Interiors Inc.; Ethan Allen Inc.; Ethan Allen Marketing Corporation;
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Ethan Allen Manufacturing Corporation
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(Exact name of registrant as specified in its charter)
Delaware 06-1275288
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Ethan Allen Drive, Danbury, CT 06811
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 743-8000
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Securities registered pursuant to Section 12(b) of the Act: None
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Name of Each Exchange
Title of Each Class On Which Registered
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Common Stock, $.01 par value New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
None
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [x]Yes [ ]No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [x]
The aggregate market value of Common Stock, par value $.01 per share held by
non-affiliates (based upon the closing sale price on the New York Stock
Exchange) on August 18, 2000 was approximately $1,157,464,476. As of August 18,
2000, there were 39,403,046 shares of Common Stock, par value $.01 outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: The definitive Proxy Statement for the 2000
Annual Shareholders Meeting is incorporated by reference into Part III hereof.
TABLE OF CONTENTS
Item Page
- ---- ----
PART I
1. Business 2
2. Properties 10
3. Legal Proceedings 11
4. Submission of Matters to a Vote of Security Holders 12
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters 13
6. Selected Financial Data 14
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
7A. Quantitative and Qualitative Disclosure About Market Risk 22
8. Financial Statements and Supplementary Data 24
9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure 43
PART III
10. Directors and Executive Officers of the Registrant 44
11. Executive Compensation 44
12. Security Ownership of Certain Beneficial Owners and Management 44
13. Certain Relationships and Related Transactions 44
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 45
Signatures
1
PART I
ITEM 1. BUSINESS
Ethan Allen Interiors Inc. ("Ethan Allen"; together with its direct and
indirect subsidiaries, the "Company") is a leading manufacturer and retailer of
quality home furnishings, offering a full range of furniture products and home
accessories. The Company was founded in 1932 and has sold products since 1937
under the Ethan Allen brand name. Ethan Allen is a Delaware corporation,
incorporated in 1989.
Ethan Allen manufactures and distributes three principal product lines: (i)
case goods (wood furnishings), consisting primarily of bedroom and dining room
furniture, wall units and tables; (ii) upholstered products, consisting
primarily of sofas, loveseats, chairs, and recliners; and (iii) home accessories
and other, including carpeting and area rugs, lighting, clocks, wall decor,
bedding ensembles, draperies, decorative accessories and indoor\outdoor
furnishings. The following table shows the approximate percentage of wholesale
sales of home furnishing products for each of these product lines during the
three most recent fiscal years:
Fiscal Year Ended June 30:
-------------------------
2000 1999 1998
---- ---- ----
Case Goods 56% 57% 58%
Upholstered Products 29 28 28
Home Accessories and Other 15 15 14
--- --- ---
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 nine
major home furnishing collections and has discontinued five home furnishing
collections in the past five years. In addition, Ethan Allen continuously
refines and enhances its product lines by adding and redesigning pieces within
each collection. This allows the Company to maintain focused product lines
within each style category, which enhances efficiencies. In fiscal year 2000,
the Company's focus was on introducing the Horizon and EA Elements product lines
of home furnishings.
Current products are positioned in terms of selection, quality and value.
Management believes that the two most important style categories in home
furnishings today are the Classic and Casual product lines. Ethan Allen's
products are grouped into collections within these two lifestyle categories.
Each collection includes case goods, upholstered products and home accessories.
Each is styled with its own distinct design characteristics. Home accessories
play an important role in Ethan Allen's marketing program as this enables the
Company to provide a complete home furnishings collection. Ethan Allen's store
interiors are designed for the display of these categories in complete room
settings, which utilize the related collections to project the category
lifestyle.
2
The following is a summary of Ethan Allen's major categories of home
furnishing collections that have been introduced at the wholesale level:
PRINCIPAL CASE GOOD CALENDAR
STYLE HOME FURNISHING PRINCIPAL YEAR OF
CATEGORY CHARACTERISTICS COLLECTIONS WOOD TYPE INTRODUCTION
Classic An opulent style, which Georgian Court Cherry 1965
includes English 18th 18th Century Mahogany 1987
Century and 19th Century Medallion Cherry 1990
Neo-Classic styling. Avenue Cherry 1998
Collectors Classics Various Various
Legacy Collection Maple 1992
British Classics Maple 1995
Country French Birch 1998
Casual This style is based American Impressions Cherry 1991
on classic contemporary Radius Prima Vera 1994
design elements. Farmhouse Pine Pine 1988
Country Crossings Maple 1993
Country Colors Maple 1995
American Artisan Oak 1998
EA Elements Maple 1999
Horizon Ash 1999
Industry Segments
The Company's operations are classified into two main businesses: wholesale
and retail home furnishings. The wholesale home furnishings business is
principally involved in the manufacture, sale and distribution of home
furnishing products to a network of independently-owned and Ethan Allen-owned
("Company-owned") stores. The wholesale business primarily consists of three
operating segments; case goods (wood furniture), upholstery, and home
accessories. The retail home furnishings business sells home furnishing products
through a network of Ethan Allen-owned stores.
Wholesale Home Furnishings:
Case Good Business. For fiscal year 2000, the Company's case good business
had net sales of $382.1 million (56% of the Company's wholesale net sales). The
case good segment is engaged in the manufacture and sale of wood furniture to
independent and company-owned retail stores. The Company currently has 13 case
good manufacturing locations, which includes 3 sawmill operations. Sales of wood
furniture include home furnishing items such as, beds, dressers, armoires, night
tables, dining room chairs and tables, buffets, sideboards, coffee tables,
entertainment units, and home offices.
Upholstery Business. For fiscal year 2000, the upholstery segment had net
sales of $194.7 million (29% of the Company's wholesale net sales). The
Upholstery segment is involved in the manufacture and sale of upholstered
frames, cut fabrics and leathers. Skilled craftsmen cut and sew custom-designed
upholstery items having a variety of frame and fabric options. Sales of
upholstery home furnishing items include sleepers, recliners, sofas and cut
fabrics.
Home Accessory Business. For fiscal year 2000, home accessories had net
sales of $98.4 million (14% of the Company's wholesale net sales). The home
accessory segment primarily sells home accent items such as wall decor,
lighting, clocks, wood accents, bedspreads, decorative accessories, area rugs,
and bedding.
3
Retail Home Furnishings:
The retail business exclusively sells Ethan Allen's products through a
network of 305 retail stores. As of June 30, 2000, Ethan Allen owned and
operated 82 stores and independent dealers owned and operated 202 North American
stores and 21 stores abroad. In the past five years, Ethan Allen and its
independent dealers have opened over 90 new stores, many of them relocations.
Sales to independent dealer-owned stores accounted for approximately 56% of
total net sales of the Company in fiscal year 2000. The ten largest independent
dealers own a total of 43 stores, which accounted for approximately 22% of net
orders booked in fiscal year 2000.
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. It is the
Company's intention to grow independent licensees as well as expand our company
owned retail business by opening new stores and by acquiring stores from our
existing independent dealers.
Company Retail Business. For fiscal year 2000, the retail segment had net
sales of $371.4 million (43% of the Company's net sales). As of June 30, 2000,
the Company-owned stores consisted of 82 locations as compared to 73 at the end
of the prior fiscal year. During 2000, the Company acquired 8 stores from
independent dealers, sold 1 to an independent retailer, opened 3 new stores,
relocated 1 store and closed 1 store.
For further information regarding operating segments, see Note 14 to the
Company's Consolidated Financial Statements for the year ended June 30, 2000.
Retail Store Concept. Ethan Allen's interior and exterior design is
dependent on the store's location and size. Depending on the opportunity in the
market, stores are located in busy urban settings, suburban strip malls and
free-standing destination stores. 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.
Ethan Allen maximizes uniformity of store presentation throughout the
retail network through uniform standards of operation. These standards of
operation help each store present the same high quality image and offer retail
customers consistent levels of product selection and service. The stores are
staffed with a sales force of over 3,000 trained designers and professionals,
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, 2000, this renovation program has been completed for all stores
(including Ethan Allen-owned stores and independent dealers). These stores have
4
either implemented the new exterior design or are currently under renovation.
Ethan Allen provides display planning assistance to dealers to support them in
updating the interior projection of their stores. In 1997, the Company
implemented a new interior design format for its retail stores. The interior
design format positions Ethan Allen as a specialist in casual styles, classic
designs and decorative accessory retailing. The store interior's present
products in focused vignettes that are easy and relatively inexpensive to update
each season. Information displays also educate consumers as they travel
throughout the store. To date, 78 or 26% of all stores have incorporated or are
currently in the process of incorporating this new interior design. Consumer
response has been strong and Ethan Allen expects to have essentially all of its
Company-owned retail stores incorporate the new interior look over the next few
years and believes that many of its independent retail stores will also
incorporate this new strategy.
Ethan Allen recognizes the importance of its store network to its long-term
success and has developed and maintains a close ongoing relationship with its
dealers. Ethan Allen offers substantial services to the Ethan Allen stores in
support of their marketing efforts, including coordinated national advertising,
merchandising and display programs, and extensive dealer training seminars and
educational materials. Ethan Allen believes that the development of designers,
sales managers, service and delivery personnel and dealers is important for the
growth of its business. Ethan Allen has, therefore, committed to offer to all
dealers a comprehensive training program that will help to develop retail
managers/owners, designers and service and delivery personnel to their fullest
potential. Ethan Allen has offered dealers various assistance programs,
including long-term financial assistance in connection with the financing of
their inventory, the opening of new stores and the renovation of stores in
accordance with Ethan Allen's image and logo program.
5
The Company introduced a new financing plan during fiscal year 2000 called
the Simple Finance Plan. Financing offered to consumers through this plan is
granted on a non-recourse basis to the Company. The plan provides credit lines
from $3,000 to $50,000 and has an annual interest rate of 9.99%. Consumers may
apply for this financing plan either at the retail stores or through the Company
website. Approximately 77% of applications submitted during fiscal year 2000
were approved and there are over 7,000 accounts currently outstanding. The
aggregate outstanding balances as of June 30, 2000 are over $30.0 million and
the average credit line is $14,400 with an average transaction size of $1,635.
This plan has been well received by the retail network and will be included in
the Company's national marketing campaign in fiscal year 2001.
Internet
In fiscal year 2000, the Company continued the development of its Internet
strategy. Phase I of this strategy, which was introduced in January 2000,
included web browsing capabilities that allows consumers to view most of the
Company's product line on the Company's website located at www.ethanallen.com.
Phase I also included the development of an extranet, which links the retail
stores with the consumer information captured on-line. This information includes
requests for design assistance and for copies of the Company's catalogue. In May
2000, Phase II of our strategy enabled e-commerce functionality to the website
so that consumers may purchase home accessory items. Phase III will extend
e-commerce functionality to the case good and upholstery product lines in the
fall of this year. The Company believes that the primary goal for the website is
to drive additional business to our retail network through lead generation.
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 25 weeks per year.
The Ethan Allen Interiors magazine, which features Ethan Allen's home
furnishing collections, is one of Ethan Allen's most important marketing tools.
Over 70 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.
6
Manufacturing
Ethan Allen is one of the largest manufacturers of household furniture in
the United States. Ethan Allen manufactures and/or assembles approximately 83%
of its products at 20 manufacturing facilities which includes 3 saw mills,
thereby maintaining control over cost, quality and service to its consumers. The
case goods facilities are located close to sources of raw materials and skilled
craftsmen, predominantly in the Northeast and Southeast regions of the country.
Upholstery facilities are located across the country in order to reduce shipping
costs to stores and are located at sites where skilled craftsmanship is
available. Management believes that continued investment at its manufacturing
facilities, combined with selective acquisitions and outsourcing will
accommodate future sales growth.
To further strengthen case goods manufacturing capacity, the Company signed
a Letter of Intent on July 31, 2000 to purchase Pulaski Furniture Corporation's
Dublin, Virginia manufacturing facility. This plant which opened in 1973,
consists of 450,000 square feet of case good manufacturing space and 120,000
square feet of distribution space. The Company's objective is to retain most of
the employees and convert the operations to manufacture Ethan Allen product
lines. It is anticipated that the plant will increase case good production by
approximately 10% on an annual basis. The Company is also constructing a
dimensions plant at the saw mill plant in Andover, Maine, which will be
completed early in fiscal year 2001.
Distribution
Ethan Allen distributes its products primarily through six 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 33% of shipments are made to and from the distribution and
home delivery service centers by the Company's fleet of trucks and trailers. The
balance of Ethan Allen's shipments are subcontracted to independent carriers.
Approximately 80% of Ethan Allen-owned delivery vehicles are leased under two to
eight-year leases.
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.
Raw Materials and Suppliers
The most important raw materials used by Ethan Allen in furniture
manufacturing are lumber, veneers, plywood, particle board, hardware, glue,
finishing materials, glass, mirrored glass, laminates and fabrics. The various
types of wood used in Ethan Allen's products include cherry, oak, maple, prima
vera, mahogany, birch and pine, substantially all of which are purchased
domestically. Fabrics and other raw materials are purchased both domestically
and abroad. Ethan Allen has no significant long-term supply contracts, and has
experienced no significant problems in supplying its operations. Ethan Allen
maintains a number of sources for its raw materials which management believes
contribute to its ability to obtain competitive pricing for raw materials.
Lumber prices fluctuate over time depending on factors such as weather and
demand, which impact availability. Upward trends in prices could have a
short-term impact on margins. A sufficient inventory of lumber and fabric is
usually stocked to maintain approximately 8 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.
7
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, increasing the volume of such
dealers' retail sales, and expanding our company-owned retail business by
opening new stores and, when appropriate, acquiring stores from our existing
independent dealers. 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 on May 22, 2000. Ethan Allen was ranked
No. 2 in terms of furniture, bedding, and accessory sales for dealer-owned and
Company-owned stores and was ranked No. 1 as the largest single-source store
network for home furnishings in the country. According to the survey, sales for
the top 100 furniture stores approximated $20 billion, an increase of 11.9% over
the prior year. These stores accounted for 53% of all furniture sales in the
United States in 1999. Sales for the top 10 furniture retailers grew 6.4% to
approximately $8.0 billion, which represents a 22% share of all furniture
stores.
Trademarks
Ethan Allen currently holds numerous trademarks, service marks and design
patents for the Ethan Allen name, logos and designs in a broad range of classes
for both products and services. Ethan Allen also holds international
registrations for Ethan Allen trademarks in fifty-six foreign countries and has
applications for registration pending in twenty 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 ongoing program to diligently monitor their
unauthorized use through appropriate action.
Backlog and Net Orders Booked
As of June 30, 2000, Ethan Allen had a wholesale backlog of approximately
$75.4 million, compared to a backlog of $56.9 million as of June 30, 1999. The
backlog is anticipated to be serviced in the first quarter of fiscal year 2001.
Backlog at any point in time is primarily a result of net orders booked in prior
periods, manufacturing schedules and the timing of product shipments. Net orders
booked at the wholesale level from all Ethan Allen stores (including all
independently-owned and Ethan Allen-owned stores) for the twelve months ended
June 30, 2000 were $706.9 million, resulting in an increase of 14.3% over fiscal
year 1999. 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.
8
Employees
Ethan Allen has 8,090 employees as of June 30, 2000. Approximately 7% of
the Company's employees are represented by unions under collective bargaining
agreements. The Company's labor contracts expire at various times in 2002. The
Company expects no significant changes in its relations with these unions and
Ethan Allen believes it has good relations with its employees.
9
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 guestrooms. 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 20 manufacturing facilities, which includes 3 saw mills
located in 10 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 13 case goods manufacturing plants, totaling 3,192,000 square feet
(including three sawmills), 6 upholstery furniture plants, totaling 1,384,000
square feet and 1 plant involved in the manufacture and assembly of Ethan
Allen's non-furniture coordinates with 295,000 square feet. In addition, Ethan
Allen owns six and leases four distribution warehouses, totaling 1,012,500
square feet, and leases one home delivery service center with 52,000 square
feet. The Company's manufacturing and distribution facilities are located in
North Carolina, Vermont, Pennsylvania, Virginia, New York, Oklahoma, California,
New Jersey, Indiana, Maine and Massachusetts.
There are 82 Ethan Allen-owned retail stores in the United States, of which
29 stores are owned and 53 stores are leased.
Ethan Allen's manufacturing facility in Maiden, North Carolina and the Inn
at Ethan Allen in Danbury, Connecticut were financed with industrial revenue
bonds and the Beecher Falls, Vermont facility was financed in part by the State
of Vermont Economic Development Authority. In addition, one retail store is
subject to a mortgage loan agreement. Ethan Allen believes that all of its
properties are well maintained and in good condition.
Ethan Allen estimates that its case goods, upholstery, and home accessories
operating segments are currently operating at approximately 87% of capacity.
Management believes it has additional capacity at many facilities, which it
could utilize with minimal additional capital expenditures.
10
ITEM 3. LEGAL PROCEEDINGS
Ethan Allen is a party to various legal actions with customers, employees
and others arising in the normal course of its business. Ethan Allen maintains
liability insurance, which Ethan Allen believes, is adequate for its needs and
commensurate with other companies in the home furnishings industry. Ethan Allen
believes that the final resolution of pending actions (including any potential
liability not fully covered by insurance) will not have a substantial adverse
effect on the Company's results of operations and financial position.
Environmental Matters
The Company has been named as a potentially responsible party ("PRP") for
the cleanup of three sites currently listed or proposed for inclusion on the
National Priorities List ("NPL") under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"). 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 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. For two of the sites, the remedial investigation is ongoing. A volume
based allocation of responsibility among the parties has been prepared. Numerous
other parties have been identified as PRP's at these sites. The Company is also
a settling defendant for remedial design and construction activities at one of
the sites. Approximately two-thirds of the remedial work has been performed at
this site and Ethan Allen's portion of the remedial action will be completed
over the next several months. The Company believes that the resolution of such
matter will not have a material adverse effect on its financial condition,
results of operations, or cash flows.
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.
11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to security holders of the Company in
fiscal year 2000:
o Proposal for the election of M. Farooq Kathwari and Horace G. McDonell
as Directors.
o Proposal for ratification of KPMG LLP as Independent Auditors for
fiscal year 2000.
o Proposal of an amendment to the 1992 Stock Option Plan to award
options to purchase 2,000 shares of stock to each of the Independent
Directors.
12
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:
Market Price
---------------------------
High Low
---------------------------
Fiscal 2000
Fourth Quarter $ 28 3/4 $ 23 1/16
Third Quarter 30 3/16 21 5/8
Second Quarter 36 13/16 29 3/8
First Quarter 33 1/16 26 7/16
Fiscal 1999
Fourth Quarter $ 37 3/4 $ 24 21/32
Third Quarter 33 13/16 25 1/2
Second Quarter 29 15 3/4
First Quarter 34 3/4 20
As of August 18, 2000, there were approximately 441 shareholders of record
of the Company's Common Stock.
On August 3, 2000, the Company declared a $0.04 per common share dividend
for all holders of record on October 10, 2000 and payment date of October 25,
2000. The Company expects to continue to declare quarterly dividends for the
foreseeable future.
13
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth summary consolidated financial information
of the Company for the years and dates indicated (dollars in thousands, except
per share data):
Fiscal Years Ended June 30,
-------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- ----------
Statement of Operations Data:
Net sales $ 856,171 $ 762,233 $ 679,321 $ 571,838 $ 509,776
Cost of sales 455,561 407,234 363,746 323,600 304,650
Selling, general and
administrative expenses 254,511 222,107 195,885 162,389 149,559
--------- --------- --------- --------- ---------
Operating income 146,099 132,892 119,690 85,849 55,567
Interest and other
miscellaneous income, net 1,925 1,707 3,449 1,272 1,039
--------- --------- --------- --------- ---------
Income before interest expense,
income taxes, and extraordinary
charge 148,024 134,599 123,139 87,121 56,606
Interest expense 1,254 1,882 4,609 6,427 9,616
Income tax expense 56,200 51,429 46,583 31,954 18,845(1)
--------- --------- --------- --------- ---------
Income before extraordinary
charge 90,570 81,288 71,948 48,740 28,145
Extraordinary charge (net of tax) -- -- (802)(3) -- --
--------- --------- --------- --------- ---------
Net income $ 90,570 $ 81,288 $ 71,146 $ 48,740 $ 28,145
========= ========= ========= ========= =========
Per Share Data: (2)
Net income per basic share $ 2.25 $ 1.97 $ 1.65 $ 1.13 $ 0.66
Basic weighted average shares
outstanding 40,301 41,278 43,050 43,190 42,936
Net income per diluted share $ 2.20 $ 1.92 $ 1.61 $ 1.11 $ 0.64
Diluted weighted average
shares outstanding 41,198 42,287 44,136 43,815 43,692
Cash dividends declared $ 0.16 $ 0.12 $ 0.09 $ 0.07 $ 0.03
Other information:
Depreciation and amortization $ 16,975 $ 16,344 $ 15,868 $ 16,411 $ 17,495
Capital expenditures 48,181 40,628 29,665 23,383 13,314
Balance Sheet Data (at end of period):
Total assets $ 543,571 $ 480,622 $ 433,123 $ 427,784 $ 395,981
Long-term debt including
capital lease obligations 9,487 9,919 12,496 66,766 82,681
Shareholders' equity $ 390,509 $ 350,535 $ 314,320 $ 265,434 $ 220,293
Footnotes on following page.
14
NOTES TO SELECTED FINANCIAL DATA
(Dollars in thousands)
(1) 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 in
1996.
(2) Amounts have been retroactively adjusted to reflect the two-for-one stock
split on September 2, 1997 and the three-for-two stock split on May 21,
1999.
(3) During fiscal 1998, the Company completed its optional early redemption of
all of its $52.4 million then-outstanding 8-3/4% Senior Notes, due on March
15, 2001, at 101.458% of par value. As a result of the early redemption, an
extraordinary charge of $0.8 million, net of tax benefit, was recorded. The
extraordinary charge included the write-off of unamortized deferred
financing costs associated with the Senior Notes and the premium related to
the early redemption.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of results of operations and financial condition
is based upon and should be read in conjunction with the Consolidated Financial
Statements of the Company and notes thereto included under Item 8 of this
Report.
Forward-Looking Statements
Management's discussion and analysis of financial condition and results of
operations and other sections of this annual report contain forward-looking
statements relating to future results of the Company. Such forward-looking
statements are identified by use of forward-looking words such as "anticipates",
"believes", "plans", "estimates", "expects", and "intends" or words or phrases
of similar expression. These forward-looking statements are subject to various
assumptions, risks and uncertainties, including but not limited to, changes in
political and economic conditions, demand for the Company's products, acceptance
of new products, technology developments affecting the Company's products and to
those discussed in the Company's filings with the Securities and Exchange
Commission. Accordingly, actual results could differ materially from those
contemplated by the forward-looking statements.
Basis of Presentation
The Company has no material assets other than its ownership of Ethan
Allen's capital stock and conducts all significant transactions through Ethan
Allen; therefore, substantially all of the financial information presented
herein is that of Ethan Allen.
Results of Operations:
Ethan Allen's revenues are comprised of wholesale sales to dealer-owned and
company-owned retail stores and retail sales of company-owned stores. The
Company's wholesale sales are mainly derived from its three reportable operating
segments; case goods, upholstery, and home accessories. See Note 14 to the
Company's Consolidated Financial Statements for the year ended June 30, 2000.
The components of consolidated revenues and operating income are as follows
(dollars in millions):
Fiscal Years Ended June 30,
----------------------------------
2000 1999 1998
------ ------ -------
Revenue:
Wholesale Revenue:
Case goods $ 382.1 $ 352.2 $ 328.6
Upholstery 194.7 174.6 160.1
Home accessories 98.4 90.1 71.4
Other 9.4 13.7 9.0
------ ------- ------
Total Wholesale Revenue 684.6 630.6 569.1
Total Retail Revenue 371.4 294.7 235.2
Other 6.4 6.4 6.7
Elimination of inter-segment sales (206.2) (169.5) (131.7)
------ ------ ------
Consolidated Revenue $ 856.2 $ 762.2 $ 679.3
====== ====== ======
Operating Income:
Wholesale Operating Income:
Case goods $ 131.5 $ 127.5 $ 120.3
Upholstery 59.2 53.2 51.2
Home accessories 30.9 29.2 22.9
Unallocated Corporate Expenses (90.5) (87.8) (86.4)
------ ------ -----
Total Wholesale Operating Income 131.1 122.1 108.0
Total Retail Operating Income 20.6 15.1 13.8
Other 0.5 1.4 1.7
Eliminations (6.1) (5.7) (3.8)
------ ----- ------
Consolidated Operating Income $ 146.1 $ 132.9 $ 119.7
====== ====== ======
16
Fiscal 2000 Compared to Fiscal 1999
Consolidated revenue for fiscal year 2000 of $856.2 million increased by
$94.0 million or 12.3% from fiscal year 1999 consolidated revenue of $762.2
million. Overall sales growth resulted from new product offerings, new and
relocated stores, growth in the retail segment, a selected case good price
increase effective December 1, 1998 and to a lesser extent, an overall price
increase effective February 25, 2000.
Total wholesale revenue for fiscal year 2000 was $684.6 million as compared
to $630.6 million in fiscal year 1999. This represents a $54.0 million or 8.6%
increase from fiscal year 1999.
Case goods revenue increased $29.9 million or 8.5% to $382.1 million in
fiscal year 2000 as compared to the prior year of $352.2 million mainly due to
new product offerings and from the benefit of a selected price increase
effective December 1, 1998.
Upholstery revenue increased $20.1 million or 11.5% to $194.7 million in
fiscal year 2000 as compared to $174.6 million in fiscal year 1999. The
increase in revenue of $20.1 million is primarily attributable to new fabric
introductions, a focused marketing effort, and more attractive price points on
new products.
Home accessory revenue increased $8.3 million or 9.2% to $98.4 million in
fiscal year 2000. This increase resulted from new merchandising strategies and
expanded product lines.
Total retail revenue from Ethan Allen-owned stores during fiscal year 2000
increased by $76.7 million or 26.0% to $371.4 million from $294.7 million in
fiscal year 1999. The increase in retail sales by Ethan Allen-owned stores is
attributable to a 17.2% or $48.0 million increase in comparable store sales, and
an increase in sales generated by newly opened or acquired stores of $37.9
million, partially offset by closed stores, which generated $9.2 million less
sales in fiscal year 2000 as compared to fiscal year 1999. The number of Ethan
Allen-owned stores increased to 82 as of June 30, 2000 as compared to 73 as of
June 30, 1999. The Company acquired 8 stores from independent dealers, sold 1 to
an independent dealer, opened 3 new stores, relocated 1 store and closed 1
store.
Comparable stores are those which have been operating for at least 15
months. Minimal net sales, derived from the delivery of customer ordered
product, are generated during the first three months of operations of newly
opened stores. Stores acquired from dealers by Ethan Allen are included in
comparable store sales in their 13th full month of Ethan Allen-owned operations.
During fiscal year 2000, the Company and its independent dealers opened 15
new stores, of which 4 stores represented relocations. At June 30, 2000, there
were 305 total stores, of which 223 were dealer-owned stores. The Company's
objective is to continue the expansion of both the dealer-owned and Ethan
Allen-owned stores.
Gross profit for fiscal year 2000 increased by $45.6 million or 12.8% from
fiscal year 1999 to $400.6 million. This increase is attributable to higher
sales volume, combined with an increase in gross margin from 46.6% in fiscal
1999 to 46.8% in fiscal 2000. Gross margins have been favorably impacted by
higher sales volumes, a selected case good price increase effective December 1,
1998, a selected price increase effective February 25, 2000, and a higher
percentage of retail sales to total sales, partially offset by, higher
manufacturing costs, mainly raw materials and labor.
Operating expenses increased $32.4 million from $222.1 million or 29.1% of
net sales in fiscal year 1999 to $254.5 million or 29.7% of net sales in fiscal
year 2000. This increase is primarily attributable to the expansion of the
retail segment resulting in the addition of 9 net new Ethan Allen-owned stores
in fiscal year 2000.
Consolidated operating income for fiscal year 2000 was $146.1 million or
17.1% of net sales compared to $132.9 million or 17.4% of net sales in fiscal
year
17
1999. This represents an increase of $13.2 million or 9.9%. This increase
is primarily attributable to higher sales volume, partially offset by a lower
wholesale and retail gross margin and higher operating expenses resulting from
the growth in the retail segment.
Total wholesale operating income for fiscal year 2000 was $131.1 million or
19.2% of wholesale net sales compared to $122.1 million or 19.4% of wholesale
net sales in fiscal year 1999. Wholesale operating income increased $9.0 million
or 7.4% in fiscal year 2000.
Case goods operating income increased $4.0 million or 3.1% to $131.5
million in fiscal year 2000 over the prior year mainly due to higher sales
volume, the impact of the price increases, offset by a lower gross margin
resulting from certain manufacturing inefficiencies.
Upholstery operating income increased $6.0 million or 11.3% to $59.2
million in fiscal year 2000 as compared to $53.2 million in fiscal year 1999.
The increase resulted from higher sales volume and improved gross margin
resulting from manufacturing efficiencies gained through increased production.
Home accessory operating income increased $1.7 million or 5.8% to $30.9
million in fiscal year 2000 from $29.2 million in the prior year. This increase
is attributable to higher sales volume, partially offset by, a slight reduction
in gross margin caused by higher manufacturing costs.
Operating income from the retail segment increased by $5.5 million or 36.4%
to $20.6 million or 5.5% of net sales from $15.1 million or 5.1% of net sales in
fiscal year 1999. The increase in retail operating income by Ethan Allen-owned
stores is primarily attributable to increased sales volume, offset by a
reduction in gross margin and higher operating expenses associated with the
addition of new stores.
Interest expense, including the amortization of deferred financing costs,
for fiscal 2000 decreased by $0.6 million to $1.3 million, due to lower debt
balances and lower amortization of deferred financing costs.
Income tax expense of $56.2 million was recorded in fiscal year 2000. The
Company's effective tax rate was 38.3% in fiscal year 2000 as compared to 38.8%
in fiscal year 1999. The decline in the effective income tax rate in 2000 as
compared to 1999 resulted from state income tax benefits realized in fiscal year
2000.
In fiscal year 2000, the Company recorded net income of $90.6 million, an
increase of 11.4%, compared to $81.3 million in fiscal year 1999.
Fiscal 1999 Compared to Fiscal 1998
Consolidated revenue for fiscal year 1999 increased by $82.9 million or
12.2% from fiscal year 1998 to $762.2 million. Overall sales growth resulted
from new product offerings, new and relocated stores and growth in the retail
segment.
Total wholesale revenue for fiscal year 1999 increased by $61.5 million or
10.8% to $630.6 million from $569.1 million in fiscal year 1998. Case goods
revenue increased $23.6 million or 7.2% to $352.2 million in fiscal year 1999 as
compared to the prior year of $328.6 million mainly due to new product offerings
and the benefit of a selected price increase effective December 1, 1998.
Upholstery revenue increased $14.5 million or 9.1% to $174.6 million in
fiscal year 1999 as compared to $160.1 million in fiscal year 1998. The
increase in revenue of $14.5 million is primarily attributable to new fabric
introductions and the impact of expanded national television advertising.
Home accessory revenue increased $18.7 million or 26.2% to $90.1 million in
fiscal year 1999. This increase resulted from enhanced merchandising strategies,
18
new product introductions, and an improved in-stock inventory position, which
reduced customer lead time.
Total retail revenue from Ethan Allen-owned stores during fiscal year 1999
increased by $59.5 million or 25.3% to $294.7 million from $235.2 million in
fiscal year 1998. The increase in retail sales by Ethan Allen-owned stores is
attributable to a 14.3% or $30.9 million increase in comparable store sales, and
an increase in sales generated by newly opened or acquired stores of $35.2
million, partially offset by closed stores, which generated $6.6 million less
sales in fiscal year 1999 as compared to fiscal year 1998. The number of Ethan
Allen-owned stores increased to 73 as of June 30, 1999 as compared to 67 as of
June 30, 1998. The Company acquired 5 stores from independent dealers, opened 4
new stores, relocated 3 stores and closed 3 stores.
Comparable stores are those which have been operating for at least 15
months. Minimal net sales, derived from the delivery of customer ordered
product, are generated during the first three months of operations of newly
opened stores. Stores acquired from dealers by Ethan Allen are included in
comparable store sales in their 13th full month of Ethan Allen-owned operations.
During fiscal year 1999, the Company and its independent dealers opened 20
new stores, of which 9 stores represented relocations. At June 30, 1999, there
were 309 total stores, of which 236 were dealer-owned stores. The Company's
objective is to continue the expansion of both the dealer-owned and Ethan
Allen-owned stores.
Gross profit for fiscal year 1999 increased by $39.4 million or 12.5% from
fiscal year 1998 to $355.0 million. This increase is attributable to higher
sales volume, combined with an increase in gross margin from 46.5% in fiscal
1998 to 46.6% in fiscal 1999. Gross margins have been favorably impacted by
higher sales volumes, greater manufacturing efficiencies, improvements in
manufacturing technology, a selected case good price increase effective December
1, 1998, and a higher percentage of retail sales to total sales. These factors
are partially offset by higher raw material and labor costs.
Operating expenses increased $26.2 million from $195.9 million or 28.8% of
net sales in fiscal 1998 to $222.1 million or 29.1% of net sales in fiscal year
1999. This increase is attributable to an increase in operating expenses in the
Company's retail division of $23.1 million due the expansion of the retail
segment resulting in the addition of 7 new Ethan Allen-owned stores in 1999.
Consolidated operating income for fiscal year 1999 was $132.9 million or
17.4% of net sales compared to $119.7 million or 17.6% of net sales in fiscal
year 1998. This represents an increase of $13.2 million or 11.0%. This increase
is primarily attributable to higher sales volume, partially offset by a lower
wholesale and retail gross margin and higher operating expenses related to the
higher retail volume.
Total wholesale operating income for fiscal year 1999 was $122.1 million or
19.4% of net sales compared to $108.0 million or 19.0% of net sales in fiscal
year 1998. Wholesale operating income increased $14.1 million or 13.1%. Case
goods operating income increased $7.2 million or 6.0% to $127.5 million in
fiscal year 1999 over the prior year mainly due to higher sales volume and a
selected price increase, offset by a slight reduction in gross margin to 39.4%.
Upholstery operating income increased $2.0 million or 3.9% to $53.2 million
in fiscal year 1999 as compared to $51.2 million in fiscal year 1998. The
increase resulted from increased volume and continued management of expenses.
These factors are partially offset by a reduction in gross margin to 32.9% in
fiscal year 1999 as compared to 34.5% in the prior fiscal year.
19
Home accessory operating income increased $6.3 million or 27.5% to $29.2
million in fiscal year 1999. This increase resulted from higher volume and lower
operating expenses, slightly offset by a 0.6% reduction in gross margin to
33.2%.
Operating income from the retail segment increased by $1.3 million or 9.4%
to $15.1 million or 5.1% of net sales from $13.8 million or 5.8% of net sales in
fiscal year 1998. The increase in retail operating income by Ethan Allen-owned
stores is primarily attributable to increased volume, slightly offset by a
reduction in gross margin from 44.6% in fiscal year 1998 to 44.0% in fiscal year
1999 and a higher composition of expenses related to the start-up of 7 retail
stores and the acquisition of 5 additional stores from independent dealers in
fiscal year 1999.
Interest expense, including the amortization of deferred financing costs,
for fiscal 1999 decreased by $2.7 million to $1.9 million, due to lower debt
balances and lower amortization of deferred financing costs.
Income tax expense of $51.4 million was recorded in fiscal year 1999. The
Company's effective tax rate was 38.8% in 1999 as compared to 39.3% in 1998. The
decline in the effective income tax rate in 1999 as compared to 1998 has
resulted from planning strategies initiated by the Company during fiscal year
1999.
During the year ended June 30, 1998, the Company recorded a $0.8 million
extraordinary charge (net of tax benefit) related to the early retirement of its
8-3/4% Senior Notes due 2001. The extraordinary charge included the write-off of
unamortized deferred financing costs and the premium paid related to the early
redemption.
In fiscal year 1999, the Company recorded net income of $81.3 million, an
increase of 14.3%, compared to $71.1 million in fiscal year 1998.
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 $104.9 million for fiscal year 2000 as compared to
$86.7 million in fiscal year 1999 and $87.6 million in fiscal year 1998. The
increase in net cash provided by operating activities principally resulted from
an increase of $9.3 million in net income and less of an increase in working
capital including inventories, which increased by $9.2 million in fiscal year
2000 as compared to $25.0 million in fiscal year 1999. The $9.2 million increase
in inventory in fiscal year 2000 was attributable to a $5.2 million increase in
Company-owned store inventory and a $3.5 million increase in manufacturing
inventory. These increases reflect the expansion of the business and an
improvement in the in-stock inventory position, thereby reducing lead times. The
current ratio was 2.18 to 1 in 2000 and 2.43 to 1 in 1999.
During fiscal year 2000, capital spending, exclusive of acquisitions,
totaled $42.1 million as compared to $40.6 million and $29.7 million in fiscal
1999 and 1998, respectively. The increased level of capital spending, which is
principally attributable to new store openings and relocations and expanding
manufacturing capacity, is expected to continue for the foreseeable future.
Capital expenditures in fiscal year 2001, exclusive of acquisitions, are
anticipated to be approximately $55.0 million. The Company anticipates that cash
from operations will be sufficient to fund this level of capital expenditures.
Total debt outstanding at June 30, 2000 was $17.9 million. At June 30,
2000, there was $8.0 million of revolving loans and $16.2 million of trade and
standby letters of credit outstanding under the Credit Agreement. The Company
had $100.8 million available under its revolving credit facility at June 30,
2000.
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. On January 27,
2000, the Board of Directors re-authorized the Company to repurchase up to
2,000,000 common shares. Through June 30, 2000, the Company repurchased 639,097
common shares at an average price of $23.20 per share. Depending on market
20
prices and other conditions relevant to the Company, such purchases may be
discontinued at any time. During fiscal year 2000 and 1999, the Company
purchased 1,928,350 shares of its common stock on the open market at an average
price of $25.72 per share and 1,921,784 shares at an average price of $23.49,
respectively.
As of June 30, 2000, aggregate scheduled maturities of long-term debt for
each of the next five fiscal years are $8.1 million, and $0.1 million, $0.1
million, $0.1 million and $4.7 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, 2000, the Company has approximately $18.5 million of net
operating loss carryovers ("NOL's") for federal income tax purposes. The
Recapitalization in 1993 triggered an "ownership change" of the Company, as
defined in Section 382 of the Internal Revenue Code of 1986, as amended,
resulting in an annual limitation on the utilization of the NOL's by the Company
of approximately $3.9 million.
New Accounting Pronouncements
In June 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 138 "Accounting for
Certain Derivative Instruments and Certain Hedging Activities". SFAS No. 138
amended SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities", which establishes accounting and reporting standards for derivative
instruments, including derivative instruments embedded in other contracts, and
for hedging activities. This pronouncement requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133 and No. 138
are effective for fiscal years beginning after June 15, 2000. The Company will
adopt SFAS No. 133 and No. 138 in fiscal year 2001. However, the Company does
not expect these pronouncements to have a material impact on its financial
results.
21
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 rollover risk for borrowings as they mature and are renewed at current
market rates. The extent of this risk is not quantifiable or predictable because
of the variability of future interest rates and the Company's future financing
requirements. At June 30, 2000, the Company had $8.4 million of short term debt
outstanding and $9.5 million of total long term debt outstanding.
The Company has one debt instrument outstanding with a variable interest
rate. This debt instrument has a principal balance of $4.6 million, which
matures in 2004. Based on the principal outstanding in 2000, a one-percentage
point increase in the variable interest rate would not have had a significant
impact on the Company's 2000 interest expense.
Currently, the Company does not enter into financial instruments
transactions for trading or other speculative purposes or to manage interest
rate exposure.
22
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, 2000 and 1999, 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, 2000.
In connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule listed in the index under Item No.
14. The consolidated financial statements and financial statement schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on the consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, 2000 and 1999, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 2000, in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG LLP
Stamford, Connecticut
July 28, 2000
23
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Consolidated Balance Sheets
June 30, 2000 and 1999
(Dollars in thousands)
2000 1999
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 14,024 $ 8,968
Accounts receivable, less allowance of
$2,751 and $2,460 at June 30, 2000 and
1999, respectively 34,336 34,302
Inventories 159,006 144,045
Prepaid expenses and other current assets 17,670 14,728
Deferred income taxes 10,751 7,783
--------- ---------
Total current assets $ 235,787 $ 209,826
--------- ---------
Property, plant and equipment, net 247,738 214,492
Intangibles, net 54,770 51,598
Other assets 5,276 4,706
--------- ---------
Total assets $ 543,571 $ 480,622
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and
capital lease obligations $ 8,420 $ 757
Accounts payable 65,879 59,378
Accrued expenses 11,003 9,174
Accrued compensation and benefits 22,966 16,937
--------- ---------
Total current liabilities 108,268 86,246
--------- ---------
Long-term debt 9,487 9,611
Other long-term liabilities 1,593 1,678
Deferred income taxes 33,714 32,552
--------- ---------
Total liabilities 153,062 130,087
Commitments and contingencies
Shareholders' equity:
Class A common stock, par value $.01, 150,000,000
shares authorized, 45,081,384 shares issued
at June 30, 2000, 44,666,791 shares issued at
June 30, 1999 451 447
Preferred stock, par value $.01, 1,055,000 shares
authorized, no shares issued and outstanding
at June 30, 2000 and 1999 -- --
Additional paid-in capital 272,710 267,286
--------- ---------
273,161 267,733
Less:
Treasury stock (at cost), 5,674,278 shares
at June 30, 2000 and 3,745,928 shares at
June 30, 1999 (128,493) (78,887)
--------- ---------
144,668 188,846
Retained earnings 245,841 161,689
--------- ---------
Total shareholders' equity 390,509 350,535
--------- ---------
Total liabilities and shareholders' equity $ 543,571 $ 480,622
========= =========
See accompanying notes to consolidated financial statements.
24
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Consolidated Statements of Operations
For the years ended June 30, 2000, 1999 and 1998
(Dollars in thousands, except per share data)
2000 1999 1998
--------- --------- ---------
Net sales $ 856,171 $ 762,233 $ 679,321
Cost of sales 455,561 407,234 363,746
--------- --------- ---------
Gross profit 400,610 354,999 315,575
Operating expenses:
Selling 140,760 123,742 110,240
General and administrative 113,751 98,365 85,645
--------- --------- ---------
Operating income 146,099 132,892 119,690
--------- --------- ---------
Interest and other miscellaneous
income, net 1,925 1,707 3,449
Interest and other related financing
costs 1,254 1,882 4,609
--------- --------- ---------
Income before income taxes
and extraordinary charge 146,770 132,717 118,530
Income tax expense 56,200 51,429 46,582
--------- --------- ---------
Income before extraordinary
charge 90,570 81,288 71,948
Extraordinary charge from early
retirement of debt, net of
income tax benefit of $527 -- -- 802
--------- --------- ---------
Net income $ 90,570 $ 81,288 $ 71,146
========= ========= =========
Per share data:
Net income per basic share:
Income before extraordinary charge $ 2.25 $ 1.97 $ 1.67
Extraordinary charge -- -- (0.02)
--------- --------- ---------
Net income per basic share $ 2.25 $ 1.97 $ 1.65
========= ========= =========
Net income per diluted share:
Income before extraordinary charge $ 2.20 $ 1.92 $ 1.63
Extraordinary charge -- -- (0.02)
--------- --------- ---------
Net income per diluted share $ 2.20 $ 1.92 $ 1.61
========= ========= =========
Dividends declared per common share $ 0.16 $ 0.12 $ 0.09
========= ========= =========
See accompanying notes to consolidated financial statements.
25
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the years ended June 30, 2000, 1999 and 1998
(Dollars in thousands)
2000 1999 1998
--------- --------- ---------
Operating activities:
Net income $ 90,570 $ 81,288 $ 71,146
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 16,975 16,344 15,868
Compensation expense related to
restricted stock award 898 1,819 2,136
Provision for deferred
income taxes (1,806) (20) 683
Extraordinary charge -- -- 802
Other non-cash (charge) benefit (424) 251 77
Change in assets and liabilities:
Accounts receivable (783) 1,222 (3,340)
Inventories (9,243) (25,040) (6,839)
Prepaid and other current assets (3,181) (3,353) (4,011)
Other assets (973) (1,064) (891)
Accounts payable 5,455 10,652 11,576
Accrued expenses 7,140 4,023 414
Other long-term liabilities 223 558 (3)
--------- --------- ---------
Net cash provided by operating
activities 104,851 86,680 87,618
--------- --------- ---------
Investing activities:
Proceeds from the disposal of property,
plant, and equipment 1,112 1,721 827
Capital expenditures (42,065) (40,628) (29,665)
Acquisition of businesses (12,631) (7,164) --
Payments received on long-term notes
receivable 941 799 1,538
Disbursements made for long-term notes
receivable (136) (255) (302)
Redemption of short-term securities -- -- 30,270
Investments in short-term securities -- -- (12,295)
--------- --------- ---------
Net cash used in investing activities (52,779) (45,527) (9,627)
--------- --------- ---------
Financing activities:
Borrowings on revolving credit facility 78,000 81,500 --
Payments on revolving credit facility (70,000) (81,500) --
Redemption of Senior Notes -- -- (52,543)
Premium paid on Senior Note redemption -- -- (461)
Other payments on long-term debt and
capital leases (768) (2,717) (2,079)
Other borrowings on long-term debt -- 18 111
Payments to acquire treasury stock (49,606) (45,137) (23,310)
Net proceeds from issuance of common stock 2,351 747 1,255
Increase in deferred financing costs (524) (55) --
Dividends paid (6,469) (4,421) (3,450)
--------- --------- ---------
Net cash used in financing activities (47,016) (51,565) (80,477)
--------- --------- ---------
Net (decrease)/increase in cash and cash
equivalents 5,056 (10,412) (2,486)
Cash and cash equivalents
at beginning of year 8,968 19,380 21,866
--------- --------- ---------
Cash and cash equivalents at end of year $ 14,024 $ 8,968 $ 19,380
========= ========= =========
Supplemental disclosure:
Cash payments for:
Income taxes $ 61,319 $ 50,331 $ 45,382
Interest 980 1,637 5,585
See accompanying notes to consolidated financial statements.
26
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Consolidated Statements of Shareholders' Equity
For the years ended June 30, 2000, 1999 and 1998
(Dollars in thousands, except share data)
Additional
Common Paid-in Treasury Retained
Stock Capital Stock Earnings Total
------ ------- ------ -------- -----
Balance at June 30, 1997 $ 442 $ 257,536 $ (10,440) $ 17,896 $ 265,434
Issuance of common stock 3 3,388 -- -- 3,391
Purchase of 774,096 shares of
treasury stock -- -- (23,310) -- (23,310)
Dividends declared -- -- -- (3,730) (3,730)
Tax benefit associated with the
exercise of employee stock
options and warrants -- 1,389 -- -- 1,389
Net income -- -- -- 71,146 71,146
--------- --------- --------- --------- ---------
Balance at June 30, 1998 445 262,313 (33,750) 85,312 314,320
Issuance of common stock 2 2,564 -- -- 2,566
Purchase of 1,921,784 shares of
treasury stock -- -- (45,137) -- (45,137)
Dividends declared -- -- -- (4,911) (4,911)
Tax benefit associated with the
exercise of employee stock
options and warrants -- 2,409 -- -- 2,409
Net income -- -- -- 81,288 81,288
--------- --------- --------- --------- ---------
Balance at June 30, 1999 447 267,286 (78,887) 161,689 350,535
Issuance of common stock 4 3,245 -- -- 3,249
Purchase of 1,928,350 shares of
treasury stock -- -- (49,606) -- (49,606)
Dividends declared -- -- -- (6,418) (6,418)
Tax benefit associated with the
exercise of employee stock
options and warrants -- 2,179 -- -- 2,179
Net income -- -- -- 90,570 90,570
--------- --------- --------- --------- ---------
Balance at June 30, 2000 $ 451 $ 272,710 $(128,493) $ 245,841 $ 390,509
========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
27
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 305 retail stores, of which 82 are Ethan Allen-owned and 223 are
independently owned. The Company's retail stores are primarily located in
North America, with 30 located abroad. Ethan Allen has 20 manufacturing
facilities and 3 sawmills throughout the United States.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Reclassifications
Certain reclassifications have been made to prior years' financial
statements to conform with the current year's presentation. These changes
did not have a material impact on previously reported results of operations
or shareholders' equity.
Cash Equivalents
The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation of plant and
equipment is provided over the estimated useful lives of the respective
assets on a straight-line basis. Estimated useful lives of the respective
assets generally range from twenty to forty years for buildings and
improvements and from three to twenty years for machinery and equipment.
28
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies (continued)
Intangible Assets
Intangible assets primarily represent goodwill, trademarks and product
technology and are amortized on a straight-line basis over forty years.
Goodwill represents the excess cost of acquired businesses. The Company
continuously assesses the recoverability of these intangible assets by
evaluating whether the amortization of the intangible asset balances over
the remaining lives can be recovered through expected future results.
Expected future results are based on projected undiscounted operating
results before the effects of intangible amortization. Product technology
is measured based upon wholesale operating income, while goodwill and
trademarks are assessed based upon total wholesale and retail operating
income. The amount of impairment, if any, is measured based on the fair
value or projected discounted future results.
Financial Instruments
The carrying value of the Company's financial instruments approximates fair
market value.
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 to dealers when goods are shipped, at which point title
has passed. 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. Advertising
costs for the fiscal years 2000, 1999, and 1998 were $44,379,664,
$43,215,000, and $40,035,000, respectively. Prepaid advertising costs at
June 30, 2000 and 1999 were $2,332,000 and $2,806,000, respectively.
Closed Store Expenses
Future expenses, such as rent and real estate taxes, net of expected lease
or sublease recovery, which will be incurred subsequent to vacating a
closed Ethan Allen-owned store, are charged to operations upon a formal
decision to close the store.
29
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies (continued)
Earnings Per Share
The Company computes basic earnings per share by dividing net income by the
weighted average number of common shares outstanding for the period.
Diluted earnings per share reflect the potential dilution that could occur
if all dilutive potential common shares were exercised.
Stock Compensation
As permitted by SFAS No. 123, the Company follows the provisions of APB No.
25, "Accounting for Stock Issued to Employees" and related interpretations
in accounting for compensation expense related to the issuance of stock
options.
Comprehensive Income
The Company does not have any components of comprehensive income as defined
under SFAS No. 130, "Reporting Comprehensive Income".
New Accounting Standards
In June 1998, the FASB issued SFAS No. 133, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities". SFAS No. 138 later
amended this pronouncement. Both provide guidance on accounting for
derivatives and hedging activities. The Company will adopt SFAS No. 133 and
No. 138 in fiscal year 2001. However, the Company does not expect these
pronouncements to have a material impact on its financial results.
(2) Inventories
Inventories at June 30 are summarized as follows (dollars in thousands):
2000 1999
-------- --------
Finished Goods $103,787 $ 92,304
Work in process 19,233 16,143
Raw materials 35,986 35,598
------- -------
$159,006 $144,045
======= =======
(3) Property, Plant and Equipment
Property, plant and equipment at June 30 are summarized as follows (dollars
in thousands):
2000 1999
-------- ---------
Land and improvements $ 40,839 $ 30,849
Buildings and improvements 192,256 201,543
Machinery and equipment 138,458 93,576
------- ------
371,553 325,968
Less accumulated depreciation (123,815) (111,476)
------- -------
$247,738 $214,492
======= =======
30
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) Intangibles
Intangibles at June 30 are summarized as follows (dollars in thousands):
2000 1999
-------- --------
Product technology $ 25,950 $ 25,950
Trademarks 28,200 28,200
Goodwill 18,795 13,855
Other 350 350
------- -------
73,295 68,355
Less accumulated amortization (18,525) (16,757)
------- -------
$ 54,770 $ 51,598
======= =======
(5) Borrowings
Total debt obligations at June 30 consists of the following (dollars in
thousands):
2000 1999
------- -------
Revolving Credit Facility $ 8,000 $ -
Industrial Revenue Bonds,
2.45%-7.50%, maturing at
various dates through 2011 8,455 8,455
Other 1,452 1,913
------ ------
Total debt 17,907 10,368
Less current maturities and
short-term capital lease
obligations 8,420 907
------ ------
Long-term debt $ 9,487 $ 9,611
====== ======
On August 25, 1999, the Company entered into a new $125.0 million unsecured
Revolving Credit Facility (the "Credit Agreement") with Chase Manhattan
Bank as agent. Proceeds from the Credit Agreement may be used for working
capital purposes or general corporate purposes.
The Credit Agreement includes sub-facilities for trade and standby letters
of credit of $25.0 million and swingline loans of $3.0 million. Loans under
the Credit Agreement bear interest at Chase Manhattan Bank's Alternative
Base Rate ("ABR"), or adjusted LIBOR plus 0.625%, which is subject to
adjustment arising from changes in the credit rating of Ethan Allen's
senior unsecured debt. The Credit Agreement provides for the payment of a
commitment fee equal to 0.15% per annum on the average daily unused amount
of the revolving credit commitment. The Company is also required to pay a
fee equal to 0.75% per annum on the average daily letters of credit
outstanding. For fiscal years ended June 30, 2000, 1999 and 1998 the
weighted-average interest rates were 6.22%, 6.17% and 8.13%, respectively.
The Credit Agreement matures in August of 2004 and there are no minimum
repayments required during the term of the facility. The revolving loans
may be borrowed, repaid and reborrowed over the term of the facility until
final maturity.
The Credit Agreement contains various covenants which limit the ability of
the Company and its subsidiaries to incur debt, engage in mergers and
consolidations, make restricted payments, make asset sales, make
investments and issue stock. The Company is required to meet certain
financial covenants including consolidated net worth, fixed charge coverage
and leverage ratios.
31
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) Borrowings (continued)
The Company has loan commitments in the aggregate amount of approximately
$1.1 million related to the modernization of its Beecher Falls
manufacturing facility. Loans made pursuant to these commitments bear
interest at rates ranging from 3.0% to 5.5% and have maturities of 10 to 30
years. The loans have a first and second lien in respect of equipment
financed by such loans and a first and second mortgage interest in respect
of a building, the construction of which was financed by such loans.
During fiscal year 1998, the Company completed its optional early
redemption of all of its then-outstanding $52.4 million 8-3/4% Senior
Notes, due on March 15, 2001, at 101.458% of par value. As a result of the
early redemption, an extraordinary charge of $0.8 million or $0.02 a share,
net of tax benefit, was recorded. The extraordinary charge included the
write-off of unamortized deferred financing costs associated with the
Senior Notes and the premium related to the early redemption. During fiscal
year 1998, $0.1 million of Senior Notes was repurchased at 102.19% of face
value.
Aggregate scheduled maturities of long-term debt for each of the five
fiscal years subsequent to June 30, 2001, and thereafter are as follows
(dollars in thousands):
2002 . . . . . . . . . . . $ 131
2003 . . . . . . . . . . . 141
2004 . . . . . . . . . . . 61
2005 . . . . . . . . . . . 4,662
Subsequent to 2005 . . . . . 4,492
(6) Leases
Ethan Allen leases real property and equipment under various operating
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.
Future minimum payments by year and in the aggregate under non-cancelable
operating leases consisted of the following at June 30, 2000 (dollars in
thousands):
Fiscal Year Ending June 30:
---------------------------
2001 $ 12,599
2002 12,736
2003 12,595
2004 10,627
2005 8,160
Subsequent to 2005 24,384
-------
Total minimum lease payments $ 81,101
=======
The above amounts will be offset in the aggregate by minimum future rentals
from subleases of $20.4 million.
32
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) Leases (continued)
Total rent expense for the fiscal years ended June 30 was as follows
(dollars in thousands):
2000 1999 1998
-------- -------- --------
Basic rentals under operating
leases $ 16,102 $ 16,761 $ 14,997
Contingent rentals under
operating leases 1,972 1,509 977
-------- -------- --------
18,074 18,270 15,974
Less sublease rent 3,314 2,812 2,173
-------- -------- --------
$ 14,760 $ 15,458 $ 13,801
======== ======== ========
(7) Shareholders' Equity
On April 28, 1999, the Company declared a three-for-two stock split to be
distributed on May 21, 1999 to shareholders of record on May 7, 1999. On
August 6, 1997, the Company declared a two-for-one stock split to be
distributed on September 2, 1997 to shareholders of record on August 18,
1997. All related amounts have been retroactively adjusted to reflect the
stock splits.
On May 20, 1996, the Board of Directors adopted a Stockholder Rights Plan
and declared a dividend of one Right for each outstanding share of common
stock as of July 10, 1996. Each Right entitles its holder, under certain
circumstances, to purchase one one-hundredth of a share of the Company's
Series C Junior Participating Preferred Stock at a price of $41.67 on a
post split basis. The Rights may not be exercised until 10 days after a
person or group acquires 15% or more of the Company's common stock, or 15
days after the commencement or the announcement of the intent to commence a
tender offer which, if consummated, would result in a 15% or more ownership
of the Company's common stock. Until then, separate Rights certificates
will not be issued, nor will the Rights be traded separately from the
stock. Should an acquirer become the beneficial owner of 15% of the
Company's common stock, and under certain additional circumstances, the
Company's stockholders (other than the acquirer) would have the right to
receive in lieu of the Series C Junior Participating Preferred Stock, a
number of shares of the Company's common stock, or in stock of the
surviving enterprise if the Company is acquired, having a market value
equal to two times the purchase price per share.
The Rights will expire on May 31, 2006, unless redeemed prior to that date.
The redemption price is $0.01 per Right. The Board of Directors may redeem
the Rights at its option any time prior to the announcement that a person
or group has acquired 15% or more of the Company's common stock.
The Company's authorized capital stock consists of (a) 150,000,000 shares
of Common Stock, par value $.01 per share, (b) 600,000 shares of Class B
Common Stock, par value $.01 per share, (c) 1,055,000 shares of Preferred
Stock, par value $.01 per share of which (i) 30,000 shares have been
designated Series A Redeemable Convertible Preferred Stock, (ii) 30,000
shares have been designated Series B Redeemable Convertible Preferred
Stock, (iii) 155,010 shares have been designated as Series C Junior
Participating Preferred Stock, and (iv) the remaining 839,990 shares may be
designated by the Board of Directors with such rights and preferences as
they determine (all such preferred stock, collectively, the "Preferred
Stock").
33
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) Shareholders' Equity (continued)
As of June 30, 2000, no shares of Preferred Stock or shares of Class B
Common Stock were issued or outstanding.
The Company has been authorized by its Board of Directors to repurchase 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 shareholders' equity. During fiscal years 2000 and
1999, the Company repurchased 1,928,350 and 1,921,784 shares of its Common
Stock for $49.6 million, an average of $25.72 per share and $45.1 million,
an average of $23.49 per share, respectively. The Company funded its
purchases through cash from operations and through revolver loan borrowings
under the Credit Agreement. As of June 30, 2000, the Company has a
remaining Board authorization to purchase 1.4 million shares.
(8) Earnings per Share
The following table sets forth the calculation of weighted average shares
for the fiscal years ended June 30 (shares in thousands):
2000 1999 1998
------- ------ -------
Weighted average common shares
outstanding for basic
calculation 40,301 41,278 43,050
Add: Effect of stock options
and warrants 897 1,009 1,086
------ ------ ------
Weighted average common shares
outstanding, adjusted for
diluted calculation 41,198 42,287 44,136
====== ====== ======
Stock options to purchase 986,600 shares of common stock had an exercise
price in excess of the average market price in fiscal year 2000. These
options have been excluded from the diluted earnings per share calculation
since their impact is anti-dilutive.
(9) Employee Stock Plans
The Company has reserved 7,419,699 shares of Common Stock for issuance
pursuant to the Company's stock option and warrant plans as follows:
1992 Stock Option Plan
The 1992 Stock Option Plan provides for the grant of options to employees
and non-employee directors to purchase shares of Common Stock that are
either qualified or non-qualified under Section 422 of the Internal Revenue
Code, as well as stock appreciation rights on such options. The awarding of
such options is determined by the Compensation Committee of the Board of
Directors after consideration of recommendations proposed by the Chief
Executive Officer. The options awarded to employees vest 25% per year over
a four-year period and are exercisable at the market value of the Common
Stock at the date of grant. The maximum number of shares of Common Stock
reserved for issuance under the 1992 Stock Option Plan is 5,490,597 shares.
34
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) Employee Stock Plans (continued)
Incentive Stock Option Plan
In 1991, pursuant to the Incentive Stock Option Plan, the Company granted
to members of management options to purchase 829,542 shares of Common Stock
at an exercise price of $5.50 per share. Such options vest twenty percent
per year over a five year period.
Management Warrants
Warrants to purchase 699,560 shares of Common Stock were granted to certain
key members of management during fiscal years 1991 and 1992. The warrants
have been fully earned and were exercisable at $1.23 per share.
Restricted Stock Award
Commencing in 1994 and for each of the four subsequent years, annual awards
of 30,000 shares of restricted stock were granted to Mr. Kathwari with the
vesting based on performance of the Company's stock price during the three
year period after grant as compared to the Standard and Poors 500 index. As
of June 30, 2000, 90,000 shares have been deemed vested.
Stock Unit Award
During fiscal year 1998, the Company established a book account for Mr.
Kathwari, which will be credited with 21,000 Stock Units as of July 1 of
each year, commencing July 1, 1997, for a total of up to 105,000 Stock
Units, with an additional 21,000 Stock Units to be credited in connection
with each of the two one-year extensions. Following the termination of Mr.
Kathwari's employment, Mr. Kathwari will receive shares of Common Stock
equal to the number of Stock Units credited to the account.
Stock option and warrant activity during fiscal years 2000, 1999 and 1998
is as follows:
Number of
Shares
---------------------------------------
92 Stock Incentive Management
Option Plan Options Warrants
----------- --------- -----------
Options Outstanding
at June 30, 1997 1,611,699 383,331 192,834
Granted in 1998 1,610,400 -- --
Exercised in 1998 (112,629) (55,210) (108,274)
Canceled in 1998 (6,900) (15) (15)
---------- ---------- ----------
Options Outstanding
at June 30, 1998 3,102,570 328,106 84,545
Granted in 1999 104,700 -- --
Exercised in 1999 (64,034) (32,247) (37,756)
Canceled in 1999 (33,761) (2) (2,101)
---------- ---------- ----------
Options Outstanding
at June 30, 1999 3,109,475 295,857 44,688
Granted in 2000 395,290 -- --
Exercised in 2000 (88,063) (281,850) (44,680)
Canceled in 2000 (33,112) (7) (8)
---------- ---------- ----------
Options Outstanding
at June 30, 2000 3,383,590 14,000 --
========== ========== ==========
35
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) Employee Stock Plans (continued)
The following table summarizes the stock awards outstanding at June 30,
2000:
Weighted Weighted
Average Average
Range of Number Remaining Exercise
Prices Outstanding Life Price
--------------- ----------- -------- --------
1992 Stock Option Plan $ 6.00 to $ 6.50 1,168,400 4.7 yrs $ 6.37
$14.50 to $18.21 157,800 6.7 yrs $ 15.10
$21.17 to $25.00 1,070,790 7.9 yrs $ 22.18
$26.25 to $27.81 856,450 7.4 yrs $ 27.41
$30.75 to $32.67 130,150 8.9 yrs $ 31.36
----------
3,383,590
Incentive Options $ 5.50 14,000 0.5 yrs $ 5.50
The following table summarizes the number of shares exercisable at June 30,
2000:
Weighted
Number of Average
Range of Shares Exercise
Prices Exercisable Price
--------------- ----------- --------
1992 Stock Option Plan $ 6.00 to $ 6.50 808,400 $ 6.37
$14.50 to $18.21 112,013 $14.92
$21.17 to $25.00 536,000 $21.17
$26.25 to $27.81 529,738 $27.47
$30.75 to $32.67 18,524 $32.67
---------
2,004,675
Incentive Options $ 5.50 14,000 $ 5.50
Had compensation costs related to the issuance of stock options under the
Company's 1992 Stock Option Plan been determined based on the estimated
fair value at the grant dates for awards under SFAS No. 123, the Company's
net income end earnings per share for the fiscal years ended June 30, 2000,
1999 and 1998 would have been reduced to the proforma amounts listed below,
(dollars in thousands, except per share data):
2000 1999 1998
-------- -------- -------
Net Income
As reported $90,570 $81,288 $71,146
Proforma 86,630 77,840 67,945
Net Income per Basic Share
As reported $ 2.25 $ 1.97 $ 1.65
Proforma 2.15 1.89 1.58
Net Income per Diluted Share
As reported $ 2.20 $ 1.92 $ 1.61
Proforma 2.10 1.84 1.54
36
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) Employee Stock Plans (continued)
The per share weighted average fair value of stock options granted during
fiscal 2000, 1999 and 1998 was $12.24, $11.98, and $8.59, 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 6.22%, 5.15%, and
5.99% for fiscal 2000, 1999 and 1998, respectively, dividend yield of
0.61%, 0.60%, and 0.67% for fiscal 2000, 1999 and 1998, respectively,
expected volatility of 45.9%, 46.8%, and 43.3% in fiscal 2000, 1999 and
1998, respectively, and expected lives of five years for each.
(10) Income Taxes
Total income taxes were allocated as follows (dollars in thousands):
2000 1999 1998
------- ------- -------
Income from operations $ 56,200 $ 51,429 $ 46,582
Extraordinary charge -- -- (527)
Stockholders' equity (2,179) (2,409) (1,389)
-------- -------- --------
$ 54,021 $ 49,020 $ 44,666
======== ======== ========
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):
2000 1999 1998
-------- ---