SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 1-11692
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Ethan Allen Interiors Inc.; Ethan Allen Inc.; Ethan Allen Marketing Corporation;
Ethan Allen Manufacturing Corporation
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1275288
- ------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer ID No.)
incorporation or organization)
Ethan Allen Drive, Danbury, Connecticut 06811
-----------------------------------------------
(Address of principal executive offices)
(203) 743-8000
---------------
(Registrant's telephone number, including area code)
N/A
-----
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. [ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
40,791,733 at September 30, 1999
ETHAN ALLEN INTERIORS INC.
AND SUBSIDIARY
INDEX
PAGE
----
PART I. Financial Information:
Item 1. Consolidated Financial Statements as of
September 30, 1999 (unaudited) and
June 30, 1999 and for the three
months ended September 30, 1999 and
1998 (unaudited)
Consolidated Balance Sheets 2
Consolidated Statements of Operations 3
Consolidated Statements of Cash Flows 4
Consolidated Statements of Shareholders'
Equity 5
Notes to Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 11
Item 3 Quantitative and Qualitative Disclosures
about Market Risk 15
PART II. Other Information: 16
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of
Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES 17
1
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Dollars in thousands)
September 30,
1999 June 30,
(unaudited) 1999
------------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 13,399 $ 8,968
Accounts receivable, less allowances of $2,433
and $2,460 at September 30, 1999 and June 30, 1999 34,293 34,302
Notes receivable, current portion, less
allowances of $83 and $79 at September 30, 1999
and June 30, 1999, respectively 608 640
Inventories 150,988 144,045
Prepaid expenses and other current assets 20,236 14,088
Deferred income taxes 8,978 7,783
--------- -------
Total current assets 228,502 209,826
---------- -------
Property, plant and equipment, net 228,845 214,492
Intangibles, net of amortization of $17,190 and
$16,757 at September 30, 1999 and June 30, 1999,
respectively 54,162 51,598
Other assets 4,746 4,706
---------- ---------
Total assets $ 516,255 $ 480,622
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and
capital lease obligations $ 2,518 $ 757
Accounts payable 71,295 58,066
Income taxes payable 13,260 1,312
Accrued expenses 8,421 9,174
Accrued compensation and benefits 16,746 16,937
---------- ---------
Total current liabilities 112,240 86,246
---------- ---------
Long-term debt and capital lease obligations,
less current maturities 9,730 9,919
Other long-term liabilities 1,402 1,370
Deferred income taxes 28,137 32,552
---------- ---------
Total liabilities 151,509 130,087
---------- ---------
Commitments and Contingencies - -
Shareholders' equity:
Class A common stock, par value $.01, 150,000,000
shares authorized, 44,700,774 and 44,666,791
shares issued at September 30, 1999 and
June 30, 1999, respectively 447 447
Additional paid-in capital 268,846 267,286
--------- ---------
269,293 267,733
Less: Treasury stock (at cost), 3,909,041 shares
at September 30, 1999 and 3,745,928 shares at
June 30, 1999, respectively (83,341) (78,887)
------- -------
185,952 188,846
Retained earnings 178,794 161,689
--------- ---------
Total shareholders' equity 364,746 350,535
--------- ---------
Total liabilities and shareholders' equity $ 516,255 $ 480,622
========= =========
See accompanying notes to consolidated financial statements.
2
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
(Amounts in thousands, except per share data)
Three Months
Ended September 30,
1999 1998
--------- ---------
Net sales $ 189,592 $ 166,226
Cost of sales 101,071 89,222
--------- ----------
Gross profit 88,521 77,004
Operating expenses:
Selling 32,352 27,824
General and administrative 25,835 22,592
--------- ---------
Operating income 30,334 26,588
Interest and other miscellaneous income, net 525 470
Interest and other related financing costs 349 354
--------- ---------
Income before income taxes 30,510 26,704
Income tax expense 11,777 10,495
--------- --------
Net income $ 18,733 $ 16,209
========= ========
Per share data:
- ---------------
Basic earnings per common share:
Net income per basic share $ 0.46 $ 0.39
======== ========
Basic weighted average common shares
outstanding 40,856 42,011
Diluted earnings per common share:
Net income per diluted share $ 0.45 $ 0.38
======== ========
Diluted weighted average common shares
outstanding 41,915 42,995
See accompanying notes to consolidated financial statements.
3
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Three Months
Ended September 30,
1999 1998
-------- --------
Operating activities:
Net income $ 18,733 $ 16,209
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 4,137 3,897
Compensation expense related to restricted
stock award 267 126
Provision for deferred income taxes (5,610) 65
Other non-cash charges 83 8
Change in assets and liabilities:
Accounts receivable (519) (259)
Inventories (3,177) (9,902)
Prepaid and other current assets (6,098) (3,719)
Accounts payable 10,869 6,076
Income taxes payable 13,005 5,952
Accrued expenses (936) (755)
Other 41 (459)
-------- --------
Net cash provided by operating activities 30,795 17,239
-------- --------
Investing activities:
Proceeds from the disposal of property, plant
and equipment 34 -
Capital expenditures (11,885) (10,625)
Acquisition of businesses (9,886) (3,583)
Payments received on long-term notes receivable 164 142
-------- --------
Net cash used in investing activities (21,573) (14,066)
-------- --------
Financing activities:
Payments on revolving credit facilities (15,500) -
Borrowings on revolving credit facilities 17,500 23,000
Other payments on long-term debt, including
capital leases (429) (290)
Increase in deferred financing costs (507) -
Issuance of common stock 236 120
Payment of dividends (1,637) (1,138)
Payments to acquire treasury stock (4,454) (32,217)
-------- --------
Net cash used in financing activities (4,791) (10,525)
-------- --------
Net increase (decrease) in cash and cash
equivalents 4,431 (7,352)
Cash and cash equivalents at
beginning of period 8,968 19,380
-------- --------
Cash and cash equivalents at
end of period $ 13,399 $ 12,028
======== ========
See accompanying notes to consolidated financial statements.
4
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Consolidated Statements of Shareholders' Equity
Three Months Ended September 30, 1999
(Unaudited)
(Dollars in thousands)
Additional
Common Paid-in Treasury Retained
Stock Capital Stock Earnings Total
------- ----------- -------- -------- ---------
Balance at June 30, 1999 $ 447 $267,286 $(78,887) $161,689 $350,535
Issuance of common stock - 503 - - 503
Purchase of 163,113 shares
of treasury stock - - (4,454) - (4,454)
Tax benefit associated with the
exercise of employee options
and warrants - 1,057 - - 1,057
Dividends on common stock - - - (1,628) (1,628)
Net income - - - 18,733 18,733
-------- -------- -------- -------- --------
Balance at September 30, 1999 $ 447 $268,846 $(83,341) $178,794 $364,746
======= ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
5
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
(1) Basis of Presentation
Ethan Allen Interiors Inc. (the "Company") is a Delaware corporation
incorporated on May 25, 1989. The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiary Ethan Allen
Inc. ("Ethan Allen") and Ethan Allen's subsidiaries. All of Ethan Allen's
capital stock is owned by the Company. The Company has no other assets or
operating results other than those associated with its investment in Ethan
Allen.
(2) Interim Financial Presentation
All significant intercompany accounts and transactions have been eliminated
in the consolidated financial statements.
In the opinion of the Company, all adjustments, consisting only of normal
recurring accruals necessary for fair presentation, have been included in
the financial statements. The results of operations for the three months
ended September 30, 1999, are not necessarily indicative of results for the
fiscal year. It is suggested that the interim consolidated financial
statements be read in conjunction with the consolidated financial
statements and notes included in the Company's Annual Report on Form 10-K
for the year ended June 30, 1999.
(3) Inventories
Inventories at September 30, 1999 and June 30, 1999 are summarized as
follows (dollars in thousands):
September 30, June 30,
1999 1999
------------ --------
Retail merchandise $ 53,968 $ 49,742
Finished products 42,927 42,562
Work in process 17,434 16,143
Raw materials 36,659 35,598
-------- --------
$150,988 $144,045
======== ========
(4) Borrowings
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 revolving credit facility includes a sub-facility for trade and standby
letters of credit of $25.0 million and a swingline loan sub-facility of
$3.0 million. Loans under the revolving credit facility bear interest at
Chase Manhattan Bank's Alternative Base Rate ("ABR"), or adjusted LIBOR
plus .625%, which is subject to adjustment arising from changes in the
credit rating of Ethan Allen's senior unsecured debt. The Credit Agreement
provides for the payment of a commitment fee equal to the ABR per annum on
the average daily unused amount of the revolving credit commitment. The
Company is also required to pay a fee equal to the ABR per annum plus a
.125% per annum fee on the average daily letters of credit outstanding.
6
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
(4) Borrowings (continued)
The credit facility matures in five years and there are no minimum
repayments required during the term of the facility. The revolving loans
may be borrowed, repaid and reborrowed over the term of the facility until
final maturity.
The revolving credit facility contains various covenants which limit the
ability of the Company and its subsidiaries to incur debt, engage in
mergers and consolidations, make restricted payments, make asset sales,
make investments and issue stock. The Company is required to meet certain
financial covenants including consolidated net worth, fixed charge coverage
and leverage ratios.
(5) Contingencies
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 minimal in relation to the
total; however, liability under CERCLA may be joint and several. The
Company has concluded its involvement with one site and settled as a
de-minimis party. For two of the sites, the remedial investigation is
ongoing. A volume-based allocation of responsibility among the parties has
been prepared. 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. The Company has reserves
of approximately $500,000 applicable to these sites, which the Company
believes is sufficient to cover any resulting liability.
(6) Shareholders' Equity
Since July 1, 1999, 33,983 shares of common stock of the Company have been
issued to employees upon exercise of non-qualified stock options and
warrants under the Company's stock option plan. The increase in additional
paid-in capital from June 30, 1999 to September 30, 1999 represents i) the
difference between the exercise price for the stock options or warrants and
the par value of the common stock issued to option holders of $0.2 million,
ii) the income tax benefit of $1.1 million realized on the exercise of
these stock options and warrants and iii) $0.3 million recorded for
restricted stock during the period.
The Company has been authorized by its Board of Directors to repurchase its
common stock from time to time, either directly or through agents, in the
open market at prices and on terms satisfactory to the Company. The
Company's common stock repurchases are recorded as treasury stock and
result in a reduction of stockholder's equity. As of September 30, 1999,
the Company had repurchased 3,909,041 shares of its common stock for $83.3
million.
On April 28, 1999, the Board of Directors authorized a three-for-two stock
split to shareholders on record as of May 7, 1999, whereby additional
common shares arising from the stock split were distributed on May 21,
1999. All references in this Form 10-Q referring to shares, share prices,
per share amounts and stock plans have been adjusted retroactively for the
three-for-two stock split.
7
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
(7) Earnings Per Share
Basic and diluted earnings per share are calculated based on the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings
Per Share", using the following share data (amounts in thousands):
Three Months Ended
September 30,
1999 1998
------- -------
Weighted average common
shares outstanding for
basic calculation 40,856 42,011
Add: Effect of stock options
and warrants 1,059 984
------ ------
Weighted average common
shares outstanding for
diluted calculation 41,915 42,995
====== ======
(8) Segment Information
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" which changes the financial disclosure
requirements for operating segments. Segment information presented for 1998
has been restated to reflect the requirements of the new pronouncement. The
Company's reportable segments are strategic business areas that are managed
separately and offer different products and services. The Company's
operations are classified into two main businesses: wholesale and retail
home furnishings. The wholesale home furnishings business is principally
involved in the manufacture, sale and distribution of home furnishing
products to a network of independently-owned and Ethan Allen-owned stores.
The wholesale business consists of three operating segments; case goods,
upholstery, and home accessories. Wholesale profitability includes the
wholesale gross margin which is earned on wholesale sales to all retail
stores, including Ethan Allen-owned stores. The retail home furnishings
business sells home furnishing products through a network of Ethan
Allen-owned stores. Retail profitability includes the retail gross margin
which is earned based on purchases from the wholesale business.
The operating segments follow the same accounting policies. The Company
evaluates performance of the respective segments based upon revenues and
operating income. Inter-segment eliminations primarily comprise the
wholesale sales and profit on the transfer of inventory between segments.
Inter-segment eliminations also include items not allocated to reportable
segments.
The following table presents segment information for the three months ended
September 30, 1999 and 1998 (dollars in thousands):
1999 1998
-------- --------
Net Sales:
----------
Case Goods $ 86,238 $ 79,686
Upholstery 42,340 37,447
Home Accessories 20,368 18,594
Other (1) 3,356 3,814
------- --------
Wholesale Net Sales 152,302 139,541
Retail 79,070 61,805
Other (2) 1,705 1,775
Elimination of inter-segment sales (43,485) (36,895)
-------- --------
Consolidated Total $189,592 $166,226
======== ========
8
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
(8) Segment Information (continued)
1999 1998
-------- --------
Operating Income:
-----------------
Case Goods $ 30,537 $ 28,267
Upholstery 12,887 11,326
Home accessories 6,366 6,228
Unallocated corporate expenses (3) (21,515) (20,215)
-------- --------
Wholesale Operating Income 28,275 25,606
Retail 2,803 2,022
Other (2) 352 531
Eliminations (1,096) (1,571)
-------- --------
Consolidated Total $ 30,334 $ 26,588
======== ========
Total Assets:
-------------
Case Goods $113,142 $ 96,866
Upholstery 32,637 28,425
Home accessories 6,769 7,642
Corporate (4) 276,026 246,113
-------- --------
Wholesale Total Assets 428,574 379,046
Retail 105,315 86,407
Other (2) 6,372 4,918
Inventory Profit Elimination (5) (24,006) (19,739)
-------- --------
Consolidated Total $516,255 $450,632
======== ========
Capital Expenditures:
---------------------
Case Goods $ 4,295 $ 4,167
Upholstery 827 740
Home accessories 53 104
Other (6) 5,097 4,964
-------- --------
Wholesale Capital Expenditures 10,272 9,975
Retail 967 643
Other (2) 646 7
-------- --------
Consolidated Total $ 11,885 $ 10,625
======== ========
(1) The Other category included in the wholesale business consists of the
operating activity for indoor/outdoor furniture and the corporate
holding company.
(2) The Other category includes miscellaneous operating activities and
related assets.
(3) Unallocated corporate expenses primarily consist of corporate
advertising costs, unreimbursed training costs, system development
costs, and other corporate administrative charges.
(4) Corporate assets primarily include receivables from third party
retailers, finished goods inventory, property, plant and equipment,
intangible assets, deferred tax assets, and the Company's distribution
operations.
(5) Inventory profit elimination reflects the embedded wholesale profit in
the Company-owned store inventory that has not been realized. These
profits will be recorded when shipments are made to the retail
customer.
(6) The Other category includes unallocated capital expenditures made by
the corporate holding company.
There are 30 independent dealers located outside the United States.
Approximately 3% of the Company's total revenue is derived from sales
to these dealers.
9
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
(9) Wholly-Owned Subsidiary
The Company owns all of the outstanding stock of Ethan Allen, has no
material assets other than its ownership of Ethan Allen stock, and conducts
all significant operating transactions through Ethan Allen. The Company has
guaranteed Ethan Allen's obligations under its Credit Agreement.
The condensed balance sheets of Ethan Allen as of September 30, 1999 and
June 30, 1999 are as follows (dollars in thousands):
September 30, June 30,
1999 1999
------------- --------
Assets
------
Current assets $ 228,382 $ 209,768
Non-current assets 380,110 357,237
--------- ---------
Total assets $ 608,492 $ 567,005
========= =========
Liabilities
-----------
Current liabilities $ 110,464 $ 84,500
Non-current liabilities 39,269 43,841
--------- ---------
Total liabilities $ 149,733 $ 128,341
========= =========
A summary of Ethan Allen's operating activity for the three months ended
September 30, 1999 and 1998, are as follows (dollars in thousands):
Three Months
Ended September 30,
1999 1998
-------- ---------
Net sales $189,592 $166,226
Gross profit 88,521 77,004
Operating income 30,372 26,623
Interest expense 192 296
Amortization of deferred
financing costs 157 58
Income before income
tax expense 30,548 26,739
Net income $ 18,771 $ 16,244
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussions set forth in this form 10-Q should be read in conjunction with
the financial information included herein and the Company's Annual Report on
Form 10-K for the year ended June 30, 1999. Management's discussion and analysis
of financial condition and results of operations and other sections of this
report contain forward-looking statements relating to future results of the
Company. Such forward-looking statements are identified by use of
forward-looking words such as "anticipates", "believes", "plans", "estimates",
"expects", and "intends" or words or phrases of similar expression. These
forward-looking statements are subject to various assumptions, risk and
uncertainties, including but not limited to, changes in political and economic
conditions, demand for the Company's products, acceptance of new products,
conditions in the various real estate markets where the Company does business,
developments affecting the Company's products and to those discussed in the
Company's filings with the Securities and Exchange Commission. Accordingly,
actual results could differ materially from those contemplated by the
forward-looking statements.
Results of Operations:
Ethan Allen's revenues are 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. The Company's retail
sales are derived from sales from company-owned retail stores. See Note 8 to the
Company's Consolidated Financial Statements for the Three Months Ended September
30, 1999. The components of consolidated revenues and operating income are as
follows (dollars in millions):
Three Months Ended September 30,
1999 1998
------- ------
Revenue:
Wholesale Revenue:
Case goods $ 86.2 $ 79.7
Upholstery 42.3 37.4
Home Accessories 20.4 18.6
Other 3.4 3.8
----- -----
Total Wholesale Revenue 152.3 139.5
Total Retail Revenue 79.1 61.8
Other 1.7 1.8
Elimination of inter-segment sales (43.5) (36.9)
----- -----
Consolidated Revenue $189.6 $166.2
====== ======
Operating Income:
Wholesale Operating Income:
Case goods $ 30.5 $ 28.3
Upholstery 12.9 11.3
Home Accessories 6.4 6.2
Unallocated Corporate Expenses (21.5) (20.2)
----- ------
Total Wholesale Operating Income 28.3 25.6
Total Retail Operating Income 2.8 2.0
Other 0.3 0.5
Eliminations (1.1) (1.5)
------ ------
Consolidated Operating Income $ 30.3 $ 26.6
====== ======
11
Three Months Ended September 30, 1999 Compared to Three Months Ended
September 30, 1998
Consolidated revenue for the three months ended September 30, 1999
increased by $23.4 million or 14.1% to $189.6 million from $166.2 million for
the three months ended September 30, 1998. Overall sales growth resulted from
new product offerings, new and relocated stores and growth in the retail
segment.
Total wholesale revenue for the first quarter of fiscal year 2000
increased by $12.8 million or 9.2% to $152.3 million from $139.5 million in the
first quarter of fiscal year 1999. Case goods revenue increased $6.5 million or
8.2% to $86.2 million for the three months ended September 30, 1999 as compared
to $79.7 million in the corresponding period in the prior year mainly due to new
product offerings and the benefit of a selected price increase effective
December 1, 1998.
Upholstery revenue increased $4.9 million or 13.1% to $42.3 million in
the first quarter of fiscal year 2000 as compared to $37.4 million in the first
quarter of fiscal year 1999. The increase in revenue of $4.9 million was
primarily attributable to a focused marketing effort and new fabric
introductions.
Home accessories revenue increased $1.8 million or 9.7% to $20.4
million in the first quarter of fiscal year 2000 as compared to $18.6 million in
the first quarter of fiscal year 1999. This increase resulted from enhanced
merchandising strategies and an improved in-stock inventory position which
reduced customer lead time.
Total retail revenue from Ethan Allen-owned stores for the three months
ended September 30, 1999 increased by $17.3 million or 28.0% to $79.1 million
from $61.8 million for the three months ended September 30, 1998. The increase
in retail sales by Ethan Allen-owned stores is attributable to a 10.8% or $6.1
million increase in comparable store sales, and an increase in sales generated
by newly opened or acquired stores of $14.5 million, partially offset by closed
stores, which generated $3.3 million less sales in fiscal year 2000 as compared
to fiscal year 1999. The number of Ethan Allen-owned stores increased to 77 as
of September 30, 1999 as compared to 71 as of September 30, 1998.
Comparable stores are those which have been operating for at least 15
months. Minimal net sales, derived from the delivery of customer ordered
product, are generated during the first three months of operations of newly
opened stores. Stores acquired from dealers by Ethan Allen are included in
comparable store sales in their 13th full month of Ethan Allen-owned operations.
Gross profit increased by $11.5 million or 15.0% to $88.5 million for
the first three months of fiscal year 2000 from $77.0 million for the first
three months of fiscal year 1999. This increase is attributable to higher sales
volume, combined with an increase in gross margin from 46.3% in the first
quarter of fiscal year 1999 to 46.7% in the first quarter of fiscal year 2000.
Gross margins have been favorably impacted by higher sales volumes, improvements
in manufacturing technology and production efficiencies, a selected case good
price increase effective December 1, 1998, and a higher percentage of retail
sales to total sales.
Operating expenses increased $7.8 million or 15.4% to $58.2 million or
30.7% of net sales in the current quarter as compared to $50.4 million or 30.3%
of net sales for the first quarter of fiscal year 1999. This increase is mainly
attributable to the expansion of the retail segment resulting in the addition of
10 new Ethan Allen-owned stores since September 30, 1998.
Consolidated operating income for the three months ended September 30,
1999 was $30.3 million or 16.0% of net sales compared to $26.6 million or 16.0%
of net sales for the three months ended September 30, 1998. This represents an
increase of $3.7 million or 13.9%. 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.
12
Total wholesale operating income for the first quarter of fiscal year
2000 was $28.3 million or 18.6% of net sales compared to $25.6 million or 18.4%
of net sales in the first quarter of fiscal year 1999. Wholesale operating
income increased $2.7 million or 10.5%. Case goods operating income increased
$2.2 million or 7.8% to $30.5 million for the first three months of fiscal year
2000 over the corresponding prior year period mainly due to higher sales volume
and a selected price increase effective December 1, 1998.
Upholstery operating income increased $1.6 million or 14.2% to $12.9
million in the first quarter of fiscal year 2000 as compared to $11.3 million in
the first quarter of fiscal year 1999. The increase resulted from higher sales
volume and lower operating expenses, partially offset by a reduction in gross
margin to 32.8% for the three months ended September 30, 1999 as compared to
33.0% for the three months ended September 30, 1998.
Home accessories operating income increased slightly by $0.2 million to
$6.4 million for the first three months of fiscal year 2000 from $6.2 million in
the first three months of fiscal year 1999. This increase resulted from higher
sales volume, offset by a reduction in gross margin to 32.2% from 34.5% for the
three months ended September 30, 1999.
Operating income from the retail segment increased by $0.8 million this
quarter to $2.8 million or 3.5% of net sales from $2.0 million or 3.3% of net
sales in the prior year quarter. The increase in retail operating income by
Ethan Allen-owned stores is primarily attributable to increased sales volume,
slightly offset by a reduction in gross margin from 43.8% in the first quarter
of fiscal year 1999 to 43.6% in fiscal year 2000 and a higher composition of
expenses related to the start-up of 5 retail stores and the acquisition of 7
additional stores from independent retailers since September 30, 1998.
Interest expense, including the amortization of deferred financing
costs, for the three months ended September 30, 1999 decreased $0.1 million to
$0.3 million from $0.4 million for the three months ended September 30, 1998.
Income tax expense of $11.8 million was recorded in the first quarter
as compared to $10.5 million in the prior year first quarter. The Company's
effective tax rate was 38.6% as of September 30, 1999 compared to 39.3% in the
corresponding prior year period. The decline in the effective income tax rate
resulted from planning strategies initiated by the Company during fiscal year
1999.
For the three months ended September 30, 1999, the Company recorded net
income of $18.7 million, an increase of 15.6%, compared to $16.2 million for the
three months ended September 30, 1998.
Financial Condition and Liquidity
- ---------------------------------
Principal sources of liquidity are cash flow from operations and
additional borrowing capacity under the revolving credit facility. Through
September 30, 1999, the Company used cash provided by operating activities of
$30.8 million, borrowings of $2.0 million from its revolving credit facility and
an increase in cash balances of $4.4 million to fund acquisitions of treasury
stock of $4.5 million, capital expenditures of $11.9 million, store acquisitions
of $9.9 million, dividend payments of $1.6 million, and payments of $0.4 million
on long-term debt and capital leases.
During the three months ended September 30, 1999, capital spending
totaled $11.9 million as compared to $10.6 million in the three months ended
September 30, 1998. Capital expenditures for fiscal year 2000 are expected to be
approximately $50.0 million. The Company anticipates that cash from operations
will be sufficient to fund this level of capital expenditures. The current level
of anticipated capital spending, which is attributable primarily to
manufacturing efficiency improvements and new store openings, is expected to
continue for the foreseeable future.
13
Total debt outstanding at September 30, 1999 was $12.2 million. There
were $2.0 million of revolving loans outstanding under the Credit Agreement and
$16.2 million of trade and standby letters of credit outstanding as of September
30, 1999.
As of September 30, 1999, aggregate scheduled maturities of long-term
debt for each of the next five fiscal years are $0.1 million, $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. At September 30, 1999, the Company
had working capital of $116.3 million and a current ratio of 2.04 to 1.
The Company may from time to time, either directly or through agents,
repurchase its common stock in the open market through negotiated purchases or
otherwise, at prices and on terms satisfactory to the Company. Depending on
market prices and other conditions relevant to the Company, such purchases may
be discontinued at any time. During the three months ended September 30, 1999,
the Company purchased 123,000 shares of its stock on the open market at an
average price of $26.97 per share.
Year 2000
- ---------
The Company expects to implement the systems and programming changes
necessary to address Year 2000 issues and does not believe the cost of such
actions will have a material effect on the Company's results of operations or
financial condition. However, there is no guarantee that the Company, its
suppliers or other third parties will be able to make all of the modifications
necessary to address Year 2000 issues on a timely basis. This could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company views all of its retail, wholesale and
manufacturing applications as mission critical. The Company recently converted
its retail, wholesale and a portion of its manufacturing applications onto an
AS400 enterprise system, utilizing integrated software. The software is
substantially compliant, with all date fields expanded to meet year 2000
compliance requirements. The Company formed a redundant environment and has
rolled the date forward to the year 2000 and has completed testing all of its
business transactions. All programs tested are compliant.
Concurrently with the aforementioned project, the Company has been
remediating its pre-existing manufacturing systems. This process is complete in
the Company's wood and upholstery manufacturing facilities. Substantial progress
has been made in the Company's home accessory manufacturing systems and the
Company is in the final testing phase of the home accessory systems.
Investments have been made in the Company's peripheral hardware. These
investments were necessitated by the retail and wholesale systems conversion.
The Company compiled a comprehensive database of hardware and associated
software that is currently in service. All non compliant hardware has been
replaced. To date, the Company has expended less than $1.0 million in capital
expenditures related to Year 2000 remediation.
The Company's vertical integrated structure might to some degree
mitigate the impact of third parties' Year 2000 issues to adversely affect the
Company. However, the Company anticipates the possibility that not all of its
vendors, retailers and other third parties will have taken the necessary steps
to adequately address their respective Year 2000 issues on a timely basis. In
order to minimize the impact on the Company, a project team has been formed to
monitor the activities of third parties, including sending out inquiries and
evaluating responses.
Notwithstanding the progress the Company has made thus far in
remediating its existing systems and implementing new systems, the Company is
finalizing a formal contingency plan. The Company intends to continue monitoring
the progress of others in order to determine whether adequate services will be
provided to run the Company's operations in the Year 2000.
14
Item 3. Quantitative and Qualitative Disclosure about Market Risk
---------------------------------------------------------
The Company is exposed to interest rate risk primarily through its
borrowing activities. The Company's policy has been to utilize United States
dollar denominated borrowings to fund its working capital and investment needs.
Short term debt, if required, is used to meet working capital requirements and
long term debt is generally used to finance long term investments. There is
inherent roll-over risk for borrowings as they mature and are renewed at current
market rates. The extent of this risk is not quantifiable or predictable because
of the variability of future interest rates and the Company's future financing
requirements. At September 30, 1999, the Company had $2.5 million of short term
debt outstanding and $9.7 million of total long term debt outstanding.
The Company has one debt instrument outstanding with a variable
interest rate. This debt instrument has a principal balance of $4.6 million
which matures in 2004. Based on the principal outstanding in 1999, a one
percentage point increase in the variable interest rate would not have had a
significant impact on the Company's 1999 interest expense.
Currently, the Company does not enter into financial instruments
transactions for trading or other speculative purposes or to manage interest
rate exposure.
15
PART II. OTHER INFORMATION
Item 1. - Legal Proceedings
There has been no change to matters discussed in Business-Legal
Proceedings in the Company's Form 10-K as filed with the Securities and Exchange
Commission on September 22, 1999.
Item 2. - Changes in Securities
There has been no change to matters discussed in Description and
Ownership of Capital Stock in the Company's Form 10-K as filed with the
Securities and Exchange Commission on September 22, 1999.
Item 3. - Defaults Upon Senior Securities
None.
Item 4. - Submission of Matters to a Vote of Security Holders
None.
Item 5. - Other Information
None.
Item 6. - Exhibits and Reports on Form 8-K
27. Edgar Financial Data Schedule
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ETHAN ALLEN INTERIORS INC.
(Registrant)
DATE: 11/10/99 BY: /s/ M. Farooq Kathwari
-------- ------------------------------------
M. Farooq Kathwari
Chairman of the Board
President and Chief
Executive Officer
(Principal Executive Officer
and Acting Principal Financial
Officer)
DATE: 11/10/99 BY: /s/ Michele Bateson
-------- ------------------------------------
Michele Bateson
Corporate Controller
(Principal Accounting Officer)
17