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, 2000 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 1-11692 Ethan Allen Interiors Inc.; Ethan Allen Inc.; Ethan Allen Marketing Corporation; Ethan Allen Manufacturing Corporation (Exact name of registrant as specified in its charter) Delaware 06-1275288 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer ID No.) 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. 39,363,180 at October 31, 2000 ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY INDEX PAGE Part I. Financial Information: Item 1. Consolidated Financial Statements as of September 30, 2000 (unaudited) and June 30, 2000 and for the three months ended September 30, 2000 and 1999 (unaudited) Consolidated Balance Sheets 2 Consolidated Statements of Operations 3 Consolidated Statements of Cash Flows 4 Consolidated Statements of Shareholders' Equity 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures about Market Risk 15 Part II. Other Information: 16 Item 1. Legal Proceedings Item 2. Changes in Securities and Use of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K Signatures 17 ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY Consolidated Balance Sheets (Dollars in thousands) September 30, 2000 June 30, (unaudited) 2000 ----------- ---- ASSETS Current assets: Cash and cash equivalents $ 30,359 $ 14,024 Accounts receivable, less allowances of $2,215 and $2,751 at September 30, 2000 and June 30, 2000, respectively 34,664 34,336 Inventories 161,819 159,006 Prepaid expenses and other current assets 24,273 17,670 Deferred income taxes 11,554 10,751 Total current assets 262,669 235,787 Property, plant and equipment, net 251,119 247,738 Intangibles, net 54,063 54,770 Other assets 7,598 5,276 Total assets $ 575,449 $ 543,571 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt and capital lease obligations $ 373 $ 8,420 Accounts payable 85,410 65,879 Accrued expenses 14,347 11,003 Accrued compensation and benefits 20,697 22,966 Total current liabilities 120,827 108,268 Long-term debt 9,455 9,487 Other long-term liabilities 1,620 1,593 Deferred income taxes 33,912 33,714 Total liabilities 165,814 153,062 Commitments and contingencies Shareholders' equity: Class A common stock, par value $.01, 150,000,000 shares authorized, 45,071,726 and 45,081,384 shares issued at September 30, 2000 and June 30, 2000, respectively 451 451 Preferred stock, par value $.01, 1,055,000 shares authorized, no shares issued and outstanding at September 30, 2000 and June 30, 2000 - - Additional paid-in capital 272,924 272,710 273,375 273,161 Less: Treasury stock (at cost), 5,682,196 shares at September 30, 2000 and 5,674,278 shares at June 30, 2000 (128,708) (128,493) 144,667 144,668 Retained earnings 264,968 245,841 Total shareholders' equity 409,635 390,509 Total liabilities and shareholders' equity $ 575,449 $ 543,571 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, 2000 1999 ---- ---- Net sales $ 211,231 $ 189,592 Cost of sales 111,522 101,071 Gross profit 99,709 88,521 Operating expenses: Selling 38,078 33,458 General and administrative 28,922 24,729 Operating income 32,709 30,334 Interest and other miscellaneous income, net 766 525 Interest and other related financing costs 196 349 Income before income taxes 33,279 30,510 Income tax expense 12,579 11,777 Net income $ 20,700 $ 18,733 Per share data: Basic earnings per common share: Net income per basic share $ 0.53 $ 0.46 Basic weighted average common shares outstanding 39,405 40,856 Diluted earnings per common share: Net income per diluted share $ 0.52 $ 0.45 Diluted weighted average common shares outstanding 40,190 41,915 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, 2000 1999 ---- ---- Operating activities: Net income $ 20,700 $ 18,733 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,570 4,137 Compensation (benefit) expense related to restricted stock award (330) 267 Provision for deferred income taxes (605) (5,610) Other non-cash (income) expense (636) 83 Change in assets and liabilities: Accounts receivable (328) (519) Inventories (4,369) (3,177) Prepaid and other current assets (7,894) (6,098) Accounts payable 9,300 10,869 Income taxes payable 11,364 13,005 Accrued expenses 1,322 (936) Other (196) 41 Net cash provided by operating activities 32,898 30,795 Investing activities: Proceeds from the disposal of property, plant and equipment 2,315 34 Capital expenditures (9,185) (11,885) Acquisition of businesses - (9,886) Other 120 164 Net cash used in investing activities (6,750) (21,573) Financing activities: Borrowings on revolving credit facilities - 17,500 Payments on revolving credit facilities (8,000) (15,500) Other payments on long-term debt and capital leases (79) (429) Increase in deferred financing costs - (507) Net proceeds from issuance of common stock 51 236 Dividends paid (1,570) (1,637) Payments to acquire treasury stock (215) (4,454) Net cash used in financing activities (9,813) (4,791) Net increase (decrease) in cash and cash equivalents 16,335 4,431 Cash and cash equivalents at beginning of period 14,024 8,968 Cash and cash equivalents at end of period $ 30,359 $ 13,399 See accompanying notes to consolidated financial statements. 4 ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY Consolidated Statements of Shareholders' Equity Three Months Ended September 30, 2000 (Unaudited) (Dollars in thousands)
Additional Common Paid-in Treasury Retained Stock Capital Stock Earnings Total ----- ------- ----- -------- ----- Balance at June 30, 2000 $ 451 $272,710 $(128,493) $245,841 $390,509 Issuance of common stock upon exercise of stock options and restricted stock award compensation (benefit) - (279) - - (279) Purchase of 7,919 shares of treasury stock - - (215) - (215) Tax benefit associated with the exercise of employee options and warrants - 493 - - 493 Dividends declared on common stock - - - (1,573) (1,573) Net income - - - 20,700 20,700 Balance at September 30, 2000 $ 451 $272,924 $(128,708) $264,968 $409,635
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, 2000, are not necessarily indicative of results for the fiscal year. It is suggested that the interim consolidated financial statements are 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, 2000. Certain reclassifications have been made to prior year financial information in order to conform to the current year's presentation. These changes were made for disclosure purposes only and did not have an impact on previously reported results of operations or shareholders' equity. (3) New Accounting Standards In 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivatives and Hedging Activities" and in 2000, SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of No. 133." These statements require that all derivative instruments be recognized on the balance sheet at fair value effective July 1, 2000. Derivatives that are not hedges should be adjusted to fair value through earnings. For derivatives that are effective hedges, changes in fair value of the derivative should be recorded in either other comprehensive income or earnings. The ineffective portion of the derivative classified as a hedge will be immediately recognized in earnings. The Company adopted these standards as required beginning July 1, 2000. Upon review of the Company's current contracts, it was determined that the Company has no derivative instruments as defined under these standards. (4) Inventories Inventories at September 30, 2000 and June 30, 2000 are summarized as follows (dollars in thousands): September 30, June 30, 2000 2000 ---- ---- Finished goods $101,056 $103,787 Work in process 18,847 19,233 Raw materials 41,916 35,986 $161,819 $159,006 6 ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Unaudited) (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. 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. Over seventy-five percent of the remedial work has been performed at this site and Ethan Allen's portion of the remedial action should be completed in calendar year 2000. 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. (6) Earnings Per Share Basic and diluted earnings per share are calculated using the following share data (amounts in thousands): Three Months Ended September 30, 2000 1999 ---- ---- Weighted average common shares outstanding for basic calculation 39,405 40,856 Add: Effect of stock options and warrants 785 1,059 Weighted average common shares outstanding for diluted calculation 40,190 41,915 Stock options to purchase 895,000 shares of common stock had an exercise price in excess of the average market price. These options have been excluded from the diluted earnings per share calculation since their effect is anti-dilutive. (7) Segment Information 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. 7 ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Unaudited) (7) Segment Information (continued) Wholesale profitability includes the wholesale gross margin, which is earned on wholesale sales to all retail stores, including Ethan Allen-owned stores. 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, 2000 and 1999 (dollars in thousands): Three Months Ended September 30, 2000 1999 ---- ---- Net Sales: Case Goods $ 87,818 $ 86,238 Upholstery 47,978 42,340 Home Accessories 22,327 20,368 Other (1) 2,128 3,356 Wholesale Net Sales 160,251 152,302 Retail 98,526 79,070 Other (2) 1,704 1,705 Elimination of inter-segment sales (49,250) (43,485) Consolidated Total $211,231 $189,592 Operating Income: Case Goods $ 27,269 $ 30,537 Upholstery 14,493 12,887 Home Accessories 7,465 6,366 Unallocated corporate expenses (3) (23,209) (21,515) Wholesale Operating Income 26,018 28,275 Retail 5,843 2,803 Other (2) 163 352 Eliminations (6) 685 (1,096) Consolidated Total $ 32,709 $ 30,334 Capital Expenditures: Case Goods $ 3,074 $ 4,295 Upholstery 1,282 827 Home Accessories 45 53 Other (5) 1,177 2,190 Wholesale Capital Expenditures 5,578 7,365 Retail 3,458 3,874 Other (2) 149 646 Acquisition of businesses - 9,886 Consolidated Total $ 9,185 $ 21,771 8 ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Unaudited) (7) Segment Information (continued) September 30, 2000 1999 ---- ---- Total Assets: Case Goods $128,410 $113,142 Upholstery 38,015 32,637 Home Accessories 2,393 6,769 Corporate (4) 247,564 230,726 Wholesale Total Assets 416,382 383,274 Retail 177,164 150,615 Other (2) 8,389 6,372 Inventory Profit Elimination (6) (26,486) (24,006) Consolidated Total $575,449 $516,255 (1) The Other category included in the wholesale business consists of the operating activity for indoor/outdoor furniture and the corporate office. (2) The Other category includes miscellaneous operating activities. (3) Unallocated corporate expenses primarily consist of corporate advertising costs, unreimbursed training costs, system development costs, and other corporate administrative charges. (4) Corporate assets primarily include assets from the corporate office and from the Company's distribution operations, including cash, receivables from independent dealers, finished goods inventory, property, plant and equipment, intangible assets, and deferred tax assets. (5) The Other category primarily includes the capital expenditures made by the corporate office for the Company's distribution operations. (6) 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 shipped to the retail customer. There are 29 independent retail stores located outside the United States. Approximately 2.4% of the Company's net sales are derived from sales to these retail stores. (8) 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. 9 ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Unaudited) (8) Wholly-Owned Subsidiary (continued) The condensed balance sheets of Ethan Allen as of September 30, 2000 and June 30, 2000 are as follows (dollars in thousands): September 30, June 30, 2000 2000 ---- ---- Assets Current assets $ 262,623 $ 235,782 Non-current assets 454,868 448,059 Total assets $ 717,491 $ 683,841 Liabilities Current liabilities $ 119,151 $ 106,595 Non-current liabilities 44,987 44,794 Total liabilities $ 164,138 $ 151,389 A summary of Ethan Allen's operating activity for the three months ended September 30, 2000 and 1999, are as follows (dollars in thousands): Three Months Ended September 30, 2000 1999 ---- ---- Net sales $211,231 $189,592 Gross profit 99,709 88,521 Operating income 32,747 30,372 Interest expense and other related financing costs 196 349 Income before income tax expense 33,317 30,548 Net income $ 20,738 $ 18,771 (9) Subsequent Event In October of 2000, the Company purchased a manufacturing facility in Dublin, Virginia from Pulaski Furniture Corporation. This facility was opened in 1973 and consists of 450,000 square feet of Case Good manufacturing space and 120,000 square feet of distribution space. The acquisition was financed through cash from operations. 10 ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY 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, 2000. 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 7 to the Company's Consolidated Financial Statements for the three months ended September 30, 2000. The components of consolidated revenues and operating income are as follows (dollars in millions): Three Months Ended September 30, 2000 1999 ---- ---- Revenue: Wholesale Revenue: Case Goods $ 87.8 $ 86.2 Upholstery 48.0 42.3 Home Accessories 22.3 20.4 Other 2.2 3.4 Total Wholesale Revenue 160.3 152.3 Total Retail Revenue 98.5 79.1 Other 1.6 1.7 Elimination of inter-segment sales (49.2) (43.5) Consolidated Revenue $211.2 $189.6 Operating Income: Wholesale Operating Income: Case Goods $ 27.3 $ 30.5 Upholstery 14.5 12.9 Home Accessories 7.4 6.4 Unallocated Corporate Expenses (23.2) (21.5) Total Wholesale Operating Income 26.0 28.3 Total Retail Operating Income 5.8 2.8 Other 0.2 0.3 Eliminations 0.7 (1.1) Consolidated Operating Income $ 32.7 $ 30.3 11 ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY Three Months Ended September 30, 2000 Compared to Three Months Ended September 30, 1999 Consolidated revenue for the three months ended September 30, 2000 increased by $21.6 million or 11.4% to $211.2 million from $189.6 million for the three months ended September 30, 1999. Overall sales growth resulted from new product offerings, a selected price increase effective February 2000, and growth in the retail segment. Total wholesale revenue for the first quarter of fiscal year 2001 increased by $8.0 million or 5.3% to $160.3 million from $152.3 million in the first quarter of fiscal year 2000. Case goods revenue increased $1.6 million or 1.9% to $87.8 million for the three months ended September 30, 2000 as compared to $86.2 million in the corresponding prior year period due to a selected price increase and new product offerings, offset by fewer production days in the current quarter as compared to the prior year quarter. Upholstery revenue increased $5.7 million or 13.5% to $48.0 million in the first quarter of fiscal year 2001 as compared to $42.3 million in the first quarter of fiscal year 2000. The increase in revenue of $5.7 million was primarily attributable to a selected price increase, new product and new fabric introductions, and more attractive price points on new product offerings. Home accessories revenue increased $1.9 million or 9.3% to $22.3 million in the first quarter of fiscal year 2001 as compared to $20.4 million in the first quarter of fiscal year 2000. The increase is attributable to new product introductions and the resulting impact of a better in-stock position, thereby reducing customer lead times. Total retail revenue from Ethan Allen-owned stores for the three months ended September 30, 2000 increased by $19.4 million or 24.5% to $98.5 million from $79.1 million for the three months ended September 30, 1999. Comp stores sales increased 17.8% reflecting one additional delivery day included in the current quarter over the prior year quarter. The increase in retail sales by Ethan Allen-owned stores is attributable to a $12.8 million increase in comparable store sales, an increase in sales generated by newly opened or acquired stores of $8.7 million, and the gain on the sale of retail stores to an independent dealer of $0.8 million, partially offset by closed stores, which generated $2.9 million less sales in fiscal year 2001 as compared to fiscal year 2000. The number of Ethan Allen-owned stores increased to 80 as of September 30, 2000 as compared to 77 as of September 30, 1999. As a percentage of total net sales, retail sales represent 46.2% of total net sales in the first quarter of fiscal year 2000 as compared to 41.7% in the first quarter of the prior year. 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 $11.2 million or 12.7% to $99.7 million in the first quarter of fiscal year 2001 from $88.5 million in the first quarter of the prior year. The gross margin increased to 47.2% in the first quarter of fiscal year 2001 from 46.7% in the prior year first quarter. Gross margins have been favorably impacted by higher sales volumes, a price increase effective February 2000, and a higher percentage of retail sales to total sales, partially offset by higher manufacturing costs. Operating expenses increased $8.8 million or 15.1% to $67.0 million or 31.7% of net sales in the current quarter as compared to $58.2 million or 30.7% of net sales for the first quarter of fiscal year 2000. This increase is mainly attributable to the expansion of the retail segment resulting in the addition of three net new Ethan Allen-owned stores 12 ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY since September 30, 1999 and from increased business for comparable Ethan Allen-owned stores. Operating income for the three months ended September 30, 2000 was $32.7 million or 15.5% of net sales compared to $30.3 million or 16.0% of net sales for the three months ended September 30, 1999. This represents an increase of $2.4 million or 7.9%, which is primarily attributable to higher sales volume and a selected price increase, offset by higher manufacturing costs, primarily material and labor costs. Total wholesale operating income for the first quarter of fiscal year 2001 was $26.0 million or 16.2% of net sales compared to $28.3 million or 18.6% of net sales in the first quarter of fiscal year 2000. Wholesale operating income decreased $2.3 million or 8.1% this quarter. Case goods operating income decreased $3.2 million or 10.5% to $27.3 million for the first quarter of fiscal year 2001 over the corresponding prior year period mainly due to higher labor and material costs resulting, in part from changes in production scheduling between manufacturing facilities, fewer production days during the quarter as compared to the prior year quarter, and from the introduction of new products at lower margins. Upholstery operating income increased $1.6 million or 12.4% to $14.5 million in the first quarter of fiscal year 2001 as compared to $12.9 million in the first quarter of fiscal year 2000. The increase resulted from higher sales volume, a selected price increase, and lower manufacturing costs associated with higher production levels. Home accessories operating income increased $1.0 million or 15.6% to $7.4 million in the first quarter of fiscal year 2001 as compared to $6.4 million in the first quarter of fiscal year 2000. Operating income for home accessories increased primarily due to higher sales volume and a selected price increase. Operating income for the retail segment increased by $3.0 million in the three months ended September 30, 2000 to $5.8 million or 5.9% of net sales from $2.8 million or 3.5% of net sales from the three months ended September 30, 1999. The increase in retail operating income by Ethan Allen-owned stores is primarily attributable to increased sales volume and the gain recorded on the sale of retail stores, offset by higher operating expenses related to the addition of three net new stores this quarter and higher costs necessary to service the increase in sales volume. Interest expense for the three months ended September 30, 2000 decreased $0.1 million to $0.2 million from $0.3 million for the three months ended September 30, 1999. The decrease in interest expense is due to lower debt balances outstanding and lower amortization of deferred financing costs. Income tax expense of $12.6 million was recorded in the first quarter as compared to $11.8 million in the prior year first quarter. The Company's effective tax rate was 37.8% for the first quarter of fiscal year 2001 and 38.6% for the first quarter of fiscal year 2000. The decline in the effective income tax rate in the current quarter as compared to the prior year quarter resulted from the utilization of various state tax credits. 13 ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY For the three months ended September 30, 2000, the Company recorded net income of $20.7 million, an increase of 10.7%, compared to $18.7 million for the three months ended September 30, 1999. Earnings per diluted share of $0.52 increased 15.6% or $0.07 per diluted share in the quarter from $0.45 per diluted share in the prior year quarter. 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 $32.9 million for the three months ended September 30, 2000. The increase in net cash provided by operating activities principally resulted from an increase of $2.0 million in net income. Total debt outstanding at September 30, 2000 was $9.8 million. There were no revolving loans outstanding under the Credit Agreement. As of September 30, 2000, there were $16.2 million of trade and standby letters of credit outstanding. During the three months ended September 30, 2000, capital spending, exclusive of acquisitions, totaled $9.2 million as compared to $11.9 million in the three months ended September 30, 1999. Capital expenditures made during the three months ended September 30, 2000 primarily relate to i) manufacturing plant expansions in Boonville, New York and Andover, Maine, ii) manufacturing equipment purchases and upgrades, iii) the expansion of a distribution facility in Kentland, Indiana, and iv) new store construction and interior redesigns. Capital expenditures, exclusive of acquisitions, for fiscal year 2001 are expected to be approximately $45.0 million. The Company anticipates that cash from operations will be sufficient to fund this level of capital expenditures. As of September 30, 2000, 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, $4.7 million and $0.1 million, respectively. Management believes that its cash flow from operations, together with its other available sources of liquidity, will be adequate to make all required payments of principal and interest on its debt, to permit anticipated capital expenditures and to fund working capital and other cash requirements over the next twelve months. As of September 30, 2000, the Company had working capital of $141.8 million and a current ratio of 2.17 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, 2000, the Company did not purchase any of its common shares through the open market. 14 ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY 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. Although the Company did not have any revolving loans outstanding under the Credit Agreement as of September 30, 2000, the Company had $0.4 million of short term debt outstanding and $9.4 million of total long term debt outstanding, including capital lease obligations. The Company has one long term 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 balance outstanding, a one percentage point increase in the variable interest rate would not have had a significant impact on the Company's 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 ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY PART II. OTHER INFORMATION Item 1. - Legal Proceedings There has been no change to matters discussed in Business-Legal Proceedings in the Company's Annual Report on Form 10-K as filed with the Securities and Exchange Commission on September 13, 2000. Item 2. - Changes in Securities There has been no change to matters discussed in Description and Ownership of Capital Stock in the Company's Annual Report on Form 10-K as filed with the Securities and Exchange Commission on September 13, 2000. 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 ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY 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: 11/13/00 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: 11/13/00 BY: /s/ Michele Bateson Michele Bateson Corporate Controller (Principal Accounting Officer) 17