SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 -------------------------- 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. ------------------------------------------------------ (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. 39,397,273 at March 31, 2001 ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY INDEX PAGE Part I. Financial Information: Item 1. Consolidated Financial Statements as of March 31, 2001 (unaudited) and June 30, 2000 and for the three and nine months ended March 31, 2001 and 2000 (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 of Operations 10 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) March 31, 2001 June 30, (unaudited) 2000 ----------- -------- ASSETS Current assets: Cash and cash equivalents $ 37,557 $ 14,024 Accounts receivable, less allowances of $2,828 and $2,751 at March 31, 2001 and June 30, 2000, respectively 37,276 34,336 Inventories 169,640 159,006 Prepaid expenses and other current assets 20,983 17, 670 Deferred income taxes 12,049 10,751 --------- --------- Total current assets 277,505 235,787 Property, plant and equipment, net 271,138 247,738 Intangibles, net 53,211 54,770 Other assets 7,882 5,276 --------- --------- Total assets $ 609,736 $ 543,571 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt and capital lease obligations $ 232 $ 8,420 Accounts payable 76,210 65,879 Accrued expenses 12,723 11,003 Accrued compensation and benefits 25,037 22,966 --------- --------- Total current liabilities 114,202 108,268 Long-term debt 9,389 9,487 Other long-term liabilities 2,031 1,593 Deferred income taxes 33,542 33,714 --------- --------- Total liabilities 159,164 153,062 --------- --------- Shareholders' equity: Class A common stock, par value $.01, 150,000,000 shares authorized, 45,120,130 and 45,081,384 shares issued at March 31, 2001 and June 30, 2000, respectively 451 451 Preferred stock, par value $.01, 1,055,000 shares authorized, no shares issued and outstanding at March 31, 2001 and June 30, 2000 -- -- Additional paid-in capital 274,261 272,710 --------- --------- 274,712 273,161 Less: Treasury stock (at cost), 5,722,859 shares at March 31, 2001 and 5,674,278 shares at June 30, 2000 (129,ll8) (128,493) --------- --------- 145,594 144,668 Retained earnings 304,978 245,841 --------- --------- Total shareholders' equity 450,572 390,509 --------- --------- Total liabilities and shareholders' equity $ 609,736 $ 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 Nine Months Ended March 31, Ended March 31, 2001 2000 2001 2000 -------- -------- -------- -------- Net sales $233,791 $220,300 $677,689 $627,378 Cost of sales 130,280 117,152 366,732 331,810 -------- -------- -------- -------- Gross profit 103,511 103,148 310,957 295,568 Operating expenses: Selling 42,026 37,197 121,618 107,246 General and administrative 30,292 27,586 87,973 78,732 -------- -------- -------- -------- Operating income 31,193 38,365 101, 366 109,590 -------- -------- -------- -------- Interest and other miscellaneous income, net 1,188 13 1, 829 328 Interest and other related financing costs 178 392 563 978 -------- -------- -------- -------- Income before income taxes 32,203 37,986 102,632 108,940 Income tax expense 12,173 14,815 38,795 42,203 -------- -------- -------- -------- Net income $ 2O,O30 $ 23,171 $ 63,837 $ 66,737 ======== ======== ======== ======== Per share data: - -------------- Basic earnings per common share: Net income per basic share $ 0.51 $ 0.58 $ 1.62 $ 1.65 ======== ======== ======== ======== Basic weighted average common shares outstanding 39, 397 39, 998 39, 386 40,562 Diluted earnings per common share: Net income per diluted share $ 0.50 $ 0.57 $ 1.59 $ 1.61 ======== ======== ======== ======== Diluted weighted average common shares outstanding 40,442 40,755 40,267 41,523
See accompanying notes to consolidated financial statements. -3- ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY Consolidated Statements of Cash Flows (Unaudited) (Dollars in thousands) Nine Months Ended March 31, 2001 2000 -------- -------- Operating activities: Net income $ 63,837 $ 66,737 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 14,710 12,616 Compensation expense related to restricted stock award 324 641 Provision for deferred income taxes (1,470) (1,537) Other non-cash (income) expense (1,621) (553) Change in assets and liabilities, net of the effects from acquired and divested businesses: Accounts receivable (2,936) 370 Inventories (11,814) (10,401) Prepaid and other current assets (4,441) (4,661) Accounts payable 11,311 14,016 Accrued expenses 3,664 4,056 Other (1,138) (362) -------- -------- Net cash provided by operating activities 70,426 80,922 -------- -------- Investing activities: Proceeds from the disposal of property, plant and equipment 6,965 1,096 Capital expenditures (40,880) (31,922) Acquisition of retail businesses (291) (9,886) Other 329 627 -------- -------- Net cash used in investing activities (33,877) (40,085) -------- -------- Financing activities: Borrowings on revolving credit facilities 1,500 66,000 Payments on revolving credit facilities (9,500) (50,000) Other payments on long-term debt and capital leases (287) (701) Increase in deferred financing costs -- (507) Net proceeds from issuance of common stock 603 2,123 Dividends paid (4,707) (4,894) Payments to acquire treasury stock (625) (45,736) -------- -------- Net cash used in financing activities (13,016) (33,715) -------- -------- Net increase in cash and cash equivalents 23,533 7,122 Cash and cash equivalents at beginning of period 14,024 8,968 -------- -------- Cash and cash equivalents at end of period $ 37,557 $ 16,090 ======== ======== See accompanying notes to consolidated financial statements. -4- ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY Consolidated Statements of Shareholders' Equity Nine Months Ended March 31, 2001 (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 -- 927 -- -- 927 Purchase of treasury shares relating to employee benefit and compensation plans -- -- (625) -- (625) Tax benefit associated with the exercise of employee options and warrants -- 624 -- -- 624 Dividends declared on common -- -- -- (4,700) (4,700) stock Net income -- -- -- 63,837 63,837 ------ -------- --------- -------- -------- Balance at March 31, 2001 $ 451 $274,261 $(129,118) $304,978 $450,572 ====== ======== ========= ======== ========
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 and nine months ended March 31, 2001, 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 March 31, 2001 and June 30, 2000 are summarized as follows: (dollars in thousands): March 31, June 30, 2001 2000 -------- --------- Finished goods $103,203 $103,787 Work in process 21,574 19,233 Raw materials 44,863 35,986 -------- -------- $169,640 $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 two sites currently listed on the National Priorities List ("NPL") under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), which the Company may be subject to future costs and/or liabilities. With respect to both of these sites, the Company believes 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 sites; however, liability under CERCLA may be joint and several. For one of the sites, the SRSNE Superfund Site in Southington, Connecticut, the remedial investigation is ongoing. A volume-based allocation of responsibility among the parties has been prepared, which includes other parties identified as PRP's at this site. The Company is also a settling defendant and is responsible, in part, for funding remedial design and construction activities at the Parker Landfill Superfund Site in Lyndonville, Vermont. Over ninety-five percent of these activities have been successfully completed. The Company believes that the resolution of these matters will not, either individually or in the aggregate, 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 Nine Months Ended March 31, March 31, 2001 2000 2001 2000 ----- ---- ---- ---- Weighted average common shares outstanding for basic calculation 39,397 39,998 39,386 40,562 Add: Effect of stock options and warrants 1,045 757 881 961 ------ ------ ------ ------ Weighted average common shares outstanding for diluted calculation 40,442 40,755 40,267 41,523 ====== ====== ====== ====== As of March 31, 2000, stock options to purchase 998,950 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 segments: wholesale and retail home furnishings. The wholesale home furnishings segment is principally involved in the manufacture, sale and distribution of home furnishing products to a network of independently-owned and Ethan Allen-owned stores. 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 segment 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 segment. -7- ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY Notes to Consolidated Financial Statement (Unaudited) (7) Segment Information (continued) The operating segments follow the same accounting policies. The Company evaluates performance of the respective segments based upon revenues and operating income. Inter-company eliminations primarily comprise the wholesale sales and profit on the transfer of inventory between the wholesale and retail segments. Inter-company eliminations also include items not allocated to reportable segments. During the third quarter of 2001, the Company re-evaluated its operating segments and as a result changed its reporting format from five segments (Case Goods, Upholstery, Home Accessories, Retail and Other) to two segments (Wholesale and Retail). This change reflects how management currently manages its operations, resulting in part from the growth of the Company's retail business. The following table presents segment information for the three and nine months ended March 31, 2001 and 2000 (dollars in thousands):
Three Months Ended Nine Months Ended March 31, March 31, 2001 2000 2001 2000 ---- ---- ---- ---- NET SALES: - --------- Wholesale $ 188,887 $ 185,761 $ 530,220 $ 509,909 Retail 104,333 92,222311,592 270,174 Elimination of inter-company sales (59,429) (57,683) (164,123) (152,705) --------- --------- --------- --------- Consolidated Total $ 233,791 $ 220,300 $ 677,689 $ 627,378 ========= ========= ========= ========= OPERATING INCOME: - ---------------- Wholesale $ 26,881 $ 36,813 $ 81,271 $ 98,546 Retail 5,419 4,947 18,057 14,564 Elimination (1) (1,107) (3,395) 2,038 (3,520) --------- --------- --------- --------- Consolidated Total $ 31,193 $ 38,365 $ 101,366 $ 109,590 ========= ========= ========= ========= CAPITAL EXPENDITURES: - -------------------- Wholesale (2) $ 5,362 $ 5,106 $ 26,420 17,118 Retail 4,498 14,575 14,460 14,804 Acquisition of retail businesses 12 - 291 9,886 --------- --------- --------- --------- Consolidated Total $ 9,872 $ 9,681 $ 41,171 $ 41,808 ========= ========= ========= ========= TOTAL ASSETS: - ------------ Wholesale $ 450,263 $ 392,313 Retail 184,266 169,049 Inventory profit elimination (3) (24,793) (26,308) --------- --------- Consolidated Total $ 609,736 $ 535,O54 ========= =========
(1) The elimination in operating income includes the elimination for retail profit in ending inventory. (2) Wholesale capital expenditures for the nine months ended March 31, 2001 include the purchase of a manufacturing facility in Dublin, Virginia in October of 2000. (3) 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. -8- ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY Notes to Consolidated Financial Statement (Unaudited) (7) SEGMENT INFORMATION (continued) There are 29 independent retail stores located outside the United States. Approximately 2.4% and 2.8% of the Company's net sales for the nine month period ended March 31, 2001 and 2000, respectively 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. The condensed balance sheets of Ethan Allen as of March 31, 2001 and June 30, 2000 are as follows (dollars in thousands): March 31, June 30, 2001 2000 -------- -------- ASSETS Current assets $277,462 $235,782 Non-current assets 477,371 448,059 -------- -------- Total assets $754,833 $683,841 ======== ======== LIABILITIES Current liabilities $112,521 $106,595 Non-current liabilities 44,962 44,794 -------- -------- Total liabilities $157,483 $151,389 ======== ======== A summary of Ethan Allen's operating activity for the three and nine months ended March 31, 2001 and 2000, are as follows (dollars in thousands): Three Months Nine Months Ended Ended March 31, March 31, 2001 2000 2001 2000 ---- ---- ---- ----- Net sales $233,791 $220,300 $677,689 $627,378 Gross profit 103,511 103,148 310,957 295,568 Operating income 31,231 38,403 101,479 109,703 Interest expense and other related financing costs 178 392 563 978 Income before income tax expense 32,241 38,024 102,745 109,053 Net income $ 20,068 $ 23,209 $ 63,950 $ 66,850 -9- ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY ITEM 2. 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 geographical 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. See Note 7 to the Company's Consolidated Financial Statements for the three and nine months ended March 31, 2001 and 2000. The components of consolidated revenues and operating income are as follows (dollars in millions):
Three Months Ended Nine Months Ended March 31, March 31, 2001 2000 2001 2000 ------ ------ ------ ------ Revenue: Wholesale $ 188.9 $ 185.7 $ 530.2 $ 509.9 Retail 104.3 92.2 311.6 270.2 Elimination of inter-segment sales (59.4) (57.6) (164.1) (152.7) ------ ------ ------ ------ Consolidated Revenue $ 233.8 $ 220.3 $ 677.7 $ 627.4 ====== ====== ====== ====== Operating Income: Wholesale $ 26.9 $ 36.8 $ 81.3 $ 98.6 Retail 5.4 5.0 18.1 14.6 Eliminations (1.1) (3.4) 2.0 (3.6) ------ ------ ------ ------ Consolidated Operating Income $ 31.2 $ 38.4 $ 101.4 $ 109.6 ====== ====== ====== ======
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000 Consolidated revenue for the three months ended March 31, 2001 increased by $13.5 million or 6.1% to $233.8 million from $220.3 million for the three months ended March 31, 2000. The growth in sales resulted from new product introductions, a selective price increase effective February 2000, an increase in company-owned comparable store sales of 10.7% and the addition of six net new company-owned stores since March 2000. Total wholesale revenue for the third quarter of fiscal year 2001 increased by $3.2 million or 1.7% to $188.9 million from $185.7 million in the third quarter of fiscal year 2000. This increase resulted from a selective price increase and new product introductions offered at more affordable price points, which attracted a larger and broader consumer base to our stores in the third quarter of fiscal year 2001. These increases were partially offset by a new program put into place during the second quarter of this fiscal year called 'Branding the Interior' of the stores. This program refers to the Company's plan to feature the best selling items in the most effective display settings. In preparation, a slowdown in home accessory orders has occurred while many stores reduced their overall home accessory inventory items on display and for sale in the retail stores. -10- ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY Total retail revenue from Ethan Allen-owned stores for the three months ended March 31, 2001 increased by $12.1 million or 13.1% to $104.3 million from $92.2 million for the three months ended March 31, 2000. The increase in retail sales by Ethan Allen owned stores is attributable to an increase in comparable store sales of $8.2 million, or 10.7%, and an increase in sales generated by newly opened or acquired stores of $8.4 million, partially offset by closed stores, which generated $3.8 million less sales in fiscal year 2001 as compared to fiscal year 2000 and a prior quarter gain of $0.7 million on the sale of a retail store to an independent dealer. The number of Ethan Allen-owned stores increased to 84 as of March 31, 2001 as compared to 78 as of March 31, 2000. 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. Booked orders for the quarter were lower than the prior year quarter by 6.0%, however, last year's increase was 19.2%. Total orders include wholesale orders and written business of company-owned retail stores. Wholesale orders were down 7.2% and orders for company-owned stores were down 1.7% reflecting an overall slowdown in the economy during the quarter. Gross profit increased slightly during the quarter to $103.5 million from $103.1 million in the third quarter of the prior year. The $0.4 million increase in gross profit was mainly due to greater sales volume, a selective price increase effective February 2000 and a higher percentage of retail sales to total sales, offset by a decline in the wholesale gross margin. Gross margin decreased to 44.3% in the third quarter of fiscal year 2001 from 46.8% in the prior year third quarter principally from the sale of more affordably priced products manufactured at lower margins, impacting the wholesale gross margin. Higher costs were also incurred from plant expansions, including the start-up of the new case goods manufacturing facility in Dublin, Virginia and other initiatives necessary to increase production capacity. Operating expenses increased $7.5 million or 11.6% to $72.3 million or 30.9% of net sales in the current quarter as compared to $64.8 million or 29.4% of net sales for the third quarter of fiscal year 2000. This increase was mainly due to the expansion of the retail segment resulting in the addition of six net new Ethan Allen-owned stores since March 2000 and from increased business for comparable Ethan Allen-owned stores. Additionally, this quarter, the Company also experienced increases in utilities, fuel and freight, and employee benefit costs. Operating income for the three months ended March 31, 2001 was $31.2 million or 13.3% of net sales compared to $38.4 million or 17.4% of net sales for the three months ended March 31, 2000. Operating income decreased $7.2 million or 18.8% primarily due to a lower wholesale gross margin as noted above, greater operating expenses resulting from the growth of the retail segment and an overall increase in energy costs and employee benefits this quarter, partially offset by higher sales volume, a selective price increase effective February 2000, and a higher percentage of retail sales to total sales. Total wholesale operating income for the third quarter of fiscal year 2001 was $26.9 million or 14.2% of net sales compared to $36.8 million or 19.8% of net sales in the third quarter of fiscal year 2000. Wholesale operating income decreased $9.9 million or 26.9% this quarter due to greater production of lower margin items designed to broaden our consumer base, higher distribution costs due to increases in utilities, fuel and freight, and employee benefit costs. In addition, wholesale operating income was impacted by the costs relating to the start up of the Dublin, Virginia manufacturing facility and other plant expansion projects necessary to increase production capacity. -11- ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY Operating income for the retail segment increased by $0.4 million for the three months ended March 31, 2001 to $5.4 million or 5.2% of net sales from $5.0 million or 5.4% of net sales for the three months ended March 31, 2000. The increase in retail operating income is primarily attributable to higher sales volume and a selective price increase effective February 2000. These increases were offset by higher operating expenses related to the addition of six net new stores since March 2000 and higher compensation costs necessary to strengthen the staffing of the retail division. Interest and other miscellaneous income of $1.2 million increased over the prior year third quarter principally from the gain on the sale of real property related to a retail store relocation. Interest expense for the three months ended March 31, 2001 decreased $0.2 to $0.2 from $0.4 in the prior year period due to lower debt balances outstanding. Income tax expense of $12.2 million was recorded in the third quarter as compared to $14.8 million in the prior year third quarter. The Company's effective tax rate was 37.8% for the third quarter of fiscal year 2001 and 39.0% for the third 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 income tax credits and from the realization of tax planning strategies. For the three months ended March 31, 2001, the Company recorded net income of $20.0 million, a decrease of 13.8%, compared to $23.2 million for the three months ended March 31, 2000. Earnings per diluted share of $0.50 decreased 12.3% or $0.07 per diluted share in the quarter from $0.57 per diluted share in the prior year quarter. NINE MONTHS ENDED MARCH 31, 2001 COMPARED TO NINE MONTHS ENDED MARCH 31, 2000 Consolidated revenue for the nine months ended March 31, 2001 increased by $50.3 million or 8.0% to $677.7 million from $627.4 million for the nine months ended March 31, 2000. The growth in sales resulted from new product offerings, a selective price increase effective February 2000, an increase in company-owned comparable store sales of 12.2% and from the addition of six net new company-owned stores since March 2000. Total wholesale revenue for the nine month period in fiscal year 2001 increased by $20.3 million or 4.0% to $530.2 million from $509.9 million in the nine month period of fiscal year 2000. The increase in wholesale revenue was due to a selective price increase and new product introductions offered at more affordable price points, offset by fewer production days in the current nine month period as compared to the comparable prior year period and from a new program put into place during the three months ended December 31, 2000 called 'Branding the Interior' of the stores. This program refers to the Company's plan to feature the best selling items in the most effective display settings. In preparation, a slowdown in home accessory orders occurred while many stores reduced their overall home accessory inventory items on display and for sale in the retail stores. Total retail revenue from Ethan Allen-owned stores for the nine months ended March 31, 2001 increased by $41.4 million or 15.3% to $311.6 million from $270.2 million for the same period in the prior year. Comparable store sales increased 12.2%. The increase in retail sales by Ethan Allen-owned stores is attributable to a $30.4 million increase in comparable store sales, an increase in sales generated by newly opened or acquired stores of $21.6 million, and the gain on the sale of retail stores to independent dealers for $0.2 million, partially offset by closed stores, which generated $10.8 million less sales in fiscal year 2001 as compared to fiscal year 2000. Booked orders for the nine month period ended March 31, 2001 were slightly lower than the same period in the prior year by 0.5%. The prior year's increase in booked orders was 18.4%. Total orders include wholesale orders and written business of company-owned retail stores. Wholesale orders were down 1.8% and orders for company-owned stores were higher by 4.8% reflecting slower economic growth in the second and third quarter of this fiscal year. -12- ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY Gross profit increased by $15.4 million or 5.2% to $311.0 million in the nine months ended March 31, 2001 from $295.6 million in the nine months ending March 31, 2000. The $15.4 million increase in gross profit was mainly due to greater sales volume, a selective price increase effective February 2000 and a higher percentage of retail sales to total sales, offset by a decline in the wholesale gross margin. Gross margin decreased to 45.9% for the nine months ending March 31, 2001 from 47.1% in the comparable period of the prior year. Gross margin was negatively impacted by changes in production scheduling mainly due to new product introductions and from the sale of more affordably priced products manufactured at lower margins. Margins were also negatively impacted by higher costs incurred from plant expansions, including the start-up of the new case goods manufacturing facility in Dublin, Virginia and from other plant expansions initiated to increase production capacity. Operating expenses increased $23.6 million or 12.7% to $209.6 million or 30.9% of net sales in the nine months ended March 31, 2001 compared to $186.0 million or 29.6% of net sales for the nine months ended March 31, 2000. This increase is mainly attributable to the expansion of the retail segment resulting in the addition of six net new Ethan Allen-owned stores since March 2000, and from increased business for comparable Ethan Allen-owned stores. Advertising expenses, utilities, fuel and freight, and employee benefit costs have also increased over the last nine months. Operating income for the nine months ended March 31, 2001 was $101.4 million or 15.0% of net sales compared to $109.6 million or 17.5% of net sales for the nine months ended March 31, 2000. This represents a decrease in operating income of $8.2 million or 7.5%, which is primarily attributable to a lower wholesale gross margin as noted above, greater operating expenses resulting from the growth of the retail segment and an increase in advertising, energy costs and employee benefits, partially offset by higher sales volume, a selective price increase effective February 2000, and a higher percentage of retail sales to total sales. Total wholesale operating income for the first nine months of fiscal year 2001 was $81.3 million or 15.3% of net sales compared to $98.6 million or 19.3% of net sales in the first nine months of fiscal year 2000. Wholesale operating income decreased $17.3 million or 17.6%. This decrease was attributable to a lower wholesale gross margin as noted above, higher labor and material costs resulting in part from changes in production scheduling between manufacturing facilities primarily caused by the introduction of new products, fewer production days in the nine month period ending March 31, 2001 as compared to the comparable prior year period, the start up of the Dublin, Virginia case good facility and the implementation of plant expansion projects, and the introduction of new products at lower margins. Operating income for the retail segment increased by $3.5 million in the nine months ended March 31, 2001 to $18.1 million or 5.8% of net sales from $14.6 million or 5.4% of net sales from the nine months ended March 31, 2000. The increase in retail operating income by Ethan Allen-owned stores is primarily attributable to increased sales volume, a selective price increase effective February 2000, the gain recorded on the sale of retail stores, and a higher percentage of retail sales to total sales, offset by higher operating expenses related to the addition of six net new stores since March 2000 and higher compensation costs necessary to strengthen the staffing of the retail division. Interest and other miscellaneous income of $1.8 million increased $1.5 million from $0.3 million in the nine month period ended March 31, 2000 mainly due to the gain recorded on the sale of real property related to a retail store relocation and from an increase in investment income due to lower debt balances outstanding. Interest expense for the nine months ended March 31, 2001 decreased $0.4 million to $0.6 million from $1.0 million for the nine months ended March 31, 2000. The decrease in interest expense is due to lower debt balances outstanding and lower amortization of deferred financing costs. -13- ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY Income tax expense of $38.8 million was recorded in the first nine months as compared to $42.2 million in the prior year. The Company's effective tax rate was 37.8% for the first nine months of fiscal year 2001 and 38.7% for the first nine months of fiscal year 2000. The decline in the effective income tax rate in the current nine months compared to the prior year nine months resulted from the utilization of various state income tax credits and from the realization of tax planning strategies. For the nine months ended March 31, 2001, the Company recorded net income of $63.8 million, a decrease of 4.3%, compared to $66.7 million for the nine months ended March 31, 2000. Earnings per diluted share of $1.59 decreased 1.2% or $0.02 per diluted share in the current nine months from $1.61 per diluted share in the prior year. FINANCIAL CONDITION AND LIQUIDITY The Company's principal sources of liquidity are cash flows from operations and borrowing capacity under a revolving credit facility. Net cash provided by operating activities totaled $70.4 million for the nine months ended March 31, 2001 as compared to $80.9 million for the nine months ended March 31, 2000. The decrease of $10.5 million in net cash provided by operating activities resulted from lower earnings and from changes in working capital requirements for the nine months ended March 31, 2001 compared to the nine months ended March 31, 2000. Total debt outstanding at March 31, 2001 was $9.6 million. There were no revolving loans outstanding under the Credit Agreement. As of March 31, 2001, there were $16.7 million of trade and standby letters of credit outstanding. During the nine months ended March 31, 2001, capital spending, exclusive of retail acquisitions, totaled $40.9 million as compared to $31.9 million in the nine months ended March 31, 2000. Capital expenditures made during the nine months ended March 31, 2001 primarily relate to (i) the purchase of a manufacturing facility in Dublin, Virginia, (ii) manufacturing plant expansions in Boonville, New York and Andover, Maine, (iii) manufacturing equipment purchases and upgrades, (iv) the expansion of a distribution facility in Kentland, Indiana, and (v) new store construction and interior redesigns. Capital expenditures, exclusive of acquisitions, for fiscal year 2001 are expected to be approximately $55.0 million. The Company anticipates that cash from operations will be sufficient to fund this level of capital expenditures. As of March 31, 2001, 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 March 31, 2001, the Company had working capital of $163.3 million and a current ratio of 2.43 to 1. The Company may from time to time, either directly or through agents, repurchase its common stock in the open market through negotiated purchases or otherwise, at prices and on terms satisfactory to the Company. Depending on market prices and other conditions relevant to the Company, such purchases may be discontinued at any time. During the nine months ended March 31, 2001, 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 March 31, 2001, the Company had $0.2 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- PART II. OTHER INFORMATION ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY 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 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 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 None. -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: 05/10/01 BY: /s/ M. Faroog Kathwari -------- --------------------------------- M. Farooq Kathwari Chairman of the Board President and Chief Executive Officer (Principal Executive and Financial Officer) DATE: 05/10/01 BY: /s/ Michele Bateson -------- --------------------------------- Michele Bateson Corporate Controller (Principal Accounting Officer) -17-