UNITED STATES 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 December 31, 1996 ------------------------------------------------ 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: 1-11806 Ethan Allen Interiors Inc.; Ethan Allen Inc.; Ethan Allen Finance Corporation; Ethan Allen Manufacturing Corporation; Andover Wood Products Inc. (Exact name of registrant as specified in its charter) Delaware 06-1275288 (State or other jurisdiction of incorporation (I.R.S. Employer ID No.) 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. 14,402,367 at December 31, 1996 ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY INDEX PAGE Part I. Financial Information: Item 1. Consolidated Financial Statements as of December 31 and June 30, 1996 and for the three and six months ended December 31, 1996 and 1995 (unaudited): Consolidated Balance Sheets 2 Consolidated Statements of Income 4 Consolidated Statements of Cash Flows 5 Consolidated Statement of Shareholders' Equity 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Part II. Other Information: 17 Item 1. Legal Proceedings Item 2. Changes in Securities Item 6. Exhibits and reports on Form 8-K -1- ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY Consolidated Balance Sheets (Dollars in thousands) December 31, ASSETS 1996 June 30, (unaudited) 1996 Current assets: Cash $ 23,238 $ 9,078 Accounts receivable, less allowances of $2,446 and $2,564 at December 31 and June 30, 1996, respectively 30,896 33,984 Notes receivable, current portion, less allowances of $342 and $314 at December 31 and June 30, 1996,respectively 1,400 1,314 Inventories (note 3) 100,236 107,224 Prepaid expenses and other current assets 7,476 7,377 Deferred income taxes 8,593 9,305 ------- ------- Total current assets 171,839 168,282 ------- ------- Property, plant and equipment, net 163,299 159,634 Property, plant and equipment held for sale (note 4) 1,135 4,233 Notes receivable, net of current portion, less allowance of $176 and $97 at December 31 and June 30, 1996, respectively 2,523 2,561 Intangibles, net of amortization of $12,594 and $11,768 at December 31 and June 30, 1996, respectively 53,239 54,065 Deferred financing costs, net of amortization of $1,709 and $1,426 at December 31 and June 30, 1996, respectively 1,767 1,877 Other assets 4,638 5,329 ------- ------- Total assets $398,440 $395,981 ======== ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt and capital lease obligations $ 1,878 $ 2,498 Accounts payable 34,579 36,742 Accrued expenses 7,204 6,956 Accrued compensation and benefits 13,890 12,939 ------- ------- Total current liabilities 57,551 59,135 ------- ------- Long-term debt, less current maturities 63,857 79,929 Obligations under capital leases, less current maturities 2,867 2,752 Other long-term liabilities, principally long-term compensation and environmental reserves 853 1,036 Deferred income taxes 31,999 32,836 ------- ------- Total liabilities 157,127 175,688 ------- ------- Commitments and contingencies (note 5) - - Shareholders' equity: Class A common stock, par value $.01, 35,000,000 shares authorized, 14,666,781 and 14,568,731 shares -2- issued at December 31 and June 30, 1996 respectively 146 146 Preferred stock, par value $.01, 1,055,000 shares authorized, no shares issued and outstanding at December 31 and June 30, 1996, respectively - - Additional paid-in capital 255,170 254,971 ------- ------- 255,316 255,117 Less: Notes receivable from officer and employees - (51) Treasury stock (at cost) 264,414 and 256,480 shares at December 31 and June 30, 1996, (5,606) (5,371) respectively ------- ------- 249,710 249,695 Accumulated deficit ( 8,397) (29,402) ------- ------- Total shareholders' equity 241,31 220,293 ------- ------- Total liabilities and shareholders' equity $398,440 $395,981 ======== ======== See accompanying notes to consolidated financial statements. -3- ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY Consolidated Statements of Income (Unaudited) (Dollars in thousands, except per share data) Three Months Six Months Ended December 31, Ended December 31, 1996 1995 1996 1995 Net sales $138,330 $127,212 $270,685 $244,153 Cost of sales 78,409 75,857 156,186 147,327 ------- ------- ------- ------- Gross profit 59,921 51,355 114,499 96,826 Operating expenses: Selling 18,875 17,857 38,035 35,626 General and administrative 19,396 18,270 38,412 36,086 ------- ------- ------- ------- Operating income 21,650 15,228 38,052 25,114 ------- ------- ------- ------- Interest and other miscellaneous income, net 295 287 344 590 Interest expense 1,420 2,341 3,011 4,894 Amortization of deferred financing costs 136 105 357 214 ------- ------- ------- ------- Income before income taxes 20,389 13,069 35,028 20,596 Income tax expense 8,162 5,228 14,018 8,255 ------- ------- ------- ------- Net income $ 12,227 $ 7,841 $ 21,010 $ 12,341 ======= ======= ======= ======= Per share data: Net income per common share $ 0.84 $ 0.54 $ 1.44 $ 0.85 ======= ======= ======= ======= Dividend declared per common share $ 0.04 $ - $ 0.08 $ - ======= ======= ======= ======= Weighted average common shares outstanding (in thousands) 14,621 14,472 14,627 14,536 See accompanying notes to consolidated financial statements. -4- ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY Consolidated Statements of Cash Flows (Unaudited) (Dollars in thousands) Six Months Ended December 31, 1996 1995 Operating activities: Net income $ 21,010 $ 12,341 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,855 8,586 Provision for deferred income taxes 544 (237) Other non-cash charges 419 (71) Change in: Accounts receivable 3,196 2,044 Inventories 6,988 3,903 Prepaid and other current assets (99) (1,124) Other assets 68 77 Accounts payable (2,163) 3,284 Accrued expenses 761 359 Other long-term liabilities (183) (31) ------- -------- Net cash provided by operating activities 39,396 29,131 ------- -------- Investing activities: Proceeds from the disposal of property, plant 110 96 and equipment Proceeds from the disposal of plant, and equipment held for sale 1,945 - Capital expenditures (9,753) (6,320) Payments received on long-term notes receivable 621 977 Disbursements made for long-term notes receivable (727) (400) Net cash used by investing activities (7,804) (5,647) ------- -------- Financing activities: Payments on revolving credit facility (21,500) (44,000) Borrowings on revolving credit facility 14,500 26,500 Other long-term borrowings 440 - Redemption of Senior Notes (9,384) - Payments on long-term debt, including (77) (39) current maturities Payments under capital leases (1,039) (805) Issuance of capital stock 611 154 Payments to acquire treasury stock (235) (2,755) Increase in deferred financing costs (173) (99) Payment of dividends (575) - Net cash used by financing activities (17,432) (21,044) -------- -------- Net increase in cash 14,160 2,440 Cash at beginning of period 9,078 7,546 -------- -------- Cash at end of period $ 23,238 $ 9,986 ======== ========= See accompanying notes to consolidated financial statements. -5- ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY Consolidated Statements of Shareholders' Equity Six Months Ended December 31, 1996 (Unaudited) (Dollars in thousands) Additional Common Paid-in Notes Treasury Accumulated Stock Capital Receivable Stock Deficit Total ----- --------- ---------- -------- ----------- ----- Balance at June 30, 1996 ........................ $ 146 $ 254,971 $ (51) $(5,371) $ (29,402) $ 220,293 Issuance of capital stock ..................... 611 -- -- -- 611 Payments received on notes receivable .................................. -- -- 51 -- -- 51 Increase in management warrants .................................... -- 71 -- -- -- 71 Purchase of 7,934 shares of treasury stock ........................... -- -- -- (235) -- (235) Tax benefit associated with the exercise of employee options and warrants ........................ -- 669 -- -- -- 669 Dividends declared ............................ -- (1,152) -- -- -- (1,152) Foreign currency adjustment ................... -- -- -- -- (5) (5) Net income .................................... -- -- -- -- 21,010 21,010 ---------- ---------- ------------ ---------- ---------- ---------- Balance at December 31, 1996 .................... $ 146 $ 255,170 $ -- $ (5,606) $ (8,397) $ 241,313 ========= ========= =========== ========== ========== =========
See accompanying notes to consolidated financial statements. -6- 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 intercompany accounts and transactions have been eliminated in the consolidated financial statements. All of Ethan Allen's capital stock is owned by the Company. The Company has no other assets or operating results other than those associated with its investment in Ethan Allen. (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 six months ended December 31, 1996 are not necessarily indicative of results for the fiscal year. (3) Inventories Inventories at December 31 and June 30, 1996 are summarized as follows (dollars in thousands): December 31, June 30, 1996 1996 Retail merchandise $ 27,540 $ 28,695 Finished products 31,765 39,146 Work in process 13,306 12,803 Raw materials 27,625 26,580 ------- ------- $100,236 $107,224 (4) Plant, Property Equipment Held for Sale Property and plants held for resale are recorded at the lower of cost or net realizable values. As of July 1, 1996, the Company adopted FAS 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets To Be Disposed Of". The adoption of this standard did not have a material impact on the Company's financial position or its results of operations. -7- 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 four sites currently listed or proposed for inclusion on the National Priorities List ("NPL") under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"). Numerous other parties have been identified as PRP's at these sites, and the Company believes its share of waste contributed to these sites is small in relation to the total; however, liability under CERCLA may be joint and several. The Company has total reserves of $500,000 applicable to these sites. 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. For three of the sites, the site assessment is at a very early stage and there has been no allocation of responsibility among the parties. Environmental assessment activity with respect to these sites is expected to continue over the next few years. With respect to the fourth site, final allocation is in the process of being negotiated. (6) 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 the Credit Agreement and Senior Notes and has pledged all the outstanding capital stock of Ethan Allen to secure its guarantee under its Credit Agreement. -8- ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Unaudited) The condensed balance sheets of Ethan Allen as of December 31 and June 30, 1996 are as follows (dollars in thousands): December 31, June 30, 1996 1996 Assets Current assets $171,794 $168,261 Non-current assets 231,187 231,163 ------- ------- Total assets $402,981 $399,424 ======= ======= Liabilities Current liabilities $ 56,926 $ 58,517 Non-current liabilities 99,576 116,553 ------- ------- Total liabilities $156,502 $175,070 A summary of Ethan Allen's operating activity for the three and six months ended December 31, 1996 and 1995, is as follows (dollars in thousands): Three Months Six Months Ended December 31, Ended December 31, 1996 1995 1996 1995 -------- -------- -------- ------ Net sales $138,330 $127,212 $270,685 $244,153 Gross profit 59,921 51,355 114,499 96,826 Operating income 21,668 15,256 38,088 25,171 Interest expense 1,420 2,341 3,011 4,894 Amortization of deferred financing costs 136 105 357 214 Income before income tax expense 20,407 13,096 35,063 20,650 Net income 12,245 7,868 21,045 12,395 -9- ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Unaudited) 7) Business Reorganization The Company implemented a business reorganization ("Reorganization") effective July 1, 1995, which permitted the separation of manufacturing operations from distribution and store operations. This has given the Company additional flexibility to permit it to reduce its aggregate state corporate income tax liability by allocating income to the operations responsible for generating such income thereby reducing the Company's effective tax rate. The Company believes that the separation of manufacturing operations from distribution and store operations will also provide for improved measures of performance, including profitability of operations and return on assets, by allowing the Company to more easily allocate income, expenses and assets to the separate operations of the Company's business. The Reorganization consisted principally of the following elements: (i) the contribution of Ethan Allen's manufacturing equipment to Ethan Allen Manufacturing Corporation ("EAMC"), which is a newly formed, wholly-owned subsidiary of Ethan Allen (ii) the execution of operating lease arrangements between EAMC and Ethan Allen for real property used in manufacturing operations (iii) the contribution by Ethan Allen of certain of Ethan Allen's trademarks and service marks, design patents and related assets to Ethan Allen Finance Corporation ("EAFC") which is a newly formed, wholly-owned subsidiary of Ethan Allen, (iv) the full and unconditional guarantee on a senior unsecured basis of Ethan Allen's obligations under Ethan Allen's Credit Agreement and 8-3/4% Senior Notes due 2001 by each of EAMC and EAFC and Andover Wood Products Inc. ("Andover", the existing wholly-owned subsidiary of the Company) (collectively, "Guarantor Subsidiaries"), (v) the amendment of the Company's existing guarantee of Ethan Allen's obligations under the Senior Notes and the Indenture to include a guarantee of each Guarantor Subsidiary's obligations under its Subsidiary Guarantee, (vi) the execution of a management agreement and a service mark licensing agreement and a trademark licensing agreement between EAMC and EAFC, (vii) the execution of a management agreement between Ethan Allen and EAFC and (viii) the execution of a manufacturing agreement between Ethan Allen and EAMC. Ethan Allen continues to own its headquarters building in Danbury, Connecticut, the real property associated with EAMC's manufacturing operations and the assets and liabilities associated with the Ethan Allen-owned retail operations and Ethan Allen's distribution, service and home delivery operations. -10- ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Unaudited) The summarized historical combined balance sheet information for EAMC, EAFC, and Andover (the "Guarantor Subsidiaries") at December 31 and June 30, 1996 is as follows (dollars in thousands): December 31, June 30, Assets 1996 1996 ------ ------------ ------ Current assets $ 61,533 $ 46,394 Non-current assets 165,418 164,602 ------- ------- Total assets $226,951 $210,996 ======= ======= Liabilities Current liabilities $ 22,188 $ 21,346 Non-current liabilities 17,917 17,939 ------- ------- Total liabilities $ 40,105 $ 39,285 ======= ======= Summarized historical combined operating activity for the three and six months ended December 31, 1996 and 1995 is as follows (dollars in thousands): Three Months Six Months Ended Ended December 31, December 31, 1996 1995 1996 1995 ---- ---- ---- ---- Net Sales $ 84,769 $ 79,629 $162,182 $147,594 Gross Profit 16,176 14,450 31,856 25,206 Operating income 11,519 10,264 22,808 17,127 Income before income taxes 12,630 11,356 25,017 19,239 Net income 7,641 6,871 15,135 11,640 The summarized historical financial information for the Guarantor Subsidiaries above, has been derived from the financial statements of the Company. -11- MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Ethan Allen's revenues are comprised of wholesale sales to dealer-owned stores and retail sales of Ethan Allen-owned stores as follows (dollars in millions): Three Months Six Months Ended Ended December 31, December 31, 1996 1995 1996 1995 ---- ---- ---- ---- Revenues: Net wholesale sales to dealer-owned stores $ 88.4 $ 80.2 $174.5 $158.0 Net retail sales of Ethan Allen-owned stores 44.2 41.5 84.4 76.3 Other revenues 5.7 5.5 11.8 9.8 ----- ----- ----- ----- Total $138.3 $127.2 $270.7 $244.1 ===== ===== ===== ===== Three Months Ended December 31, 1996 Compared to Three Months Ended December 31, 1995 Sales for the three months ended December 31, 1996 increased by $11.1 million, or 8.7%, over the corresponding period in the prior year to $138.3 million. Net sales by Ethan Allen-owned stores increased $2.7 million or 6.5% to $44.2 million and net sales to dealer-owned stores increased $8.2 million or 10.2% to $88.4 million. The increase in sales to dealer-owned stores has resulted from increased distribution through relocated stores, improved effectiveness of existing stores, newer product offerings, a coordinated advertising program, and growth in international sales. At December 31, 1996, there were 290 total stores, of which 232 were dealer-owned, as compared to 298 total stores, of which 238 were dealer-owned at December 31, 1995. The net decrease in the number of stores is primarily due to the closing of 14 smaller, under-performing stores in Japan, which were replaced by 3 larger, high-volume stores in fiscal 1996. The increase in retail sales by Ethan Allen-owned stores is attributable to a 7.5%, or $3.0 million, increase in comparable store sales, and sales generated by newly opened or acquired stores of $1.5 million, partially offset by closed stores, which generated $1.8 million less in sales in the three months ended December 31, 1996, as compared to the three months ended December 31, 1995. Comparable stores are stores that, if newly opened, have been open for at least 15 months. Ethan Allen's retail business is principally special order and minimal net sales are generated during the first three months of operations of newly opened stores. Stores acquired from dealers by Ethan -12- Allen are included in comparable store sales in their thirteenth full month of Ethan Allen-owned operations. Gross profit for the three months ended December 31, 1996 increased by $8.5 million, or 16.7% from the three months ended December 31, 1995 to $59.9 million. This increase is attributable to higher sales volume, combined with an increase in gross margin from 40.4% in the three months ended December 31, 1995 to 43.3% in the three months ended December 31, 1996. Gross margins have been favorably impacted by increased sales volume, greater manufacturing efficiencies, improvements in manufacturing technology, full benefit of the recent price increases, and higher retail gross margins. These factors are partially offset by higher medical and employee benefit costs as well as an increase in the price of certain raw materials. Selling, general and administrative expenses increased $2.1 million from $36.1 million, or 28.4% of net sales, in the three months ended December 31, 1995 to $38.3 million, or 27.7% of net sales, in the three months ended December 31, 1996. This increase is principally attributable to an increase in the operating expenses of Ethan Allen-owned stores of $.6 million due to higher sales volumes. The remaining increase can be attributed to expenses associated with the higher wholesale sales. Operating income for the three months ended December 31, 1996 was $21.7 million (15.7% of sales), an increase of $6.5 million as compared to the three months ended December 31, 1995. Wholesale operating income was $19.1 million for the three months ended December 31, 1996, reflecting an increase of $5.0 million as compared to the prior year period. The improvement in wholesale operating income is primarily due to a $12.1 million increase in wholesale sales combined with a 2.1% improvement in wholesale gross margin to 34.4%. Retail operating income was $2.9 million for the three months ended December 31, 1996, an increase of $1.0 million from the prior year. The higher retail sales volumes and improved gross margin were partially offset by higher operating expenses due to the higher sales volumes. Interest expense, including the amortization of deferred financing costs, for the three months ended December 31, 1996 decreased by $0.9 million to $1.5 million from $2.4 million in the three months ended December 31, 1995. The lower expense reflects the lower debt balances outstanding. Income tax expense of $8.2 million or an effective tax rate of 40.0% was recorded for the three months ended December 31, 1996, as compared to $5.2 million or an effective tax rate of 40.0% in the prior year quarter. For the three months ended December 31, 1996, the Company recorded net income of $12.2 million, compared to net income for the three months ended December 31, 1995 of $7.8 million. -13- Six Months Ended December 31, 1996 Compared to Six Months Ended December 31, 1995 Sales for the six months ended December 31, 1996 increased by $26.5 million, or 10.9%, over the six months ended December 31, 1995 to $270.6 million. Net retail sales by Ethan Allen-owned stores increased by 10.6% to $84.4 million and sales to dealer-owned stores increased by 10.4% to $174.5 million. The increase in sales to dealer-owned stores has resulted from increased distribution through relocated stores, improved effectiveness of existing stores, newer product offerings, and growth in international sales. The increase in retail sales by Ethan Allen-owned stores is attributable to a 10.0% or $7.1 million increase in comparable store sales, and an increase in sales generated by newly opened or acquired stores of $3.5 million, partially offset by closed stores which generated $2.5 million less in sales in the six months ended December 31, 1996 as compared to the six months ended December 31, 1995. Gross profit for the six months ended December 31, 1996 increased by $17.7 million from the six months ended December 31, 1995 to $114.5 million. This increase is attributable to higher sales volume and an improvement in gross margin from 39.7% in the six months ended December 31, 1995 to 42.3% in the six months ended December 31, 1995. The gross margin percentage improved due to greater manufacturing efficiencies, improvements in manufacturing technology, and the full benefit of recent price increases, partially offset by higher medical and employee benefit costs as well as an increase in the price of certain raw materials. Additionally, the prior year margin was negatively impacted by $.8 million of costs related to extended plant shutdowns. Selling, general and administrative expenses increased $4.7 million from $71.7 million or 29.4% of net sales, in the fiscal 1996 period to $76.4 million, or 28.2% of net sales, in the fiscal 1997 period. This increase is attributable principally to an increase in operating expenses in the Company's retail division of $1.9 million due to higher sales volumes. The remaining increase is attributable to the increase in wholesale shipments combined with higher employee medical and benefit costs. Operating income for the six months ended December 31, 1996 was $38.1 million (14.1% of sales), an increase of $13.0 million, as compared to the six months ended December 31, 1995. Wholesale operating income was $34.4 million for the six months ended December 31, 1996, an increase of $10.7 million as compared to the six months ended December 31, 1995. This increase is attributable to higher sales volumes and an improved gross margin. Retail operating income was $ 4.2 million for the six months ended December 31, 1996. This represents a $2.4 million increase from the six months ended December 31, 1995. This increase is attributable to higher sales volumes and an improved gross margin partially offset by higher operating expenses due to the higher sales volumes. -14- Interest expense, including the amortization of deferred financing costs, for the six months ended December 31, 1996 decreased by $1.7 million to $3.4 million, from $5.1 million in the fiscal 1996 period, due to lower debt balances outstanding. Income tax expense of $14.0 million or an effective tax rate of 40.0%, was recorded for the six months ended December 31, 1996, as compared to $8.3 million or an effective rate of 40.0% in the prior year period. For the six months ended December 31, 1996, the Company recorded net income of $21.0 million, compared to net income for the six months ended December 31, 1995 of $12.3 million. Financial Condition and Liquidity Principal sources of liquidity are cash flow from operations and additional borrowing capacity under the revolving credit facility. Net cash provided by operating activities totaled $39.4 million for the six months ended December 31, 1996, as compared to $29.1 million in the six months ended December 31, 1995. The increase is due principally to higher net income of $8.7 million. At December 31, 1996, the Company had working capital of $114.3 million and a current ratio of 2.99 to 1. During the six months ended December 31, 1996, capital spending totaled $9.8 million as compared to $6.3 million in the six months ended December 31, 1995. Capital expenditures in fiscal 1997 are anticipated to be approximately $18.0 million. The Company anticipates that cash from operations will be sufficient to fund this level of capital expenditures. The current level of anticipated capital spending, which is attributable primarily to manufacturing efficiency improvements and new store openings, is expected to continue for the foreseeable future. Total debt outstanding at December 31, 1996 is $68.6 million. At December 31, 1996 there are no outstanding revolving loans under the Credit Agreement. Trade and standby letters of credit of $14.3 million were outstanding as of December 31, 1996. During the quarter ended December 31, 1996, the Company amended its Credit Agreement with Chase Manhattan Bank as agent. Amendments to the Credit Agreement include: (1) the reduction of the commitment of senior secured debt under a revolving credit facility to $100.0 million, (2) reduction of interest rates to adjusted LIBOR plus .45% which is subject to adjustment arising from changes in the credit rating of Ethan Allen's senior secured debt or Fixed Charge Ratio, (3) elimination of a lien on certain fixed assets as collateral and (4) amendment of certain additional debt and restricted payment limitations. In connection with the Amended and Restated Credit Agreement, $173,000 in additional deferred financing fees were incurred. These charges will be amortized over the remaining life of the credit agreement. Other debt includes $52.6 million of outstanding Senior Notes which have a final maturity in 2001, with no scheduled amortization prior to final maturity. The Senior Notes may not be redeemed at the option of the Company -15- until March 15, 1998. Therefore, the Company does not anticipate that any Senior Notes will be repaid until this date; however, the Company may from time to time, either directly or through agents, repurchase its Senior Notes in the open market, through negotiated purchases or otherwise, at prices and on terms satisfactory to the Company. During the six months ended December 31, 1996, $9.4 million principal amount was repurchased. The Company may also, from time to time, either directly or through agents, repurchase its common stock in the open market through negotiated purchases or otherwise, at prices and on terms satisfactory to the Company. Depending on market prices and other conditions relevant to the Company, such purchases may be discontinued at any time. During the six months ended December 31, 1996, the Company purchased 7,934 shares of its stock on the open market at an average price of $29.62 per share. As of December 31, 1996, aggregate scheduled maturities of long-term debt for each of the next five fiscal years are $.1 million, $.1 million, $.4 million, $.2 million and $52.8 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. -16- PART II. OTHER INFORMATION Item 1. - Legal Proceedings There has been no change to matters discussed in Business-Legal Proceedings in Company's Form 10-K as filed with the Securities and Exchange Commission on September 27, 1996. 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 27, 1996, except that pursuant to the November 4, 1996 Annual Meeting, the shareholders approved an Amendment to the 1992 Stock Option Plan to increase by 600,000 the authorized shares reserved for use in connection with the Stock Option Plan. Item 6. - Exhibits and Reports on Form 8-K 4(k)-3 Amended and Restated Senior Secured Revolving Credit Facility dated as of March 10, 1995, as amended and restated as of December 4, 1996, between Ethan Allen Inc. and the Chase Manhattan Bank 4(t) Security Agreement, dated as of March 10, 1995, between Ethan Allen Inc. and the Chase Manhattan Bank 11 Statement Re: Computation of Per Share Earnings 27 Financial Data Schedule -17- 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: 2/13/97 BY: /s/ M. Farooq Kathwari ---------------------- M. Farooq Kathwari Chairman of the Board President and Chief Executive Officer (Principal Executive Officer) DATE: 2/13/97 BY: /s/ Edward P. Schade ---------------------- Edward P. Schade Vice President & Treasurer (Principal Financial Officer) DATE: 2/13/97 BY: /s/ Gerardo Burdo ---------------------- Gerardo Burdo Corporate Controller (Principal Accounting Officer) -18- INDEX TO EXHIBITS 4(k)-3 Amended and Restated Senior Secured Revolving Credit Facility dated as of March 10, 1995, as amended and restated as of December 4, 1996, between Ethan Allen Inc. and the Chase Manhattan Bank. 4(t) Security Agreement, dated as of March 10, 1995, between Ethan Allen Inc. and the Chase Manhattan Bank. 11 Statement Re: Computation of Per Share Earnings 27 Financial Data Schedule