UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended DECEMBER 31, 2002
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or
[ ] TRANSITION REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 1-11692
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ETHAN ALLEN INTERIORS INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 06-1275288
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(State or other jurisdiction of incorporation (I.R.S. Employer ID No.)
or organization)
ETHAN ALLEN DRIVE, DANBURY, CONNECTICUT 06811
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(Address of principal executive offices)
(203) 743-8000
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(Registrant's telephone number, including area code)
N/A
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(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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[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.
As of December 31, 2002, there were 37,773,539 shares
of Common Stock, par value $.01 outstanding.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
TABLE OF CONTENTS
ITEM PAGE
PART I - FINANCIAL INFORMATION
1. Consolidated Financial Statements as of December 31, 2002
(unaudited) and June 30, 2002 and for the three and six
months ended December 31, 2002 and 2001 (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
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
3. Quantitative and Qualitative Disclosures About Market Risk 21
4. Controls and Procedures 21
PART II - OTHER INFORMATION
1. Legal Proceedings 22
2. Changes in Securities and Use of Proceeds 22
3. Defaults Upon Senior Securities 22
4. Submission of Matters to a Vote of Security Holders 22
5. Other Information 22
6. Exhibits and Reports on Form 8-K 22
Signatures 23
Certification of Principal Executive Officer and Principal 24
Financial Officer as Required by Section 302 of the
Sarbanes-Oxley Act of 2002
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
2002 June 30,
(unaudited) 2002
------------ ---------
ASSETS
Current assets:
Cash and cash equivalents $ 69,557 $ 75,688
Accounts receivable, less allowance for doubtful
accounts of $1,535 at December 31, 2002 and
$2,019 at June 30, 2002 21,859 32,845
Inventories, net (note 3) 179,842 174,147
Prepaid expenses and other current assets 22,259 18,731
Deferred income taxes 18,304 17,345
--------- ---------
Total current assets 311,821 318,756
Property, plant and equipment, net 302,925 293,626
Intangible assets, net (note 5) 78,354 69,708
Other assets 5,788 6,665
--------- ---------
Total assets $ 698,888 $ 688,755
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and capital
lease obligations $ 193 $ 107
Customer deposits 47,372 42,966
Accounts payable 27,476 38,027
Accrued compensation and benefits 28,479 30,190
Accrued expenses (note 4) 16,020 17,838
--------- ---------
Total current liabilities 119,540 129,128
Long-term debt 10,126 9,214
Other long-term liabilities 2,442 2,066
Deferred income taxes 38,783 37,158
--------- ---------
Total liabilities 170,891 177,566
Shareholders' equity:
Class A common stock, par value $.01, 150,000,000 shares
authorized; 45,289,349 shares issued at December 31,
2002 and 45,252,880 shares issued at June 30, 2002 453 453
Class B common stock, par value $.01, 600,000 shares
authorized; no shares issued and outstanding at
December 31, 2002 and June 30, 2002 -- --
Preferred stock, par value $.01, 1,055,000 shares
authorized; no shares issued and outstanding at
December 31, 2002 and June 30, 2002 -- --
Additional paid-in capital 277,924 277,694
--------- ---------
278,377 278,147
Less: Treasury stock (at cost), 7,515,810 shares at
December 31, 2002 and 6,794,510 shares at June 30, 2002 (183,809) (161,428)
Retained earnings 433,091 394,470
Accumulated other comprehensive income (note 8) 338 --
--------- ---------
Total shareholders' equity 527,997 511,189
--------- ---------
Total liabilities and shareholders' equity $ 698,888 $ 688,755
========= =========
See accompanying notes to consolidated financial statements.
2
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share data)
Three Months Ended Six Months Ended
December 31, December 31,
2002 2001 2002 2001
-------- -------- -------- --------
Net sales $229,713 $222,857 $446,242 $429,582
Cost of sales 113,909 119,477 223,723 232,233
-------- -------- -------- --------
Gross profit 115,804 103,380 222,519 197,349
Operating expenses:
Selling 43,875 39,886 86,765 78,724
General and administrative 34,734 30,288 66,716 58,884
-------- -------- -------- --------
Total operating expenses 78,609 70,174 153,481 137,608
-------- -------- -------- --------
Operating income 37,195 33,206 69,038 59,741
Interest and other miscellaneous income, net 125 1,046 741 1,558
Interest and other related financing costs 204 176 377 325
-------- -------- -------- --------
Income before income taxes 37,116 34,076 69,402 60,974
Income tax expense 14,030 12,881 26,234 23,048
-------- -------- -------- --------
Net income $ 23,086 $ 21,195 $ 43,168 $ 37,926
======== ======== ======== ========
PER SHARE DATA (NOTE 7):
Basic earnings per common share:
Net income per basic share $ 0.61 $ 0.55 $ 1.14 $ 0.97
======== ======== ======== ========
Basic weighted average common shares 37,767 38,691 37,876 38,952
Diluted earnings per common share:
Net income per diluted share $ 0.60 $ 0.53 $ 1.11 $ 0.95
======== ======== ======== ========
Diluted weighted average common shares 38,793 39,781 38,854 40,026
See accompanying notes to consolidated financial statements.
3
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Six Months Ended
December 31,
2002 2001
-------- --------
Operating activities:
Net income $ 43,168 $ 37,926
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 10,367 9,455
Compensation expense related to restricted
stock award (398) (223)
Provision for deferred income taxes 666 (1,432)
Other non-cash expense (income) (112) (542)
Change in assets and liabilities, net of the
effects of acquired and divested businesses:
Accounts receivable 10,467 8,495
Inventories 3,987 23,838
Prepaid and other current assets (2,448) 1,120
Other assets (404) 438
Customer deposits (277) (527)
Accounts payable (7,213) (14,853)
Income taxes payable 1,919 3,423
Accrued expenses (3,539) (2,197)
Other liabilities (150) (619)
-------- --------
Net cash provided by operating activities 56,033 64,302
-------- ---------
Investing activities:
Proceeds from the disposal of property, plant
and equipment 2,435 2,307
Capital expenditures (16,925) (17,709)
Acquisitions (10,742) (10,484)
Other 178 81
-------- --------
Net cash used in investing activities (25,054) (25,805)
-------- --------
Financing activities:
Borrowings on revolving credit facility -- --
Payments on revolving credit facility -- --
Other payments on long-term debt and capital
leases (3,435) (68)
Net proceeds from issuance of common stock 490 1,171
Dividends paid (4,587) (3,113)
Payments to acquire treasury stock (29,578) (20,781)
-------- --------
Net cash used in financing activities (37,110) (22,791)
-------- --------
Net (decrease) increase in cash and cash equivalents (6,131) 15,706
Cash and cash equivalents - beginning of period 75,688 48,112
-------- --------
Cash and cash equivalents - end of period $ 69,557 $ 63,818
======== ========
See accompanying notes to consolidated financial statements.
4
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
SIX MONTHS ENDED DECEMBER 31, 2002
(Unaudited)
(In thousands, except share data)
Accumulated
Additional Other
Common Paid-in Treasury Comprehensive Retained
Stock Capital Stock Income Earnings Total
------ ---------- -------- ------------- -------- --------
Balance at June 30, 2002 $ 453 $277,694 $(161,428) $ -- $394,470 $511,189
Issuance of 36,469 shares of common
stock upon the exercise of stock
options -- 92 -- -- -- 92
Purchase of 721,300 shares of
treasury stock -- -- (22,381) -- -- (22,381)
Tax benefit associated with exercise
of employee stock options -- 138 -- -- -- 138
Dividends declared on common stock -- -- -- -- (4,547) (4,547)
Other comprehensive income (note 8) -- -- -- 338 -- 338
Net income -- -- -- -- 43,168 43,168
--------
Total comprehensive income 43,506
----- -------- --------- ------ -------- --------
Balance at December 31, 2002 $ 453 $277,924 $(183,809) $ 338 $433,091 $527,997
===== ======== ========= ====== ======== ========
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 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, 2002
are not necessarily indicative of results for the fiscal year. It is
suggested that the interim consolidated financial statements be read in
conjunction with the consolidated financial statements and accompanying
notes included in the Company's Annual Report on Form 10-K for the year
ended June 30, 2002.
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) INVENTORIES
Inventories at December 31, 2002 and June 30, 2002 are summarized as
follows (in thousands):
December 31, June 30,
2002 2002
----------- --------
Finished goods $130,061 $123,906
Work in process 14,981 15,418
Raw materials 34,800 34,823
-------- --------
$179,842 $174,147
======== ========
(4) RESTRUCTURING AND IMPAIRMENT CHARGE
During each of the last two fiscal years, the Company developed and
executed plans to consolidate its manufacturing operations as part of an
overall strategy to maximize production efficiencies and maintain its
competitive advantage. In the fourth quarter of fiscal 2002, the Company
initiated a plan which involved the closure of one of its manufacturing
facilities as well as the rough mill operation of a separate facility.
Closure of these facilities resulted in the elimination of approximately
220 employees; 150 employees effective June 29, 2002, and 70 employees
terminated during the first quarter of fiscal 2003. A pre-tax
restructuring and impairment charge of $5.1 million was recorded for costs
associated with these plant closings, of which $2.0 million principally
relates to employee severance and benefits costs and plant exit costs, and
$3.1 million relates to a fixed asset impairment charge, primarily for
properties and machinery and equipment of the closed facilities.
6
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
In the fourth quarter of fiscal 2001, the Company announced the closure of
three of its manufacturing facilities and the elimination of approximately
350 employees effective August 6, 2001. A pre-tax restructuring and
impairment charge of $6.9 million was recorded for costs associated with
the plant closings, of which $3.3 million principally relates to employee
severance and benefits costs and plant exit costs, and $3.6 million
relates to a fixed asset impairment charge, primarily for properties and
machinery and equipment of the closed facilities.
As of December 31, 2002, remaining restructuring reserves totaling $0.3
million were included in the Consolidated Balance Sheet as an accrued
expense within current liabilities. In addition, total impairment charges
of $6.7 million ($3.1 million and $3.6 million in 2002 and 2001,
respectively) were recorded to reduce certain property, plant and
equipment to their net realizable value.
Activity in the Company's restructuring reserves is summarized as follows
(in thousands):
FISCAL 2002 RESTRUCTURING
-------------------------
Original Cash Non-cash
Charges Payments Utilized Total
-------- -------- -------- -------
Employee severance and other
related payroll and benefit
costs $ 1,847 $(1,757) $ -- $ 90
Plant exit costs and other 171 (24) -- 147
Write-down of long-lived assets 3,105 -- (3,105) --
------- -------- ------- -------
Balance as of December 31, 2002 $ 5,123 $(1,781) $(3,105) $ 237
======= ======= ======= =======
FISCAL 2001 RESTRUCTURING
-------------------------
Original Cash Non-cash
Charges Payments Utilized Total
-------- -------- -------- -------
Employee severance and other
related payroll and benefit
costs $ 2,974 $(2,916) $ (58) $ --
Plant exit costs and other 332 (258) (34) 40
Write-down of long-lived assets 3,600 -- (3,600) --
------- -------- ------- -------
Balance as of December 31, 2002 $ 6,906 $(3,174) $(3,692) $ 40
======= ======= ======= =======
(5) BUSINESS ACQUISITIONS
During the quarter, the Company acquired two Ethan Allen retail stores for
total consideration of approximately $0.8 million. As a result of these
acquisitions, the Company (i) recorded additional inventory of $0.9
million and other assets of $0.2 million, and (ii) assumed customer
deposits of $0.8 million and other liabilities of $0.1 million. Goodwill
associated with these acquisitions totaled $0.6 million and represents the
effects of ordinary fair value adjustments to the assets acquired and
liabilities assumed, as well as the premium paid to the sellers for (i)
the ability to further develop the Company's presence in a particular
geographic market and (ii) the acquired customer base, including related
order backlog of approximately $1.5 million.
As of December 31, 2002, the Company had goodwill, including product
technology, (net of accumulated amortization) of $58.6 million and other
identifiable intangible assets (net of accumulated amortization) of $19.7
million. Comparable balances as of June 30, 2002 were $50.0 million and
$19.7 million, respectively.
7
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Goodwill in the wholesale and retail segments was $27.5 million and $31.1
million, respectively, at December 31, 2002 and $27.5 million and $22.5
million, respectively, at June 30, 2002. The wholesale segment, at both
dates, includes additional intangible assets of $19.7 million. These
assets consist of Ethan Allen trade names which, prior to the Company's
adoption of Statement of Financial Accounting Standards ("SFAS") No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS, on July 1, 2001, were being
amortized over 40 years. In connection with the adoption of SFAS No. 142,
the Company re-assessed the useful lives of goodwill and other intangible
assets and both were determined to have indefinite useful lives. As such,
amortization ceased on that date. No impairment losses were recorded on
these intangible assets as a result of the adoption of SFAS No. 142.
(6) LITIGATION
The Company has been named as a potentially responsible party ("PRP") for
the cleanup of three active 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").
The Company has resolved its liability at one of the sites by completing
remedial action activities. With regard to the other two sites, the
Company does not anticipate incurring significant cost as it 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 sites.
However, liability under CERCLA may be joint and several. Additionally,
the Company has been notified by the State of New York that it may be a
PRP in a separate, unrelated matter. As a result, the extent of any
adverse effect on the Company's financial condition, results of
operations, or cash flows with respect to this matter cannot be reasonably
estimated at this time.
(7) EARNINGS PER SHARE
Basic and diluted earnings per share are calculated using the following
weighted average share data (in thousands):
Three Months Ended Six Months Ended
December 31, December 31,
2002 2001 2002 2001
------ ------ ------ ------
Weighted average common shares
outstanding for basic calculation 37,767 38,691 37,876 38,952
Add: Dilutive effect of stock
options and warrants 1,026 1,090 978 1,074
------ ------ ------ ------
Weighted average common shares
outstanding, adjusted for diluted
calculation 38,793 39,781 38,854 40,026
====== ====== ====== ======
As of December 31, 2002 and 2001, stock options to purchase 88,819 shares
and 26,500 shares of common stock, respectively, had exercise prices which
exceeded the average market price for the corresponding period. These
options have been excluded from the respective diluted earnings per share
calculation as their impact is anti-dilutive.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(8) COMPREHENSIVE INCOME
Total comprehensive income represents the sum of net income and items of
"other comprehensive income or loss" that are reported directly in equity.
Such items may include foreign currency translation adjustments, minimum
pension liability adjustments, fair value adjustments on certain
derivative instruments, and unrealized gains and losses on certain
investments in debt and equity securities. The Company has reported its
total comprehensive income in the Consolidated Statement of Shareholders'
Equity.
The Company's other comprehensive income, which is attributable solely to
foreign currency translation adjustments, was $0.3 million for the
six-month period ended December 31, 2002. This amount, as well as the
Company's accumulated other comprehensive income included in equity, are
the result of changes in foreign currency exchange rates related to the
operations of 7 Ethan Allen-owned retail stores located in Canada. Foreign
currency translation adjustments exclude income tax expense (benefit)
given that the earnings of non-U.S. subsidiaries are deemed to be
reinvested for an indefinite period of time.
(9) 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.
The wholesale 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 segment sells home furnishing products through a network of
Ethan Allen-owned stores. Retail profitability includes the retail gross
margin, which represents the difference between retail sales price and the
cost of goods purchased from the wholesale segment.
The Company evaluates performance of the respective segments based upon
revenues and operating income. Inter-segment eliminations primarily
consist of 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 and six
months ended December 31, 2002 and 2001 (in thousands):
Three Months Ended Six Months Ended
December 31, December 31,
2002 2001 2002 2001
------ ------ ------ ------
NET SALES:
Wholesale segment $158,362 $158,206 $ 316,208 $313,090
Retail segment 139,294 116,915 259,773 215,755
Elimination of inter-company sales (67,943) (52,264) (129,739) (99,263)
-------- -------- --------- --------
Consolidated Total $229,713 $222,857 $ 446,242 $429,582
======== ======== ========= ========
OPERATING INCOME:
Wholesale segment $ 28,012 $ 24,473 $ 56,889 $ 47,737
Retail segment 8,056 7,727 11,103 10,729
Elimination (1) 1,127 1,006 1,046 1,275
-------- -------- --------- --------
Consolidated Total $ 37,195 $ 33,206 $ 69,038 $ 59,741
======== ======== ========= ========
9
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
2002 2001 2002 2001
------ ------ ------ ------
CAPITAL EXPENDITURES:
Wholesale segment $ 3,744 $ 2,493 $ 7,707 $ 6,747
Retail segment 3,872 7,085 9,218 10,962
Acquisitions (2) 812 118 10,742 10,484
-------- -------- -------- --------
Consolidated Total $ 8,428 $ 9,696 $ 27,667 $ 28,193
======== ======== ======== ========
December 31, June 30,
2002 2002
------------ --------
TOTAL ASSETS:
Wholesale segment $445,761 $459,311
Retail segment 283,865 259,770
Inventory profit elimination (3) (30,738) (30,326)
-------- --------
Consolidated Total $698,888 $688,755
======== ========
(1) Adjustment reflects the change in the elimination entry for
profit in ending inventory.
(2) Acquisitions include the purchase of 2 retail stores during the
three months ended December 31, 2002 and none during the three
months ended December 31, 2001. For the six month period ended
December 31, 2002, acquisitions include the purchase of 15
retail stores, while for the six month period ended December 31,
2001, acquisitions include the purchase of 10 retail stores.
(3) Inventory profit elimination reflects the embedded wholesale
profit in the Ethan Allen-owned store inventory that has not
been realized. These profits will be recorded when shipped to
the retail customer.
At December 31, 2002, there are 30 Ethan Allen retail stores located
outside the United States, of which 23 are independently-owned.
Approximately 2% of the Company's net sales for the three and six month
periods ended December 31, 2002 and 2001 were derived from sales to
non-domestic, independently-owned retail stores.
(10) RECENT ACCOUNTING PRONOUNCEMENTS
In October 2002, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board ("FASB") reached a consensus on EITF Issue No.
02-17, "Recognition of Customer Relationship Intangible Assets Acquired in
a Business Combination". EITF 02-17 addresses the application of the
separate recognition criteria specified in SFAS No. 141, BUSINESS
COMBINATIONS, in establishing intangible assets, apart from goodwill, that
meet the contractual-legal or separability provisions of that Statement.
Specifically, EITF 02-17 addresses the recognition of customer-related
intangible assets acquired in a purchase business combination, including
(i) order or production backlog, (ii) customer contracts and related
customer relationships, and (iii) non-contractual customer relationships.
The provisions of this EITF consensus are to be applied to business
combinations consummated, and goodwill impairment tests performed, after
October 25, 2002. The Company is currently evaluating the impact of
adopting EITF 02-17 and, at this time, does not expect that application of
the provisions of this authoritative guidance will have a material effect
on the consolidated financial statements.
10
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
In November 2002, the FASB approved FASB Interpretation No. ("FIN") 45,
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES,
INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS, AN INTERPRETATION
OF FASB STATEMENTS NO. 5, 57 AND 107 AND RESCISSION OF FASB INTERPRETATION
NO. 34. FIN 45 clarifies the requirements of SFAS No. 5, ACCOUNTING FOR
CONTINGENCIES, relating to a guarantor's accounting for, and disclosure
of, the issuance of certain types of guarantees. Specifically, FIN 45
requires a guarantor to recognize a liability for the non-contingent
component of certain guarantees, representing the obligation to stand
ready to perform in the event that specified triggering events or
conditions occur. The initial measurement of the liability is the fair
value of the guarantee at inception and recognition is required even if it
is not probable that payment will be required under the guarantee. The
provisions for initial recognition and measurement are effective on a
prospective basis for guarantees that are issued or modified after
December 31, 2002, irrespective of a guarantor's fiscal year-end. However,
the disclosure provisions of FIN 45 are effective for financial statements
of interim or annual periods ending after December 15, 2002. The Company
is currently evaluating the impact of adopting FIN 45 and, at this time,
does not expect that application of the provisions of this interpretation
will have a material effect on the consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION -- TRANSITION AND DISCLOSURE -- AN AMENDMENT OF FASB
STATEMENT NO. 123. SFAS No. 148 amends SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, to provide alternative methods of transition for
a voluntary change to the fair value method of accounting for stock-based
compensation. In addition, Statement No. 148 amends the disclosure
requirements of Statement No. 123 to require more prominent disclosures in
both annual and interim financial statements about the method of
accounting employed for stock-based compensation and the effect of the
method used on reported results. The Company is required to follow the
prescribed format, and provide the additional disclosures set forth in
Statement No. 148 in its annual financial statements for the year ended
June 30, 2003. In addition, the Company must also provide the required
disclosures in quarterly reports containing its consolidated financial
statements for interim periods beginning with the quarterly period ended
March 31, 2003.
11
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, 2002. Management's discussion and analysis
of financial condition and results of operations and other sections of this
quarterly 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,
technology developments affecting the Company's products and to those matters
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.
CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America which require that certain estimates and assumptions be made that affect
the amounts and disclosures reported in the those financial statements and the
related accompanying notes. Actual results could differ from these estimates and
assumptions. Management uses its best judgment in valuing these estimates and
may, as warranted, solicit external advice. Estimates are based on current facts
and circumstances, prior experience and other assumptions believed to be
reasonable. The following critical accounting policies, some of which are
impacted significantly by judgments, assumptions and estimates, affect the
Company's consolidated financial statements.
RETAIL STORE ACQUISITIONS - The Company accounts for the acquisition of
retail stores and related assets in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 141, BUSINESS COMBINATIONS, which requires
application of the purchase method for all business combinations initiated after
June 30, 2001. Accounting for these transactions as purchase business
combinations requires the allocation of purchase price paid to the assets
acquired and liabilities assumed based on their fair values as of the date of
the acquisition. The amount paid in excess of the fair value of net assets
acquired is accounted for as goodwill.
IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL - The Company periodically
evaluates whether events or circumstances have occurred that indicate that
long-lived assets may not be recoverable or that the remaining useful life may
warrant revision. When such events or circumstances are present, the Company
assesses the recoverability of long-lived assets by determining whether the
carrying value will be recovered through the expected undiscounted future cash
flows resulting from the use of the asset. In the event the sum of the expected
undiscounted future cash flows is less than the carrying value of the asset, an
impairment loss equal to the excess of the asset's carrying value over its fair
value is recorded. The long-term nature of these assets requires the estimation
of its cash inflows and outflows several years into the future and only takes
into consideration technological advances known at the time of the impairment
test.
In accordance with SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS,
which was adopted by the Company on July 1, 2001, goodwill and other intangible
assets are to be evaluated for impairment at the reporting unit level on an
annual basis and between annual tests whenever events or circumstances indicate
that the carrying value of a reporting unit may exceed its fair value. A
discounted cash flow model is used to estimate the fair value of a reporting
unit. This model requires the use of long-term planning forecasts and
assumptions regarding industry-specific economic conditions that are outside the
control of the Company.
12
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
ALLOWANCE FOR DOUBTFUL ACCOUNTS - The Company maintains an allowance
for doubtful accounts for estimated losses resulting from the inability of its
customers to make required payments. The allowance for doubtful accounts is
based on a review of specifically identified accounts in addition to an overall
aging analysis. Judgments are made with respect to the collectibility of
accounts receivable based on historical experience and current economic trends.
Actual losses could differ from those estimates.
INVENTORIES - Inventories (finished goods, work in process and raw
materials) are stated at the lower of cost, determined on a first-in, first-out
basis, or market. The Company estimates an inventory reserve for excess
quantities and obsolete items based on specific identification and historical
write-offs, taking into account future demand and market conditions. If actual
demand or market conditions in the future are less favorable than those
estimated, additional inventory write-downs may be required.
REVENUE RECOGNITION - Revenue is recognized when the risks and rewards
of ownership and title to the product have transferred to the buyer. This
generally occurs upon the shipment of goods to independent dealers or, in the
case of Ethan Allen-owned retail stores, upon delivery to the customer. Recorded
sales provide for estimated returns and allowances. The Company permits retail
customers to return defective products and incorrect shipments for credit
against other purchases. Terms offered by the Company are standard for the
industry.
BUSINESS INSURANCE RESERVES - The Company has insurance programs in
place to cover workers' compensation and property/casualty claims. The insurance
programs, which are funded through self-insured retention, are subject to
various stop-loss limitations. The Company accrues estimated losses using
actuarial models and assumptions based on historical loss experience. Although
management believes that the insurance reserves are adequate, the reserve
estimates are based on historical experience, which may not be indicative of
current and future losses. In addition, the actuarial calculations used to
estimate insurance reserves are based on numerous assumptions, some of which are
subjective. The Company adjusts insurance reserves, as needed, in the event that
future loss experience differs from historical loss patterns.
OTHER LOSS RESERVES - The Company has a number of other potential loss
exposures incurred in the ordinary course of business such as environmental
claims, product liability, litigation, restructuring charges, and the
recoverability of deferred income tax benefits. Establishing loss reserves for
these matters requires management's estimate and judgment with regard to maximum
risk exposure and ultimate liability or realization. As a result, these
estimates are often developed with the Company's counsel, or other appropriate
advisors, and are based on management's current understanding of the underlying
facts and circumstances. Because of uncertainties related to the ultimate
outcome of these issues or the possibilities of changes in the underlying facts
and circumstances, additional charges related to these issues could be required
in the future.
RESULTS OF OPERATIONS
The Company's revenues are comprised of wholesale sales to dealer-owned
and Ethan Allen-owned retail stores and retail sales of Ethan Allen-owned
stores. See Note 9 to the Company's Consolidated Financial Statements for the
three and six months ended December 31, 2002 and 2001. The components of
consolidated revenues and operating income are as follows (in millions):
Three Months Ended Six Months Ended
December 31, December 31,
2002 2001 2002 2001
------ ------ ------ ------
REVENUE:
Wholesale segment $158.4 $158.2 $316.2 $313.1
Retail segment 139.3 116.9 259.8 215.8
Elimination of inter-segment sales (68.0) (52.2) (129.8) (99.3)
------ ------ ------ ------
Consolidated Revenue $229.7 $222.9 $446.2 $429.6
====== ====== ====== ======
13
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Three Months Ended Six Months Ended
December 31, December 31,
2002 2001 2002 2001
------ ------ ------ ------
OPERATING INCOME:
Wholesale segment $28.0 $ 24.5 $ 56.9 $ 47.7
Retail segment 8.1 7.7 11.1 10.7
Elimination 1.1 1.0 1.0 1.3
----- ------ ------ ------
Consolidated Operating Income $37.2 $ 33.2 $ 69.0 $ 59.7
===== ====== ====== ======
THREE MONTHS ENDED DECEMBER 31, 2002 COMPARED TO THREE MONTHS
ENDED DECEMBER 31, 2001
Consolidated revenue for the three months ended December 31, 2002
increased by $6.8 million, or 3.1%, to $229.7 million from $222.9 million for
the three months ended December 31, 2001. Net sales increased due to the
continued expansion of the Company's retail segment, partially offset by the
effects of a relative softness in consumer spending caused by a sluggish
economy. The Company's first quarter results were negatively impacted by an
inability to service orders of certain off-shore sourced product lines due to
delays caused by shutdowns at selected West Coast ports. With that work stoppage
resolved, those orders were delivered during the current quarter. Also during
the quarter, the Company initiated selected price reductions within four
collections: British Classics; Country French; Horizons by Ethan Allen; and
Country Crossings. The objective of these price reductions was to increase sales
volume within some of the more popular collections while continuing to expand
the Company's consumer reach. Although it is difficult to quantify, management
does not believe that the price reductions had a material effect on the
Company's consolidated operations for the period.
Total wholesale revenue for the second quarter of fiscal year 2003
increased by $0.2 million, or 0.1%, to $158.4 million from $158.2 million in the
second quarter of fiscal year 2002. The wholesale segment continues to be
challenged by the state of the U.S. economy and its effects on consumer
confidence and the incoming order rate.
Total retail revenue from Ethan Allen-owned stores for the three months
ended December 31, 2002 increased by $22.4 million, or 19.1%, to $139.3 million
from $116.9 million for the three months ended December 31, 2001. The increase
in retail sales by Ethan Allen-owned stores was attributable to an increase in
sales generated by newly-opened or acquired stores of $30.5 million, partially
offset by a decrease in comparable store delivered sales of $3.5 million, or
3.2%, and a decrease resulting from sold and closed stores, which generated $4.6
million fewer sales in fiscal year 2003 as compared to fiscal year 2002. The
number of Ethan Allen-owned stores increased to 118 as of December 31, 2002 as
compared to 93 as of December 31, 2001. During that twelve month period, the
Company acquired 25 stores from independent dealers, sold 1 to an independent
dealer, relocated 2 stores, opened 2 new stores, and closed 1 store.
Comparable stores are those newly-opened stores 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.
Total booked orders, which include wholesale orders and written
business of Ethan Allen-owned retail stores, increased from the prior year
quarter by 6.7%, reflecting the continued expansion of the Company's retail
segment, partially offset by the effects of a relative softness in consumer
spending. Comparing the current quarter to the prior year quarter, wholesale
orders increased 3.4% while Ethan Allen-owned store orders increased 19.1%.
Comparable store written business decreased 3.4% over that same period.
Gross profit increased during the second quarter to $115.8 million from
$103.4 million in the second quarter of the prior year. The $12.4 million, or
12.0%, increase
14
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
in gross profit was primarily attributable to (i) a higher proportionate share
of retail sales to total sales (61% in the current year quarter compared to 52%
in the prior year quarter), and (ii) lower costs associated with wholesale sales
returns and allowances and certain raw materials. Gross profit for the quarter
was also positively impacted, to a lesser extent, by higher margins attributable
to the off-shore sourcing of certain recent product introductions and increased
production efficiencies resulting from the Company's continued focus on quality.
These favorable variances were partially offset by increased costs associated
with excess capacity at our manufacturing facilities. Consolidated gross margin
increased to 50.4% in the second quarter of fiscal year 2003 from 46.4% in the
prior year second quarter. The gross margin was positively impacted as a result
of the factors identified previously.
Operating expenses increased $8.4 million, or 12.0%, to $78.6 million,
or 34.2% of net sales, in the current quarter from $70.2 million, or 31.5% of
net sales, in the prior year comparable quarter. This increase is primarily
attributable to further expansion of the retail segment and the higher
proportionate share of retail sales to total sales in the current quarter as
compared to the prior year quarter. The addition of 25 net new Ethan Allen-owned
stores since December 2001 has resulted in higher costs associated with
warehousing and delivery, occupancy, advertising, healthcare, district
management and design consultant salaries. These increases were partially offset
by lower selling costs within the wholesale segment as a result of a decline in
wholesale sales volume.
Operating income for the three months ended December 31, 2002 was $37.2
million, or 16.2% of net sales, compared to $33.2 million, or 14.9% of net
sales, for the three months ended December 31, 2001. This represents an increase
of $4.0 million, or 12.0%, which is primarily attributable to a higher gross
margin and lower costs at the wholesale level, both of which were noted above,
partially offset by increased operating expenses resulting from the continued
expansion of the retail segment.
Total wholesale operating income for the second quarter of fiscal year
2003 was $28.0 million, or 17.7% of net sales, compared to $24.5 million, or
15.5% of net sales, in the second quarter of fiscal year 2002. The increase of
$3.5 million, or 14.3%, is primarily attributable to (i) lower costs associated
with sales returns and allowances and certain raw materials, and (ii) a decrease
in selling expenses. These favorable variances were partially offset by
increased costs associated with excess capacity at our manufacturing facilities.
During the current quarter, operating income for the retail segment
increased $0.3 million, or 4.3%, to $8.0 million, or 5.8% of net sales, from
$7.7 million, or 6.6% of net sales, in the prior year quarter. The increase in
retail operating income generated by Ethan Allen-owned stores is primarily
attributable to increased sales volume associated with new stores, partially
offset by a 3.2% decline in comparable store delivered sales, reduced sales
volume resulting from closed and sold stores, and higher operating expenses
related to the addition of 25 net new stores since December 2001.
Interest and other miscellaneous income for the current quarter was
$0.1 million, a decrease of $0.9 million from the prior year quarter. The
decrease is the result of a $0.8 million gain recognized in the prior year
quarter in connection with the sale of real estate.
Income tax expense was $14.0 million for the quarter ended December 31,
2002 as compared to $12.9 million for the comparable quarter in the prior year.
The Company's effective tax rate was 37.8% in both periods.
For the three months ended December 31, 2002, the Company recorded net
income of $23.1 million, an increase of $1.9 million, or 8.9%, from $21.2
million recorded for the three months ended December 31, 2001. Earnings per
diluted share were $0.60 for the current quarter representing an increase of
$0.07, or 13.2%, from $0.53 per diluted share in the prior year quarter.
15
SIX MONTHS ENDED DECEMBER 31, 2002 COMPARED TO SIX MONTHS ENDED
DECEMBER 31, 2001
Consolidated revenue for the six months ended December 31, 2002
increased by $16.6 million, or 3.9%, to $446.2 million from $429.6 million for
the six months ended December 31, 2001. Net sales increased due to the continued
expansion of the Company's retail segment, partially offset by the effects of a
relative softness in consumer spending caused by a sluggish economy during the
past six months.
Total wholesale revenue for the first half of fiscal year 2003
increased by $3.1 million, or 1.0%, to $316.2 million from $313.1 million in the
first half of fiscal year 2002. The wholesale segment continues to be challenged
by the state of the U.S. economy and its effects on consumer confidence and the
incoming order rate.
Total retail revenue from Ethan Allen-owned stores for the six months
ended December 31, 2002 increased by $44.0 million, or 20.4%, to $259.8 million
from $215.8 million for the six months ended December 31, 2001. The increase in
retail sales by Ethan Allen-owned stores was attributable to an increase in
sales generated by newly-opened or acquired stores of $58.3 million, partially
offset by a decrease in comparable store delivered sales of $7.2 million, or
3.5%, and a decrease resulting from sold and closed stores, which generated $7.1
million fewer sales in fiscal year 2003 as compared to fiscal year 2002.
Total booked orders, which include wholesale orders and written
business of Ethan Allen-owned retail stores, increased from the prior year six
month period by 8.3%, reflecting the continued expansion of the Company's retail
segment, partially offset by the effects of a relative softness in consumer
spending. Comparing the current six month period to the prior year six month
period, wholesale orders increased 3.5% while Ethan Allen-owned store orders
increased 25.6%. Comparable store written business increased 0.7% over that same
period.
Gross profit increased during the first half of the current year to
$222.5 million from $197.3 million in the first half of the prior year. The
$25.2 million, or 12.8%, increase in gross profit was primarily attributable to
(i) a higher proportionate share of retail sales to total sales (58% in the
current six month period compared to 50% in the prior year six month period),
(ii) lower costs associated with wholesale sales returns and allowances and
certain raw materials, and (iii) higher margins attributable to the off-shore
sourcing of certain recent product introductions and increased production
efficiencies resulting from the Company's continued focus on quality. These
favorable variances were partially offset by increased costs associated with
excess capacity at our manufacturing facilities. Consolidated gross margin
increased to 49.9% for the first half of fiscal year 2003 from 45.9% in the
first half of the prior fiscal year. The gross margin was positively impacted as
a result of the factors identified previously.
Operating expenses increased $15.9 million, or 11.5%, to $153.5
million, or 34.4% of net sales, in the current year six month period from $137.6
million, or 32.0% of net sales, in the prior year six month period. This
increase is primarily attributable to further expansion of the retail segment
and the higher proportionate share of retail sales to total sales in the current
period as compared to the prior year period. The addition of 25 net new Ethan
Allen-owned stores since December 2001 has resulted in higher costs associated
with warehousing and delivery, occupancy, advertising, healthcare, district
management and design consultant salaries. These increases were partially offset
by lower selling costs within the wholesale segment as a result of a decline in
wholesale sales volume.
Operating income for the six months ended December 31, 2002 was $69.0
million, or 15.5% of net sales, compared to $59.7 million, or 13.9% of net
sales, for the six months ended December 31, 2001. This represents an increase
of $9.3 million, or 15.6%, which is primarily attributable to a higher gross
margin and lower costs at the wholesale level, both of which were noted above,
partially offset by increased operating expenses resulting from the continued
expansion of the retail segment.
16
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Total wholesale operating income for the first half of fiscal year 2003
was $56.9 million, or 18.0% of net sales, compared to $47.7 million, or 15.2% of
net sales, in the first half of fiscal year 2002. The increase of $9.2 million,
or 19.2%, is primarily attributable to (i) lower costs associated with sales
returns and allowances and certain raw materials, (ii) a decrease in selling
expenses, and (iii) higher margins attributable to the off-shore sourcing of
certain recent product introductions and increased production efficiencies
resulting from the Company's continued focus on quality. These favorable
variances were partially offset by increased costs associated with excess
capacity at our manufacturing facilities.
Operating income for the retail segment during the current six month
period increased $0.4 million, or 3.5%, to $11.1 million, or 4.3% of net sales,
from $10.7 million, or 5.0% of net sales, in the prior year six month period.
The increase in retail operating income generated by Ethan Allen-owned stores is
primarily attributable to increased sales volume associated with new stores,
partially offset by a 3.5% decline in comparable store delivered sales, reduced
sales volume resulting from closed and sold stores, and higher operating
expenses related to the addition of 25 net new stores since December 2001.
Interest and other miscellaneous income for the current year six month
period was $0.7 million, a decrease of $0.8 million from the prior year six
month period. The decrease is due, primarily, to (i) slightly higher gains
recognized in the prior year in connection with the sale of real estate, (ii) a
decrease in interest income associated with the Company's investment portfolio
as a result of a decline in interest rates during the period, and (iii) the
Company's share of current year losses incurred in connection with the start-up
of its United Kingdom joint venture with MFI Furniture Group Plc.
Income tax expense was $26.2 million for the six months ended December
31, 2002 as compared to $23.0 million for the comparable six month period in the
prior year. The Company's effective tax rate was 37.8% in both periods.
For the six months ended December 31, 2002, the Company recorded net
income of $43.1 million, an increase of $5.2 million, or 13.8%, from $37.9
million recorded for the six months ended December 31, 2001. Earnings per
diluted share were $1.11 for the current period representing an increase of
$0.16, or 16.8%, from $0.95 per diluted share in the prior year period.
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 $56.0 million for the six months ended
December 31, 2002, compared to $64.3 million for the six months ended December
31, 2001. The year-over-year decrease of $8.3 million in net cash provided by
operating activities was principally the result of a decline in inventory levels
(net of inventories acquired in the purchase of retail stores) at a rate
substantially lower than that noted in the prior year ($19.9 million), partially
offset by (i) a decrease in cash required to satisfy outstanding accounts
payable ($7.6 million), and (ii) an increase in net income ($5.2 million). The
decline in the year-over-year rate of inventory reduction is the result of the
Company's decision to close three of its manufacturing facilities during the
summer of 2001 and other inventory management efforts.
During the current six month period, net cash used in investing
activities decreased to $25.1 million from $25.8 million in the prior year six
month period. Of those amounts, $10.7 million was used to finance acquisitions
during the current year as compared to $10.5 million in the prior year. During
the six months ended December 31, 2002, capital spending, exclusive of
acquisitions, totaled $16.9 million as compared to $17.7 million for the six
months ended December 31, 2001. The current level of capital spending is
principally attributable to (i) new store development and renovation and (ii)
technology improvements. Capital expenditures for fiscal year
17
2003, exclusive of acquisitions, are anticipated to be approximately $35.0
million. The Company anticipates that cash from operations will be sufficient to
fund such capital expenditures.
Net cash used in financing activities totaled $37.1 million in the
current six month period as compared to $22.8 million in the prior year six
month period, an increase of $14.3 million. The increase in net cash used in
financing activities is primarily the result of an increase in payments related
to the acquisition of treasury stock, an increase in dividends paid, and the
repayment of debt. Total debt outstanding at December 31, 2002 was $10.3
million. At December 31, 2002, there were no revolving loans outstanding and
$19.6 million of trade and standby letters of credit outstanding under the
Company's credit facility. The Company had $105.4 million available under its
revolving credit facility at December 31, 2002.
The Company has been authorized by its Board of Directors to repurchase
its common stock, from time to time, either directly or through agents, in the
open market at prices and on terms satisfactory to the Company. The Company also
retires shares of unvested restricted stock and, prior to June 30, 2002,
repurchased shares of common stock from terminated or retiring employee's
accounts in the Ethan Allen Retirement Savings Plan. All of the Company's common
stock repurchases and retirements are recorded as treasury stock and result in a
reduction of shareholders' equity. During the first six months of fiscal year
2003 and 2002, the Company repurchased the following shares of its common stock:
Six Months Ended
December 31,
2002 2001
----------- ------------
Common shares repurchased 721,300 727,680
Cost to repurchase common shares $22,381,598 $20,556,471
Average price per share $31.03 $28.25
The Company funded its common stock repurchases through available cash
and cash from operations. As of December 31, 2002, the Company had a remaining
Board authorization to purchase 2.0 million shares.
As of December 31, 2002, the aggregate scheduled maturities of the
Company's long-term debt for each of the next five fiscal years are as follows:
$0.8 million in fiscal 2004, $4.7 million in fiscal 2005, $0.2 million in fiscal
2006, $0.1 million in fiscal 2007, $0.1 million in fiscal 2008, and $4.2 million
thereafter. 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 December 31, 2002, the Company had working
capital of $192.3 million and a current ratio of 2.61 to 1.
OTHER COMMITMENTS, CONTINGENCIES AND CONTRACTUAL OBLIGATIONS
From time to time, in the ordinary course of business, the Company, or
its wholly-owned subsidiaries, may provide guarantees on behalf of selected
affiliated entities or become contractually obligated to perform in accordance
with the terms and conditions of certain business agreements. The nature and
extent of these guarantees and obligations varies based on the underlying
relationship of the benefiting party to the Company and the business purpose for
which the guarantee or obligation is being provided. Details of those
arrangements for which the Company, or any of its wholly-owned subsidiaries, act
as guarantor or obligor are provided below.
DEALER-RELATED GUARANTEES
As part of the Company's expansion strategy for the Ethan Allen retail
store network, selected independent dealers are provided, on rare occasion, with
financial
18
guarantees relating to leases in connection with certain store locations. As of
December 31, 2002, two such guarantees exist; one has been provided by Ethan
Allen Inc. on behalf of an independent dealer while the other has been provided
by Ethan Allen Interiors Inc. on behalf of an independent dealer currently
operating as assignee under a lease agreement previously entered into by Ethan
Allen Inc. The remaining terms of these guarantees range from three months to
two years, and generally represent the remaining contractual terms of the
underlying lease agreements (subject to certain term limitations). The Company
is obligated to act under such guarantees in the event of default by the
respective dealers (lessees). The guarantee terms may be extended, in the event
that applicable lease renewal options are exercised, for a period of up to ten
years.
The maximum potential amount of future payments (undiscounted) that the
Company could be required to make under these guarantees is limited to the
amount of the remaining contractual lease payments (subject to certain term
limitations) and, as such, is not an estimate of future cash flows. As of
December 31, 2002, the amount of remaining contractual lease payments guaranteed
by the Company was approximately $0.6 million. The Company maintains specific
recourse rights related to these dealer arrangements that would enable recovery
of up to $0.5 million of any amount paid under these guarantees. Management
expects, based on the underlying creditworthiness of the guaranteed parties,
these guarantees will expire without requiring funding by the Company.
Accordingly, as of December 31, 2002, the carrying amount of the liability
related to such guarantees is zero.
In addition, Ethan Allen Inc. has obligated itself, on behalf of one
its independent dealers, with respect to a $1.3 million credit facility (the
"Credit Facility"). This obligation requires the Company, in the event of the
dealer's default under the Credit Facility, to repurchase the dealer's
inventory, applying such purchase price to the dealer's outstanding indebtedness
under the Credit Facility. The Company's obligation remains in effect for as
long as the Credit Facility is in existence. The maximum potential amount of
future payments (undiscounted) that the Company could be required to make under
this obligation is limited to the amount outstanding under the Credit Facility
at the time of default (subject to pre-determined lending limits based on the
value of the underlying inventory) and, as such, is not an estimate of future
cash flows. No specific recourse or collateral provisions exist that would
enable recovery of any portion of amounts paid under this obligation, except to
the extent that the Company maintains the right to take title to the repurchased
inventory. Management anticipates that the repurchased inventory could
subsequently be sold through the Company's retail store network. As of December
31, 2002, the amount outstanding under the Credit Facility totaled approximately
$1.0 million, of which $0.7 million was in the form of a revolving credit line.
Management expects, based on the underlying creditworthiness of the respective
dealer, this obligation will expire without requiring funding by the Company.
Accordingly, as of December 31, 2002, the carrying amount of the liability
related to such obligation is zero.
INDEMNIFICATION AGREEMENT
In connection with the Company's joint venture arrangement with United
Kingdom-based MFI Industries Plc., Ethan Allen Inc. has entered into a tax
cross-indemnification agreement with the joint venture partner. The
indemnification agreement stipulates that both parties agree to pay fifty
percent of the amount of any tax liability arising as a result of (i) an adverse
tax judgment or (ii) the imposition of additional taxes against either partner,
and attributable to the operations of the joint venture. The indemnification
agreement is effective until such time that the joint venture is terminated. At
the present time, management anticipates that the joint venture will continue to
operate for the foreseeable future.
The maximum potential amount of future payments (undiscounted) that the
Company could be required to make under this indemnification agreement is
indeterminable as no such tax liability currently exists. Further, the nature,
extent and magnitude of any such tax liability arising in the future as a result
of an adverse tax judgment or
19
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
change in applicable tax law cannot be estimated with any reasonable certainty.
It should be further noted that no recourse or collateral provisions exist that
would enable recovery of any portion of amounts paid under this indemnification
agreement. Management expects, based on its current understanding of the
applicable tax laws and the existing legal structure of the joint venture,
subject to future changes in applicable laws and regulations, this
cross-indemnity agreement will expire without requiring funding by the Company.
Accordingly, as of December 31, 2002, the carrying amount of the liability
related to this indemnification agreement is zero.
RESIDUAL VALUE GUARANTEES
In connection with its distribution activities, the Company has entered
into operating lease agreements for certain trucks and trailers within its
fleet. For a portion of these vehicles, the Company has guaranteed the related
residual values upon completion of the contractual lease terms. The remaining
terms of such guarantees range from one to two years, and generally represent
the remaining contractual terms of the underlying lease agreements. The Company
is obligated to act under such guarantees in the event that the fair value of
the vehicles at the end of the lease term is less than the guaranteed residual
value. The maximum potential amount of future payments (undiscounted) that the
Company could be required to make under these guarantees is limited to the
guaranteed residual value for each respective vehicle subject to such guarantee
and, as such, is not an estimate of future cash flows. As of December 31, 2002,
the Company's maximum potential exposure related to residual value guarantees
was approximately $0.5 million. While no specific recourse or collateral
provisions exist that would enable recovery of any portion of amounts paid under
these guarantees, all payments made by the Company related to such guarantees
are computed net of the proceeds received by the lessor upon sale of the
underlying assets. Management expects, based on historical experience and the
present condition of its fleet, these guarantees will expire without requiring
funding by the Company. Accordingly, as of December 31, 2002, the carrying
amount of the liability related to such guarantees is zero.
PRODUCT WARRANTIES
The Company's products, including its case goods, upholstery and home
accents, generally carry explicit product warranties that extend from three to
five years and are provided based on terms that are generally accepted in the
industry. All of the Company's independent dealers are required to enter into,
and perform in accordance with the terms and conditions of, a warranty service
agreement. The Company records provisions for estimated warranty and other
related costs at time of sale based on historical warranty loss experience and
makes periodic adjustments to those provisions to reflect actual experience. On
rare occasion, certain warranty and other related claims involve matters of
dispute that ultimately are resolved by negotiation, arbitration or litigation.
In certain cases, a material warranty issue may arise which is beyond the scope
of the Company's historical experience. The Company provides for such warranty
issues as they become known and estimable. It is reasonably possible that, from
time to time, additional warranty and other related claims could arise from
disputes or other matters beyond the scope of the Company's historical
experience. As of December 31, 2002, the Company's product warranty liability
totaled $0.7 million and, for the six month period then ended, no settlements
(in cash or in-kind) were made.
20
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As of December 31, 2002, the Company was essentially debt-free. Cash
and short-term investments totaled $69.6 million and there were no revolving
loans outstanding under the Company's credit facility. The current portion of
the Company's outstanding long-term debt and capital lease obligations totaled
$0.2 million as of December 31, 2002, while the long-term portion totaled $10.1
million.
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.
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 instrument
transactions for trading or other speculative purposes or to manage foreign
currency exchange, commodity price or interest rate exposure.
ITEM 4. CONTROLS AND PROCEDURES
Ethan Allen management, including the Chairman of the Board and Chief
Executive Officer ("CEO") and the Chief Financial Officer ("CFO"), conducted an
evaluation of the effectiveness of disclosure controls and procedures (as such
term is defined in Rules 13a-14 and 15d-14 under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) as of a date within 90 days prior to the
filing of this quarterly report (the "Evaluation Date"). Based on such
evaluation, the CEO and CFO have concluded that, as of the Evaluation Date, the
Company's disclosure controls and procedures are effective in ensuring that
material information relating to the Company (including its consolidated
subsidiaries), which is required to be included in the Company's periodic
filings under the Exchange Act, has been made known to them in a timely fashion.
There have been no significant changes in internal controls, or in
factors that could significantly affect internal controls, nor were any
corrective actions required with regard to significant deficiencies and material
weaknesses, subsequent to the Evaluation Date.
21
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There has been no change to matters discussed in Part I, Item 3 - Legal
Proceedings in the Company's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on September 30, 2002.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
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
(a) Exhibits
None.
(b) Reports on Form 8-K
On November 12, 2002, the Company filed its quarterly report
on Form 10-Q for the three month period ended September 30,
2002 with the Securities and Exchange Commission. Accompanying
such report was a certification, filed on Form 8-K, of the
Company's Chief Executive Officer and Chief Financial Officer,
pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 and attached thereto as
Exhibit 99.1.
22
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: February 12, 2003 BY: /S/ M. FAROOQ KATHWARI
-------------------------------------------
M. Farooq Kathwari
Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
DATE: February 12, 2003 BY: /S/ EDWARD D. TEPLITZ
-------------------------------------------
Edward D. Teplitz
Vice President and Chief Financial Officer
(Principal Financial Officer)
23
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AS REQUIRED BY SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, M. Farooq Kathwari, do hereby certify that:
(1) I have reviewed the December 31, 2002 quarterly report on Form 10-Q
filed by Ethan Allen Interiors Inc. (the "Company");
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Company as of, and for, the periods presented in this
quarterly report;
(4) I and the other certifying officers are responsible for establishing
and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Company and have:
(i) Designed such disclosure controls and procedures to
ensure that material information relating to the
Company, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
(ii) Evaluated the effectiveness of the Company's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(iii) Presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
(5) I and the other certifying officers have disclosed, based on our most
recent evaluation, to the Company's auditors and the Audit Committee of
the Board of Directors (or persons fulfilling the equivalent function):
(i) All significant deficiencies in the design or
operation of internal controls which could adversely
affect the Company's ability to record, process,
summarize and report financial data and have
identified for the Company's auditors any material
weaknesses in internal controls; and
(ii) Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the Company's internal controls; and
(6) I and the other certifying officers have indicated in this quarterly
report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/S/ M. FAROOQ KATHWARI Chairman, Chief Executive
- -------------------------------------------- Officer and Director
(M. Farooq Kathwari)
24
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER AS REQUIRED BY SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Edward D. Teplitz, do hereby certify that:
(1) I have reviewed the December 31, 2002 quarterly report on Form 10-Q
filed by Ethan Allen Interiors Inc. (the "Company");
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Company as of, and for, the periods presented in this
quarterly report;
(4) I and the other certifying officers are responsible for establishing
and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Company and have:
(i) Designed such disclosure controls and procedures to
ensure that material information relating to the
Company, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
(ii) Evaluated the effectiveness of the Company's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(iii) Presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
(5) I and the other certifying officers have disclosed, based on our most
recent evaluation, to the Company's auditors and the Audit Committee of
the Board of Directors (or persons fulfilling the equivalent function):
(i) All significant deficiencies in the design or
operation of internal controls which could adversely
affect the Company's ability to record, process,
summarize and report financial data and have
identified for the Company's auditors any material
weaknesses in internal controls; and
(ii) Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the Company's internal controls; and
(6) I and the other certifying officers have indicated in this quarterly
report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/S/ EDWARD D. TEPLITZ Chief Financial Officer
- -------------------------------------------------
(Edward D. Teplitz)
25