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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended June 30, 1997
------------------------------------------------------
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
(Exact name of registrant as specified in its charter)
Delaware 06-1275288
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Ethan Allen Drive, Danbury, CT 06811
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 743-8000
-----------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
------------------- -------------------
Common Stock, $.01 par value New York Stock Exchange, Inc.
8 3/4% Senior Notes due 2001 New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
None
- -------------------------------------------------------------------------------
(Title of class)
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
[ ]
The aggregate market value of Common Stock, par value $.01 per share held
by non-affiliates (based upon the closing sale price on the New York Stock
Exchange) on August 29, 1997 was approximately $1,058,473,574. As of August 29,
1997, there were 14,401,001 shares of Common Stock, par value $.01 outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive Proxy Statement for the 1997 Annual Shareholders Meeting is
incorporated by reference into Part III hereof.
TABLE OF CONTENTS
Item Page
---- ----
PART I
1. Business 2
2. Properties 7
3. Legal Proceedings 8
4. Submission of Matters to a Vote of Security Holders 9
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters 10
6. Selected Financial Data 11
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
8. Financial Statements and Supplementary Data 18
9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 40
PART III
10. Directors and Executive Officers of the Registrant 41
11. Executive Compensation 41
12. Security Ownership of Certain Beneficial Owners
and Management 41
13. Certain Relationships and Related Transactions 41
PART IV
14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 42
Signatures
1
PART I
Item 1. Business
- ----------------
Ethan Allen Inc. ("Ethan Allen") is a leading manufacturer and retailer of
quality home furnishings, offering a full range of furniture products and
accessories. Ethan Allen was founded in 1932 and has sold products since 1937
under the Ethan Allen brand name. Ethan Allen Interiors Inc. (the "Company") is
a Delaware corporation, incorporated in 1989.
Industry Segments
The Company's operations are classified into two business segments:
wholesale and retail home furnishings. The wholesale home furnishings segment is
principally involved in the manufacture, sale and distribution of home
furnishing products to a network of independently-owned and Ethan Allen-owned
stores. The retail home furnishings segment sells home furnishing products
through a network of Ethan Allen-owned stores. These products consist of case
goods (wood furniture), upholstered products, and home accessories. Refer to the
information appearing in the section captioned "Segment Information" in the
Company's Financial Statements on page 37.
Narrative Description of Business
Ethan Allen manufactures and distributes three principal product lines: (i)
case goods (wood furnishings), consisting primarily of bedroom and dining room
furniture, wall units and tables; (ii) upholstered products, consisting
primarily of sofas, loveseats, chairs, and recliners; and (iii) home furnishing
accessories including carpeting and area rugs, lighting products, clocks, wall
decor, bedding ensembles, draperies and decorative accessories. The following
table shows the approximate percentage of wholesale sales of home furnishing
products for each of these product lines during the three most recent fiscal
years:
Fiscal Year Ended June 30:
--------------------------
1997 1996 1995
---- ---- ----
Case Goods 58% 58% 60%
Upholstered Products 30 30 28
Home Furnishing Accessories 12 12 12
-- -- --
100% 100% 100%
==== ==== ====
Ethan Allen's product strategy has been to expand its home furnishings
collections to appeal to a broader consumer base while providing good quality
and value. Ethan Allen continuously monitors consumer demands through marketing
research and through consultation with its dealers and store designers who
provide valuable input on consumer tastes and needs. As a result, the Company is
able to react quickly to changing consumer tastes and has added eight major new
home furnishing collections in the past six years. In addition, Ethan Allen
continuously refines and enhances each collection by adding new pieces and, as
appropriate, discontinuing or redesigning pieces. Approximately 85% of the
Company's products have been redesigned over the last six years. This allows the
Company to maintain focused lines within each style category which enhances
efficiencies. In fiscal 1997, the Company's focus was on introducing important
signature pieces including the compact "Office Hideaway" and the "Smart Armoire"
which strengthened the Company's commitment to the fast-growing home office
consumer demand, strengthening our British Classics collection, and further
defining our accessory lines.
Current products are positioned in terms of selection, quality and value
within what management believes are the four most important style categories in
home furnishings today: Formal, American Country, Casual Contemporary, and
Classic Elegance.
2
Ethan Allen's products are grouped into collections within these four
lifestyle categories. Each collection includes case goods, upholstered products
and accessories, each styled with distinct design characteristics. Accessories,
including lighting, floor covering, wall decor, draperies and textiles, play an
important role in Ethan Allen's marketing program as this enables Ethan Allen to
provide a complete home furnishings collection. Ethan Allen's stores concept
allows for the display of these categories in complete room settings which
utilize the related collections to project the category lifestyle.
The following is a summary of Ethan Allen's major categories of home
furnishing collections:
PRINCIPAL
STYLE HOME FURNISHING CASE GOOD YEAR OF
CATEGORY CHARACTERISTICS COLLECTIONS WOOD TYPE INTRODUCTION
- -------- --------------- ----------- --------- ------------
Formal An opulent style, which Georgian Court Cherry 1965
includes English 18th Medallion Cherry 1990
Century and 19th Century 18th Century Mahogany 1987
Neo-Classic styling. Regents Park Cherry 1995
American Updated country style. Farmhouse Pine Pine 1988
Country Country Crossings Maple 1993
Country Colors Maple 1995
Casual This style is based American Impressions Cherry 1991
Contemporary on classic contemporary American Dimensions Maple 1992
design elements. Radius Prima 1994
Vera
Classic A relaxed yet sophisticated Country French Birch 1984
Elegance mix of furnishings inspired Collectors Classics Various Various
by designs found in the Legacy Collection Maple 1992
countryside of Europe. British Classics Maple 1995
Ethan Allen Store Network
Ethan Allen Stores. Ethan Allen's products are sold by a network of 299
Ethan Allen stores which exclusively sell Ethan Allen's products. As of June 30,
1997, Ethan Allen owned and operated 65 stores and independent dealers owned and
operated 218 North American stores and 16 stores abroad. In the past six years,
Ethan Allen has opened over 130 new stores, many of them relocations. Sales to
independent dealer-owned stores accounted for approximately 68% of total net
sales of the Company in fiscal 1997. The ten largest independent dealers own a
total of 37 stores, which accounted for approximately 22% of net orders booked
in fiscal 1997.
Ethan Allen desires to maintain independent ownership of most of its
retail stores and has an active program to identify and develop new independent
dealers. Independent dealers are required to enter into license agreements with
Ethan Allen authorizing the use of certain Ethan Allen service marks and
requiring adherence to certain standards of operation. These standards include
the exclusive sale of Ethan Allen products. Additionally, dealers are required
to enter into warranty service agreements. Ethan Allen is not subject to any
territorial or exclusive dealer agreements in the United States.
Showcase Store Concept. Each independent and Ethan Allen-owned store
employs a consistent showcase store concept wherein products are displayed in
complete room ensembles, which include furnishings, wall decor, window
treatments, floor coverings, accents and accessories. Management believes that
the store concept results in higher sales of Ethan Allen products by encouraging
3
the consumer to purchase a complete home collection, including case goods,
upholstery and accessories, and by providing for a high level of service. The
average size of an Ethan Allen store is 15,000 square feet.
Ethan Allen maximizes uniformity of store presentation throughout the
retail network through uniform standards of operation. These standards of
operation help each store present the same high quality image and offer retail
customers consistent levels of product selection and service. The stores are
staffed with a sales force consisting of approximately 2,400 trained designers,
who assist customers at no additional charge in decorating their homes. Ethan
Allen believes this design service gives it an unusual competitive advantage
over other furniture retailers.
In 1992, Ethan Allen instituted a new image and logo program.
Additionally, Ethan Allen undertook a program to renovate the exterior of its
stores. As of June 30, 1997, this renovation program has been substantially
completed with 246 or 82% of all stores (including dealer-owned and Ethan
Allen-owned stores) having either implemented new exteriors or are currently
under renovation. Ethan Allen also provides display planning assistance to
dealers to support them in updating the interior projection of their stores. In
May 1997, the Company unveiled a 30,000 square foot prototype store in Stamford,
Connecticut. The store is divided into three-stores-in-one and positions Ethan
Allen as specialists in casual styles, classic designs and decorative accessory
retailing. Ethan Allen's focus will be on incorporating many of the display,
signage, and merchandising ideas of this "prototype" store into its smaller
stores in the near future.
Ethan Allen recognizes the importance of its store network to its
long-term success and has developed and maintains a close ongoing relationship
with its dealers. Ethan Allen offers substantial services to the Ethan Allen
stores in support of their marketing efforts, including coordinated national
advertising, merchandising and display programs, and extensive dealer training
seminars and educational materials. Ethan Allen believes that the development of
designers, sales managers, service and delivery personnel and dealers is
important for the growth of its business. Ethan Allen has, therefore, committed
to offer to all dealers a comprehensive training program that will help to
develop retail managers/owners, designers and service and delivery personnel to
their fullest potential. Ethan Allen has offered dealers various assistance
programs, including long-term financial assistance in connection with the
financing of their inventory, the opening of new stores and the renovation of
stores in accordance with Ethan Allen's image and logo program.
Advertising and Promotion
Ethan Allen has developed a highly coordinated, nationwide advertising and
promotional campaign designed to increase consumer awareness of the breadth of
Ethan Allen's product offerings. Ethan Allen launched an expanded national
television campaign in January 1997 to increase the Company's projection at the
national level. In addition to its national television campaign, Ethan Allen
utilizes direct mail, magazine, newspaper and radio advertising. Ethan Allen
believes that its ability to coordinate its advertising efforts with those of
its dealers provides a competitive advantage over other home furnishing
manufacturers and retailers. In January of 1997, the Company changed to a new
annual cycle of
4
eight sale events from six, which increased the frequency and shortened the
duration of sale periods.
Ethan Allen's in-house staff, working with a leading advertising firm, has
developed and implemented what the Company believes the most extensive national
television campaign in the home furnishings industry. This campaign is designed
to support the eight annual sale periods and to increase the flow of traffic
into stores during the sale periods. Ethan Allen television advertising is aired
approximately 24 weeks per year.
Ethan Allen Interiors magazine, which features Ethan Allen's home furnishing
collections, is one of Ethan Allen's most important marketing tools.
Approximately 52 million copies of the magazine, which features sale products,
are distributed to consumers during the eight sale periods. The Company
publishes and sells the magazines to its dealers who, with demographic
information collected through independent market research, are able to target
potential consumers.
Ethan Allen's television advertising and direct mail efforts are supported
by strong print campaigns in various markets, and in leading home fashion
magazines using advertisements and multi-page inserts. The Company coordinates
significant advertisements in major newspapers in its major markets. The Ethan
Allen Treasury, a complete catalogue of the Ethan Allen home collection which is
distributed in the stores, is one of the most comprehensive home furnishing
catalogues in the industry.
Manufacturing
Ethan Allen is one of the ten largest manufacturers of household furniture
in the United States. Ethan Allen manufactures and/or assembles approximately
90% of its products at 20 manufacturing facilities and 3 saw mills, thereby
maintaining control over cost, quality and service to its consumers. The case
goods facilities are located close to sources of raw materials and skilled
craftsmen, predominantly in the Northeast and Southeast regions of the country.
Upholstery facilities are located across the country in order to reduce shipping
costs to stores and based upon the availability of skilled craftsmen. Management
believes that its manufacturing facilities are currently well positioned to
accommodate sales growth.
Distribution
Ethan Allen distributes its products primarily through ten regional
distribution centers strategically located throughout the United States. These
distribution centers hold finished products received from Ethan Allen's
manufacturing facilities for shipment to Ethan Allen's dealers or home delivery
service centers. Ethan Allen stocks case goods and accessories to provide for
quick delivery of in-stock items and to allow for more efficient production
runs.
Approximately, 40% of shipments are made to and from the distribution and
home delivery service centers by the Company's fleet of trucks and trailers. The
balance of Ethan Allen's shipments are sub-contracted to independent carriers.
Approximately, 95% of Ethan Allen-owned delivery vehicles are leased under three
to five-year leases.
5
Ethan Allen's policy is to sell its products at the same delivered cost to
all dealers nationwide, regardless of their shipping point. The adoption of this
policy has discouraged dealers from carrying significant inventory in their own
warehouses. As a result, Ethan Allen obtains accurate information regarding
sales to dealers to better plan production runs and manage inventory. Having one
national landed cost has permitted Ethan Allen to provide one national suggested
retail price which, in turn, helps facilitate a national advertising program.
Raw Materials and Suppliers
The most important raw materials used by Ethan Allen in furniture
manufacturing are lumber, veneers, plywood, particle board, hardware, glue,
finishing materials, glass, mirrored glass, laminates and fabrics. The various
types of wood used in Ethan Allen's products include cherry, oak, maple, prima
vera, mahogany, birch and pine, substantially all of which are purchased
domestically. Fabrics and other raw materials are purchased both domestically
and abroad. Ethan Allen has no long-term supply contracts, and has experienced
no significant problems in supplying its operations. Ethan Allen maintains a
number of sources for its raw materials which management believes contribute to
its ability to obtain competitive pricing for raw materials. Lumber prices
fluctuate over time depending on factors such as weather and demand, which
impact availability. Upward trends in prices could have a short-term impact on
margins. Management believes however, such increases in cost would be
substantially offset by further improvements in manufacturing efficiencies. A
sufficient inventory of lumber and fabric is usually stocked to maintain
approximately 8 to 22 weeks of production. Management believes that its sources
of supply for these materials are adequate and that it is not dependent on any
one supplier.
6
Competition
The home furnishings industry at the retail level is highly competitive and
fragmented. Although Ethan Allen is among the ten largest furniture
manufacturers, industry estimates indicate that there are over 1,000
manufacturers of all types of furniture in the United States. Some of these
manufacturers produce furniture types not manufactured by Ethan Allen. Certain
of the companies which compete directly with Ethan Allen may have greater
financial and other resources than the Company.
Since Ethan Allen's products are sold primarily through stores which sell
exclusively Ethan Allen products, Ethan Allen's effort is focused primarily upon
obtaining and retaining independent dealers and upon increasing the volume of
such dealers' retail sales and opening new Ethan Allen-owned stores. The home
furnishings industry competes primarily on the basis of product styling and
quality, personal service, prompt delivery, product availability and price.
Ethan Allen believes that it effectively competes on the basis of each of these
factors and believes that its store format provides it with a competitive
advantage because of the complete home furnishing product selection and service
available to the consumer.
Furniture Today (a leading industry publication) published a survey of
America's Top 100 Furniture Retailers for 1997 which ranked Ethan Allen's
showcase store network as the largest furniture retail network which utilizes
the furniture showcase store concept. According to the survey, the nation's 100
largest furniture retailers accounted for 41% of all furniture sales in the
United States in 1996. Recently, the September 15, 1997 issue of Home
Furnishings News noted that Ethan Allen ranked as the highest home furnishings
brand that has a vertically integrated structure.
Trademarks
Ethan Allen currently holds numerous trademarks, service marks and design
patents for the Ethan Allen name, logos and designs in a broad range of classes
for both products and services. Ethan Allen also holds international
registrations for Ethan Allen trademarks in twenty-nine foreign countries and
has applications for registration pending in nineteen other foreign countries.
Ethan Allen has registered or has applications pending for many of its major
collection names as well as certain of its slogans coined for use in connection
with retail sales and other services. Ethan Allen views its trade and service
marks as valuable assets and has an on-going program to diligently police their
unauthorized use through institution of legal action.
Backlog and Net Orders Booked
As of June 30, 1997, Ethan Allen had a wholesale backlog of approximately
$43.3 million, compared to a backlog of $31.5 million as of June 30, 1996. The
backlog is anticipated to be serviced in the first quarter of fiscal 1998.
Backlog at any point in time is primarily a result of net orders booked in prior
periods, manufacturing schedules and the timing of product shipments. Net orders
booked at the wholesale level from all Ethan Allen stores (including all
independently-owned and Ethan Allen-owned stores) for the three months and
twelve months ended June 30, 1997 were $120.3 million and $490.8 million,
respectively,
7
resulting in an increase of 17.8% and 16.6% for the three months ended June 30,
1997 and for the fiscal year 1997, respectively. Net orders booked in any period
are recorded based on wholesale prices and do not reflect the additional retail
margins produced by the Ethan Allen-owned stores.
Employees
Ethan Allen has 6,417 employees as of June 30, 1997. Approximately 9% of
the employees are represented by unions under collective bargaining agreements.
Ethan Allen believes it has good relations with its employees and there have
been no work stoppages during the last three years.
8
Item 2. Properties
The corporate headquarters of Ethan Allen, located in Danbury, Connecticut,
consists of one building containing 144,000 square feet, situated on
approximately 17.5 acres of land, all of which is owned by Ethan Allen. Located
adjacent to the corporate headquarters is the Ethan Allen Inn, a hotel
containing 195 guest rooms. This hotel, owned by a wholly-owned subsidiary of
Ethan Allen, is used for Ethan Allen functions and in connection with training
programs as well as for accommodations for the general public.
Ethan Allen has 20 manufacturing facilities and 3 saw mills located in 11
states, all of which are owned, with the exception of a leased upholstery plant
in California, totaling 133,000 square feet. These facilities consist of 12 case
goods manufacturing plants, totaling 3,019,500 square feet (including three
sawmills), five upholstered furniture plants, totaling 1,361,500 square feet and
three plants involved in the manufacture and assembly of Ethan Allen's
non-furniture coordinates totaling 263,200 square feet. In addition, Ethan Allen
owns nine and leases one distribution warehouses, totaling 1,298,200 square
feet, and leases two home delivery service centers aggregating 102,800 square
feet. The Company's manufacturing and distribution facilities are located in
North Carolina, Vermont, Pennsylvania, Virginia, New York, Oklahoma, California,
New Jersey, Georgia, Indiana, Maine, and Massachusetts.
Ethan Allen operates 65 Ethan Allen stores in the United States, of which
16 stores are owned and 49 stores are leased.
Certain store properties are subject to mortgage loan agreements. In
addition, Ethan Allen's Maiden, North Carolina facility was financed with an
industrial revenue bond. Ethan Allen believes that all of its properties are
well maintained and in good condition.
Ethan Allen estimates that its case goods and upholstery divisions are
currently operating at approximately 80% of capacity. Management believes it has
significant additional capacity at many facilities, which it could utilize with
minimal additional capital expenditures by adding multiple shift operations.
Ethan Allen considers its present manufacturing capacity to be sufficient for
its foreseeable needs.
9
Item 3. Legal Proceedings
Ethan Allen is a party to various legal actions with customers, employees
and others arising in the normal course of its business. Ethan Allen maintains
liability insurance which Ethan Allen believes is adequate for its needs and
commensurate with other companies in the home furnishings industry. Ethan Allen
believes that the final resolution of pending actions (including any potential
liability not fully covered by insurance) will not have a substantial adverse
effect on the Company's financial position.
Environmental Matters
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. 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, which would be sufficient to cover any
resulting liability. With respect to all of these sites, the Company believes
that it is not a major contributor based on the very small volume of waste
generated by the Company in relation to total volume at the site. The Company
has concluded its involvement with one site and settled as a de-minimis party.
For two of the sites, the remedial investigation is ongoing. A volume based
allocation of responsibility among the parties has been prepared. With respect
to the fourth site, a consent decree to finally resolve the matter with the EPA
has been signed.
Ethan Allen is subject to other federal, state and local environmental
protection laws and regulations and is involved from time to time in
investigations and proceedings regarding environmental matters. The Company is
regulated under several federal, state and local laws and regulations concerning
air emissions, water discharges, and management of solid and hazardous wastes.
The Company believes that its facilities are in material compliance with all
applicable laws and regulations. Regulations issued under the Clean Air Act
Amendments of 1990 required the Company to reformulate certain furniture
finishes or institute process changes to reduce emissions of volatile organic
compounds. These requirements have been implemented via high solids coating
technology and alternative formulations. Ethan Allen continues to implement
reformulating of finishing materials and processing changes, and will continue
to investigate new treatment technology, in order to reduce such emissions.
10
Item 4. Submission of Matters to a Vote of Security Holders
The following matters were submitted to security holders of the Company in
fiscal 1997:
o Election of Directors
1) M. Farooq Kathwari
2) Steven A. Galef
3) Horace G. McDonell
o Proposal for ratification of KPMG Peat Marwick LLP as Independent
Auditors for the 1997 fiscal year.
o Proposal to approve 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.
11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock is traded on the New York Stock Exchange. The
following table indicates the high and low sales prices of the Company's Common
Stock as reported on the New York Stock Exchange Composite Tape, as adjusted for
the two-for-one stock split:
Market Price
------------
High Low
---- ---
Fiscal 1997
-----------
Fourth Quarter 29 3/16 19 5/8
Third Quarter 25 7/16 18 1/2
Second Quarter 19 1/2 14 11/16
First Quarter 15 3/4 10 1/2
Fiscal 1996
-----------
Fourth Quarter 14 3/16 11 1/4
Third Quarter 13 1/2 9 13/16
Second Quarter 11 3/16 9 11/16
First Quarter 11 11/16 8 7/8
As of August 29, 1997, there were approximately 358 security holders of
record of the Company's Common Stock.
On April 20, 1997, the Company declared a $.03 per common share
dividend for all holders of record on July 10, 1997 and payment date of July 27,
1997. The Company expects to continue to declare quarterly dividends for the
foreseeable future.
On August 6, 1997, the Company declared a two-for-one stock split to be
distributed on September 2, 1997 to shareholders of record on August 18, 1997.
12
Item 6. Selected Financial Data
The following table sets forth summary consolidated financial
information of the Company for the years and dates indicated (dollars in
thousands, except per share data):
Fiscal Years Ended June 30,
1997 1996 1995 1994 1993
-------- -------- -------- -------- ------
Statement of Operations Data:
Net sales ............................ $ 571,838 $ 509,776 $ 476,111 $ 437,286 $ 384,178
Cost of sales ........................ 323,600 304,650 291,038 266,504 240,733
Selling, general and
administrative expenses ............. 162,389 149,559 137,387 120,569 108,028
Expenses related to business
reorganization and write-down
of assets held for sale (1) ......... -- -- 1,550 -- --
--------- --------- --------- --------- ---------
Operating income ..................... 85,849 55,567 46,136 50,213 35,417
Interest and other
miscellaneous income ................ 1,272 1,039 1,766 1,732 3,043
--------- --------- --------- --------- ---------
Net income before interest expense,
income taxes, extraordinary
charge and cumulative effect
of accounting change ................ 87,121 56,606 47,902 51,945 38,460
--------- --------- --------- --------- ---------
Interest expense (2) ................. 6,427 9,616 11,937 13,327 41,812
Income tax expense (benefit) ......... 31,954 18,845 13,233(3) 16,047 (1,094)
--------- --------- --------- --------- ---------
Income (loss) before extraordinary
charge and cumulative effect of
accounting change ................... 48,740 28,145 22,732 22,571 (2,258)
Extraordinary charge ................. -- -- (2,073)(4) -- (15,052)(7)
Cumulative effect of
accounting change ................... -- -- 1,467(5) -- --
--------- --------- --------- --------- ---------
Net income (loss) .................... $ 48,740 $ 28,145 $ 22,126 $ 22,571 $ (17,310)
========= ========= ========= ========= =========
Other information:
Depreciation and amortization ........ $ 15,848 $ 16,761 $ 16,098 $ 15,859 $ 16,483
Per Share Data:
Net income (loss) per common
share before extraordinary
charge and cumulative effect
of accounting change (10) ........... $ 1.67 $ .97 $ .78 $ .77(6) $ .56(8)
Weighted average common shares
outstanding (9) (10) ................ 29,232 29,128 29,246 28,282 26,516
Cash dividends declared .............. $ 0.10 $ 0.04 -- -- --
Balance Sheet Data (at End of Period):
Working capital ...................... $ 131,421 $ 109,147 $ 122,681 $ 103,709 $ 90,797
Property, plant and
equipment, net ...................... 171,406 159,634 161,115 164,615 166,875
Total assets ......................... 427,784 395,981 408,288 413,287 396,233
Long-term debt including
capital lease obligations ........... 66,766 82,681 127,032 139,175 153,749
Redeemable convertible
preferred stock ..................... -- -- -- -- 29,825
13
Shareholders' equity 265,434 220,293 193,098 171,166 116,053
Footnotes on following page.
14
Notes to Selected Financial Data
(Dollars in thousands)
(1) Included in the $1,550 charge in fiscal 1995 are fees associated with
the business reorganization (note 14) and the write-down of property
and plants held for sale to fair market value.
(2) Interest expense includes the following non-cash components:
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Non-cash interest $ -- $ -- $ -- -- $21,717
Amortization of
deferred financing
costs ... 490 596 1,160 1,384 3,023
-------- -------- -------- -------- --------
$ 490 $ 596 $ 1,160 $ 1,384 $24,740
======== ======== ======== ======== ========
(3) Includes a $1.7 million credit to income tax expense, resulting from
the restatement of deferred taxes to reflect the Company's expected
future effective tax rate upon the completion of the business
reorganization.
(4) During fiscal 1995, the Company entered into a bank credit agreement to
provide up to $110,000 of senior secured debt. As a result of the new
financing, an extraordinary charge of $3,484 in the aggregate, $2,073
net of tax benefit or $.07 a share (adjusted for the two-for-one stock
split) was recorded relating to the write-off of unamortized deferred
financing costs associated with the existing bank financing.
(5) As of July 1, 1994, the Company changed its method of accounting for
packaging costs to better match revenue with expenses. This change
resulted in a cumulative adjustment of $2,466 ($1,467 net of tax or
$.05 a share adjusted for the two-for one stock split) which represents
the capitalization of packaging costs into finished goods and retail
inventories.
(6) Net income per common share in fiscal 1994 is adjusted for dividend
requirements on the redeemable preferred stock and for the write-off of
fees in connection with the redemption of the preferred stock.
Historical earnings per common share for years prior to fiscal 1994
have been omitted as the historical capitalization of the Company is
not indicative of the Company's current capital structure.
(7) In connection with the full repayment of its 18.17% Senior Subordinated
Exchange Notes and the existing bank credit agreement at the time of a
Recapitalization in 1993, $19,180 of unamortized deferred financing
costs were written off. Additionally, in connection with the early
termination of the bank credit agreement, the Company was required to
make a $5,097 payment to buy out the related interest rate swap
agreement. Such charges ($24,277 in the aggregate, $15,052 net of tax
benefit) are reflected as an extraordinary charge in the statement of
operations.
(8) Represents unaudited pro forma net income per common share data
adjusted assuming the Company's recapitalization, including an initial
public offering, which was effective March 23, 1993 (the
"Recapitalization"), occurred as of the beginning of the periods
presented. The principal adjustments are (1) the elimination of charges
related to a consulting agreement which was terminated in connection
with the Recapitalization and (2) the reduction of interest and related
expense to reflect the Recapitalization as of the beginning of the
periods presented.
(9) Weighted average common shares used in the computation of net income
per share includes shares of common stock outstanding and common stock
equivalents.
15
(10) Amounts have been retroactively adjusted to reflect the two-for-one
stock split on September 2, 1997.
16
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Basis of Presentation
The Company has no material assets other than its ownership of Ethan
Allen's capital stock and conducts all significant transactions through Ethan
Allen; therefore, substantially all of the financial information presented
herein is that of Ethan Allen.
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):
Fiscal Years Ended June 30,
------------------------------------------
1997 1996 1995
---- ---- ----
Revenues:
Net wholesale sales to
dealer-owned stores $374.6 $330.8 $320.3
Net retail sales of Ethan
Allen-owned stores 175.8 155.6 133.2
Other revenues 21.4 23.4 22.6
------ ------ ------
Total $571.8 $509.8 $476.1
====== ====== ======
Fiscal 1997 Compared to Fiscal 1996
Sales in fiscal 1997 increased by $62.0 million, or 12.2%, from fiscal
1996 to $571.8 million. Net sales to dealer-owned stores increased by 13.2% to
$374.6 million and net retail sales by Ethan Allen-owned stores increased by
13.0% to $175.8 million. Sales growth has resulted from increased sales from
relocated and new stores, improved effectiveness of existing stores, a 3.5%
wholesale price increase effective January 1, 1997, new product offerings, and
expanded national television advertising. During fiscal 1997, the Company opened
22 new stores, of which 3 stores represented relocations. At June 30, 1997,
there were 299 total stores, of which 234 were dealer-owned stores. The
Company's objective is to continue the expansion of both the dealer-owned and
Ethan Allen-owned stores.
The increase in retail sales by Ethan Allen-owned stores is attributable
to a 9.4%, or $13.6 million increase in comparable store sales, and an increase
in sales generated by newly opened or acquired stores of $11.6 million,
partially offset by closed stores, which generated $5.0 million less in fiscal
1997 as compared to fiscal 1996. The number of Ethan Allen-owned stores has
increased to 65 at June 1997 as compared to 60 at June 1996.
Comparable stores are those which have been operating for at least 15
months. Minimal net sales, derived from the delivery of customer ordered
product, are generated during the first three months of operations of newly
opened stores. Stores acquired from dealers by Ethan Allen are included in
comparable store sales in their 13th full month of Ethan Allen-owned operations.
Gross profit for fiscal 1997 increased by $43.1 million, or 21.0%, from
fiscal 1996 to $248.2 million. This increase is attributable to higher sales
volume, combined with an increase in gross margin from 40.2% in fiscal 1996 to
43.4% in fiscal 1997. Gross margins have been favorably impacted by greater
manufacturing efficiencies, improvements in manufacturing technology, a 3.5%
wholesale price increase and lower employee benefit costs. These factors are
partially offset by higher lumber and other raw materials cost.
Operating expenses increased $12.8 million from $149.6 million, or 29.3%
of net sales, in fiscal 1996, to $162.4 million, or 28.4% of net sales, in
fiscal 1997. This increase is attributable to an increase in operating expenses
in the Company's retail division of $5.3 million, due to higher sales volume,
and additional Ethan Allen-owned stores. Additionally, wholesale operating
expenses increased due to a $7.6 million increase in the Company's advertising
expense due to the expanded national television campaign effective January 1,
1997.
17
Operating income for fiscal 1997 was $85.8 million, an increase of $30.2
million, or 54.5%, as compared to fiscal 1996. Wholesale operating income was
$82.8 million in fiscal 1997, an increase of $30.1 million or 57.0% as compared
to the prior year. This increase is attributable to higher sales volumes,
increased gross margins reflecting, in part, improved efficiencies, and
continued monitoring of expenses. Retail operating income was $7.4 million in
fiscal 1997, an improvement of $3.3 million as compared to fiscal 1996. This
increase is attributable to higher retail sales volume, partially offset by
higher operating expenses related to the higher volumes.
Interest expense, including the amortization of deferred financing costs,
for fiscal 1997 decreased by $3.2 million to $6.4 million, due to lower debt
balances, and lower amortization of deferred financing costs.
Income tax expense of $32.0 million was recorded in fiscal 1997. The
Company's effective tax rate for fiscal 1997 was 39.6% as compared to 40.1% in
fiscal 1996.
In fiscal 1997, the Company recorded net income of $48.7 million, an
increase of 73.1%, compared to $28.1 million in fiscal 1996.
Fiscal 1996 Compared to Fiscal 1995
Sales in fiscal 1996 increased by $33.7 million, or 7.1%, from fiscal 1995
to $509.8 million. Net sales to dealer-owned stores increased by 3.3% to $330.8
million and net retail sales by Ethan Allen-owned stores increased by 16.8% to
$155.6 million. Sales growth has resulted from newer product offerings, a
coordinated advertising program, and approximately 95% brand awareness. In
addition, new stores have contributed to the sales growth. During fiscal 1996,
the Company opened 19 new stores, of which 7 stores represented relocations. At
June 30, 1996, there were 288 total stores, of which 228 were dealer-owned
stores. The Company's objective is to continue the expansion of both the
dealer-owned and Ethan Allen-owned stores.
The increase in retail sales by Ethan Allen-owned stores is attributable
to an 8.1%, or $9.9 million increase in comparable store sales, and an increase
in sales generated by newly opened or acquired stores of $16.8 million,
partially offset by closed stores, which generated $4.3 million less in fiscal
1996 as compared to fiscal 1995. The number of Ethan Allen-owned stores has
decreased to 60 at June 1996 as compared to 61 at June 1995.
Gross profit for fiscal 1996 increased by $20.0 million, or 10.8%, from
fiscal 1995 to $205.1 million. This increase is attributable to a higher sales
volume, combined with an increase in gross margin from 38.9% in fiscal 1995 to
40.2% in fiscal 1996. The improvement in gross margin is principally due to a
higher wholesale gross margin and a higher proportionate level of retail sales
by Ethan Allen-owned stores relative to total sales. Retail sales generate a
higher gross margin relative to wholesale sales. At the wholesale level, gross
margins increased by .5% due primarily to greater manufacturing efficiencies and
the full benefit of the prior year price increase and partial benefit of
selected price increases announced during the current fiscal year, partially
offset by $.5 million of costs related to the extended plant shutdowns in the
first quarter and higher employee benefit costs. A price increase of 3% on
certain case good products was implemented in the fourth quarter of fiscal 1995.
Operating expenses increased $10.7 million from $138.9 million, or 29.2%
of net sales, in fiscal 1995, to $149.6 million, or 29.3% of net sales, in
fiscal 1996. The prior year included $1.6 million of one-time charges related to
the business reorganization and the write-down to then current fair market value
of property held for sale. Operating expenses in the current year are $12.3
million higher than the prior year, excluding these charges. This increase is
primarily attributable to an increase in operating expenses in the Company's
retail division of $9.7 million, due to the higher sales volume experienced by
the division in fiscal 1996. Additionally, wholesale operating expenses
increased
18
due to higher employee benefit costs and increased shipping costs associated
with higher volumes.
Operating income for fiscal 1996 was $55.6 million, an increase of $9.4
million, or 20.4%, as compared to fiscal 1995. Wholesale operating income was
$52.7 million in fiscal 1996, an increase of $7.7 million or 17.1% as compared
to the prior year. This increase is attributable to higher sales volumes,
increased gross margins reflecting, in part, improved efficiencies, and greater
monitoring of expenses. Retail operating income was $4.1 million in fiscal 1996,
an improvement of $1.5 million as compared to fiscal 1995. This increase is
attributable to higher retail sales volume, partially offset by higher operating
expenses related to the higher volumes.
Interest expense, including the amortization of deferred financing costs,
for fiscal 1996 decreased by $2.3 million to $9.6 million, due to lower debt
balances and lower amortization of deferred financing costs.
Income tax expense of $18.8 million was recorded in fiscal 1996. The
Company's effective tax rate for fiscal 1996 was 40.1% as compared to 36.8% in
fiscal 1995. In fiscal 1995, income tax expense included a one-time deferred tax
benefit of $1.7 million, resulting from the adjustment of deferred taxes to
reflect the Company's future tax rate upon the completion of the business
reorganization. Exclusive of this adjustment, the effective rate in 1995 would
have been 41.4%.
In fiscal 1996, the Company recorded net income of $28.1 million, an
increase of 21.7%, compared to $22.1 million in fiscal 1995.
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 $77.4 million for fiscal 1997, as compared to $60.9
million in fiscal 1996 and $35.5 million in fiscal 1995. The increase is due
principally to a higher net income of $20.6 million and a $2.7 million reduction
in inventory in fiscal 1997 as compared to a $6.9 million reduction in inventory
in fiscal 1996. At June 30, 1997, the Company had working capital of $131.4
million and a current ratio of 3.08 to 1.
During fiscal 1997, capital spending totaled $23.4 million as compared to
$13.3 million and $11.2 million in fiscal 1996 and 1995, respectively. Capital
expenditures in fiscal 1998 are anticipated to be approximately $27.0 million.
The Company anticipates that cash from operations will be sufficient to fund
this level of capital expenditures. The increased level of capital spending,
which is attributable to new store openings and manufacturing efficiency
improvements, is expected to continue for the foreseeable future.
Total debt outstanding at June 30, 1997 is $67.9 million. At June 30,
1997, there are no outstanding revolving loans under the Credit Agreement. Trade
and standby letters of credit of $12.1 million were outstanding as of June 30,
1997. During fiscal 1997, 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 the Eurodollar spread used in
determining adjusted LIBOR 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.
Other debt includes $52.5 million of outstanding Senior Notes which have a
final maturity in 2001, with no scheduled amortization prior to final maturity.
On April 16, 1997, Standard Poors upgraded the rating on the Senior Notes to BBB
from BB+. The Company's Senior Secured Debt was also upgraded to BBB from BBB-.
The Senior Notes may be redeemed at the option of the Company commencing March
15, 1998. The Company does not anticipate that any Senior Notes will be repaid
prior to this date at the earliest; however, the Company may from time to time,
19
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 fiscal 1997, 1996 and 1995, $9.5 million,
$6.0 million and $3.0 million, respectively, principal amount of Senior Notes
were 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. The Company is currently authorized to repurchase a total of 2,200,000
shares. Depending on market prices and other conditions relevant to the Company,
such purchases may be discontinued at any time. During fiscal 1997 and 1996,
respectively, the Company purchased 333,296 shares of its stock at an average
price of $21.75 per share and 358,564 shares at an average price of $10.87,
respectively.
As of June 30, 1997, aggregate scheduled maturities of long-term debt for
each of the next five fiscal years are $0.1 million, $0.4 million, $0.2 million,
$52.7 million and $0.2 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.
Impact of Inflation
The Company does not believe that inflation has had a material impact on
its profitability during the last three fiscal years. In the past, the Company
has generally been able to increase prices to offset increases in operating
costs.
Income Taxes
At June 30, 1997, the Company has approximately $30.0 million of net
operating loss carryovers ("NOL's") for federal income tax purposes. The
Recapitalization triggered an "ownership change" of the Company, as defined in
Section 382 of the Internal Revenue Code of 1986, as amended, resulting in an
annual limitation on the utilization of the NOL's by the Company of
approximately $3.9 million.
Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("FAS") No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
This statement, effective for fiscal years beginning after December 15, 1995,
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for long-lived assets and certain identifiable intangibles to
be disposed of. The adoption of this standard has not had a material impact on
the Company's financial position or its results of operations.
In October 1995, the FASB issued FAS 123, Accounting for Stock-Based
Compensation which is effective for years beginning after December 15, 1995. FAS
123 permits a fair value based method of accounting for employee stock
compensation plans. It also allows a company to continue to use the intrinsic
value method of accounting prescribed by Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB 25"). Companies electing to
continue to use the accounting prescribed by APB 25 must make pro forma
disclosures of net income and net income per share as if the fair value based
method of accounting defined in FAS 123 had been applied. The Company adopted
FAS 123 in fiscal 1997 and has continued to use the intrinsic value method of
accounting.
In February 1997, the FASB isssued Statement of Financial Accounting Standard
No. 128, "Earnings per Share". The statement sets forth guidance on the
presentation of earnings per share and requires dual presentation of basic and
diluted earnings per share on the face of the income statement. Basic earnings
per share is computed by dividing net income available to common stockholders by
the weighted average number of common shares outstanding for the period. Diluted
20
earnings per share reflects the potential dilution that could occur if all
common stock equivalents were exercised (similar to fully diluted earnings per
share under APB Opinion No. 15). If the new standard was in effect during fiscal
1997, basic net income per share for the years ended June 30, 1997, 1996 and
1995 would have been $1.76, $.98 and $.77 per share, respectively. Diluted
income per share would have been $1.67, $.97 and $.76 per share for years ended
June 30, 1997, 1996 and 1995, respectively. The Company is required to adopt the
new standard in fiscal 1998.
21
Item 8. Financial Statements and Supplementary Data
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Ethan Allen Interiors Inc.:
We have audited the accompanying consolidated balance sheets of Ethan Allen
Interiors Inc. and Subsidiary ("the Company") as of June 30, 1997 and 1996, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the years in the three-year period ended June 30, 1997.
In connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule listed in the index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Ethan Allen
Interiors Inc. and Subsidiary as of June 30, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1997, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
As discussed in note 2 to the consolidated financial statements, the Company
changed its method of accounting for packaging costs in 1995.
/s/ KPMG PEAT MARWICK LLP
Stamford, Connecticut
August 6, 1997
22
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Consolidated Balance Sheets
June 30, 1997 and 1996
(Dollars in thousands)
ASSETS 1997 1996
------ ---------- --------
Current assets:
Cash and cash equivalents $ 21,866 $ 9,078
Short term investments 17,975 -
Accounts receivable, less allowance of
$1,903 and $2,564 at June 30, 1997 and
1996, respectively 32,232 33,984
Notes receivable, current portion, less
allowance of $74 and $314 at
June 30, 1997 and 1996, respectively 1,056 1,314
Inventories (note 4) 107,525 107,224
Prepaid expenses and other current assets 6,724 7,377
Deferred income taxes (note 11) 7,353 9,305
------- -------
Total current assets 194,731 168,282
------- -------
Property, plant and equipment, net (note 6) 171,406 159,634
Property held for sale (note 1) 1,135 4,233
Notes receivable, net of current portion,
less allowance of $145 and $97 at
June 30, 1997 and 1996,
respectively 2,725 2,561
Intangibles, net (note 6) 52,419 54,065
Deferred financing costs, net of amortization of
$1,916 and $1,426 at June 30, 1997 and 1996,
respectively (note 3) 1,560 1,877
Other assets 3,808 5,329
--------- ---------
Total assets $ 427,784 $ 395,981
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and
capital lease obligations (notes 7 and 8) $ 1,119 $ 2,498
Accounts payable 41,172 36,742
Accrued expenses 8,036 6,956
Accrued compensation and benefits 12,983 12,939
-------- --------
Total current liabilities 63,310 59,135
-------- -------
Long-term debt, less current maturities (note 7) 64,066 79,929
Obligations under capital leases, less current
maturities (note 8) 2,700 2,752
Other long-term liabilities, principally long-term
compensation, environmental and legal reserves 815 1,036
Deferred income taxes (note 11) 31,459 32,836
------- --------
Total liabilities 162,350 175,688
------- --------
Commitments and contingencies (notes 7 and 15) - -
Shareholders' equity (notes 9 and 10):
Class A common stock, par value $.01, 35,000,000
shares authorized, 29,465,400 shares issued
at June 30, 1997, 29,137,462 shares issued
at June 30, 1996 294 292
Preferred stock, par value $.01, 1,055,000 shares
authorized, no shares issued and outstanding
at June 30, 1997 and 1996, respectively - -
Additional paid-in capital 257,684 254,825
------- -------
257,978 255,117
23
Less: Notes receivable from officer and
employees (note 16) - (51)
Treasury stock (at cost) 700,032 shares
at June 30, 1997 and 512,960 shares at
June 30, 1996 (10,440) (5,371)
-------- --------
247,538 249,695
Retained earnings (accumulated deficit) 17,896 (29,402)
-------- --------
Total shareholders' equity 265,434 220,293
-------- --------
Total liabilities and shareholders' equity $427,784 $395,981
========= =========
See accompanying notes to consolidated financial statements.
24
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Consolidated Statements of Operations
Years ended June 30, 1997, 1996, and 1995
(Dollars in thousands, except per share data)
1997 1996 1995
-------- -------- --------
Net sales $571,838 $509,776 $476,111
Cost of sales 323,600 304,650 291,038
-------- -------- --------
Gross profit 248,238 205,126 185,073
Operating expenses:
Selling 85,927 74,582 71,463
General and administrative 76,462 74,977 65,924
Expenses related to the
business reorganization
and write-down of assets
held for sale (notes 1
and 14) - - 1,550
-------- -------- --------
Operating income 85,849 55,567 46,136
-------- -------- --------
Interest and other miscellaneous
income, net 1,272 1,039 1,766
Interest and related expense:
Interest 5,864 8,882 10,777
Amortization of deferred
financing costs 563 734 1,160
-------- -------- --------
6,427 9,616 11,937
-------- -------- --------
Income before income
taxes, extraordinary charge
and cumulative effect of
accounting change 80,694 46,990 35,965
Income tax expense (note 11) 31,954 18,845 13,233
-------- -------- --------
Income before extraordinary
charge and cumulative
effect of accounting change 48,740 28,145 22,732
Extraordinary charge from early
retirement of debt, net of
income tax benefits of $1,411
(note 3) - - (2,073)
Cumulative effect of accounting
change, net of income tax
of $999 (note 2) - - 1,467
-------- -------- --------
Net income $ 48,740 $ 28,145 $ 22,126
======== ======== ========
Per share data (notes 1 and 9):
Net income per common share
excluding extraordinary charge and
cumulative effect of accounting
change $ 1.67 $ 0.97 $ 0.78
Extraordinary charge (note 3) - - (0.07)
Cumulative effect of accounting
change (note 2) - - 0.05
-------- -------- --------
Net income per common share $ 1.67 $ 0.97 $ 0.76
======== ======== ========
25
Dividends declared per common share $ 0.10 $ 0.04 $ -
======== ======== ========
See accompanying notes to consolidated financial statements.
26
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended June 30, 1997, 1996 and 1995
(Dollars in thousands)
1997 1996 1995
---------- ---------- ---------
Operating activities:
Net income $ 48,740 $ 28,145 $ 22,126
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 16,411 17,495 17,258
Provision (benefit) for deferred
income taxes 575 622 (2,306)
Extraordinary charge - - 2,073
Cumulative effect of accounting change - - (1,467)
Other non-cash benefit (charges) 498 (64) (96)
Change in:
Accounts receivable 1,822 1,407 2,561
Inventories 2,726 6,891 (8,323)
Prepaid and other current assets 653 745 75
Other assets 137 (271) 1,581
Accounts payable 5,099 4,333 4,463
Accrued expenses 973 1,621 (2,068)
Other long-term liabilities (221) (36) (416)
--------- --------- ---------
Net cash provided by operating
activities 77,413 60,888 35,461
--------- --------- ---------
Investing activities:
Proceeds from the disposal of property,
plant, and equipment 110 1,216 3,071
Proceeds from the disposal of property
held for sale 1,945 - -
Capital expenditures (23,383) (13,314) (11,244)
Payments received on long-term notes
receivable 1,152 2,559 2,642
Disbursements made for long-term notes
receivable (1,077) (935) (581)
Investments in short term securities (17,975) - -
--------- --------- ---------
Net cash used by investing activities (39,228) (10,474) (6,112)
--------- --------- ---------
Financing activities:
Borrowings on revolving credit facilities 14,500 56,500 49,000
Payments on revolving credit facilities (21,500) (95,500) (67,000)
Redemption of Senior Notes (9,457) (6,000) (3,000)
Other payments on long-term debt and
capital leases (2,134) (1,823) (11,698)
Other borrowings on long-term debt 794 500 4,600
Payments to acquire treasury stock (7,249) (3,895) (1,082)
Net proceeds from issuance of common stock 2,126 1,474 421
Increase in deferred financing costs (173) (138) (742)
Initial borrowing under bank
credit agreement - - 43,000
Repayment of bank credit agreement - - (42,018)
Paid fees associated with the
common stock offerings - - (15)
Dividends paid (2,304) - -
--------- --------- ---------
27
Net cash used by financing activities (25,397) (48,882) (28,534)
--------- --------- ---------
Net increase in cash and cash equivalents 12,788 1,532 815
Cash and cash equivalents
at beginning of year 9,078 7,546 6,731
--------- --------- ---------
Cash and cash equivalents
at end of year $ 21,866 $ 9,078 $ 7,546
========= ========= =========
Supplemental disclosure:
Cash payments for:
Income taxes $ 28,116 $ 12,515 $ 17,867
Interest 6,138 9,073 11,026
Non cash transactions:
Additions to obligations under
capitalized leases 504 1,107 2,067
Acquisition of stores with treasury stock 3,327 - -
See accompanying notes to consolidated financial statements.
28
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Consolidated Statements of Shareholders' Equity
Years ended June 30, 1995, 1996 and 1997
(Dollars in thousands)
Retained
Additional Earnings/
Common Paid-in Notes Treasury (Accumulated
Stock Capital Receivable Stock Deficit) Total
------- ----------- ---------- -------- ------------- -----
Balance at June 30, 1994 286 251,588 (641) (394) (79,673) 171,166
Issuance of capital
stock 2 419 - - - 421
Payments received on
notes receivable - - 49 - - 49
Increase in vested
management warrants
(note 10) - 418 - - - 418
Purchase of 103,238 shares
of treasury stock - - - (1,082) - (1,082)
Net income - - - - 22,126 22,126
------- ---------- ------- ------ --------- ---------
Balance at June 30, 1995 288 252,425 (592) (1,476) (57,547) 193,098
Issuance of capital stock 4 1,470 - - - 1,474
Payments received
on notes receivable - - 541 - - 541
Increase in vested
management warrants
(note 10) - 304 - - - 304
Purchase of 358,564 shares of
treasury stock - - - (3,895) - (3,895)
Dividend declared - (574) - - - (574)
Tax benefit associated with the
exercise of employee stock
options and warrants - 1,200 - - - 1,200
Net income - - - - 28,145 28,145
------- ---------- ------- ------ --------- ---------
Balance at June 30, 1996 $ 292 $254,825 $ (51) $(5,371) $(29,402) $220,293
Issuance of capital stock 2 2,124 - - - 2,126
Payments received
on notes receivable - - 51 - - 51
Increase in vested
management warrants (note 10) - 71 - - - 71
Purchase of 333,296 shares of
treasury stock - - - (7,249) - (7,249)
29
Shares issued in connection with
acquisition - 1,147 - 2,180 - 3,327
Dividends declared - (1,152) - - (1,442) (2,594)
Tax benefit associated with the
exercise of employee stock
options and warrants - 669 - - - 669
Net income - - - - 48,740 48,740
------- ---------- ------- --------- --------- ---------
Balance at June 30, 1997 $ 294 $ 257,684 $ - $(10,440) $ 17,896 $265,434
======= ========== ======= ========= ========= =========
See accompanying notes to consolidated financial statements.
30
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
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.
Nature of Operations
The Company, through its wholly-owned subsidiary, is a leading
manufacturer and retailer of quality home furnishings and sells a full
range of furniture products and decorative accessories through an
exclusive network of 299 retail stores, of which 65 are Ethan
Allen-owned and 234 are independently owned. Retail stores are
primarily located in North America, with 16 located abroad. Ethan Allen
has 20 manufacturing facilities and 3 sawmills throughout the United
States.
Cash Equivalents
Cash equivalents of $9,754,000 at June 30, 1997 consist of overnight
repurchase agreements and commercial paper with an initial term less
than three months. For the purposes of the statements of cash flows,
the Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
Short Term Investments
Short term investments consist primarily of certificates of deposits
and debt securities and have been classified as held-to-maturity,
having maturities of one year or less. Because of the short maturity of
the short term investments, the carrying amount approximates fair
value.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation of plant
and equipment is provided over the estimated useful lives of the
respective assets on a straight-line basis. Estimated useful lives of
the respective assets generally range from twenty to forty years for
buildings and improvements and from three to twenty years for machinery
and equipment.
31
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property Held for Sale
Property held for sale are recorded at net realizable values. The
Company continues to actively market the properties. During fiscal
1995, the net realizable values of such assets were written down by
$800,000 to reflect current estimates of fair market values based upon
updated independent assessments of value.
32
Intangible Assets
Intangible assets primarily represent goodwill, trademarks and product
technology which will be amortized on a straight-line basis over forty
years. Goodwill represents the excess of cost of the Company over the
fair value of net identifiable assets acquired. The Company
continuously assesses the recoverability of these intangible assets by
evaluating whether the amortization of the intangible asset balances
over the remaining lives can be recovered through expected future
results. Expected future results are based on projected undiscounted
operating results before the effects of intangible amortization.
Product technology is measured based upon wholesale operating income,
while goodwill and trademarks are assessed based upon total wholesale
and retail operating income. The amount of impairment, if any, is
measured based on the fair value of projected discounted future
results.
Notes Receivable
Notes receivable represent financing arrangements under which Ethan
Allen has made loans to certain of its dealers. These loans primarily
have terms ranging from five to eight years and are generally secured
by the assets of the borrower. Interest is charged on outstanding
balances at a rate which generally approximates the prime rate plus an
additional rate which may be adjustable over the loan term.
Financial Instruments
The carrying value of the Company's financial instruments approximates
fair market value. The Company's Senior Notes as of June 30, 1997 were
traded at 103% of face value.
Deferred Financing Costs
Debt financing costs are deferred and amortized, using the
straight-line method, over the term of the related debt.
Revenue Recognition
Sales are recorded when goods are shipped to dealers, with the
exception of shipments under Ethan Allen's Home Delivery Service Center
Program. These sales are recognized as revenue when goods are shipped
to the Home Delivery Service Centers, at which point title has passed
to the dealers. Ethan Allen, through its Home Delivery Service Centers,
provides preparation and delivery services for its dealers for a fee
which is recognized as revenue upon delivery of goods to the retail
customer. Sales made through Ethan Allen-owned stores are recognized
when delivery is made to the customer.
Advertising Costs
Advertising costs are expensed when first aired or distributed.
Advertising costs for the fiscal years 1997, 1996, and 1995 were
$27,712,000, $21,289,000 and $19,528,000, respectively.
33
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Pre-opening Expenses
All costs incurred prior to the opening of a new Ethan Allen-owned
store are deferred and amortized over the respective store's first
twelve months of operations.
Closed Store Expenses
Future expenses, such as rent and real estate taxes, net of expected
lease or sublease recovery, which will be incurred subsequent to
vacating a closed Ethan Allen-owned store, are charged to operations
upon a formal decision to close the store.
Earnings Per Share
Earnings per common share are computed by dividing net earnings by the
weighted average number of shares of common stock and common stock
equivalents outstanding during each period, after giving effect for the
two-for-one stock split as described in note 9. The Company has issued
stock options and warrants, which are the Company's only common stock
equivalents. Weighted average common shares outstanding includes common
stock equivalents calculated in accordance with the "treasury stock
method" wherein the net proceeds from such common stock equivalents are
assumed to repurchase shares of common stock. Weighted average common
shares outstanding were 29,232,000, 29,128,000 and 29,246,000 in fiscal
1997, 1996 and 1995, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(2) Cumulative Effect of Accounting Change
As of July 1, 1994, the Company changed its method of accounting for
packaging costs to better match revenue with expenses. This change
resulted in a cumulative adjustment of $2.5 million ($1.5 million net
of tax) which represents the capitalization of packaging costs into
finished goods and retail inventories. Such amounts were previously
charged to selling expense in the period the related product was
manufactured and shipped to a Company warehouse. Commencing July 1,
1994, packaging costs have been included in cost of sales as the
product is shipped to customers.
(3) Extraordinary Charge
During fiscal 1995, the Company entered into a Credit Agreement to
provide
34
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
up to $110 million of senior secured debt, the proceeds of which were
used to repay existing senior secured debt (see note 7). As a result of
the financing, an extraordinary charge of $3.5 million ($2.1 million
net of tax benefit), was recorded relating to the write-off of
unamortized deferred financing costs associated with the previous bank
financing.
35
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(4) Inventories
Inventories at June 30 are summarized as follows (dollars in
thousands):
1997 1996
-------- --------
Retail Merchandise $ 34,478 $ 28,695
Finished products 32,665 39,146
Work in process 13,333 12,803
Raw materials 27,049 26,580
-------- --------
$107,525 $107,224
(5) Property, Plant and Equipment
Property, plant and equipment at June 30 are summarized as follows
(dollars in thousands):
1997 1996
-------- --------
Land and improvements 22,624 22,075
Buildings and improvements 168,990 152,915
Machinery and equipment 70,288 63,989
-------- --------
261,902 238,979
Less accumulated depreciation (90,496) (79,345)
-------- --------
$171,406 $159,634
======== ========
(6) Intangibles
Intangibles at June 30 are summarized as follows (dollars in
thousands):
1997 1996
-------- --------
Product technology $25,950 $25,950
Trademarks 28,200 28,200
Goodwill 11,333 11,333
Other 350 350
-------- --------
65,833 65,833
Less accumulated amortization (13,414) (11,768)
-------- --------
$52,419 $54,065
======== ========
(7) Borrowings
Long-term debt at June 30 consists of the following (dollars in
thousands):
1997 1996
-------- --------
Revolving Credit Facility $ - $ 7,000
8.75% Senior Notes due 2001 52,543 62,000
36
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Other Debt:
9.75% mortgage note payable in
monthly installments through 2015
collateralized by Ethan Allen Inn 1,589 1,623
Industrial Revenue Bonds, 4.0% - 8.0%,
maturing at various dates through
2011 8,455 8,455
Other 1,626 958
-------- --------
Total debt 64,213 80,036
Less current maturities 147 107
-------- --------
$ 64,066 $ 79,929
======== ========
During 1997, the Company amended its Credit Agreement which it had
originally entered into 1995, 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 the Eurodollar spread used in
determining adjusted LIBOR 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.
During 1995, the Company completed a five year financing arrangement to
provide up to $110.0 million of senior secured debt under a revolving
credit facility pursuant to a Credit Agreement with Chase Manhattan
Bank, as agent, proceeds of which were used to repay existing senior
secured debt. The revolving credit facility includes a $40.0 million
sub-facility for trade and standby letters of credit availability and a
$3.0 million swingline loan sub-facility. Loans under the revolving
credit facility bear interest at Chase Manhattan Bank's Alternative
Base Rate, or adjusted LIBOR plus .5%, which is subject to adjustment
arising from changes in the credit rating of Ethan Allen's senior
secured debt. For fiscal years ended June 30, 1997 and 1996, the
weighted-average interest rates were 7.37% and 6.81%, respectively.
There are no minimum repayments required during the term of the
facility.
The Credit Agreement is secured by a first lien in respect of Ethan
Allen's accounts receivable, inventory, trademarks, patents and the
Company's shares of Ethan Allen's capital stock. The Company has
guaranteed Ethan Allen's obligation under the Credit Agreement and the
Senior Notes and has pledged all the outstanding capital stock of Ethan
Allen to secure its guarantee under the Credit Agreement.
The Credit Agreement and the Senior Note Indenture contain covenants
requiring the maintenance of certain defined tests and ratios and limit
the ability of Ethan Allen and the Company to incur debt, engage in
mergers and consolidations, make restricted payments, make asset sales,
make investments and issue stock. The Senior Notes, which rank pari
passu in right of payment with loans under the Credit Agreement provide
for the repurchase of the Senior Notes in the event of a change in
control and the Credit Agreement and the Senior Note Indenture contain
various customary events of default. Ethan Allen satisfied the
requirements of the
37
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
covenants in the Credit Agreement and the Senior Note Indenture at June
30, 1997. The Senior Notes may not be redeemed at the option of the
Company until March 15, 1998. The Company has announced that, from time
to time, it will repurchase its Senior Notes in the open market. During
fiscal 1997, 1996, and 1995, $9.5 million, $6.0 million, and $3.0
million, respectively, of Senior Notes were repurchased at 101.48%,
101.25%, and 99.50% of face value, respectively.
In June 1996, the Company closed on loan commitments in the aggregate
amount of approximately $1.4 million related to the modernization of
its Beecher Falls manufacturing facility. Loans made pursuant to these
commitments bear interest at rates of 3% to 8% and have maturities of 7
to 30 years. The loans have a first and second lien in respect of
equipment financed by such loans and a first and second mortgage
interest in respect of a building, the construction of which was
financed by such loans.
38
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Aggregate scheduled maturities of long-term debt for each of the five
fiscal years subsequent to June 30, 1997, are as follows (dollars in
thousands):
1998 . . . . . . . . . . . . . 148
1999 . . . . . . . . . . . . . 407
2000 . . . . . . . . . . . . . 157
2001 . . . . . . . . . . . .52,711
2002 . . . . . . . . . . . . . 180
(8) Leases
Ethan Allen leases real property and equipment under various operating
and capital lease agreements expiring through the year 2014. Leases
covering retail outlets and equipment generally require, in addition to
stated minimums, contingent rentals based on retail sales and equipment
usage. Generally, the leases provide for renewal for various periods at
stipulated rates.
Property, plant and equipment include the following amounts for leases
which have been capitalized at June 30 (dollars in thousands):
1997 1996
-------- -------
Land $ 103 $ 103
Buildings and improvements 911 911
Machinery and equipment 11,131 11,021
------ ------
12,145 12,035
Less Accumulated depreciation (10,732) (9,833)
------- ------
$ 1,413 $ 2,202
======= ======
Future minimum payments by year and in the aggregate, under the capital
leases and non-cancelable operating leases, with initial or remaining
terms of one year or more consisted of the following at June 30, 1997
(dollars in thousands):
Capital Operating
Fiscal Year Ending June 30: Leases Leases
--------------------------- -------- ---------
1998 $ 1,801 $ 6,727
1999 1,136 5,638
2000 425 4,678
2001 333 3,750
2002 112 3,579
Subsequent to 2002 1,092 16,288
-------- --------
Total minimum lease payments 4,899 $40,660
======== ========
Amounts representing interest 1,227
--------
Present value of future minimum
lease payments 3,672
Less amounts due in one year 972
--------
Long-term obligations under $ 2,700
capital leases ========
The above amounts will be offset by minimum future rentals from
subleases of $12,709,000 on operating leases.
39
RENUMBER
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Total rent expense for the fiscal years ended June 30 was as follows
(dollars in thousands):
1997 1996 1995
------- ------- -----
Basic rentals under operating
leases $ 14,578 $ 14,419 $ 8,579
Contingent rentals under
operating leases 1,028 1,082 4,294
------- ------- ------
15,606 15,501 12,873
Less sublease rent 1,923 1,782 2,091
------- ------- ------
$ 13,683 $ 13,719 $10,782
======= ======= ======
(9) Shareholders' Equity
On August 6, 1997, the Company declared a two-for-one stock split to be
distributed on September 2, 1997 to shareholders of record on August
18, 1997. All related amounts have been retroactively adjusted to
reflect the stock split.
During fiscal 1997, the Company acquired a number of retail stores and
used 146,224 treasury shares with a fair value of $3.3 million as part
of the consideration of the transaction.
On May 20, 1996, the Board of Directors adopted a Stockholder Rights
Plan and declared a dividend of one Right for each outstanding share of
common stock as of July 10, 1996. Each Right entitles its holder, under
certain circumstances, to purchase one one-hundredth of a share of the
Company's Series C Junior Participating Preferred Stock at a price of
$62.50 on a post split basis (Purchase Price) (subject to adjustment).
The Rights may not be exercised until 10 days after a person or group
acquires 15% or more of the Company's common stock, or 15 days after
the commencement or the announcement of the intent to commence a tender
offer which, if consummated, would result in a 15% or more ownership of
the Company's common stock.
Until then, separate Rights certificates will not be issued, nor will
the Rights be traded separately from the stock.
Should an acquirer become the beneficial owner of 15% of the Company's
common stock, and under certain additional circumstances, the Company's
stockholders (other than the acquirer) would have the right to receive
in lieu of the Series C Junior Participating Preferred Stock, a number
of shares of the Company's common stock, or in stock of the surviving
enterprise if the Company is acquired, having a market value equal to
two times the Purchase Price.
The Rights will expire on May 31, 2006, unless redeemed prior to that
date. The redemption price is $0.01 per Right. The Board of Directors
may redeem the Rights at its option any time prior to the announcement
that a person or group has acquired 15% or more of the Company's common
stock.
41
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The Company's authorized capital stock consists of (a) 35,000,000
shares of Common Stock, par value $.01 per share, (b) 600,000 shares of
Class B Common Stock, par value $.01 per share, (c) 1,055,000 shares of
Preferred Stock, par value $.01 per share of which (i) 30,000 shares
have been designated Series A Redeemable Convertible Preferred Stock
("the Redeemable Convertible Preferred Stock"), (ii) 30,000 shares have
been designated Series B Redeemable Convertible Preferred Stock, (iii)
155,010 shares have been designated as Series C Junior Participating
Preferred Stock, and (iv) the remaining 839,990 shares may be
designated by the Board of Directors with such rights and preferences
as they determine (all such preferred stock, collectively, the
"Preferred Stock"). As of June 30, 1997, no shares of Preferred Stock
or shares of Class B Common Stock were issued or outstanding.
In February 1997, Statement of Financial Accounting Standard No 128,
"Earnings per Share" was issued. The statement sets forth guidance on
the presentation of earnings per share and requires dual presentation
of basic and diluted earnings per share on the face of the statement of
operations. Basic earnings per share is computed by dividing net income
available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur if all common stock
equivalents were exercised (similar to fully diluted earnings per share
under APB Opinion No. 15). If the new standard was in effect during
fiscal 1997, basic net income per share for the years ended June 30,
1997, 1996, and 1995 would have been $1.76, $.98 and $.77 per share,
respectively. Diluted income per share would have been $1.67, $.97 and
$.76 per share for years ended June 30, 1997, 1996 and 1995,
respectively. The Company is required to adopt the new standard in
fiscal 1998.
(10) Employee Stock Plans
The Company has reserved 3,646,466 shares of Common Stock for issuance
pursuant to the Company's stock option and warrant plans as follows:
1992 Stock Option Plan
The 1992 Stock Option Plan provides for the grant of options
to key employees and non-employee directors to purchase shares
of Common Stock that are either qualified or non-qualified
under Section 422 of the Internal Revenue Code, as well as
stock appreciation rights on such options. The awarding of
such options is determined by the Compensation Committee of
the Board of Directors after consideration of recommendations
proposed by the Chief Executive Officer. The options awarded
to employees vest 25% per year over a four-year period and are
exercisable at the market value of the Common Stock at the
date of grant. The maximum number of shares of Common Stock
reserved for issuance under the 1992 Stock Option Plan is
2,360,398 shares. Options covering 68,000 shares, which are
exercisable at
42
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
prices ranging from $9.00 to $9.75 per share, have been
awarded to independent directors and will vest 50% on each of
the first two anniversary dates of the grant. Options to
purchase 120,000 shares were awarded to Mr. Kathwari during
fiscal year 1995 and an additional 480,000 options to purchase
shares were awarded to Mr. Kathwari during 1996. These options
are exercisable at $9.75 and $9.50 per share, respectively and
will vest over seven years commencing with the first vesting
date of July 27, 1994, and each of the next six years. Through
June 30, 1996, options to purchase 397,400 shares were issued
to other employees with exercise prices ranging from $9.50 to
$9.75 per share and options to purchase 139,900 shares were
issued to certain key employees in fiscal 1997 and were
exercisable at $21.75 per share.
Incentive Stock Option Plan
Pursuant to the Incentive Stock Option Plan, the Company has
granted to members of management options to purchase 553,028
shares of Common Stock at an exercise price of $8.25 per
share. Such options vest twenty percent per year over a
five-year period.
Management Warrants
Warrants to purchase 466,374 shares of Common Stock were
granted to certain key members of management during fiscal
1991 and 1992. The warrants are currently exercisable at
$1.838 per share.
Earn-In Warrants
Earn-In Warrants have been fully earned and 266,666 shares
have been allocated to Ethan Allen's managers and employees.
Earn-In warrants were exercisable at $.188 per share.
Stock option and warrant activity during 1997, 1996 and 1995 is as
follows:
Number of shares
---------------------------------------------------------------
1992 Stock Incentive Management Earn-In
Option Plan Options Warrants Warrants
----------- --------- ---------- --------
Outstanding at June 30, 1994 227,800 510,902 294,776 263,666
--------- -------- ------- -------
Granted in 1995 242,800 - - -
Exercised in 1995 (500) (6,934) (52,594) (14,098)
Canceled in 1995 (16,700) (24,000) (624) (8,666)
--------- ------- ------- -------
Outstanding at June 30, 1995 453,400 479,968 241,558 240,902
43
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Granted in 1996 591,400 - - -
Exercised in 1996 (5,900) (134,700) (60,638) (87,992)
Canceled in 1996 (25,450) (21,750) (6,234) (11,932)
--------- -------- ------- -------
Outstanding at June 30, 1996 1,013,450 323,518 174,686 140,978
Granted in 1997 139,900 - - -
Exercised in 1997 (61,108) (65,734) (46,118) (134,978)
Canceled in 1997 (17,776) (2,230) (12) (6,000)
--------- ------- ------- --------
Outstanding at June 30, 1997 1,074,466 255,554 128,556 -0-
========= ======= ======= =====
Exercisable at June 30, 1997 462,946 255,554 128,556 -0-
========= ======= ======= =====
Option prices per share:
Outstanding at June 30, 1997 $ 9.50 to $ 8.25 $ 1.838 -
$21.75
Exercisable at June 30, 1997 $ 9.50 to $ 8.25 $ 1.838 -
$ 9.75
In fiscal 1997, the Company adopted SFAS No. 123, Accounting for Stock Based
Compensation ("SFAS 123"). As permitted by SFAS 123, the Company will continue
to follow the provisions of APB No. 25, Accounting for Stock Issued to Employees
and related interpretations in accounting for compensation expense related to
the issuance of stock options. Had compensation costs related to the issuance of
stock options under the Company's 1992 Stock Option Plan been determined based
on the estimated fair value at the grant dates for awards under SFAS 123, the
Company's net
44
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
income end earnings per share for the fiscal years ended June 30, 1997 and 1996
would have been reduced to the proforma amounts listed below, (dollars in
thousands, except per share data):
June 30, 1997 June 30, 1996
------------- -------------
Net Income
- ----------
As reported $48,740 $28,145
Proforma 48,350 27,925
Earnings Per Share
- ------------------
As reported $ 1.67 $ 0.97
Proforma 1.66 0.96
The fair value of each stock option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions;
weighted average risk-free interest rates of 6.35% and 6.09% for fiscal 1997 and
1996, respectively, dividend yield of 1.0% for both years, expected volatility
of 39.8% and 38.7% in fiscal 1997 and 1996, respectively, and expected lives of
five years for both years.
(11) Income Taxes
Income tax expense consists of the following for the fiscal years ended
June 30 (dollars in thousands):
1997 1996 1995
-------- -------- ---------
Current:
Federal $ 25,434 $ 14,445 $ 12,172
State 5,945 3,778 3,367
-------- -------- ---------
Total current 31,379 18,223 15,539
-------- -------- ---------
Deferred:
Federal 595 517 (392)
State (20) 105 (1,914)
-------- -------- ---------
Total deferred 575 622 (2,306)
======== ======== =========
Income tax expense
on income
before extraordinary
charge and the cumulative
effect of accounting
change $ 31,954 $ 18,845 $ 13,233
======== ======== =========
45
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The following is a reconciliation of expected income taxes (computed by
applying the Federal statutory rate to income before taxes,
extraordinary charge and cumulative effect of accounting change) to
actual income tax expense (dollars in thousands):
1997 1996 1995
-------- -------- --------
Computed "expected"
income tax expense $ 28,243 $ 16,447 $ 12,588
State income taxes,
net of federal income
tax benefit 3,163 2,016 1,987
Goodwill amortization 99 99 99
Decrease in state deferred tax
balances, due to
business reorganization
(note 14) - - (1,660)
Other, net 449 283 219
------- ------- ------
Income tax expense
on income before
extraordinary charge
and cumulative effect
of accounting change $ 31,954 $ 18,845 $ 13,233
======= ======= =======
The significant components of the deferred tax expense (benefit) are as
follows (dollars in thousands):
1997 1996 1995
-------- -------- ------
Deferred tax expense (benefit)
exclusive of the
component below $ (933) $ (885) $ (3,938)
Utilization of net operating
loss carryforwards 1,508 1,507 1,632
------- ------- -------
$ 575 $ 622 $ (2,306)
======= ======= =======
46
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The components of the net deferred tax liability as of June 30 are as
follows (dollars in thousands):
1997 1996
-------- ------
Deferred tax assets:
Accounts receivable $ 853 $ 1,204
Inventories 2,774 3,513
Other liabilities and reserves 3,726 4,588
Net operating loss carryforwards 11,750 13,256
------ ------
Total deferred tax asset 19,103 22,561
------ ------
Deferred tax liabilities:
Property, plant and equipment 26,811 29,006
Intangible assets other than
goodwill 15,681 16,194
Miscellaneous 717 892
------ ------
Total deferred tax liability 43,209 46,092
------ ------
Net deferred tax liability $24,106 $23,531
====== ======
The Company has tax operating loss carryforwards of approximately $30.0
million at June 30, 1997, of which $8.1 million expires in 2006, $11.3
million expires in 2007 and $10.6 million expires in 2008. Pursuant to
Section 382 of the Internal Revenue Code, the Company's utilization of
the net operating loss carryforwards are subject to an annual
limitation of approximately $3.9 million.
During fiscal 1997, Ethan Allen received a $5.2 million investment tax
credit from the State of Vermont. The credit may be utilized to offset
80% of current and future years tax liability and may be carried
forward up to 10 years. Ethan Allen does not expect to be able to
utilize the entire credit. The estimated net realizable credit of $2
million is being accounted for under the deferral method, with
amortization over the average life of the related assets.
Management believes that the results of future operations will generate
sufficient taxable income to realize the deferred tax assets.
(12) Retirement Programs - Employee Benefits
The Ethan Allen Profit Sharing and 401(k) Retirement Plan
The Ethan Allen Profit Sharing and 401(k) Retirement Plan was formed
effectively July 1, 1994 with the merger of the Retirement Program of
Ethan Allen Inc. ("Retirement Program") into the Ethan Allen 401(k)
Employee Savings Plan. As a result of the merger on July 1, 1994, all
participant investments in the Retirement Program (except for the Ethan
Allen Restricted stock which was transferred directly) were liquidated
and the proceeds were transferred into the Plan and allocated to
participant accounts at each participant's request.
The Plan is offered to substantially all employees of the company who
have completed both one year and 1,000 hours of service during the Plan
year.
47
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Ethan Allen, may at its discretion, make a matching contribution to the
401(k) portion of the Plan on behalf of each participant, provided the
contribution does not exceed the lesser of 50% of the participant's
contribution or $600 per participant per Plan year. Contributions to
the profit sharing portion of the Plan are made at the discretion of
management. Total profit sharing and 401(k) company match expense was
$1,595,000 in 1997, $2,866,000 in 1996, and $1,697,000 in 1995.
48
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Other Retirement Plans and Benefits
Ethan Allen provides additional benefits to selected members of senior
and middle management in the form of deferred compensation arrangements
and a management incentive program. The total cost of these benefits
was $1,567,000, $2,047,000, and $1,157,000 in 1997, 1996 and 1995,
respectively.
(13) Wholly-Owned Subsidiary
The Company owns all of the outstanding stock of Ethan Allen and 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 obligation under the Credit
Agreement and the Senior Notes and has pledged all the outstanding
capital stock of Ethan Allen to secure its guarantee under the Credit
Agreement.
The condensed balance sheets of Ethan Allen as of June 30 are as
follows (dollars in thousands):
Assets
------
1997 1996
-------- --------
Current assets $194,704 $168,261
Non-current assets 244,880 231,163
------- -------
Total assets $439,584 $399,424
======= =======
Liabilities
-----------
Current liabilities $ 62,398 $ 58,517
Non-current liabilities 99,040 116,553
------- -------
Total liabilities $161,438 $175,070
======= =======
A summary of Ethan Allen's operating activity for each of the years in
the three-year period ended June 30, 1997, is as follows:
1997 1996 1995
-------- -------- --------
Net sales $571,838 $509,776 $476,111
Gross profit 248,238 205,126 185,073
Operating income 85,943 55,677 46,216
Interest expense 5,864 8,882 10,777
Amortization of deferred
financing costs 563 734 1,160
Income before income
taxes, extraordinary charge,
and cumulative effect
of accounting change 80,787 47,095 36,037
Net income $ 48,833 $ 28,250 $ 22,198
49
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(14) Business Reorganization
The Company implemented a business reorganization ("Reorganization")
effective July 1, 1995, which permitted a separation of manufacturing
operations from distribution and store operations. The Company believes
that the separation of manufacturing operations from distribution and
store operations provides 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 wholly owned subsidiary of Ethan Allen
(ii) EAMC entered into operating lease arrangements with 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 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
Senior Notes due 2001 by each of EAMC and EAFC and Andover Woods
Products Inc. ("Andover"), a wholly owned subsidiary of Ethan Allen (v)
the amendment of the Company's existing guarantee of Ethan Allen's
obligations under the Senior Notes 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 between Ethan Allen and EAFC (vii) the execution of a
management agreement and a trademark licensing agreement between EAMC
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 current Ethan Allen-owned retail operations and
Ethan Allen's distribution, service and home delivery operations.
Costs associated with the Reorganization of $750,000, including consent
fees paid to the holders of the Company's Senior Notes, were expensed
in fiscal 1995.
The summarized historical combined balance sheet information for EAMC,
EAFC, and Andover (the "Guarantor Subsidiaries") at June 30, 1997 and
1996 is as follows (dollars in thousands):
June 30 June 30
Assets 1997 1996
------ --------- ---------
Current assets $ 85,355 $ 46,394
Non-current assets 168,540 164,602
-------- --------
Total assets $ 253,895 $ 210,996
======== ========
Liabilities
-----------
Current Liabilities $ 28,160 $ 21,346
Non-current liabilities 16,893 17,939
-------- --------
Total liabilities $ 45,053 $ 39,285
======== ========
50
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Summarized historical combined operating activity of the Guarantor
Subsidiaries for each of the years in the three-year period ended June
30, 1997 is as follows (dollars in thousands):
1997 1996 1995
---------- ---------- ----------
Net Sales $ 357,470 $ 317,563 $ 292,148
Gross Profit 75,278 57,227 38,721
Operating Income 57,113 39,324 15,882
Income before
income taxes 61,475 43,636 15,717
Net income $ 37,131 $ 26,400 $ 9,351
The summarized historical financial information for the Guarantor
Subsidiaries above, has been derived from the financial statements of
the Company.
(15) Litigation
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. 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, which would be sufficient to cover
any resulting liability. With respect to all of these sites, the
Company believes that it is not a major contributor based on the very
small volume of waste generated by the Company in relation to total
volume at the site. The Company has concluded its involvement with one
site and settled as a de-minimis party. For two of the sites, the
remedial investigation is ongoing. A volume based allocation of
responsibility among the parties has been prepared. With respect to the
fourth site, a consent decree to finally resolve the matter with the
EPA has been signed.
(16) Related Party Transactions
As of June 30, 1996, the Company had notes receivable from members of
management of $51,000, the proceeds of which were used to purchase the
Company's common stock. Accordingly, the notes receivable balance at
June
51
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
30, 1996 is reflected as a reduction of shareholders' equity in the
balance sheet. Such loans bore interest at 7% and were repaid January
1997.
(17) Segment Information
The Company's operations are classified into two business segments:
wholesale and retail home furnishings. The wholesale home furnishings
segment is principally involved in the manufacture, sale and
distribution of home furnishing products to a network of
independently-owned and Ethan Allen-owned galleries. The retail home
furnishings segment sells home furnishing products through a network of
Ethan Allen-owned galleries. These products consist of case goods (wood
furniture), upholstered products, and home accessories.
Wholesale profitability includes the wholesale gross margin which is
earned on wholesale sales to all retail stores, including Ethan
Allen-owned stores. The retail profitability includes the retail gross
margin which is earned based on purchases from the wholesale business.
Inter-segment eliminations primarily comprise the wholesale sales and
profit on the transfer of inventory between segments. Operating
earnings by business segment are defined as sales less operating costs
and expenses. Income and expense items, such as corporate operating
expenses, are included in the applicable segment. Identifiable assets
are those assets used exclusively in the operations of each business
segment. Corporate assets principally comprise cash, deferred financing
costs, and deferred income taxes.
52
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The following table shows sales, operating earnings and other financial
information by business segment for the fiscal years ended June 30,
1997, 1996, and 1995 (dollars in thousands):
Inter-Segment
Wholesale Retail Eliminations Consolidated
--------- ------ ------------ ------------
1997
Net sales $495,001 $175,825 $ (98,988) $571,838
Operating income 84,034 7,419 (5,604) 85,849
Interest and other
income 974 298 - 1,272
Less: Interest expense ( 6,427)
-------
Income before income
tax expense 80,694
Depreciation and
amortization 14,235 1,613 - 15,848
Identifiable assets 335,260 61,745 - 397,005
Cash 21,866
Deferred income taxes 7,353
Deferred financing costs 1,560
-------
Total assets 427,784
Capital expenditures 9,990 13,393 - 23,383
Inter-Segment
Wholesale Retail Eliminations Consolidated
--------- -------- ------------- ------------
1996
Net sales $433,886 $155,601 $ (79,711) $509,776
Operating income 53,745 4,059 (2,237) 55,567
Interest and other
income 663 376 - 1,039
Less: Interest expense - - - (9,616)
-------
Income before income 46,990
tax expense
Depreciation and
amortization 15,199 1,562 - 16,761
Identifiable assets 327,371 48,350 - 375,721
Cash 9,078
Deferred income taxes 9,305
Deferred financing costs 1,877
-------
Total assets 395,981
Capital expenditures 7,421 5,893 - 13,314
--------
53
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Inter-Segment
Wholesale Retail Eliminations Consolidated
--------- ------ ------------- ------------
1995
----
Net sales $415,412 $133,168 $(72,469) $476,111
Operating income 46,012 2,625 (2,501) 46,136
Interest and other
income 1,451 315 - 1,766
Less: Interest expense (11,937)
Income before income tax
expense, extraordinary
charge, and cumulative
effect of accounting
change 35,965
Depreciation and
amortization 14,798 1,300 - 16,098
Identifiable assets 338,572 50,314 - 388,886
Cash 7,546
Deferred income taxes 9,505
Deferred financing costs 2,351
-------
Total assets 408,288
Capital expenditures 5,768 5,476 - 11,244
(18) Selected Quarterly Financial Data (Unaudited)
Tabulated below are certain data for each quarter of the fiscal years
ended June 30, 1997 and 1996 (dollar amounts in thousands, except per
share data).
Quarter Ended
----------------------------------------------------------------
September 30 December 31 March 31 June 30
------------ ----------- -------- -------
1997 Quarters:
Net Sales $132,355 $138,330 $144,719 $156,434
Gross Profit 54,578 59,921 63,308 70,431
Net income $ 8,783 12,227 12,849 14,881
Net income per common
share $ 0.30 $ 0.42 $ 0.44 $ 0.51
Dividend declared per
common share $ 0.02 $ 0.02 $ 0.03 $ 0.03
1996 Quarters:
Net sales $116,941 $127,212 $134,631 $130,992
Gross profit 45,471 51,355 54,141 54,159
Net income $ 4,500 7,841 8,348 7,456
Net income per common
share $ 0.16 $ 0.27 $ 0.29 $ 0.25
Dividend declared per
common share $ 0.00 $ 0.00 $ 0.02 $ 0.02
54
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures
No changes in or disagreements with accountants on accounting or
financial disclosure occurred in fiscal years 1997 and 1996.
55
PART III
Part III is omitted as the Company intends to file with the Commission
within 120 days after the end of the Company's fiscal year a definitive proxy
statement pursuant to Regulation 14A which will involve the election of
directors.
ITEM 10. Directors and Executive Officers of the Registrant
- -------- --------------------------------------------------
See reference to definitive proxy statement under Part III.
ITEM 11. Executive Compensation
- -------- ----------------------
See reference to definitive proxy statement under Part III.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
- -------- --------------------------------------------------------------
See reference to definitive proxy statement under Part III.
ITEM 13. Certain Relationships and Related Transactions
- -------- ----------------------------------------------
See reference to definitive proxy statement under Part III.
56
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Listing of Documents
(1) Financial Statements. The Company's Consolidated Financial
Statements included in Item 8 hereof, as required at June 30,
1997 and 1996, and for the years ended June 30, 1997, 1996 and
1995, consist of the following:
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Consolidated Statements of Shareholders' Equity
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules. Financial Statement Schedules
of the Company appended hereto, as required for the years
ended June 30, 1997, 1996 and 1995, consist of the following:
II. Valuation and Qualifying Accounts
The schedules listed in Reg. 210.5-04, except those listed above, have
been omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
(3) The following Exhibits are filed as part of this report on
Form 10-K:
Exhibit
Number Exhibit
------ -------
*2(a) Agreement and Plan of Merger, dated May 20, 1989
among the Company, Green Mountain Acquisition
Corporation ("Merger Sub"), INTERCO Incorporated,
Interco Subsidiary, Inc. and Ethan Allen *2(b)
Restructuring Agreement, dated as March 1, 1991,
among Green Mountain Holding Corporation, Ethan
Allen, Chemical Bank, General Electric Capital
Corporation, Smith Barney Inc. and the stockholder's
name on the signature page thereof *3(a) Restated
Certificate of Incorporation for Green Mountain
Holding Corporation *3(b) Restated and Amended
By-Laws of Green Mountain Holding Corporation *3(c)
Restated Certificate of Incorporation of the Company
*3(d) Amended and Restated By-laws of the Company
*3(e) Certificate of Designation relating to the New
Convertible Preferred Stock *3(f) Certificate of
Incorporation of Ethan Allen Finance Corporation
*3(g) By-Laws of Ethan Allen Finance Corporation
*3(h) Certificate of Incorporation of Ethan Allen
Manufacturing Corporation
57
*3(i) By-Laws of Ethan Allen Manufacturing Corporation
*4(a) First Amendment to Management Non-Qualified Stock
Option Plan
*4(b) Second Amendment to Management Non-Qualified Stock
Option Plan
*4(c) 1992 Stock Option Plan
58
Exhibit
Number Exhibit
------ -------
*4(d) Management Letter Agreement among the Management
Investors and the Company
*4(e) Management Warrant, issued by the Company to members
of the Management of Ethan Allen
*4(f) Form of Dealer Letter Agreement among Dealer
Investors and the Company
*4(g) Form of Kathwari Warrant, dated June 28, 1989
*4(j) Form of Indenture relating to the Senior Notes
*4(j)-1 First Supplemental Indenture dated as of March 23,
1995 between Ethan Allen and the First National Bank
of Boston for $75,000,000 8-3/4% Senior Notes due
2007
*4(k) Credit Agreement among the Company, Ethan Allen and
Bankers Trust Company
*4(k)-1 Amended Credit Agreement among the Company, Ethan
Allen and Bankers Trust Company
*4(k)-2 110,000,000 Senior Secured Revolving Credit Facility
dated March 10, 1995 between Ethan Allen and Chase
Manhattan Bank
*4(k)-3 Amended and Restated Credit Agreement as of December
4, 1996 between Ethan Allen Inc. and the Chase
Manhattan Bank
*4(l) Catawba County Industrial Facilities Revenue Bond
*4(l)-1 Trust Indenture dated as of October 1, 1994 securing
$4,6000,000 Industrial Development Revenue Refunding
Bonds, Ethan Allen Inc. Series 1994 of the Catawba
County Industrial Facilities and Pollution Control
Financing Authority
*4(m) Lease for 2700 Sepulveda Boulevard Torrance,
California
*4(n) Amended and Restated Warrant Agreement, dated March
1, 1991, among Green Mountain Holding Corporation and
First Trust National Association
*4(o) Exchange Notes Warrant Transfer Agreement
*4(p) Warrant (Earned) to purchase shares of the Company's
Common Stock dated March 24, 1993
*4(q) Warrant (Earned-In) to purchase shares of the
Company's Common Stock, dated March 23, 1993
*4(r) Recapitalization Agreement among the Company, General
Electric Capital Corporation, Smith Barney Inc.,
Chemical Fund Investments, Inc., Legend Capital
Group, Inc., Legend Capital International Ltd.,
Castle Harlan, Inc., M. Farooq Kathwari, the Ethan
Allen Retirement Program and other stockholders named
on the signature pages thereto, dated as of March 24,
1993
*4(s) Preferred Stock and Common Stock Subscription
Agreement, dated March 24, 1993, among the Company,
General Electric Capital Corporation, and Smith
Barney Inc.
*4(t) Security Agreement, dated as of March 10, 1995,
between Ethan Allen Inc. and Chase Manhattan Bank
*10(b) Employment Agreement, dated June 29, 1989, among Mr.
Kathwari, the Company and Ethan Allen
*10(c) Employment Agreement dated July 27, 1994 among Mr.
Kathwari, the Company and Ethan Allen
*10(d) Restated Directors Indemnification Agreement, dated
March 1993, among the Company and Ethan Allen and
their Directors
*10(e) Registration Rights Agreement, dated March 1993, by
and among Ethan Allen, General Electric Capital
Corporation and Smith Barney Inc.
*10(f) Form of management Bonus Plan, dated October 30, 1991
*10(g) Ethan Allen Profit Sharing and 401(k) Retirement Plan
59
*10(h) General Electric Capital Corporation Credit Card
Agreement
11 Statement Regarding Computation of Per Share Earnings
*21 List of wholly-owned subsidiaries of the Company
*23(a) Consent of KPMG Peat Marwick LLP.
27 Financial Data Schedule
* Incorporated by reference to the exhibits filed with the
Registration Statement on Form S-1 of the Company and Ethan
Allen Inc. filed with the Securities and Exchange Commission
on March 16, 1993 (Commission File No. 33-57216) and the
exhibits filed with the Annual Report on Form 10-K of the
Company and Ethan Allen Inc. filed with the Securities and
Exchange Commission on September 27, 1996 (Commission File No.
1-11806), the Quarterly Report on Form 10-Q of the Company and
Ethan Allen Inc. filed with the Securities and Exchange
Commission on February 13, 1997 (Commission File No. 1-11806
and the Registration Statement on Form S-3 of the Company,
Ethan Allen, Ethan Allen Manufacturing Corporation, Ethan
Allen Finance Corporation and Andover Wood Products Inc. filed
with the Securities and Exchange Commission on October 23,
1994 (Commission File No. 33-85578-01) and all supplements
thereto.
60
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
As of and for the Fiscal Years Ended June 30, 1997, 1996 and 1995
(Dollars in thousands)
Balance at Additions Balance at
Beginning Charged to End of
of Period Income Adjustments Period
--------- ----------- ----------- ----------
Receivables:
Allowance for doubtful accounts:
June 30, 1997 $ 2,975 $ 328 $ (1,181) $ 2,122
June 30, 1996 $ 4,567 $ 47 $ (1,639) $ 2,975
June 30, 1995 $ 3,718 $ 977 $ (128) $ 4,567
61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
By /s/ M. Farooq Kathwari
---------------------------------
Chairman, Chief Executive Officer
and Director
ETHAN ALLEN INC.
(Registrant)
By /s/ M. Farooq Kathwari
---------------------------------
Chairman, Chief Executive Officer
and Director
62
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
/s/ M. Farooq Kathwari Chairman, Chief Executive
- -------------------------------- Officer and Director
(M. Farooq Kathwari)
/s/ Clinton A. Clark Director
- --------------------------------
(Clinton A. Clark)
/s/ Kristin Gamble Director
- --------------------------------
(Kristin Gamble)
/s/ Steven A. Galef Director
- --------------------------------
(Steven A. Galef)
/s/ Horace McDonell Director
- --------------------------------
(Horace McDonell)
/s/ Edward H. Meyer Director
- --------------------------------
(Edward H. Meyer)
/s/ William W. Sprague Director
- --------------------------------
(William W. Sprague)
/s/ Edward P. Schade Vice President &
- -------------------------------- Treasurer
(Edward P. Schade)
/s/ Gerardo Burdo Corporate Controller
- --------------------------------
(Gerardo Burdo)
63
EXHIBIT 11. STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Fiscal Year Ended
June 30,
1997 1996
----------- -----------
Primary Earnings Per Share:
- ---------------------------
Average number of
shares outstanding 28,750,000 28,732,000
Treasury Stock (1,012,000) (1,384,000)
Net effect of common
stock equivalents 1,494,000 1,780,000
----------- -----------
Average number of
shares-primary 29,232,000 29,128,000
Net income $48,740,000 $28,145,000
============ ============
Per Share Data:
Net income per
common share $1.67 $0.97
============ ============
Earnings Per Common Share:
Earnings per common share are computed by dividing net earnings by the
weighted average number of shares of common stock equivalents outstanding during
each period. The Company has issued stock options and warrants which are the
Company's only common stock equivalents.
Fully Diluted Earnings Per Share:
Fully diluted earnings per share is within 3% of primary earnings per share for
all periods presented
64