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redefined
redefining our
entreprenuerial spirit,
our products, and the
ethan allen experience
2 0 0 5 A N N U A L R E P O R T
©2005 ETHAN ALLEN GLOBAL, INC.
FINANCIAL HIGHLIGHTS
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dear fellow
shareholders
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TABLE OF CONTENTS
1
2
4
6
8
9
President’s Letter
Redefining Our Style
Redefining The Ethan Allen
Experience
Redefining Our Marketing Strategies
Officers and Corporate Data
Form 10K
’05 ’04 ’03 ’02 ’01
Net Sales (in millions)
’05 ’04 ’03 ’02 ’01
Net Income (in millions)
’05 ’04 ’03 ’02 ’01
Net Income Per Diluted Share
Amounts in thousands, except per share data.
Fiscal Years ended June 30
Statement of Operations Data
Net sales
Gross profit
Operating income (a)
Net income (a)
Per Share Data
Net income per diluted share (a)
Diluted weighted average
common shares outstanding
Balance Sheet Data
Working capital
Current ratio
Total assets
Total debt, including capital
lease obligations
2005
2004*
2003*
949,012
461,054
128,978
79,338
955,107
461,035
126,404
79,478
907,264
449,340
119,457
74,624
2.19
2.08
1.93
36,193
38,295
38,569
130,423
1.97
628,386
161,772
2.18
658,367
228,177
2.70
735,008
12,510
9,221
10,218
Shareholders’ equity
Debt as % of equity
434,068
2.9%
456,140
2.0%
533,922
1.9%
(a) Includes the effects of pre-tax restructuring and impairment charges totaling $12.5 million
and $13.1 million in fiscal years 2004 and 2003, respectively.
*As restated for F.Y. 2004, 2003, 2002, and 2001.
How a company conducts its business does
indeed define it.
At Ethan Allen, we are always looking to
evolve how we do business—even when
business is good. By redefining our product
line, our structure, and our marketing, we
engage in forward thinking and innovative
management, two keys to success.
As Ethan Allen is a leader in style,
customers look to us for help in fashioning
the homes they need and want. And as
customers’ needs are ever-changing, the
challenge to our product development and
style teams is to ensure that they continual-
ly produce home furnishings that are quali-
ty-crafted, highly functional, and fashion
forward. To that effect, we have revitalized
both our casual and classic product lines.
Seventy percent of our products are new
during the last three years.
What began with a redefinition of our
classic product line a few years ago and
evolved into the completion of our casual
relaunch this fiscal year now moves back to
the classic product line with the introduc-
tion of Maison by Ethan Allen during the
first quarter of Fiscal 2006.
This redefinition also became the core
of our marketing strategy in the latter half
of this fiscal year. In addition to redesign-
ing our direct mail magazine and Solutions
for Living book to focus more on style
forecasts, which enhances our position as
a style leader, we introduced our New
Casuals to consumers with a fast-
paced national television advertising
campaign. These spots showcased
how fresh and modern Ethan Allen
really is by showing how our New
Country by Ethan Allen, Horizons
by Ethan Allen, and the two casual
collections we launched this year—
New Impressions and Tango—
appeal to a broad array of lifestyles.
Our national network of branded
stores and the more than 3,000 design
consultants throughout our retail network
are the cornerstones of our business.
We continue to realize growth oppor-
tunities by repositioning existing stores in
higher traffic locations: 24 new branded
stores were opened this year, including 10
international locations.
We have reinforced our corporate
culture by better utilizing our web-based
communications, and have strengthened
our retail management, which we believe
will increase our design consultants’
efficiency and productivity.
During the past few years we’ve consol-
idated our domestic manufacturing to our
most efficient plants. We will continue
to balance our domestic capacity by devel-
oping strong strategic relationships with
outsourcing vendors.
The Ethan Allen brand is more than
seventy years old and our potential as a
premier manufacturer and retailer of home
furnishings has only begun to be realized.
A fiscally sound and motivated
company, we are positioned well for growth
in our marketplace and look forward to the
challenges and rewards that lie ahead of us.
Farooq Kathwari
Chairman of the Board, President and CEO,
Ethan Allen Interiors Inc.
1
FINANCIAL HIGHLIGHTS
1
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4
9
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3
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7
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9
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4
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9
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3
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2
9
8
$
dear fellow
shareholders
3
.
9
7
$
*
5
.
9
7
$
*
6
.
4
7
$
*
9
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9
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9
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2
$
*
8
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2
$
*
5
0
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2
$
*
3
9
.
1
$
*
6
9
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1
$
TABLE OF CONTENTS
1
2
4
6
8
9
President’s Letter
Redefining Our Style
Redefining The Ethan Allen
Experience
Redefining Our Marketing Strategies
Officers and Corporate Data
Form 10K
’05 ’04 ’03 ’02 ’01
Net Sales (in millions)
’05 ’04 ’03 ’02 ’01
Net Income (in millions)
’05 ’04 ’03 ’02 ’01
Net Income Per Diluted Share
Amounts in thousands, except per share data.
Fiscal Years ended June 30
Statement of Operations Data
Net sales
Gross profit
Operating income (a)
Net income (a)
Per Share Data
Net income per diluted share (a)
Diluted weighted average
common shares outstanding
Balance Sheet Data
Working capital
Current ratio
Total assets
Total debt, including capital
lease obligations
2005
2004*
2003*
949,012
461,054
128,978
79,338
955,107
461,035
126,404
79,478
907,264
449,340
119,457
74,624
2.19
2.08
1.93
36,193
38,295
38,569
130,423
1.97
628,386
161,772
2.18
658,367
228,177
2.70
735,008
12,510
9,221
10,218
Shareholders’ equity
Debt as % of equity
434,068
2.9%
456,140
2.0%
533,922
1.9%
(a) Includes the effects of pre-tax restructuring and impairment charges totaling $12.5 million
and $13.1 million in fiscal years 2004 and 2003, respectively.
*As restated for F.Y. 2004, 2003, 2002, and 2001.
How a company conducts its business does
indeed define it.
At Ethan Allen, we are always looking to
evolve how we do business—even when
business is good. By redefining our product
line, our structure, and our marketing, we
engage in forward thinking and innovative
management, two keys to success.
As Ethan Allen is a leader in style,
customers look to us for help in fashioning
the homes they need and want. And as
customers’ needs are ever-changing, the
challenge to our product development and
style teams is to ensure that they continual-
ly produce home furnishings that are quali-
ty-crafted, highly functional, and fashion
forward. To that effect, we have revitalized
both our casual and classic product lines.
Seventy percent of our products are new
during the last three years.
What began with a redefinition of our
classic product line a few years ago and
evolved into the completion of our casual
relaunch this fiscal year now moves back to
the classic product line with the introduc-
tion of Maison by Ethan Allen during the
first quarter of Fiscal 2006.
This redefinition also became the core
of our marketing strategy in the latter half
of this fiscal year. In addition to redesign-
ing our direct mail magazine and Solutions
for Living book to focus more on style
forecasts, which enhances our position as
a style leader, we introduced our New
Casuals to consumers with a fast-
paced national television advertising
campaign. These spots showcased
how fresh and modern Ethan Allen
really is by showing how our New
Country by Ethan Allen, Horizons
by Ethan Allen, and the two casual
collections we launched this year—
New Impressions and Tango—
appeal to a broad array of lifestyles.
Our national network of branded
stores and the more than 3,000 design
consultants throughout our retail network
are the cornerstones of our business.
We continue to realize growth oppor-
tunities by repositioning existing stores in
higher traffic locations: 24 new branded
stores were opened this year, including 10
international locations.
We have reinforced our corporate
culture by better utilizing our web-based
communications, and have strengthened
our retail management, which we believe
will increase our design consultants’
efficiency and productivity.
During the past few years we’ve consol-
idated our domestic manufacturing to our
most efficient plants. We will continue
to balance our domestic capacity by devel-
oping strong strategic relationships with
outsourcing vendors.
The Ethan Allen brand is more than
seventy years old and our potential as a
premier manufacturer and retailer of home
furnishings has only begun to be realized.
A fiscally sound and motivated
company, we are positioned well for growth
in our marketplace and look forward to the
challenges and rewards that lie ahead of us.
Farooq Kathwari
Chairman of the Board, President and CEO,
Ethan Allen Interiors Inc.
1
redefining
our style
KEEPING ONE STEP
AHEAD OF
CONSUMER NEEDS
The only thing casual about life is how
you live it. Our focus this year was on up-
dating our casual lifestyle collections. Our
New Casuals are fashion-forward, competi-
tively priced designs that are attractive to
a broad consumer base, from single urban
professionals to young, growing families,
to empty-nesters.
This fiscal year we introduced two
exciting new collections, Tango and New
Impressions. Tango features hip, smart
silhouettes for both adults and children,
and can be styled to suit either a classic or
casual setting. New Impressions is rich in
simplicity and purpose, a fusion of Mission
design influences and Shaker styling. Both
collections have state-of-the-art media
cabinetry for plasma and LCD televisions.
These high-tech home theatres have been
well received by customers and join our
already wide array of entertainment centers.
In addition, we introduced a warmer finish
for our popular Horizons by Ethan Allen
collection and added recliners to our
Leather Expressions family, which resulted
in a 23% increase in that product category.
Style Leader
In the business of fashion—whether it’s
clothes or furnishings—it’s imperative to be
on the cutting edge. That’s why 70% of our
current products have been introduced during
the last three years. What began with an
update of our classic product line a few years
ago has come full circle. Now that our casuals
are completely revitalized we will continue our
redefinition of our classic product line during
Fiscal 2006 with Maison by Ethan Allen, a
collection that is European-inspired.
The Details Are Important
What has always differentiated Ethan Allen
in the marketplace is our attention to
detail. While many of our industry peers
have chosen to offer consumers fewer
options, we are offering more. Our wood
furniture features quality construction, a
variety of finishes and design inspirations,
and details like carving and hand-painted
nuances that enhance its style and value.
As part of our goal to increase effi-
ciency, we have made changes to our case
goods and upholstery divisions. During
PRODUCTS
PEOPLE WANT
Our customers want home
furnishings that cater to
their aesthetic sensibilities
and that fit into their
everyday lives. The HT
Series 250, shown here,
is modular and can be
configured to meet a cus-
tomer’s specific needs.
Our New Casuals are represent-
ed by versatile collections like
(clockwise from top), Horizons
by Ethan Allen, New Country by
Ethan Allen, New Impressions,
and Tango. All collections offer
maximum style, functionality,
and comfort.
REDEFINING CASUALS
this fiscal year, we have reduced the
number of case good items (SKUs) by
approximately 20% in order to manage
inventory more efficiently and speed
up delivery to customers.
With our custom upholstery program,
customers have the freedom to choose
from dozens of sofa, chair, and recliner
frames, hundreds of fabrics, an array of
trim options, and several new cushion
levels that cater to an individual’s need
for comfort. The changes we have made to
our upholstery business center around ver-
satility and productivity. Each upholstery
piece shown in our stores can be designed
to work in any lifestyle because of the vari-
ety of options we offer; and each option
can be sold from a single frame, improving
floor space efficiency. This maximization
of floor space will enable our
upholstery business to continue
growing, thereby increasing
productivity.
Maintaining A Balance
Depending on product mix,
between 65% and 70% of our
products are currently manufac-
tured at our domestic plants.
Our United States production
is balanced with foreign and
domestic outsourcing through
carefully selected vendors who
meet our quality standards.
Our classic collections
are a mix of traditional
European-inspired
designs and a formal
yet relaxed attitude.
REDEFINING
CLASSICS
CUSTOMIZATION
Our custom programs help to differ-
entiate Ethan Allen in the market-
place. Customers are given the
freedom and opportunity to truly
express their own sense of style.
3
redefining
our style
KEEPING ONE STEP
AHEAD OF
CONSUMER NEEDS
The only thing casual about life is how
you live it. Our focus this year was on up-
dating our casual lifestyle collections. Our
New Casuals are fashion-forward, competi-
tively priced designs that are attractive to
a broad consumer base, from single urban
professionals to young, growing families,
to empty-nesters.
This fiscal year we introduced two
exciting new collections, Tango and New
Impressions. Tango features hip, smart
silhouettes for both adults and children,
and can be styled to suit either a classic or
casual setting. New Impressions is rich in
simplicity and purpose, a fusion of Mission
design influences and Shaker styling. Both
collections have state-of-the-art media
cabinetry for plasma and LCD televisions.
These high-tech home theatres have been
well received by customers and join our
already wide array of entertainment centers.
In addition, we introduced a warmer finish
for our popular Horizons by Ethan Allen
collection and added recliners to our
Leather Expressions family, which resulted
in a 23% increase in that product category.
Style Leader
In the business of fashion—whether it’s
clothes or furnishings—it’s imperative to be
on the cutting edge. That’s why 70% of our
current products have been introduced during
the last three years. What began with an
update of our classic product line a few years
ago has come full circle. Now that our casuals
are completely revitalized we will continue our
redefinition of our classic product line during
Fiscal 2006 with Maison by Ethan Allen, a
collection that is European-inspired.
The Details Are Important
What has always differentiated Ethan Allen
in the marketplace is our attention to
detail. While many of our industry peers
have chosen to offer consumers fewer
options, we are offering more. Our wood
furniture features quality construction, a
variety of finishes and design inspirations,
and details like carving and hand-painted
nuances that enhance its style and value.
As part of our goal to increase effi-
ciency, we have made changes to our case
goods and upholstery divisions. During
PRODUCTS
PEOPLE WANT
Our customers want home
furnishings that cater to
their aesthetic sensibilities
and that fit into their
everyday lives. The HT
Series 250, shown here,
is modular and can be
configured to meet a cus-
tomer’s specific needs.
Our New Casuals are represent-
ed by versatile collections like
(clockwise from top), Horizons
by Ethan Allen, New Country by
Ethan Allen, New Impressions,
and Tango. All collections offer
maximum style, functionality,
and comfort.
REDEFINING CASUALS
this fiscal year, we have reduced the
number of case good items (SKUs) by
approximately 20% in order to manage
inventory more efficiently and speed
up delivery to customers.
With our custom upholstery program,
customers have the freedom to choose
from dozens of sofa, chair, and recliner
frames, hundreds of fabrics, an array of
trim options, and several new cushion
levels that cater to an individual’s need
for comfort. The changes we have made to
our upholstery business center around ver-
satility and productivity. Each upholstery
piece shown in our stores can be designed
to work in any lifestyle because of the vari-
ety of options we offer; and each option
can be sold from a single frame, improving
floor space efficiency. This maximization
of floor space will enable our
upholstery business to continue
growing, thereby increasing
productivity.
Maintaining A Balance
Depending on product mix,
between 65% and 70% of our
products are currently manufac-
tured at our domestic plants.
Our United States production
is balanced with foreign and
domestic outsourcing through
carefully selected vendors who
meet our quality standards.
Our classic collections
are a mix of traditional
European-inspired
designs and a formal
yet relaxed attitude.
REDEFINING
CLASSICS
CUSTOMIZATION
Our custom programs help to differ-
entiate Ethan Allen in the market-
place. Customers are given the
freedom and opportunity to truly
express their own sense of style.
3
redefining
the ethan allen
experience
ENSURING THAT
OUR CUSTOMERS ARE
CLIENTS FOR LIFE
Since we oversee all aspects of our business,
we can create a rewarding and enjoyable
shopping experience for our customers. Our
vertically integrated structure allows for
all aspects of our company to be run as if
each was a separate business, encouraging
an entrepreneurial spirit in every member
of the Ethan Allen family. We have strived
to ensure that all of our employees have
a sense of ownership because we strongly
believe that people who are passionate
about the company they work for move
that brand ahead. So whether it’s the warm
greeting offered by a receptionist in a store;
the excitement that ripples through a prod-
uct development meeting; or the satisfac-
tion our delivery personnel see every time
they leave a customer’s home, the people
behind our products are the key to the
success of Ethan Allen.
Seventy Years Young
We have never been a brand that rested
on its laurels. The brand is more than sev-
enty years old and has only just begun to
tap into its potential. This year we have
worked diligently to even further enhance
the empowered mindset that defines our
corporate culture. And since the most vital
Ethan Allen customer relationships are
cultivated within the walls of our retail net-
4
CREATING PROJECT
MANAGEMENT TEAMS
In an effort to increase productivity
among our design consultants and
enhance the customer experience,
we have strengthened the manage-
ment of our retail stores. By having
project management teams, our
performance index increased 13%
in June ’05 versus a year ago in
retail division stores.
work, we opted to start there. This year
we began implementing an exciting new
initiative that centers on a strong team phi-
losophy. We transformed our management
team into Senior Project Managers and
Project Managers. Using their know-how
and expertise, they will work more closely
with the design consultants in each of
their stores, helping them to give each
customer the best decorating solutions
for their needs.
Giving the more than 3,000 design
consultants as much support as possible
is vital. After all, it is through their rela-
tionships with customers that we reap the
best benefit possible—clients for life.
FROM DESIGN TO
DELIVERY
Overseeing all aspects of
our business gives us a
distinct advantage in the
marketplace.
EVERYDAY
BEST PRICING
It allows our customers to shop
with confidence knowing that
they are receiving the best price
on our full selection of home
furnishings, and increases the
productivity of our design con-
sultants, who are no longer
encumbered by sales periods.
SUPERIOR SERVICES
Great customer service is smart
business. By offering our cus-
tomers a unique experience
through our financing solu-
tions, free local delivery, and
complimentary design service,
we ensure their satisfaction
and cultivate relationships that
span generations.
5
redefining
the ethan allen
experience
ENSURING THAT
OUR CUSTOMERS ARE
CLIENTS FOR LIFE
Since we oversee all aspects of our business,
we can create a rewarding and enjoyable
shopping experience for our customers. Our
vertically integrated structure allows for
all aspects of our company to be run as if
each was a separate business, encouraging
an entrepreneurial spirit in every member
of the Ethan Allen family. We have strived
to ensure that all of our employees have
a sense of ownership because we strongly
believe that people who are passionate
about the company they work for move
that brand ahead. So whether it’s the warm
greeting offered by a receptionist in a store;
the excitement that ripples through a prod-
uct development meeting; or the satisfac-
tion our delivery personnel see every time
they leave a customer’s home, the people
behind our products are the key to the
success of Ethan Allen.
Seventy Years Young
We have never been a brand that rested
on its laurels. The brand is more than sev-
enty years old and has only just begun to
tap into its potential. This year we have
worked diligently to even further enhance
the empowered mindset that defines our
corporate culture. And since the most vital
Ethan Allen customer relationships are
cultivated within the walls of our retail net-
4
CREATING PROJECT
MANAGEMENT TEAMS
In an effort to increase productivity
among our design consultants and
enhance the customer experience,
we have strengthened the manage-
ment of our retail stores. By having
project management teams, our
performance index increased 13%
in June ’05 versus a year ago in
retail division stores.
work, we opted to start there. This year
we began implementing an exciting new
initiative that centers on a strong team phi-
losophy. We transformed our management
team into Senior Project Managers and
Project Managers. Using their know-how
and expertise, they will work more closely
with the design consultants in each of
their stores, helping them to give each
customer the best decorating solutions
for their needs.
Giving the more than 3,000 design
consultants as much support as possible
is vital. After all, it is through their rela-
tionships with customers that we reap the
best benefit possible—clients for life.
FROM DESIGN TO
DELIVERY
Overseeing all aspects of
our business gives us a
distinct advantage in the
marketplace.
EVERYDAY
BEST PRICING
It allows our customers to shop
with confidence knowing that
they are receiving the best price
on our full selection of home
furnishings, and increases the
productivity of our design con-
sultants, who are no longer
encumbered by sales periods.
SUPERIOR SERVICES
Great customer service is smart
business. By offering our cus-
tomers a unique experience
through our financing solu-
tions, free local delivery, and
complimentary design service,
we ensure their satisfaction
and cultivate relationships that
span generations.
5
2005 STORE OPENINGS
The retail network is the heart of our
company. This year fourteen new stores
were opened in the United States, includ-
ing eleven relocations. Several relocated
stores increased their sales by more than
30% over the previous year’s figures.
Our international footprint
expanded this fiscal year
with the opening of ten
new stores—seven of which
are located in China.
redefining
our marketing
strategies
New Store Openings
Existing Store Locations
A CALL TO ACTION
Our new print
campaign has been
successful in enticing
consumers to shop.
EXPANDING OUR REACH
THROUGH STRATEGIC AND
INNOVATIVE THINKING
In an era of sameness, Ethan Allen meets
the needs of our customers, provides servic-
es that cater to our clientele, and enhances
the overall shopping experience. With that
in mind, we continue to realize the poten-
tial of our retail network by further evolv-
ing its infrastructure, expanding its reach,
and redefining the Ethan Allen experience.
Expanding Our Footprint
Our focus remains on location, location,
location. By moving existing stores to high-
er traffic areas, our business
improves. During this fiscal
year 24 new stores were
opened, 11 of which were
6
TV CAMPAIGN
relocations—including the start of a com-
prehensive repositioning of our Chicago,
Illinois market.
We continued to expand our interna-
tional presence with the opening of ten
new stores abroad. Our independent retail-
er in China opened seven new stores this
year, including two in Beijing, and two in
Shanghai. We now have 11 stores in China.
Inspiring Design
For the Ethan Allen family, “Welcome
Home” isn’t simply a phrase, it’s a philoso-
phy. Nowhere is this better reflected than
in the interior of our stores. Our easy-to-
shop floor plan includes the home fashion
center, the “heart” of the store, where our
customers can sit down with a design con-
sultant to explore fabric, room design, and
window treatment options. Surround-
ing this hub are two show houses—one
casual, the other classic—that comprise
fully decorated, inspirational room
vignettes of our beautiful and functional
furnishings and decorative accessories.
Redefining Our Image
Since we have so much to offer consumers,
our marketing efforts cover a broad spec-
trum of media, from national television
and print campaigns to direct mail. The
most recent evolution of our magazine,
Ethan Allen Style, has an authoritative
voice and showcases the latest in home
decorating trends and style; and our New
Casuals television commercial, which
premiered in late April, shows one family
in four different living environments.
The message in this exciting, fast-paced
spot is that Ethan Allen has invigorated
its casual collections with a fresh, modern,
and energetic appeal.
A Bold Move
Our focus on providing the customer with
a unique experience led us to implement
an innovative everyday best pricing strate-
gy, and it continues to be an effective
marketing tool. Our customers are drawn
to the idea that they no longer have to
wait for a sale to decorate their homes and
instead can enjoy our best prices always;
the message has garnered customer attention
and has allowed them to shop with confidence.
Ultimately, although our marketing
and retail network may be evolving, one
aspect of our business remains constant:
our primary objective is the complete satis-
faction of our customers.
This year’s magazine design
reiterates our position as
experts in home decorating,
and, along with our
brochures, showcases all
that we have to offer.
A STYLE LEADER
7
Our New Casuals television
spot illustrates how versatile
our collections are.
2005 STORE OPENINGS
The retail network is the heart of our
company. This year fourteen new stores
were opened in the United States, includ-
ing eleven relocations. Several relocated
stores increased their sales by more than
30% over the previous year’s figures.
Our international footprint
expanded this fiscal year
with the opening of ten
new stores—seven of which
are located in China.
redefining
our marketing
strategies
New Store Openings
Existing Store Locations
A CALL TO ACTION
Our new print
campaign has been
successful in enticing
consumers to shop.
EXPANDING OUR REACH
THROUGH STRATEGIC AND
INNOVATIVE THINKING
In an era of sameness, Ethan Allen meets
the needs of our customers, provides servic-
es that cater to our clientele, and enhances
the overall shopping experience. With that
in mind, we continue to realize the poten-
tial of our retail network by further evolv-
ing its infrastructure, expanding its reach,
and redefining the Ethan Allen experience.
Expanding Our Footprint
Our focus remains on location, location,
location. By moving existing stores to high-
er traffic areas, our business
improves. During this fiscal
year 24 new stores were
opened, 11 of which were
6
TV CAMPAIGN
relocations—including the start of a com-
prehensive repositioning of our Chicago,
Illinois market.
We continued to expand our interna-
tional presence with the opening of ten
new stores abroad. Our independent retail-
er in China opened seven new stores this
year, including two in Beijing, and two in
Shanghai. We now have 11 stores in China.
Inspiring Design
For the Ethan Allen family, “Welcome
Home” isn’t simply a phrase, it’s a philoso-
phy. Nowhere is this better reflected than
in the interior of our stores. Our easy-to-
shop floor plan includes the home fashion
center, the “heart” of the store, where our
customers can sit down with a design con-
sultant to explore fabric, room design, and
window treatment options. Surround-
ing this hub are two show houses—one
casual, the other classic—that comprise
fully decorated, inspirational room
vignettes of our beautiful and functional
furnishings and decorative accessories.
Redefining Our Image
Since we have so much to offer consumers,
our marketing efforts cover a broad spec-
trum of media, from national television
and print campaigns to direct mail. The
most recent evolution of our magazine,
Ethan Allen Style, has an authoritative
voice and showcases the latest in home
decorating trends and style; and our New
Casuals television commercial, which
premiered in late April, shows one family
in four different living environments.
The message in this exciting, fast-paced
spot is that Ethan Allen has invigorated
its casual collections with a fresh, modern,
and energetic appeal.
A Bold Move
Our focus on providing the customer with
a unique experience led us to implement
an innovative everyday best pricing strate-
gy, and it continues to be an effective
marketing tool. Our customers are drawn
to the idea that they no longer have to
wait for a sale to decorate their homes and
instead can enjoy our best prices always;
the message has garnered customer attention
and has allowed them to shop with confidence.
Ultimately, although our marketing
and retail network may be evolving, one
aspect of our business remains constant:
our primary objective is the complete satis-
faction of our customers.
This year’s magazine design
reiterates our position as
experts in home decorating,
and, along with our
brochures, showcases all
that we have to offer.
A STYLE LEADER
7
Our New Casuals television
spot illustrates how versatile
our collections are.
O F F I C E R S
M. Farooq Kathwari
President and Chief Executive Officer
Pamela A. Banks
Vice President, General Counsel
and Secretary
Kelly A. Bean
Vice President, Advertising
Jack DeKorne
Vice President, Retailer Relations
Khusro Elley
Vice President and Regional Manager,
Retail Division
Charles J. Farfaglia
Vice President, Human Resources
Don Garrett
Vice President, Case Goods Manufacturing
Jeffrey Hoyt
Vice President, Finance and Treasurer
Henry Kapteina
Director, Internal Audit
Sandra Lamenza
General Manager, Ethan Allen Hotel
Margaret W. Lupton
Director, Investor and Public Relations
and Assistant Secretary
James D. McCreary
Vice President, Product Sourcing
Peggy McLinden
Vice President, Store Planning
Jack Moll
General Manager, Physical Distribution
Nora Murphy
Vice President, Style
Kenneth Musante
Manufacturing Controller
Craig Stout
Vice President, Merchandising
Case Goods
officers and
corporate data
Edward Teplitz
Vice President, Retail Division
Executive Vice President,
Ethan Allen Retail, Inc.
Clifford Thorn
Vice President, Upholstery Manufacturing
Corey Whitely
Vice President, Operations
Executive Vice President,
Ethan Allen Operations, Inc.
Ann M. Zaccaria
Vice President, Business Development
C O R P O R AT E DATA
Corporate Headquarters
Ethan Allen Interiors Inc.
Ethan Allen Drive
Danbury, CT 06811
203.743.8000
www.ethanallen.com
Transfer Agent
Computershare Investor Services, LLC
2 North LaSalle Street
P.O. Box A3504
Chicago, IL 60690-3504
312.360.5196
Independent Certified
Public Accountants
KPMG LLP
3001 Summer Street
Stamford, CT 06905
203.356.9800
Stock Exchange Listing
New York Stock Exchange
Ethan Allen Interiors Inc.
Trading Symbol: (ETH)
Investor Relations
203.743.8234
plupton@ethanalleninc.com
Design
Ethan Allen Global, Inc.
D I R E C TO R S
M. Farooq Kathwari
Chairman of the Board
Clinton A. Clark
President, Ironwood Equity, Inc.
Kristin Gamble
President, Flood, Gamble Associates, Inc.
Horace G. McDonell
Former Chairman and Chief Executive
Officer, Perkin Elmer Corporation
Edward H. Meyer
Chairman of the Board,
President and Chief Executive Officer,
Grey Global Group
Richard A. Sandberg
Chief Financial Officer, Matritech, Inc.
Frank G. Wisner
Vice Chairman, American
International Group
E A B OA R D O F D I R E C TO R S
Top row from left: Clinton A. Clark, Richard A. Sandberg,
Horace G. McDonell, Frank G. Wisner
Bottom row from left: Farooq Kathwari, Kristin Gamble,
Edward H. Meyer
8
FORM 10-K
STARTS HERE
FORM 10-K
ENDS HERE
redefined
new
casuals
new
classics
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Annual Report Pursuant to Sections 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended
June 30, 2005
or
[ ] Transition Report Pursuant to Sections 13 or 15(d) of the Securities Exchange
Act of 1934
Commission file number
1-11692
Ethan Allen Interiors Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
06-1275288
(I.R.S. Employer
Identification No.)
Ethan Allen Drive, Danbury, CT
(Address of principal executive offices)
06811
(Zip Code)
Registrant's telephone number, including area code
(203) 743-8000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $.01 par value
On Which Registered
New York Stock Exchange, Inc.
Name of Each Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 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.
[X]
Indicate by check mark whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act). [X]Yes [ ]No
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). [ ]Yes [X]No
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
December 31, 2004, (the last day of the Company’s most recently completed second
fiscal quarter) was approximately $1,420,610,230. As of December 31, 2004, there
were 35,497,507 shares of Common Stock, par value $.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: The definitive Proxy Statement for the 2005
Annual Shareholders Meeting is incorporated by reference into Part III hereof.
TABLE OF CONTENTS
PART I
Item
1. Business
2. Properties
3. Legal Proceedings
4. Submission of Matters to a Vote of Security Holders
PART II
5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of
Equity Securities
6. Selected Financial Data
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
7A. Quantitative and Qualitative Disclosure About
Market Risk
8. Financial Statements and Supplementary Data
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
9A. Controls and Procedures
9B. Other Information
PART III
10. Directors and Executive Officers of the Registrant
11. Executive Compensation
12. Security Ownership of Certain Beneficial Owners
and Management
13. Certain Relationships and Related Transactions
Page
3
12
13
14
15
16
19
31
33
58
58
58
59
59
59
59
14. Principal Accountant Fees and Services
59
15. Exhibits and Financial Statement Schedules
Signatures
61
65
PART IV
2
Item 1. Business
Background
PART I
Incorporated in Delaware in 1989, Ethan Allen Interiors Inc., through its
wholly-owned subsidiary, Ethan Allen Inc., and Ethan Allen Inc.’s subsidiaries
(collectively, "Ethan Allen" or the "Company"), is a leading manufacturer and
retailer of quality home furnishings and accessories, offering a full complement of
home decorating solutions through the country’s largest network of home furnishing
retail stores. The Company was founded in 1932 and has sold products under the
Ethan Allen brand name since 1937.
Mission Statement
The Company’s primary business objective is to be a leader in style, providing
its customers with a convenient, full-service, one-stop shopping alternative for
their home decorating needs. In order to meet its stated objective, the Company has
developed, and adheres to, a focused and comprehensive business strategy. The
elements of this strategy, each of which represent specific home decorating
solutions, include (i) the Company’s vertically-integrated operating structure, (ii)
its products and related marketing initiatives, (iii) its retail store network, (iv)
its people, and (v) its numerous customer service offerings.
Operating Segments
The Company’s operating segments represent strategic business areas which,
although they operate separately, both offer the Company’s complete line of home
furnishings through their own distinctive services. The Company’s operations are
classified into two such segments: wholesale and retail. See Note 16 to the
Consolidated Financial Statements included under Item 8 of this Annual Report for
certain financial information regarding the Company’s operating segments.
The wholesale segment is principally involved in the development of the Ethan
Allen brand, which encompasses the design, manufacture, domestic and off-shore
sourcing, sale and distribution of a full range of home furnishings to a network of
independently-owned and Ethan Allen-owned stores as well as related marketing and
brand awareness efforts. Wholesale profitability includes the wholesale gross
margin, which is earned on wholesale sales to all retail stores, including Ethan
Allen-owned stores.
The retail segment sells home furnishings to consumers through a network of
Company-owned stores. Retail profitability includes the retail gross margin, which
represents the difference between retail sales price and the cost of goods purchased
from the wholesale segment.
While the manner in which the Company’s home furnishings are marketed and sold
is consistent, the nature of the underlying recorded sales (i.e. wholesale versus
retail) and the specific services that each operating segment provides (i.e.
wholesale manufacture and distribution versus retail sales) are different. Within
the wholesale segment, the Company maintains revenue information according to each
respective product line (i.e. case goods, upholstery, or home accessories and
other). Sales of case good items include, but are not limited to, beds, dressers,
armoires, night tables, dining room chairs and tables, buffets, sideboards, coffee
tables, entertainment units, bathroom vanities and home office furniture. Sales of
upholstery home furnishing items include sleepers, recliners, chairs, sofas,
loveseats, cut fabrics and leather. Skilled craftsmen cut, sew and upholster
custom-designed upholstery items which are available in a variety of frame and
fabric options. Home accessory and other items include window treatments, wall
decor, lighting, clocks, wood accents, bedspreads, decorative accessories, area
rugs, bedding, and home and garden furnishings.
Revenue information by product line is not readily available within the retail
segment as it is not practicable. However, because wholesale production and sales
3
are matched, for the most part, to incoming orders, the Company believes that the
allocation of retail sales would be similar to that of the wholesale segment.
The Company evaluates performance of the respective segments based upon
revenues and operating income. Inter-segment eliminations result, primarily, from
the wholesale sale of inventory to the retail segment, including the related profit
margin. Inter-segment eliminations also include items not allocated to reportable
segments.
The Wholesale Segment:
For fiscal years 2005, 2004 and 2003, the wholesale segment recorded net
sales of $663.2 million, $673.8 million, and $661.0 million, respectively. A
breakdown of wholesale sales by product line for each of the last three fiscal years
is provided below:
Case Goods
Upholstered Products
Home Accessories and Other
Fiscal Year Ended June 30,
2003
2004
2005
53%
49% 52%
33
34
36
14
14
15
100%
100%
100%
The Company has 12 manufacturing facilities which consist of 6 case good
plants (2 of which include separate sawmill operations), 5 upholstery plants and 1
home accent plant, all located in the United States. The Company also sources
selected case good, upholstery, and home accessory items from third-party vendors
located both domestically and abroad.
In the fourth quarter of fiscal 2004, the Company announced a plan to close
and consolidate two of its manufacturing facilities. The plants, both involved in
the production of case goods, were located in Boonville, New York and Bridgewater,
Virginia. The plant closures resulted in a headcount reduction totaling
approximately 460 employees; 270 employees effective June 25, 2004, and 190
employees throughout the first quarter of fiscal 2005. A pre-tax restructuring and
impairment charge of $12.8 million was recorded for costs associated with these
plant closings, of which $4.5 million related to employee severance and benefits and
other plant exit costs, and $8.3 million related to fixed asset impairment charges,
primarily for real property and machinery and equipment associated with the closed
facilities. During the first six months of fiscal 2005, the final cash payments
related to these plant closings were made and adjustments totaling $0.2 million were
recorded to reverse the remaining previously established accruals which were no
longer required.
In the third quarter of fiscal 2003, the Company announced a plan to close
three of its smaller manufacturing facilities. Closure of these facilities resulted
in a headcount reduction totaling approximately 580 employees; 340 employees
effective April 21, 2003, and 240 employees throughout the last quarter of fiscal
2003 and the first quarter of fiscal 2004. A pre-tax restructuring and impairment
charge of $13.4 million was recorded for costs associated with these plant closings,
of which $4.5 million related to employee severance and benefits and other plant
exit costs, and $8.9 million related to fixed asset impairment charges, primarily
for real property and machinery and equipment associated with the closed facilities.
During the quarter ended September 30, 2003, adjustments totaling $0.2 million were
recorded to reverse certain of these previously established accruals which were no
longer required.
Product Sourcing Activities
Ethan Allen is one of the largest manufacturers of home furnishings in the
United States, currently manufacturing and/or assembling approximately 65-70% of its
products within 12 manufacturing facilities, 2 of which include separate sawmill
operations. The balance of the Company’s production is outsourced through third-
party vendors, most of which are located abroad. The Company’s case good facilities
are located close to sources of raw materials and skilled craftsmen, predominantly
4
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 are
situated where skilled craftsmen are available. The Company believes that continued
investment in its manufacturing facilities, combined with an appropriate level of
outsourcing through both foreign and domestic vendors, will accommodate future sales
growth and allow the Company to maintain a greater degree of control over cost,
quality and service to its customers.
Raw Materials and Other Suppliers
The most important raw materials used by Ethan Allen in furniture
manufacturing are lumber, veneers, plywood, hardware, glue, finishing materials,
glass, mirrored glass, laminates, fabrics, foam, and filling material. The various
types of wood used in Ethan Allen's products include cherry, ash, 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 significant 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, the Company believes, contributes to its
ability to obtain competitive pricing. Lumber prices fluctuate over time based on
factors such as weather and demand, which, in turn, impact availability. Upward
trends in prices could have an adverse effect on margins.
Appropriate amounts of lumber and fabric inventory are typically stocked so as
to maintain adequate production levels. The Company believes that its sources of
supply for these materials are sufficient and that it is not dependent on any one
supplier.
The Company enters into standard purchase agreements with certain foreign and
domestic vendors to source selected case good, upholstery, and home accessory items.
The terms of these arrangements are customary for the industry and do not contain
any long-term contractual obligations on behalf of the Company. Ethan Allen
believes it maintains good relationships with its vendors.
Distribution and Logistics
Within the wholesale segment, Ethan Allen distributes its products primarily
through a national network of 7 owned and 5 leased distribution centers
strategically located throughout the United States. These distribution centers hold
finished product received from Ethan Allen’s manufacturing facilities, as well as
its domestic and off-shore vendors, for shipment to Ethan Allen retail stores or
retail 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 one-third of all shipments are made to and from the distribution
and retail service centers by the Company’s fleet of trucks and trailers. The
remaining shipments are subcontracted to independent carriers. Approximately 45% of
the Company’s fleet (trucks and trailers) is leased under two to seven-year leases.
Ethan Allen’s policy is to sell its products at the same delivered cost to all
Company-owned and independently-owned stores nationwide, regardless of their
shipping point. The adoption of this policy has created credibility by offering
product at one suggested national retail price and eliminated the need for the
Company’s retailers to carry significant amounts of inventory in their own
warehouses. As a result, Ethan Allen obtains more accurate information regarding
sales in order to better plan production runs and manage inventory levels.
Backlog and Net Orders Booked
As of June 30, 2005, Ethan Allen had a wholesale backlog of $49.3 million,
compared to a backlog of $51.4 million as of June 30, 2004. The backlog is
anticipated to be serviced in the first quarter of fiscal 2006. Backlog at any
point in time is primarily a result of net orders booked in prior periods,
5
manufacturing schedules and the timing of product shipments. Net orders booked at
the wholesale level from Ethan Allen stores (including independently-owned and
Company-owned stores) for the twelve months ended June 30, 2005 were $666.1 million
as compared to $686.5 million for the twelve months ended June 30, 2004. Net orders
booked in any period are recorded based on wholesale prices and do not reflect the
additional retail margins produced by Company-owned stores.
Advertising
Ethan Allen has developed a highly coordinated, national advertising campaign
designed to (i) capitalize on the Company’s existing brand equity, and (ii) maintain
top-of-mind awareness of the breadth of the Company’s product and service offerings.
Ethan Allen's in-house staff, working with a leading advertising firm, has developed
and implemented what the Company believes is the most cohesive national advertising
campaign in the home furnishings industry. This campaign is designed to communicate
the Company’s position as a leader in style and a full-service provider of home
furnishing solutions, and to increase the flow of traffic into stores.
In support of its Solutions campaign, launched nationally in fiscal 2004,
Ethan Allen continues to utilize television, direct mail, newspaper, magazines and
radio to market its products and services. Ethan Allen believes that its ability to
coordinate its advertising efforts for all Ethan Allen branded stores provides a
competitive advantage over other home furnishing manufacturers and retailers. With
an exclusive network of more than 300 retail stores adhering to a uniform marketing
approach and "speaking with one voice", Ethan Allen believes it is better positioned
to fulfill its brand promise on a consistent basis.
The Ethan Allen direct mail magazine, which features the Company’s home
furnishing collections in lifestyle settings and communicates its breadth of
services, is one of Ethan Allen’s most important marketing tools. Approximately 57
million copies of the magazine were distributed to consumers during fiscal 2005,
representing a 45% increase from the prior fiscal year. The Company publishes and
sells the magazines to retailers of both Company-owned and independently-owned
stores, who, with demographic information collected through independent market
research, are able to target potential customers.
Ethan Allen’s television advertising and direct mail efforts are supported by
strong print and radio campaigns in various markets, and in leading home fashion
magazines using advertisements and public relations efforts. The Company coordinates
significant advertisements in major newspapers in major markets. During fiscal
2005, the Company also distributed a publication entitled "Solutions for Living".
This 288-page book, which includes a complete catalogue of the Company’s home
furnishing collections, helps customers identify their own personal style using
Ethan Allen product offerings. The Company believes these publications represent one
of the most comprehensive and effective home decorating resources in the home
furnishings industry.
Internet
Ethan Allen is located on the worldwide web at www.ethanallen.com. The
Company’s primary goal for the website is to drive additional business into the
retail network through lead generation and information sourcing. Customers may
access the Company’s website to review home furnishing collections or to purchase
selected home accessories. On average, over 18,000 daily users logged onto the
Ethan Allen website during fiscal 2005.
The Company has also developed an extranet website which links the retail
stores with consumer information captured on-line such as customer requests for
design assistance and copies of the Company’s catalogue. This medium has become the
primary source of communications between the Company and its retail network
providing a variety of information, including a Company-wide daily news flash,
downloads of current advertising materials, prototype store display floor plans and
detailed product information.
6
The Retail Segment:
For fiscal years 2005, 2004, and 2003, the retail segment recorded net sales
of $586.2 million, $576.2 million, and $526.4 million, respectively.
Ethan Allen sells its products through an exclusive network of 313 retail
stores. As of June 30, 2005, Ethan Allen owned and operated 126 stores (as compared
to 127 at the end of the prior fiscal year) and independent retailers owned and
operated 187 stores. The geographic distribution of all retail store locations is
included under Item 2 of this Annual Report. During 2005, the Company acquired 6
stores from, and sold 4 stores to, independent retailers, opened 7 new stores (of
which 5 were relocations), and closed 5 stores. In the past five years, Ethan Allen
and its independent retailers have opened 78 new stores, approximately 40% of which
were relocations.
In fiscal 2005, wholesale sales to independent retailers and retail sales of
Company-owned stores accounted for approximately 38% and 62%, respectively, of Ethan
Allen’s total net sales. The ten largest independent retailers own a total of 36
stores, which, based on net orders booked, accounted for approximately 13% of total
net sales in fiscal 2005.
Ethan Allen pursues further expansion of the Company-owned retail business by
opening new stores, relocating existing stores and, when appropriate, acquiring
stores from independent retailers. In addition, the Company continues to promote
the development and growth of its independent retailers. All retailers are required
to enter into license agreements with the Company which (i) authorize the use of
certain Ethan Allen service marks and (ii) require adherence to certain standards of
operation, including the exclusive sale of Ethan Allen products and a requirement to
fulfill related warranty service agreements. Ethan Allen is not subject to any
territorial or exclusive retailer agreements in the United States.
In October 2001, the Company formed a joint venture with MFI Furniture Group
Plc to open a network of retail stores in the United Kingdom. The initial phase of
the agreement, which calls for the two companies to collaborate on the development
of a retail store format that will market their respective retail concepts, involves
up to five stores with approximately 8,000 to 15,000 square feet per store. The
first of these stores, located in the London suburb of Kingston, opened in May 2002.
The second, located in the suburb of Bromley, opened in December 2002. Both retail
locations have been included as independently-owned stores in compiling the
Company’s store count as of June 30, 2005.
Products
Ethan Allen’s product strategy has been to position its brand as a "preferred"
brand with superior quality and value while, at the same time, providing consumers
with a comprehensive, one-stop shopping solution for their home furnishing needs. In
carrying out its strategy, the Company continues to expand its reach to a broader
consumer base through a diverse selection of attractively priced product lines, many
of which have been designed to effectively complement one another, reflecting the
recent trend toward more eclectic home decorating. In recent years, this effort is
best evidenced by the introduction of collections such as Townhouse, Tuscany,
Newport, New Country, and, most recently, Tango. These collections, as well as
increased styles and fabric selections within the Company’s custom upholstery line,
new finishes within the Horizons line, the redesign of the Impressions line, and
expanded product offerings to accommodate today’s home theater trends, are serving
to redefine Ethan Allen, positioning the Company as a leader in style. All of these
product lines, each of which broadens the Company’s consumer reach, are reflective
of Ethan Allen’s continuing efforts to offer well valued, stylish home furnishings
that appeal to a variety of customers and lifestyles.
The Company believes that the two most important style categories in home
furnishings are the "Classic" and the "Casual" product lifestyles. As such, Ethan
Allen collections are designed to reflect unique elements applicable to each
lifestyle. To accomplish this, the Company’s collections consist of case goods,
coordinated upholstered products and home accessories, each styled with its own
7
distinct design characteristics. Home accessories play an important role in Ethan
Allen’s marketing program as they enable the Company to offer the consumer the
convenience of one-stop shopping by creating a comprehensive home furnishing
solution. Ethan Allen’s store interiors are designed to facilitate display of the
Company’s product offerings in complete room settings which utilize the related
collections to project the category lifestyle.
Ethan Allen continuously monitors consumer demand through marketing research
and communication with its retailers and store design consultants who provide
valuable input on consumer trends. As a result, the Company believes that it is able
to react quickly to changing consumer tastes. For example, since 1995, approximately
80% of the Company’s current complement of collections is new. The balance has been
refined and enhanced through product redesign, additions, deletions, and/or finish
changes. Such undertakings are indicative of the Company’s ability to adapt to the
recent consumer trend toward more casual and eclectic lifestyles while, at the same
time, maintaining a classic appeal.
During the past year, the Company also introduced its innovative everyday
pricing program, eliminating periodic sale events in lieu of an "everyday best"
price on all of its product offerings. The Company believes that this initiative
demonstrates its commitment to differentiating itself through strategies focused on
customer credibility and excellence in service. In addition, everyday pricing
provided the Company the opportunity to critically examine all facets of its
business, making substantive changes, where necessary, in order to more effectively
carry out its solutions-based approach to home decorating.
Retail Store Network
Ethan Allen’s interior and exterior store design is dependent on the store’s
location and size. Ethan Allen stores are located in busy urban settings as
freestanding destination stores or as part of suburban strip malls, depending upon
the real estate opportunities in a particular market. Currently, stores range in
size from approximately 6,000 square feet to 35,000 square feet, with the average
size of a store being approximately 15,000 square feet.
Ethan Allen maximizes uniformity of store presentation throughout the retail
network through a comprehensive set of operating standards. These operating
standards assist each store in presenting the same high quality image and offer
retail customers consistent levels of product selection and service. A uniform
store image is conveyed through Ethan Allen’s ongoing program to model its retail
stores with similar and consistent exterior facades and interior layouts. This
program is carried out by all stores, including independently-owned stores.
Ethan Allen provides display planning assistance to all Company-owned stores
and independent retailers to support them in updating the interior projection of
their stores and to maintain a consistent image. Several years ago, the Company
developed a standard interior design format for its retail stores which, through the
use of focused lifestyle settings to display its products and information displays
throughout the store to educate consumers, has positioned Ethan Allen as a
specialist in "Classic" and "Casual" lifestyles and decorative accessory retailing.
People
At June 30, 2005, Ethan Allen has approximately 6,400 employees.
Approximately 5% of those employees are represented by unions under collective
bargaining agreements, most which expire at various times throughout the next three
years. The Company expects no significant changes in its relations with these unions
and believes it maintains good relationships with its employees.
The retail network, which includes both Company-owned and independently-owned
stores, is staffed with a sales force of approximately 3,100 design consultants and
professionals who provide customers with an effective home decorating solution at no
additional charge. These employees receive appropriate training with respect to the
distinctive design and quality features inherent in each of the Company’s products,
allowing them to more effectively communicate the elements of style and value that
8
serve to differentiate Ethan Allen. As such, the Company believes its design
consultants, and the complimentary service they provide, create a distinct
competitive advantage over other home furnishing retailers.
Ethan Allen recognizes the importance of its retail store network to its long-
term success. Accordingly, the Company believes it has established strong management
teams within Company-owned stores while, at the same time, maintaining effective
relationships with independent retailers. With this in mind, the Company makes
available its services to all stores in support of their marketing efforts,
including coordinated national advertising, merchandising and display programs, and
extensive training seminars and educational materials. Ethan Allen believes that the
development of design consultants, project managers, service and delivery personnel,
and retailers is important for the growth of its business. As a result, Ethan Allen
has committed to make available a comprehensive training program that will help to
develop retail managers/owners, design consultants and service and delivery
personnel to their fullest potential.
Customer Service Offerings
Ethan Allen offers numerous customer service programs, each of which has been
developed and introduced to consumers in an effort to make their shopping experience
easier and more enjoyable.
Gift Card
This program allows customers to purchase, through the Company’s website or at
any participating retail store, gift cards which can be redeemed for any of the
Company’s products or services.
Wedding Registry
The primary objectives of the wedding registry program are to increase
customer traffic in Ethan Allen’s network of retail stores (and on-line), capture
consumers in the early stage of their lifecycle, capitalize on the growing trend for
non-traditional registries and promote the Company’s complimentary design service.
Ethan Allen believes this program further strengthens its competitive advantage by
enhancing its current complement of service offerings with a national gift registry.
On-Line Room Planning
The Company offers, via its website, an interactive on-line room planning
resource which serves to further assist consumers with their home decorating needs.
Through the use of this web-based tool, customers can determine which Ethan Allen
product offerings best fit their particular needs based on their own individual home
floor plan.
Ethan Allen Consumer Credit Programs
The EA Finance Plus program offers consumers two financing options through the
use of just one account. Consumers can choose between (i) the "Simple Finance Plan"
which consists of fixed monthly payments ranging from 12 to 60 months at an interest
rate of 9.99% per annum, and (ii) the revolving credit line which carries a variable
interest rate currently ranging from 21.00% to 23.75% per annum. Both plans provide
credit lines from $1,000 to $50,000. Financing offered through both programs is
administered by a third-party financial institution and is granted on a non-recourse
basis to the Company. Consumers may apply for an EA Finance Plus card at any
participating retail store.
Competition
In recent years, the home furnishings industry, already highly competitive and
fragmented, has faced additional challenges. Globalization, which represents the
most notable change within the industry landscape, has led to increased competitive
pressures brought about by the increasing volume of imported finished goods and
components, particularly for case good products, and the development of
9
manufacturing capabilities in other countries, specifically within Asia. The
increase in overseas production capacity in recent years has created over-capacity
for many U.S. manufacturers, including Ethan Allen, which has led to industry-wide
plant consolidation. In addition, because many foreign manufacturers are able to
maintain substantially lower production costs, including the cost of labor and
overhead, imported product is capable of being sold at a lower price to consumers
which, in turn, has led to some measure of industry-wide price deflation. The
Company believes that the aforementioned factors have contributed to the recent
trend toward product commoditization, which is exacerbated by the overwhelming and
wide-spread use of highly-promotional pricing policies and marketing strategies
focused on "no money down" and "no interest".
During the last three years, as the industry has slowly been overcome by a
greater degree of "sameness", Ethan Allen has, instead, used that time to further
differentiate itself as a "preferred" brand by adhering to a business strategy
focused on providing (i) high-quality products at good value, including the
marketing of its products at an "everyday best" price, (ii) a comprehensive
complement of home decorating solutions, including its complimentary design service,
and (iii) excellence in customer service. The Company considers its vertical
integration a significant competitive advantage in the current environment as it
allows the Company to design, manufacture, source, distribute, market, and sell its
products through the industry’s largest sole-source retail store network. With
respect to the issue of price deflation, Ethan Allen saw a foreign, low-cost supply
of labor as an opportunity to introduce selected products to consumers at prices
that, until recently, were not practical. As such, the Company continues to adhere
to a blended strategy, establishing relationships with certain manufacturers, both
domestically and abroad, to source selected case goods, upholstery, and home
accessory items. Ethan Allen intends to continue to balance its domestic production
with opportunities to source from foreign and domestic manufacturers, as
appropriate, in order to maintain its competitive advantage.
Although Ethan Allen is currently among the ten largest domestic furniture
manufacturers in the United States, the recent emergence of the foreign
manufacturers referred to previously has served to broaden the competitive
landscape. Some of these competitors may produce furniture types not manufactured by
Ethan Allen and may have greater financial and other resources than the Company.
Ethan Allen sells its products through an exclusive network of Company-owned
and independently-owned retail stores. Ethan Allen’s objective is to continue to
develop and strengthen its retail network by (i) expanding the Company-owned retail
business through the opening of new stores, relocating existing stores and, when
appropriate, acquiring stores from, or selling stores to, independent retailers, and
(ii) obtaining and retaining independent retailers, assisting such retailers in
increasing the volume of their sales.
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 that, more specifically, its store format and complimentary design
service create a distinct competitive advantage, further supporting the Company’s
mission of providing consumers with a complete home decorating solution.
Trademarks
Ethan Allen currently holds, or has registration applications pending for,
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 in the
United States and in many foreign countries. In addition, Ethan Allen has
registered, or has applications pending for, many of its major collection names as
well as certain of its slogans utilized in connection with promoting brand
awareness, retail sales and other services. The Company views such trade and
service marks as valuable assets and has an ongoing program to diligently monitor
and defend, through appropriate action, against their unauthorized use.
10
Available Information
The Company makes available, free of charge via its website, all Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K
and other information filed with, or furnished to, the Securities and Exchange
Commission ("SEC"), including amendments to such reports. This information is
available at www.ethanallen.com/investors as soon as reasonably practicable after it
is electronically filed with, or furnished to, the SEC.
In addition, charters of all committees of the Company’s Board of Directors,
as well as the Company’s Corporate Governance guidelines, are available on the
Company’s website at www.ethanallen.com/governance or, upon written request, in
printed hardcopy form. Written requests should be sent to Office of the Secretary,
Ethan Allen Interiors Inc., Ethan Allen Drive, Danbury, Connecticut 06811.
11
Item 2. Properties
The Company’s corporate headquarters, located in Danbury, Connecticut,
consists of one building containing 144,000 square feet, situated on approximately
18.0 acres of land, all of which is owned by Ethan Allen. Located adjacent to the
corporate headquarters, and situated on approximately 5.4 acres, is the Ethan Allen
Hotel and Conference Center, containing 195 guestrooms. This hotel, owned by a
wholly-owned subsidiary of Ethan Allen, is used in connection with Ethan Allen
functions and training programs, as well as for functions and accommodations for the
general public.
Ethan Allen has 12 manufacturing facilities located in 8 states. All of these
facilities are owned, with the exception of a leased upholstery plant in California,
totaling 145,636 square feet. The Company’s 12 facilities consist of 6 case good
manufacturing plants (2 of which include separate sawmill operations), totaling
2,381,187 square feet; 5 upholstery furniture plants, totaling 1,234,136 square
feet; and 1 plant involved in the manufacture and assembly of Ethan Allen’s home
accessory products, totaling 295,000 square feet.
In addition, Ethan Allen owns 7 and leases 5 ancillary distribution centers,
totaling 1,346,570 square feet, and owns 3 and leases 27 retail service centers,
totaling 1,194,765 square feet. The Company’s manufacturing and distribution
facilities are located in North Carolina, Vermont, Pennsylvania, Virginia, Oklahoma,
California, New Jersey, Indiana, Illinois, and Maine. The Company’s retail service
centers are located throughout the United States and serve to support Ethan Allen’s
various sales districts.
The geographic distribution of the Company’s retail store network as of June
30, 2005 is as follows:
United States
North America-Other (1)
Asia
Middle East
Europe
West Indies
Africa
Total
Retail Store Category
Company
Owned
121
5
-
-
-
-
-
126
Independently
Owned
159
3
20
1
2
1
1
187
(1) Seven retail stores located in Canada were acquired by the Company
during the first quarter of fiscal 2003. Subsequently, one store was
closed and one store was sold to an independent Ethan Allen retailer.
Of the 126 retail stores owned and operated by the Company, 46 of the
properties are owned and 80 of the properties are leased from independent third
parties. Of the 46 Company-owned store locations, 11 are subject to land leases.
The Company owns an additional 5 retail properties; 4 of which are leased to
independent Ethan Allen retailers, and 1 which is leased to an unaffiliated third
party.
Ethan Allen’s manufacturing facility located in Maiden, North Carolina and the
Ethan Allen Hotel and Conference Center located in Danbury, Connecticut, were
financed, in part, with industrial revenue bonds. The bonds associated with the
Maiden facility matured in October 2004 and were repaid in full at that time. The
Beecher Falls, Vermont manufacturing facility was financed, in part, by the State of
Vermont Economic Development Authority. Ethan Allen believes that all of its
properties are well maintained and in good condition.
Ethan Allen estimates that its manufacturing division is currently operating
at approximately 80% of capacity. The Company believes it has additional capacity
at many facilities, which it could utilize with minimal additional capital
expenditures.
12
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 is deemed to be 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 material adverse effect on the Company's financial
condition, results of operations, or cash flows.
Environmental Matters
The Company and its subsidiaries are subject to various environmental laws and
regulations. Under these laws, the Company and/or its subsidiaries are, or may be,
required to remove or mitigate the effects on the environment of the disposal or
release of certain hazardous materials.
As of June 30, 2005, the Company and/or its subsidiaries has been named as a
potentially responsible party ("PRP") with respect to the remediation of four active
sites currently listed, or proposed for inclusion, on the National Priorities List
("NPL") under the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended, ("CERCLA"). The sites are located in Lyndonville, Vermont;
Southington, Connecticut; High Point, North Carolina; and Atlanta, Georgia.
With respect to the Lyndonville, Vermont site, the Company has substantially
resolved its liability by completing remedial construction activities. The Company
continues to work with the U.S. Environmental Protection Agency ("EPA") and has
obtained a certificate of construction completion, subject to certain limited
conditions. The Company does not anticipate incurring significant costs with respect
to the Southington, Connecticut, High Point, North Carolina, or Atlanta, Georgia
sites as it believes that it is not a major contributor based on the very small
volume of waste generated by the Company in relation to total volume at those sites.
Specifically, with respect to the Southington site, the Company’s volumetric share
is less than 1% of over 51 million gallons disposed of at the site and there are
more than 1,000 PRPs. With respect to the High Point site, the Company’s volumetric
share is less than 1% of over 18 million gallons disposed of at the site and there
are more than 2,000 PRPs, including 1,100 "de-minimis" parties (of which Ethan Allen
is one). With respect to the Atlanta site, a former solvent recycling/reclamation
facility, the Company’s volumetric share is less than 1% of over 20 million gallons
disposed of at the site by more than 1,700 PRPs. In all three cases, the other PRPs
consist of local, regional, national and multi-national companies.
Liability under CERCLA may be joint and several. As such, to the extent
certain named PRPs are unable, or unwilling, to accept responsibility and pay their
apportioned costs, the Company could be required to pay in excess of its pro rata
share of incurred remediation costs. The Company’s understanding of the financial
strength of other PRPs has been considered, where appropriate, in the determination
of the Company’s estimated liability.
In addition, in July 2000, the Company was notified by the State of New York
(the "State") that it may be named a PRP in a separate, unrelated matter with
respect to a site located in Carroll, New York. To date, no further notice has been
received from the State and an initial environmental study has not yet been
conducted at this site.
As of June 30, 2005, the Company believes that established reserves related to
these environmental contingencies are adequate to cover probable and reasonably
estimable costs associated with the remediation and restoration of these sites.
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. Such investigations
and proceedings typically concern air emissions, water discharges, and/or management
of solid and hazardous wastes. The Company believes that its facilities are in
material compliance with all such applicable laws and regulations.
13
Regulations issued under the Clean Air Act Amendments of 1990 required the
industry to reformulate certain furniture finishes or institute process changes to
reduce emissions of volatile organic compounds. Compliance with many of these
requirements has been facilitated through the introduction of high solids coating
technology and alternative formulations. In addition, the Company has instituted a
variety of technical and procedural controls, including reformulation of finishing
materials to reduce toxicity, implementation of high velocity low pressure spray
systems, development of storm water protection plans and controls, and further
development of related inspection/audit teams, all of which have served to reduce
emissions per unit of production. Ethan Allen remains committed to implementing new
waste minimization programs and/or enhancing existing programs with the objective of
(i) reducing the total volume of waste, (ii) limiting the liability associated with
waste disposal, and (iii) continuously improving environmental and job safety
programs on the factory floor which serve to minimize emissions and safety risks for
employees. The Company will continue to evaluate the most appropriate, cost
effective, control technologies for finishing operations and design production
methods to reduce the use of hazardous materials in the manufacturing process.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to security holders of the Company during the fourth
quarter of fiscal 2005.
14
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
The Company’s Common Stock is traded on the New York Stock Exchange under
ticker symbol "ETH". The following table indicates (i) the high and low stock prices
as reported on the New York Stock Exchange and (ii) dividends declared by the
Company:
Closing Market Price
High
Low
Dividends
Declared
Fiscal 2005
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$ 38.05
42.73
39.35
34.06
Fiscal 2004
First Quarter
Second Quarter
Third Quarter
Fourth Quarter (1) 42.60
$ 39.56
41.88
46.08
$
$
$
33.69
33.80
32.00
29.80
0.15
0.15
0.15
0.15
34.05
35.64
40.55
35.51
$ 0.10
0.10
0.10
3.10
(1) On April 27, 2004, the Company declared a special, one-time cash
dividend of $3.00 per common share, payable on May 27, 2004 to
shareholders of record as of May 10, 2004.
As of September 7, 2005, there were approximately 390 shareholders of record
of the Company's Common Stock.
On July 26, 2005, the Company declared a dividend of $0.18 per common share,
payable on October 25, 2005 to shareholders of record as of October 11, 2005. The
Company expects to continue to declare quarterly dividends for the foreseeable
future.
Issuer Purchases of Equity Securities
Certain information regarding purchases made by or on behalf of the Company or
any affiliated purchaser (as defined in Rule 10b-18(a)(3) under the Securities
Exchange Act of 1934, as amended) of our common stock during the three months ended
June 30, 2005 is provided below:
Period
April 2005 (a)
May 2005
June 2005
Total
Total Number
of Shares
Purchased
716,900
-
-
716,900
Average
Price Paid
Per Share
$31.48
-
-
$31.48
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs (b)
716,900
-
-
716,900
Maximum Number of
Shares that May
Yet Be Purchased
Under the Plans or
Programs (b)
691,100
2,000,000
2,000,000
(a) Purchased in nine separate open market transactions on nine different trading days.
(b) On November 21, 2002, the Company’s Board of Directors approved a share repurchase program
authorizing the Company to repurchase up to 2,000,000 shares of its common stock, from
time to time, either directly or through agents, in the open market at prices and on terms
satisfactory to the Company. Subsequent to that date, the Board of Directors increased the
remaining authorization as follows: from 904,755 shares to 2,500,000 shares on April 27,
2004; from 753,600 shares to 2,000,000 shares on November 16, 2004; and from 691,100
shares to 2,000,000 shares on April 26, 2005.
Subsequent to June 30, 2005 and through September 9, 2005, the Company
repurchased, in 17 separate open market transactions, an additional 1,140,000
million shares of its common stock at a total cost of $36.8 million, representing an
average price per share of $32.28. As of September 9, 2005, the Company had a
remaining Board authorization to repurchase 860,000 shares.
15
Stockholder Rights Plan
The Company has a Stockholder Rights Plan, a description of which is set forth
in Note 9 to the Consolidated Financial Statements included under Item 8 of this
Annual Report and incorporated herein by reference. Such description contains all of
the required information with respect thereto.
Item 6. Selected Financial Data
The following historical consolidated statement of operations and balance
sheet data for the fiscal years ended June 30, 2005, 2004, 2003, 2002 and 2001 have
been derived from the consolidated financial statements of the Company. The
information set forth below should be read in conjunction with Management’s
Discussion and Analysis of Financial Condition and Results of Operations and the
Consolidated Financial Statements of the Company (including the notes thereto)
included within this Annual Report.
16
(in thousands, except per share data)
Fiscal Year Ended June 30,
Statement of Operations Data:
Net sales
$ 949,012
$ 955,107
$ 907,264
$ 892,288
$ 904,133
2005
2004
2003
2002
2001
Cost of sales
487,958
494,072
457,924
471,018
490,509
Selling, general and
administrative expenses
Restructuring and impairment
charge, net (1)
332,295
322,111
316,752
286,888
281,723
(219)
12,520
13,131
5,123
6,906
Operating income
128,978
126,404
119,457
129,259
124,995
Interest and other (income)
expense, net
Income before income tax
expense
(442)
(2,691)
(517)
(2,344)
(2,056)
129,420
129,095
119,974
131,603
127,051
Income tax expense
50,082
49,617
45,350
49,746
48,025
Net income
$ 79,338
$ 79,478
$ 74,624
$ 81,857
$ 79,026
Per Share Data:
Net income per basic share
Basic weighted average
shares outstanding
$ 2.24
$
2.14
$
1.98
$ 2.11
$ 2.01
35,400
37,179
37,607
38,828
39,390
Net income per diluted share $ 2.19
Diluted weighted average
shares outstanding
36,193
$
2.08
$
1.93
$ 2.05
$ 1.96
38,295
38,569
39,942
40,321
Cash dividends declared (2)
$ 0.60
$
3.40
$
0.25
$ 0.18
$ 0.16
Other Information:
Depreciation and
amortization (3)
Capital expenditures,
including acquisitions
Working capital
Current ratio
$
21,338
$
21,854
$
21,634
$
19,503
$
20,295
34,381
$
48,238
$ 130,423 $ 161,772 $ 228,177 $ 193,354 $ 183,863
1.97 2.18 2.70 2.50 2.70
39,781
24,976
73,481
$
$
$
$
Balance Sheet Data (at end of period):
Total assets
Total debt, including
capital lease obligations
Shareholders’ equity
Debt as a percentage of
equity
$ 628,386 $ 658,367 $ 735,008 $ 690,812 $ 621,069
12,510
9,487
$
$ 434,068 $ 456,140 $ 533,922 $ 508,170 $ 462,163
9,221
10,218
9,321
$
$
$
$
2.9%
2.0%
1.9%
1.8%
2.1%
See footnotes on following page.
17
(1)
In the fourth quarter of fiscal 2004, the Company announced a plan to close
and consolidate two of its manufacturing facilities. The plants, both involved
in the production of case goods, were located in Boonville, New York and
Bridgewater, Virginia. The plant closures resulted in a headcount reduction
totaling approximately 460 employees: 270 employees effective June 25, 2004,
and 190 employees throughout the first quarter of fiscal 2005. A pre-tax
restructuring and impairment charge of $12.8 million was recorded for costs
associated with these plant closings, of which $4.5 million related to
employee severance and benefits and other plant exit costs, and $8.3 million
related to fixed asset impairment charges, primarily for real property and
machinery and equipment associated with the closed facilities. During the
first six months of fiscal 2005, the final cash payments related to these
plant closings were made and adjustments totaling $0.2 million were recorded
to reverse the remaining previously established accruals which were no longer
required.
In the third quarter of fiscal 2003, the Company announced a plan to close
three of its smaller manufacturing facilities. Closure of these facilities
resulted in a headcount reduction totaling approximately 580 employees: 340
employees effective April 21, 2003, and 240 employees throughout the last
quarter of fiscal 2003 and the first quarter of fiscal 2004. A pre-tax
restructuring and impairment charge of $13.4 million was recorded for costs
associated with these plant closings, of which $4.5 million related to
employee severance and benefits and other plant exit costs, and $8.9 million
related to fixed asset impairment charges, primarily for real property and
machinery and equipment associated with the closed facilities. During the
first quarter of fiscal 2004, adjustments totaling $0.2 million were recorded
to reverse certain of these previously established accruals which were no
longer required.
In the fourth quarter of fiscal 2002, the Company announced a plan that
involved the closure of one of its manufacturing facilities as well as the
rough mill operation of a separate facility. Closure of these facilities
resulted in a headcount reduction totaling approximately 220 employees: 150
employees effective June 29, 2002, and 70 employees throughout the first
quarter of fiscal 2003. A pre-tax restructuring and impairment charge of $5.1
million was recorded for costs associated with these plant closings, of which
$2.0 million related to employee severance and benefits and other plant exit
costs, and $3.1 million related to fixed asset impairment charges, primarily
for real property and machinery and equipment associated with the closed
facilities. During the third quarter of fiscal 2003, adjustments totaling $0.2
million were recorded to reverse certain of these previously established
accruals which were no longer required.
In the fourth quarter of fiscal 2001, the Company announced a plan that
involved the closure of three of its manufacturing facilities and a headcount
reduction totaling approximately 350 employees effective August 6, 2001. A
pre-tax restructuring and impairment charge of $6.9 million was recorded for
costs associated with these plant closings, of which $3.3 million related to
employee severance and benefits and other plant exit costs, and $3.6 million
related to fixed asset impairment charges, primarily for real property and
machinery and equipment associated with the closed facilities. During the
first quarter of fiscal 2003, adjustments totaling $0.1 million were recorded
to reverse certain of these previously established accruals which were no
longer required.
(2)
(3)
On April 27, 2004, the Company declared a special, one-time cash dividend
of $3.00 per common share, payable on May 27, 2004 to shareholders of record
as of May 10, 2004.
As a result of the Company’s adoption of Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets, amortization of
goodwill and indefinite-lived intangible assets ceased on July 1, 2001. The
amount of amortization related to these assets totaled $1.8 million in fiscal
2001.
18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion of financial condition and results of operations is
based upon, and should be read in conjunction with, the Consolidated Financial
Statements of the Company (and notes thereto) included under Item 8 of this Annual
Report.
Forward-Looking Statements
Management's discussion and analysis of financial condition and results of
operations and other sections of this Annual Report contain forward-looking
statements relating to future results of the Company. Such forward-looking
statements are identified by use of forward-looking words such as "anticipates",
"believes", "plans", "estimates", "expects", and "intends" or words or phrases of
similar expression. These forward-looking statements are subject to management
decisions and various assumptions, risks and uncertainties, including, but not
limited to: changes in political and economic conditions; changes in demand for the
Company’s products; acceptance of new products; changes in conditions in the various
geographic markets where the Company does business; technology developments
affecting the Company’s products; changes in laws and regulations; and those matters
discussed in the Company’s filings with the SEC. Accordingly, actual circumstances
and results could differ materially from those contemplated by the forward-looking
statements.
Critical Accounting Policies
The Company’s consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America which require, in some cases, that certain estimates and assumptions be made
that affect the amounts and disclosures reported in those financial statements and
the related accompanying notes. Estimates are based on currently known facts and
circumstances, prior experience and other assumptions believed to be reasonable.
Management uses its best judgment in valuing these estimates and may, as warranted,
solicit external advice. Actual results could differ from these estimates,
assumptions and judgments, and these differences could be material. The following
critical accounting policies, some of which are impacted significantly by estimates,
assumptions and judgments, affect the Company’s consolidated financial statements.
Inventories – Inventories (finished goods, work in process and raw materials)
are stated at the lower of cost, determined on a first-in, first-out basis, or
market. Cost is determined based solely on those charges incurred in the acquisition
and production of the related inventory (i.e. material, labor and manufacturing
overhead costs). The Company estimates an inventory reserve for excess quantities
and obsolete items based on specific identification and historical write-offs,
taking into account future demand and market conditions. If actual demand or market
conditions in the future are less favorable than those estimated, additional
inventory write-downs may be required.
Revenue Recognition – Revenue is recognized when all of the following have
occurred: persuasive evidence of a sales arrangement exists (e.g. a wholesale
purchase order or retail sales invoice); the sales arrangement specifies a fixed or
determinable sales price; product is shipped or services are provided to the
customer; and collectibility is reasonably assured. This occurs upon the shipment of
goods to independent retailers or, in the case of Ethan Allen-owned retail stores,
upon delivery to the customer. Recorded sales provide for estimated returns and
allowances. The Company permits retail customers to return defective products and
incorrect shipments, and terms offered by the Company are standard for the industry.
Allowance for Doubtful Accounts – The Company maintains an allowance for
doubtful accounts for estimated losses resulting from the inability of its customers
to make required payments. The allowance for doubtful accounts is based on a review
of specifically identified accounts in addition to an overall aging analysis.
Judgments are made with respect to the collectibility of accounts receivable based
on historical experience and current economic trends. Actual losses could differ
from those estimates.
19
Retail Store Acquisitions - The Company accounts for the acquisition of retail
stores and related assets in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 141, Business Combinations, which requires application of the
purchase method for all business combinations initiated after June 30, 2001.
Accounting for these transactions as purchase business combinations requires the
allocation of purchase price paid to the assets acquired and liabilities assumed
based on their fair values as of the date of the acquisition. The amount paid in
excess of the fair value of net assets acquired is accounted for as goodwill.
Impairment of Long-Lived Assets and Goodwill - The Company periodically
evaluates whether events or circumstances have occurred that indicate that long-
lived assets may not be recoverable or that the remaining useful life may warrant
revision. When such events or circumstances are present, the Company assesses the
recoverability of long-lived assets by determining whether the carrying value will
be recovered through the expected undiscounted future cash flows resulting from the
use of the asset. In the event the sum of the expected undiscounted future cash
flows is less than the carrying value of the asset, an impairment loss equal to the
excess of the asset’s carrying value over its fair value is recorded. The long-term
nature of these assets requires the estimation of its cash inflows and outflows
several years into the future and only takes into consideration technological
advances known at the time of the impairment test.
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets,
goodwill and other intangible assets are to be evaluated for impairment on an annual
basis and between annual tests whenever events or circumstances indicate that the
carrying value of the goodwill or other intangible asset may exceed its fair value.
The Company conducts its required annual impairment test during the fourth quarter
of each fiscal year and uses a discounted cash flow model to estimate fair value.
This model requires the use of long-term planning forecasts and assumptions
regarding industry-specific economic conditions that are outside the control of the
Company.
Business Insurance Reserves – The Company has insurance programs in place to
cover workers’ compensation and property/casualty claims. The insurance programs,
which are funded through self-insured retention, are subject to various stop-loss
limitations. The Company accrues estimated losses using actuarial models and
assumptions based on historical loss experience. Although management believes that
the insurance reserves are adequate, the reserve estimates are based on historical
experience, which may not be indicative of current and future losses. In addition,
the actuarial calculations used to estimate insurance reserves are based on numerous
assumptions, some of which are subjective. The Company adjusts insurance reserves,
as needed, in the event that future loss experience differs from historical loss
patterns.
Other Loss Reserves – The Company has a number of other potential loss
exposures incurred in the ordinary course of business such as environmental claims,
product liability, litigation, tax liabilities, restructuring charges, and the
recoverability of deferred income tax benefits. Establishing loss reserves for these
matters requires management’s estimate and judgment with regard to maximum risk
exposure and ultimate liability or realization. As a result, these estimates are
often developed with the Company’s counsel, or other appropriate advisors, and are
based on management’s current understanding of the underlying facts and
circumstances. Because of uncertainties related to the ultimate outcome of these
issues or the possibilities of changes in the underlying facts and circumstances,
additional charges related to these issues could be required in the future.
Basis of Presentation
As of June 30, 2005, Ethan Allen Interiors Inc. has no material assets other
than its ownership of the capital stock of Ethan Allen Inc. and conducts all
significant transactions through Ethan Allen Inc.; therefore, substantially all of
the financial information presented herein is that of Ethan Allen Inc.
20
Results of Operations
Ethan Allen’s revenues are comprised of (i) wholesale sales to independently-
owned and Company-owned retail stores and (ii) retail sales of Company-owned stores.
See Note 16 to the Company’s Consolidated Financial Statements for the year ended
June 30, 2005 included under Item 8 of this Annual Report.
The components of consolidated revenues and operating income are as follows
(in millions):
2005 2004 2003
Fiscal Year Ended June 30,
Revenue:
Wholesale segment
Retail segment
Elimination of inter-segment sales
Consolidated Revenue
$ 663.2
586.2
(300.4)
$ 949.0
$ 673.8
576.2
(294.9)
$ 955.1
$ 661.0
526.4
(280.1)
$ 907.3
Operating Income:
Wholesale segment (1)
Retail segment
Adjustment for inter-company profit (2)
Consolidated Operating Income
$ 115.9
12.8
0.3
$ 129.0
$ 108.0
11.7
6.7
$ 126.4
$ 109.3
13.4
(3.2)
$ 119.5
(1) Operating income for the wholesale segment includes pre-tax restructuring and impairment
charges, net of $12.5 million and $13.1 million recorded in fiscal years 2004 and 2003,
respectively.
(2) Represents the change in the inventory profit elimination entry necessary to adjust for
the embedded wholesale profit contained in Ethan Allen-owned store inventory existing at
the end of the period.
Fiscal 2005 Compared to Fiscal 2004
Consolidated revenue for fiscal 2005 totaled $949.0 million, representing a
decrease of $6.1 million, or 0.6%, from fiscal 2004 consolidated revenue of $955.1
million. Net sales for the period reflect the delivery of product associated with a
slight decline in total booked orders, and the resultant lower level of backlog
noted throughout most of the year. The modest decrease in net sales for the current
year was due, primarily, to (i) inconsistent consumer spending habits noted
throughout much of the last twelve months likely attributable to ongoing economic
uncertainty caused by the threat of further interest rate increases, rising fuel
prices and a decline in the stock markets, and (ii) the Company’s current year
transition to everyday pricing from periodic sale events conducted in the prior
year. These factors were partially offset by the continued re-positioning of the
Company’s retail stores to larger and more prominent locations and the impact of
recent product introductions. Overall, sales volume for the period was impacted by
increased industry competition and the continued use of highly-promotional pricing
strategies by the Company’s competitors.
Total wholesale revenue for fiscal 2005 decreased $10.6 million, or 1.6%, to
$663.2 million from $673.8 million in the prior year. The year-over-year decrease
was attributable to a decline in the incoming order rate noted during the period,
particularly within the Company’s case goods operations, partially offset by
increased throughput within the Company’s upholstery operations, and improved
service position, resulting in shorter delivery cycle times, within certain imported
product lines.
Total retail revenue from Ethan Allen-owned stores for fiscal 2005 increased
$10.0 million, or 1.7%, to $586.2 million from $576.2 million in the prior year.
This increase in retail delivered sales by Ethan Allen-owned stores was attributable
to an increase in sales generated by newly-opened (including relocations) or
acquired stores of $25.7 million, partially offset by decreases in comparable store
delivered sales of $1.2 million, or 0.2%, and closed stores, which generated $14.5
million fewer sales in fiscal 2005 as compared to fiscal 2004. The number of Ethan
Allen-owned stores decreased to 126 as of June 30, 2005 as compared to 127 as of
June 30, 2004. During that twelve month period, the Company acquired 6 stores from,
and sold 4 stores to, independent retailers, closed 5 stores and opened 7 stores (5
of which were relocations).
21
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 retailers are included in comparable store sales in their 13th
full month of Ethan Allen-owned operations.
Total booked orders, which include wholesale orders and written business of
Ethan Allen-owned retail stores, decreased 1.4% from the prior year. Year-over-year,
wholesale orders decreased 3.0% while Ethan Allen-owned store orders increased 2.9%
and comparable store written business increased 1.0%. The modest increase in retail
written sales was likely attributable to the continued re-positioning of the
Company’s retail stores to larger and more prominent locations. During the year,
the Company increased distribution of the "Furnishing Solutions by Ethan Allen"
direct mail magazine, distributing approximately 57 million copies which represented
a 45% increase over historical annual levels. These positive factors were likely
offset, to some degree, by the current year transition to everyday pricing from
periodic sale events conducted in the prior year.
Gross profit for fiscal 2005 totaled $461.0 million and was effectively
unchanged from prior year. Consolidated gross profit was favorably impacted by a
higher proportionate share of retail sales to total sales (62% in fiscal 2005
compared to 60% in fiscal 2004), an overall increase in retail sales volume as a
result of the Company’s continued re-positioning of its store network, and a
reduction in costs associated with excess capacity at the Company’s manufacturing
facilities. These favorable variances were offset by gross profit declines
resulting, primarily, from (i) an overall decrease in wholesale shipments, (ii)
ordinary inefficiencies within the Company’s case goods operations associated with
the production of first cuts for new collections, and (iii) price increases within
selected raw material categories, namely lumber, foam, plywood and steel.
Consolidated gross margin increased to 48.6% for the year ended June 30, 2005 from
48.3% in the prior year as a result, primarily, of the factors identified
previously.
Operating expenses decreased $2.5 million, or 0.7%, to $332.1 million, or
35.0% of net sales, in the current year from $334.6 million, or 35.0% of net sales,
in the prior year, which included restructuring and impairment charges, net of $12.5
million. This decrease is primarily attributable to (i) the aforementioned
restructuring and impairment charge recorded in the fourth quarter of the prior
year, (ii) cost savings attributable to the closure of selected plant locations in
recent periods, and (iii) a decrease in advertising costs within the wholesale
segment stemming from the Company’s decision to increase distribution of the
Company’s direct mail magazine in lieu of more costly national television
advertising. These favorable variances were partially offset by costs associated
with the continued re-positioning of the Company’s retail stores to larger and more
prominent locations, and increased distribution expenses attributable to higher fuel
and freight charges. The Company’s initiative to re-position its retail store
network has resulted in higher costs associated with managerial salaries and
benefits, occupancy, credit card fees, advertising, and delivery and warehousing.
Operating income was $129.0 million, or 13.6% of net sales, for the year ended
June 30, 2005, as compared to $126.4 million, or 13.2% of net sales, for the year
ended June 30, 2004, which included restructuring and impairment charges, net of
$12.5 million. This represents an increase of $2.6 million, or 2.0%, which is
primarily attributable to lower operating expenses as referred to previously.
Total wholesale operating income for the year ended June 30, 2005 was $115.9
million, or 17.5% of wholesale net sales, as compared to $108.0 million, or 16.0% of
wholesale net sales, for the year ended June 30, 2004, which included restructuring
and impairment charges, net of $12.5 million. The increase of $7.9 million, or 7.3%,
is primarily attributable to (i) the aforementioned restructuring and impairment
charge recorded in the fourth quarter of the prior year, (ii) a decrease in
advertising costs, particularly as it relates to national television advertising,
(iii) a reduction in costs associated with excess capacity at the Company’s
manufacturing facilities, and (iv) cost savings attributable to the closure of
selected plant locations in recent periods. These decreases were partially offset
22
by (i) an overall decline in wholesale sales volume, (ii) price increases within
selected raw material categories, (iii) an increase in selling expenses primarily
related to the increased distribution of the Company’s direct mail magazine, and
(iv) an increase in distribution expenses attributable to higher fuel and freight
charges.
Operating income for the retail segment increased $1.0 million, or 8.9%, to
$12.7 million, or 2.2% of net retail sales, for fiscal 2005, as compared to $11.7
million, or 2.0% of net retail sales, in fiscal 2004. The increase in retail
operating income generated by Ethan Allen-owned stores is primarily attributable to
higher sales volume generated from newly-opened (including relocations) or acquired
stores, and the gain recorded upon the sale of selected retail stores. These
increases were partially offset by higher operating expenses related to the
continued re-positioning of the Company’s retail store network, and, to a lesser
extent, the sell-off of floor inventory necessary to make room for new product
introductions.
Interest and other miscellaneous income, net totaled $1.2 million in fiscal
2005 as compared to $3.3 million in fiscal 2004. The decrease was due, primarily,
to a decrease in interest income associated with the lower cash balances maintained
during the period, and the favorable settlement of an outstanding legal matter
during the prior year period.
Income tax expense for the year ended June 30, 2005 totaled $50.1 million as
compared to $49.6 million for the year ended June 30, 2004. The Company's effective
tax rate was 38.7% in fiscal 2005, up from 38.4% in fiscal 2004. The higher
effective tax rate is a result of recently-enacted changes within certain state tax
legislation, and increased state income tax liability arising in connection with the
operation of a greater number of Company-owned stores, some of which are located in
new jurisdictions.
For fiscal 2005, the Company recorded net income of $79.3 million as compared
to $79.5 million in fiscal 2004. Net income per diluted share totaled $2.19 in the
current year and $2.08 per diluted share in the prior year.
Fiscal 2004 Compared to Fiscal 2003
Consolidated revenue for fiscal 2004 was $955.1 million, an increase of $47.8
million, or 5.3%, from fiscal 2003 consolidated revenue of $907.3 million. Net
sales for the period reflect the delivery of product associated with an increased
level of booked orders and related backlog noted throughout most of the year. Such
order levels are reflective of (i) the continued expansion and strategic re-
positioning of the Company’s retail segment, and (ii) an increase in the incoming
order rate resulting, primarily, from an increased level of consumer confidence and
an improved U.S. economy, both of which were sustained for much of the last twelve
months, and from the success of recent product introductions, some of which have
been introduced in accordance with the Company’s "everyday value" pricing strategy.
These positive factors were partially offset, to some degree, by softer business
conditions during the last three months of the fiscal year likely attributable to
consumer concerns with respect to rising fuel prices, the threat of increasing
interest rates, and the continued unsettled geo-political environment.
Total wholesale revenue for fiscal 2004 was $673.8 million as compared to
$661.0 million in fiscal 2003, representing a $12.8 million increase. As stated
previously, the Company experienced an increase in the incoming order rate as a
result, primarily, of improved consumer spending habits and a sustained
strengthening of the U.S. economy throughout most of the fiscal year. To a lesser
extent, wholesale sales volume was also positively impacted by two additional
shipping days in the current year as compared to the prior year. Partially
offsetting these increases were lower than anticipated shipments stemming from (i)
longer lead times on selected case good items as a result of the re-allocation of
production associated with the closure of two plants announced in April 2004, and
(ii) modest delays in receiving certain upholstery-related import shipments (both
finished goods and raw materials).
23
Total retail revenue from Ethan Allen-owned stores for fiscal 2004 increased
$49.8 million, or 9.5%, to $576.2 million from $526.4 million in the prior year.
This increase in retail delivered sales by Ethan Allen-owned stores was attributable
to an increase in sales generated by newly-opened (including relocations) or
acquired stores of $46.8 million, and an increase in comparable store delivered
sales of $22.7 million, or 4.6%, partially offset by a decrease resulting from
closed stores, which generated $19.7 million fewer sales in fiscal 2004 as compared
to fiscal 2003. The number of Ethan Allen-owned stores increased to 127 as of June
30, 2004 as compared to 119 as of June 30, 2003. During that twelve month period,
the Company acquired 4 stores from an independent retailer, closed 1 store and
opened 6 stores, 4 of which were relocations. The Company-owned store count at June
30, 2004 also reflects the net addition of 3 stores stemming from Ethan Allen’s
acquisition of the 25% minority interest in a joint venture previously established
in 1998 between the Company and an independent retailer, the purpose of which was to
own and operate 4 stores in the Dallas market. Subsequent to the Company’s
acquisition of the minority interest, the assets of 1 store were sold to the joint
venture partner. While the operations of these stores have been reflected in the
Company’s consolidated financial statements since inception of the joint venture as
a result of the Company’s 75% majority ownership, the stores have not been
previously included in the Company’s store count due to the fact that the stores
were independently managed.
Total booked orders, which include wholesale orders and written business of
Ethan Allen-owned retail stores, increased 4.4% from the prior year. Year-over-year,
wholesale orders increased 3.2% while Ethan Allen-owned store orders increased 7.7%
and comparable store written business increased 2.6%. These increases are indicative
of the continued expansion and strategic re-positioning of the Company’s retail
segment, an increase in consumer confidence and a period of sustained economic
improvement for most of the last twelve months.
Gross profit for fiscal 2004 increased $11.7 million, or 2.6%, to $461.0
million from $449.3 million in fiscal 2003. The increase in gross profit was
primarily attributable to a higher proportionate share of retail sales to total
sales (61% in fiscal 2004 compared to 59% in fiscal 2003), and an overall increase
in sales volume as a result of the Company servicing the increased level of backlog
noted throughout much of the past year. These favorable variances were partially
offset by increased costs associated with unabsorbed overhead at the Company’s
manufacturing facilities resulting, primarily, from excess capacity, particularly
during the third and fourth quarters of fiscal 2003, and, to a lesser extent, a
modest decline in retail gross profit as a result of the sell-off of floor inventory
necessary to make room for new product introductions. Consolidated gross margin
decreased to 48.3% for the year ended June 30, 2004 from 49.5% in the prior year as
a result, primarily, of the factors identified previously.
The Company recorded pre-tax restructuring and impairment charges of $12.8
million and $13.4 million in the fourth quarter of fiscal 2004 and the third quarter
of fiscal 2003, respectively, relating to the consolidation of certain manufacturing
facilities. The fiscal 2004 consolidation involved the closure of two case good
manufacturing facilities, which resulted in a headcount reduction totaling
approximately 460 employees; 270 employees effective June 25, 2004, and 190
employees throughout the first quarter of fiscal 2005. The fiscal 2003 consolidation
involved the closure of three smaller manufacturing facilities, two of which were
case good plants. Closure of these facilities resulted in a headcount reduction
totaling approximately 580 employees; 340 employees effective April 21, 2003, and
240 employees throughout the last quarter of fiscal 2003 and the first quarter of
fiscal 2004. The costs incurred in closing these facilities consisted, primarily, of
employee severance and benefits and other plant exit costs, as well as fixed asset
impairment charges, primarily for real property and machinery and equipment
associated with the closed facilities. Adjustments totaling $0.2 million were
recorded during fiscal 2004 to reverse certain accruals previously established in
connection with the fiscal 2003 consolidation plan which were no longer required.
Including restructuring and impairment charges of $12.5 million and $13.1
million in fiscal 2004 and 2003, respectively, operating expenses increased to
$334.6 million, or 35.0% of net sales, for the year ended June 30, 2004 from $329.9
24
million, or 36.4% of net sales, for the year ended June 30, 2003. This increase is
primarily attributable to the continued growth of the retail segment and the higher
proportionate share of retail sales to total sales in fiscal 2004. Such expansion
has resulted in higher costs associated with occupancy, designer salaries and
commissions, and delivery and warehousing. These increases were partially offset by
a decline in selling expenses within the wholesale division as a result of a
continued Company-wide focus on cost containment, particularly within national
television advertising, as well as initiatives undertaken in recent periods to
streamline the Company’s U.S. manufacturing operations and increase production
efficiencies.
Including restructuring and impairment charges of $12.5 million and $13.1
million in fiscal 2004 and 2003, respectively, operating income was $126.4 million,
or 13.2% of net sales, for the year ended June 30, 2004 compared to $119.5 million,
or 13.2% of net sales, for the year ended June 30, 2003. This represents an
increase of $6.9 million, or 5.8%, which is primarily attributable to an increase in
gross profit during the period, and lower operating expenses within the wholesale
division, partially offset by increased costs related to continued expansion of the
retail division.
Including restructuring and impairment charges of $12.5 million and $13.1
million in fiscal 2004 and 2003, respectively, total wholesale operating income was
$108.0 million, or 16.0% of wholesale net sales, for the year ended June 30, 2004
compared to $109.3 million, or 16.5% of wholesale net sales, for the year ended June
30, 2003. The decrease of $1.3 million, or 1.2%, is primarily attributable to
increased costs associated with unabsorbed overhead at the Company’s manufacturing
facilities resulting, primarily, from excess capacity, particularly during the third
and fourth quarters of fiscal 2003, partially offset by decreased operating expenses
within the division and increased wholesale sales volume.
Operating income for the retail segment decreased $1.7 million, or 12.7%, to
$11.7 million, or 2.0% of net retail sales, for fiscal 2004, as compared to $13.4
million, or 2.5% of net retail sales, in the prior fiscal year. The decrease in
retail operating income generated by Ethan Allen-owned stores is primarily
attributable to higher operating expenses related to the continued expansion of the
Company’s retail store network, reduced sales volume resulting from closed stores,
and a modest decline in gross margin resulting from the sell-off of floor inventory
necessary to make room for new product introductions, partially offset by increased
sales volume associated with newly-opened (including relocations) or acquired stores
and in increase in comparable store sales.
Interest and other miscellaneous income increased $2.1 million to $3.3 million
in fiscal 2004 from $1.2 million in fiscal 2003. The increase is due, primarily, to
(i) higher gains recorded in the current year in connection with the sale of real
estate, (ii) a favorable judgment in the case of an outstanding legal matter, and
(iii) increased interest income associated with higher cash balances during the
period.
Income tax expense totaled $49.6 million for the year ended June 30, 2004 as
compared to $45.4 million for the year ended June 30, 2003. The Company's effective
tax rate was 38.5% for June 2004 as compared to 37.8% for June 2003. The higher
effective tax rate is a result of recently-enacted changes within certain state tax
legislation, and increased state income tax liability arising in connection with the
operation of a greater number of Company-owned stores, some of which are located in
new jurisdictions.
For fiscal 2004, the Company recorded net income of $79.5 million, an increase
of 6.5%, as compared to $74.6 million in fiscal 2003. Earnings per diluted share for
fiscal year 2004 amounted to $2.08, an increase of $0.15 per diluted share, or 7.8%,
from $1.93 per diluted share in the prior year.
Financial Condition and Liquidity
The Company’s principal sources of liquidity include cash and cash
equivalents, cash flow from operations and borrowing capacity under a revolving
25
credit facility. Throughout fiscal 2005, the Company had in place a $100.0 million
facility, effective June 2004 (the "Credit Agreement"), which modified and renewed a
five-year facility previously entered into in August 1999. On July 21, 2005, the
Credit Agreement was replaced with a new five-year, $200.0 million revolving credit
facility (the "New Credit Agreement"). In addition to the $200.0 million revolving
credit component, the New Credit Agreement includes an accordion feature which
provides for an additional $100.0 million of liquidity if needed, as well as sub-
facilities for trade and standby letters of credit of $100.0 million and swingline
loans of $5.0 million.
On July 26, 2005, the Board of Directors of the Company authorized the
issuance of up to $200.0 million in senior unsecured notes. The specific terms of
the proposed notes, including the maturity and covenants of the notes and the
related pricing, have not yet been determined, and closing of the issuance is
subject to satisfactory determination thereof, changes in capital market conditions,
material changes affecting the Company or its business or industry and other
factors. If completed as authorized, the Company intends to utilize the net proceeds
from the issuance for general corporate purposes including, but not limited to, (i)
retail store expansion, (ii) investment in manufacturing operations, (iii)
acquisitions, (iv) the payment of dividends, and (v) the repurchase of shares of the
Company’s common stock in the open market. The Company has no present commitments or
understandings as to any material acquisition.
In connection with the forecasted issuance of the proposed notes, the Company
entered into 6 separate forward contracts to hedge the risk-free interest rate
associated with $108.0 million of the related debt in order to minimize the negative
impact of interest rate fluctuations on the Company’s earnings, cash flows and
equity. The forward contracts were entered into with a major banking institution
thereby minimizing the risk of credit loss. These hedging transactions were executed
during July and August 2005 and, as such, have not been reflected in the Company’s
financial position, results of operations or cash flows for the year ended June 30,
2005.
As of June 30, 2005, the Company had cash and cash equivalents totaling $3.4
million, and outstanding debt and capital lease obligations totaling $12.5 million.
The current and long-term portions of the Company’s outstanding debt and capital
lease obligations totaled $0.2 million and $12.3 million, respectively, at that
date. Also at June 30, 2005, the Company had revolving loans and trade and standby
letters of credit outstanding under the Credit Agreement totaling $8.0 million and
$15.6 million, respectively. Remaining available borrowing capacity under the Credit
Agreement at that date was $76.4 million.
Net cash provided by operating activities totaled $103.3 million in fiscal
2005 as compared to $126.0 million in fiscal 2004 and $101.4 million in fiscal 2003.
The current year-over-year decrease of $22.7 million was principally the result of
(i) the change in inventories ($12.4 million effect) which declined at a slower rate
in fiscal 2005 as compared to fiscal 2004, (ii) changes in prepaid expenses and
other current assets ($10.2 million effect) due, primarily, to an increase in the
Company’s income tax receivable balance, (iii) the change in net restructuring and
impairment charges ($8.2 million effect), (iv) changes in other assets ($4.6 million
effect), and (v) changes in customer deposits ($2.6 million effect) reflecting the
period-to-period change in the level of written and delivered sales. These
unfavorable variances were partially offset by changes in income taxes and accounts
payable ($5.0 million effect), deferred income taxes ($3.8 million effect), accrued
expenses ($4.7 million effect), and other liabilities ($2.9 million effect), all as
a result of normal business activity.
The decrease in inventory levels since June 2004 was the result, primarily, of
a decline in work-in-process inventories attributable to the consolidation of two
manufacturing facilities, announced in April 2004, and the related phase-out of
those plants’ production during the current period, as well as better Company-wide
management of inventories. These decreases were partially offset by an increase in
(i) finished goods inventories, attributable to recent increases in the wholesale
incoming order rate and an increase in retail sales volume, and (ii) raw material
26
inventories, resulting from the purchase of lumber, fabric, and purchased frames in
anticipation of future production needs.
Net cash used in investing activities totaled $22.5 million in fiscal 2005 as
compared to cash provided of $8.1 million in fiscal 2004 and cash utilized of $41.0
million in fiscal 2003. The current year-over-year decrease in cash of $30.6 million
was due, primarily, to (i) a $27.5 million decrease in net cash proceeds from the
sale of short-term investments, (ii) a $6.8 million increase in other capital
spending, exclusive of acquisitions, to $30.3 million from $23.5 million in the
prior year, and (iii) a $2.6 million increase in cash utilized to fund acquisition
activity (6 retail stores were acquired in the current year as compared to 4 retail
stores acquired in the prior year). These cash decreases were partially offset by
increases in (i) proceeds from the sale of retail stores ($3.5 million) and (ii)
proceeds from the disposal of property, plant and equipment ($1.8 million). The
current level of capital spending is principally attributable to (i) new store
development and renovation, (ii) Company-wide technology initiatives, and (iii)
improvements within the Company’s remaining manufacturing facilities. The Company
anticipates that cash from operations will be sufficient to fund future capital
expenditures.
Net cash used in financing activities totaled $105.1 million in fiscal 2005
as compared to $161.0 million in fiscal 2004 and $61.1 million in fiscal 2003. The
current year-over-year decrease of $55.9 million was the result of (i) a decrease of
$106.2 million in dividends paid due, primarily, to a special, one-time cash
dividend of $3.00 per common share paid in the prior year period, (ii) net borrowing
activity under the Company’s revolving credit facility ($8.0 million), and (iii) an
increase in net proceeds from the issuance of common stock ($1.1 million). These
cash increases were partially offset by an increase in payments related to the
acquisition of treasury stock ($56.0 million) and an increase in cash utilized in
the repayment of outstanding debt ($3.7 million).
On July 26, 2005, the Company declared a dividend of $0.18 per common share,
payable on October 25, 2005 to shareholders of record as of October 11, 2005. The
Company expects to continue to declare quarterly dividends for the foreseeable
future.
In addition to using available cash to fund changes in working capital,
necessary capital expenditures, acquisition activity, the repayment of debt, and the
payment of dividends, the Company has been authorized by its Board of Directors to
repurchase its common stock, from time to time, either directly or through agents,
in the open market at prices and on terms satisfactory to the Company. The Company
also retires shares of unvested restricted stock and, prior to June 30, 2002,
repurchased shares of common stock from terminated or retiring employee’s accounts
in the Ethan Allen Retirement Savings Plan. All of the Company’s common stock
repurchases and retirements are recorded as treasury stock and result in a reduction
of shareholders’ equity.
During fiscal years 2005, 2004 and 2003, the Company repurchased and/or
retired the following shares of its common stock:
Common shares repurchased
Cost to repurchase common shares
Average price per share
2005(1)(3)
2,410,400
$81,435,589
$33.79
2004(1) 2003(2)
1,004,445
$39,094,203
$38.92
1,457,000
$43,503,500
$29.86
(1) The cost to repurchase shares in fiscal years 2005 and 2004 reflects $745,735 in common
stock repurchases with a June 2004 trade date and a July 2004 settlement date.
(2) The cost to repurchase shares in fiscal year 2003 excludes $7,197,165 in common stock
repurchases with a June 2002 trade date and a July 2002 settlement date.
(3) During fiscal 2005, the Company also retired 405,511 shares of common stock tendered upon
the exercise of outstanding employee stock options. The value of such shares on the date
redeemed was $12,173,440, representing an average price per share of $30.02.
For each of the fiscal years presented above, the Company funded its purchases
of treasury stock with existing cash on hand and cash generated through current
period operations. The Board of Directors increased the then remaining share
repurchase authorization to 2.5 million shares on April 27, 2004, and again to 2.0
27
million shares on November 16, 2004 and April 26, 2005. As of June 30, 2005, the
Company had a remaining Board authorization to repurchase 2.0 million shares.
Subsequent to June 30, 2005 and through September 9, 2005, the Company
repurchased, in 17 separate open market transactions, an additional 1,140,000
million shares of its common stock at a total cost of $36.8 million, representing an
average price per share of $32.28. As of September 9, 2005, the Company had a
remaining Board authorization to repurchase 860,000 shares.
As of June 30, 2005, aggregate scheduled maturities of long-term debt,
including capital lease obligations, for each of the next five fiscal years are $0.2
million in fiscal 2006, $0.1 million in fiscal 2007, $0.1 million in fiscal 2008,
$8.0 million in fiscal 2009, and $0.1 million in fiscal 2010. The balance of the
Company’s long-term debt ($3.8 million) matures in fiscal years 2011 and thereafter.
The Company 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. As of June 30, 2005, the
Company had working capital of $130.4 million and a current ratio of 1.97 to 1.
The following table summarizes, as of June 30, 2005, the timing of cash
payments related to the Company’s outstanding contractual obligations (in
thousands):
Less
than 1
Year
Total
1-3
Years
4-5
Years
$
Long-term debt obligations
Capital lease obligations
Operating lease obligations
15,634
Letters of credit
-
Purchase obligations (1)
Other long-term liabilities 417
Total contractual obligations $ 202,458 $ 46,233 $ 50,229 $ 43,498 $
78 $ 8,083 $
-
173,897 30,317 50,059 35,349
- -
- -
66
15,634
-
42
12,492 $
18
222 $
18
92
-
More
than 5
Years
4,109
-
58,172
-
-
217
62,498
(1) For purposes of this table, purchase obligations are defined as agreements that are enforceable
and legally binding and that specify all significant terms, including: fixed or minimum
quantities to be purchased; fixed, minimum or variable price provisions; and the approximate
timing of the transaction. While the Company is not a party to any significant long-term supply
contracts or purchase commitments, the Company does, in the normal course of business, regularly
initiate purchase orders for the procurement of (i) selected finished goods sourced from third-
party vendors, (ii) lumber, fabric, leather and other raw materials used in production, and (iii)
certain outsourced services. All purchase orders are based on current needs and are fulfilled by
suppliers within short time periods. At any point in time, the Company’s open purchase orders
with respect to such goods and services totals approximately $55.0 to $65.0 million.
Further discussion of the Company’s contractual obligations associated with
outstanding debt and lease arrangements can be found in Notes 7 and 8, respectively,
to the Consolidated Financial Statements included under Item 8 of this Annual
Report.
Off-Balance Sheet Arrangements and Other Commitments, Contingencies and Contractual
Obligations
Except as indicated below, the Company does not utilize or employ any off-
balance sheet arrangements, including special-purpose entities, in operating its
business. As such, the Company does not maintain any (i) retained or contingent
interests, (ii) derivative instruments (other than as specified below), or (iii)
variable interests which could serve as a source of potential risk to its future
liquidity, capital resources and results of operations.
On July 26, 2005, the Board of Directors of the Company authorized the
issuance of up to $200.0 million in senior unsecured notes. The specific terms of
the proposed notes, including the maturity and covenants of the notes and the
related pricing, have not yet been determined, and closing of the issuance is
subject to satisfactory determination thereof, changes in capital market conditions,
material changes affecting the Company or its business or industry and other
28
factors. In connection with the forecasted issuance of the proposed notes, the
Company entered into 6 separate forward contracts to hedge the risk-free interest
rate associated with $108.0 million of the related debt in order to minimize the
negative impact of interest rate fluctuations on the Company’s earnings, cash flows
and equity. The forward contracts were entered into with a major banking institution
thereby minimizing the risk of credit loss. These hedging transactions were executed
during July and August 2005 and, as such, have not been reflected in the Company’s
financial position, results of operations or cash flows for the year ended June 30,
2005.
The Company, or its consolidated subsidiaries, may, from time to time in the
ordinary course of business, provide guarantees on behalf of selected affiliated
entities or become contractually obligated to perform in accordance with the terms
and conditions of certain business agreements. The nature and extent of these
guarantees and obligations may vary based on the underlying relationship of the
benefiting party to the Company and the business purpose for which the guarantee or
obligation is being provided. Details of those arrangements for which the Company,
or any of its consolidated subsidiaries, act as guarantor or obligor are provided
below.
Retailer-Related Guarantees
Ethan Allen Inc. has obligated itself, on behalf of one of its independent
retailers, with respect to a $1.5 million credit facility (the "Retailer Credit
Facility") comprised of a $1.1 million revolving line of credit and a $0.4 million
term loan. This obligation requires the Company, in the event of the retailer’s
default under the Retailer Credit Facility, to repurchase the retailer’s inventory,
applying such purchase price to the retailer’s outstanding indebtedness under the
Retailer Credit Facility. The Company’s obligation remains in effect for the life of
the term loan which expires in April 2008. The maximum potential amount of future
payments (undiscounted) that the Company could be required to make under this
obligation is limited to the amount outstanding under the Retailer Credit Facility
at the time of default (subject to pre-determined lending limits based on the value
of the underlying inventory) and, as such, is not an estimate of future cash flows.
No specific recourse or collateral provisions exist that would enable recovery of
any portion of amounts paid under this obligation, except to the extent that the
Company maintains the right to take title to the repurchased inventory. Management
anticipates that the repurchased inventory could subsequently be sold through the
Company’s retail store network. As of June 30, 2005, the amount outstanding under
the Retailer Credit Facility totaled approximately $1.0 million, of which $0.9
million was outstanding under the revolving credit line. Management expects that,
based on the underlying creditworthiness of the respective retailer, this obligation
will expire without requiring funding by the Company. However, in accordance with
the provisions of FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, a liability has been established to reflect the Company’s non-contingent
obligation under this arrangement as a result of modifications made to the Retailer
Credit Facility subsequent to January 1, 2003. As of June 30, 2005, the carrying
amount of such liability is less than $50,000.
Indemnification Agreement
In connection with the Company’s joint venture arrangement with United
Kingdom-based MFI Furniture Group Plc, Ethan Allen Inc. has entered into a tax
cross-indemnification agreement with the joint venture partner. The indemnification
agreement stipulates that both parties agree to pay 50% of the amount of any tax
liability arising as a result of (i) an adverse tax judgment or (ii) the imposition
of additional taxes against either partner, and attributable to the operations of
the joint venture. The indemnification agreement is effective until such time that
the joint venture is terminated. At the present time, management anticipates that
the joint venture will continue to operate for the foreseeable future.
The maximum potential amount of future payments (undiscounted) that the
Company could be required to make under this indemnification agreement is
indeterminable as no such tax liability currently exists. Further, the nature,
29
extent and magnitude of any such tax liability arising in the future as a result of
an adverse tax judgment or change in applicable tax law cannot be estimated with any
reasonable certainty. It should be further noted that no recourse or collateral
provisions exist that would enable recovery of any portion of amounts paid under
this indemnification agreement. Management expects, based on its current
understanding of the applicable tax laws and the existing legal structure of the
joint venture, subject to future changes in applicable laws and regulations, this
cross-indemnity agreement will expire without requiring funding by the Company.
Accordingly, as of June 30, 2005, the carrying amount of the liability related to
this indemnification agreement is zero.
Product Warranties
The Company’s products, including its case goods, upholstery and home accents,
generally carry explicit product warranties that extend from three to five years and
are provided based on terms that are generally accepted in the industry. All of the
Company’s independent retailers are required to enter into, and perform in
accordance with the terms and conditions of, a warranty service agreement. The
Company records provisions for estimated warranty and other related costs at time of
sale based on historical warranty loss experience and makes periodic adjustments to
those provisions to reflect actual experience. On rare occasion, certain warranty
and other related claims involve matters of dispute that ultimately are resolved by
negotiation, arbitration or litigation. In certain cases, a material warranty issue
may arise which is beyond the scope of the Company’s historical experience. The
Company provides for such warranty issues as they become known and estimable. It is
reasonably possible that, from time to time, additional warranty and other related
claims could arise from disputes or other matters beyond the scope of the Company’s
historical experience. As of June 30, 2005, the Company’s recorded product warranty
liability totaled $1.4 million.
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 or seek lower cost alternatives in order to
offset increases in operating costs and effectively manage its working capital.
Income Taxes
At June 30, 2005, the Company has, for federal income tax purposes,
approximately $1.9 million of net operating loss carryforwards ("NOLs"). The
Company’s utilization of these NOLs, which expire in 2022, is limited, pursuant to
Section 381(c) of the Internal Revenue Code, based upon the separate earnings and/or
eventual liquidation of the wholly-owned subsidiary to which the NOLs relate.
Business Outlook
The Company has experienced inconsistent business activity throughout much of
the last twelve months. During that time, macro-economic factors such as the ongoing
war in Iraq, rising fuel prices, the threat of further interest rate increases, and
recent declines in the stock markets, appear to have contributed to lower levels of
consumer confidence and discretionary spending, particularly for home furnishings.
In addition, the Company’s current year transition to everyday pricing in lieu of
its historical periodic sale events, likely also had some effect on order trends as
compared to prior periods. Despite these challenges, the Company believes it is
well-positioned for the next phase of economic growth as a result of (i) its
established brand, (ii) its comprehensive complement of home decorating solutions,
and (iii) its vertically-integrated business model.
Should the economy strengthen, however, it is also possible that costs
associated with production (including raw materials and labor), distribution
(including freight and fuel charges), and retail operations (including compensation,
delivery and warehousing, occupancy and advertising expenses) may continue to
increase. Similarly, continued increases in interest rates and crude oil prices
could serve to further adversely impact the level of discretionary spending on the
30
part of consumers. We cannot reasonably predict when, or to what extent, such
events may occur or what effect, if any, such events may have on the Company’s
consolidated financial condition or results of operations.
The industry remains extremely competitive with domestic manufacturers facing
increased pricing pressure as a result of the continued development of manufacturing
capabilities in other countries, specifically within Asia. In response to these
pressures, a large number of U.S. furniture manufacturers and retailers, including
Ethan Allen, have increased their overseas sourcing activities in an attempt to
maintain a competitive advantage and retain market share. At the present time, the
Company manufactures and/or assembles approximately 65-70% of its products.
Management of the Company continues to believe that a balanced approach to product
sourcing, which includes the domestic manufacture of certain product offerings
coupled with the import of other selected products, provides the greatest degree of
flexibility and is the most effective approach to ensuring that acceptable levels of
quality, service and value are attained.
Further discussion of the specific issues facing the home furnishings industry
has been included under Item I of this Annual Report.
Recent Accounting Pronouncements
In May 2005, the Financial Accounting Standards Board ("FASB") issued SFAS No.
154, Accounting Changes and Error Corrections – A Replacement of APB Opinion No. 20
and FASB Statement No. 3. SFAS No. 154 requires the retrospective application to
prior periods' financial statements of changes in accounting principle, unless it is
impracticable to determine either the period-specific effects or the cumulative
effect of the change. The Statement also requires that a change in depreciation,
amortization, or depletion method for long-lived non-financial assets be accounted
for as a change in accounting estimate affected by a change in accounting principle.
Statement 154 is effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005. Accordingly, the Company will adopt
the provisions of SFAS No. 154, as applicable, on July 1, 2006.
In June 2005, the Emerging Issues Task Force ("EITF") of the FASB reached a
consensus on EITF Issue No. 05-6, Determining the Amortization Period for Leasehold
Improvements ("Issue 05-6"). The provisions of Issue 05-6 require that leasehold
improvements acquired in a business combination or purchased subsequent to the
inception of a lease be amortized over the lesser of the useful life of the assets
or a term that includes renewals that are reasonably assured at the date of the
business combination or purchase. The consensus is to be applied prospectively to
leasehold improvements acquired subsequent to June 29, 2005. The Company does not
believe that the adoption of Issue 05-6 will have a material effect on its financial
position, results of operations or cash flows.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The Company is exposed to interest rate risk primarily through its borrowing
activities. The Company’s policy has been to utilize United States dollar
denominated borrowings to fund its working capital and investment needs. Short-term
debt, if required, is used to meet working capital requirements and long-term debt
is generally used to finance long-term investments. There is inherent rollover risk
for borrowings as they mature and are renewed at current market rates. The extent
of this risk is not quantifiable or predictable because of the variability of future
interest rates and the Company’s future financing requirements. As of June 30, 2005,
the Company had no debt instruments outstanding with variable interest rates.
The Company’s exposure to foreign currency exchange risk is primarily limited
to its operation of five Ethan Allen-owned retail stores located in Canada as
substantially all purchases of imported parts and finished goods are denominated in
United States dollars. As such, gains or losses resulting from market changes in
the value of foreign currencies have not had, nor are they expected to have, a
material effect on the Company’s consolidated results of operations.
31
Historically, the Company has not entered into financial instrument, including
derivative, transactions for trading or other speculative purposes or to manage
interest rate or currency exposure. However, on July 26, 2005, the Board of
Directors authorized the issuance of up to $200.0 million in senior unsecured notes.
The specific terms of the proposed notes, including the maturity and covenants of
the notes and the related pricing, have not yet been determined, and closing of the
issuance is subject to satisfactory determination thereof, changes in capital market
conditions, material changes affecting the Company or its business or industry and
other factors.
In connection with the forecasted issuance of the proposed notes, the Company
entered into 6 separate forward contracts to hedge the risk-free interest rate
associated with $108.0 million of the related debt in order to minimize the negative
impact of interest rate fluctuations on the Company’s earnings, cash flows and
equity. The forward contracts were entered into with a major banking institution
thereby minimizing the risk of credit loss. These hedging transactions were executed
during July and August 2005 and, as such, have not been reflected in the Company’s
financial position, results of operations or cash flows for the year ended June 30,
2005.
32
Item 8. Financial Statements and Supplementary Data
The Company’s Consolidated Financial Statements and Supplementary Data are listed
under Item 15 of this Annual Report.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Ethan Allen Interiors Inc.:
We have audited the accompanying consolidated balance sheets of Ethan Allen
Interiors Inc. and Subsidiaries (the "Company") as of June 30, 2005 and 2004, 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, 2005. We also
have audited management's assessment, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting, that Ethan Allen Interiors Inc.
and Subsidiaries maintained effective internal control over financial reporting as
of June 30, 2005, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company's management is responsible for these consolidated
financial statements, for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion on these
consolidated financial statements, an opinion on management's assessment, and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement and whether effective internal control
over financial reporting was maintained in all material respects. Our audit of the
financial statements included examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal control over
financial reporting included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other
procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may
not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
33
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 Subsidiaries as of June 30, 2005 and 2004, and the results of their
operations and their cash flows for each of the years in the three-year period ended
June 30, 2005, in conformity with U.S. generally accepted accounting principles.
Also, in our opinion, management's assessment that Ethan Allen Interiors Inc. and
Subsidiaries maintained effective internal control over financial reporting as of
June 30, 2005, is fairly stated, in all material respects, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Furthermore, in our
opinion, Ethan Allen Interiors Inc. and Subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of June 30, 2005,
based on criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
/s/ KPMG LLP
Stamford, Connecticut
September 8, 2005
34
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2005 and 2004
(In thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, less allowance for
doubtful accounts of $2,102 at June 30,
2005 and $2,194 at June 30, 2004
Inventories (note 4)
Prepaid expenses and other current assets
Deferred income taxes (note 12)
Total current assets
2005
2004
$ 3,448
$ 27,528
28,019
186,479
37,084
9,359
264,389
26,967
186,895
28,166
28,905
298,461
277,437
80,038
2,431
$ 658,367
Property, plant and equipment, net (note 5)
Goodwill and other intangible assets (notes 3 and 6)
Other assets
Total assets
275,211
82,897
5,889
$ 628,386
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and
capital lease obligations (notes 7 and 8)
Customer deposits
Accounts payable
Accrued compensation and benefits
Accrued expenses and other current liabilities
Total current liabilities
Long-term debt (note 7)
Other long-term liabilities
Deferred income taxes (note 12)
Total liabilities
$ 240
53,654
19,352
29,916
30,804
133,966
$ 4,712
56,026
22,222
27,950
25,779
136,689
12,270
12,445
35,637
194,318
4,509
9,781
51,248
202,227
Shareholders' equity (notes 9, 10, 11 and 15):
Class A common stock, par value $.01, 150,000,000
shares authorized, 46,585,896 shares issued at
June 30, 2005 and 45,812,032 shares issued at
June 30, 2004
Class B common stock, par value $.01, 600,000 shares
authorized; no shares issued and outstanding at
June 30, 2005 and June 30, 2004
Preferred stock, par value $.01, 1,055,000 shares
authorized, no shares issued and outstanding at
June 30, 2005 and 2004
Additional paid-in capital
466
458
-
-
-
302,620
303,086
-
289,707
290,165
Less:
Treasury stock (at cost), 12,071,866 shares at
June 30, 2005 and 9,255,955 shares at June 30,
2004
(337,635)
(244,026)
Retained earnings
Accumulated other comprehensive income
Total shareholders' equity
Total liabilities and shareholders' equity
467,566
1,051
434,068
$ 628,386
409,401
600
456,140
$ 658,367
See accompanying notes to consolidated financial statements.
35
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended June 30, 2005, 2004 and 2003
(In thousands, except per share data)
2005 2004 2003
Net sales
Cost of sales
Gross profit
Operating expenses:
Selling
General and administrative
Restructuring and impairment
charge, net (note 3)
Total operating expenses
$949,012
487,958
461,054
$955,107 $907,264
457,924
449,340
494,072
461,035
184,310
147,985
176,859
145,252
178,615
138,137
(219)
332,076
12,520
334,631
13,131
329,883
Operating income
128,978
126,404
119,457
Interest and other miscellaneous
income, net
Interest and other related financing
costs
1,203
3,332 1,162
761
641 645
Income before income taxes
129,420
129,095
119,974
Income tax expense (note 12)
50,082
49,617
45,350
Net income
$ 79,338
$ 79,478
$ 74,624
Per share data (notes 10, 11 and 17):
Net income per basic share
$ 2.24
$ 2.14
$ 1.98
Basic weighted average common shares
35,400
37,179
37,607
Net income per diluted share
$ 2.19
$ 2.08
$ 1.93
Diluted weighted average common shares
36,193
38,295
38,569
Dividends declared per common share
$ 0.60
$ 3.40
$ 0.25
See accompanying notes to consolidated financial statements.
36
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended June 30, 2005, 2004 and 2003
(In thousands)
Operating activities:
Net income
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization
Restructuring and impairment charge, net
Compensation expense (benefit) related to
restricted stock award
Provision for deferred income taxes
Gain on disposal of property, plant and
equipment
Gain on sale of retail stores
Other
Change in operating assets and liabilities,
net of the effects of acquired and divested
businesses:
2005
2004 2003
$ 79,338
$ 79,478
$ 74,624
21,338
(219)
21,854
8,007 8,792
21,634
327
3,935
(110)
(1,384)
(19)
254
121
(335)
4,290
(1,452)
-
5
(1)
-
(58)
Accounts receivable
Inventories
Prepaid and other current assets
Other assets
Customer deposits
Income taxes and accounts payable
Accrued expenses
Other liabilities
(1,614)
757
(5,377)
(3,155)
(3,690)
4,829
5,637
2,742
(1,156)
5,891
13,168 (13,970)
(7,771)
219
8,066
(6,130)
3,874
(118) 2,231
4,782
1,395
(1,120)
(149)
963
Net cash provided by operating activities
103,335
126,032 101,356
Investing activities:
Purchases of short-term investments
Proceeds from sale of short-term investments
Proceeds from the disposal of property, plant
and equipment
Proceeds from the sale of retail stores
Capital expenditures
Acquisitions
Other
(12,000)
12,000
(37,500)
65,000
(52,150)
45,650
7,628
3,529
(30,301)
(4,080)
711
(23,534)
5,796
-
5,040
-
(28,449)
(1,442) (11,332)
262
(267)
Net cash provided by (used in) investing
activities
Financing activities:
15,500
Borrowings on revolving credit facility
(7,500)
Payments on revolving credit facility
Payments on long-term debt and capital leases
(4,716)
Purchases and other retirements of company stock (94,355)
Net proceeds from issuance of common stock
Payment of deferred financing costs
Payment of cash dividends
Net cash used in financing activities
(19,625)
(105,055)
(22,513)
5,641
-
8,053
(40,979)
-
-
-
-
(1,027) (3,528)
(50,700)
2,219
-
(38,348)
4,547
(349)
(125,783)
(160,960)
(9,066)
(61,075)
Effect of exchange rate changes on cash
153
47
366
Net decrease in cash and cash equivalents
(24,080)
(26,828)
(332)
Cash and cash equivalents - beginning of year
Cash and cash equivalents - end of year
27,528
$ 3,448
54,356
$ 27,528
54,688
$ 54,356
Supplemental cash flow information:
Net income taxes (received) paid
Interest paid
$ 44,135
550
$ 41,193
510
$ 44,596
508
See accompanying notes to consolidated financial statements.
37
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity
For the Years Ended June 30, 2005, 2004 and 2003
(In thousands, except share data)
Common
Stock
Additional
Paid-in
Capital
Treasury Comprehensive Retained
Stock
Income Earnings
Total
Accumulated
Other
Balance at June 30, 2002 $ 453
$277,694 $(161,428)
$ -
$391,450 $508,169
Issuance of 196,206 shares of common
stock upon the exercise of stock
options and restricted stock
award compensation (notes 9 and 11) 1
Purchase/retirement of 1,457,000
shares of company stock (note 9)
Tax benefit associated with exercise
of employee stock options
Dividends declared on common stock
Charge for early vesting of stock
options
-
-
-
-
Other comprehensive income (note 15) -
-
Net income
1,883
-
-
(43,503)
1,536
-
27
-
-
-
-
-
-
-
-
-
-
-
-
-
1,884
- (43,503)
- 1,536
(9,395)
(9,395)
-
27
580
-
Total comprehensive income
Balance at June 30, 2003
454
281,140
(204,931)
580
Issuance of 362,946 shares of common
stock upon the exercise of stock
options and restricted stock
award compensation (notes 9 and 11) 4
Purchase/retirement of 1,044,445
shares of company stock (note 9)
Tax benefit associated with exercise
of employee stock options
Dividends declared on common stock
Charge for early vesting of stock
options
-
-
-
-
Other comprehensive income (note 15) -
-
Net income
4,797
-
-
(39,095)
3,750
-
20
-
-
-
-
-
-
-
-
-
-
-
-
20
-
Total comprehensive income
Balance at June 30, 2004
458
289,707
(244,026)
600
-
74,624
580
74,624
75,204
456,679
533,922
-
4,801
- (39,095)
- 3,750
(126,756) (126,756)
-
20
-
79,478
20
79,478
79,498
456,140
409,401
Issuance of 773,864 shares of common
stock upon the exercise of stock
options and restricted stock
award compensation (notes 9 and 11) 8
Purchase/retirement of 2,815,911
shares of company stock (note 9)
Tax benefit associated with exercise
of employee stock options
Dividends declared on common stock
-
-
-
Other comprehensive income (note 15) -
-
Net income
5,960
-
-
(93,609)
6,953
-
-
-
-
-
-
-
Total comprehensive income
Balance at June 30, 2005
$ 466
$302,620
$(337,635)
See accompanying notes to consolidated financial statements.
38
-
-
-
-
-
5,968
- (93,609)
- 6,953
(21,173) (21,173)
451
-
451
79,338
79,789
$1,051 $467,566 $434,068
-
79,338
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 2005, 2004 and 2003
(In thousands, except share data)
(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, 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 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 accessories, selling a full range of
products through an exclusive network of 313 retail stores, of which 126 are
Ethan Allen-owned and operated and 187 are independently-owned and operated.
Nearly all of the Company’s retail stores are located in the United States, with
the remaining stores located in Canada. The majority of the independently-owned
stores are also located in the United States, with the remaining stores located
throughout Asia, the Middle East, Canada, Mexico, Europe, Africa and the West
Indies. Ethan Allen has 12 manufacturing facilities, 2 of which include separate
sawmill operations, located throughout the United States.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires the Company to make
estimates and assumptions that affect the amounts and disclosures reported in
those financial statements and the related accompanying notes. Actual results
could differ from those estimates.
Reclassifications
Certain reclassifications have been made to prior years’ financial statements in
order to conform to the current year’s presentation. These changes were made for
disclosure purposes only and did not have any impact on previously reported
results of operations or shareholders’ equity.
Cash Equivalents
Cash and short-term highly-liquid investments with original maturities of 3
months or less are considered cash and cash equivalents. The Company invests
excess cash primarily in money market accounts and short-term commercial paper.
Short-Term Investments
The Company’s short-term investments consist of auction rate securities which
represent funds available for current operations. In accordance with Statement
of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain
Investments in Debt and Equity Securities, these short-term investments are
classified as available-for-sale and are carried at cost, which approximates fair
value. These securities have stated maturities beyond three months but are
priced and traded as short-term instruments due to the liquidity provided through
the interest rate reset mechanism of 28 or 35 days.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Cost is determined based solely on those charges incurred in the acquisition and
production of the related inventory (i.e. material, labor and manufacturing
overhead costs).
39
Property, Plant and Equipment
Property, plant and equipment are stated at cost, net of accumulated depreciation
and amortization. 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 typically range from twenty to
forty years for buildings and improvements and from three to twenty years for
machinery and equipment. Leasehold improvements are amortized based on the
underlying lease term, or the asset’s estimated useful life, whichever is
shorter.
Operating Leases
The Company accounts for its operating leases in accordance with the provisions
of SFAS No. 13, Accounting for Leases, which require minimum lease payments be
recognized on a straight-line basis, beginning on the date that the lessee takes
possession or control of the property. A number of the Company’s operating lease
agreements contain provisions for tenant improvement allowances, rent holidays,
rent concessions, and/or rent escalations.
Incentive payments received from landlords are recorded as deferred lease
incentives and are amortized over the underlying lease term on a straight-line
basis as a reduction of rent expense. When the terms of an operating lease
provide for periods of free rent, rent concessions, and/or rent escalations, the
Company establishes a deferred rent liability for the difference between the
scheduled rent payment and the straight-line rent expense recognized. This
deferred rent liability is also amortized over the underlying lease term on a
straight-line basis as a reduction of rent expense.
Retail Store Acquisitions
The Company accounts for the acquisition of retail stores and related assets in
accordance with SFAS No. 141, Business Combinations, which requires application
of the purchase method for all business combinations initiated after June 30,
2001. Accounting for these transactions as purchase business combinations
requires the allocation of purchase price paid to the assets acquired and
liabilities assumed based on their fair values as of the date of the acquisition.
The amount paid in excess of the fair value of net assets acquired is accounted
for as goodwill.
Goodwill and Other Intangible Assets
The Company’s intangible assets are accounted for in accordance with SFAS No.
142, Goodwill and Other Intangible Assets, and are comprised, primarily, of
goodwill, which represents the excess of cost over the fair value of net assets
acquired, product technology, and trademarks. In re-assessing the useful lives of
its goodwill and other intangible assets upon adoption of the standard, the
Company determined these assets to have indefinite useful lives. Accordingly,
amortization of these assets ceased on that date. Prior to July 1, 2001, these
assets were amortized on a straight-line basis over forty years.
Statement 142 requires that the Company annually perform an impairment analysis
to assess the recoverability of the recorded balance of goodwill and other
intangible assets. The Company conducts its required annual impairment test
during the fourth quarter of each fiscal year. The provisions of the Statement
indicate that the impairment test should be conducted more frequently if events
occur or circumstances change that would more likely than not reduce the fair
value of the goodwill or other intangible asset below its carrying value. In
addition, the Company performed an initial impairment analysis upon adoption of
the standard. No impairment losses have been recorded on the Company’s goodwill
or other intangible assets as a result of applying the provisions of Statement
142.
Financial Instruments
The carrying value of the Company’s financial instruments approximates fair
value.
40
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis and operating loss
and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
Revenue Recognition
Revenue is recognized when all of the following have occurred: persuasive
evidence of a sales arrangement exists (e.g. a wholesale purchase order or retail
sales invoice); the sales arrangement specifies a fixed or determinable sales
price; product is shipped or services are provided to the customer; and
collectibility is reasonably assured. This occurs upon the shipment of goods to
independent retailers or, in the case of Ethan Allen-owned retail stores, upon
delivery to the customer.
Shipping and Handling Costs
Ethan Allen’s policy is to sell its products at the same delivered cost to all
retailers nationwide, regardless of shipping point. Costs incurred to deliver
finished goods to the consumer are expensed and recorded in selling, general and
administrative expenses. Shipping and handling costs amounted to $75.2 million,
$71.6 million, and $67.6 million for fiscal years 2005, 2004, and 2003,
respectively.
Advertising Costs
Advertising costs are expensed when first aired or distributed. Total advertising
costs incurred by the Company in fiscal years 2005, 2004 and 2003, amounted to
$30.5 million, $30.5 million, and $42.8 million, respectively. These amounts are
presented net of income received by Ethan Allen under its agreement with the
third-party financial institution responsible for administering its consumer
finance programs. Prepaid advertising costs at June 30, 2005 and 2004 totaled
$5.0 million and $7.2 million, respectively.
Earnings Per Share
The Company computes basic earnings per share by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share is calculated similarly, except that the weighted average
outstanding shares are adjusted to include the effects of converting all
potentially dilutive stock options and awards issued under the Company’s employee
stock plans (see Note 10).
Stock Compensation
The Company’s 1992 Stock Option Plan (the "Plan") is accounted for in accordance
with the recognition and measurement provisions of Accounting Principles Board
Opinion ("APB") No. 25, Accounting for Stock Issued to Employees, and related
interpretations, which employs the intrinsic value method of measuring
compensation cost. Accordingly, compensation expense is not recognized for fixed
stock options if the exercise price of the option equals the fair value of the
underlying stock at the grant date. For certain stock-based awards, where the
exercise price is equal to zero, the fair value of the award, measured at the
grant date, is amortized to compensation expense on a straight-line basis over
the vesting period. In addition, other stock-based award programs provided for
under the Plan may also result in the recognition of compensation expense
(benefit) to the extent they are deemed to be variable (as that term is defined
in APB No. 25) in nature.
41
SFAS No. 123, Accounting for Stock-Based Compensation, encourages recognition of
the fair value of all stock-based awards on the date of grant as expense over the
vesting period. However, as permitted by SFAS No. 123, the Company continues to
apply the intrinsic value-based method of accounting prescribed by APB Opinion
No. 25 and discloses certain pro-forma amounts as if the fair value approach of
SFAS No. 123 had been applied.
In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, an
amendment of SFAS No. 123, to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based employee
compensation. In addition, this standard amends the disclosure requirements of
SFAS No. 123 by requiring more prominent pro-forma disclosures in both the annual
and interim financial statements.
The following table, which addresses the disclosure requirements of SFAS No. 148,
illustrates the effect on net income and earnings per share if the fair value
recognition provisions of SFAS No. 123 had been applied to all outstanding and
unvested awards in each period.
Net income as reported
$
79,338
$
79,478
$
74,624
Fiscal Year Ended June 30,
2005
2004
2003
Add: Stock-based employee
compensation expense (benefit)
included in reported net income,
net of related tax effects
Deduct: Stock-based employee
compensation expense determined
under the fair-value based
method for all awards granted
since July 1, 1995, net of
related tax effects
Pro forma net income
Earnings per share:
Basic – as reported
Basic – pro forma
Diluted – as reported
Diluted – pro forma
200
156
(208)
(6,891)
72,647
2.24
2.05
2.19
2.01
(5,077)
74,558
2.14
2.01
2.08
1.96
(2,768)
71,648
1.98
1.91
1.93
1.87
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Note: The Company employs the Black-Scholes option-pricing model for purposes of estimating the
fair value of stock options granted. See Note 11 for a further discussion of SFAS No. 123.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment, which replaces SFAS No. 123 and supercedes APB No. 25, requiring
compensation costs related to share-based payment transactions, including
employee stock options, to be recognized in the financial statements. Statement
123(R) was effective for the Company as of July 1, 2005. In addition, in March
2005, the SEC issued Staff Accounting Bulletin ("SAB") 107, which was effective
upon issuance and provides the Staff's views regarding the interaction between
SFAS No. 123(R) and certain SEC rules and regulations and provides
interpretations of the valuation of share-based payments for public companies.
The Company continues to evaluate the provisions of Statement 123(R) and SAB 107
in order to determine, among other things, the fair value method to be used to
measure compensation expense and the appropriate assumptions to include in the
fair value model. Some of this information, however, such as the level of share-
based payments to be granted in future years, is unknown at this time. Still,
based on its initial review of this authoritative guidance, and considering the
provisions of existing employment agreements and the recent historical levels of
share-based payments granted to individuals other than Mr. Kathwari, the
Company’s President and Chief Executive Officer (whose outstanding unvested
options vest on August 1, 2005 and are described further in Note 11), the Company
42
does not believe that the impact of adoption will have a material effect on its
financial position, results of operations or cash flows.
Foreign Currency Translation
The functional currency of each Company-owned foreign retail location is the
respective local currency. Assets and liabilities are translated into United
States dollars using the current period-end exchange rate and income and expense
amounts are translated using the average exchange rate for the period in which
the transaction occurred. Resulting translation adjustments are reported as a
component of accumulated other comprehensive income within shareholders’ equity.
Derivative Instruments
The Company adopted SFAS No. 133, Accounting for Certain Derivative Instruments
and Certain Hedging Activities, and SFAS No. 138, which later amended Statement
133, in fiscal 2001. Upon review of its contracts as of June 30, 2005, the
Company has determined that it has no derivative instruments as defined under
these standards.
New Accounting Standards
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS
No. 154 requires the retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. The Statement also requires that a change in depreciation, amortization,
or depletion method for long-lived non-financial assets be accounted for as a
change in accounting estimate affected by a change in accounting principle.
Statement 154 is effective for accounting changes and corrections of errors made
in fiscal years beginning after December 15, 2005. Accordingly, the Company will
adopt the provisions of SFAS No. 154, as applicable, on July 1, 2006.
In June 2005, the Emerging Issues Task Force ("EITF") of the FASB reached a
consensus on EITF Issue No. 05-6, Determining the Amortization Period for
Leasehold Improvements ("Issue 05-6"). The provisions of Issue 05-6 require that
leasehold improvements acquired in a business combination or purchased subsequent
to the inception of a lease be amortized over the lesser of the useful life of
the assets or a term that includes renewals that are reasonably assured at the
date of the business combination or purchase. The guidance is effective for
periods beginning after June 29, 2005. The Company does not believe that the
adoption of Issue 05-6 will have a material effect on its financial position,
results of operations or cash flows.
(2) Restructuring and Impairment Charge
In recent years, the Company has developed, announced and executed plans to
consolidate its manufacturing operations as part of an overall strategy to
maximize production efficiencies and maintain its competitive advantage.
In the fourth quarter of fiscal 2004, the Company announced a plan to close and
consolidate two of its manufacturing facilities. The plants, both involved in the
production of wood case goods furniture, were located in Boonville, New York and
Bridgewater, Virginia. The plant closures resulted in a headcount reduction
totaling approximately 460 employees: 270 employees effective June 25, 2004, and
190 employees throughout the first quarter of fiscal 2005. A pre-tax
restructuring and impairment charge of $12.8 million was recorded for costs
associated with these plant closings, of which $4.5 million was related to
employee severance and benefits and other plant exit costs, and $8.3 million was
related to fixed asset impairment charges, primarily for real property and
machinery and equipment associated with the closed facilities. During the first
six months of fiscal 2005, the final cash payments related to these plant
closings were made. In addition, adjustments totaling $0.2 million were recorded
to reverse the remaining previously established accruals which were no longer
deemed necessary.
43
In the third quarter of fiscal 2003, the Company announced a plan to close three
of its smaller manufacturing facilities. Closure of these facilities resulted in
a headcount reduction totaling approximately 580 employees: 340 employees
effective April 21, 2003, and 240 employees throughout the last quarter of fiscal
2003 and the first quarter of fiscal 2004. A pre-tax restructuring and impairment
charge of $13.4 million was recorded for costs associated with these plant
closings, of which $4.5 million related to employee severance and benefits and
other plant exit costs, and $8.9 million related to fixed asset impairment
charges, primarily for real property and machinery and equipment associated with
the closed facilities. During the first quarter of fiscal 2004, adjustments
totaling $0.2 million were recorded to reverse certain of these previously
established accruals which were no longer required.
As of June 30, 2005, all related accruals have been reduced to zero. In addition,
total impairment charges of $17.2 million ($8.3 million and $8.9 million in 2004
and 2003, respectively) have been recorded to reduce certain property, plant and
equipment to net realizable value.
(3) Business Acquisitions
During fiscal 2005, the Company acquired, in three separate transactions, six
Ethan Allen retail stores from independent retailers for total consideration of
approximately $4.6 million. As a result of these acquisitions, the Company (i)
recorded additional inventory of $3.2 million and other assets of $0.6 million,
and (ii) assumed customer deposits of $1.7 million and other liabilities of $0.1
million. Goodwill associated with these acquisitions totaled $2.6 million and
represents the premium paid to the sellers related to the acquired businesses
(i.e. market presence) and other fair value adjustments to the assets acquired
and liabilities assumed.
Further discussion of the Company’s intangible assets can be found in Note 6.
A summary of the Company’s allocation of purchase price in each of the last three
fiscal years is provided below (in thousands):
Fiscal Year Ended June 30,
2005
2004
2003
$
Nature of acquisition
Total consideration
Assets acquired and
liabilities assumed:
Inventory
PP&E and other assets
Customer deposits
Third-party debt
A/P and other liabilities
Goodwill
6 stores
4,642
$
4 stores
2,070
16 stores
11,952
$
3,194
614
(1,735)
-
(25)
1,851
530
(1,207)
-
(121)
10,095
5,109
(4,907)
(4,300)
(2,938)
$ 2,594
$ 1,017
$ 8,893
(4) Inventories
Inventories at June 30 are summarized as follows (in thousands):
Finished goods
Work in process
Raw materials
2005
2004
$149,322
8,437
28,720
$186,479
$148,240
10,840
27,815
$186,895
Inventories are presented net of a related valuation allowance of $2.7 million
and $3.2 million at June 30, 2005 and 2004, respectively.
44
(5) Property, Plant and Equipment
Property, plant and equipment at June 30 are summarized as follows (in
thousands):
Land and improvements
Buildings and improvements
Machinery and equipment
Less: accumulated depreciation
and amortization
(6) Goodwill and Other Intangible Assets
2005
2004
$ 57,972
232,453
137,390
427,815
$ 52,863
237,586
137,996
428,445
(152,604)
$275,211
(151,008)
$277,437
As of June 30, 2005, the Company had goodwill, including product technology, of
$63.2 million and other identifiable intangible assets of $19.7 million.
Comparable balances as of June 30, 2004 were $60.3 million and $19.7 million,
respectively.
Goodwill in the wholesale and retail segments was $27.5 million and $35.7
million, respectively, at June 30, 2005 and $27.5 million and $32.8 million,
respectively, at June 30, 2004. The wholesale segment, at both dates, includes
additional intangible assets of $19.7 million. These assets represent Ethan
Allen trade names which are considered to have indefinite useful lives.
In accordance with SFAS No. 142, the Company does not amortize goodwill and other
intangible assets but, rather, evaluates such assets for impairment on an annual
basis and between annual tests whenever events or circumstances indicate that the
carrying value of the goodwill or other intangible asset may exceed its fair
value. The Company conducts its required annual impairment test during the fourth
quarter of each fiscal year. No impairment losses have been recorded on the
Company’s goodwill or other intangible assets as a result of applying the
provisions of Statement 142.
(7) Borrowings
Total debt obligations at June 30 consist of the following (in thousands):
2005
Industrial revenue bonds
$ 3,855
Other debt and capital lease obligations 8,655
12,510
Total debt
2004
$ 8,455
766
9,221
Less: current maturities and short-
term capital lease obligations
Long-term debt
240
$12,270
4,712
$ 4,509
In June 2004, the Company entered into a five-year, $100.0 million unsecured
revolving credit facility, (the "Credit Agreement") with J.P. Morgan Chase Bank,
as administrative agent, Bank of America, N.A., as syndication agent, and
SunTrust Bank and Wachovia Bank, N.A., as co-documentation agents. The Credit
Agreement includes an accordion feature, providing an additional $50.0 million of
liquidity if needed, as well as sub-facilities for trade and standby letters of
credit of $50.0 million and swingline loans of $3.0 million. Interest is charged
on revolving loans under the Agreement at J.P. Morgan Chase Bank’s Alternate Base
Rate (as defined), or adjusted LIBOR plus either (i) 0.50% (on a first-drawn
basis for borrowings up to 50% of the facility), or (ii) 0.625% (on a fully-drawn
basis for borrowings in excess of 50% of the facility), and is subject to
adjustment arising from changes in the credit rating of Ethan Allen’s senior
unsecured debt. The Credit Agreement provides for the payment of a commitment fee
equal to 0.125% per annum on the average daily, unused amount of the revolving
credit commitment. The Company is also required to pay a fee equal to 0.625% per
annum on the average daily letters of credit outstanding.
45
At June 30, 2005, the Company had $8.0 million in revolving loans and $15.6
million in trade and standby letters of credit outstanding under the Credit
Agreement. Remaining available borrowing capacity under the Credit Agreement was
$76.4 million at that date. For fiscal years ended June 30, 2005, 2004 and 2003,
the weighted-average interest rates applicable under the Company’s revolving
credit facility were 5.95%, 4.19% and 4.49%, respectively.
The Credit Agreement also contains various covenants which limit the ability of
the Company and its subsidiaries to: incur debt; engage in mergers and
consolidations; make restricted payments; sell certain assets; make investments;
and issue stock. The Company is also required to meet certain financial
covenants including fixed charge coverage and leverage ratios. As of June 30,
2005, the Company had satisfactorily complied with all such covenants.
In July 2005, the Company replaced the Credit Agreement with a new five-year,
$200.0 million unsecured revolving credit facility and received authorization
from its Board of Directors to issue up to $200.0 million in senior unsecured
notes. Further discussion of both of these matters can be found in Note 18.
The majority of the Company’s remaining debt is related to industrial revenue
bonds which were issued to finance capital improvements at the Ethan Allen Hotel
and Conference Center, which is adjacent to the Company’s corporate headquarters
in Danbury, Connecticut. These bonds bear interest at a fixed rate of 7.50% and
have a remaining maturity of 6 years.
The Company has loans outstanding in the aggregate amount of approximately $0.6
million related to the modernization of its Beecher Falls, Vermont manufacturing
facility. These loans bear interest at fixed rates ranging from 3.00% to 5.50%
and have remaining maturities of 1 to 22 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 the building, the construction of which was also
financed by such loans.
The Company assumed $4.3 million in third-party debt in connection with its
acquisition of 16 retail stores during fiscal 2003. This debt was in the form of
a line of credit, a mortgage on an existing retail store location and, to a
lesser extent, obligations under certain capital leases. As of June 30, 2005,
$4.2 million of this amount had been repaid. The remaining outstanding balance
relates to the aforementioned capital lease obligations.
Aggregate scheduled maturities of long-term debt for each of the five fiscal
years subsequent to June 30, 2005, and thereafter are as follows (in thousands):
Fiscal Year Ended June 30:
2006
2007
2008
2009
2010
Subsequent to 2010
Total debt payments
$
$
240
38
40
8,041
42
4,109
12,510
(8) Leases
Ethan Allen leases real property and equipment under various operating lease
agreements expiring through 2029. Leases covering retail store locations and
equipment may require, in addition to stated minimums, contingent rentals based
on retail sales or equipment usage. Generally, the leases provide for renewal for
various periods at stipulated rates.
46
Future minimum payments by year, and in the aggregate, under non-cancelable
operating leases consisted of the following at June 30, 2005 (in thousands):
Fiscal Year Ended June 30:
30,317
2006
26,651
2007
23,408
2008
18,629
2009
16,720
2010
Subsequent to 2010
58,172
Total minimum lease payments $ 173,897
$
The above amounts will be offset in the aggregate by minimum future rentals from
subleases of $15.4 million.
Total rent expense for each of the past three fiscal years ended June 30 was as
follows (in thousands):
2005
Basic rentals under operating leases
$ 31,329
Contingent rentals under operating leases 654
31,983
(3,812)
2003
2004
$ 29,361 $ 26,722
691
27,413
(2,269)
796
30,157
(2,926)
Less: sublease rent
Total rent expense
$ 28,171
$ 27,231
$ 25,144
As of June 30, 2005 and 2004, deferred rent credits totaling $7.9 million and
$7.2 million, respectively, and deferred lease incentives totaling $4.0 million
and $1.9 million, respectively, are reflected in the Consolidated Balance Sheets.
These amounts are amortized over the respective underlying lease terms on a
straight-line basis as a reduction of rent expense.
(9) Shareholders' Equity
The Company's authorized capital stock consists of (a) 150,000,000 shares of
Common Stock, par value $.01 per share, (b) 600,000 shares of Class B Common
Stock, par value $.01 per share, and (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, (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"). Shares of Class B Common Stock are convertible to shares
of the Company’s Common Stock upon the occurrence of certain events or other
specified conditions being met. As of June 30, 2005 and 2004, there were no
shares of Preferred Stock or Class B Common Stock issued or outstanding.
On November 21, 2002, the Company’s Board of Directors approved a share
repurchase program authorizing the Company to repurchase up to 2.0 million shares
of its common stock, from time to time, either directly or through agents, in the
open market at prices and on terms satisfactory to the Company. Subsequent to
that date, the Board of Directors has increased the then remaining authorization
as follows: from 904,755 shares to 2.5 million shares on April 27, 2004; from
753,600 shares to 2.0 million shares on November 16, 2004; and from 691,100
shares to 2.0 million shares on April 26, 2005. The Company also retires shares
of unvested restricted stock and, prior to June 30, 2002, repurchased shares of
common stock from terminated or retiring employee’s accounts in the Ethan Allen
Retirement Savings Plan.
All of the Company’s common stock repurchases and retirements are recorded as
treasury stock and result in a reduction of shareholders’ equity. During fiscal
years 2005, 2004 and 2003, the Company repurchased and/or retired the following
shares of its common stock:
47
Common shares repurchased
1,004,445
Cost to repurchase common shares $81,435,589 $39,094,203
$38.92
Average price per share
2,410,400
$33.79
1,457,000
$43,503,500
$29.86
2005(1)(3) 2004(1) 2003(2)
(1) The cost to repurchase shares in fiscal years 2005 and 2004 reflects $745,735 in common
stock repurchases with a June 2004 trade date and a July 2004 settlement date.
(2) The cost to repurchase shares in fiscal years 2003 excludes $7,197,165 in common stock
repurchases with a June 2002 trade date and a July 2002 settlement date.
(3) During fiscal 2005, the Company also retired 405,511 shares of common stock tendered upon
the exercise of outstanding employee stock options. The value of such shares on the date
redeemed was $12,173,440, representing an average price per share of $30.02.
For each of the fiscal years presented above, the Company funded its purchases of
treasury stock with existing cash on hand and cash generated through current
period operations. As of June 30, 2005, the Company had a remaining Board
authorization to repurchase 2.0 million shares.
On May 20, 1996, the Board of Directors adopted a Stockholder Rights Plan (the
"Rights Plan") and declared a dividend of one Right for each share of the
Company’s common stock outstanding as of July 10, 1996. Under the Rights Plan,
each share of the Company’s common stock issued after July 10, 1996 is
accompanied by one Right (or such other number of Rights as results from the
adjustments for stock splits and other events described below). 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
purchase price of $125. 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 acquisition by a person or group of
15% or more of the Company's common stock. Until then, separate Rights
certificates will not be issued and the Rights will not be traded separately from
shares of the Company’s common stock.
If the Rights become exercisable, then, upon exercise of a Right, the Company’s
stockholders (other than the acquirer) would have the right to receive, in lieu
of the Company’s Series C Junior Participating Preferred Stock, a number of
shares of the Company's common stock (or a number of shares of the common stock
of the acquirer, if the Company is acquired, or other assets under various
circumstances) having a market value equal to two times the purchase price.
Under the Rights Plan, as amended by the Board of Directors on July 27, 2004, the
Rights will expire on May 31, 2011, 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 time when the Rights become exercisable.
The Rights Plan provides for adjustment to the number of Rights which accompanies
each share of the Company’s common stock (whether then outstanding or thereafter
issued) upon the occurrence of various events after July 10, 1996, including
stock splits. The Company effected a 2-for-1 stock split on September 3, 1997
and a 3-for-2 stock split on May 24, 1999. Accordingly, at June 20, 2005, each
share of the Company’s common stock was accompanied by one-third of one Right.
(10) Earnings per Share
The following table sets forth the calculation of weighted average shares for the
fiscal years ended June 30 (in thousands):
2005
2004
2003
Weighted average common shares outstanding
for basic calculation
35,400
37,179
37,607
Effect of dilutive stock options and awards
793
1,116
962
Weighted average common shares outstanding,
adjusted for diluted calculation
36,193
38,295
38,569
In 2005, 2004 and 2003, stock options to purchase 778,458, 63,756 and 71,781
shares, respectively, had exercise prices that exceeded the average market price
for each corresponding period. These options have been excluded from the
respective diluted earnings per share calculation as their impact is anti-
dilutive.
48
(11) Employee Stock Plans
The Company has 6,320,139 shares of Common Stock reserved for issuance pursuant
to the following stock-based compensation plans:
1992 Stock Option Plan
The Plan provides for the grant of non-compensatory stock options to eligible
employees and non-employee directors. Stock options granted under the Plan are
non-qualified under Section 422 of the Internal Revenue code and allow for the
purchase of shares of the Company’s Common Stock. The Plan also provides for the
issuance of stock appreciation rights ("SARs") on issued options, however, no
SARs have been issued as of June 30, 2005. 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.
Options awarded are exercisable at the market value of the Company’s Common Stock
at the date of grant and vest ratably over a four-year period for awards to
employees and a two-year period for awards to independent directors.
Mr. Kathwari, the Company’s President and Chief Executive Officer, entered into a
new employment agreement with the Company dated August 1, 2002 (the "2002
Employment Agreement"). This agreement was effective as of July 1, 2002 and
served to supercede all terms and conditions set forth in his previous employment
agreement dated July 1, 1997, which expired on June 30, 2002 (the "1997
Employment Agreement"). Pursuant to the terms of the 2002 Employment Agreement,
Mr. Kathwari was awarded, on August 1, 2002, August 1, 2003, and August 1, 2004,
options to purchase 600,000, 400,000 and 200,000 shares, respectively, of the
Company’s Common Stock. These options were issued at exercise prices of $31.02,
$35.53, and $37.15 per share, respectively, (the price of a share of the
Company’s Common Stock on the New York Stock Exchange as of such dates). The
2002 grant vests ratably over a three-year period, while the fiscal 2003 grant
vests ratably over a two-year period, and the 2004 grant vests ratably over a
one-year period.
The maximum number of shares of Common Stock reserved for issuance under the 1992
Stock Option Plan is 5,490,597 shares.
In connection with the 1992 Stock Option Plan, the following two stock award
plans have also been established:
Restricted Stock Award
In connection with the 2002 Employment Agreement, Mr. Kathwari is entitled to
receive, as of August 1, 2002 and for each successive year through August 1,
2004, an annual award of 10,500 shares of restricted stock, with vesting based on
the performance of the Company's stock price during the three-year period
subsequent to grant as compared to the Standard and Poor’s 500 index. As of June
30, 2005, Mr. Kathwari has not been deemed vested in any of these shares.
Stock Unit Award
In accordance with the provisions of the 1997 Employment Agreement, the Company
established, during fiscal 1998, a book account for Mr. Kathwari, which was
credited with 21,000 Stock Units as of July 1 of each year, commencing July 1,
1997, for a total of up to 105,000 Stock Units, over the initial five-year term
of the 1997 Employment Agreement, with an additional 21,000 Stock Units to be
credited in connection with each of the two optional one-year extensions.
Following the termination of his employment, Mr. Kathwari will receive shares of
Common Stock equal to the number of Stock Units credited to the account. In
connection with the establishment of the 2002 Employment Agreement, Mr. Kathwari
was deemed to have earned 126,000 of the Stock Units contemplated under the
performance provisions of the 1997 Employment Agreement.
Incentive Stock Option Plan
In 1991, pursuant to the Incentive Stock Option Plan, the Company granted to
members of management options to purchase 829,542 shares of Common Stock at an
49
exercise price of $5.50 per share. These options vested ratably over a five-year
period.
Stock option activity during fiscal years 2005, 2004 and 2003 was as follows:
Number of Shares
1992 Stock
Option Plan
3,266,981
Options Outstanding - June 30, 2002
694,800
Granted in 2003
Exercised in 2003
(187,896)
Canceled in 2003 (59,780)
Options Outstanding - June 30, 2003
Granted in 2004
Exercised in 2004
Canceled in 2004 (48,470)
Options Outstanding - June 30, 2004
Granted in 2005
Exercised in 2005
Canceled in 2005 (21,733)
3,260,007
Options Outstanding - June 30, 2005
266,025
3,789,991
474,200
3,714,105
(774,276)
(349,844)
The following table summarizes the stock awards outstanding and exercisable at
June 30, 2005:
Options Outstanding
Options Exercisable
Weighted
Average
Exercise Life Exercise Exercise
Weighted Average
Price Range Number (in years) Price Number Price
Remaining
$ 6.33 to 8.21
21.17 to 5.00
26.25 to 8.31
29.23 to 5.53
37.15 to 1.59
35,900
873,814
810,610
1,232,177
307,506
3,260,007
1.7
2.5
2.4
7.5
8.6
4.9
$
$
35,900 $ 15.02
15.02
21.63
21.63 873,814
27.47
27.47 809,763
32.29
32.53 723,227
38.21 55,754
39.53
28.69 2,498,458 $ 26.91
As stated in Note 1, the Company employs the intrinsic value recognition and
measurement provisions of APB No. 25 in accounting for stock-based compensation.
However, in complying with the disclosure provisions of SFAS No. 123, the Company
estimates the fair value of stock options granted using the Black-Scholes option-
pricing model. The per share weighted average fair value of stock options granted
during fiscal years 2005, 2004 and 2003 was $15.02, $17.45, and $15.94,
respectively.
The fair value of each stock option grant was estimated on the date of grant
using the following assumptions: weighted average risk-free interest rates of
4.32%, 4.19%, and 4.26% for fiscal years 2005, 2004 and 2003, respectively;
dividend yields of 1.69%, 1.11%, and 0.83% for fiscal years 2005, 2004 and 2003,
respectively; expected volatility factors of 38.7%, 43.1%, and 44.3% for fiscal
years 2005, 2004 and 2003, respectively; and expected lives of 8.0 years, 8.4
years and 8.5 years for fiscal 2005, 2004, and 2003, respectively.
The table located in Note 1 illustrates the effect on net income and earnings per
share as if the fair value recognition and measurement provisions of SFAS No. 123
had been applied to all outstanding and unvested awards in each period.
(12) Income Taxes
Total income taxes were allocated as follows for the fiscal years ended June 30
(in thousands):
Income from operations
Shareholders’ equity
Total
2005
2004 2003
$ 50,082
(6,953)
$ 43,129
$ 49,617
(3,750)
$ 45,867
$ 45,350
(1,536)
$ 43,814
The income taxes credited to shareholders’ equity relate to the tax benefit
arising from the exercise of employee stock options.
50
Income tax expense (benefit) attributable to income from operations consists of
the following for the fiscal years ended June 30 (in thousands):
2005 2004
2003
Current:
Federal
State
Total current
Deferred:
Federal
State
Total deferred
Income tax expense
$ 39,423
6,724
46,147
3,445
490
3,935
$ 50,082
$ 42,997
6,500
49,497
$ 35,909
5,152
41,061
132
3,934
(12) 355
120 4,289
$ 45,350
$ 49,617
The following is a reconciliation of expected income tax expense (computed by
applying the federal statutory income tax rate to income before taxes) to actual
income tax expense (in thousands):
Expected income tax expense
State income taxes, net of
federal income tax benefit
Other, net
Actual income tax expense
2005
2004
2003
$ 45,297 35.0 % $ 45,137 35.0% $ 41,956 35.0%
4,918 3.8 %
3,211 2.6%
(133) (0.1)%
183 0.2%
$ 50,082 38.7 % $ 49,617 38.4% $ 45,350 37.8%
4,213 3.2%
267 0.2%
The significant components of the deferred tax expense (benefit) are as follows
(in thousands):
Deferred tax expense (benefit)
Utilization of net operating
loss carryforwards
Total deferred tax expense (benefit)
2005
2004
2003
$ 2,858
$ (1,229)
$ 2,833
1,077
$ 3,935
1,349
$ 120
1,456
$ 4,289
The tax effects of temporary differences between the financial statement carrying
amounts of assets and liabilities and their respective tax bases, which give rise
to deferred tax assets and liabilities, are as follows at June 30 (in thousands):
Deferred tax assets:
Accounts receivable
Inventories
Employee compensation accruals
Restructuring accruals
Other accrued liabilities
Deferred rent credits
Net operating loss carryforwards
Tax credit carryforwards
Total deferred tax asset
Deferred tax liabilities:
Inventories
Property, plant and equipment
Intangible assets other than goodwill
Non-deductible temporary differences
arising as a result of Section 481a
changes in accounting methods
Other
Total deferred tax liability
Net deferred tax liability
2005
2004
$ 817
-
8,091
-
648
4,450
667
206
14,879
1,007
17,691
17,857
889
3,713
41,157
$ 26,278
$ 960
3,744
7,603
9,057
3,015
3,123
1,744
635
29,881
-
26,348
14,525
7,719
3,632
52,224
$ 22,343
51
The deferred income tax balances are classified in the Consolidated Balance
Sheets as follows at June 30 (in thousands):
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Total net deferred tax liability
2005
2004
$ 10,366
4,513
1,007
40,150
$ 26,278
$ 26,026
3,855
-
52,224
$ 22,343
Note: Current assets and current liabilities and non-current assets and non-current liabilities
have been presented net in the Consolidated Balance Sheets.
At June 30, 2005, the Company has, for federal income tax purposes, approximately
$1.9 million of net operating loss carryforwards ("NOLs"). The Company’s
utilization of these remaining NOLs, which expire in 2022, is limited, pursuant
to Section 381(c) of the Internal Revenue Code, based upon the separate earnings
and/or eventual liquidation of the wholly-owned subsidiary to which the NOLs
relate.
Based on the Company’s historical and anticipated future pre-tax earnings,
management believes that it is more likely than not that the Company’s deferred
tax assets will be realized.
(13) Employee Retirement Programs
The Ethan Allen Retirement Savings Plan
The Ethan Allen Retirement Savings Plan (the "Savings Plan") is a defined
contribution plan, which is offered to substantially all employees of the Company
who have completed three consecutive months of service regardless of hours
worked.
Ethan Allen may, at its discretion, make a matching contribution to the 401(k)
portion of the Savings Plan on behalf of each participant, provided the
contribution does not exceed the lesser of 50% of the participant's contribution
or $1,300 per participant per Savings Plan year. Total profit sharing and 401(k)
Company match expense amounted to $4.0 million in 2005, $3.7 million in 2004, and
$3.9 million in 2003.
Other Retirement Plans and Benefits
Ethan Allen provides additional benefits to selected members of senior and middle
management in the form of previously entered deferred compensation arrangements
and a management cash bonus and other incentive programs. The total cost of
these benefits was $3.0 million, $3.2 million, and $3.3 million in 2005, 2004 and
2003, respectively.
(14) Litigation
The Company and its subsidiaries are subject to various environmental laws and
regulations. Under these laws, the Company and/or its subsidiaries are, or may
be, required to remove or mitigate the effects on the environment of the disposal
or release of certain hazardous materials.
As of June 30, 2005, the Company and/or its subsidiaries has been named as a
potentially responsible party ("PRP") with respect to the remediation of four
active sites currently listed, or proposed for inclusion, on the National
Priorities List ("NPL") under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, ("CERCLA"). The sites are
located in Lyndonville, Vermont; Southington, Connecticut; High Point, North
Carolina; and Atlanta, Georgia.
With respect to the Lyndonville, Vermont site, the Company has substantially
resolved its liability by completing remedial construction activities. The
Company continues to work with the U.S. Environmental Protection Agency ("EPA")
and has obtained a certificate of construction completion, subject to certain
limited conditions. The Company does not anticipate incurring significant costs
52
with respect to the Southington, Connecticut, High Point, North Carolina, or
Atlanta, Georgia sites as it believes that it is not a major contributor based on
the very small volume of waste generated by the Company in relation to total
volume at those sites. Specifically, with respect to the Southington site, the
Company’s volumetric share is less than 1% of over 51 million gallons disposed of
at the site and there are more than 1,000 PRPs. With respect to the High Point
site, the Company’s volumetric share is less than 1% of over 18 million gallons
disposed of at the site and there are more than 2,000 PRPs, including 1,100 "de-
minimis" parties (of which Ethan Allen is one). With respect to the Atlanta site,
a former solvent recycling/reclamation facility, the Company’s volumetric share
is less than 1% of over 20 million gallons disposed of at the site by more than
1,700 PRPs. In all three cases, the other PRPs consist of local, regional,
national and multi-national companies.
Liability under CERCLA may be joint and several. As such, to the extent certain
named PRPs are unable, or unwilling, to accept responsibility and pay their
apportioned costs, the Company could be required to pay in excess of its pro rata
share of incurred remediation costs. The Company’s understanding of the
financial strength of other PRPs has been considered, where appropriate, in the
determination of the Company’s estimated liability.
In addition, in July 2000, the Company was notified by the State of New York (the
"State") that it may be named a PRP in a separate, unrelated matter with respect
to a site located in Carroll, New York. To date, no further notice has been
received from the State and an initial environmental study has not yet been
conducted at this site.
As of June 30, 2005, the Company believes that established reserves related to
these environmental contingencies are adequate to cover probable and reasonably
estimable costs associated with the remediation and restoration of these sites.
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. Such investigations and proceedings
typically concern air emissions, water discharges, and/or management of solid and
hazardous wastes. The Company believes that its facilities are in material
compliance with all such applicable laws and regulations.
Regulations issued under the Clean Air Act Amendments of 1990 required the
industry to reformulate certain furniture finishes or institute process changes
to reduce emissions of volatile organic compounds. Compliance with many of these
requirements has been facilitated through the introduction of high solids coating
technology and alternative formulations. In addition, the Company has instituted
a variety of technical and procedural controls, including reformulation of
finishing materials to reduce toxicity, implementation of high velocity low
pressure spray systems, development of storm water protection plans and controls,
and further development of related inspection/audit teams, all of which have
served to reduce emissions per unit of production. Ethan Allen remains committed
to implementing new waste minimization programs and/or enhancing existing
programs with the objective of (i) reducing the total volume of waste, (ii)
limiting the liability associated with waste disposal, and (iii) continuously
improving environmental and job safety programs on the factory floor which serve
to minimize emissions and safety risks for employees. The Company will continue
to evaluate the most appropriate, cost effective, control technologies for
finishing operations and design production methods to reduce the use of hazardous
materials in the manufacturing process.
(15) Comprehensive Income
Total comprehensive income represents the sum of net income and items of "other
comprehensive income or loss" that are reported directly in equity. Such items
may include foreign currency translation adjustments, minimum pension liability
adjustments, fair value adjustments on certain derivative instruments, and
unrealized gains and losses on certain investments in debt and equity securities.
The Company has reported its total comprehensive income in the Consolidated
Statement of Shareholders’ Equity.
53
The Company’s accumulated other comprehensive income, which is attributable
solely to foreign currency translation adjustments for the periods presented in
the Consolidated Balance Sheets, was $1.1 million at June 30, 2005 and $0.6
million at June 30, 2004. These amounts are the result of changes in foreign
currency exchange rates related to the operations of 5 Ethan Allen-owned retail
stores located in Canada. Foreign currency translation adjustments exclude income
tax expense (benefit) given that the earnings of non-U.S. subsidiaries are deemed
to be reinvested for an indefinite period of time.
(16) Segment Information
The Company's reportable segments represent strategic business areas which,
although they operate separately, both offer the Company’s complete line of home
furnishings through their own distinctive services. The Company’s operations are
classified into two such segments: wholesale and retail.
The wholesale segment is principally involved in the development of the Ethan
Allen brand, which encompasses the design, manufacture, domestic and off-shore
sourcing, sale and distribution of a full range of home furnishings to a network
of independently-owned and Ethan Allen-owned stores as well as related marketing
and brand awareness efforts. Wholesale profitability includes the wholesale gross
margin, which is earned on wholesale sales to all retail stores, including Ethan
Allen-owned stores.
The retail segment sells home furnishings to consumers through a network of
Company-owned stores. Retail profitability includes the retail gross margin,
which represents the difference between retail sales price and the cost of goods
purchased from the wholesale segment.
While the manner in which the Company’s home furnishings are marketed and sold is
consistent, the nature of the underlying recorded sales (i.e. wholesale versus
retail) and the specific services that each operating segment provides (i.e.
wholesale manufacture and distribution versus retail sales) are different. Within
the wholesale segment, the Company maintains revenue information according to
each respective product line (i.e. case goods, upholstery, or home accessories
and other).
A breakdown of wholesale sales by these product lines for each of the last three
fiscal years is provided below:
Case Goods
Upholstered Products
Home Accessories and Other
Fiscal Year Ended June 30,
2003
2005
53%
49%
33
36
14
15
100%
2004
52%
34
14
100%
100%
Revenue information by product line is not readily available within the retail
segment as it is not practicable. However, because wholesale production and sales
are matched, for the most part, to incoming orders, the Company believes that the
allocation of retail sales would be similar to that of the wholesale segment.
The Company evaluates performance of the respective segments based upon revenues
and operating income. Inter-segment eliminations result, primarily, from the
wholesale sale of inventory to the retail segment, including the related profit
margin. Inter-segment eliminations also include items not allocated to
reportable segments.
The following table presents segment information for each of the fiscal years
ended June 30, 2005, 2004, and 2003 (in thousands):
2005
2004
2003
Net Sales:
Wholesale segment
Retail segment
Elimination of inter-company sales
Consolidated Total
$663,218
586,234
$673,771
576,186
(300,440) (294,850) (280,110)
$955,107
$949,012
$660,986
526,388
$907,264
54
Operating Income:
$108,033
Wholesale segment (1)
11,721
Retail segment
Adjustment for inter-company profit (2) 351 6,650
$126,404
Consolidated Total
$115,863
12,764
$128,978
$109,341
13,387
(3,271)
$119,457
2005
2004
2003
Capital Expenditures:
Wholesale segment
Retail segment
Acquisitions (3)
Consolidated Total
$ 4,897
25,404
4,080
$ 34,381
$ 6,801
16,733
1,442
$ 24,976
$ 11,759
16,690
11,332
$ 39,781
Total Assets:
Wholesale segment
Retail segment
Inventory profit elimination (4)
Consolidated Total
$352,817
311,263
(31,223)
$632,857
$387,041
302,043
(30,717)
$658,367
$467,963
303,555
(36,510)
$735,008
(1) Operating income for the wholesale segment includes pre-tax restructuring and impairment
charges, net of $12.5 million and $13.1 million recorded in fiscal years 2004 and 2003,
respectively.
(2) Represents the change in the inventory profit elimination entry necessary to adjust for the
embedded wholesale profit contained in Ethan Allen-owned store inventory existing at the end of
the period. See footnote 4 below.
(3) Acquisitions include the purchase of 6 retail stores in 2005, 4 retail stores in 2004 and 16
retail stores in 2003.
(4) Represents the embedded wholesale profit contained in Ethan Allen-owned store inventory that
has not yet been realized. These profits are realized when the related inventory is sold.
There are 28 independent retail stores located outside the United States. Less
than 2.0% of the Company’s net sales are derived from sales to these retail
stores.
(17) Selected Quarterly Financial Data (Unaudited)
Tabulated below are certain data for each quarter of the fiscal years ended June
30, 2005, 2004, and 2003 (in thousands, except per share data):
Fiscal 2005:
September 30 December 31
March 31
June 30
Quarter Ended
$245,252
Net sales
119,444
Gross profit
Net income
23,134
Earnings per basic share 0.52 0.65
Earnings per diluted share
0.63
Dividend declared per
$230,346
110,382
18,758
0.51
$231,154 $242,260
120,778
19,511
0.57
0.56
110,450
17,935
0.51
0.50
common share
0.15
0.15
0.15
0.15
Fiscal 2004:
Net sales
$241,150
Gross profit
116,268
24,197
Net income
Earnings per basic share 0.50 0.65
Earnings per diluted share
0.63
Dividend declared per
common share
$222,765
108,432
18,690
0.10
0.10
0.49
Fiscal 2003:
$229,713
Net sales
115,793
Gross profit
22,870
Net income
Earnings per basic share 0.53 0.61
Earnings per diluted share
0.59
Dividend declared per
common share
$216,529
106,704
19,955
0.06
0.51
0.06
$244,592 $246,600
117,073
13,460
0.36
0.35
119,262
23,131
0.62
0.60
0.10
3.10(1)
$224,574 $236,448
114,904
20,360
0.55
0.54
111,939
11,439
0.30
0.30
0.06
0.07
(1) On April 27, 2004, the Company declared a special, one-time cash dividend of $3.00 per
common share, payable on May 27, 2004 to shareholders of record as of May 10, 2004.
55
(18) Subsequent Events
Stock Repurchases and Remaining Authorization
Subsequent to June 30, 2005 and through September 9, 2005, the Company
repurchased, in 17 separate open market transactions, an additional 1,140,000
shares of its common stock at a total cost of $36.8 million, representing an
average price per share of $32.28. As of September 9, 2005, the Company had a
remaining Board authorization to repurchase 860,000 shares.
Revolving Credit Facility
On July 21, 2005, the Company entered into a five-year, $200.0 million unsecured
revolving credit facility with J.P. Morgan Chase Bank, N.A. ("JP Morgan"), as
administrative agent, and certain other lenders (the "New Credit Agreement").
The New Credit Agreement replaces the five-year, $100.0 million unsecured credit
facility, effective June 2004, which is discussed further in Note 7.
The New Credit Agreement consists of a $200.0 million unsecured revolving credit
facility and includes an accordion feature providing an additional $100.0 million
of liquidity, if needed. In addition, the New Credit Agreement contains sub-
facilities for trade and standby letters of credit of $100.0 million and swing
line loans of $5.0 million. Revolving loans under the New Credit Agreement bear
interest at JP Morgan’s Alternate Base Rate (as defined), or adjusted LIBOR plus
0.40% (plus a utilization fee of 0.125% during any period that usage of the
facility is 50% or more of the total commitment under the facility), and are
subject to adjustment resulting from changes in the credit rating of Ethan
Allen’s senior unsecured debt. The New Credit Agreement also provides for the
payment of (i) a facility fee equal to 0.10% per annum on the average daily
amount (whether used or unused) of the revolving credit commitment and (ii) a
letter of credit fee equal to 0.525% per annum on the average daily letters of
credit outstanding.
The New Credit Agreement has a maturity date of July 21, 2010 and there are no
minimum repayments required during the term of the facility. The revolving loans
may be borrowed, repaid and re-borrowed over the term of the facility until final
maturity.
The New Credit Agreement also contains various covenants which limit the ability
of the Company to: incur debt; engage in mergers and consolidations; make
restricted payments; sell certain assets; make investments; and issue stock. The
Company is also required to meet certain financial covenants including a fixed
charge coverage ratio and a leverage ratio. In addition, the New Credit
Agreement contains customary representations and warranties, conditions to
borrowing (including the continued accuracy of such representations and
warranties) and events of default (the occurrence of which would entitle the
lenders to accelerate the maturity of any outstanding borrowings and terminate
their commitment to make future loans).
As of September 9, 2005, the Company had revolving loans and trade and standby
letters of credit outstanding under the New Credit Agreement totaling $17.0
million and $15.6 million, respectively. Remaining available borrowing capacity
under the New Credit Agreement at that date was $167.4 million.
Senior Unsecured Notes
On July 26, 2005, the Board of Directors of the Company authorized the issuance
of up to $200.0 million in senior unsecured notes. At this time, the specific
terms of the proposed financing, including the duration of the notes and the
related pricing, have not yet been determined, and closing of the issuance is
subject to satisfactory determination thereof, changes in capital market
conditions, material changes affecting the Company or its business or industry
and other factors. If completed as authorized, the Company intends to utilize
the proceeds from the issuance for general corporate purposes including, but not
limited to, (i) retail store expansion, (ii) investment in manufacturing
operations, (iii) acquisitions, (iv) the payment of dividends, and (v) the
repurchase of shares of the Company’s common stock in the open market. The
56
Company has no present commitments or understandings as to any material
acquisition.
In connection with the forecasted issuance of the proposed notes, the Company
entered into 6 separate forward contracts to hedge the risk-free interest rate
associated with $108.0 million of the related debt in order to minimize the
negative impact of interest rate fluctuations on the Company’s earnings, cash
flows and equity. The forward contracts were entered into with a major banking
institution thereby minimizing the risk of credit loss. These hedging
transactions were executed during July and August 2005 and, as such, have not
been reflected in the Company’s financial position, results of operations or cash
flows for the year ended June 30, 2005. The Company will apply the provisions of
SFAS No. 133 in accounting for these derivative instruments.
Acquisitions
On July 1, 2005, the Company acquired three Ethan Allen retail stores from an
independent retailer for total consideration of approximately $1.7 million. As a
result of this acquisition, the Company (i) recorded additional inventory of
approximately $1.4 million and other assets of approximately $0.1 million, and
(ii) assumed customer deposits of approximately $0.6 million and other
liabilities of approximately $0.1 million. Goodwill associated with this
acquisition totaled approximately $0.9 million and represents the premium paid to
the seller related to the acquired business (i.e. market presence) and other fair
value adjustments to the assets acquired and liabilities assumed.
Restructuring and Impairment Charge
On September 7, 2005, the Company announced a plan to convert its Dublin,
Virginia case goods manufacturing facility into a regional distribution center.
In connection with this initiative, the Company will permanently cease production
at the Dublin location and consolidate the distribution operations of its
existing Old Fort, North Carolina location into the new, larger facility.
The decision impacts approximately 325 employees, of which the Company expects
approximately 75 to remain employed by Ethan Allen in new positions. The net
reduction in headcount is anticipated to occur throughout the second quarter of
fiscal 2006. The Company will record a pre-tax restructuring and impairment
charge of approximately $4.0 to $5.0 million ($2.5 to $3.1 million, after-tax)
for costs associated with this initiative, of which approximately $1.5 million
relates to employee severance and benefits and other plant exit costs, and
approximately $2.5 to $3.5 million relates to fixed asset impairment charges,
primarily for real property and machinery and equipment.
57
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
No changes in, or disagreements with, accountants as a result of accounting or
financial disclosure matters, occurred during fiscal years 2005, 2004 or 2003.
Item 9A. Controls and Procedures
Management's Report on Disclosure Controls and Procedures
Ethan Allen’s management, including the Chairman of the Board and Chief Executive
Officer ("CEO") and the Vice President-Finance ("VPF"), conducted an evaluation of the
effectiveness of disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) as of the end of the period covered by this report. Based on such
evaluation, the CEO and VPF have concluded that, as of June 30, 2005, the Company’s
disclosure controls and procedures were effective in ensuring that material information
relating to the Company (including its consolidated subsidiaries), which is required to
be included in the Company’s periodic filings under the Exchange Act, was made known to
them in a timely manner.
Management's Report on Internal Control over Financial Reporting
The Company's management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange Act
Rule 13a-15(f). Under the supervision and with the participation of management,
including the CEO and VPF, Ethan Allen conducted an evaluation of the effectiveness of
its internal control over financial reporting based on the framework in Internal
Control - Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission ("COSO"). Based on that evaluation, management concluded that
the Company's internal control over financial reporting was effective as of June 30,
2005.
KPMG LLP, the independent registered public accounting firm that audited the
consolidated financial statements included in this Annual Report on Form 10-K, has also
audited (i) management's assessment of the effectiveness of the Company's internal
control over financial reporting as of June 30, 2005, and (ii) the effectiveness of the
Company’s internal control over financial reporting as of June 30, 2005, as stated in
their report incorporated by reference under Item 8.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) during the fourth fiscal quarter ended June 30, 2005 that have materially
affected, or are reasonably likely to materially affect, the Company’s internal control
over financial reporting.
Item 9B. Other Information
None.
58
PART III
Except as set forth below, the information required by Items 10, 11, 12, 13 and
14 will appear in the Ethan Allen Interiors Inc. proxy statement for the Annual Meeting
of Shareholders scheduled to be held on November 14, 2005 (the "Proxy Statement"). The
Proxy Statement, which will be filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934, is incorporated by reference in this Annual Report pursuant to
General Instruction G(3) of Form 10-K (other than the portions thereof not deemed to be
"filed" for the purpose of Section 18 of the Securities Exchange Act of 1934). In
addition, the information set forth below is provided as required by Item 10 and the
listing standards of the New York Stock Exchange ("NYSE").
Item 10. Directors and Executive Officers of the Registrant
Code of Ethics
The Company has adopted a code of ethics that applies to its principal executive
officer, principal financial officer, principal accounting officer or controller, or
persons performing similar functions. The Company’s code of ethics can be accessed via
its website at www.ethanallen.com/governance.
The Company intends to disclose any amendment of its Code of Ethics, or waiver of
provision thereof, applicable to the Company’s principal executive officer and/or
principal financial officer, or persons performing similar functions, on its website
within 4 days of the date of such amendment or waiver. In the case of a waiver, the
nature of the waiver, the name of the person to whom the waiver was granted, and the
date of the waiver will also be disclosed.
Information contained on, or connected to, the Company’s website is not
incorporated by reference into this Form 10-K and should not be considered part of this
or any other report that the Company files with, or furnishes to, the SEC.
Audit Committee Financial Expert
The Company’s Board of Directors has determined that the Company has three "audit
committee financial experts", as defined under Item 401 of Regulation S-K of the
Securities Exchange Act of 1934, currently serving on its Audit Committee. Those
members of the Company’s Audit Committee who are deemed to be audit committee financial
experts are as follows:
Clinton A. Clark
Horace G. McDonell
Richard A. Sandberg
All persons identified as audit committee financial experts are independent from
management as defined by Item 7(d)(3), of Schedule 14A.
59
Item 12. Security Ownership of Certain Beneficial Owners and Management
Equity Compensation Plan Information
The following table sets forth certain information regarding the Company’s equity
compensation plans as of June 30, 2005.
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
Weighted-average
exercise price of
outstanding
options, warrants
and rights
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in first
column)
3,417,507
$27.37
-
3,417,507
-
$27.37
470,131
-
470,131
Plan Category
Equity compensation plans
approved by security
holders (1)
Equity compensation plans
not approved by security
holders (2)
Total
(1) Amount includes stock options outstanding under the Company’s 1992 Stock Option Plan (the "Plan") as
well as unvested shares of restricted stock and vested Stock Units which have been provided for under
the provisions of the Plan. See Note 11 to the Company’s Consolidated Financial Statements included
under Item 8 of this Annual Report.
(2) As of June 30, 2005, the Company does not maintain any equity compensation plans which have not been
approved by its shareholders.
Mr. Kathwari, Chief Executive Officer and President, has certified to the NYSE,
pursuant to Section 303A.12 of the NYSE’s listing standards, that he is unaware of any
violation by the Company of the NYSE’s corporate governance listing standards.
NYSE Certification
60
Item 15. Exhibits and Financial Statement Schedules
I.
Listing of Documents
PART IV
(1) Financial Statements. The Company's Consolidated Financial Statements,
included under Item 8 hereof, as required at June 30, 2005 and 2004, and
for the years ended June 30, 2005, 2004 and 2003, 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 Schedule. The Company’s Financial Statement Schedule,
appended hereto, as required for the years ended June 30, 2005, 2004 and
2003, consists of the following:
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 consolidated financial statements or notes thereto.
(3) The following Exhibits are filed as part of this report on Form 10-K:
Exhibit
Number
3(a)
3(a)-1
3(a)-2
3(a)-3
3(b)
3(c)
*
3(c)-1
3(d)
Exhibit
Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3(c) to the Registration
Statement on Form S-1 of the Company filed with the SEC on
March 16, 1993)
Certificate of Amendment to Restated Certificate of
Incorporation as of August 5, 1997 (incorporated by reference
to Exhibit 3(c)-2 to the Quarterly Report on Form 10-Q of the
Company filed with the SEC on May 13, 1999)
Second Certificate of Amendment to Restated Certificate of
Incorporation as of March 27, 1998 (incorporated by reference
to Exhibit 3(c)-3 to the Quarterly Report on Form 10-Q of the
Company filed with the SEC on May 13, 1999)
Third Certificate of Amendment to Restated Certificate of
Incorporation as of April 28, 1999 (incorporated by reference
to Exhibit 3(c)-4 to the Quarterly Report on Form 10-Q of the
Company filed with the SEC on May 13, 1999)
Certificate of Designation relating to the New Convertible
Preferred Stock (incorporated by reference to the Registration
Statement on Form S-1 of the Company filed with the SEC on
March 16, 1993)
Certificate of Designation relating to the Series C Junior
Participating Preferred Stock (incorporated by reference to
Exhibit 1 to Form 8-A of the Company filed with the SEC on
July 3, 1996)
Certificate of Amendment of Certificate of Designation of
Series C Junior Participating Preferred Stock
Amended and Restated By-laws of the Company (incorporated by
reference to Exhibit 3(d) to the Registration Statement on Form
S-1 of the Company filed with the SEC on March 16, 1993)
61
4(a)
*
4(a)-1
*
*
*
*
*
*
*
10(a)
10(b)
10(b)-1
10(b)-2
10(b)-3
10(b)-4
10(b)-5
10(b)-6
10(c)
10(c)-1
10(d)
10(e)
10(e)-1
10(e)-2
10(f)
Rights Agreement, dated July 26, 1996, between the Company and
Harris Trust and Savings Bank (incorporated by reference to
Exhibit 10.1 to the Current Report on Form 8-K of the Company
filed with the SEC on July 3, 1996)
Amendment No. 1 to Rights Agreement, dated as of December 23,
2004 between the Company and Harris Trust Savings Bank and
Computershare Investor Services, LLC
Restated Directors Indemnification Agreement dated March 1993,
among the Company and Ethan Allen and their Directors
(incorporated by reference to Exhibit 10(c) to the Registration
Statement on Form S-1 of the Company filed with the SEC on
March 16, 1993)
The Ethan Allen Retirement Savings Plan as Amended and
Restated, effective January 1, 2001
First Amendment of The Ethan Allen Retirement Savings Plan as
Amended and Restated
Second Amendment of The Ethan Allen Retirement Savings Plan as
Amended and Restated
Third Amendment of The Ethan Allen Retirement Savings Plan as
Amended and Restated
Fourth Amendment of The Ethan Allen Retirement Savings Plan as
Amended and Restated
Fifth Amendment of The Ethan Allen Retirement Savings Plan as
Amended and Restated
Sixth Amendment of The Ethan Allen Retirement Savings Plan as
Amended and Restated
General Electric Capital Corporation Credit Card Program
Agreement dated August 25, 1995 (incorporated by reference from
Exhibit 10(h) to the Annual Report on Form 10-K of the Company
filed with the SEC on September 21, 1995)
First Amendment to Credit Card Program Agreement dated February
22, 2000 (incorporated by reference to Exhibit 10(h)-1 to the
Annual Report on Form 10-K of the Company filed with the SEC on
September 13, 2000)
Sales Finance Agreement, dated June 25, 1999, between the
Company and MBNA America Bank, N.A. (incorporated by reference
to Exhibit 10(j) to the Annual Report on Form 10-K of the
Company filed with the SEC on September 13, 2000)
Amended and Restated Consumer Credit Card Program Agreement,
dated February 22, 2000, by and among the Company and Monogram
Credit Card Bank of Georgia (incorporated by reference to
Exhibit 10(k) to the Annual Report on Form 10-K of the Company
filed with the SEC on September 13, 2000)
Second Amendment to Amended and Restated Consumer Credit Card
Program Agreement, dated February 1, 2002, by and among the
Company and Monogram Credit Card Bank of Georgia (incorporated
by reference to Exhibit 10(k)-2 to the Quarterly Report on Form
10-Q of the Company filed with the SEC on May 13, 2002)
(confidential treatment requested as to certain portions)
Third Amendment to Amended and Restated Consumer Credit Card
Program Agreement, dated July 26, 2002, by and among the
Company and Monogram Credit Card Bank of Georgia (incorporated
by reference to Exhibit 10(k)-3 to the Quarterly Report on Form
10-Q of the Company filed with the SEC on November 12, 2002)
Employment Agreement, dated August 1, 2002, between Mr.
Kathwari and Ethan Allen Interiors Inc. (incorporated by
reference to Exhibit 10(l) to the Annual Report on Form 10-K of
the Company filed with the SEC on September 30, 2002)
62
10(f)-1
*
10(g)
10(h)
10(h)-1
10(h)-2
10(h)-3
10(h)-4
10(h)-5
21
23
31.1
31.2
32.1
32.2
*
*
*
*
*
*
*
*
*
First Amendment to Employment Agreement, dated August 1, 2002,
between Mr. Kathwari and Ethan Allen Interiors Inc.
(incorporated by reference to Exhibit 10(l)-1 to the Quarterly
Report on Form 10-Q of the Company filed with the SEC on May
15, 2003)
Credit Agreement, dated as of July 21, 2005, by and among Ethan
Allen Global, Inc., Ethan Allen Interiors Inc., the J.P. Morgan
Chase Bank, N.A., Citizens Bank of Massachusetts, Wachovia
Bank, N.A. and certain other lenders (confidential treatment
requested as to certain portions)
Amended and Restated 1992 Stock Option Plan (incorporated by
reference to Exhibit 4(c)-2 to the Quarterly Report on Form 10-
Q of the Company filed with the SEC on November 14, 1997)
First Amendment to Amended and Restated 1992 Stock Option Plan
(incorporated by reference to Exhibit 4(c)-3 to the Quarterly
Report on Form 10-Q of the Company filed with the SEC on
February 12, 1999)
Second Amendment to Amended and Restated 1992 Stock Option Plan
(incorporated by reference to Exhibit 4(c)-4 to the Quarterly
Report on Form 10-Q of the Company filed with the SEC on
February 14, 2000)
Third Amendment to Amended and Restated 1992 Stock Option Plan
Form of Option Agreement for Grants to Independent Directors
Form of Option Agreement for Grants to Employees
List of wholly-owned subsidiaries of the Company
Report and Consent of KPMG LLP
Rule 13a-14(a) Certification of Principal Executive Officer
Rule 13a-14(a) Certification of Principal Financial Officer
Section 1350 Certification of Principal Executive Officer
Section 1350 Certification of Principal Financial Officer
* Filed herewith.
63
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
As of and for the Fiscal Years Ended June 30, 2005, 2004 and 2003
(In thousands)
Accounts Receivable:
Sales discounts, sales returns and
allowance for doubtful accounts:
June 30, 2005 $
June 30, 2004 $
June 30, 2003 $
Balance at
Beginning
of Period
2,194
1,490
2,019
Additions
Charged to
Income
563
1,269
354
$
$
$
Adjustments
and/or
Deductions
(655)
(565)
(883)
$
$
$
Balance at
End of
Period
2,102
2,194
1,490
$
$
$
Inventory:
Inventory valuation allowance:
June 30, 2005 $
June 30, 2004 $
June 30, 2003 $
3,181
4,668
4,517
1,107
$
$ 1,075
$
772
$ (1,597)
$ (2,562)
$
(621)
$
$
$
2,691
3,181
4,668
64
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.
SIGNATURES
ETHAN ALLEN INTERIORS INC.
(Registrant)
By /s/ M. Farooq Kathwari
(M. Farooq Kathwari)
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
By /s/ Jeffrey Hoyt
(Jeffrey Hoyt)
Vice President, Finance and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
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
(M. Farooq Kathwari)
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
/s/ Jeffrey Hoyt
(Jeffrey Hoyt)
Vice President, Finance and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
/s/ Clinton A. Clark
(Clinton A. Clark)
Director
/s/ Kristin Gamble
(Kristin Gamble)
Director
/s/ Horace G. McDonell
(Horace G. McDonell)
Director
/s/ Edward H. Meyer
(Edward H. Meyer)
Director
/s/ Richard A. Sandberg
(Richard A. Sandberg)
Director
/s/ Frank G. Wisner
(Frank G. Wisner)
Director
Date: September 12, 2005
65
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redefined
redefining our
entreprenuerial spirit,
our products, and the
ethan allen experience
2 0 0 5 A N N U A L R E P O R T
©2005 ETHAN ALLEN GLOBAL, INC.