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©2008 ETHAN ALLEN GLOBAL, INC.
A N N U A L R E P O R T 2 0 0 8
F I N A N C I A L H I G H L I G H T S
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
2008
$980,045
$526,065
$96,000
$58,072
2007
$1,005,312
$526,583
$111,119
$69,227
2006
$1,066,390
$540,982
$142,672
$85,682
Net income per diluted share (a)
Diluted weighted average common shares outstanding
$1.97
29,470
$2.15
32,261
$2.51
34,086
Balance Sheet Data
Working capital
Current ratio
Total assets
Total debt, including capital lease obligations
Shareholders’ equity
Debt as % of equity
Debt as % of capital
Cash Returned to Shareholders
Dividends paid
Cost of shares repurchased
Number of shares repurchased
$174,676
2.29 to 1
$761,973
$203,029
$375,773
54.0%
35.1%
$234,990
2.59 to 1
$802,598
$202,908
$409,642
49.5%
33.1%
$278,038
2.88 to 1
$814,100
$202,787
$417,442
48.6%
32.7%
$25,495
$69,745
2.3 million
$24,797
$53,956
1.5 million
$23,128
$85,107
2.5 million
(a) Includes the effects of pre-tax restructuring and impairment charges totaling $6.8 million,
$13.4 million and $4.2 million in Fiscal Years 2008, 2007, and 2006, respectively.
Net Income per
Diluted Share
$2.51
$2.19
$2.08
$2.15
$1.97
Net Income
(in millions)
$79.5 $79.3
$85.7
Net Sales
(in millions)
$1066.4
$955.1 $949.0
$1005.3
$980.0
$69.2
$58.1
‘04
‘05
’06
’07
‘08
‘04
‘05
’06
’07
‘08
‘04
‘05
’06
’07
‘08
modern
chic
sexy
elegant
f resh
cool
pretty
hip
“New Attitude,” our dynamic new
television commercial, has a unique
percussive rhythm and striking
modern attitude. A fluid medley
of exciting images and words, the
commercial is a high-impact vehicle
for spreading news of our fashion
sensibility to younger—and younger-
minded—demographics.
D E A R
S H A R E H O L D E R S
I’m pleased to report that Ethan Allen has performed well in a difficult economic environment.
We ended the fiscal year with a 2.5% decline in sales and maintained a healthy 10.5% operating
margin, excluding restructuring and impairment charges. During the year we invested about $70
million to repurchase about 2.3 million shares, and at year end our Board of Directors authorized
a 13.6% increase in our quarterly cash dividend, resulting in an annualized dividend amount of
$1 per share. We ended the year with a healthy cash balance of $74 million.
We put ourselves in a strong position by preparing for the downturn. Now we’re looking forward
to the next business cycle. We have strengthened our ability to provide what people want today:
professional interior design solutions and service to help them decorate their homes with stylish,
good quality products at reasonable prices. We have added details to the product styling and
further improved levels of quality while delivering our products faster. And for several years now,
our everyday pricing has given our clients the best price on our full line of products whenever
the time is right for them.
F A R O O Q K A T H W A R I
Chairman of the Board,
President and CEO,
Ethan Allen Interiors Inc.
This year we have further strengthened our business in many ways.
We opened nineteen new Design Centers in the United States and four abroad. We ended
the year with a stronger retail network in place with a total of 295 Design Centers, 159 of which
are operated by the company.
We reduced our number of retail service centers and streamlined our logistics operations to
help us absorb higher energy costs.
We acquired a cut-and-sew facility in Mexico to support our four upholstery manufacturing
plants in the United States.
We invested in technology to support our manufacturing and retail operations, to improve
efficiencies, and to work on developing a new website that will give clients much greater access
to information and personal service.
We strengthened our support for our design consultants through new training and hiring standards.
We increased our national advertising presence to get across our message “we can help as little
or as much as you like.”SM
The June, 2008, opening of our new flagship Design Center at 1010 Third Avenue in the interior
design district of New York City, and the launch of a dynamic new television campaign—which
encourages prospective clients to come in and make an appointment—reflect our evolution into
a business that provides interior design solutions and service. Our new website, which will roll
out later this year, will be innovative in combining the personal service of design consultants with
new technology, giving us a unique competitive advantage.
As we continue to balance our domestic manufacturing and offshore sourcing, we maintain a
strong core of manufacturing with four upholstery plants, four wood furniture plants, and one
accessory plant in the United States. Our domestic wood factories have the advantage of being
located close to well-managed, sustainable hardwood forests.
With economic conditions affecting consumer confidence, it makes sense to carefully control
costs, but it is also important to make the investments necessary to be ready for growth when
consumer confidence improves. We have done both, and the initiatives we have taken position
us well to continue to be financially strong and to perform well.
We appreciate your continued confidence and support.
Sincerely,
T H E W E L L - D E S I G N E D H O M E . T H A T ’ S O U R J O B . 1
“A smart woman
never overspends.”
Plantation Poster Bed, Queen $1599
Canopy Frame $259
we can help as little or as much as you like
SM
C O M P L I M E N T A R Y D E S I G N S E R V I C E . D R O P I N O R M A K E A N A P P O I N T M E N T T O D A Y.
W W W. E T H A N A L L E N . C O M © 2 0 0 8 E T H A N A L L E N G L O B A L , I N C .
G O T A N A P P O I N T M E N T ?
We can help as little or as much as you like.SM
You know our reputation. Ethan Allen is a designer, manufacturer, and retailer of
high-quality furniture and accessories. What sets us apart is that we are an interior
design business as well. This differentiates us in the marketplace and drives our
strong marketing strategy and messages.
One of those new messages: We can help as little or as much as you like.SM Ethan
Allen has an all-encompassing understanding of today’s shopper’s needs and the
means to fill those needs in a way that no mere furniture store could. We let our
clients know, whether it's for one piece or an entire room, Ethan Allen is with them.
Another new message: Got an appointment? To draw attention to the profession-
alism of our design service, we began urging clients to make a “date” with a design
pro, just as they would book an appointment for any other type of professional
service. We believe that the convenience of an appointment will be good for
clients and for business. It’s another of Ethan Allen’s benefits that feels like a
luxury—the undivided attention of a design professional and the relationship
that builds—and yet is absolutely free.
Our marketing initiatives include a vigorous integrated campaign. From an expanded
prime time television presence and the addition of new cable networks, to healthy
direct mail, print, and email campaigns, we are getting our message across to
younger—and younger-minded—demographics.
We launched an exciting new television commercial that juxtaposes arresting
fashion-forward imagery with the words that define our style today: Modern. Chic.
Fresh. Elegant. Sexy. Cool. Pretty. Hip.
We produced and mailed millions of copies of our aspirational and inspiring
magazines, plus four newsletters, all loaded with news, trends, and design tips to
cement our reputation as a go-to design authority. We also added a hard-hitting
call-to-action direct mail piece, an invitation to the Design Center. Our integrated
marketing campaign also encompasses our website, twice-monthly email blasts,
and Design Center signage.
All of our marketing initiatives make it clear that we are a style leader; that even
the smallest project deserves the undivided attention of a design pro; and that
Ethan Allen is the destination for the stylish one-stop shopper, the source for all
that is practical, comfortable, and chic.
A print ad appeals to the nature of our clients
(and potential clients!): At every turn we remind
them of our style, value, and quality, and the
convenience of professional design advice.
T H E W E L L - D E S I G N E D H O M E . T H A T ’ S O U R J O B . 3
D E S I G N A U T H O R I T Y
The seven Lifestyles. New sofa families. Small space style.
New flagship at 1010 Third Avenue.
This fiscal year saw our coming of age as an interior design authority—
sought after by the design media and clients alike. Our seven branded
Lifestyles form our foundation. Our in-house interior design team, working
closely with our product designers, has created a kind of signature, three-
dimensional interior design manifesto: seven distinct, stylish, and eclectic
vibes that reflect the way people live and want to live.
Ethan Allen has always been about American style, which today is diverse
and dynamic. We created our Lifestyles to mirror the exciting mix of cultures
and aesthetics that is unique to America.
Each Lifestyle is supported by a large selection of fabrics and furniture so
that clients can personalize the look with their color preferences and their
points of view. We make it possible—easy, even—for clients to find their
design passion. Each Lifestyle embodies our fundamental design philosophy:
Classic design. Modern perspective.SM
As we strive to make sure we offer what our clients want and need, we
launched Expressions, five new sofa families offering so many options that
clients can virtually design their own pieces. We also saw the opportunity
to help clients who had smaller spaces to furnish. We reinvented some
signature pieces on a smaller scale and created altogether new pieces
for smaller spaces.
Our premier showcase is our inspiring and attention-grabbing new flagship
Design Center at 1010 Third Avenue in the design and decorating district of
Manhattan. Full of attitude, the Design Center is a magnet for tastemakers
throughout the design industry. It has created notable buzz and points
toward our style direction for the future.
The design studio at the new flagship Ethan Allen
Design Center at 1010 Third Avenue in Manhattan.
The hub of every Design Center, the design studio is
where design consultants and clients work together.
T H E W E L L - D E S I G N E D H O M E . T H A T ’ S O U R J O B . 5
V E R T I C A L L Y
From concept to delivery and everything in between.
I N T E G R A T E D
First we focus on what people want and need: a beautiful, comfortable,
practical home. Everything else we do springs from that idea. Our Style team
identifies and defines the lifestyles and trends that people are attracted to.
The group then works with product development, merchandising, and
manufacturing to turn ideas into designs. In development, we incorporate
the style and quality details that add value and set us apart. Our product
sourcing team uses their knowledge of the strengths and competitive
advantages throughout our supply chain to make sure we provide our
clients with great products at reasonable prices.
Our marketing materials are developed in-house so we know that the
messages we send to our clients are powerful reflections of what they’ll
experience when they enter the unique environment of an Ethan Allen
Design Center.
We’ve invested in new technology and information systems to increase the
efficiency and productivity of our manufacturing and logistics systems. We
want our clients to have the best possible information and service, beginning
before they even walk into our Design Centers. And soon, we will be rolling
out our new website, which will blend our personal decorator services with
online convenience.
Our conveniently located Design Centers are stylish destinations that provide
personal services, including help from professional design consultants,
exciting walk-through Lifestyle environments, custom decorating options,
everyday best pricing, free local delivery, and attractive financing. We created
each of these services to make it more inspiring, efficient, and affordable for
clients to decorate their homes in true American style: spirited, innovative,
eclectic, and individual.
Striking. A stylish statement, the windows of
the new 1010 Design Center are emblazoned
with our signature words: Modern. Chic. Fresh.
Elegant. Sexy. Cool. Pretty. Hip.
T H E W E L L - D E S I G N E D H O M E . T H A T ’ S O U R J O B . 7
C O R P O R A T E D A T A
D I R E C T O R S
O F F I C E R S
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.
Farooq Kathwari
CHAIRMAN OF THE BOARD, PRESIDENT,
AND CHIEF EXECUTIVE OFFICER
Farooq Kathwari
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
John P. Birkelund
CO-FOUNDER AND MANAGING DIRECTOR,
SARATOGA PARTNERS
Pamela A. Banks
VICE PRESIDENT, GENERAL COUNSEL
AND SECRETARY
Clinton A. Clark
PRESIDENT AND SOLE STOCKHOLDER
OF CAC INVESTMENTS, 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 AND CHIEF EXECUTIVE
OFFICER, OCEAN ROAD ADVISORS, INC.
Richard A. Sandberg
CHIEF FINANCIAL OFFICER OF
OXFORD IMMUNOTEC, LTD.
Ambassador Frank G. Wisner
VICE CHAIRMAN, EXTERNAL AFFAIRS,
AMERICAN INTERNATIONAL GROUP, INC.
David R. Callen
VICE PRESIDENT, FINANCE AND TREASURER
Don Garrett
VICE PRESIDENT, CASE GOODS MANUFACTURING
Henry Kapteina
DIRECTOR, INTERNAL AUDIT
Sandra Lamenza
GENERAL MANAGER, ETHAN ALLEN HOTEL
Margaret W. Lupton
DIRECTOR, INVESTOR RELATIONS
AND ASSISTANT SECRETARY
James D. McCreary
VICE PRESIDENT, PRODUCT SOURCING
Jack Moll
GENERAL MANAGER, PHYSICAL DISTRIBUTION
Nora Murphy
EXECUTIVE VICE PRESIDENT, STYLE AND ADVERTISING
Kenneth Musante
MANUFACTURING CONTROLLER
Tracy Paccione
VICE PRESIDENT, MERCHANDISING,
UPHOLSTERY AND ACCENT PROGRAMS
Craig Stout
VICE PRESIDENT, CASE GOODS MERCHANDISING
Lynda W. Stout
VICE PRESIDENT, RETAIL DIVISION
Clifford Thorn
VICE PRESIDENT, UPHOLSTERY MANUFACTURING
Corey Whitely
EXECUTIVE VICE PRESIDENT, OPERATIONS
Ann M. Zaccaria
VICE PRESIDENT, BUSINESS DEVELOPMENT
F O R M 1 0 K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2008 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Delaware
(State or other jurisdiction of
incorporation or organization)
Commission file number 1-11692
Ethan Allen Interiors Inc.
(Exact name of registrant as specified in its charter)
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
Name of Each Exchange
On Which Registered
New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
[X] Yes [ ] No
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
[ ] Yes [X] No
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.
[ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act
(check one):
Large accelerated filer
Non-accelerated filer
[X] Accelerated filer
[ ]
Smaller reporting company
[ ]
[ ]
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).
[ ] Yes [X] No
The aggregate market value of the Registrant’s 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, 2007, (the last day of the Registrant’s most recently
completed second fiscal quarter) was approximately $827,128,995. As of July 31, 2008, there were 28,708,959 shares of the
Registrant’s common stock, par value $.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: The Registrant’s definitive Proxy Statement for the 2008 Annual Meeting of
stockholders, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A of the Securities
Exchange Act of 1934, is incorporated by reference into Part III hereof.
Item
Page
TABLE OF CONTENTS
PART I
1.
1A.
1B.
2.
3.
4.
5.
6.
7.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders
PART II
Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition
and Results of Operation
7A.
Quantitative and Qualitative Disclosures About Market Risk
8.
9.
9A.
9B.
10.
11.
12.
13.
14.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director
Independence
Principal Accountant Fees and Services
PART IV
15.
Exhibits and Financial Statement Schedules
Signatures
2
3
11
14
14
15
16
17
19
21
34
35
70
70
70
71
71
71
71
71
73
78
Item 1. Business
Background
PART I
Incorporated in Delaware in 1989, Ethan Allen Interiors Inc., through its wholly-owned subsidiary, Ethan Allen
Global, Inc., and Ethan Allen Global, Inc.’s subsidiaries (collectively, "We," "Us," "Our," "Ethan Allen" or the
"Company"), is a leading manufacturer and retailer of quality home furnishings and accessories, offering a full
complement of home decorating and design solutions through one of the country’s largest home furnishing retail
networks. In recent years, we have made, and continue to make, considerable investment in our business in order
to expand and improve our interior design capabilities. In order to better reflect these expanded capabilities, we
have changed the designation of our Ethan Allen retail outlets from "stores" to "design centers". The Company
was founded in 1932 and has sold products under the Ethan Allen brand name since 1937.
Mission Statement
Our primary business objective is to provide our customers with a convenient, full-service, one-stop shopping
solution for their home decorating needs by offering stylish, high-quality products at good value. In order to
meet our stated objective, we have developed and adhere to a focused and comprehensive business strategy. The
elements of this strategy, each of which is integral to our solutions-based philosophy, include (i) our vertically
integrated operating structure, (ii) our products and related marketing initiatives, (iii) our retail design center
network, (iv) our people, and (v) our numerous customer service offerings.
Operating Segments
Our operations are classified into two operating segments: wholesale and retail. These operating segments
represent strategic business areas which, although they operate separately and provide their own distinctive
services, enable us to more effectively offer our complete line of home furnishings and accessories. For certain
financial information regarding our operating segments, see Note 16 to the Consolidated Financial Statements
included under Item 8 of this Annual Report and incorporated herein by reference.
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 and accessories to a network of independently owned and Ethan Allen-owned design centers as well
as related marketing and brand awareness efforts. Wholesale revenue is generated upon the wholesale sale and
shipment of our product to all retail design centers, including those owned by Ethan Allen. Wholesale
profitability includes (i) the wholesale gross margin, which represents the difference between the wholesale sales
price and the cost associated with manufacturing and/or sourcing the related product, and (ii) other operating
costs associated with wholesale segment activities.
The retail segment sells home furnishings and accessories to consumers through a network of Company owned
design centers. Retail revenue is generated upon the retail sale and delivery of our product to our customers.
Retail profitability includes (i) the retail gross margin, which represents the difference between the retail sales
price and the cost of goods purchased from the wholesale segment, and (ii) other operating costs associated with
retail segment activities.
While the manner in which our home furnishings and accessories 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 manufacturing, sourcing, and distribution versus retail selling) are different.
Within the wholesale segment, we maintain 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, tables, chairs, buffets, entertainment units, home office furniture, bathroom vanities, and
3
wood accents. 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, bedspreads, decorative accessories, area rugs, bedding, and home and garden
furnishings.
Revenue information by product line is not as easily determined within the retail segment. However, because
wholesale production and sales are matched, for the most part, to incoming orders, we believe that the allocation
of retail sales by product line would be similar to that of the wholesale segment.
We evaluate 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.
In fiscal 2008, wholesale sales to independent retailers and retail sales of Company owned design centers
accounted for approximately 26% and 74%, respectively, of our total net sales.
Wholesale Segment Overview:
Wholesale net sales for each of the last three fiscal years are summarized below (in millions):
Wholesale net sales
Fiscal Year Ended June 30,
2007
$656.0
2006
$736.1
2008
$616.2
Wholesale net sales for each of the last three fiscal years, allocated by product line, were as follows:
Case Goods
Upholstered Products
Home Accessories and Other
Fiscal Year Ended June 30,
2007
44%
38
18
100%
2006
48%
37
15
100%
2008
43%
40
17
100%
We operate ten manufacturing facilities, including four case good plants (two of which include separate
sawmill operations), five upholstery plants and one home accessory plant, located within the United States and
one in Mexico. We also source selected case good, upholstery, and home accessory items from third-party
suppliers located both domestically and outside the United States.
As of June 30, 2008, we maintained a wholesale backlog of $33.0 million (as compared to $43.1 million as of June
30, 2007) which is anticipated to be serviced in the first quarter of fiscal 2009. Backlog at a point in time is a result,
primarily, of net orders booked in prior periods, manufacturing schedules, timing associated with the receipt of
sourced product, and the timing and volume of wholesale shipments. Because orders may be rescheduled and/or
canceled, the measure of backlog at a point in time may not necessarily be indicative of future sales performance.
For the twelve months ended June 30, 2008, net orders booked at the wholesale level, which includes orders
generated by independently owned and Company owned design centers, totaled $617.1 million as compared to
$670.6 million for the twelve months ended June 30, 2007. In any given period, net orders booked may be
impacted by the timing of floor sample orders received in connection with new product introductions. New
product offerings may be made available to the retail network at any time during the year, including in
connection with our periodic retailer conferences.
4
Retail Segment Overview:
Retail net sales for each of the last three fiscal years are summarized below (in millions):
Retail net sales
Fiscal Year Ended June 30,
2008
$724.6
2007
$698.6
2006
$691.0
We sell our products through a dedicated network of 295 retail design centers. As of June 30, 2008, we owned and
operated 159 design centers and independent retailers owned and operated 136 design centers (as compared to 158
and 155, respectively, at the end of the prior fiscal year). The ten largest independent retailers own a total of 55
design centers, which, based on net orders booked, accounted for approximately 10% of total net sales in fiscal
2008.
During fiscal 2008 we acquired five design centers from, and opened one previously owned by independent
retailers, and opened eighteen new design centers (of which eleven were relocations). In addition, during the past
year, independent retailers opened five new design centers (of which one was a relocation), and closed seventeen
design centers. In the past five years, we and our independent retailers have, on a combined basis, opened 98 new
design centers, 43 of which were relocations. The geographic distribution of all retail design center locations is
included under Item 2 of Part I of this Annual Report.
We pursue further expansion of the Company owned retail business by opening new design centers, relocating
existing design centers and, when appropriate, acquiring design centers from independent retailers. In addition, we
continue to promote the growth of our independent retailers through ongoing support in the areas of market
analysis, site selection, and business development. All retailers are required to enter into license agreements with us
which (i) authorize the use of certain Ethan Allen service marks and (ii) require adherence to certain standards of
operation, including a requirement to fulfill related warranty service agreements. We are not subject to any
territorial or exclusive retailer agreements in the United States.
Products
Our strategy has been to position Ethan Allen 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 our strategy, we continue to expand our reach to a broader consumer base through a diverse selection
of attractively priced products, many of which have been designed to complement one another, reflecting the recent
trend toward more eclectic home decorating. Recent product introductions, as well as increased styles and fabric
selections within our custom upholstery line, new finishes for, and redesigns of, previous product introductions, and
expanded product offerings to accommodate today’s home decorating trends, are serving to redefine Ethan Allen,
positioning us as a leader in style.
In an effort to more effectively position ourselves as a provider of interior design solutions, we introduced a
merchandising strategy which involves the grouping of our product offerings, previously categorized by collection,
into seven distinct product “lifestyles”, each reflecting the diversity and eclecticism that we believe represents the
best in American design. In accordance with this merchandising strategy, new products are designed and developed
to reflect unique elements applicable to one or more of the following lifestyles: Country House; Estate; Glamour;
Global; Loft; Metro; and Villa.
All of our case goods, coordinated upholstered products, and home accessories are styled with distinct design
characteristics. Home accessories play an important role in our marketing strategy as they enable us to offer the
consumer the convenience of one-stop shopping by creating a comprehensive home furnishing solution. The interior
of our design centers is designed to facilitate display of our product offerings in complete room settings in order to
project the category lifestyle.
5
We continuously monitor changes in home design trends through attendance at international industry events and
fashion shows, internal market research, and regular communication with our retailers and design center design
consultants who provide valuable input on consumer tendencies. Observations and input gathered as a result of
our efforts enable us to incorporate appropriate style details into our products thereby allowing us, we believe, to
react quickly to changing consumer tastes. For example, since 2004, approximately 63% of our current
complement of product offerings is new. The balance has been refined and enhanced through product redesign,
additions, deletions, and/or finish changes. Such undertakings are indicative of our ability to adapt to the current
consumer trend toward more casual and eclectic lifestyles while, at the same time, maintaining a classic appeal.
In fiscal 2005, we also introduced an innovative pricing program, eliminating periodic sale events in lieu of an
"everyday best" price on all of our product offerings. We believe that this initiative demonstrates our commitment to
differentiating ourselves through strategies focused on customer credibility and excellence in service. In addition,
“everyday best” pricing provided us the opportunity to critically examine all facets of our business, making
substantive changes, where necessary, in order to more effectively carry out our solutions-based approach to home
decorating.
Product Sourcing Activities
We are one of the largest manufacturers of home furnishings in the United States, currently manufacturing and/or
assembling approximately 60% of our products within ten manufacturing facilities, two of which include separate
sawmill operations. The balance of our production is outsourced, according to our own internally-developed
design specifications, through third-party suppliers, most of which are located outside the United States. Our case
good facilities are located in the Northeast and Southeast regions of the country where they are close to sources of
raw materials and skilled craftsmen. Upholstery facilities are located across the country in order to reduce shipping
costs to retail design centers and are situated where skilled craftsmen are available. Our U.S. plants are supported by
a cut and sew operation in Mexico. We believe that continued investment in our manufacturing facilities, combined
with an appropriate level of outsourcing through both foreign and domestic suppliers, will accommodate future
sales growth and allow us to maintain an appropriate degree of control over cost, quality and service to our
customers.
Raw Materials and Other Suppliers
The most important raw materials we use 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 our 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 outside the United States. We have no
significant long-term supply contracts, and have experienced no significant problems in supplying our operations.
We maintain a number of sources for our raw materials which, we believe, contributes to our 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. We believe that our sources of supply for these materials are sufficient and that we are not dependent on
any one supplier.
We enter into standard purchase agreements with certain foreign and domestic suppliers 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 our behalf. We believe we maintain good
relationships with our suppliers.
6
Distribution and Logistics
Within the wholesale segment, we warehouse and distribute our products primarily through a national network
of five distribution centers (four of which are owned) strategically located throughout the United States. These
distribution centers hold finished product received from our manufacturing facilities and our third-party
suppliers, for shipment to retail design centers and retail service centers. From time to time, we may also rent
temporary warehouse space and/or utilize third-party logistics service providers to accommodate our additional
storage needs. We stock selected case goods, upholstery and accessories to provide for quick delivery of in-stock
items and to allow for more efficient production runs.
Wholesale shipments are made utilizing our own fleet of trucks and trailers or through subcontracting
agreements with independent carriers. Approximately 46% of our fleet (trucks and trailers) is leased under
operating lease agreements with terms ranging from 24 to 72 months.
Our policy is to sell our products at the same delivered cost to all Company owned and independently owned
design centers nationwide, regardless of their shipping point. The adoption of this policy has created pricing
credibility with our customers and provided our retail network the opportunity to achieve more consistent
margins as fluctuations attributable to the cost of shipping have been eliminated. Further, this policy has
eliminated the need for our independent retailers to carry significant amounts of inventory in their own
warehouses. As a result, we obtain more accurate information regarding product demand in order to better plan
production runs and manage inventory levels.
Marketing Programs
We believe that our ability to create high-quality marketing programs and coordinate advertising efforts for Ethan
Allen design centers, including, from time to time, coordination of local market advertising, provides a
competitive advantage over other home furnishing manufacturers and retailers. With a dedicated network of
about 300 retail design centers taking advantage of such internally-developed marketing efforts, we believe we
are better positioned to fulfill our brand promise on a more consistent basis.
The objectives of our marketing campaign are to (i) communicate our position as both a leader in style and a full-
service provider of home decorating and design solutions, and (ii) drive traffic into the retail design center network.
In support of these objectives, several forms of media are utilized, including television (both national and local),
direct mail, newspapers, magazines, radio, and our internet website. We also conduct a national email marketing
campaign which serves to distribute electronic newsletters containing inspirational interior design ideas to a
growing database of consumers.
Our national television advertising campaign is designed to capitalize on our existing brand equity and maintain top-of-
mind awareness of the breadth of our product and service offerings. With this is mind, our in-house team of advertising
specialists has developed what we believe is the most cohesive national advertising campaign in the home furnishings
industry. Coordinated local television, to the extent the medium is utilized, serves to support our national television
program.
The Ethan Allen direct mail magazine, which brands our product lifestyles and communicates the breadth of our
services, is one of our most important marketing tools. We publish and sell the magazines to both Company
owned and independently owned design centers, who, with demographic information collected through
independent market research, are able to target potential customers. Given the importance of this advertising
medium, direct mail marketing lists continue to be refined in order to target those consumers that are most likely
to purchase, with the objective of improving our return on direct mail expenditures. Approximately 23 million
copies of our direct mail magazine were distributed to consumers during fiscal 2008.
7
Our television advertising and direct mail efforts are supported by strong print and radio campaigns in various
markets. During fiscal 2008, we also updated our 220-page "Ethan Allen Style" book. This publication, which
includes a catalogue of our home furnishings and accessories, projects our seven product lifestyles to our clients and
helps customers identify their own personal style using our product offerings. We believe this publication represents
one of the most comprehensive and effective home decorating resources in the home furnishings industry.
We are located on the worldwide web at www.ethanallen.com. The primary goal of our website is to drive
additional business into the retail design center network through lead generation and information sourcing. With
this is mind, customers may access our website to review our home furnishing offerings or to purchase selected
home accessories. The Company has been developing a new state-of-the-art website which we expect to launch later
in calendar 2008. We believe this new website will enable us to add the newest technology of the web to the personal
service of our design consultants, giving us a unique competitive advantage. The new website will also enable our
clients to place orders for Ethan Allen's product offering which will be serviced through our retail network
We have also developed an extranet website which links the retail design centers with consumer information
captured on-line, such as customer requests for design assistance and copies of our direct mail magazine. This
medium has become the primary source of communications within our retail network providing a variety of
information, including a Company-wide daily news flash, downloads of current advertising materials, prototype
design center display floor plans and detailed product information.
Retail Design Center Network
Ethan Allen design centers are typically located in busy urban settings as freestanding destinations or as part of
suburban strip malls, depending upon the real estate opportunities in a particular market. At the present time,
our design centers average approximately 16,000 square feet in size. While the footprint for most of our retail
network is similar, our design centers currently range in size from approximately 6,000 square feet to 35,000
square feet.
We maximize uniformity of presentation throughout the retail design center network through a comprehensive
set of standards. These standards assist each design center in presenting a high quality image and offer retail
customers consistent levels of product selection and service. A uniform design center image is conveyed through
our ongoing program to model all retail design centers with similar and consistent exterior facades and interior
layouts. This program is carried out at all design centers, including those that are independently owned and
operated.
We provide display planning assistance to all Company owned design centers and independent retailers to support
them in updating the interior projection and to maintain a consistent image. We have developed a standard interior
design format for our retail network which, through the use of focused lifestyle settings to display our products and
information displays to educate consumers, has positioned Ethan Allen as a leader in home furnishings retailing.
People
At June 30, 2008, we had approximately 5,800 employees, approximately 5% of whom are represented by unions
under collective bargaining agreements. Most of these collective bargaining agreements expire at various times
throughout the next three years. We expect no significant changes in our relations with these unions and believe we
maintain good relationships with our employees.
The retail network, which includes both Company owned and independently owned design centers, is staffed
with a sales force of design consultants and service professionals who provide customers with an effective home
decorating solution at no additional charge. Our employees receive appropriate training with respect to the
distinctive design and quality features inherent in each of our products and programs, allowing them to more
effectively communicate the elements of style and value that serve to differentiate us from the competition. As
8
such, we believe our design consultants, and the complimentary service they provide, create a distinct
competitive advantage over other home furnishing retailers.
We have strengthened the retail division with many initiatives, including rationalization of our structure, with 23
newer locations added during the year including relocations. We converted 8% of the network to design studios.
Twelve locations in underperforming markets closed. We consolidated 16 retail service centers into larger service
centers, and most importantly, implemented the team concept, with the development of interior design teams.
We have made considerable investment within the retail network to strengthen the level of service, professionalism,
interior design competence, efficiency, and effectiveness of retail design center personnel. The implementation of the
"team" concept is the latest phase of that progression, which resulted in the development of over 280 interior design
teams. We believe that with this structure, along with the emphasis in our messaging to clients that “we can help as
little or as much as you like”, as well as offering the benefit of making appointments with our design professionals,
we continue to improve the customer service experience.
We recognize the importance of our retail design center network to our long-term success. Accordingly, we believe
we (i) have established strong management teams within Company owned design centers and (ii) continue to work
closely with our independent retailers in order to assist them in strengthening their teams. With this in mind, we
make our services available to every design center, whether independently owned or Company owned, in support of
their marketing efforts, including coordinated advertising, merchandising and display programs, and extensive
training seminars and educational materials. We believe that the development of design teams, design consultants,
service and delivery personnel, and retailers is important for the growth of our business. As a result, we have
committed to make available a comprehensive retail training program which is intended to increase the customer
service capabilities of each individual.
Customer Service Offerings
We offer 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 our website or at any participating retail design center, gift
cards which can be redeemed for any of our products or services.
On-Line Room Planning
We offer, via our 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 of our
product offerings best fit their particular needs based on their own individual home floor plan.
Ethan Allen Consumer Credit Programs
The Ethan Allen Finance Plus program offers consumers (clients) a menu of three custom financing options through
the use of just one account. Consumers (clients) can choose between (1) “Term Choice” which offers fixed monthly
payments the customer chooses from 12 to 60 months at an interest rate from 3.99% to 9.99% per annum, (2) "No
Payment / Deferred Interest" which offers clients a way to borrow interest free for three or six months with no
monthly payments. If the purchase is not paid by the due date, interest is charged from the date of purchase at a
fixed interest rate of 23.99% per annum, and (3) “Ethan Allen Prime” which offers the lowest minimum monthly
payment plan including no payments the first three months; interest is accrued at a rate that matches the current
prime rate. All plans provide credit lines from $1,000 to $30,000, or greater, if the customer qualifies. Financing
offered is administered by a third-party financial institution and is granted to us on a non-recourse basis. Consumers
(clients) may apply for an Ethan Allen Finance Plus card at any participating design center.
9
Competition
In recent years, the home furnishings industry has faced numerous challenges, not the least of which is an influx
of low-priced competition from overseas and some resultant measure of price deflation. As a result, we believe a
trend toward product commoditization has developed. In that time, we have, instead, attempted to further
differentiate ourselves as a "preferred" brand by adhering to a business strategy focused on providing (i) high-
quality, well designed products at good value, including the marketing of our products at an "everyday best"
price, (ii) a comprehensive complement of home furnishing design solutions, including our complimentary
design service, and (iii) excellence in customer service. We consider our vertical integration a significant
competitive advantage in the current environment as it allows us to design, manufacture, source, distribute,
market, and sell our products through one of the industry’s largest single-source retail networks.
Industry globalization has provided us an opportunity to adhere to a blended sourcing strategy, establishing
relationships with certain manufacturers, both domestically and outside the United States, to source selected case
goods, upholstery, and home accessory items. We intend to continue to balance our domestic production with
opportunities to source from foreign and domestic manufacturers, as appropriate, in order to maintain our
competitive advantage.
We believe the home furnishings industry competes primarily on the basis of product styling and quality,
personal service, prompt delivery, product availability and price. We further believe that we effectively compete
on the basis of each of these factors and that, more specifically, our retail format and complimentary design
service create a distinct competitive advantage, further supporting our mission of providing consumers with a
complete home decorating and design solution. Our objective is to continue to develop and strengthen our retail
network by (i) expanding the Company owned retail business through the relocation of existing design centers,
opening of new design centers, and, when appropriate, acquiring design centers from, or selling design centers to,
independent retailers, and (ii) obtaining and retaining independent retailers, encouraging such retailers to expand
their business through the opening or relocation of new design centers with the objective of increasing the volume
of their sales.
Trademarks
We currently hold, or have 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, we have registered, or have applications pending
for, many of our major collection names as well as certain of our slogans utilized in connection with promoting
brand awareness, retail sales and other services. We view such trade and service marks as valuable assets and
have an ongoing program to diligently monitor and defend, through appropriate action, against their
unauthorized use.
Available Information
We make available, free of charge via our 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 (the "SEC" or the "Commission"), 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, the SEC maintains a website that contains reports, proxy and information
statements, and other information regarding companies that file electronically with the Commission. This
information is available at www.sec.gov.
In addition, charters of all committees of our Board of Directors, as well as our Corporate Governance guidelines,
are available on our website at www.ethanallen.com/governance or, upon written request, in printed hardcopy
10
form. Written requests should be sent to Office of the Secretary, Ethan Allen Interiors Inc., Ethan Allen Drive,
Danbury, Connecticut 06811.
Item 1A. Risk Factors
The following information describes certain significant risks and uncertainties inherent in our business that should be
carefully considered, along with other information contained elsewhere in this report and in other filings, when making an
investment decision with respect to us. If one or more of these risks actually occurs, the impact on our business, including
our financial condition, results of operations, and cash flows could be adverse.
We face changes in global and local economic conditions that may adversely affect consumer demand and
spending, our manufacturing operations or sources of merchandise.
Historically, the home furnishings industry has been subject to cyclical variations in the general economy and to
uncertainty regarding future economic prospects. Such uncertainty, as well as other variations in global economic
conditions such as rising fuel costs and increasing interest rates, may continue to cause inconsistent and
unpredictable consumer spending habits, while increasing our own fuel, utility, transportation or security costs.
These risks, as well as industrial accidents or work stoppages, could also severely disrupt our manufacturing
operations, which could have a material adverse effect on our financial performance.
We import a portion of our merchandise from foreign countries. As a result, our costs may be increased by events
affecting international commerce and businesses located outside the United States, including changes in
international trade, central bank actions, changes in the relationship of the U.S. dollar versus other currencies, and
other governmental policies of the U.S. and the countries from which we import a portion of our merchandise.
The inability to import products from certain foreign countries or the imposition of significant tariffs could have a
material adverse effect on our results of operations.
Competition from overseas manufacturers continues to increase and may adversely affect our business, operating
results or financial condition.
Our wholesale business segment is involved in the development of our brand, which encompasses the design,
manufacture, sourcing, sales and distribution of our home furnishings products, and competes with other U.S.
and foreign manufacturers. Our retail business segment sells home furnishings to consumers through a network
of Company owned design centers, and competes against a diverse group of retailers ranging from specialty
stores to traditional furniture and department stores, any of which may operate locally, regionally and nationally.
We also compete with these and other retailers for appropriate retail locations as well as for qualified design
consultants and management personnel. Such competition could adversely affect our future financial
performance.
Industry globalization 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
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 us, 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 may be capable
of being sold at a lower price to consumers, which, in turn, could lead to some measure of further industry-wide
price deflation.
We cannot provide assurance that we will be able to establish or maintain relationships with certain
manufacturers, whether foreign or domestic, to supply us with selected case goods, upholstery and home
accessory items to enable us to maintain our competitive advantage. In addition, the recent emergence of foreign
manufacturers has served to broaden the competitive landscape. Some of these competitors produce furniture
11
types not manufactured by us and may have greater financial and other resources available to them. This
competition could adversely affect our future financial performance.
Failure to successfully anticipate or respond to changes in consumer tastes and trends in a timely manner could
adversely impact our business, operating results and financial condition.
Sales of our products are dependent upon consumer acceptance of our product designs, styles, quality and price.
We continuously monitor changes in home design trends through attendance at international industry events and
fashion shows, internal marketing research, and regular communication with our retailers and design center
design consultants who provide valuable input on consumer tendencies. However, as with all retailers, our
business is susceptible to changes in consumer tastes and trends. Such tastes and trends can change rapidly and
any delay or failure to anticipate or respond to changing consumer tastes and trends in a timely manner could
adversely impact our business, operating results and financial condition.
Fluctuations in the price, availability and quality of raw materials could result in increased costs or cause
production delays which might result in a decline in sales, either of which could adversely impact our earnings.
We use various types of wood, foam, fibers, fabrics, leathers, and other raw materials in manufacturing our
furniture. Certain of our raw materials, including fabrics, are purchased both outside the United States and
domestically. Fluctuations in the price, availability and quality of raw materials could result in increased costs or
a delay in manufacturing our products, which in turn could result in a delay in delivering products to our
customers. For example, lumber prices fluctuate over time based on factors such as weather and demand, which
in turn, impact availability. Production delays or upward trends in raw material prices could result in lower sales
or margins, thereby adversely impacting our earnings.
In addition, certain suppliers may require extensive advance notice of our requirements in order to produce
products in the quantities we desire. This long lead time may require us to place orders far in advance of the time
when certain products will be offered for sale, thereby exposing us to risks relating to shifts in consumer demand
and trends, and any downturn in the U.S. economy.
Our business is sensitive to increasing labor costs, competitive labor markets, our continued ability to retain
high-quality personnel and risks of work stoppages.
The market for qualified employees and personnel in the retail and manufacturing industries is highly
competitive. Our success depends upon our ability to attract, retain and motivate qualified craftsmen,
management, marketing and sales personnel and upon the continued contributions of these individuals. We
cannot provide assurance that we will be successful in attracting and retaining qualified personnel. A shortage of
qualified personnel may require us to enhance our wage and benefits package in order to compete effectively in
the hiring and retention of qualified employees. Our labor costs may continue to increase and such increases may
not be recovered. In addition, some of our employees are covered by collective bargaining agreements with local
labor unions. Although we do not anticipate any difficulty renegotiating these contracts as they expire, a labor-
related stoppage by these unionized employees could adversely affect our business and results of operations. The
loss of the services of key personnel or our failure to attract additional qualified personnel could have a material
adverse effect on our business, operating results and financial condition.
Our success depends upon our brand, marketing and advertising efforts and pricing strategies, and if we are not
able to maintain and enhance our brand, or if we are not successful in these other efforts, our business and
operating results could be adversely affected.
Maintaining and enhancing our brand is critical to our ability to expand our base of customers and may require
us to make substantial investments. Our advertising campaign utilizes television, direct mail, newspapers,
magazines and radio to maintain and enhance our existing brand equity. We cannot provide assurance that our
12
marketing, advertising and other efforts to promote and maintain awareness of our brand will not require us to
incur substantial costs. If these efforts are unsuccessful or we incur substantial costs in connection with these
efforts, our business, operating results and financial condition could be adversely affected.
We may not be able to maintain our current design center locations at current costs. We may also fail to
successfully select and secure design center locations.
Our design centers are typically located in busy urban settings as freestanding destinations or as part of suburban
strip malls, depending upon the real estate opportunities in a particular market. Our business competes with
other retailers and as a result, our success may be affected by our ability to renew current design center leases and
to select and secure appropriate retail locations for existing and future design centers.
We depend on key personnel and could be affected by the loss of their services.
The success of our business depends upon the services of certain senior executives, and in particular, the services
of M. Farooq Kathwari, Chairman of the Board, President and Chief Executive Officer, who is the only one of our
senior executives who operates under a written employment agreement. The loss of any such person or other key
personnel could have a material adverse effect on our business and results of operations.
As we expand and grow our business, we may rely on external funding sources to finance our operations and
growth.
Historically, we have relied upon our cash from operations to fund our operations and growth. As we expand our
business, we may rely on external funding sources, including the proceeds from the issuance of debt or the
$200 million revolving bank line of credit available under our existing credit facility. Any unexpected reduction
in cash flow from operations could increase our external funding requirements to levels above those currently
available. There can be no assurance that we will not experience unexpected cash flow shortfalls in the future or
that any increase in external funding required by such shortfalls will be available.
Our results of operations for any quarter are not necessarily indicative of our results of operations for a full year.
Sales of furniture and other home furnishing products fluctuate from quarter to quarter due to such factors as
changes in global and regional economic conditions, changes in competitive conditions, changes in production
schedules in response to seasonal changes in energy costs and weather conditions, and changes in consumer
order patterns. From time to time, we have experienced, and may continue to experience, volatility with respect
to demand for our home furnishing products. Accordingly, results of operations for any quarter are not
necessarily indicative of the results of operations for a full year.
Our current and former manufacturing and retail operations are subject to increasingly stringent environmental,
health and safety requirements.
We use and generate hazardous substances in our manufacturing and retail operations. In addition, both the
manufacturing properties on which we currently operate and those on which we have ceased operations are and
have been used for industrial purposes. Our manufacturing operations and, to a lesser extent, our retail
operations involve risk of personal injury or death. We are subject to increasingly stringent environmental, health
and safety laws and regulations relating to our current and former properties and our current operations. These
laws and regulations provide for substantial fines and criminal sanctions for violations and sometimes require the
installation of costly pollution control or safety equipment or costly changes in operations to limit pollution or
decrease the likelihood of injuries. In addition, we may become subject to potentially material liabilities for the
investigation and cleanup of contaminated properties and to claims alleging personal injury or property damage
resulting from exposure to or releases of hazardous substances or personal injury as a result of an unsafe
workplace.
13
We have been identified as a potentially responsible party in connection with three sites that are currently listed,
or proposed for inclusion, on the National Priorities List under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, or its state counterpart, and have received notification that
we may be named a PRP in a separate, unrelated matter with respect to a fourth site. In addition, noncompliance
with, or stricter enforcement of, existing laws and regulations, adoption of more stringent new laws and
regulations, discovery of previously unknown contamination or imposition of new or increased requirements
could require us to incur costs or become the basis of new or increased liabilities that could be material.
Failure to protect our intellectual property could adversely affect us.
We believe that our patents, trademarks, service marks, trade secrets, copyrights and all of our other intellectual
property are important to our success. We rely on patent, trademark, copyright and trade secret laws, and
confidentiality and restricted use agreements, to protect our intellectual property and may seek licenses to
intellectual property of others. Some of our intellectual property is not covered by any patent, trademark, or
copyright or any applications for the same. We cannot provide assurance that agreements designed to protect our
intellectual property will not be breached, that we will have adequate remedies for any such breach, or that the
efforts we take to protect our proprietary rights will be sufficient or effective. Any significant impairment of our
intellectual property rights or failure to obtain licenses of intellectual property from third parties could harm our
business or our ability to compete. Moreover, we cannot provide assurance that the use of our technology or
proprietary know-how or information does not infringe the intellectual property rights of others. If we have to
litigate to protect or defend any of our rights, such litigation could result in significant expense.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our 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 us. 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.
We operate ten manufacturing facilities located in six states and Mexico. All of these facilities are owned, with the
exception of a leased upholstery plant in California, totaling 145,636 square feet. Our ten facilities consist of four
case good manufacturing plants (two of which include separate sawmill operations), totaling 1,964,897 square
feet; five upholstery furniture plants (including the leased facility in California), totaling 1,137,732 square feet;
and one plant involved in the manufacture and assembly of our home accessory products, totaling 295,000 square
feet.
In addition, we operate five distribution centers, totaling 1,347,739 square feet. All of these facilities are owned,
with the exception of one leased distribution facility in California, totaling 80,000 square feet. We utilize 6,490
square feet within one of our manufacturing facilities as a garage operation for our fleet of trucks and trailers. Our
U.S. manufacturing and distribution facilities are located in North Carolina, Vermont, Pennsylvania, Virginia,
Oklahoma, California, New Jersey, Indiana and Maine, and our Mexico plant is located in Guanajuato.
We own three and lease 30 retail service centers, totaling 1,296,902 square feet. Our retail service centers are
located throughout the United States and serve to support our various retail sales districts.
14
The geographic distribution of our retail design center network as of June 30, 2008 is as follows:
United States
North America-Other (1)
Asia
Middle East
Total
Retail Design Center Category
Company Owned
154
5
-
-
159
Independently Owned
95
2
38
1
136
(1) We own and operate five retail design centers located in Canada.
Of the 159 retail design centers owned and operated by us, 74 of the properties are owned and 85 of the
properties are leased from independent third parties. Of the 74 design center locations owned by us, 17 are
subject to land leases. We own three additional retail properties, two of which are leased to independent Ethan
Allen retailers, and one of which is leased to an unaffiliated third party. See Note 8 to the Consolidated Financial
Statements included under Item 8 of this Annual Report for more information with respect to our operating lease
obligations.
Our Ethan Allen Hotel and Conference Center located in Danbury, Connecticut, was financed, in part, with
industrial revenue bonds. The bonds bear interest at a fixed rate of 7.50% and have a remaining balance at June 30,
2008 of $3.9 million which matures in three years. The Beecher Falls, Vermont manufacturing facility was financed,
in part, by the State of Vermont Economic Development Authority (“VEDA”) and the Town of Canaan, Vermont.
The VEDA debt matured in June 2006 and was repaid in full at that time. The Town of Canaan debt bears interest at
a fixed rate of 3.00% and has remaining balance at June 30, 2008 of $0.3 million, with maturities of three to 18 years.
We believe that all of our properties are well maintained and in good condition.
We estimate that our manufacturing division is currently operating at approximately 75% to 80% of capacity. We
believe we have additional capacity at selected facilities, which we could utilize with minimal additional capital
expenditures.
Item 3. Legal Proceedings
We are a party to various legal actions with customers, employees and others arising in the normal course of our
business. We maintain liability insurance, which is deemed to be adequate for our needs and commensurate with
other companies in the home furnishings industry. We believe that the final resolution of pending actions
(including any potential liability not fully covered by insurance) will not have a material adverse effect on our
financial condition, results of operations, or cash flows.
Environmental Matters
We and our subsidiaries are subject to various environmental laws and regulations. Under these laws, we and/or
our 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, 2008, we and/or our subsidiaries have been named as a potentially responsible party ("PRP") with
respect to the remediation of three active sites currently listed, or proposed for inclusion, on the National
Priorities List ("NPL") under the Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA"). The sites are located in Southington, Connecticut; High Point, North Carolina;
and Atlanta, Georgia.
In addition, during the fiscal year ended June 30, 2007, our liability with respect to a fourth site located in
Lyndonville, Vermont was resolved. We had previously received a certificate of construction completion for this
15
location, subject to certain limited conditions which were the obligation of another PRP. In July 2007, we
obtained the final certificate of construction completion advising us that all conditions had been met.
We do not anticipate incurring significant costs with respect to the Southington, Connecticut, High Point, North
Carolina, or Atlanta, Georgia sites as we believe that we are not a major contributor based on the very small
volume of waste generated by us in relation to total volume at those sites. Specifically, with respect to the
Southington site, our 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, our 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 more than 1,000 "de-
minimis" parties (of which we are one). With respect to the Atlanta site, a former solvent recycling/reclamation
facility, our 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, we could be required to pay in excess of our
pro rata share of incurred remediation costs. Our understanding of the financial strength of other PRPs has been
considered, where appropriate, in the determination of our estimated liability.
In addition, in July 2000, we were notified by the State of New York (the "State") that we 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 the State has not yet conducted an initial environmental study at this site.
As of June 30, 2008, we believe 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. We believe our currently anticipated capital expenditures for environmental control facility matters
are not material.
We are subject to other federal, state and local environmental protection laws and regulations and are 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. We believe that our 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, we have 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. We remain
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. We 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 for vote by our security holders during the fourth quarter of fiscal 2008.
16
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Our common stock is traded on the New York Stock Exchange under ticker symbol "ETH". The following table
sets forth, for each of the past two fiscal years, (i) the high and low stock prices as reported on the New York
Stock Exchange and (ii) the dividend per share paid by us:
Fiscal 2008
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal 2007
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
$
High
36.55
35.41
31.98
31.37
39.77
38.63
39.56
37.85
Market Price
Low
$
$
31.57
25.87
22.67
24.48
33.54
34.17
34.75
34.19
$
$
Close
32.69
28.50
28.43
24.60
34.66
36.11
35.34
34.25
Dividend
Per Share
$
$
0.22
0.22
0.22
0.22
0.20
0.20
0.20
0.20
As of August 13, 2008, there were 348 shareholders of record of our common stock. Management estimates there
are over eleven thousand beneficial shareholders of the Company’s common stock. On July 22, 2008, we declared
a dividend of $0.25 per common share, payable on October 27, 2008 to shareholders of record as of October 10,
2008. We expect to continue to declare quarterly dividends for the foreseeable future.
Comparative Company Performance
The following line graph compares cumulative total stockholder return for the Company with a performance
indicator of the overall stock market, the Standard & Poor’s 500 Index, and an industry index, the Peer Issuer
Group Index, assuming $100 was invested on June 30, 2003.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Ethan Allen Interiors Inc., The S&P 500 Index
And A Peer Group
$180
$160
$140
$120
$100
$80
$60
$40
$20
$0
6/03
6/04
6/05
6/06
6/07
6/08
Ethan Allen Interiors Inc.
S&P 500
Peer Group
*$100 invested on 6/30/03 in stock & index-including reinvestment of dividends. (Fiscal year ending June 30.)
Copyright © 2008 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
Note - Peer Issuer Group includes Bassett Furniture Industries, Inc., Chromcraft Revington, Inc., Flexsteel Industries,
Inc., Furniture Brands International, Inc., Haverty Furniture Companies, Inc., La-Z Boy Inc., Legett & Platt, Inc., and
Pier 1 Imports Inc. The returns of each company have been weighted according to each company’s market
capitalization.
17
Equity Compensation Plan Information
The information required by this Item 5 with respect to Equity Compensation Plan Information is set forth in Item
12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters,
contained in this Annual Report and incorporated herein by reference.
Issuer Purchases of Equity Securities
On November 21, 2002, our Board of Directors approved a share repurchase program authorizing us to
repurchase up to 2,000,000 shares of our common stock, from time to time, either directly or through agents, in
the open market at prices and on terms satisfactory to us. 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; from 691,100 shares to 2,000,000 shares on April 26,
2005; from 393,100 shares to 2,500,000 shares on November 15, 2005; from 1,110,400 shares to 2,500,000 shares on
July 25, 2006; from 707,300 to 2,500,000 shares on July 24, 2007, and from 1,368,000 to 2,000,000 shares on
November 13, 2007. As of June 30, 2008 we had a remaining Board authorization to repurchase 1,567,669 shares.
There were no share repurchases during the quarter ended June 30, 2008. Since the Company began
repurchasing shares in 1995, approximately 17.7 million shares have been repurchased (adjusted for splits).
On June 20, 2008, options to purchase 19,600 shares of our common stock were granted to employees of the
Company. These options were issued at an exercise price of $25.71 (the price of a share of our common stock on
the New York Stock Exchange as of such date), vest ratably over a 4-year period and have a contractual term of 10
years.
Stockholder Rights Plan
We have 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.
18
Item 6. Selected Financial Data
The following table presents selected financial data for the fiscal years ended June 30, 2008, 2007, 2006, 2005 and
2004 which has been derived from our consolidated financial statements. The information set forth below should
be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of
Operations included under Item 7 of this Annual Report and our Consolidated Financial Statements (including
the notes thereto) included under Item 8 of this Annual Report.
Statement of Operations Data:
Net sales
Cost of sales
Selling, general and
administrative expenses
Restructuring and impairment
charge, net (1)
Operating income
Interest and other expense
(income), net
Income before income tax
expense
Income tax expense
Net income
Per Share Data:
Net income per basic share
Basic weighted average shares
outstanding
Net income per diluted share
Diluted weighted average
shares outstanding
Cash dividends per share (2)
Other Information:
Depreciation and amortization
Capital expenditures and
acquisitions
Working capital
Current ratio
$
$
$
$
$
$
$
Effective tax rate
Balance Sheet Data (at end of period):
Total assets
Total debt, including capital
$
Fiscal Year Ended June 30,
2008
2007
2006
2005
2004
$
980,045 $
1,005,312 $ 1,066,390 $
949,012
$
955,107
453,980
478,729
525,408
487,958
494,072
423,229
402,022
394,069
332,295
322,111
6,836
96,000
13,442
111,119
4,241
(219)
142,672
128,978
12,520
126,404
3,822
1,393
4,567
(442)
(2,691)
92,178
34,106
109,726
40,499
138,105
52,423
129,420
50,082
129,095
49,617
58,072 $
69,227 $
85,682 $
79,338
$
79,478
1.98
$
2.19
$
2.58
$
2.24
$
2.14
29,267
31,566
33,210
35,400
37,179
1.97
$
2.15
$
2.51
$
2.19
$
2.08
29,470
32,261
34,086
36,193
38,295
0.88
$
0.80
$
0.72
$
0.60
$
3.40
24,670 $
23,013 $
21,599 $
21,338
$
21,854
67,815 $
74,370 $
49,296 $
34,381
174,676 $
234,990 $
278,038 $
130,423
$
$
24,976
161,772
2.29 to 1
2.59 to 1
2.88 to 1
1.97 to 1
2.18 to 1
37.0%
36.9%
38.0%
38.7%
38.4%
761,973 $
802,598 $
814,100 $
628,386
$
658,367
lease obligations
203,029
202,908
202,787
12,510
9,221
Shareholders’ equity
$
375,773 $
409,642 $
417,442 $
434,068
$
456,140
Debt as a percentage of equity
Debt as a percentage of capital
54.0%
35.1%
49.5%
33.1%
48.6%
32.7%
2.9%
2.8%
2.0%
2.0%
See footnotes on following page.
19
(1)
On January 10, 2008, we announced a plan to consolidate the operations of certain company owned retail design
centers and retail service centers. In connection with this initiative, we have permanently ceased operations at ten
design centers and six retail service centers which, for the most part, were consolidated into other existing
operations. We also implemented our design team concept across the Retail division at the end of the fiscal year.
These decisions resulted in a reduction in headcount of approximately 400 employees, with the reduction in
headcount occurring during the third and fourth quarters of fiscal 2008. Additionally, other actions taken during
fiscal 2008 were not included in the restructuring plan. Altogether, there were more than 500 fewer associates in our
Retail business by the end of the fiscal year. We recorded a pre-tax restructuring and impairment charge of $4.0
million during the third quarter of fiscal 2008 and $2.8 million in the fourth quarter. Of the $6.8 million for the fiscal
year, $3.3 million is for lease cancellation and other costs which will be paid out over periods ranging from less than
one to seven years; $2.7 million, which was non-cash in nature, related to fixed asset impairment charges, primarily
for real property and leasehold improvements; and $0.9 million was related to employee severance and benefits.
Within the next six months, the Company expects to record a net gain of approximately $2.5 to $3.5 million on the
sale of real estate held for sale, net of restructuring for remaining charges of lease termination and other costs, after
which time the consolidation plan should be complete. The cumulative net pre-tax cost of implementing the 2008
restructuring is estimated to be between $3.3 million and $4.3 million ($2.1 million and $2.7 million after tax).
On September 6, 2006, we announced a plan to close our Spruce Pine, North Carolina case goods manufacturing
facility and convert our Atoka, Oklahoma upholstery manufacturing facility into a regional distribution center. In
connection with this initiative, we permanently ceased production at both locations, allocating production among our
remaining domestic manufacturing locations and selected offshore suppliers. The decision impacted approximately
465 employees with the reduction in headcount occurring during the second and third quarters of fiscal 2007. We
recorded a pre-tax restructuring and impairment charge of $14.1 million during the quarter ended September 30,
2006, of which $4.0 million was related to employee severance and benefits and other plant exit costs, and $10.1
million, which was non-cash in nature, was related to fixed asset impairment charges, primarily for real property
and machinery and equipment, stemming from the decision to cease production activities. During the first six
months of fiscal 2007, adjustments totaling $0.4 million were recorded to reverse remaining previously established
accruals which were no longer deemed necessary.
In the first quarter of fiscal 2006, we announced a plan to convert one of our existing manufacturing facilities into a
regional distribution center. The facility, formerly involved in the production of wood case goods furniture, is located
in Dublin, Virginia. In connection with this initiative, we permanently ceased production at the Dublin location,
allocating production among our remaining domestic manufacturing locations and selected offshore suppliers, and
consolidated the distribution operations of our existing Old Fort, North Carolina location into this larger facility. The
decision impacted approximately 325 employees, of which approximately 75 have been employed in new positions.
We recorded a pre-tax restructuring and impairment charge of $4.2 million during the quarter ended September 30,
2005, of which $1.3 million was related to employee severance and benefits and other plant exit costs, and $2.9
million, which was non-cash in nature, was related to fixed asset impairment charges, primarily for machinery and
equipment, stemming from the decision to cease production activities. During the first six months of fiscal 2007,
adjustments totaling $0.2 million were recorded to reverse remaining previously established accruals which were no
longer deemed necessary.
In the fourth quarter of fiscal 2004, we announced a plan to close and consolidate two of our 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, adjustments totaling $0.2 million were recorded to reverse the remaining
previously established accruals which were no longer deemed necessary.
(2)
On April 27, 2004, we 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.
20
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation
The following discussion of financial condition and results of operations is based upon, and should be read in
conjunction with, our Consolidated Financial Statements (including the 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 our future results. 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: the
effects of terrorist attacks or conflicts or wars involving the United States or its allies or trading partners; the
effects of labor strikes; weather conditions that may affect sales; volatility in fuel, utility, transportation and
security costs; changes in global or regional political or economic conditions, including changes in governmental
and central bank policies; changes in business conditions in the furniture industry, including changes in
consumer spending patterns and demand for home furnishings; effects of our brand awareness and marketing
programs, including changes in demand for our existing and new products; our ability to locate new design
center sites and/or negotiate favorable lease terms for additional design centers or for the expansion of existing
design centers; competitive factors, including changes in products or marketing efforts of others; pricing
pressures; fluctuations in interest rates and the cost, availability and quality of raw materials; those matters
discussed in Items 1A and 7A of this Annual Report and in our SEC filings; and our future decisions.
Accordingly, actual circumstances and results could differ materially from those contemplated by the forward-
looking statements.
Critical Accounting Policies
Our consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting
principles 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.
We use our 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 our 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).
We estimate an inventory valuation allowance for excess quantities and obsolete items based on specific
identification and historical write-downs, 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. As such, revenue recognition occurs upon the shipment of goods to independent retailers or,
in the case of Ethan Allen-owned retail design centers, upon delivery to the customer. Recorded sales provide for
estimated returns and allowances. We permit our customers to return defective products and incorrect shipments,
and terms we offer are standard for the industry.
21
Allowance for Doubtful Accounts – We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability of our 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.
Retail Design Center Acquisitions - We account for the acquisition of retail design centers 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 – We periodically evaluate 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, we assess 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 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 indefinite-lived
intangible assets are 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.
We conduct our required annual impairment test during the fourth quarter of each fiscal year and use 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 our control.
Business Insurance Reserves – We have 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. We accrue estimated losses using actuarial models and assumptions based on
historical loss experience. Although we believe 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. We adjust insurance reserves, as needed, in the event that future loss experience differs from historical
loss patterns.
Other Loss Reserves – We have 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 the use of
estimates and judgment with regard to maximum risk exposure and ultimate liability or realization. As a result,
these estimates are often developed with our counsel, or other appropriate advisors, and are based on our 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.
22
Basis of Presentation
As of June 30, 2008, Ethan Allen Interiors Inc. has no material assets other than its ownership of the capital stock
of Ethan Allen Global, Inc. and conducts all significant transactions through Ethan Allen Global, Inc.; therefore,
substantially all of the financial information presented herein is that of Ethan Allen Global, Inc.
Results of Operations
Our revenues are comprised of (i) wholesale sales to independently owned and Company owned retail design
centers and (ii) retail sales of Company owned design centers. See Note 16 to our Consolidated Financial
Statements for the year ended June 30, 2008 included under Item 8 of this Annual Report.
The components of consolidated revenues and operating income are as follows (in millions):
Fiscal Year Ended June 30,
2007
2008
2006
Revenue:
Wholesale segment
Retail segment
Elimination of inter-segment sales
Consolidated revenue
$ 616.2
724.6
(360.8)
$ 980.0
$ 656.0
698.6
(349.3)
$ 1,005.3
Operating Income:
Wholesale segment (1)
Retail segment (2)
Adjustment for inter-company profit(3)
Consolidated operating income
$ 100.3
(2.8)
(1.5)
$ 96.0
$ 99.2
15.2
_ (3.3)
$ 111.1
$ 736.1
691.0
(360.7)
$ 1,066.4
$ 125.2
19.7
_ _(2.2)
$ 142.7
(1) Operating income for the Wholesale segment for the twelve months ended June 2007 and 2006 includes pre-tax
restructuring and impairment charges of $13.4 million and $4.2 million, respectively.
(2) Operating income for the Retail segment for the twelve months ended June 2008 includes pre-tax restructuring and
impairment charges of $6.8 million.
(3) Represents the change in the inventory profit elimination entry necessary to adjust for the embedded wholesale profit
contained in Ethan Allen-owned design center inventory existing at the end of the period.
Fiscal 2008 Compared to Fiscal 2007
Consolidated revenue for the fiscal year ended June 30, 2008 decreased by $25.3 million, or 2.5%, to $980 million,
from $1.005 billion in fiscal 2007. Net sales for the period largely reflect the delivery of product associated with
booked orders and backlog existing as of beginning of the period. During the year, sales were impacted by a
weak retail environment for home furnishings, particularly during the latter half of the year. We believe this is
due to continued weakening of consumer confidence with the current economic conditions in the U.S. and
abroad. These factors were partially offset by (i) the positive effects of our continued efforts to reposition the
retail network, (ii) new product introductions, and (iii) an increase in the continued use of national television as
an advertising medium, where we emphasize to clients our interior design services and the full line of our quality
product offerings.
We have made considerable investment within the retail network to strengthen the level of service, professionalism,
interior design competence, efficiency, and effectiveness of retail design center personnel. The implementation of the
"team" concept is the latest phase of that progression, which resulted in the development of over 280 interior design
teams. We believe that with this structure along with the emphasis in our messaging to clients that we are here to
"help as little or as much" as they like, as well as offering the benefit of making appointments with our design
professionals, we continue to improve the customer service experience.
23
Wholesale revenue for fiscal 2008 decreased by $39.8 million, or 6.1%, to $616.2 million from $656.0 million in the
prior year. The year-over-year decrease was primarily attributable to a decline in the incoming order rate as a
result of the softer retail environment for home furnishings noted throughout much of the current period and
from fewer independent retail design centers, which decreased to 136 from 155 including six locations transferred
in to the company’s Retail division during the year.
Retail revenue from Ethan Allen-owned design centers for the twelve months ended June 30, 2008 increased by
$26.0 million, or 3.7%, to $724.6 million from $698.6 million for the twelve months ended June 30, 2007. The
increase in retail sales by Ethan Allen-owned design centers was attributable to higher sales generated by newly
opened (including relocated) or acquired design centers of $66.8 million. This favorable variance was partially
offset by unfavorable variances related to a decrease in comparable design center delivered sales of $21.3 million,
or 3.2%, and reduced revenue from sold and closed design centers of $19.5 million. The number of Ethan Allen-
owned design centers increased to 159 as of June 30, 2008 as compared to 158 as of June 30, 2007. During that
twelve month period, we acquired five design centers from, and opened one previously owned by independent
retailers, and opened eighteen new design centers (of which eleven were relocations).
Comparable design centers 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 (including relocated) design centers. Design centers acquired by us from independent retailers
are included in comparable design center sales in their 13th full month of Ethan Allen-owned operations.
Year-over-year, written business of Ethan Allen-owned design centers increased 0.6% and comparable design
center written business decreased 5.6%. Over that same period, wholesale orders decreased 8.0%. Retail written
business reflects the softer retail environment for home furnishings noted throughout much of the current year,
likely offset, to some degree, by (i) our continued efforts to reposition the retail network, (ii) recent product
introductions, and (iii) our continued use of national television as an advertising medium throughout much of the
year.
Gross profit for fiscal 2008 declined slightly to $526.1 million from $526.6 million in fiscal 2007. The $0.5 million
decrease in gross profit was primarily attributable to a decline in wholesale sales volume partially offset by a shift
in sales mix with retail sales representing a higher proportionate share of total sales in the current full year (74%)
as compared to the prior full year (69%). The consolidated gross margin increased to 53.7% for fiscal 2008 from
52.4% in fiscal 2007 as a result, primarily, of the factors set forth above.
Operating profit, the elements of which are discussed in greater detail below, was impacted by the following
items during the twelve months ended June 30, 2008 and 2007:
On January 10, 2008, we announced a plan to consolidate the operations of certain company owned retail design
centers and retail service centers. In connection with this initiative, we have permanently ceased operations at ten
design centers and six retail service centers which, for the most part, were consolidated into other existing
operations. We also implemented our design team concept across the Retail division at the end of the fiscal year.
These decisions resulted in a reduction in headcount of approximately 400 employees, with the reduction in
headcount occurring during the third and fourth quarters of fiscal 2008. Additionally, other actions taken during
fiscal 2008 were not included in the restructuring plan. Altogether, there were more than 500 fewer associates in
our Retail business by the end of the fiscal year. We recorded a pre-tax restructuring and impairment charge of
$4.0 million during the third quarter of fiscal 2008 and $2.8 million in the fourth quarter. Of the $6.8 million for
the fiscal year, $3.3 million is for lease cancellation and other costs which will be paid out over periods ranging
from less than one to seven years; $2.7 million, which was non-cash in nature, related to fixed asset impairment
charges, primarily for real property and leasehold improvements; and $0.9 million was related to employee
severance and benefits. Within the next six months, the Company expects to record a net gain of approximately
$2.5 million to $3.5 million on the sale of real estate held for sale, net of restructuring for remaining charges of
lease termination and other costs, after which time the consolidation plan should be complete. The cumulative
24
net pre-tax cost of implementing the 2008 restructuring is estimated to be between $3.3 million and $4.3 million
($2.1 million and $2.7 million after tax).
On September 6, 2006, we announced a plan to close our Spruce Pine, North Carolina case goods manufacturing
facility and convert our Atoka, Oklahoma upholstery manufacturing facility into a regional distribution center. In
connection with this initiative, we permanently ceased production at both locations, allocating production among
our remaining domestic manufacturing locations and selected offshore suppliers. The decision impacted
approximately 465 employees with the reduction in headcount occurring during the second and third quarters of
fiscal 2007. We recorded a pre-tax restructuring and impairment charge of $14.1 million during the quarter ended
September 30, 2006, of which $4.0 million was related to employee severance and benefits and other plant exit
costs, and $10.1 million, which was non-cash in nature, was related to fixed asset impairment charges, primarily
for real property and machinery and equipment, stemming from the decision to cease production activities.
During the first six months of fiscal 2007, adjustments totaling $0.4 million were recorded to reverse remaining
previously established accruals which were no longer deemed necessary.
Operating expenses increased $14.6 million, or 3.5%, to $430.1 million, or 43.9% of net sales, in fiscal 2008 from
$415.5 million, or 41.3% of net sales, in fiscal 2007. This increase was primarily attributable to increased costs
associated with (i) occupancy, managerial salaries and benefits, and designer compensation largely because of our
continued efforts to be located in more prominent locations and to upgrade our ability to provide professional
service during the year, as well as (ii) the impact of higher fuel costs on warehousing and delivery. Partially
offsetting these increases were (i) decreases in workers compensation insurance and health insurance and
compensation costs as a result of improved claim experience, and (ii) a period-over-period reduction in the
restructuring and impairment charges mentioned earlier.
Consolidated operating income for the year ended June 30, 2008 totaled $96.0 million, or 9.8% of net sales,
compared to $111.1 million, or 11.1% of net sales, in the prior year. The decrease of $15.1 million was primarily
attributable to higher period-over-period operating expenses discussed above, partially offset by (i) a reduction in
restructuring and impairment charges and (ii) a small decline in gross profit, all of which were discussed
previously.
Wholesale operating income for fiscal 2008 totaled $100.3 million, or 16.3% of net sales, as compared to $99.2
million, or 15.1% of net sales, in the prior year. The improvement of $1.1 million was primarily attributable to (i)
the reduction in restructuring and impairment charges mentioned above, and (ii) improved performance within
our remaining product sourcing operations, including a reduction in overhead as a result of past plant closures.
These factors were partially offset by an overall decrease in wholesale shipments during the year.
Retail operating income decreased $18.0 million to a $2.8 million loss, or (0.4)% of sales, for fiscal 2008, from
$15.2 million, or 2.2% of sales, for fiscal 2007. The decrease in retail operating income generated by Ethan Allen-
owned design centers was primarily attributable to higher operating expenses as a result of our continued efforts
to reposition the retail network including the $6.8 million restructuring and impairment charges recorded in the
year. These unfavorable variances were partially offset by higher gross profit on the higher sales recorded during
the year.
Interest and other miscellaneous income, net totaled $7.9 million in fiscal 2008 as compared to $10.4 million in
fiscal 2007. The $2.5 million decrease was mostly due to decreased investment income resulting from lower cash
and short term investment balances maintained during the current period coupled with lower rates of interest.
Interest and other related financing costs remained largely unchanged at $11.7 million from $11.8 million in the
prior year. This amount mostly consists of interest expense on our senior unsecured debt issued in September
2005.
Income tax expense totaled $34.1 million for fiscal 2008 as compared to $40.5 million for fiscal 2007. Our
effective tax rate for the current year was 37.0%, compared to 36.9% in the prior year. The effective tax rate was a
25
result, primarily, of the adverse effects of recently-enacted changes within certain state tax legislation, increased
state income tax liability arising in connection with the operation of a greater number of Company owned design
centers, and increased foreign income tax liability associated with our five retail design centers operating in
Canada and our manufacturing operation in Mexico. Partially offsetting these items were the benefits derived
from the manufacturers’ deduction provided for under The Jobs Creation Act of 2004 and certain tax planning
initiatives.
Net income for fiscal 2008 was of $58.1 million as compared to $69.2 million in fiscal 2007. Net income per
diluted share totaled $1.97 in the current year and $2.15 per diluted share in the prior year.
Fiscal 2007 Compared to Fiscal 2006
Consolidated revenue for the fiscal year ended June 30, 2007 decreased by $61.1 million, or 5.7%, to $1.005
billion, from $1.066 billion in fiscal 2006. Net sales for the period largely reflect the delivery of product
associated with booked orders and backlog existing as of beginning of the period. During the year, sales were
impacted by (i) a weak retail environment for home furnishings, and (ii) a substantial reduction in backlog
experienced during the prior year as a result of both a more favorable economic environment and our initiative to
reduce the lead time associated with product delivery to both our independent retailers and consumers. These
factors were partially offset by (i) the positive effects of our continued efforts to reposition the retail network, and
(ii) new product introductions.
To date, the repositioning of the retail network has involved three primary elements: the opening of larger, new
or relocated design centers in more prominent locations; development of a more focused advertising campaign to
highlight our solutions-based approach and position Ethan Allen as an authority in style and design; and
investment within the retail network to strengthen the existing management structure. Implementation of our
“project management” initiative, which has resulted in the promotion and/or hiring of more than 300 project
managers, has enabled us to increase the level of service, professionalism, interior design competence, efficiency,
and effectiveness of retail design center personnel. With project managers actively partnering with design
consultants and their customers, we believe we have improved the customer service experience and facilitated, to
some degree, better awareness of potential cross-selling opportunities.
Wholesale revenue for fiscal 2007 decreased by $80.1 million, or 10.9%, to $656.0 million from $736.1 million in
the prior year. The year-over-year decrease was primarily attributable to a decline in the incoming order rate as a
result of the softer retail environment for home furnishings noted throughout much of the current period.
Retail revenue from Ethan Allen-owned design centers for the twelve months ended June 30, 2007 increased by
$7.6 million, or 1.1%, to $698.6 million from $691.0 million for the twelve months ended June 30, 2006. The
increase in retail sales by Ethan Allen-owned design centers was attributable to higher sales generated by newly
opened (including relocated) or acquired design centers of $62.0 million. This favorable variance was partially
offset by unfavorable variances related to a decrease in comparable design center delivered sales of $41.3 million,
or 6.3%, and reduced revenue from sold and closed design centers, which generated $13.1 million fewer sales
during fiscal 2007 as compared to fiscal 2006. The number of Ethan Allen-owned design centers increased to 158
as of June 30, 2007 as compared to 139 as of June 30, 2006. During that twelve month period, we acquired 12
design centers from independent retailers and opened 10 design centers (3 of which were relocations).
Comparable design centers 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 (including relocated) design centers. Design centers acquired by us from independent retailers
are included in comparable design center sales in their 13th full month of Ethan Allen-owned operations.
Year-over-year, written business of Ethan Allen-owned design centers increased 2.9% and comparable design
center written business decreased 5.2%. Over that same period, wholesale orders decreased 8.6%. Retail written
business reflects the softer retail environment for home furnishings noted throughout much of fiscal 2007, likely
26
offset, to some degree, by (i) our continued efforts to reposition the retail network, (ii) recent product
introductions, and (iii) our use of national television as an advertising medium throughout much of the year.
Wholesale written business also reflects the impact of the aforementioned factors.
Gross profit for fiscal 2007 decreased to $526.6 million from $541.0 million in fiscal 2006. The $14.4 million, or
2.7%, decrease in gross profit was primarily attributable to a decline in wholesale sales volume and inefficiencies
experienced within our Spruce Pine, North Carolina and Atoka, Oklahoma manufacturing operations as a result
of the phase-out of production at these facilities during the current year. Partially offsetting these factors were (i)
a shift in sales mix with retail sales representing a higher proportionate share of total sales in fiscal 2007 (73%) as
compared to the prior year (68%), and (ii) improved performance within our remaining product sourcing
operations, including price stabilization with regard to the cost of foam and a reduction in overhead as a result of
past plant closures. The consolidated gross margin increased to 52.4% for fiscal 2007 from 50.7% in fiscal 2006 as a
result, primarily, of the factors set forth above.
Operating profit, the elements of which are discussed in greater detail below, was impacted by the following
items during the twelve months ended June 30, 2007 and 2006:
On September 6, 2006, we announced a plan to close our Spruce Pine, North Carolina case goods manufacturing
facility and convert our Atoka, Oklahoma upholstery manufacturing facility into a regional distribution center. In
connection with this initiative, we permanently ceased production at both locations, allocating production among
our remaining domestic manufacturing locations and selected offshore suppliers. The decision impacted
approximately 465 employees with the reduction in headcount occurring during the second and third quarters of
fiscal 2007. We recorded a pre-tax restructuring and impairment charge of $14.1 million during the quarter ended
September 30, 2006, of which $4.0 million was related to employee severance and benefits and other plant exit
costs, and $10.1 million, which was non-cash in nature, was related to fixed asset impairment charges, primarily
for real property and machinery and equipment, stemming from the decision to cease production activities.
During the three months ended March 31, 2007 and December 31, 2006, adjustments totaling $0.2 million and $0.3
million, respectively, were recorded to reverse remaining previously established accruals which were no longer
deemed necessary.
On September 7, 2005, we announced a plan to convert one of our existing manufacturing facilities into a regional
distribution center. The facility, formerly involved in the production of wood case goods furniture, is located in
Dublin, Virginia. In connection with this initiative, we permanently ceased production at the Dublin location,
allocating production among our remaining domestic manufacturing locations and selected offshore suppliers,
and consolidated the distribution operations of our existing Old Fort, North Carolina location into this larger
facility. The decision impacted approximately 325 employees, of which approximately 75 have been employed in
new positions. We recorded a pre-tax restructuring and impairment charge of $4.2 million during the quarter
ended September 30, 2005, of which $1.3 million was related to employee severance and benefits and other plant
exit costs, and $2.9 million, which was non-cash in nature, was related to fixed asset impairment charges,
primarily for machinery and equipment, stemming from the decision to cease production activities. During fiscal
2007, adjustments totaling $0.2 million were recorded to reverse remaining previously established accruals which
were no longer deemed necessary.
Including the restructuring and impairment charges referred to above, operating expenses increased $17.2
million, or 4.3%, to $415.5 million, or 41.3% of net sales, in fiscal 2007 from $398.3 million, or 37.4% of net sales, in
fiscal 2006. This increase was primarily attributable to increased costs associated with (i) our continued efforts to
reposition the retail network which, during the year, resulted in higher costs associated with managerial salaries
and benefits, occupancy, delivery and warehousing, and designer compensation, and (ii) the period-over-period
change in the aforementioned restructuring and impairment charges. Partially offsetting these increases were (i)
a decrease within certain compensation and benefit related costs, including share-based compensation expense,
(ii) a decrease in retail advertising costs, and (iii) a reduction in operating costs associated with closed
manufacturing facilities, including reduced losses incurred in connection with the disposition of certain property,
plant and equipment.
27
Including the restructuring and impairment charges referred to above, consolidated operating income for the
year ended June 30, 2007 totaled $111.1 million, or 11.1% of net sales, compared to $142.7 million, or 13.4% of net
sales, in the prior year. The decrease of $31.6 million was primarily attributable to (i) higher period-over-period
operating expenses and (ii) a decline in gross profit, both of which were discussed previously.
Including the restructuring and impairment charges referred to above, wholesale operating income for fiscal
2007 totaled $99.2 million, or 15.1% of net sales, as compared to $125.2 million, or 17.0% of net sales, in the prior
year. The decrease of $26.0 million was primarily attributable to (i) a decline in wholesale sales volume, (ii) the
period-over-period change in the aforementioned restructuring and impairment charges, and (iii) inefficiencies
experienced within our Spruce Pine, North Carolina and Atoka, Oklahoma manufacturing operations as a result
of the phase-out of production at these facilities during fiscal 2007. These factors were partially offset by (i)
improved performance within our remaining product sourcing operations, including price stabilization with
regard to the cost of foam and a reduction in overhead as a result of past plant closures, (ii) a reduction in certain
compensation and benefit related costs, including share-based compensation expense, and (iii) a decrease in
operating costs associated with closed manufacturing facilities, including reduced losses incurred in connection
with the disposition of certain property, plant and equipment.
Retail operating income decreased $4.5 million to $15.2 million, or 2.2% of sales, for fiscal 2007, from $19.7
million, or 2.9% of sales, for fiscal 2006. The decrease in retail operating income generated by Ethan Allen-owned
design centers was primarily attributable to higher operating expenses as a result of our continued efforts to
reposition the retail network and a decline in sales volume associated with comparable design centers and design
centers closed or sold during the period. These unfavorable variances were partially offset by higher sales
volume generated by newly-opened (including relocations) or acquired design centers.
Interest and other miscellaneous income, net totaled $10.4 million in fiscal 2007 as compared to $4.9 million in
fiscal 2006. The $5.4 million increase was due, primarily, to (i) increased investment income resulting from
higher interest rates and higher cash and short-term investment balances maintained during fiscal 2007, (ii)
increased gains recorded in connection with the sale of selected real estate assets, and (iii) prior year losses
incurred in connection with our past joint venture with U.K.-based MFI Furniture Group, Plc., the operations of
which had ceased as of June 30, 2006.
Interest and other related financing costs increased $2.3 million to $11.8 million from $9.5 million in the prior
year. The increase was due, primarily, to interest expense incurred in connection with our issuance of senior
unsecured debt in September 2005.
Income tax expense totaled $40.5 million for fiscal 2007 as compared to $52.4 million for fiscal 2006. Our
effective tax rate for fiscal 2007 was 36.9%, down from 38.0% in the prior year. The lower effective tax rate was a
result, primarily, of the benefits derived from the manufacturers’ deduction provided for under The Jobs Creation
Act of 2004 and certain tax planning initiatives. Partially offsetting these items were the adverse effects of
recently-enacted changes within certain state tax legislation, increased state income tax liability arising in
connection with the operation of a greater number of Company owned design centers, and increased foreign
income tax liability associated with our five retail design centers operating in Canada.
For fiscal 2007, we recorded net income of $69.2 million as compared to $85.7 million in fiscal 2006. Net income
per diluted share totaled $2.15 in fiscal 2007 and $2.51 per diluted share in the prior year.
Liquidity and Capital Resources
As of June 30, 2008, we held cash and cash equivalents totaling $74.4 million. Our principal sources of liquidity
include cash and cash equivalents, cash flow from operations, and borrowing capacity under a $200.0 million
revolving credit facility.
28
The credit facility 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. The credit facility contains various covenants which may limit our ability to: incur debt; engage in
mergers and consolidations; make restricted payments; sell certain assets; make investments; and issue stock. We
are also required to meet certain financial covenants including a fixed charge coverage ratio, which shall not be
less than 3.00 to 1 for any period of four consecutive fiscal quarters ended on or after June 30, 2005, and a leverage
ratio, which shall not be greater than 3.00 to 1 at any time. As of June 30, 2008, we had satisfactorily complied
with these covenants.
In addition, on September 27, 2005, we completed a private offering of $200.0 million in ten-year senior
unsecured notes due 2015 (the "Senior Notes"). The Senior Notes were offered by Ethan Allen Global, Inc.
("Global"), a wholly-owned subsidiary of the Company, and have an annual coupon rate of 5.375%. We have
used the net proceeds of $198.4 million to expand our retail network, invest in our manufacturing and logistics
operations, and for other general corporate purposes.
In July 2007, Standard & Poor’s ("S&P") lowered our corporate and senior unsecured credit ratings from "A-" to
"BBB+". Despite S&P’s view that we (i) maintain a satisfactory business model consisting of a well-known brand,
dedicated distribution network, and efficient manufacturing, and (ii) possess ample liquidity, the ratings action
was initiated in response to continued softness in the housing market and its resultant impact on the home
furnishings industry, including the credit protection measures of its participants. The change in our credit rating
had no impact on (i) our ability to satisfactorily comply with our existing debt covenants or (ii) the pricing we are
subject to under our credit facility.
A summary of net cash provided by (used in) operating, investing, and financing activities for each of the last
three fiscal years is provided below (in millions):
Fiscal Year Ended June 30,
2007
2008
2006
Operating Activities
Net income plus depreciation and amortization
Working capital
Excess tax benefits from share-based payment arrangements
Other (non-cash items, long-term assets and liabilities)
Total provided by operating activities
Investing Activities
Capital expenditures
Acquisitions
Asset sales
Other
Total used in investing activities
Financing Activities
Revolving credit borrowings (payments), net
Issuances (payments) of long-term debt, net
Issuances of common stock
Purchases and retirement of company stock
Payment of cash dividends
Excess tax benefits from share-based payment arrangements
Payment of deferred financing costs
Total provided by (used in) financing activities
29
$
$
$
$
$
$
82.7
(5.5)
(2.1)
11.0
86.1
(60.0)
(7.8)
6.9
(0.5)
(61.3)
-
-
0.5
(75.6)
(25.5)
2.1
-
(98.5)
$
$
$
$
$
$
92.2
20.9
(5.0)
11.1
119.2
(59.0)
(15.3)
5.4
0.2
(68.7)
-
-
0.5
(57.2)
(24.8)
5.0
(0.1)
(76.6)
$
$
$
$
$
$
107.3
17.0
(0.5)
7.8
131.6
(41.5)
(7.8)
4.4
0.1
(44.8)
(8.0)
198.1
2.3
(84.1)
(23.1)
0.5
(2.2)
83.5
Operating Activities
During fiscal 2008, cash provided by operating activities decreased $33.1 million because working capital
(accounts receivable, inventories, prepaid and other current assets, customer deposits, payables, accrued
expenses, and other current liabilities) arising in the ordinary course of business decreased in the prior fiscal year
and increased in the current fiscal year. Lower net income largely the result of lower sales than in the prior fiscal
year was the other primary driver of the decrease in cash provided by operating activities.
Investing Activities
In fiscal 2008, cash used in investing activities was lower by $7.4 million due, primarily, to a $7.5 million decrease
in cash utilized to fund acquisition activity. The level of capital expenditures remained relatively constant in
fiscal 2008 as compared to fiscal 2007. The current level of capital spending is principally attributable to (i) new
design center development and renovation, and (ii) entity-wide technology initiatives. We anticipate that cash
from operations will be sufficient to fund future capital expenditures.
Financing Activities
For fiscal 2008, cash used in financing activities increased $21.9 million as a result, primarily, of an increase in
payments for the acquisition of treasury stock, and to a lesser extent by changes in excess tax benefits arising in
connection with the exercise of share-based awards. On July 22, 2008, we declared a dividend of $0.25 per
common share, payable on October 27, 2008, to shareholders of record as of October 10, 2008. We expect to
continue to declare quarterly dividends for the foreseeable future.
As of June 30, 2008, our outstanding debt totaled $203.0 million, the current and long-term portions of which
amounted to less than $0.1 million and $203.0 million, respectively. The aggregate scheduled maturities of long-
term debt for each of the next five fiscal years are: less than $0.1 million in both fiscal 2009 and fiscal 2010, $3.9
million in fiscal 2011; and less than $0.1 million in both fiscal 2012 and in fiscal 2013. The balance of our long-
term debt ($199.0 million) matures in fiscal 2016.
We had no revolving loans outstanding under the credit facility as of June 30, 2008, and stand-by letters of credit
outstanding under the facility at that date totaled $14.9 million. Remaining available borrowing capacity under
the facility was $185.1 million at June 30, 2008.
The following table summarizes, as of June 30, 2008, the timing of cash payments related to our outstanding
contractual obligations (in thousands):
Less
than 1
Year
Total
1-3
Years
4-5
Years
More
than 5
Years
Long-term debt obligations:
Debt maturities
Contractual interest
Operating lease obligations
Letters of credit
Purchase obligations (1)
Other long-term liabilities
Total contractual obligations
40 $
3,917 $
$ 203,029 $
81,567
245,703
14,881
-
277
11,049
39,221
14,881
-
28
$ 545,457 $ 65,219 $
22,094
64,287
-
-
34
90,332 $
21,511
47,916
-
-
26
30 $ 199,042
26,913
94.279
-
-
189
69,483 $ 320,423
(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 we are not a party to any significant long-term supply contracts or purchase
commitments, we do, in the normal course of business, regularly initiate purchase orders for the procurement of (i) selected finished
goods sourced from third-party suppliers, (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 June
30, 2008, our open purchase orders with respect to such goods and services totaled approximately $55 million.
30
Further discussion of our 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.
We believe that our cash flow from operations, together with our other available sources of liquidity, will be
adequate to make all required payments of principal and interest on our debt, to permit anticipated capital
expenditures, and to fund working capital and other cash requirements. As of June 30, 2008, we had working
capital of $174.7 million and a current ratio of 2.29 to 1.
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, we have been authorized by our Board of
Directors to repurchase our common stock, from time to time, either directly or through agents, in the open
market at prices and on terms satisfactory to us. All of our common stock repurchases and retirements are
recorded as treasury stock and result in a reduction of shareholders’ equity.
During fiscal 2008, 2007 and 2006, we repurchased and/or retired the following shares of our common stock:
Common shares repurchased
Cost to repurchase common shares
Average price per share
2008 (1)
2,259,631
$69,745,024
$30.87
2007(2)(3)
1,548,700
$53,955,970
$34.84
2006(4)
2,545,200
$85,106,563
$33.44
(1) During fiscal 2008, we also retired 661,688 shares of common stock tendered upon the exercise of outstanding employee stock
options (592,861 to cover share exercise and 68,827 to cover related employee tax withholding liabilities). The value of such
shares on the date redeemed was $23,033,359, representing an average price per share of $34.81.
(2) The cost to repurchase shares in fiscal 2007 reflects $3,436,230 in common stock repurchases with a June 2007 trade date and a
July 2007 settlement date.
(3) During fiscal 2007, we also retired 555,531 shares of common stock tendered upon the exercise of outstanding employee stock
options (410,073 to cover share exercise and 145,458 to cover related employee tax withholding liabilities). The value of such
shares on the date redeemed was $21,506,193, representing an average price per share of $38.71.
(4) The cost to repurchase shares in fiscal 2006 reflects $1,000,807 in common stock repurchases with a June 2006 trade date and a
July 2006 settlement date.
For each of the fiscal years presented above, we funded our purchases of treasury stock with existing cash on
hand and cash generated through current period operations. During the last three fiscal years, the Board of
Directors increased the then remaining share repurchase authorization as follows: to 2.5 million shares on
November 15, 2005; to 2.5 million shares on July 25, 2006; to 2.5 million shares on July 24, 2007 and to 2.0 million
shares on November 13, 2007. As of June 30, 2008, we had a remaining Board authorization to repurchase 1.6
million shares.
Off-Balance Sheet Arrangements and Other Commitments, Contingencies and Contractual Obligations
Except as indicated below, we do not utilize or employ any off-balance sheet arrangements, including special-
purpose entities, in operating our business. As such, we do not maintain any (i) retained or contingent interests,
(ii) derivative instruments, or (iii) variable interests which could serve as a source of potential risk to our future
liquidity, capital resources and results of operations.
We 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 our
underlying relationship with the benefiting party and the business purpose for which the guarantee or obligation
is being provided. Details of those arrangements for which we act as guarantor or obligor are provided below.
31
Retailer-Related Guarantees
Independent Retailer Credit Facility
We have obligated ourselves, on behalf of one of our independent retailers, with respect to a $1.5 million credit
facility (the "Credit Facility") comprised of a $1.1 million revolving line of credit and a $0.4 million term loan. This
obligation requires us, in the event of the retailer’s default under the Credit Facility, to repurchase the retailer’s
inventory, applying such purchase price to the retailer’s outstanding indebtedness under the Credit Facility. Our
obligation remains in effect for the life of the term loan. The original agreement, which expired in April 2008, was
replaced with a new agreement with the same terms and conditions which expires in December 2008. The
maximum potential amount of future payments (undiscounted) that we could be required to make under this
obligation is limited to the amount outstanding under the Credit Facility at the time of default (subject to pre-
determined lending limits based on the value of the underlying inventory) and, as such, is not an estimate of
future cash flows. No specific recourse or collateral provisions exist that would enable recovery of any portion of
amounts paid under this obligation, except to the extent that we maintain the right to take title to the repurchased
inventory. We anticipate that the repurchased inventory could subsequently be sold through our retail design
center network.
As of June 30, 2008, the amount outstanding under the Credit Facility totaled approximately $1.3 million, with
$1.0 million outstanding under the revolving credit line and $0.3 million under the term loan. Based on the
underlying creditworthiness of the respective retailer, we believe this obligation will expire without requiring
funding by us. 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 our non-contingent obligation under this arrangement as a result of modifications made to
the Credit Facility subsequent to January 1, 2003. As of June 30, 2008, the carrying amount of such liability is less
than $50,000.
Ethan Allen Consumer Credit Program
The terms and conditions of our consumer credit program, which is financed and administered by a third-party
financial institution on a non-recourse basis to Ethan Allen, are set forth in an agreement between us and that
financial service provider (the “Program Agreement”). Any independent retailer choosing to participate in the
consumer credit program is required to enter into a separate agreement with that same third-party financial
institution which sets forth the terms and conditions under which the retailer is to perform in connection with its
offering of consumer credit to its customers (the “Retailer Agreement”). We have obligated ourselves on behalf of
any independent retailer choosing to participate in our consumer credit program by agreeing, in the event of
default, breach, or failure of the independent retailer to perform under such Retailer Agreement, to take on
certain responsibilities of the independent retailer, including, but not limited to, delivery of goods and
reimbursement of customer deposits. Customer receivables originated by independent retailers remain non-
recourse to Ethan Allen. Our obligation remains in effect for the term of the Program Agreement which expires in
July 2012. While the maximum potential amount of future payments (undiscounted) that we could be required to
make under this obligation is indeterminable, recourse provisions exist that would enable us to recover, from the
independent retailer, any amount paid or incurred by us related to our performance. Based on the underlying
creditworthiness of our independent retailers, including their historical ability to satisfactorily perform in
connection with the terms of our consumer credit program, we believe this obligation will expire without
requiring funding by us.
Product Warranties
Our products, including our 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 our domestic independent retailers are required to enter into, and perform in accordance with the terms
and conditions of, a warranty service agreement. We record provisions for estimated warranty and other related
costs at time of sale based on historical warranty loss experience and make periodic adjustments to those
provisions to reflect actual experience. On rare occasion, certain warranty and other related claims involve
32
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 our historical experience. We provide for such warranty
issues as they become known and are deemed to be both probable 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 our historical experience. As of June 30, 2008, the Company’s product warranty liability
totaled $1.6 million.
Impact of Inflation
We believe inflation had an impact on our business the last three fiscal years but we have generally been able to
increase prices, create operational efficiencies, or seek lower cost alternatives in order to offset increases in
operating costs and effectively manage our working capital.
Business Outlook
While we cannot forecast, with any degree of certainty, changes in the various macro-economic factors that
influence the incoming order rate, we believe that we are well-positioned both for the possibility of continued
market softness and the next phase of economic growth based upon our existing business model which includes:
(i) an established brand; (ii) a comprehensive complement of home decorating solutions; and (iii) a vertically-
integrated operating structure.
As macro-economic factors change, however, it is also possible that our costs associated with production
(including raw materials and labor), distribution (including freight and fuel charges), and retail operations
(including compensation and benefits, delivery and warehousing, occupancy, and advertising expenses) may
increase. We cannot reasonably predict when, or to what extent, such events may occur or what effect, if any,
such events may have on our consolidated financial condition or results of operations.
The home furnishings industry remains extremely competitive with respect to both the sourcing of products and
the retail sale of those products. Domestic manufacturers continue to face pricing pressures as a result of the
manufacturing capabilities developed during recent years in other countries, specifically within Asia. In response
to these pressures, a large number of U.S. furniture manufacturers and retailers, including us, have increased their
overseas sourcing activities in an attempt to maintain a competitive advantage and retain market share. At the
present time, we domestically manufacture and/or assemble approximately 60% of our products. We continue 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.
In addition, we believe that our retail strategy, which involves (i) a continued focus on providing a wide array of
product solutions and superior customer service, (ii) the opening of new or relocated design centers in more
prominent locations, while encouraging independent retailers to do the same, (iii) the implementation of design
teams within our retail network, and (iv) further expansion internationally, provides an opportunity to further
grow our business.
Further discussion of the home furnishings industry has been included under Item 1 of this Annual Report.
33
Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS No. 141(R)), which
replaces SFAS No. 141. SFAS No. 141(R) establishes principles and requirements for how an acquirer in a business
combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities
assumed, and any controlling interest; recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase; and determines what information to disclose to enable users of
the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R)
is to be applied prospectively to business combinations for which the acquisition date is on or after an entity's
fiscal year that begins after December 15, 2008 (July 1, 2009 for the Company). The impact of this Statement on the
Company’s financial position, results of operations and cash flows will be dependent on the terms, conditions
and details of such acquisitions.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities,
which allows the Company to choose to measure selected financial assets and financial liabilities at fair value.
Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings.
SFAS No. 159 is effective for fiscal years beginning after November 15, 2007 (July 1, 2008 for the Company). We
are currently in the process of evaluating the impact of this authoritative guidance on our consolidated financial
statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which provides a single definition of
fair value, and requires additional disclosure about the use of fair value to measure assets and liabilities. SFAS
No. 157 emphasizes that fair value is a market-based measurement defined as the price that would be received to
sell an asset or liability in an orderly transaction between market participants at the measurement date. Thus,
SFAS No. 157 adheres to a definition of fair value based upon exit price as opposed to entry price (i.e. the price
paid to acquire an asset or liability). This pronouncement is effective for fiscal years beginning after November 15,
2007 (July 1, 2008 for the Company). We are currently in the process of evaluating the impact of this authoritative
guidance on our consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks relating to fluctuations in interest rates and foreign currency exchange rates.
Interest rate risk exists primarily through our borrowing activities. Our policy has been to utilize United States
dollar denominated borrowings to fund our 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
our future financing requirements.
For floating-rate obligations, interest rate changes do not affect the fair value of the underlying financial
instrument but do impact future earnings and cash flows, assuming other factors are held constant. Conversely,
for fixed-rate obligations, interest rate changes affect the fair value of the underlying financial instrument but do
not impact earnings or cash flows. At June 30, 2008, we had no floating-rate debt obligations outstanding. As of
that same date, our fixed-rate debt obligations consist, primarily, of the Senior Notes issued on September 27,
2005. The estimated fair value of the Senior Notes as of June 30, 2008, which is based on changes, if any, in interest
rates and our creditworthiness subsequent to the date on which the debt was issued, and which has been
determined using quoted market prices, was $182.1 million as compared to a carrying value of $198.8 million.
Foreign currency exchange risk is primarily limited to our operation of five Ethan Allen-owned retail design
centers located in Canada as substantially all purchases of imported parts and finished goods are denominated in
34
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 our consolidated results of operations.
Historically, we have not entered into financial instrument, including derivative, transactions for trading or other
speculative purposes or to manage interest rate or currency exposure. However, in connection with the issuance
of the Senior Notes, Global, in July and August 2005, 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 earnings, cash flows and equity. The forward contracts were entered into with a
major banking institution thereby mitigating the risk of credit loss. Upon issuance of the Senior Notes in
September 2005, the related forward contracts were settled. At the present time, we have no current plans to
engage in further hedging activities.
Item 8. Financial Statements and Supplementary Data
Our 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, 2008 and 2007, 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, 2008. We also have audited the
Company’s internal control over financial reporting as of June 30, 2008, 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, included in the accompanying Management’s Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements
and an opinion on 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 audits of the consolidated 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, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included 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
35
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.
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, 2008 and 2007, and the results of
their operations and their cash flows for each of the years in the three-year period ended June 30, 2008, in
conformity with accounting principles generally accepted in the United States of America. Also in our opinion,
Ethan Allen Interiors Inc. and Subsidiaries maintained, in all material respects, effective internal control over
financial reporting as of June 30, 2008, based on criteria established in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
As discussed in Notes 1 and 11 to the consolidated financial statements, effective July 1, 2005, the Company
adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment. Also, as
discussed in Notes 1 and 12 to the consolidated financial statements, effective July 1, 2007, the Company adopted
FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.
/s/
KPMG LLP
Stamford, Connecticut
August 21, 2008
36
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2008 and 2007
(In thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, less allowance for doubtful accounts
of $2,535 at June 30, 2008 and $2,042 at June 30, 2007
Inventories (note 4)
Prepaid expenses and other current assets
Deferred income taxes (note 12)
Total current assets
Property, plant and equipment, net (note 5)
Goodwill and other intangible assets (notes 3 and 6)
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt (note 7)
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
Shareholders' equity (notes 9, 10, 11 and 15):
Class A common stock, par value $.01, 150,000,000
shares authorized, 48,251,780 shares issued at
June 30, 2008 and 47,454,450 shares issued at
June 30, 2007
Class B common stock, par value $.01, 600,000 shares
authorized; no shares issued and outstanding at
June 30, 2008 and June 30, 2007
Preferred stock, par value $.01, 1,055,000 shares
authorized, no shares issued and outstanding at
June 30, 2008 and 2007
Additional paid-in capital
Less: Treasury stock (at cost), 19,565,901 shares at
June 30, 2008 and 16,644,582 shares at June 30, 2007
Retained earnings
Accumulated other comprehensive income
Total shareholders' equity
Total liabilities and shareholders' equity
See accompanying notes to consolidated financial statements.
37
2008
2007
$ 74,376
$ 147,879
12,672
186,265
32,860
4,005
310,178
350,432
96,823
4,540
$ 761,973
14,602
181,884
33,104
4,960
382,429
322,185
92,500
5,484
$ 802,598
$ 41
47,297
26,444
32,568
29,152
135,502
202,988
20,383
27,327
386,200
$ 40
52,072
26,650
35,243
33,434
147,439
202,868
12,003
30,646
392,956
482
474
-
-
-
354,725
355,207
-
330,268
330,742
(588,783)
606,648
2,701
375,773
$ 761,973
(496,005)
573,535
1,370
409,642
$ 802,598
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For Years Ended June 30, 2008, 2007 and 2006
(In thousands, except per share data)
Net Sales
Cost of sales
Gross profit
Operating expenses:
Selling
General and administrative
Restructuring and impairment charge (note 2)
Total operating expenses
2008
2007
2006
$ 980,045
453,980
526,065
$1,005,312
478,729
526,583
$1,066,390
525,408
540,982
229,590
193,639
6,836
430,065
223,146
178,876
13,442
415,464
224,404
169,665
4,241
398,310
Operating income
96,000
111,119
142,672
Interest and other miscellaneous income, net
7,891
10,369
4,926
Interest and other related financing costs (note 7)
11,713
11,762
9,493
Income before income taxes
92,178
109,726
138,105
Income tax expense (note 12)
34,106
40,499
52,423
Net income
$ 58,072
$ 69,227
$ 85,682
Per share data (notes 10 and 17):
Net income per basic share
$ 1.98
$ 2.19
$ 2.58
Basic weighted average common shares
29,267
31,566
33,210
Net income per diluted share
$ 1.97
$ 2.15
$ 2.51
Diluted weighted average common shares
29,470
32,261
34,086
Dividends declared per common share
$ 0.88
$ 0.80
$ 0.72
See accompanying notes to consolidated financial statements.
38
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years Ended June 30, 2008, 2007 and 2006
(In thousands)
Operating activities
Net income
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization
Compensation expense related to share-based awards
Provision (benefit) for deferred income taxes
Excess tax benefits from shared-based awards
Restructuring and impairment charge
(Gain) loss on disposal of property, plant and equipment
Other
Changes in operating assets and liabilities, net of effects
of acquired businesses:
Accounts receivable
Inventories
Prepaid and other current assets
Other assets
Customer deposits
Accounts payable
Accrued expenses and other current liabilities
Other liabilities
2008
2007
2006
$ 58,072
$ 69,227
$ 85,682
24,670
1,260
(2,364)
(2,093)
1,762
110
221
618
(91)
3,626
660
(9,086)
3,230
(3,784)
9,326
23,013
821
200
(5,015)
9,439
(391)
500
6,677
14,531
220
657
(4,201)
(4,334)
7,993
(148)
21,599
1,900
(792)
(495)
2,915
2,841
584
3,697
3,479
3,767
690
(4,596)
8,730
1,882
(294)
Net cash provided by operating activities
86,137
119,189
131,589
Investing activities:
Proceeds from the disposal of property, plant and equipment
Capital expenditures
Acquisitions
Cash payment on hedging contracts
Other
6,943
(60,038)
(7,777)
-
(462)
5,431
(59,073)
(15,297)
-
198
4,433
(41,505)
(7,791)
(930)
978
Net cash used in investing activities
(61,334)
(68,741)
(44,815)
Financial activities:
Borrowings on revolving credit facility
Payments on revolving credit facility
Net proceeds from issuance of long-term debt
Payments on long-term debt and capital lease obligations
Purchases and retirements of company stock
Proceeds from the issuance of common stock
Excess tax benefits from share-based payment arrangements
Payment of deferred financing costs
Payment of cash dividends
-
-
-
(40)
(75,577)
474
2,093
-
(25,495)
-
-
-
(38)
(57,152)
521
5,015
(107)
(24,797)
17,000
(25,000)
198,396
(242)
(84,106)
2,349
495
(2,219)
(23,128)
Net cash provided by (used in) financing activities
(98,545)
(76,558)
83,545
Effect of exchange rate changes on cash
239
188
34
Net increase (decrease) in cash and cash equivalents
(73,503)
(25,922)
170,353
Cash and cash equivalents – beginning of year
Cash and cash equivalents – end of year
147,879
$ 74,376
173,801
$ 147,879
3,448
$ 173,801
Supplemental cash flow information:
Income taxes paid
Interest paid
See accompanying notes to consolidated financial statements.
$ 33,618
$ 11,132
$ 37,561
$ 11,173
$ 46,159
$ 6,319
39
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity
For the Years Ended June 30, 2008, 2007 and 2006
(In thousands, except share data)
Common
Stock
Additional
Paid-in
Capital
Treasury
Stock
Accumulated
Other
Comprehensive
Income
Retained
Earnings
Total
Balance as of June 30, 2005
$ 466
$302,620
$(337,635)
$ 1,051
$467,566
$ 434,068
Issuance of 100,616 shares of common stock
upon the exercise of share-based awards
(notes 9 and 11)
Compensation expense associated with share-
based awards (notes 9 and 11)
Tax benefit associated with exercise of share-
based awards (notes 9, 11 and 12)
Charge for early vesting of share-based awards
Treasury shares issued in connection with retail
design center acquisition (50,446 shares) (note 3)
Purchase/retirement of 2,545,200 shares of
company stock (note 9)
Dividends declared on common stock
Other comprehensive income (loss) (notes 7 and 15)
Currency translation adjustments
Loss on derivatives, net-of-tax
Net income
Total comprehensive income
1
-
-
-
-
-
-
-
-
-
2,348
1,900
498
15
471
-
-
-
-
-
-
-
-
-
1,434
(85,107)
-
-
-
-
-
-
-
-
-
-
-
-
-
2,349
1,900
498
15
1,905
-
(23,752)
(85,107)
(23,752)
-
-
-
329
(445)
-
-
-
85,682
329
(445)
85,682
85,566
Balance as of June 30, 2006
467
307,852
(421,308)
935
529,496
417,442
Issuance of 767,938 shares of common stock
upon the exercise of share-based awards
(notes 9 and 11)
Compensation expense associated with share-
based awards (notes 9 and 11)
Tax benefit associated with exercise of share-
- based awards (notes 9, 11 and 12)
Charge for early vesting of share-based awards
Treasury shares issued in connection with retail
design center acquisition (26,269 shares) (note 3)
Purchase/retirement of 2,104,231 shares of
company stock (note 9)
Dividends declared on common stock
Other comprehensive income (loss) (notes 7 and 15)
Currency translation adjustments
Loss on derivatives, net-of-tax
Net income
Total comprehensive income
7
16,388
-
-
-
-
-
-
-
-
-
821
5,015
22
170
-
-
-
-
-
-
-
-
-
765
(75,462)
-
-
-
-
-
-
-
-
-
-
-
-
-
16,395
821
5,015
22
935
-
(25,188)
(75,462)
(25,188)
-
-
-
387
48
-
-
-
69,227
387
48
69,227
69,662
Balance as of June 30, 2007
474
330,268
(496,005)
1,370
573,535
409,642
Issuance of 770,337 shares of common stock
upon the exercise of share-based awards
(notes 9 and 11)
Compensation expense associated with share-
based awards (notes 9 and 11)
Tax benefit associated with exercise of share-
based awards (notes 9, 11 and 12)
FIN 48 transition adjustment
Purchase/retirement of 2,921,319 shares of
company stock (note 9)
Dividends declared on common stock
Other comprehensive income (loss) (notes 7 and 15)
Currency translation adjustments
Loss on derivatives, net-of-tax
Net income
Total comprehensive income
8
21,104
-
-
-
-
-
-
-
-
1,260
2,093
-
-
-
-
-
-
-
-
-
-
(92,778)
-
-
-
-
-
-
-
-
-
-
683
21,112
1,260
2,093
683
-
(25,642)
(92,778)
(25,642)
-
-
-
1,283
48
-
-
-
58,072
1,283
48
58,072
59,403
Balance at June 30, 2008
$482
$354,725
$(588,783)
$2,701
$606,648
$375,773
See accompanying notes to consolidated financial statements.
40
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 2008, 2007 and 2006
(1) Summary of Significant Accounting Policies
Basis of Presentation
Ethan Allen Interiors Inc. ("Interiors") is a Delaware corporation incorporated on May 25, 1989. The
consolidated financial statements include the accounts of Interiors, its wholly-owned subsidiary Ethan Allen
Global, Inc. ("Global"), and Global’s subsidiaries (collectively "We," "Us," "Our," "Ethan Allen" or the
"Company"). All intercompany accounts and transactions have been eliminated in the consolidated
financial statements. All of Global’s capital stock is owned by Interiors, which has no assets or operating
results other than those associated with its investment in Global.
Nature of Operations
We are a leading manufacturer and retailer of quality home furnishings and accessories, offering a full
complement of home decorating and design solutions. We sell our products through one of the country’s
largest home furnishing retail networks with a total of 295 retail design centers, of which 159 are Company
owned and operated and 136 are independently owned and operated. Nearly all of our Company owned retail
design centers are located in the United States, with the remaining design centers located in Canada. The majority of
the independently owned design centers are also located in the United States, with the remaining design centers
located throughout Asia, Canada and the Middle East. We have ten manufacturing facilities, two of which include
separate sawmill operations, located throughout the United States and one in Mexico.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles
requires us 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 prior year amounts have been reclassified 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 three months or less are considered
cash and cash equivalents. We invest excess cash in money market accounts, short-term commercial paper, and
U.S. Treasury Bills.
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).
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
41
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
We account for our operating leases in accordance with the provisions of Statement of Financial Accounting
Standards ("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 our 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, we establish 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 Design Center Acquisitions
We account for the acquisition of retail design centers 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
Our 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, and trademarks. In re-assessing the useful lives of our goodwill and other intangible assets upon
adoption of SFAS No. 142, we determined these assets to have indefinite useful lives. Accordingly,
amortization of these assets ceased on that date. Prior to the adoption date (July 1, 2001), these assets were
amortized on a straight-line basis over forty years.
SFAS No. 142 requires that we perform an annual impairment analysis to assess the recoverability of the
recorded balance of goodwill and other indefinite-lived intangible assets. We conduct our required annual
impairment analysis during the fourth quarter of each fiscal year. The provisions of the SFAS No. 142 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. No impairment losses have been recorded on our goodwill or other indefinite-lived intangible assets as
a result of applying the provisions of SFAS No. 142.
Financial Instruments
Due to their short-term nature, the carrying value of our cash and cash equivalents, receivables and payables,
short-term debt and customer deposit liabilities approximates fair value. The estimated fair value of our
long-term debt, which is based on changes, if any, in interest rates and our creditworthiness subsequent to the
date on which the debt was issued, and which has been determined using quoted market prices, totaled
$182.1 million at June 30, 2008 and $183.4 million and at June 30, 2007, as compared to a carrying value on
those dates of $198.8 million and $198.7 million, respectively. See Note 7 for a discussion of the change in
July 2007 of our credit rating.
42
Income Taxes
Effective July 1, 2007, we adopted Financial Accounting Standards Board ("FASB") Interpretation No. ("FIN")
48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for
Income Taxes, which provides a comprehensive model for the recognition, measurement, presentation, and
disclosure in a company’s financial statements of uncertain tax positions taken, or expected to be taken, on a
tax return. If an income tax position exceeds a 50% probability of success upon tax audit, based solely on the
technical merits of the position, the company recognizes an income tax benefit in its financial statements. The
tax benefits recognized are measured based on the largest benefit that has a greater than 50% likelihood of
being realized upon ultimate settlement.
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 bases 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.
The liability associated with an unrecognized tax benefit is classified as a long-term liability except for the
amount for which a cash payment is expected to be made within one year. We recognize interest and
penalties related to income tax matters as a component of income tax expense.
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. As such, revenue recognition occurs upon the shipment of goods to independent
retailers or, in the case of Ethan Allen-owned retail design centers, upon delivery to the customer.
Shipping and Handling Costs
Our policy is to sell our 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 $87.4 million, $87.6 million, and $87.2
million for fiscal years 2008, 2007, and 2006, respectively.
Advertising Costs
Advertising costs are expensed when first aired or distributed. Our total advertising costs incurred in fiscal
years 2008, 2007 and 2006, amounted to $37.9 million, $34.3 million, and $38.3 million, respectively. These
amounts are presented net of proceeds received by us under our agreement with the third-party financial
institution responsible for administering our consumer finance programs. Prepaid advertising costs at June
30, 2008 and 2007 totaled $1.6 million and $6.2 million, respectively.
Earnings Per Share
We compute 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
share-based awards issued under our employee stock plans (see Notes 10 and 11).
43
Share-Based Compensation
Effective July 1, 2005, share-based awards are accounted for in accordance with the recognition and
measurement provisions of SFAS No. 123 (revised 2004), Share-Based Payment ("SFAS No. 123(R)"), which
replaced SFAS No. 123, Accounting for Stock-Based Compensation, and superseded Accounting Principles Board
Opinion ("APB") No. 25, Accounting for Stock Issued to Employees, and related interpretations. SFAS No. 123(R)
requires compensation costs related to share-based payment transactions, including employee stock options,
to be recognized in the financial statements.
In adopting SFAS No. 123(R) on July 1, 2005, we applied the modified prospective approach to transition.
Under the modified prospective approach, the provisions of SFAS No. 123(R) are to be applied to new awards
and to awards modified, repurchased, or cancelled after the required effective date. Additionally,
compensation cost for the portion of awards for which the requisite service has not been rendered that are
outstanding as of the required effective date is recognized as the requisite service is rendered on or after the
required effective date. The compensation cost for that portion of awards is based on the grant-date fair value
of those awards as calculated for either recognition or pro-forma disclosures under SFAS No. 123.
We estimate, as of the date of grant, the fair value of stock options awarded using the Black-Scholes option-
pricing model. Use of a valuation model requires management to make certain assumptions with respect to
selected model inputs, including anticipated changes in the underlying stock price (i.e. expected volatility)
and option exercise activity (i.e. expected life). Expected volatility is based on the historical volatility of our
stock and other contributing factors. The expected life of options granted, which represents the period of
time that the options are expected to be outstanding, is based, primarily, on historical data.
Share-based compensation expense is included in the Consolidated Statements of Operations within selling,
Tax benefits associated with our share-based compensation
general and administrative expenses.
arrangements are included in the Consolidated Statements of Operations within income tax expense.
All shares of our common stock received in connection with the exercise of share-based awards have been
recorded as treasury stock and result in a reduction in shareholders’ equity.
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
We account for derivative instruments in accordance with SFAS No. 133, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, and SFAS No. 138, which later amended SFAS No. 133. Upon
review of our contracts as of June 30, 2008, we have determined that we have no derivative instruments.
Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS No. 141(R)),
which replaces SFAS No. 141. SFAS No. 141(R) establishes principles and requirements for how an acquirer in
a business combination recognizes and measures in its financial statements the identifiable assets acquired,
the liabilities assumed, and any controlling interest; recognizes and measures the goodwill acquired in the
business combination or a gain from a bargain purchase; and determines what information to disclose to
enable users of the financial statements to evaluate the nature and financial effects of the business
combination. SFAS No. 141(R) is to be applied prospectively to business combinations for which the
44
acquisition date is on or after an entity's fiscal year that begins after December 15, 2008 (July 1, 2009 for the
Company). The impact of this Statement on the Company’s financial position, results of operations and cash
flows will be dependent on the terms, conditions and details of such acquisitions.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities, which allows the Company to choose to measure selected financial assets and financial liabilities at
fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported
in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007 (July 1, 2008 for the
Company). We are currently in the process of evaluating the impact of this authoritative guidance on our
consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which provides a single
definition of fair value, and requires additional disclosure about the use of fair value to measure assets and
liabilities. SFAS No. 157 emphasizes that fair value is a market-based measurement defined as the price that
would be received to sell an asset or liability in an orderly transaction between market participants at the
measurement date. Thus, SFAS No. 157 adheres to a definition of fair value based upon exit price as opposed
to entry price (i.e. the price paid to acquire an asset or liability). This pronouncement is effective for fiscal
years beginning after November 15, 2007 (July 1, 2008 for the Company). We are currently in the process of
evaluating the impact of this authoritative guidance on our consolidated financial statements.
(2) Restructuring and Impairment Charges
In recent years, we have announced and executed plans to consolidate our operations as part of an overall
strategy to maximize production efficiencies and maintain our competitive advantage.
On January 10, 2008, we announced a plan to consolidate the operations of certain company owned retail
design centers and retail service centers. In connection with this initiative, we have permanently ceased
operations at ten design centers and six retail service centers which, for the most part, were consolidated into
other existing operations. We also implemented our design team concept across the Retail division at the end
of the fiscal year. These decisions resulted in a reduction in headcount of approximately 400 employees, with
the reduction in headcount occurring during the third and fourth quarters of fiscal 2008. Additionally, other
actions taken during fiscal 2008 were not included in the restructuring plan. Altogether, there were more than
500 fewer associates in our Retail business by the end of the fiscal year. We recorded a pre-tax restructuring
and impairment charge of $4.0 million during the third quarter of fiscal 2008 and $2.8 million in the fourth
quarter. Of the $6.8 million for the fiscal year, $3.3 million is for lease cancellation and other costs which will
be paid out over periods ranging from less than one to seven years, $2.7 million, which was non-cash in
nature, related to fixed asset impairment charges, primarily for real property and leasehold improvements,
and $0.9 million was related to employee severance and benefits.
On September 6, 2006, we announced a plan to close our Spruce Pine, North Carolina case goods
manufacturing facility and convert our Atoka, Oklahoma upholstery manufacturing facility into a regional
distribution center. In connection with this initiative, we permanently ceased production at both locations,
allocating production among our remaining domestic manufacturing locations and selected offshore
suppliers. The decision impacted approximately 465 employees with the reduction in headcount occurring
during the second and third quarters of fiscal 2007. We recorded a pre-tax restructuring and impairment
charge of $14.1 million during the quarter ended September 30, 2006, of which $4.0 million was related to
employee severance and benefits and other plant exit costs, and $10.1 million, which was non-cash in nature,
was related to fixed asset impairment charges, primarily for real property and machinery and equipment,
stemming from the decision to cease production activities. During the first six months of fiscal 2007,
adjustments totaling $0.4 million were recorded to reverse remaining previously established accruals which
were no longer deemed necessary.
45
Activity in the Company’s restructuring reserves is summarized as follows (in thousands):
Original
Charges
Cash
Payments
Non-cash
Utilized
Adjust-
ments
Balance at
June 30
2008
Retail operations
Employee severance and other
payroll and benefit costs
Other plant exit costs
Write down of long-lived assets
Spruce Pine, NC/Atoka, OK
Employee severance and other
payroll and benefit costs
Other plant exit costs
Write down of long-lived assets
(3) Business Acquisitions
$ 856
3,271
2,709
$ 6,836
$ (856)
(617)
-
$ (1,473)
$ -
704
(2,709)
$ (2,005)
$ -
-
-
$ -
$ 3,903
100
10,099
$ 14,102
$ (3,455)
(100)
-
$ (3,555)
$ -
-
(10,099)
$(10,099)
$ (448)
-
-
$ (448)
$ -
3,358
-
$ 3,358
$ -
-
-
$ -
The Company’s business acquisition practice with respect to independent retail design centers is to selectively
acquire, at market value, design centers located in markets of strategic interest to the Company. The
Company does not actively pursue acquisitions, but is sometimes approached by independent retailers who
are retiring. Acquisitions are subject to a contractual holdback, or reconciliation, period, during which the
parties to the transaction may agree to certain normal and customary purchase accounting adjustments.
Goodwill associated with our acquisitions 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.
See Note 6 for further discussion of our goodwill and other intangible assets.
During fiscal 2008, we acquired, in two separate transactions, five Ethan Allen retail design centers (“DCs”)
from independent retailers for consideration of approximately $4.2 million in cash and forgiveness of
receivables, and assumed customer deposits of $4.3 million and other liabilities of $0.1 million.
Also in fiscal 2008, we acquired a cut and sew upholstery facility from Americraft Leather in order to
strengthen the Company’s vertically integrated structure and secure an additional reliable source for our
leather products. Total consideration of approximately $4.3 million was paid in cash for the acquisition. The
facility, which contains 40,000 square feet of manufacturing space and employs 165 people, is located in
Guanajuato, Mexico.
During fiscal 2007, we acquired, in seven separate transactions, twelve Ethan Allen retail design centers from
independent retailers for total consideration of approximately $17.0 million in cash and forgiveness of
receivables.
During fiscal 2006, we acquired, in seven separate transactions, twelve Ethan Allen retail design centers from
independent retailers for a total consideration of approximately $12.0 million. In connection with the
acquisition of two of these design centers, consideration totaling $2.5 million was provided in the form of
50,446 shares of Ethan Allen stock issued on the closing date and 15,760 shares of Ethan Allen stock held in
escrow pending completion of a contractual holdback period. In August 2006, satisfaction of the holdback
period and reconciliation with the seller of certain purchase accounting matters resulted in the issuance of the
shares previously held in escrow as well as an additional 10,509 shares of our common stock (total of 26,269
shares).
46
A summary of our allocation of purchase price in each of the last three fiscal years is provided below (in
thousands):
Fiscal Year Ended June 30,
Business segment
Total consideration
Assets acquired (liabilities
assumed)
Inventory
PP&E and other assets
Customer deposits
A/P and other liabilities
Goodwill
2008
2007
2006
Wholesale
$ 4,298
Retail
$ 4,182
Retail
$ 16,957
Retail
$ 12,037
1,054
2,707
-
(100)
$ 637
3,236
1,029
(4,311)
34
$ 4,194
6,765
9,177
(3,070)
(425)
$ 4,510
6,650
5,308
(4,145)
(483)
$ 4,707
(4)
Inventories
Inventories at June 30 are summarized as follows (in thousands):
Finished goods
Work in process
Raw materials
2008
$ 153,981
5,985
26,299
$ 186,265
2007
$ 150,994
6,172
24,718
$ 181,884
Inventories are presented net of a related valuation allowance of $2.3 million at June 30, 2008 and $2.9 million
at June 30, 2007
(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
2008
$ 89,352
382,354
120,243
591,949
(241,517)
$ 350,432
2007
$ 90,170
346,093
127,862
564,125
(241,940)
$ 322,185
As of June 30, 2008, we had goodwill and other indefinite-lived intangible assets of $77.1 million and $19.7
million, respectively. Comparable balances as of June 30, 2007 were $72.8 million and $19.7 million,
respectively.
Goodwill in the wholesale and retail segments was $28.2 million and $48.9 million, respectively, at June 30,
2008 and $27.5 million and $45.2 million, respectively, at June 30, 2007. The wholesale segment, at both dates,
includes additional indefinite-lived intangible assets of $19.7 million, which represent Ethan Allen trade
names.
In accordance with SFAS No. 142, we do not amortize goodwill or other indefinite-lived intangible assets but,
rather, evaluate 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. We conduct our required annual impairment test during the fourth quarter of each fiscal year. No
47
impairment losses have been recorded on our goodwill or other indefinite-lived intangible assets as a result
of applying the provisions of SFAS No. 142.
(7) Borrowings
Total debt obligations at June 30 consist of the following (in thousands):
5.375% Senior Notes due 2015
Industrial revenue bonds
Other debt obligations
Total debt
Less: current maturities
Total long-term debt
2008
$ 198,837
3,855
337
203,029
41
$ 202,988
2007
$ 198,677
3,855
376
202,908
40
$ 202,868
Senior Notes
On September 27, 2005, we completed a private offering of $200.0 million of ten-year senior unsecured notes
due 2015 (the "Senior Notes"). The Senior Notes were offered by Global and have an annual coupon rate of
5.375% with interest payable semi-annually in arrears on April 1 and October 1 of each year. Proceeds
received in connection with the issuance of the Senior Notes, net of a related discount of $1.6 million, totaled
$198.4 million. We used the net proceeds from the offering to expand our retail network, invest in our
manufacturing and logistics operations, and for other general corporate purposes. As of June 30, 2008,
outstanding borrowings related to this transaction have been included in the Consolidated Balance Sheets
within long-term debt. The discount on the Senior Notes is being amortized to interest expense over the life of
the related debt as is debt issuance costs of $2.0 million primarily for banking, legal, accounting, rating
agency, and printing services and $0.8 million of losses on settled forward contracts entered in conjunction
with this debt issuance.
The Senior Notes may be redeemed in whole or in part, at Global’s option at any time at the greater of (i)
100% of the principal amount of the notes to be redeemed and (ii) the sum of the present values of the
remaining scheduled payments of principal and interest on the Senior Notes to be redeemed, discounted to
the date of redemption on a semi-annual basis at the applicable treasury rate plus 20 basis points, plus, in
each case, accrued and unpaid interest to the redemption date. In the event of default, the trustee or the
holders of 25% of the outstanding principal amount of the Senior Notes may accelerate payment of principal,
premium, if any, and accrued and unpaid interest. Events of default include failure to pay in accordance with
the terms of the indenture, including failure, under certain circumstances, to pay indebtedness other than the
Senior Notes.
Revolving Credit Facility
In July 2005, we 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 " Credit Agreement").
The 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 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 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 may be subject to adjustment
resulting from changes in the credit rating of Ethan Allen’s senior unsecured debt. The 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 0.425% per annum
on the average daily letters of credit outstanding.
The 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.
48
The Credit Agreement also contains various covenants which limit our ability to: incur debt; engage in
mergers and consolidations; make restricted payments; sell certain assets; make investments; and issue stock.
We are also required to meet certain financial covenants including a fixed charge coverage ratio, which shall
not be less than 3.00 to 1 for any period of four consecutive fiscal quarters ended on or after June 30, 2005, and
a leverage ratio, which shall not be greater than 3.00 to 1 at any time. As of June 30, 2008, we have
satisfactorily complied with these covenants.
In addition, the 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).
At June 30, 2008, we had no revolving loans and $14.9 million in trade and standby letters of credit
outstanding under the Credit Agreement. Remaining available borrowing capacity under the Credit
Agreement was $185.1 million at that date.
Other Borrowings
Approximately $3.9 million of our outstanding 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 our
corporate headquarters in Danbury, Connecticut. These bonds bear interest at a fixed rate of 7.50% and have a
remaining maturity of three years.
For fiscal years ended June 30, 2008, 2007 and 2006, the weighted-average interest rates applicable under our
outstanding debt obligations were 5.53%, 5.53% and 5.65%, respectively.
Aggregate scheduled maturities of our debt obligations for each of the five fiscal years subsequent to June 30,
2008, and thereafter are as follows (in thousands):
Fiscal Year Ended June 30
2009
2010
2011
2012
2013
Subsequent to 2013
Total scheduled debt payments
$
41
42
3,898
19
11
199,018
$ 203,029
In July 2007, Standard & Poor’s ("S&P") lowered our corporate and senior unsecured credit ratings from "A-"
to "BBB+". Despite S&P’s view that we (i) maintain a satisfactory business model consisting of a well-known
brand, dedicated distribution network, and efficient manufacturing, and (ii) possess ample liquidity, the
ratings action was initiated in response to continued softness in the housing market and its resultant impact
on the home furnishings industry, including the credit protection measures of its participants. The change in
our credit rating had no impact on (i) our ability to satisfactorily comply with our existing debt covenants or
(ii) the pricing we are subject to under our credit facility.
Independent Retailer Credit Facility
We have obligated ourselves, on behalf of one of our independent retailers, with respect to a $1.5 million
credit facility (the "Credit Facility") comprised of a $1.1 million revolving line of credit and a $0.4 million
term loan. This obligation requires us, in the event of the retailer’s default under the Credit Facility, to
repurchase the retailer’s inventory, applying such purchase price to the retailer’s outstanding indebtedness
under the Credit Facility. Our obligation remains in effect for the life of the term loan. The original
agreement, which expired in April 2008, was replaced with a new agreement with the same terms and
conditions which expires in December 2008. The maximum potential amount of future payments
(undiscounted) that we could be required to make under this obligation is limited to the amount outstanding
under the Credit Facility at the time of default (subject to pre-determined lending limits based on the value of
49
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 we maintain the right to take title to the repurchased inventory. We anticipate that
the repurchased inventory could subsequently be sold through our retail design center network.
(8)
Leases
We lease real property and equipment under various operating lease agreements expiring through 2033.
Leases covering retail design center 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.
Future minimum lease payments under non-cancelable operating leases for each of the five fiscal years
subsequent to June 30, 2008, and thereafter are as follows (in thousands):
Fiscal Year Ended June 30
2009
2010
2011
2012
2013
Subsequent to 2013
Total minimum lease payments
$
39,222
34,877
29,409
26,402
21,514
94,279
$ 245,703
The above amounts will be offset in the aggregate by minimum future rentals from subleases of $5.1 million,
which is due to be received as follows: $1.2 million in 2009; $1.2 million in 2010; $0.9 million in 2011; $0.7
million in 2012; $0.7 million in 2013; and $0.6 million subsequent to 2013.
Total rent expense for each of the past three fiscal years ended June 30 was as follows (in thousands):
Basic rentals under operating leases
Contingent rentals under operating lease
Less: sublease rent
Total rent expense
2008
$ 40,387
589
40,976
(2,395)
$ 38,580
2007
$ 35,637
524
36,161
(2,899)
$ 33,262
2006
$ 34,223
772
34,995
(3,563)
$ 31,432
As of June 30, 2008 and 2007, deferred rent credits totaling $9.8 million and $8.6 million, respectively, and
deferred lease incentives totaling $2.8 million and $3.2 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
Our authorized capital stock consists of (a) 150,000,000 shares of Class A 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 our Common Stock upon the occurrence of certain
events or other specified conditions being met. As of June 30, 2008 and 2007, there were no shares of
Preferred Stock or Class B Common Stock issued or outstanding.
50
Share Repurchase Program
On November 21, 2002, the Company’s Board of Directors approved a share repurchase program authorizing
us to repurchase up to 2.0 million shares of our common stock, from time to time, either directly or through
agents, in the open market at prices and on terms satisfactory to us. Subsequent to that date, the Board of
Directors increased the then remaining share repurchase authorization as follows: to 2.5 million shares on
April 27, 2004; to 2.0 million shares on November 16, 2004; to 2.0 million shares on April 26, 2005; to 2.5
million shares on November 15, 2005; to 2.5 million shares on July 25, 2006; to 2.5 million shares on July 24,
2007, and to 2.0 million shares on November 13, 2007. As of June 30, 2008 we had a remaining Board
authorization to repurchase 1.6 million shares. Since the Company began repurchasing shares in 1995,
approximately 17.7 million shares have been repurchased (adjusted for splits).
All of our common stock repurchases and retirements are recorded as treasury stock and result in a reduction
of shareholders’ equity. During fiscal years 2008, 2007 and 2006, we repurchased and/or retired the following
shares of our common stock:
Common shares repurchased
Cost to repurchase common shares
Average price per share
2008 (1)
2,259,631
$69,745,024
$30.87
2007(2)(3)
1,548,700
$53,955,970
$34.84
2006(4)
2,545,200
$85,106,563
$33.44
(1) During fiscal 2008, we also retired 661,688 shares of common stock tendered upon the exercise of outstanding employee
stock options (592,861 to cover share exercise and 68,827 to cover related employee tax withholding liabilities). The value of
such shares on the date redeemed was $23,033,359, representing an average price per share of $34.81.
The cost to repurchase shares in fiscal 2007 reflects $3,436,230 in common stock repurchases with a June 2007 trade date and
a July 2007 settlement date.
(2)
(3) During fiscal 2007, we also retired 555,531 shares of common stock tendered upon the exercise of outstanding employee
stock options (410,073 to cover share exercise and 145,458 to cover related employee tax withholding liabilities). The value of
such shares on the date redeemed was $21,506,193, representing an average price per share of $38.71.
The cost to repurchase shares in fiscal 2006 reflects $1,000,807 in common stock repurchases with a June 2006 trade date and
a July 2006 settlement date.
(4)
For each of the fiscal years presented above, we funded our purchases of treasury stock with existing cash on
hand and cash generated through current period operations.
Stockholder Rights Plan
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 our common stock outstanding as of July 10, 1996. Under the Rights
Plan, each share of our 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 our 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 our 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 our common stock. Until then, separate Rights certificates will not be issued
and the Rights will not be traded separately from shares of our common stock.
If the Rights become exercisable, then, upon exercise of a Right, our stockholders (other than the acquirer) would
have the right to receive, in lieu of our Series C Junior Participating Preferred Stock, a number of shares of our
common stock (or a number of shares of the common stock of the acquirer, if we are 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.
51
The Rights Plan provides for adjustment to the number of Rights which accompanies each share of our common
stock (whether then outstanding or thereafter issued) upon the occurrence of various events after July 10, 1996,
including stock splits. We 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 30, 2008, each share of our 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):
Weighted average common shares outstanding for
basic calculation
Effect of dilutive stock options and share based awards
Weighted average common shares outstanding
2008
2007
2006
29,267
203
31,566
695
33,210
876
adjusted for diluted calculation
29,470
32,261
34,086
Certain restricted stock awards and the potential exercise of certain stock options were excluded from the
respective diluted earnings per share calculation because their impact is anti-dilutive. In 2008, 2007 and 2006,
stock options and share based awards of 1,713,323, 750,981 and 53,226, respectively, have been excluded.
(11) Share-Based Compensation
For the twelve months ended June 30, 2008, 2007, and 2006, share-based compensation expense totaled $1.3 million,
$0.8 million, and $1.9 million respectively. These amounts have been included in the Consolidated Statements of
Operations within selling, general and administrative expenses. During the twelve months ended June 30, 2008,
2007, and 2006, we recognized related tax benefits associated with our share-based compensation arrangements
totaling $0.5 million, $0.3 million and $0.7 million, respectively. Such amounts have been included in the
Consolidated Statements of Operations within income tax expense.
We estimate, as of the date of grant, the fair value of stock options awarded using the Black-Scholes option-pricing
model. Use of a valuation model requires management to make certain assumptions with respect to selected model
inputs, including anticipated changes in the underlying stock price (i.e. expected volatility) and option exercise
activity (i.e. expected life). Expected volatility is based on the historical volatility of our stock and other contributing
factors. The expected life of options granted, which represents the period of time that the options are expected to be
outstanding, is based, primarily, on historical data. The weighted average assumptions used for fiscal years
ended June 30 are noted in the following table:
Volatility
Risk-free rate of return
Dividend yield
2008
35.8%
4.51%
2.69%
2007
28.14%
4.97%
2.18%
2006
28.95%
4.86%
2.04%
Expected average life
9.3 years
6.0 years
5.0 years
At June 30, 2008, we had 7,317,409 shares of common stock reserved for issuance pursuant to the following
share-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 our common stock. The maximum number of shares of common
stock reserved for issuance under the Plan is 6,487,867 shares. The Plan also provides for the issuance of stock
52
appreciation rights ("SARs") on issued options, however, no SARs have been issued as of June 30, 2008. 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. Option awards are generally
granted with an exercise price equal to the market price of our common stock at the date of grant, vest ratably
over a specified service period (4 years for awards to employees; 2 years for awards to independent
directors), and have a contractual term of 10 years.
On October 10, 2007, the Company’s Board of Directors and M. Farooq Kathwari, our President and Chief
Executive Officer, agreed to the terms of a new employment agreement expiring on June 30, 2012 ("2007
Employment Agreement"). This agreement was effective as of October 1, 2007 and served to supersede all
terms and conditions set forth in his previous employment agreement dated August 1, 2002 (the "2002
Employment Agreement"). Pursuant to the terms of the 2007 Employment Agreement, Mr. Kathwari was
awarded, on October 10, 2007, and will be awarded on July 1, 2008 and July 1, 2009, options to purchase
150,000, 90,000 and 60,000 shares respectively, of our common stock. The October 10, 2007 options were
issued at an exercise price of $34.03 per share (the price of a share of our common stock on the New York
Stock Exchange on that date). This grant will vest in three installments of 33 1/3% on each June 30 of 2008,
2009, and 2010. The July 1, 2008 grant will vest in two installments of 50% on each June 30 of 2009 and 2010.
The July 1, 2009 grant will vest on June 30, 2010.
A summary of stock option activity occurring during the fiscal year ended June 30, 2008 is presented below:
Options
Outstanding - June 30, 2007
Granted
Exercised
Canceled (forfeited/expired)
Shares
2,420,250
175,600
(769,790)
(57,603)
Outstanding - June 30, 2008 1,768,457
1,598,181
Exercisable – June 30, 2008
Exercise
Price
$31.40
32.98
27.40
33.34
33.23
$32.56
Weighted
Average
Remaining
Contractual
Term (yrs)
Aggregate
Intrinsic Value
5.2
4.8
-
-
The weighted average grant-date fair value of options granted during fiscal 2008, 2007, and 2006 was $12.06,
$9.91 and $9.86 respectively. The total intrinsic value of options exercised during 2008, 2007 and 2006 was
$5.7 million, $13.5 million, and $1.3 million, respectively. As of June 30, 2008, there was $2.0 million of total
unrecognized compensation cost related to nonvested options granted under the Plan. That cost is expected to
be recognized over a weighted average period of 2.3 years. A summary of the nonvested shares as of June 30,
2008 and changes during the year then ended is presented below:
Nonvested Shares
Nonvested June 30, 2007
Granted
Vested
Canceled (forfeited/expired)
Nonvested at June 30, 2008
Shares
105,362
175,600
(95,766)
(14,920)
170,276
Weighted Average
Grant Date Fair Value
$ 10.10
12.06
11.73
10.65
$ 11.16
In connection with the 1992 Stock Option Plan, the following two stock award plans have also been
established:
Restricted Stock Awards
In connection with the 2007 Employment Agreement, Mr. Kathwari received on November 13, 2007, and will
be awarded on July 1, 2008 and July 1, 2009, an annual award of 20,000 shares of restricted stock (for a total
53
award of 60,000 shares), with vesting based on the performance of the Company's stock price during the three
year periods subsequent to the award date as compared to the Standard and Poor’s 500 index. Mr. Kathwari
also received on November 13, 2007, 15,000 shares of restricted stock which vest ratably over a five year
period through June 30, 2012. A summary of nonvested restricted share activity occurring during the fiscal
year ended June 30, 2008 is presented below.
Nonvested Restricted Shares
Nonvested - June 30, 2007
Granted
Vested
Canceled (forfeited/expired)
Nonvested - June 30, 2008
Shares
10,500
38,000
3,000
(10,500)
35,000
Weighed Average
Grant-Date
Fair Value
$35.52
30.55
30.55
35.52
$30.55
As of June 30, 2008, there was $0.8 million of total unrecognized compensation cost related to restricted
shares granted under the Plan. That cost is expected to be recognized over a weighted average period of 2.9
years. The total fair value of restricted shares vested during the fiscal years ending June 30, 2008 and 2007
was $0.1 million in each year and $0.3 million during 2006.
Stock Unit Awards
In connection with previous employment agreements, Mr. Kathwari was deemed to have earned 126,000
stock units. In the event of the termination of his employment, regardless of the reason for termination, Mr.
Kathwari will receive shares of common stock equal to the number of stock units earned.
(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
2008
$ 34,106
(2,093)
$ 32,013
2007
$ 40,499
(5,015)
$ 35,484
2006
$ 52,423
(498)
$ 51,925
The income taxes credited to shareholders’ equity relate to the excess tax benefit arising from the exercise of
employee stock options.
Income tax expense (benefit) attributable to income from operations consists of the following for the fiscal
years ended June 30 (in thousands):
Current:
Federal
State
Foreign
Total current
Deferred:
Federal
State
Total deferred
Income tax expense
2008
2007
2006
$ 32,431
4,151
(112)
36,470
(2,172)
(192)
(2,364)
$ 34,106
$ 34,768
5,125
406
40,299
190
10
200
$ 40,499
$ 43,844
9,371
-
53,215
(610)
(182)
(792)
$ 52,423
54
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
Section 199 Qualified Production
Activities deduction
EIE benefit
Other, net
Actual income tax expense
2008
2007
2006
$ 32,262
35.0 %
$ 38,404
35.0 % $ 48,337
35.0 %
2,698
2.9 %
3,331
3.0 %
6,091
4.4 %
(1,100)
-
246
$ 34,106
(1.2)%
0.0 %
0.4 %
37.0%
(630)
(59)
(547)
$ 40,499
(0.6)% (641)
(0.1)% (358)
(0.4)% (1,006)
36.9 % $ 52,423
(0.5)%
(0.3)%
(0.6)%
38.0 %
The significant components of the deferred tax expense (benefit) are as follows (in thousands):
Deferred tax expense (benefit)
Utilization of net operating loss and tax credit carryforwards
Total deferred tax expense (benefit)
2008
$(2,403)
39
$ (2,364)
2007
$ 161
39
$ 200
2006
$ (978)
186
$ (792)
Deferred tax assets:
Accounts receivable
Employee compensation accruals
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
Other accrued liabilities
Other, net
Total deferred tax liability
2008
2007
$ 963
8,116
4,619
30
20
13,748
2,719
10,458
20,737
2,483
674
37,070
$ 776
8,836
4,401
107
20
14,140
2,714
12,377
19,629
2,065
3,042
39,826
Net deferred tax liability
$ 23,322
$ 25,686
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
2008
$ 8,991
4,757
4,986
32,084
$ 23,322
2007
$ 9,739
4,401
4,779
35,047
$ 25,686
Note: Current deferred tax assets and liabilities and non-current deferred tax assets and liabilities have been presented net in the
Consolidated Balance Sheets.
55
At June 30, 2008, we had, for federal income tax purposes, approximately $0.1 million of net operating loss
carryforwards ("NOLs") which expire in 2025 and are subject to an annual limitation under Section 382 of the
Internal Revenue Code.
Based on our historical and anticipated future pre-tax earnings, we believe that it is more likely than not that
our deferred tax assets will be realized.
Uncertain Tax Positions
Effective July 1, 2007, we adopted Financial Accounting Standards Board ("FASB") Interpretation No. ("FIN")
48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for
Income Taxes, which provides a comprehensive model for the recognition, measurement, presentation, and
disclosure in a company’s financial statements of uncertain tax positions taken, or expected to be taken, on a
tax return. Under FIN 48, if an income tax position exceeds a 50% probability of success upon tax audit, based
solely on the technical merits of the position, the company is to recognize an income tax benefit in its financial
statements. The tax benefits recognized are to be measured based on the largest benefit that has a greater than
50% likelihood of being realized upon ultimate settlement. Uncertain tax positions that relate only to timing
of when an item is included on a tax return are considered to have met the recognition threshold for purposes
of applying FIN 48. Therefore, if it can be established that the only uncertainty is when an item is taken on a
tax return, such positions have satisfied the recognition step for purposes of FIN 48 and uncertainty related to
timing should be assessed as part of measurement.
FIN 48 requires that a liability associated with an unrecognized tax benefit be classified as a long-term
liability except for the amount for which a cash payment is expected to be made within one year. Further,
companies are required to accrue interest and related penalties, if applicable, on all tax exposures consistent
with the respective jurisdictional tax laws.
The adoption of FIN 48 resulted in a non-cash transition (cumulative effect of a change in accounting
principle) adjustment of $0.7 million, which was recorded as an increase to beginning retained earnings. The
transition adjustment is a result, primarily, of tax positions associated with state income tax exposures where
the original tax benefit related to periods dating back to 1998. Our continuing practice is to recognize interest
and penalties related to income tax matters as a component of income tax expense.
As of July 1, 2007, upon adoption of FIN 48, we had unrecognized income tax benefits totaling $4.8 million
and related accrued interest and penalties of $1.4 million (after related tax benefits), all of which was
reclassified from current to long-term liabilities upon adoption. If recognized, essentially all of the
unrecognized tax benefits and related interest and penalties would be recorded as a benefit to income tax
expense.
A reconciliation of the beginning and ending amount of unrecognized tax benefits as of June 30, 2008 is as
follows (in thousands):
Balance at July 1, 2007
Additions based on tax positions related to the current year
Additions for tax positions of prior years
Reductions for tax positions of prior years due to statute
expiration
Settlements
Balance at June 30, 2008
$ 6,233
305
1,628
(233)
(1,840)
$ 6,093
We do not currently anticipate significant changes in such amounts over the next twelve months.
56
Since adopting FIN 48, our unrecognized tax benefits have decreased by $0.7 million and related interest and
penalties have increased by $0.6 million. These changes resulted from a settlement reached with New York
for tax years 1998 through 2003 that reduced the unrecognized tax benefits and related interest by $1.8
million. The settlements were partially offset by unrecognized tax benefits of $1.1 million in state exposures.
The Company conducts business globally and, as a result, the Company or one or more of its subsidiaries
files income tax returns in the U.S., various state, and foreign jurisdictions. In the normal course of business,
the Company is subject to examination by the taxing authorities in such major jurisdictions as Canada, Mexico
and the U.S. As of June 30, 2008 certain subsidiaries of the Company are currently under audit from 2001
through 2007 in the U.S. It is reasonably possible that these audits may be completed during the next twelve
months. While the amount of uncertain tax benefits with respect to the entities and years under audit may
change within the next twelve months, it is not anticipated that any of the changes will be significant.
(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 of our employees who have completed three consecutive months of service regardless of
hours worked.
We may, at our 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 $3.7 million in 2008, $4.3 million in 2007, and $3.7 million in 2006.
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 $1.2 million, $2.7 million, and $4.0 million in 2008,
2007 and 2006, respectively.
(14) Litigation
Environmental Matters
We and our subsidiaries are subject to various environmental laws and regulations. Under these laws, we
and/or our 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, 2008, we and/or our subsidiaries have been named as a potentially responsible party ("PRP")
with respect to the remediation of three active sites currently listed, or proposed for inclusion, on the
National Priorities List ("NPL") under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA"). The sites are located in Southington, Connecticut; High Point,
North Carolina; and Atlanta, Georgia.
In addition, during the fiscal year ended June 30, 2007, our liability with respect to a fourth site located in
Lyndonville, Vermont was resolved. We had previously received a certificate of construction completion for
this location, subject to certain limited conditions which were the obligation of another PRP. In July 2007, we
obtained the final certificate of construction completion advising us that all conditions had been met.
We do not anticipate incurring significant costs with respect to the Southington, Connecticut, High Point,
North Carolina, or Atlanta, Georgia sites as we believe that we are not a major contributor based on the very
small volume of waste generated by us in relation to total volume at those sites. Specifically, with respect to
the Southington site, our volumetric share is less than 1% of over 51 million gallons disposed of at the site and
57
there are more than 1,000 PRPs. With respect to the High Point site, our 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 more than 1,000
"de-minimis" parties (of which we are one). With respect to the Atlanta site, a former solvent
recycling/reclamation facility, our 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, we could be required to pay in excess of
our pro rata share of incurred remediation costs. Our understanding of the financial strength of other PRPs
has been considered, where appropriate, in the determination of our estimated liability.
In addition, in July 2000, we were notified by the State of New York (the "State") that we 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 the State has not yet conducted an initial environmental study at this
site.
As of June 30, 2008, we believe 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. We believe our currently anticipated capital expenditures for environmental control facility
matters are not material.
We are subject to other federal, state and local environmental protection laws and regulations and are
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. We believe that our 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, we have 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. We remain 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. We 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, which are generally presented on a net-of-tax basis, may
include foreign currency translation adjustments, minimum pension liability adjustments, fair value
adjustments (i.e. gains and losses) on certain derivative instruments, and unrealized gains and losses on
certain investments in debt and equity securities. We have reported our total comprehensive income in the
Consolidated Statements of Shareholders’ Equity.
Our accumulated other comprehensive income, which is comprised of losses on certain derivative
instruments and accumulated foreign currency translation adjustments, totaled $2.7 million at June 30, 2008
and $1.4 million at June 30, 2007. Foreign currency translation adjustments are the result of changes in
foreign currency exchange rates related to our operation of five Ethan Allen-owned retail design centers
58
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
Our operations are classified into two operating segments: wholesale and retail. These operating segments
represent strategic business areas which, although they operate separately and provide their own distinctive
services, enable us to more effectively offer our complete line of home furnishings and accessories.
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 and accessories to a network of independently owned and Ethan Allen-owned design
centers as well as related marketing and brand awareness efforts. Wholesale revenue is generated upon the
wholesale sale and shipment of our product to all retail design centers, including those owned by Ethan
Allen. Wholesale profitability includes (i) the wholesale gross margin, which represents the difference
between the wholesale sales price and the cost associated with manufacturing and/or sourcing the related
product, and (ii) other operating costs associated with wholesale segment activities.
The retail segment sells home furnishings and accessories to consumers through a network of Company
owned design centers. Retail revenue is generated upon the retail sale and delivery of our product to our
customers. Retail profitability includes (i) the retail gross margin, which represents the difference between
the retail sales price and the cost of goods purchased from the wholesale segment, and (ii) other operating
costs associated with retail segment activities.
Inter-segment eliminations result, primarily, from the wholesale sale of inventory to the retail segment,
including the related profit margin.
We evaluate performance of the respective segments based upon revenues and operating income. While the
manner in which our home furnishings and accessories 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 manufacturing, sourcing, and distribution versus retail selling) are different. Within
the wholesale segment, we maintain revenue information according to each respective product line (i.e. case
goods, upholstery, or home accessories and other).
A breakdown of wholesale sales by product line for each of the last three fiscal years ended June 30 is
provided below:
Case Goods
Upholstered Products
Home Accessories and Other
2008
43%
40
17
100%
2007
44%
38
18
100%
2006
48%
37
15
100%
59
Revenue information by product line is not as easily determined within the retail segment. However, because
wholesale production and sales are matched, for the most part, to incoming orders, we believe that the
allocation of retail sales by product line would be similar to that of the wholesale segment. Information for
each of the last three fiscal years ended June 30 is provided below (in thousands):
2008
2007
2006
Net Sales:
Wholesale segment
Retail segment
Elimination of inter-company sales
Consolidated Total
$ 616,230
724,586
(360,771)
$ 656,035
698,611
(349,334)
$ 980,045
$1,005,312
Operating Income:
Wholesale segment (1)
Retail segment (2)
Adjustment for inter-company profit (3)
Consolidated Total
$ 100,324
(2,800)
(1,524)
$ 96,000
$ 99,215
15,162
(3,258)
$ 111,119
Capital Expenditures:
Wholesale segment
Retail segment
Acquisitions (4) (5)
Consolidated Total
$ 7,347
52,691
7,168
$ 67,206
$ 8,791
50,282
15,906
$ 74,979
$ 736,134
690,967
(360,711)
$1,066,390
$ 125,189
19,711
(2,228)
$ 142,672
$ 6,043
35,462
7,791
$ 49,296
Total Assets:
Wholesale segment
Retail segment
Inventory profit elimination (6)
Consolidated Total
June 30
2008
June 30,
2007
June 30,
2006
$ 342,960
459,842
(40,829)
$ 761,973
$ 416,237
425,382
(39,021)
$ 802,598
$ 487,951
361,109
(34,960)
$ 814,100
(1) Operating income for the wholesale segment for the twelve months ended June 30, 2007 and 2006 includes pre-tax
restructuring and impairment charges of $13.4 million and $4.2 million, respectively.
(2) Operating income for the retail segment for the twelve months ended June 30, 2008 includes pre-tax restructuring and
impairment charges of $6.8 million.
(3) Represents the change in the inventory profit elimination entry necessary to adjust for the embedded wholesale profit
contained in Ethan Allen-owned design center inventory existing at the end of the period. See footnote 6 below.
(4) Acquisitions include the purchase of five retail design centers and a cut and sew upholstery facility in 2008, 12 retail design
centers in 2007, and 12 retail design centers in 2006. Two of the retail design centers purchased during the twelve months
ended June 30, 2006 were acquired in exchange for shares of our common stock. See Note 3.
(5) Amount reflected as acquisitions for 2007 includes our purchase of a retail design center with an effective (closing) date of
June 30, 2007. However, the consideration paid in connection with this acquisition was not funded until July 2, 2007.
(6) Represents the embedded wholesale profit contained in Ethan Allen-owned design center inventory that has not yet been
realized. These profits are realized when the related inventory is sold.
There are 41 independent retail design centers located outside the United States. Approximately 2.7% of
our net sales are derived from sales to these retail design centers.
60
(17) Selected Quarterly Financial Data (Unaudited)
Tabulated below is selected financial data for each quarter of the fiscal years ended June 30, 2008, 2007,
and 2006 (in thousands, except per share data):
September 30
December 31
March 31
June 30
Quarter Ended
Fiscal 2008:
Net sales
Gross profit
Net income
Earnings per basic share (1)
Earnings per diluted share (1)
Dividend per common share
Fiscal 2007:
Net sales
Gross profit
Net income
Earnings per basic share (1)
Earnings per diluted share (1)
Dividend per common share
Fiscal 2006:
Net sales
Gross profit
Net income
Earnings per basic share (1)
Earnings per diluted share (1)
Dividend per common share
$ 248,727
133,457
17,504
0.58
0.57
0.22
$ 242,823
126,329
8,452
0.27
0.26
0.20
$ 251,314
126,540
17,130
0.50
0.49
0.18
$ 259,510
139,453
20,622
0.70
0.70
0.22
$ 257,419
133,750
22,792
0.72
0.70
0.20
$ 276,003
139,854
26,164
0.79
0.77
0.18
$ 235,901
125,187
8,846
0.31
0.30
0.22
$ 246,539
128,516
17,499
0.55
0.54
0.20
$ 267,071
134,746
19,994
0.61
0.59
0.18
$ 235,907
127,968
11,100
0.39
0.39
0.22
$ 258,531
137,988
20,484
0.66
0.65
0.20
$ 272,002
139,842
22,394
0.68
0.66
0.18
(1) The sum of the quarterly earnings per share may not equal the full-year total due to rounding and/or changes in share count.
(18) Subsequent Events
None.
(19) Financial Information About the Parent, the Issuer and the Guarantors
On September 27, 2005, Global (the "Issuer") issued $200 million aggregate principal amount of Senior Notes
which have been guaranteed on a senior basis by Interiors (the "Parent"), and other wholly-owned
subsidiaries of the Issuer and the Parent, including Ethan Allen Retail, Inc., Ethan Allen Operations, Inc.,
Ethan Allen Realty, LLC, Lake Avenue Associates, Inc. and Manor House, Inc. The subsidiary guarantors
(other than the Parent) are collectively called the "Guarantors". The guarantees of the Guarantors are
unsecured. All of the guarantees are full, unconditional and joint and several and the Issuer and each of the
Guarantors are 100% owned by the Parent. Ethan Allen (UK) Ltd., KEA International Inc. (which was legally
dissolved in January 2007), Northeast Consolidated, Inc., Riverside Water Works, Inc. and our other
subsidiaries which are not guarantors are called the "Non-Guarantors". The following tables set forth the
condensed consolidating balance sheets as of June 30, 2008 and June 30, 2007, the condensed consolidating
statements of operations for the twelve months ended June 30, 2008, 2007, and 2006, and the condensed
consolidating statements of cash flows for the twelve months ended June 30, 2008, 2007, and 2006 of the
Parent, the Issuer, the Guarantors and the Non-Guarantors.
61
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, net
Inventories
Prepaid expenses and other current assets
Intercompany receivables
Total current assets
Property, plant and equipment, net
Goodwill and other intangible assets
Other assets
Investment in affiliated companies
Total assets
Liabilities and Shareholders’ Equity
Current liabilities:
Current maturities of long-term debt
Customer deposits
Accounts payable
Accrued expenses and other current liabilities
Intercompany payables
Total current liabilities
Long-term debt
Other long-term liabilities
Deferred income taxes
Total liabilities
CONDENSED CONSOLIDATING BALANCE SHEET
(in thousands)
June 30, 2008
Parent
Issuer
Guarantors
Non-Guarantors
Eliminations
Consolidated
$ -
$ 71,117
$ 3,259
$ -
$ -
$ 74,376
-
-
-
-
-
-
-
-
662,726
662,726
-
-
-
6,438
283,216
289,654
-
-
-
289,654
11,937
-
15,355
713,984
812,393
13,186
37,905
3,604
117,368
984,456
-
-
9,785
36,885
597
47,267
198,837
7,819
27,327
281,250
735
227,094
21,510
209,471
462,069
337,246
58,918
936
-
859,169
41
47,297
16,659
18,397
639,601
721,995
4,151
12,564
-
738,710
-
-
-
-
-
-
-
-
-
(40,829)
-
(923,455)
(964,284)
-
-
-
-
-
(780,094)
(1,744,378)
-
-
-
-
-
-
-
-
41
41
(923,455)
(923,455)
-
-
-
-
-
41
-
(923,455)
12,672
186,265
36,865
0
310,178
350,432
96,823
4,540
-
761,973
41
47,297
26,444
61,720
-
135,502
202,988
20,383
27,327
386,200
Shareholders’ equity
Total liabilities and shareholders’ equity
373,072
703,206
120,459
(41)
(820,923)
375,773
$ 662,726
$ 984,456
$ 859,169
$ -
$(1,744,378)
$ 761,973
62
CONDENSED CONSOLIDATING BALANCE SHEET
(in thousands)
June 30, 2007
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, net
Inventories
Prepaid expenses and other current assets
Intercompany
Total current assets
Property, plant and equipment, net
Intangible assets, net
Other assets
Investment in affiliated companies
Parent
Issuer
Guarantors
Non-Guarantors
Eliminations
Consolidated
$ -
-
-
-
-
-
-
-
-
600,453
$ 142,253
14,118
-
15,743
591,102
763,216
11,104
37,905
4,299
149,524
$ 5,626
471
210,146
21,969
195,444
433,656
311,081
54,595
1,185
-
$ -
13
10,759
352
-
11,124
-
-
-
-
$ -
-
(39,021)
-
(786,546)
(825,567)
-
-
-
(749,977)
$ 147,879
14,602
181,884
38,064
-
382,429
322,185
92,500
5,484
-
Total assets
$ 600,453
$ 966,048
$ 800,517
$ 11,124
$(1,575,544)
$ 802,598
Liabilities and Shareholders’ Equity
Current liabilities:
Current maturities of long-term debt
Customer deposits
Accounts payable
Accrued expenses and other current liabilities
Intercompany
Total current liabilities
Long-term debt
Other long-term liabilities
Deferred income taxes
Total liabilities
$ -
-
3,436
6,286
182,458
192,180
-
-
-
192,180
$ -
-
6,509
47,471
43,443
97,423
198,676
227
30,646
326,972
$ 40
52,072
12,732
14,920
553,479
633,243
4,192
11,776
-
649,211
$ -
-
3,973
-
7,166
11,139
-
-
-
11,139
$ -
-
-
-
(786,546)
(786,546)
-
-
-
(786,546)
$ 40
52,072
26,650
68,677
-
147,439
202,868
12,003
30,646
392,956
Shareholders’ equity
408,273
639,076
151,306
(15)
(788,998)
409,642
Total liabilities and shareholders’ equity
$ 600,453
$ 966,048
$ 800,517
$ 11,124
$(1,575,544)
$ 802,598
63
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(in thousands)
Year Ended June 30, 2008
Parent
Issuer
Guarantors
Non-Guarantors
Eliminations
Consolidated
Net sales
Cost of sales
Gross profit
$ -
$ 617,547
$1,009,596
-
-
436,642
180,905
662,716
346,880
Selling, general and administrative expenses
166
50,555
372,506
Restructuring and impairment charges
Total operating expenses
Operating income (loss)
Interest and other miscellaneous income, net
Interest and other related financing costs
Income before income tax expense
Income tax expense
Net income/(loss)
-
166
(166)
-
50,555
130,350
6,836
379,342
(32,462)
58,238
-
58,072
-
(24,901)
724
11,408
94,041
33,995
305
(32,043)
111
$ -
-
-
2
-
2
(2)
-
-
(2)
-
$ (647,098)
$ 980,045
(645,378)
(1,720)
-
-
-
(1,720)
(26,170)
-
(27,890)
-
453,980
526,065
423,229
6,836
430,065
96,000
7,891
11,713
92,178
34,106
$58,072
$ 58,072
$ 60,046
$ (32,154)
$ (2)
$ (27,890)
64
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(in thousands)
Year Ended June 30, 2007
Parent
Issuer
Guarantors
Non-Guarantors
Eliminations
Consolidated
Net sales
Cost of sales
Gross profit
$ - $ 655,967
461,479
194,488
-
-
$982,503
647,249
335,254
Selling, general and administrative expenses
Restructuring and impairment charges
Total operating expenses
166
-
166
45,232
-
45,232
356,613
13,442
370,055
$ -
15
(15)
11
-
11
$ (633,158)
(630,014)
(3,144)
-
-
-
$ 1,005,312
478,729
526,583
402,022
13,442
415,464
Operating income (loss)
(166)
149,256
(34,801)
(26)
(3,144)
111,119
Interest and other miscellaneous income, net
Interest and other related financing costs
69,393
-
(26,557)
11,457
(97)
305
(55)
-
(32,315)
-
10,369
11,762
Income (loss) before income tax expense
69,227
111,242
(35,203)
(81)
(35,459)
109,726
Income tax expense
Net income (loss)
-
38,593
1,906
-
-
40,499
$ 69,227
$ 72,649
$ (37,109)
$ (81)
$ (35,459)
$ 69,227
65
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(in thousands)
Year Ended June 30, 2006
Parent
Issuer
Guarantors
Non-Guarantors
Eliminations
Consolidated
Net sales
Cost of sales
Gross profit
$ - $ 737,213
521,468
215,745
-
-
$1,022,557
694,936
327,621
Selling, general and administrative expenses
Restructuring and impairment charges
Total operating expenses
165
-
165
48,937
-
48,937
344,955
4,241
349,196
$ -
31
(31)
12
-
12
$ (693,380)
(691,027)
(2,353)
$ 1,066,390
525,408
540,982
-
-
-
394,069
4,241
398,310
Operating income (loss)
(165)
166,808
(21,575)
(43)
(2,353)
142,672
Interest and other miscellaneous income, net
Interest and other related financing costs
85,847
-
(20,780)
9,157
(427)
336
(1,177)
-
(58,537)
-
4,926
9,493
Income (loss) before income tax expense
85,682
136,871
(22,338)
(1,220)
(60,890)
138,105
Income tax expense
Net income (loss)
-
48,559
3,864
-
-
52,423
$ 85,682
$ 88,312
$ (26,202)
$ (1,220)
$ (60,890)
$ 85,682
66
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(in thousands)
Year Ended June 30, 2008
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Capital expenditures
Acquisitions
Proceeds from the disposal of property, plant and
equipment
Other
Net cash used in investing activities
Cash flows from financing activities:
Payments on long-term debt
Purchases and other retirements of company stock
Proceeds from issuance of common stock
Excess tax benefits from share-based payment
arrangements
Dividends paid
Net cash provided by (used in) financing
activities
Effect of exchange rate changes on cash
Parent
$ 100,598
Issuer
$ (68,050)
Guarantors
$ 53,589
Non-Guarantors
$ -
Eliminations
$ -
Consolidated
$ 86,137
-
-
-
-
-
-
(75,577)
474
(5,217)
-
-
38
(5,179)
-
-
-
(54,821)
(7,777)
6,943
(500)
(56,155)
(40)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(25,495)
2,093
-
-
-
-
-
-
-
(60,038)
(7,777)
6,943
(462)
(61,334)
(40)
(75,577)
474
2,093
(25,495)
(100,598)
-
2,093
-
(40)
239
-
-
-
-
(98,545)
239
Net decrease in cash and cash equivalents
-
(71,136)
(2,367)
-
-
(73,503)
Cash and cash equivalents – beginning of period
-
142,253
5,626
-
-
147,879
Cash and cash equivalents – end of period
$ -
$ 71,117
$ 3,259
$ -
$ -
$ 74,376
67
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(in thousands)
Year Ended June 30, 2007
Parent
Issuer
Guarantors
Non-Guarantors
Eliminations
Consolidated
Net cash provided by (used in) operating activities
$ 81,428 $ (32,386)
$ 70,147
$ -
$ -
$ 119,189
Cash flows from investing activities:
Capital expenditures
Acquisitions
Proceeds from the disposal of property, plant and
equipment
Other
Net cash used in investing activities
Cash flows from financing activities:
Payments on long-term debt
Payment of deferred financing costs
Purchases and other retirements of company stock
Proceeds from the issuance of common stock
Excess tax benefits from share-based payment
arrangements
Dividends paid
Net cash provided by (used in) financing activities
-
-
(2,713)
-
-
-
-
-
198
(2,515)
-
-
(57,152)
521
-
(24,797)
(81,428)
-
(107)
-
-
5,015
-
4,908
(56,360)
(15,297)
5,431
-
(66,226)
(38)
-
-
-
-
-
(38)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(59,073)
(15,297)
5,431
198
(68,741)
(38)
(107)
(57,152)
521
5,015
(24,797)
(76,558)
Effect of exchange rate changes on cash
-
-
188
-
-
188
Net increase (decrease) in cash and cash equivalents
-
(29,993)
4,071
-
-
(25,922)
Cash and cash equivalents – beginning of period
-
172,246
1,555
-
-
173,801
Cash and cash equivalents – end of period
$ -
$ 142,253
$ 5,626
$ -
$ -
$ 147,879
68
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(in thousands)
Year Ended June 30, 2006
Net cash provided by (used in) operating activities
$ 104,885 $ (13,651)
$ 40,459
$ (104)
$ -
$ 131,589
Parent
Issuer
Guarantors
Non-Guarantors
Eliminations
Consolidated
Cash flows from investing activities:
Capital expenditures
Acquisitions
Proceeds from the disposal of property, plant and
equipment
Other
Net cash used in investing activities
Cash flows from financing activities:
Net proceeds from the issuance of long-term debt
Net borrowings on revolving credit facility
Payments on long-term debt
Payment of deferred financing costs
Purchases and other retirements of company stock
Proceeds from the issuance of common stock
Excess tax benefits from share-based payment
arrangements
Dividends paid
Net cash provided by (used in) financing activities
-
-
(2,828)
-
-
-
-
5
48
(2,775)
-
-
-
-
(84,106)
2,349
198,396
(8,000)
-
(2,219)
-
-
-
(23,128)
(104,885)
495
-
188,672
(38,677)
(7,791)
4,428
-
(42,040)
-
-
(242)
-
-
-
-
-
(242)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(41,505)
(7,791)
4,433
48
(44,815)
198,396
(8,000)
(242)
(2,219)
(84,106)
2,349
495
(23,128)
83,545
Effect of exchange rate changes on cash
-
-
34
-
-
34
Net increase (decrease) in cash and cash equivalents
-
172,246
(1,789)
(104)
-
170,353
Cash and cash equivalents – beginning of period
-
-
3,344
104
-
3,448
Cash and cash equivalents – end of period
$ -
$ 172,246
$ 1,555
$ -
$ -
$ 173,801
69
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 2008, 2007 or 2006.
Item 9A. Controls and Procedures
Management's Report on Disclosure Controls and Procedures
Our 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, 2008, our disclosure controls and
procedures were effective in ensuring that material information relating to us (including our consolidated
subsidiaries), which is required to be disclosed by us in our periodic reports filed or submitted under the
Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and (ii) accumulated and communicated to management, including the CEO and
VPF, as appropriate, to allow timely decisions regarding required disclosure.
Management's Report on Internal Control over Financial Reporting
Our 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) and 15d-15(f). Under the supervision and
with the participation of management, including the CEO and VPF, we conducted an evaluation of the
effectiveness of our 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 our internal control over financial
reporting was effective as of June 30, 2008.
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 the effectiveness of our internal
control over financial reporting as of June 30, 2008, as stated in their report included under Item 8 of this
Annual Report.
Changes in Internal Control over Financial Reporting
There have been no changes in our 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, 2008 that
have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
Item 9B. Other Information
None.
70
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 11, 2008 (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, Executive Officers and Corporate Governance
Code of Ethics
We have adopted a code of ethics that applies to our principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar functions. Our code of ethics can be
accessed via our website at www.ethanallen.com/governance.
We intend to disclose any amendment of our Code of Ethics, or waiver of provision thereof, applicable to
our principal executive officer and/or principal financial officer, or persons performing similar functions, on
our 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, our website is not incorporated by reference into this Form 10-K
and should not be considered part of this or any other report that we file with, or furnish to, the SEC.
Audit Committee Financial Expert
Our Board of Directors has determined that we have three "audit committee financial experts", as defined
under Item 401 of Regulation S-K of the Securities Exchange Act of 1934, currently serving on our Audit
Committee. Those members of our 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.
On July 22, 2008, Mr. McDonell notified us that he would be retiring at the end of his term as a director and
would not be seeking re-election. Mr. McDonell agreed to continue as Chairman of the Audit Committee
until the filing of this Annual Report, at which point Mr. Clark will take over as Chairman. Mr. McDonell
will remain a member of the Audit Committee until the end of his term as a director at the 2008 Annual
Meeting of Shareholders.
71
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Equity Compensation Plan Information
The following table sets forth certain information regarding our equity compensation plans as of June 30,
2008.
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)
Plan Category
Equity compensation plans
approved by security holders (1)
1,929,457
Equity compensation plans not
approved by security holders (2)
Total
-
1,929,457
$30.46
-
$30.46
1,323,029
-
1,323,029
(1) Amount includes stock options outstanding under our 1992 Stock Option Plan (the "Plan") as well as nonvested shares
of restricted stock and vested Stock Units which have been provided for under the provisions of the Plan. See Note 11
to our Consolidated Financial Statements included under Item 8 of this Annual Report.
(2) As of June 30, 2008, we do not maintain any equity compensation plans which have not been approved by our
shareholders.
NYSE Certification
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.
72
Item 15. Exhibits and Financial Statement Schedules
I.
Listing of Documents
PART IV
(1)
Financial Statements. Our Consolidated Financial Statements, included under Item 8
hereof, as required at June 30, 2008 and 2007, and for the years ended June 30, 2008, 2007
and 2006 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. Our Financial Statement Schedule, appended hereto, as
required for the years ended June 30, 2008, 2007 and 2006 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)
to Restated Certificate of
Second Certificate of Amendment
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 (incorporated by reference to
Exhibit 3(c)-1 to the Annual Report on Form 10-K of the Company filed
with the SEC on September 13, 2005
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)
73
3 (e)
3 (f)
3 (g)
3 (g)-1
3 (h)
3 (i)
3 (i)-1
3 (j)
3 (k)
3 (l)
3 (l)-1
3 (m)
3 (n)
3 (o)
3 (p)
4 (a)
Certificate of Incorporation of Ethan Allen Global, Inc. (incorporated by
reference to Exhibit 3(e) to the Registration Statement on Form S-4 of
Ethan Allen Global, Inc. filed with the SEC on February 3, 2006)
By-laws of Ethan Allen Global, Inc. (incorporated by reference to
Exhibit 3(f) to the Registration Statement on Form S-4 of Ethan Allen
Global, Inc. filed with the SEC on February 3, 2006)
Restated Certificate of Incorporation of Ethan Allen Inc. (now known as,
Ethan Allen Retail, Inc.) (incorporated by reference to Exhibit 3(g) to the
Registration Statement on Form S-4 of Ethan Allen Global, Inc. filed
with the SEC on February 3, 2006)
Certificate of Amendment of Restated Certificate of Incorporation of
Ethan Allen Inc. (now known as Ethan Allen Retail, Inc.) as of June 29,
2005 (incorporated by reference to Exhibit 3(g)-1 to the Registration
Statement on Form S-4 of Ethan Allen Global, Inc. filed with the SEC on
February 3, 2006)
Amended and Restated By-laws of Ethan Allen Inc. (now known as
Ethan Allen Retail, Inc.) (incorporated by reference to Exhibit 3(h) to the
Registration Statement on Form S-4 of Ethan Allen Global, Inc. filed
with the SEC on February 3, 2006)
Certificate of Incorporation of Ethan Allen Manufacturing Corporation
(now known as Ethan Allen Operations, Inc.) (incorporated by reference
to Exhibit 3(i) to the Registration Statement on Form S-4 of Ethan Allen
Global, Inc. filed with the SEC on February 3, 2006)
Certificate of Amendment of Certificate of Incorporation of Ethan Allen
Manufacturing Corporation (now known as, Ethan Allen Operations,
Inc.) as of June 29, 2005 (incorporated by reference to Exhibit 3(i)-1 to
the Registration Statement on Form S-4 of Ethan Allen Global, Inc. filed
with the SEC on February 3, 2006)
By-laws of Ethan Allen Manufacturing Corporation (now known as,
Ethan Allen Operations, Inc.) (incorporated by reference to Exhibit 3(j)
to the Registration Statement on Form S-4 of Ethan Allen Global, Inc.
filed with the SEC on February 3, 2006)
Certificate of Formation of Ethan Allen Realty, LLC (incorporated by
reference to Exhibit 3(k) to the Registration Statement on Form S-4 of
Ethan Allen Global, Inc. filed with the SEC on February 3, 2006)
Limited Liability Company Operating Agreement of Ethan Allen
Realty, LLC (incorporated by reference to Exhibit 3(l) to the Registration
Statement on Form S-4 of Ethan Allen Global, Inc. filed with the SEC on
February 3, 2006)
Amendment No. 1 to Operating Agreement of Ethan Allen Realty, LLC
as of June 30, 2005 (incorporated by reference to Exhibit 3(l)-1 to the
Registration Statement on Form S-4 of Ethan Allen Global, Inc. filed
with the SEC on February 3, 2006)
Certificate of
Inc.
(incorporated by reference to Exhibit 3(m) to the Registration Statement
on Form S-4 of Ethan Allen Global, Inc. filed with the SEC on February
3, 2006)
By-laws of Lake Avenue Associates, Inc. (incorporated by reference to
Exhibit 3(n) to the Registration Statement on Form S-4 of Ethan Allen
Global, Inc. filed with the SEC on February 3, 2006)
Certificate of Incorporation of Manor House, Inc. (incorporated by
reference to Exhibit 3(o) to the Registration Statement on Form S-4 of
Ethan Allen Global, Inc. filed with the SEC on February 3, 2006)
Restated By-laws of Manor House, Inc. (incorporated by reference to
Exhibit 3(p) to the Registration Statement on Form S-4 of Ethan Allen
Global, Inc. filed with the SEC on February 3, 2006)
Rights Agreement, dated July 26, 1996, between the Company and
Harris Trust and Savings Bank (incorporated by reference to Exhibit
Incorporation of Lake Avenue Associates,
74
4 (a)-1
4 (b)
4 (c)
4 (d)
10 (a)
10 (b)
10 (c)
10 (c)-1
10 (d)
10 (e)
10 (f)
10 (g)
10 (h)
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
the Company and Harris Trust Savings Bank and
between
Computershare Investor Services, LLC (incorporated by reference to
Exhibit 4(a)-1 to the Annual Report on Form 10-K of the Company filed
with the SEC on September 13, 2005
Form of outstanding 5.375% Senior Note due 2015 pursuant to Rule
144A of the Securities Act (incorporated by reference to Exhibit A to
Exhibit 10.2 to the Current Report on Form 8-K of the Company filed
with the SEC on September 30, 2005)
Indenture dated September 27, 2005, by and among Ethan Allen Global,
Inc., the Guarantors named therein, and the Initial Purchaser named
therein, relating to the Notes (incorporated by reference to Exhibit 10.2
to the Current Report on Form 8-K of Ethan Allen Interiors Inc. filed
with the SEC on September 30, 2005)
Form of Exchange Note (incorporated by reference to Exhibit 4(d) to the
Registration Statement on Form S-4 of Ethan Allen Global, Inc. filed
with the SEC on February 3, 2006)
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, 2006 (incorporated by reference to Exhibit 10(b)-7 to
the Quarterly Report on Form 10-Q of the Company filed with the SEC
on November 5, 2007
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)
Second Amended and Restated Private Label Consumer Credit Card
Program Agreement, dated as of July 23, 2007, by and between Ethan
Allen Global, Inc., Ethan Allen Retail, Inc. and GE Money Bank
(incorporated by reference to Exhibit 10(e)-3 to the Quarterly Report on
Form 10-Q of the Company filed with the SEC on November 5, 2007)
Employment Agreement, dated As of November 13, 2007, between Mr.
Kathwari and Ethan Allen Interiors Inc. (incorporated by reference to
Exhibit 10(h) to the Current Report on Form 8-K of the Company filed
with the SEC on November 19, 2007
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 (incorporated by reference to Exhibit 10 (g) to
Amendment No. 4 to the Registration Statement on Form S-4 of Ethan
Allen Global, Inc. filed with the SEC on March 9, 2006) (confidential
treatment granted under Rule 24b-2 as to certain portions which are
omitted and filed separately with the SEC)
Amended and Restated 1992 Stock Option Plan (incorporated by
reference to Exhibit 10(f) to the Current Report on Form 8-K of the
Company filed with the SEC on November 19, 2007)
75
10 (h)-1
10 (h)-2
10(h)-3
10(h)-4
10 (i)
10 (j)
12 (a)
21
23
31.1
31.2
32.1
32.2
Form of Option Agreement for Grants to Independent Directors
(incorporated by reference to Exhibit 10(h)-4 to the Annual Report on
Form 10-K of the Company filed with the SEC on September 13, 2005
Form of Option Agreement for Grants to Employees (incorporated by
reference to Exhibit 10(h)-5 to the Annual Report on Form 10-K of the
Company filed with the SEC on September 13, 2005
Form of Restricted Stock Agreement for Executives (incorporated by
reference to Exhibit 10(f)-1 to the Current Report on Form 10-8 of the
Company filed with the SEC on November 19, 2007
Form of Restricted Stock Agreement for Directors (incorporated by
reference to Exhibit 10(f)-2 to the Current Report on Form 8-K of the
Company filed with the SEC on November 19, 2007
Purchase Agreement dated September 22, 2005, by and between Ethan
Allen Global, Inc., the Guarantors named therein, and the Initial
Purchaser named therein, relating to the Initial Notes (incorporated by
reference to Exhibit 10.1 to the Current Report on Form 8-K of the
Company filed with the SEC on September 30, 2005)
Registration Rights Agreement dated September 27, 2005, by and
among Ethan Allen Global, Inc., the Guarantors named therein, and the
Initial Purchaser named therein, relating to the Notes (incorporated by
reference to Exhibit 10.3 to the Current Report on Form 8-K of Ethan
Allen Interiors Inc. filed with the SEC on September 30, 2005)
Computation of Ratio of Earnings to Fixed Charges
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.
*
*
*
*
*
*
*
76
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
As of and for the Fiscal Years Ended June 30, 2008, 2007 and 2006
(In thousands)
Balance at
Beginning
of Period
Additions
Charged to
Income
Adjustments
and/or
Deductions
Balance at
End of Period
Accounts Receivable:
Sales discounts, sales returns and
allowance for doubtful accounts:
June 30, 2008
June 30, 2007
June 30, 2006
$
$
$
2,042
2,074
2,102
Inventory:
Inventory valuation allowance:
June 30, 2008
June 30, 2007
June 30, 2006
$
$
$
2,930
2,930
2,691
$
$
$
$
$
$
493
10
2
-
-
295
$
$
$
$
$
$
-
(42)
(30)
(670)
-
(56)
$
$
$
$
$
$
2,535
2,042
2,074
2,260
2,930
2,930
77
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/ David R. Callen
(David R. Callen)
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/ David R. Callen
(David R. Callen)
Vice President, Finance and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
/s/ John P. Birkelund
(John P. Birkelund)
/s/ Clinton A. Clark
(Clinton A. Clark)
/s/ Kristin Gamble
(Kristin Gamble)
/s/ Horace G. McDonell
(Horace G. McDonell)
/s/ Edward H. Meyer
(Edward H. Meyer)
/s/ Richard A. Sandberg
(Richard A. Sandberg)
/s/ Frank G. Wisner
(Frank G. Wisner)
Date: August 22, 2008
Director
Director
Director
Director
Director
Director
Director
78
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©2008 ETHAN ALLEN GLOBAL, INC.