© 2009 ETH AN AL LEN GL OBAL , INC.
annualreport
09
dearshareholders
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
most viable owned locations, and it puts us in a
position to use our U.S.-based manufacturing
to our advantage, with real benefits in terms of
quality, style, and delivery for our clients.
We consolidated and refined our logistics
network. During the year, we continued to
consolidate several leased retail warehouse
service centers to company-owned distribution
facilities. As of June 30, 2009, we were operating
26 service centers, compared to 34 at the end
of fiscal 2008, and 50 at the end of fiscal 2007.
We improved our technology. Early in 2009,
we launched an award-winning state-of-the-art
website, ethanallen.com, which offers an inno-
vative combination of personal service and
technology. The website offers an interactive
design tool called My Projects that allows
site visitors to create idea boards and room
plans and get feedback online from a design
consultant at a local Design Center. We also
continued to improve our information systems
with the roll-out of an updated retail system
we call Vision 8, and also continued to upgrade
our manufacturing information systems.
With these initiatives in place, we believe we
have positioned Ethan Allen for growth and
profitability. We appreciate your continued
confidence and support.
Sincerely,
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.
We maintained a strong network at retail.
At the end of the fiscal year, we had 293 Design
Centers—159 operated by the company and
134 by our independent retailers. Due to major
investments made during the last ten years,
half of our Design Centers are less than six years
old, while 30% are less than three years old. As
a result, we expect to continue substantially
reducing our capital expenditures from $60 mil-
lion in fiscal 2008 and $22.5 million in fiscal 2009
to less than $15 million expected in fiscal 2010.
We introduced our Interior Designer Affiliate
(IDA) membership program. This initiative
to enroll independent interior designers as an
extension of our retail network expands our
reach to more clients. The independent design-
ers will work in cooperation with our in-house
design consultants, and the program offers a
major opportunity to grow our business.
We enhanced our products. We expanded
our custom offerings beyond upholstery to
now include case goods. We expect to substan-
tially complete a transition to custom case
goods by the end of fiscal 2010. In manageable
increments, we have also been transitioning
all of our case goods to eco-friendly water-
based finishes. These initiatives should help
our domestic case goods to operate profitably
and offer a competitive advantage.
We maintained a strong national advertising
and marketing communications presence.
This fiscal year we centralized our advertising
campaign efforts, which enabled us to save
costs while continuing to get out our messages
to inspire, build traffic, and introduce initiatives.
Our approach is multi-layered and includes
national television ads, national and local print
advertising, our new online magazines, email
blasts, web advertising, targeted direct mail,
and new free Style Workshops.
We strengthened our U.S.-based manufac-
turing. We announced during the fiscal year
the consolidation of two upholstery plants and
the realignment of our Northeastern case goods
plants. This effort moves our operations to our
The challenges of operating this business in
fiscal 2009 were extreme, but they also gave us
an opportunity to aggressively restructure
and reinvent many elements of our enterprise.
These actions have made us ready for chal-
lenges and opportunities as we move forward.
We reduced our cost structure by $150 million
compared to fiscal 2008, which affected every
facet of our vertically integrated structure
and included the consolidation of several manu-
facturing, distribution, and retail operations.
We improved liquidity and maximized cash by
reducing inventories by $30 million, cutting
quarterly dividends to $0.05 from $0.25 per
share, contributing stock in lieu of cash to our
401(k) plan, reducing the cash compensation
of management, and establishing a $40 million
asset-based revolving credit facility.
We also took the following important steps to
strengthen the business and position ourselves
for growth as we move forward:
We continued to evolve into a solutions-
based interior design enterprise. Substantially
all of our associates in our Design Centers are
qualified in interior design. We also strengthened
their service approach by implementing a team-
based structure, which matches the skills of our
design consultants with the needs of their clients.
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
DAVID R. CALLEN
VICE PRESIDENT, FINANCE AND TREASURER
203.743.8305
dcallen@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.
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
INTERNATIONAL AFFAIRS ADVISOR OF
PATTON BOGGS LLP.
David R. Callen
VICE PRESIDENT, FINANCE AND TREASURER
Don Garrett
VICE PRESIDENT, CASE GOODS
MANUFACTURING
Daniel M. Grow
VICE PRESIDENT, BUSINESS DEVELOPMENT
Henry Kapteina
DIRECTOR, INTERNAL AUDIT
Sandra Lamenza
GENERAL MANAGER, ETHAN ALLEN HOTEL
James D. McCreary
VICE PRESIDENT, FURNITURE SOURCING
Jack Moll
GENERAL MANAGER, PHYSICAL DISTRIBUTION
Nora Murphy
EXECUTIVE VICE PRESIDENT,
STYLE AND ADVERTISING
Kenneth Musante
MANUFACTURING CONTROLLER
Tracy Paccione
VICE PRESIDENT, MERCHANDISING
Craig Stout
VICE PRESIDENT, PRODUCT DEVELOPMENT—
CASE GOODS AND UPHOLSTERY
Lynda W. Stout
VICE PRESIDENT, RETAIL DIVISION
Clifford Thorn
VICE PRESIDENT, UPHOLSTERY
MANUFACTURING
Corey Whitely
EXECUTIVE VICE PRESIDENT, OPERATIONS
Ann M. Zaccaria
VICE PRESIDENT, REAL ESTATE
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(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, 2009 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FORM 10-K/A
(Amendment No. 1)
For the transition period from
to
Commission file number 1-11692
Ethan Allen Interiors Inc.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization)
Delaware
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 whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or
[ ] No
such shorter period that the registrant was required to submit and post such files).
[ ] Yes
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
[ ] Accelerated filer
[ ]
Smaller reporting company
[X]
[ ]
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, 2008, (the last day of the Registrant’s most recently
completed second fiscal quarter) was approximately $413,411,234. As of July 31, 2009, there were 28,916,929 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 2009 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.
EXPLANATORY NOTE
Ethan Allen Interiors, Inc. (the “Company”) is filing this Amendment No. 1 on Form 10-K/A (the “Form 10-K/A”) to
the Company’s Annual Report on Form 10-K for the year ended June 30, 2009 (the “Original Filing”), to correct a
typographical error in the description and subtotal for total comprehensive income (loss) appearing in the
Consolidated Statements of Shareholders’ Equity for the year ended June 30, 2009. See the Consolidated Statements
of Shareholders’ Equity appearing on page 43 of the audited consolidated financial statements contained in this form
10-K/A.
For the convenience of the reader, this Form 10-K/A sets forth the Original Filing in its entirety. However, this form
10-K/A only amends Item 8 of part II of the Original Filing, to correct a typographical error in the description and
subtotal for other comprehensive income (loss), and no other information in the Original Filing is amended hereby.
In addition, Item 15 of Part IV of the Original Filing has been amended to contain currently dated consent, and
certifications from the Company’s Chief Executive Officer and Chief Financial Officer, and are attached to this form
10-K/A as Exhibits 23, 31.1, 31.2, 32.1 and 32.2
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
16
16
17
18
19
20
22
37
37
77
77
77
77
77
77
77
77
79
84
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 operated and Ethan Allen operated 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 operated 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-operated
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,
3
beds, dressers, armoires, tables, chairs, buffets, entertainment units, home office furniture, and 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, bedding and bedspreads, decorative accessories, area rugs, 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 2009, wholesale sales to independent retailers and retail sales of Company-operated design centers
accounted for approximately 25% and 75%, respectively, of our c consolidated 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,
2008
$616.2
2007
$656.0
2009
$403.4
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,
2008
43%
40
17
100%
2007
44%
38
18
100%
2009
41%
41
18
100%
During fiscal 2009, we operated as many as ten manufacturing facilities, including four case good plants (two of
which include separate sawmill operations), four upholstery plants and one home accessory plant, located within
the United States and one cut and sew operation in Mexico. As announced during the fiscal year, we are
consolidating two upholstery plants into existing operations and one case goods plant including its sawmill
operation. By the end of our first fiscal quarter of 2010, we plan to operate three case goods plants (including one
sawmill), three upholstery plants (two upholstery plants on our Maiden, North Carolina campus and one cut and
sew plant in Mexico) and one home accessory plant. 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, 2009, we maintained a wholesale backlog of $20.6 million (as compared to $33.0 million as of June
30, 2008) which is anticipated to be serviced in the first quarter of fiscal 2010. 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, 2009, net orders booked at the wholesale level, which includes orders
generated by independently operated and Company-operated design centers, totaled $398.5 million as compared
to $617.1 million for the twelve months ended June 30, 2008. In any given period, net orders booked may be
4
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.
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,
2009
$508.6
2008
$724.6
2007
$698.6
We sell our products through a dedicated network of 293 retail design centers. As of June 30, 2009, we operated 159
design centers and independent retailers operated 134 design centers (as compared to 159 and 136, respectively, at
the end of the prior fiscal year). The ten largest independent retailers own a total of 62 design centers, which, based
on net orders booked, accounted for approximately 11% of total net sales in fiscal 2009.
During fiscal 2009 we acquired four design centers from independent retailers, opened six new design centers (of
which three were relocations), and closed seven design centers. In addition, during the past year, independent
retailers opened fourteen new design centers (of which three were relocations), and closed nine design centers. In
the past five years, we and our independent retailers have, on a combined basis, opened 107 new design centers (of
which 44 were relocations), and closed 81. 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-operated 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 and expansion 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 North America.
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, 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
5
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.
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 2005, approximately 70% of our current
complement of product offerings is new. Much of 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 a
nation-wide uniform everyday best price on all of our product offerings. We believe that this approach
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. In response to the recession, in the latter part of fiscal 2009 the
Company offered special savings mostly on select initiatives including new product introductions.
Product Sourcing Activities
We are one of the largest manufacturers of home furnishings in the United States, manufacturing and/or
assembling approximately 65% of our products within six manufacturing facilities, one of which includes
separate sawmill operations. Our facilities are located in the Northeast and Southeast regions of the United States
and in Mexico where they are close to sources of raw materials and skilled craftsmen. 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. These suppliers, primarily in Asia, have been
carefully selected and generally have supplied us for many years. 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.
We also take pride in our “green” initiatives which include the use of responsibly harvested Appalachian woods,
water based finishes, organic textiles and recycled materials.
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 sufficient alternate sources of supply to prevent disruption 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. Higher material prices could have an adverse effect on margins.
6
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.
Distribution and Logistics
Within the wholesale segment, we warehouse and distribute our products primarily through a national network
of four primary distribution centers (three 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 45% of our fleet (trucks and trailers) is leased under
operating lease agreements with terms ranging from one to 72 months.
Our policy is to sell our products at the same delivered cost to all Company-operated and independently
operated 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.
Retail service centers are operated by the Company and the independent retailers to prepare products for delivery
into clients’ homes. The Company-operated service centers have been made more efficient and enabled us to
reduce the total number from 50 at the beginning of fiscal 2008 to 26 at the end of fiscal 2009. We continue to
evaluate the entire logistics and distribution model to further streamline these operations.
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.
7
Our national television and print advertising campaigns are 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 and print, to the extent these media are utilized, serve to
support our national programs.
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-
operated and independently operated design centers, which, 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 12 million
copies of our direct mail magazine were distributed to consumers during fiscal 2009.
Our television advertising and direct mail efforts are supported by strong print and radio campaigns in various
markets. During fiscal 2009, we also updated our 200-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.
In 2009, the Company launched the all-new ethanallen.com website which combines personal service and
technology. The new state-of-the-art website provides a new way to shop for Ethan Allen and is designed to inspire
visitors with videos, feature stories, design and style solutions, new photography, and Ethan Allen’s portfolio for
livable design—the Seven Lifestyles. It offers a new interactive design tool called My Projects that allows site visitors
to create idea boards and room plans and get feedback online from a design consultant at a local design center. The
website’s Inspire section includes editorial features, new product stories, design trend information, decorating
solutions, and a collection of creative films and TV clips showcasing Ethan Allen’s Lifestyles and looks. The As Seen
In column shows visitors how Ethan Allen products have influenced style around the globe. Ethan Allen’s direct
mail magazines are viewable online with full browsing and shopping capabilities. In the Design section, visitors can
explore the Seven Lifestyles in depth and after finding their own style with our style quiz, shop the furnishings
featured in the fully designed rooms. For the first time, visitors to ethanallen.com can now access nearly all of the
Company's more than 3,000 products online. The new ethanallen.com received recognition at the 2008 IAC Awards
(Internet Advertising Committee) as “outstanding website”.
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 3,000 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
8
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 operated.
We provide display planning assistance to all Company-operated 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.
We have strengthened the retail division with many initiatives, including the opening of new and relocated
design centers in desirable locations, introduction of Lifestyle presentations and floor plans, strengthening of the
professionalism of our designers through training and a team approach, and the consolidation of certain design
centers and service centers. The bulk of this effort was completed by the end of fiscal 2008, but continued in fiscal
2009 with six new Company-operated design centers during the year including relocations and seven in
underperforming markets closed. We consolidated 16 Company-operated retail service centers into larger service
centers in fiscal 2008 and another eleven in fiscal 2009. We also opened three Company-operated service centers
in fiscal 2009. This effort continues to reduce the retail logistics infrastructure needed to provide “white glove”
delivery service to our customers.
People
At June 30, 2009, we had approximately 4,300 employees (“associates”), less than one percent of whom are
represented by unions. These collective bargaining agreements expire at various times within the next two 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-operated and independently operated design centers, is staffed
with a sales force of design consultants and service professionals who operate in teams to provide customers with
an effective home decorating solution at no additional charge. Our associates 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 such, we believe our design consultants, and the complimentary service they provide, create a
distinct competitive advantage over other home furnishing retailers.
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 within the Company design centers. 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-operated 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 operated or Company-operated, 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.
9
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.
Rewards
In celebration of the new website, the Company recently launched its “Become a Member” campaign. Members
who are eligible receive 500 reward points. Each point is redeemable toward future qualifying purchases for up
to the lesser of $500 or 5% of the total qualifying purchase price. Shoppers can redeem their points both in Design
Centers or online, through a limited time.
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. 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 24.99% 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 $20,000, or greater, if the customer qualifies. Financing offered is
administered by a third-party financial institution and is granted to our customers on a non-recourse basis to the
Company. Clients may apply for an Ethan Allen Finance Plus card at any participating design center or on-line at
ethanallen.com.
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. As a result, we believe a trend toward product commoditization has
developed. In fiscal 2009, the economic recession resulted in many small furniture retailers going out of business
and other well-established competitors resorting to heavy discounts to liquidate inventory. Instead of following
this trend, we differentiate ourselves as a preferred brand by adhering to a business strategy focused on
providing (i) high-quality, well designed and often custom handmade products at good value, (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 and 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.
10
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, our award winning website, 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-operated 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
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.
A prolonged economic downturn may continue to materially adversely affect our business.
Our business and results of operations are affected by international, national and regional economic conditions.
The United States and many other international economies have entered a recession. Our primary customer base,
direct or indirect, is composed of individual consumers. Continued weakness in the U.S. economy, high
unemployment, volatile capital markets, depressed housing prices and tight consumer lending practices have
resulted in considerable negative pressure on consumer spending. We believe these events have impacted
consumers in our markets in ways that have negatively affected our business. In the event the current economic
11
downturn continues, or worsens, our current and potential customers may be inclined to further delay their
purchases. In addition, further tightening of credit markets may restrict our customers’ ability and willingness to
make purchases.
Access to consumer credit could be interrupted and reduce sales and profitability.
Our ability to continue to access consumer credit for our clients could be negatively affected by conditions
outside our control. Given the difficult capital markets, there is a risk that, though we have agreements that do
not expire until July 2012, our business partner which issues our private label credit card program, may not be
able to fulfill their obligations under that agreement.
We may be unable to obtain sufficient external funding to finance our operations and growth.
Historically, we have relied upon our cash from operations to fund our operations and growth. As we operate
and expand our business, we may rely on external funding sources, including the proceeds from the issuance of
debt or the $40 million revolving bank line of credit (expandable to $60 million) 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. If our Standard & Poor’s credit rating remains below investment grade
through March 2010, the issuer of our private label credit cards may exercise a right to demand up to $12 million
in letters of credit which would reduce the credit available for borrowings from the $27.5 million remaining
available at June 30, 2009. If the total remaining availability of the revolver is below $17.5 million, a lien by the
banks would be imposed on the Company’s intellectual property. If our credit ratings were lowered further, the
Company’s access to debt (including its ability to expand the current revolver from $40 million to up to $60
million) could be negatively impacted. 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.
Continued operating losses could reduce our liquidity and impact our dividend policy.
Historically, we have relied on our cash from operations to fund our operations and the payment of cash
dividends. If the Company continues to experience operating losses we may not be able to fund a shortfall from
operations and would require external funding. Due to recent changes in the capital markets, some financing
instruments used by the Company in the past are currently not available to the Company. We cannot assure that
additional sources of financing would be available to the Company on commercially favorable terms should the
Company's capital requirements exceed cash available from operations and existing cash and cash equivalents. In
such circumstances the Company may further reduce its quarterly dividends.
Additional impairment charges could reduce our profitability.
We have significant long-lived tangible and intangible assets recorded on our balance sheets. If our operating
results continue to decline, we may incur additional impairment charges in the future, which could have a
material impact on our financial results. Although any such impairment charge would be a non-cash expense, it
could materially increase our expenses and reduce our profitability in the period recorded. We will continue to
evaluate the recoverability of the carrying amount of our long-lived tangible and intangible assets on an ongoing
basis. There can be no assurance that the outcome of such future reviews will not result in substantial impairment
charges. Impairment assessment inherently involves judgments as to assumptions about expected future cash
flows and the impact of market conditions on those assumptions. Future events and changing market conditions
may impact our assumptions as to prices, costs or other factors that may result in changes in our estimates of
future cash flows. Although we believe the assumptions we use in testing for impairment are reasonable,
significant changes in any of our assumptions could produce a significantly different result.
12
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-operated 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
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
13
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.
The consolidation of manufacturing and logistics operations into fewer sites may increase the exposure to
business disruption and could result in higher transportation costs.
The Company has reduced the number of redundant manufacturing sites in both our case goods and upholstery
operations. Our upholstery operations consist of two upholstery plants on our Maiden, North Carolina campus
supported in part by one cut and sew plant in Mexico. If any of these upholstery manufacturing sites experience
significant business interruption, our ability to manufacture products timely would likely be impacted. Our
plants require various raw materials and commodities such as logs and lumber for our case goods plants and
foam, springs and engineered hardwood board for our upholstery plants. While we have long standing
relationships with multiple outside suppliers of our raw materials and commodities, there can be no assurance of
their ability to fulfill our supply needs on a timely basis. The consolidation to fewer retail logistics operations has
resulted in longer distances for delivery and could result in higher costs to transport products if fuel costs
increase significantly.
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.
We have been identified as a potentially responsible party in connection with one site that is 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. 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.
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.
14
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 further 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
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.
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
15
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.
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.
During fiscal 2009, we operated as many as ten manufacturing facilities located in six states and Mexico. All of
these facilities are owned, with the exception of a 145,636 square foot leased upholstery plant in California which
will be closed by January 2010. As announced during fiscal year 2009, we are consolidating select upholstery and
case goods plants into existing operations. By the end of our first quarter of fiscal 2010, we plan to operate three
case goods plants (including one sawmill) totaling 1,644,522 square feet, three upholstery furniture plants
(consisting of two upholstery plants on our Maiden, North Carolina campus and one cut and sew plant in
Mexico) totaling 649,396 square feet, and one home accessory plant that is 295,000 square feet all of which are
owned by the company.
In addition, we operate four primary distribution centers, totaling 1,179,029 square feet. All of these facilities are
owned, with the exception of one leased distribution facility in California, which is 80,000 square feet. Our U.S.
manufacturing and distribution facilities for future operations are located in North Carolina, Vermont, Virginia,
Oklahoma, California, New Jersey and Indiana, and our Mexico plant is located in Guanajuato.
We own four and lease 22 retail service centers, totaling 1,268,631 square feet. Our retail service centers are
located throughout the United States and Canada and serve to support our various retail sales districts.
16
The geographic distribution of our retail design center network as of June 30, 2009 is as follows:
United States
North America-Other (1)
Asia
Middle East
Total
Retail Design Center Category
Company
Operated
154
5
-
-
159
Independently
Operated
88
2
41
3
134
(1) We own and operate five retail design centers located in Canada.
Of the 159 retail design centers operated by us, 76 of the properties are owned and 83 of the properties are leased
from independent third parties. Of the 76 design center locations owned by us, 20 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,
2009 of $3.9 million which matures in two 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 a remaining balance at June 30, 2009 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 50% of capacity. As a
result, we announced the consolidation of our Eldred, Pennsylvania and Chino, California upholstery plants into
existing operations as well as the closure of our Andover, Maine case goods plant and realignment of other case
goods operations in the Northeast. 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.
During the fiscal year ending June 30, 2009, our liability with respect to 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"), where we and/or our subsidiaries
had been named as a Potentially Responsive Party (“PRP”) located in Southington, Connecticut; High Point,
North Carolina; and Atlanta, Georgia has been resolved.
17
In each case we were not a major contributor based on the very small volume of waste generated by us in relation
to total volume at those sites and were able to take part in de minimus settlement arrangements. 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 addition to the now settled actions discussed above, 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. In May, 2009, we were notified by the State that it had conducted an initial environmental study and
that we have been named as a PRP. We believe that we are not a major contributor; however, a review of the
initial environmental study is ongoing.
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.
As of June 30, 2009, 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 2009.
18
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 2009
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal 2008
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
$
High
34.02
28.90
15.05
14.47
36.55
35.41
31.98
31.37
Market Price
Low
$
$
22.34
11.26
6.98
9.86
31.57
25.87
22.67
24.48
$
$
Close
28.02
14.37
11.26
10.36
32.69
28.50
28.43
24.60
Dividend
Per Share
$
$
0.25
0.25
0.10
0.05
0.22
0.22
0.22
0.22
As of August 13, 2009, there were 328 shareholders of record of our common stock. Management estimates there
are over eleven thousand beneficial shareholders of the Company’s common stock. On July 21, 2009, we declared
a dividend of $0.05 per common share, payable on October 26, 2009 to shareholders of record as of October 9,
2009. We expect to continue to declare quarterly dividends for the foreseeable future, business conditions
permitting.
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, 2009 we had a remaining Board authorization to repurchase 1,567,669 shares.
There were no share repurchases during the quarter or fiscal year ended June 30, 2009.
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.
19
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, 2004.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Ethan Allen Interiors Inc., The S&P 500 Index
And A Peer Group
$160
$140
$120
$100
$80
$60
$40
$20
$0
6/04
Ethan Allen Interiors Inc.
6/05
6/06
6/07
S&P 500
6/08
6/09
Peer Group
*$100 invested on 6/30/04 in stock or index, including reinvestment of dividends.
Fiscal year ending June 30.
Copyright© 2009 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
Peer 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.
Item 6. Selected Financial Data
The following table presents selected financial data for the fiscal years ended June 30, 2009, 2008, 2007, 2006 and
2005 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.
20
Statement of Operations Data:
Net sales
Cost of sales
Selling, general and
administrative expenses
Restructuring and impairment
charges, net
Operating income (loss)
Interest and other expense
(income), net
Income (loss) before income
tax expense
Income tax expense (benefit)
Fiscal Year Ended June 30,
2009
2008
2007
2006
2005
$
674,277 $
980,045 $ 1,005,312 $ 1,066,390 $
949,012
326,935
453,980
478,729
525,408
487,958
353,112
423,229
402,022
394,069
332,295
67,001
(72,771)
6,836
96,000
13,442
111,119
4,241
(219)
142,672
128,978
8,409
3,822
1,393
4,567
(442)
(81,180)
(28,493)
92,178
34,106
109,726
40,499
138,105
52,423
129,420
50,082
Net income (loss)
$
(52,687) $
58,072 $
69,227 $
85,682
$
79,338
Per Share Data:
Net income (loss) per basic
$
share
$
(1.83)
1.98
$
2.19
$
2.58
$
2.24
Basic weighted average shares
outstanding
28,814
29,267
31,566
33,210
35,400
Net income (loss) per diluted
share
Diluted weighted average
shares outstanding
Cash dividends per share
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
$
(1.83)
$
1.97
$
2.15
$
2.51
$
2.19
28,814
29,470
32,261
34,086
36,193
0.65
$
0.88
$
0.80
$
0.72
$
0.60
25,635 $
24,670 $
23,013 $
21,599
$
21,338
23,903 $
67,815 $
74,370 $
49,296
139,239 $
176,796 $
234,990 $
278,038
$
$
34,381
130,423
2.24 to 1
2.30 to 1
2.59 to 1
2.88 to 1
1.97 to 1
35.1%
37.0%
36.9%
38.0%
38.7%
646,485 $
764,093 $
802,598 $
814,100
$
628,386
lease obligations
203,148
203,029
202,908
202,787
12,510
Shareholders’ equity
$
305,923 $
375,773 $
409,642 $
417,442
$
434,068
Debt as a percentage of equity
Debt as a percentage of capital
66.4%
39.9%
54.0%
35.1%
49.5%
33.1%
48.6%
32.7%
2.9%
2.8%
21
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 reserve 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-operated 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.
22
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.
Income Taxes – Income taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax 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. Additional factors that we consider when making judgments about the deferred tax
valuation include tax law changes, a recent history of cumulative losses, and variances in future projected
profitability.
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. 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 or tax positions settled within one year. We
recognize interest and penalties related to income tax matters as a component of income tax expense.
23
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.
Basis of Presentation
As of June 30, 2009, 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 Company has been severely impacted by the ongoing recession in the United States and abroad. Continued
weakness in the U.S. economy, high unemployment, volatile capital markets, depressed housing prices and tight
consumer lending practices have driven consumer confidence down to, or near, historical lows and resulted in
considerable negative pressure on spending by individual consumers, our primary customer base. The Company
is continuing to adjust our infrastructure to match our sales volumes as we work through these difficult times.
Restructuring Activities:
In 2009, the Company made several announcements on changes to our operations as we continue to improve the
structure of our business especially in light of the recent economic downturn. In January 2009, the Company
announced a plan to consolidate the operations of its Eldred, Pennsylvania upholstery manufacturing plant and
several of its retail service centers. In June 2009, the Company announced the consolidation of its Chino,
California operations into its Maiden, North Carolina facility and the consolidation of its Andover, Maine
sawmill and dimension mill to its Beecher Falls, Vermont sawmill and dimension mill operations. For these fiscal
2009 actions, the Company estimates pre-tax restructuring, impairment, and other related charges will ultimately
approximate $30 million, consisting of $15 million in write down of long-lived assets, $8 million in employee
severance and other payroll and benefit costs, and $7 million in other associated costs. By segment, we expect $23
million in costs for the wholesale segment and $7 million for the retail segment. Total costs for these 2009 actions
in the current fiscal year by segment are $17.0 million for Wholesale, and $2.6 million for Retail all of which have
been classified in the Statement of Operations as restructuring and impairment charges. Approximately 800
employee positions and 140 contract worker positions will be eliminated due to these actions.
In January 2008, we announced a plan to consolidate the operations of certain Company-operated retail design
centers and retail service centers. In connection with this initiative, we have permanently ceased operations at ten
24
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.
We recorded pre-tax restructuring, impairment, and other related charges of $6.8 million for fiscal 2008, with $3.3
million 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.
During fiscal 2009, we recorded a net reduction of pre-tax restructuring, impairment, and other related charges of
$1.0 million, primarily due to net gains on the sale of real estate of $4.2 million, partly offset by additional charges
and adjustments to previous estimates for leased facilities of $2.3 million and employee severance, benefits and
other charges of $0.5 million. Cumulative charges to date for these actions total $5.5 million, all of which have
been classified in the Statement of Operations as restructuring and impairment charges. In addition to the Retail
charges, $0.4 million was recorded in the first quarter of fiscal 2009 to update the fair value of a wholesale plant
site held for sale.
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.
The decision impacted approximately 465 employees. 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 of fixed asset impairment charges.
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.
Analysis of Goodwill and Other Intangible Assets:
We conduct an annual impairment analysis of goodwill and other indefinite lived intangible assets the first of
April each fiscal year, unless events occur or circumstances change that would more likely than not reduce the
fair value of the goodwill or other indefinite lived intangible assets below their carrying value. In determining
whether an interim test is appropriate, management considers several factors including changes in the Company’s
stock price, financial performance, third party ratings on its long term debt, and expected financial outlook of the
business. Methods employed to value the enterprise and the Company’s retail and wholesale segments include
the market approach and the income approach, which are reconciled with the total market capitalization of the
Company. These valuation methods use historical revenues and cash flows, as well as Company and external
analysts’ financial projections and apply discount rates, weighted average cost of capital rates, total invested
capital multiples, and premium control multiples. Fair value of our trade name is valued using the relief-from-
royalty method. Significant factors used in trade name valuation are royalty rates, future growth and discount
rates, and expense rates.
In the fiscal quarter ended December 31, 2008, net sales declined 7.9% from the previous quarter and there was a
meaningful decline (34.5%) in the company’s average stock price from the first fiscal quarter to the second (from
$26.35 to $17.27). This decline coupled with the sudden and dramatic change in the business climate as seen
through the financial crisis with global banking institutions led to an interim evaluation of goodwill and other
intangible assets. As a result of these tests, management concluded that the estimated value of the wholesale and
retail segments exceeded their carrying values and no impairment was indicated.
In the fiscal quarter ended March 31, 2009, net sales declined 26.0% from the previous quarter resulting in a 660
basis point decline in gross margin plus a further decline (36.2%) in the company’s average stock price (from
$17.27 to $11.02). These declines coupled with a significant loss from operations led to a second interim
evaluation of goodwill and other intangible assets. As a result of these tests, management concluded the carrying
value of goodwill on our retail division’s books exceeded its fair value. Therefore, we recorded a non-cash
impairment charge of $48.4 million. No impairment of the goodwill or other indefinite lived assets on our
wholesale division’s books was appropriate.
25
In the fiscal quarter ended June 30, 2009, the Company performed its annual impairment test on April 1 and
noted no additional impairment was appropriate. During the quarter, business performance stabilized with net
sales slightly lower (1%) than the previous quarter, gross margin improved 160 basis points and there was a slight
increase in cash on hand (to $53 million). The average price of our stock increased 9.8% (from $11.02 to $12.11).
The ratings on the Company’s long term debt were lowered by third parties to speculative grade and the
Company updated its forecasts. The Company considered these factors and concluded that an interim
impairment test was not required on the wholesale segment. No additional evaluation of the retail segment was
appropriate as all goodwill was written off in the previous fiscal quarter.
There can be no assurance that the outcome of future reviews will not result in substantial impairment charges.
Impairment assessment inherently involves judgments as to assumptions about expected future cash flows and
the impact of market conditions on those assumptions. Future events and changing market conditions may
impact our assumptions as to prices, costs or other factors that may result in changes in our estimates of future
cash flows. Although we believe the assumptions we use in testing for impairment are reasonable, significant
changes in any of our assumptions could produce a significantly different result.
Business Results:
Our revenues are comprised of (i) wholesale sales to independently operated and Company-operated retail
design centers and (ii) retail sales of Company-operated design centers. See Note 16 to our Consolidated
Financial Statements for the year ended June 30, 2009 included under Item 8 of this Annual Report.
The components of consolidated revenues and operating income (loss) are as follows (in millions):
Fiscal Year Ended June 30,
2008
2009
2007
Revenue:
Wholesale segment
Retail segment
Elimination of inter-segment sales
Consolidated revenue
Operating Income (loss):
Wholesale segment (1)
Retail segment (2)
Adjustment for inter-company profit(3)
Consolidated operating income
$ 403.4
508.6
(237.7)
$ 674.3
$ 616.2
724.6
(360.8)
$ 980.0
$ 656.0
698.6
(349.3)
$ 1,005.3
$ 6.7
(92.1)
12.6
$ (72.8)
$ 100.3
(2.8)
(1.5)
$ 96.0
$ 99.2
15.2
_ (3.3)
$ 111.1
(1) Operating income for the Wholesale segment for the twelve months ended June 2009 and 2007 includes pre-tax
restructuring and impairment charges of $17.4 million and $13.4 million, respectively.
(2) Operating income for the Retail segment for the twelve months ended June 2009 and 2008 includes pre-tax
restructuring and impairment charges of $49.6 million and $6.8 million, respectively.
(3) Represents the change in the inventory profit elimination entry necessary to adjust for the embedded wholesale profit
contained in Ethan Allen-operated design center inventory existing at the end of the period.
Fiscal 2009 Compared to Fiscal 2008
Consolidated revenue for the fiscal year ended June 30, 2009 decreased by $305.7 million, or 31.2%, to $674.3
million, from $980 million in fiscal 2008. 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 negatively
26
affected by a weak retail environment for home furnishings which we believe is due to a number of factors
including but not limited to continued weakness in the U.S. economy, high unemployment, volatile capital
markets, depressed housing prices and tight consumer lending practices as well as the use of highly-promotional
pricing strategies by the Company’s competitors. These factors were partially offset by (i) the positive effects of
our continued efforts to reposition the retail network, (ii) the introduction of our new American Artisan product
line, (iii) several new marketing initiatives including the launching of our new interactive web site
ethanalleninc.com and our rewards program, and in the latter part of the fiscal year, special savings pricing, and
(iv) the continued use of national television media, where we emphasize to clients our interior design services and
the full line of our quality product offerings.
Wholesale revenue for fiscal 2009 decreased by $212.9 million, or 34.5%, to $403.4 million from $616.2 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 the current period and from fewer
independent retail design centers, which decreased to 134 from 136 including four locations transferred in to the
company’s Retail division during the year.
Retail revenue from Ethan Allen-operated design centers for the twelve months ended June 30, 2009 decreased
by $216.0 million, or 29.8%, to $508.6 million from $724.6 million for the twelve months ended June 30, 2008. The
decrease in retail sales by Ethan Allen-operated design centers was attributable to a decrease in comparable
design center delivered sales of $211.9 million, or 32.5%, and reduced revenue from sold and closed design
centers of $64.4 million. This unfavorable variance was partially offset by higher sales generated by newly opened
(including relocated) or acquired design centers of $60.4 million. The number of Ethan Allen-operated design
centers remained at 159 at both June 30, 2009 and June 30, 2008. During that twelve month period, we acquired
four design centers from independent retailers, and opened six new design centers (of which three 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-operated operations.
Year-over-year, written business of Ethan Allen-operated design centers decreased 32.6% and comparable design
center written business decreased 35.4%. Over that same period, wholesale orders decreased 35.4%. Retail
written business reflects the softer retail environment for home furnishings noted throughout the current year,
likely offset, to some degree, by (i) our continued efforts to reposition the retail network, (ii) recent product
introductions, (iii) several new marketing initiatives described previously, and (iv) our continued use of national
television as an advertising medium throughout much of the year.
Gross profit for fiscal 2009 declined to $347.3 million from $526.1 million in fiscal 2008. The $178.7 million
decrease in gross profit was primarily attributable to a combined decline in both wholesale and retail sales
volume of 31.2%, partially offset by a shift in sales mix with retail sales representing a higher proportionate share
of total sales in the current full year (75.4%) as compared to the prior full year (73.9%). As a result of reduced
sales, and to reduce inventories, manufacturing plants were operated at approximately 50% of capacity. This
resulted in higher unabsorbed costs in our manufacturing plants which were charged to expense during the
period. The consolidated gross margin decreased to 51.5% for fiscal 2009 from 53.7% in fiscal 2008 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, 2009 and 2008:
Operating expenses decreased $10.0 million, or 2.3%, to $420.1 million, or 62.3% of net sales, in fiscal 2009 from
$430.1 million, or 43.9% of net sales, in fiscal 2008. Decreases in salary related costs were experienced due to the
reduced number of employees and other cost cutting efforts taken by the Company that impacted bonuses and
27
benefits. Advertising expenses decreased, while still maintaining our national TV and shelter magazine presence.
Delivery and warehousing costs were lower due to decreased sales. Partially offsetting these decreases were (i) a
non-cash goodwill impairment charge of $48.4 million recorded in the March 2009 quarter and (ii) an $11.8
million period-over-period increase in restructuring and impairment charges, both discussed earlier, and (iii)
added costs of $7 million due to the implementation of the team concept which caused a temporary overlap of
expenses and is now concluded.
Consolidated operating income for the year ended June 30, 2009 totaled a loss of $72.8 million, or 10.8% of net
sales, compared to income of $96.0 million, or 9.8% of net sales, in the prior year. The decrease of $168.8 million
was largely attributable to (i) a 31.2% reduction in net sales, resulting in a $178.7 million reduction in gross profit,
(ii) a goodwill impairment charge, (iii) increased restructuring and impairment charges and (iv) net declines in
other operating expenses, all of which were discussed previously.
Wholesale operating income for fiscal 2009 totaled $6.7 million, or 1.7% of net sales, as compared to $100.3
million, or 16.3% of net sales, in the prior year. The decrease of $93.7 million was primarily attributable to (i) the
$212.9 reduction in net sales, and (ii) a $17.4 million increase in restructuring and impairment charges due to the
2009 actions discussed earlier.
Retail operating income decreased $89.3 million to a $92.1 million loss, or 18.1% of sales, for fiscal 2009, from a
loss of $2.8 million, or 0.4% of sales, for fiscal 2008. The decrease in retail operating income generated by Ethan
Allen-operated design centers was primarily attributable to reduced sales caused by the weak retail environment
for home furnishings, as well as the $48.4 million goodwill impairment charge.
Interest and other miscellaneous income, net totaled $3.4 million in fiscal 2009 as compared to $7.9 million in
fiscal 2008. The $4.5 million decrease was mostly due to lower investment income resulting from reduced cash
and cash equivalent balances maintained along with lower rates of interest during the current period and by
gains recorded in connection with the sale of selected real estate assets in the prior year.
Interest and other related financing costs remained largely unchanged at $11.8 million from $11.7 million in the
prior year. This amount mostly consists of interest expense on our senior unsecured debt issued in September
2005.
Income tax totaled a benefit of $28.5 million for fiscal 2009 as compared to an expense of $34.1 million for fiscal
2008. Our effective tax rate for the current year was 35.1%, compared to 37.0% in the prior year. The effective tax
rate was a result, primarily, of the total current year loss before tax and the resulting valuation allowance taken
against certain deferred tax assets and the inability to apply the manufacturers’ deduction provided for under The
Jobs Creation Act of 2004.
Net income for fiscal 2009 was a loss of $52.7 million as compared to income of $58.1 million in fiscal 2008. Net
loss per diluted share totaled $1.83 in the current year compared to net income of $1.97 per diluted share in the
prior year.
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
28
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.
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-operated 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-operated 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-
operated 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 operated 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-operated operations.
Year-over-year, written business of Ethan Allen-operated 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:
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
29
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-
operated 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
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-operated
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.
Liquidity and Capital Resources
As of June 30, 2009, we held cash and cash equivalents totaling $53.0 million. Our principal sources of liquidity
include cash and cash equivalents, cash flow from operations, and borrowing capacity under revolving credit
facility.
During fiscal 2009, the Company terminated its unsecured $200 million revolving credit facility which had never
been used for other than support of outstanding letters of credit. On May 29, 2009, we entered into a three-year
secured $40 million asset-based revolving credit facility (the “Facility”) with fewer covenant restrictions which
30
the Company believes to be more appropriate in the current credit environment. The Facility is subject to
borrowing base availability and includes an opportunity for expansion of up to an additional $20 million of
financing.
At the Company’s option, revolving loans under the Agreement bear interest at an annual rate of either:
(a) London Interbank Offered rate (“LIBOR”) plus 3.25% to 4.25%, based on the average availability, or
(b)
the higher of (i) a prime rate, (ii) the federal funds effective rate plus 0.50%, or (iii) a LIBOR plus 1.00%
plus, in each case, an additional 2.25% to 3.25%, based on average availability.
The Company will pay a commitment fee of 0.50% per annum on the unused portion of the Facility and
participation fees on issued letters of credit at an annual rate of 1.625% to 4.25%, based on the average availability
and the letter of credit type, and a fronting fee of 0.125% per annum.
The borrowing base at any time equals the sum of: up to 90% of eligible credit card receivables; plus up to 85% of
eligible accounts receivable; plus up to 85% of the net orderly liquidation value of eligible inventory. The Facility
is secured by all property owned, leased or operated by the Company in the United States excluding any real
property owned by the Company and also excludes any intellectual property owned by the Company unless
availability is less than or equal to $17.5 million.
The Facility contains customary covenants which may limit the Company’s ability to incur debt; engage in
mergers and consolidations; make restricted payments (including dividends); sell certain assets; and make
investments. The Company may make restricted payments (including dividends) as long as availability equals or
exceeds the greater of (i) 25% of the aggregate commitment or (ii) $12 million. If the average monthly availability
is less than the greater of (i) 15% of the aggregate commitment and (ii) $9 million, the Company is also required to
meet a fixed charge coverage ratio financial covenant which may not be less than 1 to 1 for any period of four
consecutive fiscal quarters. The Facility also contains customary borrowing conditions 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.
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 June 2009, Moodys Investors Service lowered our corporate and senior unsecured credit ratings to Ba1 from
Baa3, and Standard & Poor’s (“S&P”) lowered our corporate and senior unsecured credit ratings to BB from BBB-.
Both rating services cited the weak economy and the resultant pressure on the home furnishings industry as
reasons for the downgrade. While the change in our credit rating had no impact on our existing credit facilities,
the S&P downgrade, if not improved to investment grade by March 2010, the issuer of our private label credit
cards has a right to demand a standby letter of credit of up to $12 million. At June 30, 2009, we had $12.5 million
in letters of credit outstanding, leaving $27.5 million remaining available credit under the revolver. Any
additional letters of credit would reduce the credit available for borrowings under the revolver.
The Company believes it has sufficient cash and access to credit (including its ability to expand the $40 million
credit facility to up to $60 million) to fund its operations and growth plans.
31
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,
2008
2007
2009
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
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
$
$
$
$
$
$
(27.1)
24.8
-
24.2
21.9
(22.5)
(1.4)
6.4
-
(17.5)
-
-
(23.6)
-
(1.4)
(25.0)
$
$
$
$
$
$
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)
Operating Activities
During fiscal 2009, cash provided by operating activities decreased $64.2 million, mostly because of the decrease
in net income. While expenses were reduced and restructuring actions were taken to counteract these conditions,
cash savings in the current year were not enough to offset reduced income. Cash generated from working capital
(accounts receivable, inventories, prepaid and other current assets, customer deposits, payables, accrued
expenses, and other current liabilities) reduction, increased cash by $30.3 million largely from inventory
reduction initiatives taken. The $13.2 million change from other operating activities was largely driven by the
non-cash restructuring and goodwill impairment charges net of tax effects recorded this fiscal year.
Investing Activities
In fiscal 2009, cash used in investing activities was lower by $43.8 million due, primarily, to a $37.5 million
decrease in cash utilized to fund capital expenditures. The level of acquisitions decreased $6.4 million in fiscal
2009 as compared to fiscal 2008. The current level of capital spending is principally attributable to (i) continued
design center development and renovation, but at a reduced level from the prior two years, and (ii) entity-wide
technology initiatives including the new interactive website. We anticipate that cash from operations will be
sufficient to fund future capital expenditures, business conditions permitting.
Financing Activities
For fiscal 2009, cash used in financing activities decreased $73.5 million as a result, primarily, of a curtailment in
payments for the acquisition of treasury stock. On July 21, 2009, we declared a dividend of $0.05 per common
share, payable on October 26, 2009, to shareholders of record as of October 9, 2009. We expect to continue to
declare quarterly dividends for the foreseeable future.
32
As of June 30, 2009, our outstanding debt totaled $203.1 million, the current and long-term portions of which
amounted to less than $0.1 million and $203.1 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 fiscal 2010; $3.9 million in fiscal 2011;
and less than $0.1 million in fiscal 2012, 2013 and 2014. The balance of our long-term debt ($199.2 million)
matures in fiscal 2015. We had no revolving loans outstanding under the credit facility as of June 30, 2009, and
stand-by letters of credit outstanding under the facility at that date totaled $12.5 million. Remaining available
borrowing capacity under the facility was $27.5 million at June 30, 2009.
The following table summarizes, as of June 30, 2009, 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
42 $
3,917 $
$ 203,148 $
70,519
234,518
12,460
-
249
11,048
36,863
12,460
-
30
$ 520,894 $ 60,443 $
21,802
59,636
-
-
51
85,406 $
21,511
41,068
-
-
48
22 $ 199,167
16,158
96,951
-
-
120
62,649 $ 312,396
(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, 2009, our open purchase
orders with respect to such goods and services totaled approximately $22 million.
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, 2009, we had working
capital of $139.2 million and a current ratio of 2.24 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 2009, 2008 and 2007, we repurchased and/or retired the following shares of our common stock:
Common shares repurchased
Cost to repurchase common shares
Average price per share
2009
-
-
-
2008 (1)
2,259,631
$69,745,024
$30.87
2007(2)(3)
1,548,700
$53,955,970
$34.84
33
(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 2008 reflects $3,436,230 in common stock repurchases with a June 2007 trade date and a
July 2007 settlement date.
(3) During fiscal 2008, 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.
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, 2009, 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.
Retailer-Related Guarantees
Independent Retailer Credit Facility
On June 11, 2009, we obligated ourselves, on behalf of one of our independent retailers, with respect to a $0.5
million credit facility (the "Amended Credit Facility"). The Company had previously guaranteed on April 9, 2009,
on behalf of the independent retailer, a $0.9 million credit facility (the “Credit Facility”). This obligation requires
us, in the event of the retailer’s default under the Amended Credit Facility, to repurchase the retailer’s inventory,
applying such purchase price to the retailer’s outstanding indebtedness under the Amended Credit Facility. Our
obligation remains in effect for the life of the term loan. The agreement expires in April 2011. 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, 2009, the amount outstanding under the Amended Credit Facility totaled approximately $0.5
million. 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, 2009, the carrying
amount of such liability is less than $50,000.
34
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. To ensure funding for delivery of products sold, the terms of this agreement also contain
a right for the credit card issuer to demand from the Company a letter of credit of up to $12 million if the
Company’s credit rating is below investment grade for more than 270 consecutive days. See the Liquidity and
Capital Resource section above for more information.
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
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, 2009, the Company’s product warranty liability
totaled $1.0 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 weakness 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.
35
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 65% 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.
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.
We adopted SFAS No. 159 on July 1, 2008 and have not elected the permitted fair value measurement provisions
of this statement.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”), which defines fair
value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements, yet does not require any new fair value measurements. In
February 2008, the FASB issued FASB Staff Position No. 157-2 (“FSP No. 157-2”), which delayed the effective date
of SFAS No. 157 as it relates to non-financial assets and non-financial liabilities until July 1, 2009 for the
Company, except for items that are recognized or disclosed at fair value by the Company on a recurring basis.
Effective July 1, 2008, the Company adopted the provisions of SFAS No. 157, except as it relates to those non-
financial assets and non-financial liabilities excluded under FSP No. 157-2. Those excluded items for which the
36
Company has not applied the fair value provisions of SFAS No. 157 include goodwill and other intangible assets
(note 6), assets held for sale (note 2), liabilities for exit or disposal activities (note 2), and business acquisitions
(note 3). The Company is currently evaluating the impact of this statement on the Company’s financial position,
results of operations and cash flows as it relates to non-financial assets and non-financial liabilities. This
pronouncement became effective for us on July 1, 2008. See note 18 for more information.
In June 2008, the FASB issued FASB Staff Position No. EITF 03-6-1, Determining Whether Instruments Granted in
Share-Based Payment Transactions are Participating Securities, which requires that unvested share-based payment
awards containing non-forfeited rights to dividends be included in the computation of earnings per common
share. The adoption of FSB EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008 and interim
periods within those fiscal years (July 1, 2009 for the Company). Retrospective application is required. We are
evaluating this pronouncement but do not expect it to impact basic or diluted earnings per share.
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, 2009, 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, 2009, 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 $146 million as compared to a carrying value of $199 million.
Foreign currency exchange risk is primarily limited to our operation of five Ethan Allen-operated retail design
centers located in Canada as substantially all purchases of imported parts and finished goods are denominated in
United States dollars. As such, gains or losses resulting from market changes in the value of foreign currencies
have not had, nor are they expected to have, a material effect on 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.
37
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, 2009 and 2008, 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, 2009. We also have audited
the Company’s internal control over financial reporting as of June 30, 2009, based on the 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
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, 2009 and 2008, and the results of its
operations and their cash flows for each of the years in the three-year period ended June 30, 2009, in conformity
with U.S. generally accepted accounting principles. Also in our opinion, Ethan Allen Interiors, Inc. and
38
subsidiaries maintained, in all material respects, effective internal control over financial reporting as of June 30,
2009, 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 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 24, 2009
39
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2009 and 2008
(In thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, less allowance for doubtful accounts
of $1,362 at June 30, 2009 and $2,535 at June 30, 2008
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, 48,334,870 shares issued at
June 30, 2009 and 48,251,780 shares issued at
June 30, 2008
Class B common stock, par value $.01, 600,000 shares
authorized; no shares issued and outstanding at
June 30, 2009 and June 30, 2008
Preferred stock, par value $.01, 1,055,000 shares
authorized, no shares issued and outstanding at
June 30, 2009 and 2008
Additional paid-in capital
Less: Treasury stock (at cost), 19,380,941 shares at
June 30, 2009 and 19,656,901 shares at June 30, 2008
Retained earnings
Accumulated other comprehensive income
Total shareholders' equity
Total liabilities and shareholders' equity
See accompanying notes to consolidated financial statements.
40
2009
2008
$ 52,960
$ 74,376
13,086
156,519
21,060
8,077
251,702
333,599
45,128
16,056
$ 646,485
12,672
186,265
32,860
6,125
312,298
350,432
96,823
4,540
$ 764,093
$ 42
31,691
22,199
29,533
28,998
112,463
203,106
24,993
-
340,562
$ 41
47,297
26,444
32,568
29,152
135,502
202,988
27,924
21,906
388,320
483
482
-
-
-
356,446
356,929
-
354,725
355,207
(583,220)
531,747
467
305,923
$ 646,485
(588,783)
606,648
2,701
375,773
$ 764,093
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For Years Ended June 30, 2009, 2008 and 2007
(In thousands, except per share data)
Net Sales
Cost of sales
Gross profit
Operating expenses:
Selling
General and administrative
Goodwill impairment (note 6)
Restructuring and impairment charge (note 2)
Total operating expenses
2009
2008
2007
$ 674,277
326,935
347,342
$ 980,045
453,980
526,065
$1,005,312
478,729
526,583
182,800
170,312
48,400
18,601
420,113
229,590
193,639
-
6,836
430,065
223,146
178,876
-
13,442
415,464
Operating income (loss)
(72,771)
96,000
111,119
Interest and other miscellaneous income, net
3,355
7,891
10,369
Interest and other related financing costs (note 7)
11,764
11,713
11,762
Income (loss) before income taxes
(81,180)
92,178
109,726
Income tax expense (benefit) (note 12)
(28,493)
34,106
40,499
Net income (loss)
$ (52,687)
$ 58,072
$ 69,227
Per share data (notes 10 and 17):
Net income (loss) per basic share
$ (1.83)
$ 1.98
$ 2.19
Basic weighted average common shares
28,814
29,267
31,566
Net income (loss) per diluted share
$ (1.83)
$ 1.97
$ 2.15
Diluted weighted average common shares
28,814
29,470
32,261
Dividends declared per common share
$ 0.65
$ 0.88
$ 0.80
See accompanying notes to consolidated financial statements.
41
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years Ended June 30, 2009, 2008 and 2007
(In thousands)
Operating activities
Net income (loss)
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
Goodwill impairment
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
2009
2008
2007
$ (52,687)
$ 58,072
$ 69,227
25,635
1,719
(32,158)
-
48,400
7,038
1,001
198
(776)
31,428
10,627
1,354
(16,266)
(3,835)
3,590
(3,335)
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)
Net cash provided by operating activities
21,933
86,137
119,189
Investing activities:
Proceeds from the disposal of property, plant and equipment
Capital expenditures
Acquisitions
Other
6,384
(22,537)
(1,366)
(7)
6,943
(60,038)
(7,777)
(462)
5,431
(59,073)
(15,297)
198
Net cash used in investing activities
(17,526)
(61,334)
(68,741)
Financial activities:
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
(41)
-
2
-
(1,380)
(23,617)
(40)
(75,577)
474
2,093
-
(25,495)
(38)
(57,152)
521
5,015
(107)
(24,797)
Net cash used in financing activities
(25,036)
(98,545)
(76,558)
Effect of exchange rate changes on cash
(787)
239
188
Net increase (decrease) in cash and cash equivalents
(21,416)
(73,503)
(25,922)
Cash and cash equivalents – beginning of year
Cash and cash equivalents – end of year
Supplemental cash flow information:
Income taxes paid
Interest paid
See accompanying notes to consolidated financial statements.
74,376
$ 52,960
147,879
$ 74,376
173,801
$ 147,879
$ 8,237
$ 11,098
$ 33,618
$ 11,132
$ 37,561
$ 11,173
42
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity
For the Years Ended June 30, 2009, 2008 and 2007
(In thousands, except share data)
Balance as of June 30, 2006
Issuance of 767,938 common shares 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
Balance as of June 30, 2007
Issuance of 770,337 common shares 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
Balance as of June 30, 2008
Issuance of 90 common shares 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)
Issuance of treasury shares for 401k match
Dividends declared on common stock
Other comprehensive income (loss) (note 15)
Currency translation adjustments
Loss on derivatives, net-of-tax
Net income (loss)
Total comprehensive income (loss)
Balance at June 30, 2009
See accompanying notes to consolidated financial statements.
Common
Stock
Additional
Paid-in
Capital
Treasury
Stock
Accumulated
Other
Compre-
hensive
Income
Retained
Earnings
Total
$ 467
$ 307,852 $ (421,308)
$ 935
$ 529,496 $ 417,442
7
16,388
-
-
-
-
-
-
-
-
-
821
5,015
22
-
-
-
-
-
8
21,104
-
-
-
-
-
-
-
-
1,260
2,093
-
-
-
-
-
-
-
-
-
-
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
409,642
21,112
1,260
2,093
683
-
-
-
683
-
-
-
-
(92,778)
-
-
-
-
-
-
-
-
(25,642)
(92,778)
(25,642)
-
-
-
1,283
48
-
-
-
58,072
1,283
48
58,072
59,403
474
330,268
(496,005)
1,370
573,535
482
354,725
(588,783)
2,701
606,648
375,773
1
2
-
-
-
-
-
-
-
1,719
-
-
-
-
-
-
-
-
-
5,563
-
-
-
-
-
-
-
-
-
(2,282)
48
-
-
-
3
1,719
-
(3,431)
(18,783)
-
-
(52,687)
-
2,132
(18,783)
(2,282)
48
(52,687)
(54,921)
$ 305,923
$ 483
$ 356,446 $ (583,220)
$ 467
$ 531,747
43
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 2009, 2008 and 2007
(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 293 retail design centers, of which 159 are Company-operated and 134 are
independently operated. Nearly all of our Company-operated retail design centers are located in the United States, with
the remaining design centers located in Canada. The majority of the independently operated 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
We prepare our consolidated financial statements in conformity with accounting principles generally accepted in
the United States, which requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during the reporting period. Due to the
inherent uncertainty involved in making those estimates, actual results could differ from those estimates. Areas
in which significant estimates have been made include, but are not limited to, revenue recognition, the allowance
for doubtful accounts receivable, inventory obsolescence, tax valuation allowances, useful lives for property, plant
and equipment and definite lived intangible assets, goodwill and indefinite lived intangible asset impairment
analyses, the evaluation of uncertain tax positions and the fair value of assets acquired and liabilities assumed in
business combinations.
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.
44
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
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. We conduct an annual impairment analysis the first of April each fiscal year,
unless 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. See note 6 for additional information.
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
45
which the debt was issued, and which has been determined using quoted market prices, totaled $146.0 million at
June 30, 2009 and $182.1 million and at June 30, 2008, as compared to a carrying value on those dates of $199.0
million and $198.8 million, respectively. See Note 7 for a discussion of the change in July 2007 of our credit
rating.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax 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.
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.
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 or tax positions settled 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-operated 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 $68.2 million, $87.4 million, and $87.6 million
for fiscal years 2009, 2008, and 2007, respectively.
Advertising Costs
Advertising costs are expensed when first aired or distributed. Our total advertising costs incurred in fiscal years
2009, 2008 and 2007, amounted to $25.1 million, $39.4 million, and $35.9 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, 2009 and
2008 totaled $0.9 million and $1.6 million, respectively.
46
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).
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,
general and administrative expenses. Tax benefits associated with our share-based compensation 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-operated 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, 2009, we have determined that we have no derivative instruments.
47
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.
We adopted SFAS No. 159 on July 1, 2008 and have not elected the permitted fair value measurement provisions
of this statement.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”), which defines fair
value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements, yet does not require any new fair value measurements. In
February 2008, the FASB issued FASB Staff Position No. 157-2 (“FSP No. 157-2”), which delayed the effective date
of SFAS No. 157 as it relates to non-financial assets and non-financial liabilities until July 1, 2009 for the
Company, except for items that are recognized or disclosed at fair value by the Company on a recurring basis.
Effective July 1, 2008, the Company adopted the provisions of SFAS No. 157, except as it relates to those non-
financial assets and non-financial liabilities excluded under FSP No. 157-2. Those excluded items for which the
Company has not applied the fair value provisions of SFAS No. 157 include goodwill and other intangible assets
(note 6), assets held for sale (note 2), liabilities for exit or disposal activities (note 2), and business acquisitions
(note 3). The Company is currently evaluating the impact of this statement on the Company’s financial position,
results of operations and cash flows as it relates to non-financial assets and non-financial liabilities. This
pronouncement became effective for us on July 1, 2008. See note 18 for more information.
In June 2008, the FASB issued FASB Staff Position No. EITF 03-6-1, Determining Whether Instruments Granted in
Share-Based Payment Transactions are Participating Securities, which requires that unvested share-based payment
awards containing non-forfeited rights to dividends be included in the computation of earnings per common
share. The adoption of FSB EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008 and interim
periods within those fiscal years (July 1, 2009 for the Company). Retrospective application is required. We are
evaluating this pronouncement but do not expect it to impact basic or diluted earnings per share.
(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.
In 2009, the Company made several announcements on changes to our operations as we continue to improve the
structure of our business especially in light of the recent economic downturn. In January 2009, the Company
announced a plan to consolidate the operations of its Eldred, Pennsylvania upholstery manufacturing plant and
several of its retail service centers. In June 2009, the Company announced the consolidation of its Chino,
California operations into its Maiden, North Carolina facility and the consolidation of its Andover, Maine
sawmill and dimension mill to its Beecher Falls, Vermont sawmill and dimension mill operations. For these fiscal
48
2009 actions, the Company estimates pre-tax restructuring, impairment, and other related charges will ultimately
approximate $30 million, consisting of $15 million in write down of long-lived assets, $8 million in employee
severance and other payroll and benefit costs, and $7 million in other associated costs. By segment, we expect $23
million in costs for the wholesale segment and $7 million for the retail segment. Total costs for these 2009 actions
in the current fiscal year by segment are $17.0 million for Wholesale, and $2.6 million for Retail all of which have
been classified in the Statement of Operations as restructuring and impairment charges. Approximately 800
employee positions and 140 contract worker positions will be eliminated due to these actions.
In January 2008, we announced a plan to consolidate the operations of certain Company-operated 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.
We recorded pre-tax restructuring, impairment, and other related charges of $6.8 million for fiscal 2008, with $3.3
million 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.
During fiscal 2009, we recorded a net reduction of pre-tax restructuring, impairment, and other related charges of
$1.0 million, primarily due to net gains on the sale of real estate of $4.2 million, partly offset by additional charges
and adjustments to previous estimates for leased facilities of $2.3 million and employee severance, benefits and
other charges of $0.5 million. Cumulative charges to date for these actions total $5.5 million, all of which have
been classified in the Statement of Operations as restructuring and impairment charges. In addition to the Retail
charges, $0.4 million was recorded in the first quarter of fiscal 2009 to update the fair value of a wholesale plant
site held for sale. These charges are reported to together in the following table.
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.
The decision impacted approximately 465 employees. 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 of fixed asset impairment charges.
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.
49
Activity in the Company’s restructuring reserves is summarized in the table below (in thousands) and is classified
with accrued expenses and other current liabilities in the Consolidated Balance Sheets:
Balance
June 30,
2008
New
charges
(credits)
Utilized
Adjust-
ments
Balance
June 30,
2009
2009 Actions
Employee severance, other
payroll and benefit costs
Other plant exit costs
Write down of long-lived assets
2008 Actions
Employee severance, other
payroll and benefit costs
Other plant exit costs
Write down of long-lived assets
(3)
Business Acquisitions
$ -
-
-
$ -
$ 7,849
825
11,347
$ 20,021
$ (3,985) $ -
-
(426)
$ (426)
(171)
(10,921)
$ (15,077)
$ 3,864
654
-
$ 4,518
$ -
3,358
-
$ 3,358
$ 369
1,677
(4,080)
$ (2,034)
$ -
(2,769)
3,664
$ 895
$ -
626
416
$ 1,042
$ 369
2,892
-
$ 3,261
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). See Note 6 for further discussion of our goodwill and other intangible assets.
During fiscal 2009, we acquired, in four separate transactions, four Ethan Allen retail design centers (“DCs”) from
independent retailers for consideration of approximately $1.8 million in cash and forgiveness of receivables, and
assumed customer deposits of $0.7 million and other liabilities of $0.2 million.
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.
50
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
2009
2008
Retail
$ 1,841
Wholesale
$ 4,298
1,682
242
(660)
(186)
$ 763
1,054
2,707
-
(100)
$ 637
Retail
$ 4,182
3,236
1,029
(4,311)
34
$ 4,194
2007
Retail
$ 16,957
6,765
9,177
(3,070)
(425)
$ 4,510
(4)
Inventories
Inventories at June 30 are summarized as follows (in thousands):
Finished goods
Work in process
Raw materials
2009
$ 130,180
7,476
18,863
$ 156,519
2008
$ 153,981
5,985
26,299
$ 186,265
Inventories are presented net of a related valuation allowance of $2.2 million at June 30, 2009 and $2.3 million at
June 30, 2008
(5)
Property, Plant and Equipment
Property, plant and equipment at June 30 are summarized as follows (in thousands):
2009
Land and improvements
Buildings and improvements
Machinery and equipment
Less: accumulated depreciation and amortization
(6)
Goodwill and Other Intangible Assets
$ 92,903
392,940
110,057
595,900
(262,301)
$ 333,599
2008
$ 89,352
382,354
120,243
591,949
(241,517)
$ 350,432
As of June 30, 2009, we had goodwill and other indefinite-lived intangible assets of $25.4 million and $19.7
million, respectively. Comparable balances as of June 30, 2008 were $77.1 million and $19.7 million, respectively.
Goodwill in the wholesale and retail segments was $25.4 million and $0 million, respectively, at June 30, 2009 and
$28.2 million and $48.9 million, respectively, at June 30, 2008. 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, we conduct an annual impairment analysis of goodwill and other indefinite lived intangible assets the first
of April each fiscal year, unless events occur or circumstances change that would more likely than not reduce the
fair value of the goodwill or other indefinite lived intangible assets below their carrying value. In determining
whether an interim test is appropriate, management considers several factors including changes in the Company’s
stock price, financial performance, third party ratings on its long term debt, and expected financial outlook of the
business. Methods employed to value the enterprise and the Company’s retail and wholesale segments include
the market approach and the income approach, which are reconciled with the total market capitalization of the
Company. These valuation methods use historical revenues and cash flows, as well as Company and external
51
analysts’ financial projections and apply discount rates, weighted average cost of capital rates, total invested
capital multiples, and premium control multiples. Fair value of our trade name is valued using the relief-from-
royalty method. Significant factors used in trade name valuation are royalty rates, future growth and discount
rates, and expense rates.
In the fiscal quarter ended December 31, 2008, net sales declined 7.9% from the previous quarter and there was a
meaningful decline (34.5%) in the company’s average stock price from the first fiscal quarter to the second (from
$26.35 to $17.27). This decline coupled with the sudden and dramatic change in the business climate as seen
through the financial crisis with global banking institutions led to an interim evaluation of goodwill and other
intangible assets. As a result of these tests, management concluded that the estimated value of the wholesale and
retail segments exceeded their carrying values and no impairment was indicated.
In the fiscal quarter ended March 31, 2009, net sales declined 26.0% from the previous quarter resulting in a 660
basis point decline in gross margin plus a further decline (36.2%) in the company’s average stock price (from
$17.27 to $11.02). These declines coupled with a significant loss from operations led to a second interim
evaluation of goodwill and other intangible assets. As a result of these tests, management concluded the carrying
value of goodwill on our retail division’s books exceeded its fair value. Therefore, we recorded a non-cash
impairment charge of $48.4 million. No impairment of the goodwill or other indefinite lived assets on our
wholesale division’s books was appropriate.
In the fiscal quarter ended June 30, 2009, the Company performed its annual impairment test on April 1 and
noted no additional impairment was appropriate. During the quarter, business performance stabilized with net
sales slightly lower (1%) than the previous quarter, gross margin improved 160 basis points and there was a slight
increase in cash on hand (to $53 million). The average price of our stock increased 9.8% (from $11.02 to $12.11).
The ratings on the Company’s long term debt were lowered by third parties to speculative grade and the
Company updated its forecasts. The Company considered these factors and concluded that an interim
impairment test was not required on the wholesale segment. No additional evaluation of the retail segment was
appropriate as all goodwill was written off in the previous fiscal quarter.
There can be no assurance that the outcome of future reviews will not result in substantial impairment charges.
Impairment assessment inherently involves judgments as to assumptions about expected future cash flows and
the impact of market conditions on those assumptions. Future events and changing market conditions may
impact our assumptions as to prices, costs or other factors that may result in changes in our estimates of future
cash flows. Although we believe the assumptions we use in testing for impairment are reasonable, significant
changes in any of our assumptions could produce a significantly different result.
(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
2009
$ 198,997
3,855
296
203,148
42
$ 203,106
2008
$ 198,837
3,855
337
203,029
41
$ 202,988
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.
52
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, 2009, 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
On January 29, 2009, the Company amended its July 2005 five-year, $200 million unsecured revolving credit
facility. The Amendment reduced the line to $100 million, and contained various operating and financial
covenants. On April 29, 2009 the Company terminated the revolving credit facility, due to the Company’s desire
to have in place a revolver that provided greater flexibility. On May 29, 2009, the Company entered into a new
three-year, $40 million senior secured asset-based revolving credit facility (“the “Facility”). The Facility provides
revolving credit financing of up to $40 million, subject to borrowing base availability, and includes an accordion
feature which, if exercised, would provide up to an additional $20 million of financing.
At the Company’s option, revolving loans under the Agreement bear interest at an annual rate of either:
(a) London Interbank Offered rate (“LIBOR”) plus 3.25% to 4.25%, based on the average availability, or
(b)
the higher of (i) a prime rate, (ii) the federal funds effective rate plus 0.50%, or (iii) a LIBOR rate plus
1.00% plus, in each case, an additional 2.25% to 3.25%, based on average availability.
The Company will pay a commitment fee of 0.50% per annum on the unused portion of the Facility and
participation fees on issued letters of credit at an annual rate of 1.625% to 4.25%, based on the average availability
and the letter of credit type, and a fronting fee of 0.125% per annum. The borrowing base at any time equals the
sum of: up to 90% of eligible credit card receivables; plus up to 85% of eligible accounts receivable; plus up to
85% of the net orderly liquidation value of eligible inventory. The Facility is secured by all property owned,
leased or operated by the Company in the United States excluding any real property owned by the Company and
also excludes any intellectual property owned by the Company unless availability is less than or equal to $17.5
million.
The Facility contains customary covenants which may limit the Company’s ability to incur debt; engage in
mergers and consolidations; make restricted payments (including dividends); sell certain assets; and make
investments. The Company may make restricted payments (including dividends) as long as availability equals or
exceeds the greater of (i) 25% of the aggregate commitment or (ii) $12 million. If the average monthly availability
is less than the greater of (i) 15% of the aggregate commitment and (ii) $9 million, the Company is also required to
meet a fixed charge coverage ratio financial covenant which may not be less than 1 to 1 for any period of four
consecutive fiscal quarters.
The Facility contains customary borrowing conditions 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, 2009, we had no revolving loans and $12.5 million in trade and standby letters of credit outstanding
under the Credit Agreement. Remaining available borrowing capacity under the Credit Agreement was $27.5
53
million at that date. During fiscal 2009, Standard & Poor’s (“S&P”) lowered our corporate and senior unsecured
credit ratings to BB from BBB-. While the change in our credit rating had no impact on our existing credit
facilities, the S&P downgrade, if not improved to investment grade by March 2010, gives a right to the issuer of
our private label credit cards to demand a standby letter of credit of up to $12 million. Any additional letters of
credit would reduce the credit available for borrowings under the revolver.
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, 2009, 2008 and 2007, the weighted-average interest rates
applicable under our outstanding debt obligations for each year were 5.53%.
Aggregate scheduled maturities of our debt obligations for each of the five fiscal years subsequent to June 30,
2009, and thereafter are as follows (in thousands):
Fiscal Year Ended June 30
2010
2011
2012
2013
2014
Subsequent to 2014
Total scheduled debt payments
$
42
3,898
19
11
11
199,167
$ 203,148
Independent Retailer Credit Facility
On June 11, 2009, we obligated ourselves, on behalf of one of our independent retailers, with respect to a $0.5
million non-revolving line of credit facility on which there is no further availability for borrowing (the "Amended
Credit Facility"). The Company had previously guaranteed on April 9, 2009, on behalf of the independent retailer,
a $0.9 million credit facility comprised of a $0.6 million revolving line of credit and a $0.3 million term loan (the
“Credit Facility”). On June 11, 2009, the Company purchased from the independent retailer one of the design
centers which was collateral under the Credit Facility. Some of the proceeds were used by the independent
retailer to pay down a portion of the Credit Facility, whereupon the Company entered into the Amended Credit
Facility. This obligation requires us, in the event of the retailer’s default under the Amended Credit Facility, to
repurchase the retailer’s inventory, applying such purchase price to the retailer’s outstanding indebtedness under
the Amended Credit Facility. Our obligation remains in effect for the life of the term loan. The agreement expires
in April 2011. The original agreement, which expired in April 2008, was replaced with a new agreement with the
same terms and conditions dated December 2008, and amended on April 9, 2009. 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, 2009, the amount outstanding under the Amended Credit Facility totaled approximately $0.5
million. 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, 2009, the carrying
amount of such liability is less than $50,000.
54
(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, 2009, and thereafter are as follows (in thousands):
Fiscal Year Ended June 30
2010
2011
2012
2013
2014
Subsequent to 2014
Total minimum lease payments
36,863
31,057
28,579
24,059
17,009
96,951
$ 234,518
$
The above amounts will be offset in the aggregate by minimum future rentals from subleases of $6.2 million,
which is due to be received as follows: $1.0 million in 2010; $0.9 million in 2011; $0.9 million in 2012; $0.9 million
in 2013; $0.5 million in 2014; and $2.0 million subsequent to 2014.
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
2009
$ 38,522
182
38,704
(1,256)
$ 37,448
2008
$ 40,387
589
40,976
(2,395)
$ 38,580
2007
$ 35,637
524
36,161
(2,899)
$ 33,262
As of June 30, 2009 and 2008, deferred rent credits totaling $11.6 million and $9.8 million, respectively, and
deferred lease incentives totaling $2.8 million at both year ends, 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, 2009 and 2008, there were no shares of Preferred Stock or Class B Common Stock issued or outstanding.
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
55
shares on November 13, 2007. As of June 30, 2009 we had a remaining Board authorization to repurchase 1.6
million shares.
All of our common stock repurchases and retirements are recorded as treasury stock and result in a reduction of
shareholders’ equity. During fiscal years 2009, 2008 and 2007, we repurchased and/or retired the following shares
of our common stock:
Common shares repurchased
Cost to repurchase common shares
Average price per share
2009
-
-
-
2008 (1)
2,259,631
$ 69,745,024
$ 30.87
2007(2)(3)
1,548,700
$ 53,955,970
$ 34.84
(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.
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.
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, 2009, each share of our common stock was accompanied by one-third of one Right.
56
(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
adjusted for diluted calculation
2009
2008
2007
28,814
-
29,267
203
31,566
695
28,814
29,470
32,261
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 2009, 2008 and 2007,
stock options and share based awards of 2,228,121, 1,713,323 and 750,981, respectively, have been excluded.
(11)
Share-Based Compensation
For the twelve months ended June 30, 2009, 2008, and 2007, share-based compensation expense totaled $1.7 million, $1.3
million, and $0.8 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, 2009, 2008, and 2007, we
recognized related tax benefits associated with our share-based compensation arrangements totaling $0.6 million, $0.5
million and $0.3 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. The risk-free rate of return is based
on the U.S. Treasury bill rate for the term closest matching the expected life of the grant. The dividend yield is based on
the annualized dividend rate at the grant date relative to the grant date stock price. 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
2009
34.4%
3.21%
5.11%
2008
35.8%
4.51%
2.69%
2007
28.14%
4.97%
2.18%
Expected average life
7.4 years
9.3 years
6.0 years
At June 30, 2009, we had 7,317,409 shares of common stock reserved for issuance pursuant to the following share-
based compensation plans:
57
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
appreciation rights ("SARs") on issued options, however, no SARs have been issued as of June 30, 2009. 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, July 1, 2008, and July 1, 2009, options to purchase 150,000, 90,000 and 60,000 shares respectively, of our
common stock. These options were issued at an exercise price of $34.03, $24.62, and $10.68 per share respectively
(the price of a share of our common stock on the New York Stock Exchange on those dates). The 2007 grant vests
in three installments of 33 1/3% on each June 30 of 2008, 2009, and 2010. The 2008 grant vests in two installments
of 50% on each June 30 of 2009 and 2010. The 2009 grant vests on June 30, 2010. On November 11, 2008 Mr.
Kathwari was awarded options to purchase 50,000 shares of our common stock at an exercise price of $15.93 (the
price of a share of our common stock on the New York Stock Exchange on that date). This grant vests in four
equal installments on the anniversary date of the grant.
58
A summary of stock option activity occurring during the fiscal year ended June 30, 2009 is presented below:
Options
Outstanding - June 30, 2008
Granted
Exercised
Canceled (forfeited/expired)
Outstanding - June 30, 2009 1,986,136
1,667,380
Exercisable – June 30, 2009
Shares
1,768,457
291,060
(90)
(73,291)
Weighted
Average
Remaining
Contractual
Term (yrs)
Aggregate
Intrinsic Value
5.0
4.2
-
-
Exercise
Price
$33.23
19.58
25.00
27.22
31.45
$33.19
The weighted average grant-date fair value of options granted during fiscal 2009, 2008, and 2007 was $4.58, $12.06
and $9.91 respectively. The total intrinsic value of options exercised during 2009, 2008 and 2007 was $0.0 million,
$5.7 million, and $13.5 million, respectively. As of June 30, 2009, there was $1.9 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 1.7 years. A summary of the nonvested shares as of June 30, 2009 and changes
during the year then ended is presented below:
Nonvested Shares
Nonvested June 30, 2008
Granted
Vested
Canceled (forfeited/expired)
Nonvested at June 30, 2009
Shares
170,276
291,060
(130,820)
(11,760)
318,756
Weighted Average
Grant Date Fair Value
$ 11.16
4.58
10.18
4.32
$ 5.80
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 July 1,
2008, and will be awarded on July 1, 2009, an annual award of 20,000 shares of restricted stock (for a total 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. On November 11, 2008 Mr. Kathwari received an award of 60,000 shares of restricted
stock, which provided for vesting to occur if specific financial objectives were achieved during the final three
quarters of fiscal 2009. The financial objectives were not achieved and the shares were forfeited. A summary of
nonvested restricted share activity occurring during the fiscal year ended June 30, 2009 is presented below.
Nonvested Restricted Shares
Nonvested - June 30, 2008
Granted
Vested
Canceled (forfeited/expired)
Nonvested - June 30, 2009
Shares
35,000
83,000
(5,000)
(60,000)
53,000
Weighed Average
Grant-Date
Fair Value
$ 22.19
10.28
30.55
8.22
$ 18.56
As of June 30, 2009, there was $0.5 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 2.7 years. The
59
total fair value of restricted shares vested during the fiscal years ending June 30, 2009 and 2008 was $0.2 million
and $0.1 million respectively.
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 (loss) from operations
Shareholders’ equity
Total
2009
$(28,493)
-
$(28,493)
2008
$ 34,106
(2,093)
$ 32,013
2007
$ 40,499
(5,015)
$ 35,484
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
2009
2008
2007
$ 2,657
975
33
3,665
(30,200)
(1,958)
(32,158)
$(28,493)
$ 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
The following is a reconciliation of expected income tax expense (benefit) (computed by applying the federal
statutory income tax rate to income before taxes) to actual income tax expense (benefit) (in thousands):
Expected income tax expense (benefit)
State income taxes (benefit), net of
federal income tax
Valuation allowance
Goodwill impairment
Section 199 Qualified Production
Activities deduction
Other, net
Actual income tax expense (benefit)
2009
2008
2007
$(28,413)
35.0 %
$ 32,262
35.0 %
$ 38,404
35.0 %
(3,237)
2,088
1,402
4.0 %
(2.6)%
(1.7)%
2,698
-
-
2.9 %
0.0 %
0.0 %
3,331
-
-
3.0 %
0.0 %
0.0 %
-
(333)
$(28,493)
0.0 %
0.4 %
35.1 %
(1,100)
246
$ 34,106
(1.2)%
0.3 %
37.0 %
(630)
(606)
$ 40,499
(0.6)%
(0.5)%
36.9 %
60
The significant components of the deferred tax expense (benefit) are as follows (in thousands):
Deferred tax expense (benefit):
Commissions
Restructuring costs
Acquired goodwill
Amortization and depreciation
Federal, foreign and state net operating losses
Other
Utilization of net operating loss and tax credit carryforwards
Total deferred tax expense (benefit)
Less: Valuation allowance
Net deferred tax expense (benefit)
2009
2008
2007
$ (3,045)
(4,469)
(16,191)
(7,126)
(2,870)
(545)
-
$ (34,246)
2,088
$ (32,158)
$ (426)
(1,238)
1,018
(1,767)
-
10
39
$ (2,364)
-
$ (2,364)
$ 211
-
927
(1,515)
-
538
39
$ 200
-
$ 200
The deferred income tax asset and liability balances at June 30 (in thousands) include:
2009
2008
Deferred tax assets:
Accounts receivable
Property, plant and equipment
Employee compensation accruals
Stock based compensation
Deferred rent credits
Restructuring charges
Net operating loss carryforwards
Other, net
Total deferred tax asset
Less: Valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Inventories
Property, plant and equipment
Intangible assets other than goodwill
Commissions
Other accrued liabilities
Other, net
Total deferred tax liability
$ 531
2,391
6,436
2,227
5,439
5,762
2,870
3,301
28,957
(2,088)
26,869
1,425
-
5,180
353
-
_37
_6,995
$ 963
-
10,236
1,514
4,619
1,345
30
2,670
21,377
_-
21,377
2,719
7,577
20,737
3,642
2,483
__ -
37,158
Net deferred tax asset (liability)
$ 19,874
$(15,781)
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
2009
$ 9,502
17,367
1,425
5,570
2008
$ 11,111
10,266
4,986
32,172
Total net deferred tax asset (liability)
$ 19,874
$(15,781)
Note: Current deferred tax assets and liabilities and non-current deferred tax assets and liabilities
have been presented net in the Consolidated Balance Sheets.
61
In accordance with SFAS No. 109, Accounting for Income Taxes, we evaluate our deferred taxes to determine if the
“more likely than not” standard of evidence has not been met thereby supporting the need for a valuation
allowance. In fiscal 2009, due to significant losses incurred in our retail segment, the uncertain outlook regarding
the current economic recession, and the lack of carry-back availability due to limitations imposed by certain states
and Canada, we established valuation allowances of $2.1 million against certain state and Canada deferred tax
assets primarily for net operating losses. Our state net operating losses and credits expire between fiscal year 2014
and 2029 and for Canada expire in fiscal 2029. At June 30, 2009 we had, for U.S. federal income tax purposes, a net
operating loss of $4.3 million which expires in 2029. We believe it is more likely than not that our deferred tax
assets and credits for U.S. federal income tax purposes will be realized due to sufficient historical and anticipated
future pre-tax earnings and we therefore have not established valuation allowances for these assets.
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. As a result of the adoption of FIN 48, we recorded a cumulative effect of a change in accounting principle
adjustment of $0.7 million as an increase to beginning retained earnings. Our continuing practice is to recognize
interest and penalties related to income tax matters as a component of income tax expense. If the $13.1 million of
unrecognized tax benefits and related interest and penalties as of June 30, 2009 were recognized, approximately
$10.8 million would be recorded as a benefit to income tax expense.
A reconciliation of the beginning and ending amount
of unrecognized tax benefits including related interest
and penalties as of June 30, 2009 is as follows (in
thousands):
Beginning balance
Additions based on tax positions in the current year
Additions for tax positions in prior years
Reductions for tax positions of prior years due to:
Statute expiration
Settlements
Ending balance
2009
2008
$13,633
399
1,264
$13,988
458
2,377
(895)
(1,341)
(360)
(2,830)
$13,060
$13,633
It is reasonably possible that various issues relating to approximately $3.7 million of the total gross unrecognized
tax benefits as of June 30, 2009 will be resolved within the next twelve months as exams are completed or statutes
expire. If recognized, approximately $3.7 million of unrecognized tax benefits would reduce our tax expense in
the period realized. However, actual results could differ from those currently anticipated.
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, 2009 certain subsidiaries of the Company are currently under audit from 2001 through
2008 in the U.S. 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.
62
(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
$500 per participant per Savings Plan year. Total profit sharing and 401(k) Company match expense amounted to
$1.3 million in 2009, $3.7 million in 2008, and $4.3 million in 2007. The contribution was made in shares of the
Company’s common stock in 2009 and in cash in 2008 and 2007.
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 (credit) of these benefits was ($0.7) million, $1.2 million, and $2.7 million in 2009, 2008
and 2007, 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.
During the fiscal year ending June 30, 2009, our liability with respect to 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"), where we and/or our subsidiaries
had been named as a Potentially Responsive Party (“PRP”) located in Southington, Connecticut; High Point,
North Carolina; and Atlanta, Georgia has been resolved.
In each case we were not a major contributor based on the very small volume of waste generated by us in relation
to total volume at those sites and were able to take part in de minimus settlement arrangements. 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 addition to the now settled actions discussed above, 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. In May, 2009, we were notified by the State that it had conducted an initial environmental study and
that we have been named as a PRP. We believe that we are not a major contributor; however, a review of the
initial environmental study is ongoing.
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.
63
As of June 30, 2009, 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 $0.5 million at June 30, 2009 and $2.7 million
at June 30, 2008. Foreign currency translation adjustments are the result of changes in foreign currency exchange
rates related to our operation of five Ethan Allen-operated retail design centers 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 operated and Ethan Allen-operated 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 operated by Ethan Allen. Wholesale
profitability includes (i) the wholesale gross margin, which represents the difference between the wholesale sales
64
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-operated
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
2009
41%
41
18
100%
2008
43%
40
17
100%
2007
44%
38
18
100%
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):
2009
2008
2007
Net Sales:
Wholesale segment
Retail segment
Elimination of inter-company sales
Consolidated Total
$ 403,378
508,621
(237,722)
$ 616,230
724,586
(360,771)
$ 674,277
$ 980,045
Operating Income:
Wholesale segment (1)
Retail segment (2)
Adjustment for inter-company profit (3)
Consolidated Total
$ 6,670
(92,100)
12,659
$ (72,771)
$ 100,324
(2,800)
(1,524)
$ 96,000
Capital Expenditures:
Wholesale segment
Retail segment
Acquisitions (4) (5)
Consolidated Total
$ 7,347
52,691
7,168
$ 67,206
$ 3,246
19,291
1,366
$ 23,903
65
$ 656,035
698,611
(349,334)
$1,005,312
$ 99,215
15,162
(3,258)
$ 111,119
$ 8,791
50,282
15,906
$ 74,979
June 30
2009
June 30
2008
June 30,
2007
$ 276,250
397,877
(27,642)
$ 646,485
$ 345,080
459,842
(40,829)
$ 764,093
Total Assets:
Wholesale segment
Retail segment
Inventory profit elimination (6)
Consolidated Total
(1) Operating income for the wholesale segment for the twelve months ended June 30, 2009 and 2007 includes pre-tax
restructuring and impairment charges of $17.4 million and $13.4 million, respectively.
(2) Operating income for the retail segment for the twelve months ended June 30, 2009 and 2008 includes pre-tax
restructuring and impairment charges of $49.6 million and $6.8 million respectively.
(3) Represents the change in the inventory profit elimination entry necessary to adjust for the embedded wholesale
profit contained in Ethan Allen-operated design center inventory existing at the end of the period. See footnote 6 below.
(4) Acquisitions include the purchase of four retail design centers in 2009, five retail design centers and a cut and sew
upholstery facility in 2008 and 12 retail design centers in 2007. See Note 3.
(5) Amount reflected as acquisitions for 2007 includes 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-operated design center inventory that has not
yet been realized. These profits are realized when the related inventory is sold.
$ 416,237
425,382
(39,021)
$ 802,598
There are 46 independent retail design centers located outside the United States. Approximately 3.3% of our
net sales are derived from sales to these retail design centers.
(17)
Selected Quarterly Financial Data (Unaudited)
Tabulated below is selected financial data for each quarter of the fiscal years ended June 30, 2009, 2008, and
2007 (in thousands, except per share data):
Fiscal 2009:
Net sales
Gross profit
Net income (loss)
Earnings (loss) per basic share (1)
Earnings (loss) per diluted share
(1)
Dividend per common share
Fiscal 2008:
Net sales
Gross profit
Net income
Earnings per basic share (1)
Earnings per diluted share (1)
Dividend per common share
September 30
December 31
March 31
June 30
Quarter Ended
$ 205,841
111,941
7,422
0.26
0.26
$ 189,558
101,801
5,488
0.19
0.19
$ 140,221
66,050
(48,674)
(1.69)
(1.69)
$ 138,657
67,550
(16,923)
(0.58)
(0.58)
0.25
0.25
0.10
0.05
$ 248,727
133,457
17,504
0.58
0.57
0.22
$ 259,510
139,453
20,622
0.70
0.70
0.22
$ 235,901
125,187
8,846
0.31
0.30
0.22
$ 235,907
127,968
11,100
0.39
0.39
0.22
Fiscal 2007:
$ 258,531
Net sales
137,988
Gross profit
20,484
Net income
0.66
Earnings per basic share (1)
0.65
Earnings per diluted share (1)
Dividend per common share
0.20
(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.
$ 242,823
126,329
8,452
0.27
0.26
0.20
$ 257,419
133,750
22,792
0.72
0.70
0.20
$ 246,539
128,516
17,499
0.55
0.54
0.20
66
(18)
Financial Instruments
We adopted SFAS No. 157 on July 1, 2008 for all financial assets and liabilities and non-financial assets and
liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least
annually). SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands
disclosures about fair value measurements.
SFAS No. 157 defines fair value as the price that would be received upon sale of an asset or paid upon transfer of
a liability in an orderly transaction between market participants at the measurement date and in the principal or
most advantageous market for that asset or liability. The fair value should be calculated based on assumptions
that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In
addition, the fair value of liabilities should include consideration of non-performance risk including our own
credit risk.
In addition to defining fair value, SFAS No. 157 expands the disclosure requirements around fair value and
establishes a fair value hierarchy for valuation inputs. The hierarchy prioritizes the inputs into three levels based
on the extent to which inputs used in measuring fair value are observable in the market. Each fair value
measurement is reported in one of the three levels which is determined by the lowest level input that is
significant to the fair value measurement in its entirety. These levels are:
• Level 1 – inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.
• Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for
identical or similar instruments in markets that are not active, and model-based valuation techniques for which all
significant assumptions are observable in the market or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
• Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that
market participants would use in pricing the asset or liability. The fair values are therefore determined using
model-based techniques that include option pricing models, discounted cash flow models, and similar
techniques.
The following section describes the valuation methodologies we use to measure different financial assets and
liabilities at fair value.
Cash Equivalents
Cash equivalents consist of money market accounts and mutual funds in U.S. government and agency securities.
We use quoted prices in active markets for identical assets or liabilities to determine fair value. This pricing
methodology applies to our Level 1 cash equivalents. We do not hold any Level 2 or Level 3 investments in our
cash equivalents.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
At June 30, 2009, the Company’s assets and liabilities measured at fair value on a recurring basis consist of $53.0
million in cash equivalents, which were valued using Level 1 inputs.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
We measure certain assets, including our cost and equity method investments, at fair value on a nonrecurring
basis. These assets are recognized at fair value when they are deemed to be other-than-temporarily impaired.
During the third quarter of fiscal, 2009, we determined that the goodwill for the Retail segment was impaired,
and a goodwill impairment charge of $48.4 million was recorded (also see note 6).
67
(19)
Subsequent Events
The Company has evaluated events and transactions subsequent to June 30, 2009 through August 24, 2009, which
was the date the financial statements were issued (filed with the SEC).
(20)
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 domestic
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. and our other subsidiaries which are not guarantors are called the
“Non-Guarantors”. During the quarter ended December 31, 2008, we determined that our international
subsidiaries in Canada and Mexico are non-guarantors. The Company has reclassified, for all prior periods
presented, the financial results of these international subsidiaries to reflect their non-guarantor status.
The following tables set forth the condensed consolidating balance sheets as of June 30, 2009 and June 30, 2008,
the condensed consolidating statements of operations for the twelve months ended June 30, 2009, 2008 and 2007,
and the condensed consolidating statements of cash flows for the twelve months ended June 30, 2009, 2008 and
2007 of the Parent, the Issuer, the Guarantors and the Non-Guarantors.
68
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
Shareholders’ equity
CONDENSED CONSOLIDATING BALANCE SHEET
(in thousands)
June 30, 2009
Parent
Issuer
Guarantors
Non-Guarantors
Eliminations
Consolidated
$ -
$ 47,712
$ 3,592
$ 1,656
$ -
$ 52,960
-
-
-
-
-
-
-
-
612,391
612,391
-
-
-
1,552
304,917
306,469
-
-
-
306,469
12,049
-
20,509
782,736
863,006
11,748
37,905
15,323
(20,616)
907,366
-
-
8,851
41,004
8,123
57,978
198,998
10,565
-
267,541
783
179,705
8,084
227,453
419,617
317,144
7,223
727
-
744,711
42
30,412
13,106
15,707
687,826
747,093
4,108
14,290
-
765,491
254
4,456
544
-
(27,642)
-
(3,010)
(1,007,179)
3,900
(1,034,821)
4,707
-
6
-
-
-
-
8,613
(591,775)
(1,626,596)
-
1,279
242
268
-
-
-
-
6,313
(1,007,179)
8,102
(1,007,179)
-
138
-
-
-
-
8,240
(1,007,179)
13,086
156,519
29,137
0
251,702
333,599
45,128
16,056
-
646,485
42
31,691
22,199
58,531
-
112,463
203,106
24,993
-
340,562
305,922
639,825
(20,780)
373
(619,417)
305,923
Total liabilities and shareholders’ equity
$ 612,391
$ 907,366
$ 744,711
$ 8,613
$(1,626,596)
$ 646,485
69
CONDENSED CONSOLIDATING BALANCE SHEET
(in thousands)
June 30, 2008
Issuer
Guarantors
Parent
Non-Guarantors
Eliminations
Consolidated
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
Shareholders’ equity
$ -
$ 71,117
$ 1,307
$ 1,952
$ -
$ 74,376
-
-
-
-
-
-
-
-
665,427
665,427
-
-
-
6,438
283,216
289,654
-
-
-
289,654
11,937
-
17,475
712,981
813,510
13,186
37,905
3,604
118,371
986,576
-
-
9,785
36,885
597
47,267
198,837
15,360
21,906
283,370
431
222,130
21,020
209,471
454,359
331,581
55,189
929
-
842,058
41
45,486
15,936
18,022
628,925
708,410
4,151
12,380
-
724,941
304
4,964
490
-
7,710
5,665
3,729
7
-
(40,829)
-
(922,452)
(963,281)
-
-
-
-
17,111
(783,798)
(1,747,079)
-
1,811
723
375
9,714
12,623
-
184
-
12,807
-
-
-
-
(922,452)
(922,452)
-
-
-
(922,452)
12,672
186,265
38,985
-
312,298
350,432
96,823
4,540
-
764,093
41
47,297
26,444
61,720
-
135,502
202,988
27,924
21,906
388,320
375,773
703,206
117,117
4,304
(824,627)
375,773
Total liabilities and shareholders’ equity
$ 665,427
$ 986,576
$ 842,058
$ 17,111
$(1,747,079)
$ 764,093
70
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(in thousands)
Year Ended June 30, 2009
Parent
Issuer
Guarantors
Non-Guarantors
Eliminations
Consolidated
$ -
$ 404,543
$676,740
$ 21,042
$ (428,048)
$ 674,277
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Restructuring and impairment charges
Total operating expenses
Operating income (loss)
-
-
302,359
102,184
453,868
222,872
165
-
165
49,191
-
49,191
293,296
67,001
360,297
12,007
9,035
10,460
-
10,460
(165)
52,993
(137,425)
(1,425)
Interest and other miscellaneous income (expense), net
(52,522)
(135,736)
43
Interest and other related financing costs
-
11,459
305
Income (loss) before income tax expense
(52,687)
(94,202)
(137,687)
Income tax expense (benefit)
-
(28,493)
-
83
-
(1,342)
-
(441,299)
13,251
326,935
347,342
-
-
-
13,251
191,487
-
204,738
-
353,112
67,001
420,113
(72,771)
3,355
11,764
(81,180)
(28,493)
Net income/(loss)
$ (52,687)
$ (65,709)
$ (137,687)
$ (1,342)
$ 204,738
$ (52,687)
71
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(in thousands)
Year Ended June 30, 2008
Parent
Issuer
Guarantors
Non-Guarantors
Eliminations
Consolidated
$ -
$ 617,547
$982,404
$ 27,192
$ (647,098)
$ 980,045
-
-
436,642
180,905
648,437
333,967
14,279
12,913
(645,378)
(1,720)
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Restructuring and impairment charges
Total operating expenses
Operating income (loss)
Interest and other miscellaneous income (expense), net
Interest and other related financing costs
Income (loss) before income tax expense
Income tax expense (benefit)
Net income/(loss)
166
-
166
(166)
58,238
-
58,072
-
50,555
-
50,555
130,350
359,719
6,836
366,555
(32,588)
(24,901)
603
11,408
94,041
33,995
305
(32,290)
111
12,789
-
12,789
124
121
-
245
-
-
-
-
(1,720)
(26,170)
-
(27,890)
-
$ 58,072
$ 60,046
$ (32,401)
$ 245
$ (27,890)
72
453,980
526,065
423,229
6,836
430,065
96,000
7,891
11,713
92,178
34,106
$58,072
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(in thousands)
Year Ended June 30, 2007
Net sales
Cost of sales
Gross profit
Parent
$ -
Issuer
$ 655,967
Guarantors
$ 959,799
Non-Guarantors
$ 22,704
Eliminations
Consolidated
$ (633,158)
$ 1,005,312
-
-
461,479
194,488
636,246
323,553
11,018
11,686
(630,014)
_ _(3,144)
478,729
526,583
Selling, general and administrative expenses
Restructuring and impairment charges
Total operating expenses
Operating income (loss)
166
45,232
346,051
-
-
13,442
166
45,232
(166)
149,256
359,493
(35,940)
10,573
-
10,573
1,113
-
-
-
(3,144)
Interest and other miscellaneous income (expense), net
Interest and other related financing costs
Income (loss) before income tax expense
Income tax expense (benefit)
Net income/(loss)
402,022
13,442
415,464
111,119
10,369
11,762
109,726
40,499
69,393
(26,137)
(97)
(55)
(32,735)
-
11,457
305
-
-
69,227
111,662
(36,342)
1,058
(35,879)
-
39,013
1,486
-
-
$ 69,227
$ 72,649
$ (37,828)
$ 1,058
$ (35,879)
$ 69,227
73
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(in thousands)
Year Ended June 30, 2009
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
(Increase) decrease in deferred
financing costs
Dividends paid
Net cash provided by (used in) financing
activities
Effect of exchange rate changes on cash
Parent
$ 23,615
Issuer
$ (20,986)
Guarantors
$ 18,710
Non-Guarantors
$ 594
Eliminations
$ -
Consolidated
$ 21,933
-
-
-
-
-
-
-
2
(1,337)
-
88
210
(1,039)
-
-
-
(21,097)
(1,366)
6,296
(217)
(16,384)
(41)
-
-
(103)
-
-
-
-
-
(103)
-
-
-
-
-
-
-
-
-
-
(23,617)
(23,615)
-
(1,380)
-
(1,380)
-
-
-
(41)
-
-
____-
-
-
-
(787)
-
-
(22,537)
(1,366)
6,384
(7)
(17,526)
(41)
-
2
(1,380)
(23,617)
(25,036)
(787)
Net increase (decrease) in cash and cash equivalents
-
(23,405)
2,285
(296)
-
(21,416)
Cash and cash equivalents – beginning of period
-
71,117
1,307
1,952
-
74,376
Cash and cash equivalents – end of period
$ -
$ 47,712
$ 3,592
$ 1,656
$ -
$ 52,960
74
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
$ 52,512
Non-Guarantors
$ 1,077
Eliminations
$ -
Consolidated
$ 86,137
-
-
-
-
-
-
(75,577)
474
(5,217)
-
-
38
(5,179)
-
-
-
(54,784)
(7,777)
6,943
(500)
(56,118)
(40)
-
-
(37)
-
-
-
-
-
(37)
-
-
-
-
-
-
-
-
-
-
(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 increase (decrease) in cash and cash equivalents
-
(71,136)
(3,646)
1,279
-
(73,503)
Cash and cash equivalents – beginning of period
-
142,253
4,953
673
-
147,879
Cash and cash equivalents – end of period
$ -
$ 71,117
$ 1,307
$ 1,952
$ -
$ 74,376
75
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)
$ 69,841
$ 306
$ -
$ 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
(56,084)
(15,297)
5,431
-
(65,950)
(38)
-
-
-
-
-
(38)
(276)
-
-
-
(276)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(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)
3,853
218
-
(25,922)
Cash and cash equivalents – beginning of period
-
172,246
1,100
455
-
173,801
Cash and cash equivalents – end of period
$ -
$ 142,253
$ 4,953
$ 673
$ -
$ 147,879
76
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 2009, 2008 or 2007.
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, 2009, 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,
2009.
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, 2009, 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, 2009 that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
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 17,
2009 (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").
77
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 407(d)(5)(ii) 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
Kristin Gamble
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.
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 at June 30, 2009.
Plan Category
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)
Equity compensation plans
approved by security holders (1)
2,165,136
Equity compensation plans not
approved by security holders (2)
Total
-
2,165,136
$ 28.85
-
$ 28.85
1,105,260
-
1,105,260
(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, 2009, we do not maintain any equity compensation plans which have not been approved by our shareholders.
78
NYSE Certification
Mr. Kathwari, Chief Executive Officer and President, has certified to the NYSE, pursuant to Section 303A.12 of the
NYSE’s Listing Company Manual, that he is unaware of any violation by the Company of the NYSE’s corporate
governance listing standards.
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, 2009 and 2008, and for the years ended June 30, 2009, 2008 and 2007
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, 2009, 2008 and 2007 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)
Exhibit
Restated Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3(c) to the Registration Statement on Form S-1 of the
Company filed with the SEC on March 16, 1993)
Certificate of Amendment to Restated Certificate of Incorporation as of
August 5, 1997 (incorporated by reference to Exhibit 3(c)-2 to the Quarterly
Report on Form 10-Q of the Company filed with the SEC on May 13, 1999)
Second Certificate of Amendment to Restated Certificate of Incorporation as
of March 27, 1998 (incorporated by reference to Exhibit 3(c)-3 to the
Quarterly Report on Form 10-Q of the Company filed with the SEC on May
13, 1999)
Third Certificate of Amendment to Restated Certificate of Incorporation as of
April 28, 1999 (incorporated by reference to Exhibit 3(c)-4 to the Quarterly
Report on Form 10-Q of the Company filed with the SEC on May 13, 1999)
Certificate of Designation relating to the New Convertible Preferred Stock
(incorporated by reference to the Registration Statement on Form S-1 of the
Company filed with the SEC on March 16, 1993)
Certificate of Designation relating to the Series C Junior Participating
Preferred Stock (incorporated by reference to Exhibit 1 to Form 8-A of the
Company filed with the SEC on July 3, 1996)
79
3 (c)-1
3 (d)
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)
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)
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 Incorporation of Lake Avenue Associates, 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)
80
3 (p)
4 (a)
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)-1
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 10.1 to the
Current Report on Form 8-K of the Company filed with the SEC on July 3,
1996)
Amendment No. 1 to Rights Agreement, dated as of December 23, 2004
between the Company and Harris Trust Savings Bank and Computershare
Investor Services, LLC (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
81
10. (g)-2
10 (h)
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
*
*
*
*
*
to
for Grants
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)
Credit Agreement, dated as of May 29, 2009, among Ethan Allen Global, Inc.,
Ethan Allen Interiors Inc., J.P. Morgan Chase Bank, N.A., and Capital One
Leverage Finance Corp (confidential treatment requested as to certain
portions. Incorporated by reference to Exhibit 10(g)-2 to the Annual Report
on Form 10-K of the Company filed with the SEC on August 24, 2009)
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)
Independent Directors
Form of Option Agreement
(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 (Incorporated by
reference to Exhibit 12.(a) to the Annual Report on Form 10-K of the
Company filed with the SEC on August 24, 2009)
List of wholly-owned subsidiaries of the Company (Incorporated by
reference to Exhibit 21 to the Annual Report on Form 10-K of the Company
filed with the SEC on August 24, 2009)
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.
82
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
As of and for the Fiscal Years Ended June 30, 2009, 2008 and 2007
(In thousands)
Balance at
Beginning
of Period
Additions
(Reductions)
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, 2009
June 30, 2008
June 30, 2007
$
$
$
2,535
2,042
2,074
Inventory:
Inventory valuation allowance:
June 30, 2009
June 30, 2008
June 30, 2007
$
$
$
2,260
2,930
2,930
$
$
$
$
$
$
(773)
493
10
-
-
-
$
$
$
$
$
$
(400)
-
(42)
(56)
(670)
-
$
$
$
$
$
$
1,362
2,535
2,042
2,204
2,260
2,930
83
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/ Edward H. Meyer
(Edward H. Meyer)
/s/ Richard A. Sandberg
(Richard A. Sandberg)
/s/ Frank G. Wisner
(Frank G. Wisner)
Date: August 27, 2009
Director
Director
Director
Director
Director
Director
84
dearshareholders
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
most viable owned locations, and it puts us in a
position to use our U.S.-based manufacturing
to our advantage, with real benefits in terms of
quality, style, and delivery for our clients.
We consolidated and refined our logistics
network. During the year, we continued to
consolidate several leased retail warehouse
service centers to company-owned distribution
facilities. As of June 30, 2009, we were operating
26 service centers, compared to 34 at the end
of fiscal 2008, and 50 at the end of fiscal 2007.
We improved our technology. Early in 2009,
we launched an award-winning state-of-the-art
website, ethanallen.com, which offers an inno-
vative combination of personal service and
technology. The website offers an interactive
design tool called My Projects that allows
site visitors to create idea boards and room
plans and get feedback online from a design
consultant at a local Design Center. We also
continued to improve our information systems
with the roll-out of an updated retail system
we call Vision 8, and also continued to upgrade
our manufacturing information systems.
With these initiatives in place, we believe we
have positioned Ethan Allen for growth and
profitability. We appreciate your continued
confidence and support.
Sincerely,
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.
We maintained a strong network at retail.
At the end of the fiscal year, we had 293 Design
Centers—159 operated by the company and
134 by our independent retailers. Due to major
investments made during the last ten years,
half of our Design Centers are less than six years
old, while 30% are less than three years old. As
a result, we expect to continue substantially
reducing our capital expenditures from $60 mil-
lion in fiscal 2008 and $22.5 million in fiscal 2009
to less than $15 million expected in fiscal 2010.
We introduced our Interior Designer Affiliate
(IDA) membership program. This initiative
to enroll independent interior designers as an
extension of our retail network expands our
reach to more clients. The independent design-
ers will work in cooperation with our in-house
design consultants, and the program offers a
major opportunity to grow our business.
We enhanced our products. We expanded
our custom offerings beyond upholstery to
now include case goods. We expect to substan-
tially complete a transition to custom case
goods by the end of fiscal 2010. In manageable
increments, we have also been transitioning
all of our case goods to eco-friendly water-
based finishes. These initiatives should help
our domestic case goods to operate profitably
and offer a competitive advantage.
We maintained a strong national advertising
and marketing communications presence.
This fiscal year we centralized our advertising
campaign efforts, which enabled us to save
costs while continuing to get out our messages
to inspire, build traffic, and introduce initiatives.
Our approach is multi-layered and includes
national television ads, national and local print
advertising, our new online magazines, email
blasts, web advertising, targeted direct mail,
and new free Style Workshops.
We strengthened our U.S.-based manufac-
turing. We announced during the fiscal year
the consolidation of two upholstery plants and
the realignment of our Northeastern case goods
plants. This effort moves our operations to our
The challenges of operating this business in
fiscal 2009 were extreme, but they also gave us
an opportunity to aggressively restructure
and reinvent many elements of our enterprise.
These actions have made us ready for chal-
lenges and opportunities as we move forward.
We reduced our cost structure by $150 million
compared to fiscal 2008, which affected every
facet of our vertically integrated structure
and included the consolidation of several manu-
facturing, distribution, and retail operations.
We improved liquidity and maximized cash by
reducing inventories by $30 million, cutting
quarterly dividends to $0.05 from $0.25 per
share, contributing stock in lieu of cash to our
401(k) plan, reducing the cash compensation
of management, and establishing a $40 million
asset-based revolving credit facility.
We also took the following important steps to
strengthen the business and position ourselves
for growth as we move forward:
We continued to evolve into a solutions-
based interior design enterprise. Substantially
all of our associates in our Design Centers are
qualified in interior design. We also strengthened
their service approach by implementing a team-
based structure, which matches the skills of our
design consultants with the needs of their clients.
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
DAVID R. CALLEN
VICE PRESIDENT, FINANCE AND TREASURER
203.743.8305
dcallen@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.
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
INTERNATIONAL AFFAIRS ADVISOR OF
PATTON BOGGS LLP.
David R. Callen
VICE PRESIDENT, FINANCE AND TREASURER
Don Garrett
VICE PRESIDENT, CASE GOODS
MANUFACTURING
Daniel M. Grow
VICE PRESIDENT, BUSINESS DEVELOPMENT
Henry Kapteina
DIRECTOR, INTERNAL AUDIT
Sandra Lamenza
GENERAL MANAGER, ETHAN ALLEN HOTEL
James D. McCreary
VICE PRESIDENT, FURNITURE SOURCING
Jack Moll
GENERAL MANAGER, PHYSICAL DISTRIBUTION
Nora Murphy
EXECUTIVE VICE PRESIDENT,
STYLE AND ADVERTISING
Kenneth Musante
MANUFACTURING CONTROLLER
Tracy Paccione
VICE PRESIDENT, MERCHANDISING
Craig Stout
VICE PRESIDENT, PRODUCT DEVELOPMENT—
CASE GOODS AND UPHOLSTERY
Lynda W. Stout
VICE PRESIDENT, RETAIL DIVISION
Clifford Thorn
VICE PRESIDENT, UPHOLSTERY
MANUFACTURING
Corey Whitely
EXECUTIVE VICE PRESIDENT, OPERATIONS
Ann M. Zaccaria
VICE PRESIDENT, REAL ESTATE
© 2009 ETH AN AL LEN GL OBAL , INC.
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