Table ofContents

 

 

 

**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

**x****     ****QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly periodended March 31, 2010**

 

**OR**

 

**o****        ****TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from                    to**

 

**Commission FileNumber:  1-11692**

 

**Ethan Allen Interiors Inc.**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                                                    | ** ** | **06-1275288**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

| **Ethan Allen Drive, Danbury,  Connecticut** | ** ** | **06811**  |
|----------------------------------------------|------------|------------|
| (Address of principal  executive offices)    |       | (Zip Code) |

 

**(203) 743-8000**

(Registrant’s telephone number, includingarea code)

 

**N/A**(Former name, former address and former fiscal year, if changed sincelast report)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.   x Yes o No

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T during the preceding 12months (or such shorter period that the registrant was required to submit andpost such files).   o Yes o No

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act

 

| Large  accelerated filer o |   | Accelerated  filer x         |
|----------------------------|--------|------------------------------|
|                       |   |                         |
| Non-accelerated  filer o   |   | Smaller  reporting company o |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).   o Yes x No

 

Indicate the number of shares outstanding of each ofthe issuer’s classes of common stock, as of the latest practicable date.

 

At April 30, 2010, there were 29,114,424shares of Class A Common Stock,

par value $.01, outstanding.

 

 

 

----

Table of Contents

** **

**TABLE OF CONTENTS**

 
| **Item**                                      | ** **                                                                                                                                                           | **Page** |
|-----------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
|                                          |                                                                                                                                                                 |     |
| **Part I —  Financial Information** |
|                                          |                                                                                                                                                                 |     |
| 1.                                            | Financial Statements as of  March 31, 2010 (unaudited) and June 30, 2009 and for the three and  nine months ended March 31, 2010 and 2009 (unaudited) |     |
|                                          |                                                                                                                                                                 |     |
|                                          | Consolidated  Balance Sheets                                                                                                                                         | 2        |
|                                          |                                                                                                                                                                 |     |
|                                          | Consolidated  Statements of Operations                                                                                                                               | 3        |
|                                          |                                                                                                                                                                 |     |
|                                          | Consolidated  Statements of Cash Flows                                                                                                                               | 4        |
|                                          |                                                                                                                                                                 |     |
|                                          | Consolidated  Statements of Shareholders’ Equity                                                                                                                | 5        |
|                                          |                                                                                                                                                                 |     |
|                                          | Notes  to Consolidated Financial Statements                                                                                                                          | 6        |
|                                          |                                                                                                                                                                 |     |
| 2.                                            | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                          | 26       |
|                                          |                                                                                                                                                                 |     |
| 3.                                            | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                          | 39       |
|                                          |                                                                                                                                                                 |     |
| 4.                                            | Controls  and Procedures                                                                                                                                             | 39       |
|                                          |                                                                                                                                                                 |     |
| **Part II  - Other Information**         |
|                                          |                                                                                                                                                                 |     |
| 1.                                            | Legal  Proceedings                                                                                                                                                   | 39       |
|                                          |                                                                                                                                                                 |     |
| 1A.                                           | Risk Factors                                                                                                                                                         | 39       |
|                                          |                                                                                                                                                                 |     |
| 2.                                            | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                                         | 39       |
|                                          |                                                                                                                                                                 |     |
| 3.                                            | Defaults  Upon Senior Securities                                                                                                                                     | 39       |
|                                          |                                                                                                                                                                 |     |
| 5.                                            | Other  Information                                                                                                                                                   | 40       |
|                                          |                                                                                                                                                                 |     |
| 6.                                            | Exhibits                                                                                                                                                             | 40       |
|                                          |                                                                                                                                                                 |     |
|                                          | Signatures                                                                                                                                                           | 41       |

 

1

----

Table of Contents

 

**PART I - FINANCIALINFORMATION**

 

**Item 1.    Financial Statements**

 

**ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES**

**Consolidated Balance Sheets**

(In thousands, except share data)

 
| ** **                                                                                                                                                                      | ** ** | **March 31,  2010** | ** ** | **June 30,  2009** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| ** **                                                                                                                                                                      | ** ** | **(unaudited)**          | ** ** | ** **              | ** ** |
| **ASSETS**                                                                                                                                                                      |       |                     |       |                    |       |
| Current  assets:                                                                                                                                                                |       |                     |       |                    |       |
| Cash  and cash equivalents                                                                                                                                                      |       | $                        | 71,925     |                    | $          | 52,960 |   |
| Marketable  securities                                                                                                                                                          |       | 2,023                    |       | —                  |       |
| Accounts  receivable, less allowance for doubtful accounts of $1,122 at March 31,  2010 and $1,362 at June 30, 2009                                                   |       | 15,725                   |       | 13,086                  |       |
| Inventories  (note 6)                                                                                                                                                           |       | 140,369                  |       | 156,519                 |       |
| Prepaid  expenses and other current assets                                                                                                                                      |       | 12,163                   |       | 21,060                  |       |
| Deferred  income taxes                                                                                                                                                          |       | 16,442                   |       | 8,077                   |       |
| Total  current assets                                                                                                                                                           |       | 258,647                  |       | 251,702                 |       |
|                                                                                                                                                                            |       |                     |       |                    |       |
| Property,  plant and equipment, net                                                                                                                                             |       | 310,578                  |       | 333,599                 |       |
| Goodwill  and other intangible assets (notes 8 and 9)                                                                                                                           |       | 45,128                   |       | 45,128                  |       |
| Other  assets                                                                                                                                                                   |       | 18,733                   |       | 16,056                  |       |
| Restricted  cash and investments                                                                                                                                                |       | 11,300                   |       | —                  |       |
| Total  assets                                                                                                                                                                   |       | $                        | 644,386    |                    | $          | 646,485 |   |
|                                                                                                                                                                            |       |                     |       |                    |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                  |       |                     |       |                    |       |
| Current  liabilities:                                                                                                                                                           |       |                     |       |                    |       |
| Current  maturities of long-term debt (note 10)                                                                                                                                 |       | $                        | 43         |                    | $          | 42 |   |
| Customer  deposits                                                                                                                                                              |       | 49,278                   |       | 31,691                  |       |
| Accounts  payable                                                                                                                                                               |       | 23,862                   |       | 22,199                  |       |
| Accrued  compensation and benefits                                                                                                                                              |       | 25,888                   |       | 29,533                  |       |
| Accrued  expenses and other current liabilities (note 7)                                                                                                                        |       | 29,754                   |       | 28,998                  |       |
| Total  current liabilities                                                                                                                                                      |       | 128,825                  |       | 112,463                 |       |
|                                                                                                                                                                            |       |                     |       |                    |       |
| Long-term  debt (note 10)                                                                                                                                                       |       | 203,194                  |       | 203,106                 |       |
| Other  long-term liabilities                                                                                                                                                    |       | 23,817                   |       | 24,993                  |       |
| Total  liabilities                                                                                                                                                              |       | 355,836                  |       | 340,562                 |       |
|                                                                                                                                                                            |       |                     |       |                    |       |
| Shareholders’  equity:                                                                                                                                                     |       |                     |       |                    |       |
| Class A  common stock, par value $.01, 150,000,000 shares authorized; 48,346,570  shares issued at March 31, 2010 and 48,334,870 shares issued at  June 30, 2009 |       | 483                      |       | 483                     |       |
| Class B  common stock, par value $.01, 600,000 shares authorized; no shares issued and  outstanding at March 31, 2010 and June 30, 2009                          |       | —                   |       | —                  |       |
| Preferred  stock, par value $.01, 1,055,000 shares authorized; no shares issued and  outstanding at March 31, 2010 and June 30, 2009                                  |       | —                   |       | —                  |       |
| Additional  paid-in capital                                                                                                                                                     |       | 358,104                  |       | 356,446                 |       |
|                                                                                                                                                                            |       | 358,587                  |       | 356,929                 |       |
| Less:  Treasury stock (at cost), 19,232,146 shares at March 31, 2010 and  19,380,941 shares at June 30, 2009                                                          |       | (578,742                 | )          | (583,220                | )          |
| Retained  earnings                                                                                                                                                              |       | 507,335                  |       | 531,747                 |       |
| Accumulated  other comprehensive income (note 14)                                                                                                                               |       | 1,370                    |       | 467                     |       |
| Total  shareholders’ equity                                                                                                                                                |       | 288,550                  |       | 305,923                 |       |
| Total  liabilities and shareholders’ equity                                                                                                                                |       | $                        | 644,386    |                    | $          | 646,485 |   |

 

See accompanying notes toconsolidated financial statements.

 

2

----

Tableof Contents

 

**ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES**

**Consolidated Statements of Operations (Unaudited)**

**(In thousands, except per share data)**

** **
| ** **                                            | ** ** | **Three months ended****March 31****,** | ** ** | **Nine months ended****March 31****,** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                            | ** ** | **2010**                                     | ** ** | **2009**                                    | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net sales                                             |       | $                                            | 147,258    |                                        | $          | 140,221 |   | $ | 426,750 |   | $ | 535,620 |   |
| Cost of sales                                         |       | 75,231                                       |       | 74,171                                      |       | 227,390 |   | 255,828 |   |
| Gross profit                                          |       | 72,027                                       |       | 66,050                                      |       | 199,360 |   | 279,792 |   |
|                                                  |       |                                         |       |                                        |       |   |   |   |   |
| Operating expenses:                                   |       |                                         |       |                                        |       |   |   |   |   |
| Selling                                               |       | 37,321                                       |       | 42,251                                      |       | 109,541 |   | 146,274 |   |
| General and administrative                            |       | 37,129                                       |       | 42,781                                      |       | 112,024 |   | 131,806 |   |
| Goodwill impairment (note  9)                         |       | —                                       |       | 48,400                                      |       | — |   | 48,400 |   |
| Restructuring and  impairment charge , net (note 7)   |       | 400                                          |       | 7,325                                       |       | 1,989 |   | 5,721 |   |
| Total operating expenses                              |       | 74,850                                       |       | 140,757                                     |       | 223,554 |   | 332,201 |   |
|                                                  |       |                                         |       |                                        |       |   |   |   |   |
| Operating income (loss)                               |       | (2,823                                       | )          | (74,707                                     | )          | (24,194 | ) | (52,409 | ) |
| Interest and other  miscellaneous income, net         |       | 894                                          |       | 806                                         |       | 2,711 |   | 3,019 |   |
| Interest and other related  financing costs (note 10) |       | 2,979                                        |       | 2,985                                       |       | 8,938 |   | 8,818 |   |
|                                                  |       |                                         |       |                                        |       |   |   |   |   |
| Income (loss) before income  taxes                    |       | (4,908                                       | )          | (76,886                                     | )          | (30,421 | ) | (58,208 | ) |
|                                                  |       |                                         |       |                                        |       |   |   |   |   |
| Income tax expense  (benefit) (note 3)                |       | (4,053                                       | )          | (28,212                                     | )          | (12,649 | ) | (22,444 | ) |
|                                                  |       |                                         |       |                                        |       |   |   |   |   |
| Net income (loss)                                     |       | $                                            | (855       | )                                           | $          | (48,674 | ) | $ | (17,772 | ) | $ | (35,764 | ) |
|                                                  |       |                                         |       |                                        |       |   |   |   |   |
| Per share data (note 13):                             |       |                                         |       |                                        |       |   |   |   |   |
| Basic earnings per common  share:                     |       |                                         |       |                                        |       |   |   |   |   |
| Net income (loss) per basic  share                    |       | $                                            | (0.03      | )                                           | $          | (1.69 | ) | $ | (0.61 | ) | $ | (1.24 | ) |
| Basic weighted average  common shares                 |       | 29,016                                       |       | 28,861                                      |       | 28,953 |   | 28,768 |   |
| Diluted earnings per common  share:                   |       |                                         |       |                                        |       |   |   |   |   |
| Net income (loss) per diluted  share                  |       | $                                            | (0.03      | )                                           | $          | (1.69 | ) | $ | (0.61 | ) | $ | (1.24 | ) |
| Diluted weighted average  common shares               |       | 29,016                                       |       | 28,861                                      |       | 28,953 |   | 28,768 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

3

----

Table of Contents

 

**ETHANALLEN INTERIORS INC. AND SUBSIDIARIES**

**Consolidated Statements of Cash Flows (Unaudited)**

(Inthousands)

 
| ** **                                                                         | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                         | ** ** | **March 31,**    | ** ** |
| ** **                                                                         | ** ** | **2010**              | ** ** | **2009** | ** ** |
| Operating activities:                                                              |       |                  |       |   |   |
| Net income (loss)                                                                  |       | $                     | (17,772    | ) | $ | (35,764 | ) |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |                  |       |   |   |
| Depreciation and  amortization                                                     |       | 23,849                |       | 19,285 |   |
| Compensation expense  related to share-based awards                                |       | 1,658                 |       | 1,357 |   |
| Provision (benefit) for  deferred income taxes                                     |       | (11,762               | )          | (18,865 | ) |
| Goodwill impairment                                                                |       | —                |       | 48,400 |   |
| Restructuring and  impairment charge (benefit), net                                |       | (230                  | )          | (1,124 | ) |
| Loss (gain) on disposal of  property, plant and equipment                          |       | 22                    |       | 758 |   |
| Other                                                                              |       | 162                   |       | 168 |   |
| Change in assets and  liabilities, net of the effects of acquired businesses:      |       |                  |       |   |   |
| Accounts receivable                                                                |       | (2,639                | )          | 1,974 |   |
| Inventories                                                                        |       | 16,150                |       | 12,784 |   |
| Prepaid and other current  assets                                                  |       | 6,340                 |       | 1,945 |   |
| Other assets                                                                       |       | 531                   |       | 764 |   |
| Customer deposits                                                                  |       | 17,587                |       | (16,457 | ) |
| Accounts payable                                                                   |       | 1,663                 |       | (6,413 | ) |
| Accrued expenses and other  current liabilities                                    |       | (695                  | )          | 4,021 |   |
| Other long-term liabilities                                                        |       | (1,263                | )          | 960 |   |
| Net cash provided by  operating activities                                         |       | 33,601                |       | 13,793 |   |
|                                                                               |       |                  |       |   |   |
| Investing activities:                                                              |       |                  |       |   |   |
| Proceeds from the disposal  of property, plant & equipment                |       | 10,256                |       | 6,283 |   |
| Capital expenditures                                                               |       | (7,611                | )          | (20,466 | ) |
| Acquisitions                                                                       |       | —                |       | (741 | ) |
| Increase in restricted cash  and investments                                       |       | (11,300               | )          | — |   |
| Purchase of marketable  securities                                                 |       | (2,023                | )          | — |   |
| Other                                                                              |       | 25                    |       | (147 | ) |
| Net cash provided by (used  in) investing activities                               |       | (10,653               | )          | (15,071 | ) |
|                                                                               |       |                  |       |   |   |
| Financing activities:                                                              |       |                  |       |   |   |
| Payments on long-term debt                                                         |       | (31                   | )          | (31 | ) |
| Proceeds from issuance of  common stock                                            |       | —                |       | 2 |   |
| Payment of deferred  financing costs                                               |       | (199                  | )          | (447 | ) |
| Payment of cash dividends                                                          |       | (4,345                | )          | (20,720 | ) |
| Net cash used in financing  activities                                             |       | (4,575                | )          | (21,196 | ) |
| Effect of exchange rate  changes on cash                                           |       | 592                   |       | (743 | ) |
| Net increase (decrease) in  cash & cash equivalents                       |       | 18,965                |       | (23,217 | ) |
| Cash & cash  equivalents - beginning of period                            |       | 52,960                |       | 74,376 |   |
| Cash & cash  equivalents - end of period                                  |       | $                     | 71,925     |   | $ | 51,159 |   |

 

See accompanying notes toconsolidated financial statements.

 

4

----

Table of Contents

 

**ETHANALLEN INTERIORS INC. AND SUBSIDIARIES**

**Consolidated Statements of Shareholders’ Equity**

** Nine months ended March 31, 2010**

**(Unaudited)**

**(Inthousands, except share data)**

** **
| ** **                                          | ** ** | **Common   Stock** | ** ** | **Additional   Paid-In****   Capital** | ** ** | **Treasury   Stock** | ** ** | **Accumulated   Other   Comprehensive   Income** | ** ** | **Retained   Earnings** | ** ** | **Total** | ** ** |
|-----------------------------------------------------|------------|-------------------------|------------|--------------------------------------------------|------------|---------------------------|------------|-----------------------------------------------------------------|------------|------------------------------|------------|-----------|------------|
| Balance  at June 30, 2009                      |       | $                       | 483        |                                             | $          | 356,446                   |       | $                                                               | (583,220   | )                            | $          | 467       |       | $ | 531,747 |   | $ | 305,923 |   |
|                                                |       |                    |       |                                             |       |                      |       |                                                            |       |                         |       |      |       |
| Share-based  compensation expense (note 12)         |       | —                  |       | 1,658                                            |       | —                    |       | —                                                          |       | —                       |       | 1,658     |       |
|                                                |       |                    |       |                                             |       |                      |       |                                                            |       |                         |       |      |       |
| Issuance  of treasury shares for 401k company match |       | —                  |       | —                                           |       | 4,478                     |       | —                                                          |       | (2,275                       | )          | 2,203     |       |
|                                                |       |                    |       |                                             |       |                      |       |                                                            |       |                         |       |      |       |
| Dividends  declared on common stock                 |       | —                  |       | —                                           |       | —                    |       | —                                                          |       | (4,365                       | )          | (4,365    | )          |
|                                                |       |                    |       |                                             |       |                      |       |                                                            |       |                         |       |      |       |
| Other  comprehensive income (note 14):              |       |                    |       |                                             |       |                      |       |                                                            |       |                         |       |      |       |
| Currency  translation adjustments                   |       | —                  |       | —                                           |       | —                    |       | 866                                                             |       | —                       |       | 866       |       |
| Hedge  amortization, net of tax and other           |       | —                  |       | —                                           |       | —                    |       | 37                                                              |       | —                       |       | 37        |       |
| Net  income (loss)                                  |       | —                  |       | —                                           |       | —                    |       | —                                                          |       | (17,772                      | )          | (17,772   | )          |
| Total  comprehensive income (loss)                  |       |                    |       |                                             |       |                      |       |                                                            |       |                         |       | (16,869   | )          |
|                                                |       |                    |       |                                             |       |                      |       |                                                            |       |                         |       |      |       |
| Balance  at March 31, 2010                     |       | $                       | 483        |                                             | $          | 358,104                   |       | $                                                               | (578,742   | )                            | $          | 1,370     |       | $ | 507,335 |   | $ | 288,550 |   |

 

See accompanying notes toconsolidated financial statements.

 

5

----

Table of Contents

** **

**ETHANALLEN INTERIORS INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements (Unaudited)**

 

**(1)          Basis of Presentationand Recent Accounting Pronouncements**

 

***Basis of Presentation***

 

Ethan Allen Interiors Inc. (“Interiors”) is a Delaware corporationincorporated on May 25, 1989. The consolidated financial statementsinclude the accounts of Interiors, its wholly owned subsidiary Ethan AllenGlobal, Inc. (“Global”), and Global’s subsidiaries (collectively “We”, “Us”,“Our”, “Ethan Allen”, or the “Company”). All intercompany accounts and transactions have been eliminated in theconsolidated financial statements.  Allof Global’s capital stock is owned by Interiors, which has no assets oroperating results other than those associated with its investment in Global.

 

We prepare our consolidated financial statements in conformity withaccounting principles generally accepted in the United States, which requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the consolidated financial statements and the reported amountsof revenues and expenses during the reporting period.  Due to the inherent uncertainty involved inmaking those estimates, actual results could differ from those estimates.  Areas in which significant estimates havebeen made include, but are not limited to, revenue recognition, the allowancefor doubtful accounts receivable, inventory obsolescence, tax valuationallowances, useful lives for property, plant and equipment and intangibleassets, goodwill and indefinite-lived intangible asset impairment analyses, theevaluation of uncertain tax positions and the fair value of assets acquired andliabilities assumed in business combinations.

 

***Recently Adopted Accounting Pronouncements***

 

In June 2009, the Financial Accounting Standards Board (“FASB”)issued guidance now codified as FASB Accounting Standards Codification (“ASC”)Topic 105, “Generally Accepted Accounting Principles,” as the single source ofauthoritative nongovernmental U.S. GAAP. ASC Topic 105 does not change current U.S. GAAP, but is intended tosimplify user access to all authoritative U.S. GAAP by providing allauthoritative literature related to a particular topic in one place. Allexisting accounting standard documents will be superseded and all otheraccounting literature not included in the ASC will be considerednon-authoritative. These provisions of ASC Topic 105 became effective for theCompany in the first quarter of fiscal 2010. The adoption of this pronouncementdid not have an impact on the Company’s financial condition or results ofoperations, but will impact our financial reporting process by eliminating allreferences to pre-codification standards. On the effective date of thisStatement, the ASC superseded all then-existing non-SEC accounting andreporting standards, and all other non-grandfathered non-SEC accountingliterature not included in the ASC became non-authoritative. References to thepre-codification pronouncements are noted in parenthesis.

 

In September 2006, FASB issued guidance now codified as ASC Topic820, “Fair Value Measurements and Disclosures,” (SFAS No. 157) whichdefines fair value, establishes a framework for measuring fair value andexpands disclosures about fair value measurements and does not require any newfair value measurements.   In February 2008,the FASB released additional ASC Topic 820 guidance (FSP No. 157-2), whichdelayed the effective date of the application of certain guidance related tonon-financial assets and non-financial liabilities until July 1, 2009 forthe Company, except for items that are recognized or disclosed at fair value inthe financial statements on a recurring basis. The Company adopted certain provisions of ASC Topic 820 effective July 1,2008, except as it relates to those non-financial assets and non-financialliabilities excluded as noted above.  TheCompany adopted the provisions of ASC Topic 820 with respect to ournon-financial assets and non-financial liabilities effective July 1, 2009.The implementation of this pronouncement did not have a material impact on ourconsolidated financial position, results of operations or cash flows.

 

InDecember 2007, the FASB issued guidance now codified as ASC Topic 805, “*Business Combinations”* (SFAS No. 141(R), which replacedSFAS No. 141).  ASC Topic 805establishes principles and requirements for how an acquirer 

 

6

----

Table of Contents

 

**ETHANALLEN INTERIORS INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements (Unaudited)**

 

ina business combination recognizes and measures in its financial statements theidentifiable assets acquired, the liabilities assumed, and any controllinginterest; recognizes and measures the goodwill acquired in the businesscombination or a gain from a bargain purchase; and determines what informationto disclose to enable users of the financial statements to evaluate the natureand financial effects of the business combination. ASC Topic 805 is to beapplied prospectively to business combinations for which the acquisition dateis 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 theCompany’s financial position, results of operations and cash flows will bedependent on the terms, conditions and details of such acquisitions.

 

In June 2008, the FASB issued guidance now codified as ASC Topic260, “Earnings Per Share” (EITF 03-6). Under ASC Topic 260, unvestedshare-based payment awards that contain rights to receive non-forfeitabledividends (whether paid or unpaid) are participating securities, and should beincluded in the two-class method of computing earnings per share. Theimplementation of this pronouncement did not have a material impact on ourconsolidated financial position, results of operations or cash flows.

 

**(2)           Interim FinancialPresentation**

 

In our opinion, all adjustments, consisting only of normal recurringadjustments necessary for fair presentation, have been included in theconsolidated financial statements. The results of operations for the three andnine months ended March 31, 2010 are not necessarily indicative of resultsthat may be expected for the entire fiscal year. The interim consolidatedfinancial statements should be read in conjunction with the consolidatedfinancial statements and accompanying notes included in our Annual Report on Form 10-K/Afor the year ended June 30, 2009. Certain prior period amounts have beenreclassified in order for them to conform to the current year’s presentation.

** **

**(3)           Income Taxes**

 

The Company reviews its expected annual effective income tax rates andmakes changes on a quarterly basis as necessary based on certain factors suchas changes in forecasted annual operating income; changes to actual orforecasted permanent book to tax differences; impacts from future tax auditswith state, federal or foreign tax authorities; or impacts from tax lawchanges.  The Company identifies itemswhich are not normal and are nonrecurring in nature and treats these asdiscrete events. The tax effect of discrete items is recorded in the quarter inwhich the discrete events occur. Due to the volatility of these factors, theCompany’s consolidated effective income tax rate can change significantly on aquarterly basis.

 

We recognize the tax benefit from an uncertain tax position only if itis more likely than not that the tax position will be sustained on examinationby the taxing authorities, based on the technical merits of the position.  All of the unrecognized tax benefits, ifrecognized, would be recorded as a benefit to income tax expense. Our continuingpractice is to recognize interest and penalties related to income tax mattersas a component of income tax expense.

 

The Company’s consolidated effective tax rate was 82.6% and 36.7% forthe three months ended March 31, 2010 and 2009 respectively, and 41.6% and38.6% for the nine months ended March 31, 2010 and 2009, respectively. Inthe current quarter, the effective tax rate is related to the tax benefit onthe current quarter loss and the expiration of certain statutes of limitationcausing certain unrecognized tax benefits to be recognized.  The tax benefit is partially offset by theforeign valuation allowance on the Canadian net operating losses, by statevaluation allowance on certain state net operating losses and by state incometax expense in states where the Company’s subsidiaries file on a separatecompany basis.

 

The Company conducts business globally and, as a result, the Company orone or more of its subsidiaries files income tax returns in the U.S., variousstate, and foreign jurisdictions. In the normal course of business, the 

 

7

----

Tableof Contents

 

**ETHANALLEN INTERIORS INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements (Unaudited)**

 

Company is subject to examination by the taxing authorities in suchmajor jurisdictions as Canada, Mexico and the U.S. As of March 31, 2010,certain subsidiaries of the Company are currently under audit from 2001 through2007 in the U.S. It is reasonably possible that some of these audits may becompleted during the next twelve months. While the amount of uncertain taxbenefits with respect to the entities and years under audit may change withinthe next twelve months, it is not anticipated that any of the changes will besignificant.

 

A valuation allowance must be established for deferred tax assets whenit is more likely than not that they will not be realized. As of March 31,2010, the Company continues to maintain a valuation allowance for the statedeferred tax assets and Canadian net operating losses in its Retail segment.After considering both positive and negative evidence, management’s assessmentis that a valuation allowance is not needed for the Company’s other deferredtax assets.  Due to the economic timesand recent losses, management will continue to assess the realizability of thetax assets based on actual and forecasted operating results on a quarterlybasis, as required under ASC topic 740. It is possible during the current fiscal year, that the realization oftax assets is not reasonably assured due to a lack of available objectiveevidence.  Management would then record avaluation allowance against the tax assets which would result in a non-cashcharge to earnings.

 

**(4)           Restricted Cash andInvestments**

 

During the quarter ended March 31, 2010, we transferred $11.3million of cash into a restricted account. The restricted cash, maintained as security for our workmen’scompensation and other insurance liabilities, previously was secured by aletter of credit.  The restricted funds,which can be invested by us in money market mutual funds, and U.S. Treasuriesand U.S. Government agency fixed income instruments with maturities of twoyears or less, cannot be withdrawn from our account without the prior writtenconsent of the secured party.  Theserestricted funds are classified as long-term assets because they are notexpected to be used within one year to fund operations.  At March 31, 2010, the restricted cashwas pledged for the purchase of U.S. municipal bonds with a settlement date of April 12,2010, are callable, and mature in two years. The balance is carried at cost, which approximates market value.  See also Note 15, “Financial Instruments”.

 

**(5)           MarketableSecurities**

 

The Company’s investments are classified as either available-for-saleor held-to-maturity at the time of purchase, and reassessed as of each balancesheet date.  Our marketable securitiesconsist of available-for-sale securities, and are marked-to-market based onprices provided by our investment advisors, with unrealized gains and temporaryunrealized losses, when material, reported as a component of othercomprehensive income, net of tax until realized.  When realized, the Company recognizes gainsand losses on the sales of the securities on a specific identification methodand includes the realized gains or losses in other income, net, in theconsolidated statements of operations. The Company includes interest, dividends, and amortization of premium ordiscount on securities classified as available-for-sale in other income, net inthe consolidated statements of operations. We also evaluate our available-for-sale securities to determine whethera decline in fair value of a security below the amortized cost basis is otherthan temporary.  Should the decline beconsidered other than temporary, we write down the cost of the security andinclude the loss in earnings. In making this determination we consider suchfactors as the reason for and significance of the decline, current economicconditions, the length of time for which there has been an unrealized loss, thetime to maturity, and other relevant information.  Available-for-sale securities are classifiedas either short-term or long-term based on management’s intention of when tosell the securities.

 

At March 31, 2010, the Company held $2.0 million of marketablesecurities consisting of $0.2 million in U.S. municipal bonds with maturitiesof less than one year and $1.8 million in U.S. municipal bonds with maturitiesof less than two years.  There have beenno material unrealized gains or losses recorded in other comprehensive income,and no realized gains or losses as of March 31, 2010.  Based on discussions with our investmentadvisors, we 

 

8

----

Tableof Contents

 

**ETHANALLEN INTERIORS INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements (Unaudited)**

 

do not believe there are any impairments considered to be other thantemporary at March 31, 2010.  Alsosee Note 4, “Restricted Cash and Investments” and Note 15, “FinancialInstruments”.

 

**(6)           Inventories**

 

Inventories at March 31, 2010 and June 30, 2009 are summarizedas follows (in thousands):

 

| ** **       | ** ** | **March 31,  2010** | ** ** | **June 30,  2009** | ** ** |
|------------------|------------|--------------------------|------------|-------------------------|------------|
|             |       |                     |       |                    |       |
| Finished  goods  |       | $                        | 112,409    |                    | $          | 130,180 |   |
| Work  in process |       | 8,436                    |       | 7,476                   |       |
| Raw  materials   |       | 19,524                   |       | 18,863                  |       |
|             |       | $                        | 140,369    |                    | $          | 156,519 |   |

 

Inventories are presented net of a related valuation allowance of $2.1million at both March 31, 2010 and $2.2 million at June 30, 2009.

 

**(7)           Restructuring andImpairment Charges**

 

In recent years, we have announced and executed plans to consolidateour operations as part of an overall strategy to maximize efficiencies andmaintain our competitive advantage.

 

In fiscal 2009, the Company consolidated several operations. Upholsteryplants in Eldred, Pennsylvania and Chino, California were consolidated into theMaiden, North Carolina and Silao, Mexico operations. Sawmill and dimension millproduction in Andover, Maine was transferred to the Beecher Falls, Vermontsite.  Our remaining case goods plantsare being converted to produce custom case goods products. Wholesale distributionlocations, and several retail service centers were consolidated. For theseactions, the Company estimates pre-tax restructuring, impairment, accelerateddepreciation and other related charges will ultimately approximate $29 million($23 million wholesale, $6 million retail), consisting of a $17 million impactfrom long-lived assets, $8 million in employee severance and other payroll andbenefit costs, and $4 million in other associated costs.   In thecurrent fiscal year, total costs were $0.2 million of restructuring credits and$6.6 million in accelerated depreciation charges for Wholesale, and $2.2million of restructuring charges for the Retail segment. Cumulative charges todate for these actions totaling $21.2 million have been classified in theStatement of Operations as restructuring and impairment charges, and $6.6million of accelerated depreciation was recorded in cost of sales.  Adjustments to the restructuring reserve inthe current period consist primarily of increased costs for severance aboveinitial estimates for both our wholesale and retail segments, gains on the saleof equipment sold and adjustments on non-cancellable leases.  The activity in the restructuring reserverelated to these plans is presented in the following table (in thousands) andis classified with accrued expenses and other current liabilities in theConsolidated Balance Sheets.

 

Fiscal2009 plans:

 
| ** **                                                 | ** ** | **Three  months ended March 31, 2010** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                 | ** ** | **Balance  at   December 31,****2009** | ** ** | **New    charges   (credits)** | ** ** | **Utilized** | ** ** | **Adjustments** | ** ** | **Balance  at   March 31,****2010** | ** ** |
| Employee severance  and other****payroll and benefit costs |       | $                                           | 638        |   | $ | — |   | $ | (794 | ) | $ | 271 |   | $ | 115 |   |
| Other associated  costs                                    |       | 1,264                                       |       | 187 |   | (348 | ) | 71 |   | 1,174 |   |
| Write down of  long-lived assets                           |       | —                                      |       | — |   | 69 |   | (69 | ) | — |   |
| ** **                                                 |       | $                                           | 1,902      |   | $ | 187 |   | $ | (1,073 | ) | $ | 273 |   | $ | 1,289 |   |

 

9

----

Table of Contents

 

**ETHANALLEN INTERIORS INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements (Unaudited)**

 

Fiscal 2009 plans:

 
| ** **                                                 | ** ** | **Nine  months ended March 31, 2010** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                 | ** ** | **Balance  at   June 30,****2009**    | ** ** | **New    charges   (credits)** | ** ** | **Utilized** | ** ** | **Adjustments** | ** ** | **Balance  at   March 31,****2010** | ** ** |
| Employee severance  and other****payroll and benefit costs |       | $                                          | 3,864      |   | $ | 103 |   | $ | (4,166 | ) | $ | 314 |   | $ | 115 |   |
| Other associated  costs                                    |       | 654                                        |       | 1,564 |   | (1,067 | ) | 23 |   | 1,174 |   |
| Write down of  long-lived assets                           |       | —                                     |       | 54 |   | 442 |   | (496 | ) | — |   |
| ** **                                                 |       | $                                          | 4,518      |   | $ | 1,721 |   | $ | (4,791 | ) | $ | (159 | ) | $ | 1,289 |   |

 

In fiscal 2008, we announced a plan to consolidate the operations ofcertain Ethan Allen-operated retail design centers and retail service centers.In connection with this initiative, we permanently ceased operations at tendesign centers and six retail service centers which, for the most part, wereconsolidated into other existing operations. Costs for these actions in the current fiscal year totaled $0.4 million,all for the Retail segment, due to non-cancellable lease adjustments and netlosses on the sale of real estate. Cumulative charges to date for these actionstotal $5.9 million, all of which have been classified in the Statement ofOperations as restructuring and impairment charges of the Retail segment.Adjustments to the restructuring reserve in the current period consistprimarily of adjustments on non-cancellable leases.  Activity in the Company’s restructuringreserves related to these plans is summarized in the following table (inthousands) and is classified with accrued expenses and other currentliabilities in the Consolidated Balance Sheets:

 

Fiscal2008 plans:

 
| ** **                                                 | ** ** | **Three  months ended March 31, 2010** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                 | ** ** | **Balance  at   December 31,****2009** | ** ** | **New    charges   (credits)** | ** ** | **Utilized** | ** ** | **Adjustments** | ** ** | **Balance  at   March 31,****2010** | ** ** |
| Employee severance  and other****payroll and benefit costs |       | $                                           | 349        |   | $ | — |   | $ | (10 | ) | $ | — |   | $ | 339 |   |
| Other associated  costs                                    |       | 2,462                                       |       | — |   | (434 | ) | (61 | ) | 1,967 |   |
| ** **                                                 |       | $                                           | 2,811      |   | $ | — |   | $ | (444 | ) | $ | (61 | ) | $ | 2,306 |   |

 

Fiscal 2008 plans:

 
| ** **                                                 | ** ** | **Nine  months ended March 31, 2010** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                 | ** ** | **Balance  at   June 30,****2009**    | ** ** | **New    charges   (credits)** | ** ** | **Utilized** | ** ** | **Adjustments** | ** ** | **Balance  at   March 31,****2010** | ** ** |
| Employee severance  and other****payroll and benefit costs |       | $                                          | 369        |   | $ | — |   | $ | (30 | ) | $ | — |   | $ | 339 |   |
| Other associated  costs                                    |       | 2,892                                      |       | 68 |   | (1,140 | ) | 147 |   | 1,967 |   |
| Write down of  long-lived assets                           |       | —                                     |       | — |   | (212 | ) | 212 |   | — |   |
| ** **                                                 |       | $                                          | 3,261      |   | $ | 68 |   | $ | (1,382 | ) | $ | 359 |   | $ | 2,306 |   |

 

**(8)****                                ****BusinessAcquisitions**

 

Therewere no acquisitions completed during the nine months ended March 31,2010.

 

InOctober 2008, we acquired, in a single transaction, one Ethan Allen retaildesign center from an independent retailer for consideration of approximately$0.3 million of cash and forgiveness of receivables.  As a result of this acquisition, we recordedadditional inventory of $0.2 million and goodwill of $0.1 million.  In August 2008, we acquired in twotransactions, two Ethan Allen retail design centers from independent retailersfor consideration of 

 

10

----

Table ofContents

 

**ETHANALLEN INTERIORS INC. AND SUBSIDIARIES**

**Notesto Consolidated Financial Statements (Unaudited)**

 

approximately$0.6 million of cash and forgiveness of receivables, assumed customer depositsof $0.7 million and other liabilities of $0.2 million.  As a result of this acquisition, we recordedadditional inventory of $0.7 million and goodwill of $0.7 million.

 

Allacquisitions are subject to a contractual holdback or reconciliation period,during which the parties to the transaction may agree to certain normal andcustomary purchase accounting adjustments.

 

Goodwillassociated with our acquisitions represents the premium paid to the sellerrelated to the acquired business (i.e. market presence) and other fair valueadjustments to the assets acquired and liabilities assumed.  Further discussion of our goodwill and otherintangible assets can be found in Note 9.

 

A summary of our allocation of purchase price accounting foracquisitions during the three and nine months ended March 31, 2009 isprovided below (in thousands).

 
| ** **                                              | ** ** | **Three months ended   March 31, 2009** | ** ** | **Nine months ended   March  31, 2009** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| Business segment                                        |       | Retail                                       |       | Retail                                       |       |
| Total consideration                                     |       | $                                            | 94         |                                         | $          | 1,005 |   |
| Fair value of assets  acquired and liabilities assumed: |       |                                         |       |                                         |       |
| Inventory                                               |       | 3                                            |       | 829                                          |       |
| PP&E and other assets                               |       | (5                                           | )          | 55                                           |       |
| Customer deposits                                       |       | 5                                            |       | (556                                         | )          |
| A/P and other liabilities                               |       | 100                                          |       | (86                                          | )          |
| Goodwill                                                |       | $                                            | (9         | )                                            | $          | 763 |   |

 

**(9)****        ****Goodwill,Other Intangible Assets and Goodwill Impairment**

 

At March 31, 2010and June 30, 2009, we had goodwill and other indefinite-lived intangibleassets of $25.4 million and $19.7 million, respectively, all of which isincluded in the Wholesale segment.  Theindefinite-lived intangible assets represent Ethan Allen trade names.  The Company previously had goodwill in theRetail segment, all of which was considered impaired and written off during thethird quarter of fiscal 2009.

 

In accordance with ASCTopic 350,*“Intangibles-Goodwill and Other”*(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 otherindefinite-lived intangible assets the first of April each fiscal year,unless events occur or circumstances change that would more likely than notreduce the fair value of the goodwill or other indefinite-lived intangibleassets below their carrying value. In determining whether an interim test isappropriate, management considers several factors including changes in theCompany’s stock price, financial performance, third party ratings on itslong-term debt, and expected financial outlook of the business. Methodsemployed to value the enterprise and the Company’s retail and wholesalesegments include the market approach and the income approach, which arereconciled with the total market capitalization of the Company. These valuationmethods use historical revenues and cash flows, as well as Company and externalanalysts’ financial projections and apply discount rates, weighted average costof capital rates, total invested capital multiples, and premium controlmultiples. Fair value of our trade name is valued using the relief-from-royaltymethod. Significant factors used in trade name valuation are royalty rates,future growth and discount rates, and expense rates.

 

TheCompany performed impairment evaluations during the second and third quartersof fiscal 2009 as a result of sudden and dramatic changes in the businessclimate and the Company’s performance, and determined as of March 31, 2009that the $48.4 million of goodwill in the Retail segment was consideredimpaired and fully written off at that 

 

11

----

Table of Contents

 

**ETHANALLEN INTERIORS INC. AND SUBSIDIARIES**

**Notesto Consolidated Financial Statements (Unaudited)**

 

time.  In the fiscal quarter ended June 30,2009, the Company performed its annual impairment test and concluded there wasno additional impairment.

 

Infiscal 2010, the Company concluded for each of the first three quarters that nointerim impairment test was required. During the nine months ended March 31, 2010, although financialresults were below management’s expectations, our sales, gross profit,operating income, net income, written orders, and other indicators improvedfrom the previous quarter, and our long-term outlook has not changedsignificantly.  The Company’s averagequarterly stock price increased 40% (from $12.11 for the quarter ended June 30,2009, to $16.91 for the quarter ended March 31, 2010), and cash (includingrestricted cash) and marketable securities increased to $85.2 million at March 31,2010 from $53.0 million at June 30, 2009.

 

Therecan be no assurance that the outcome of future reviews will not result insubstantial impairment charges. Impairment assessment inherently involves judgments as to assumptionsabout expected future cash flows and the impact of market conditions on thoseassumptions.  Future events and changingmarket conditions may impact our assumptions as to prices, costs or otherfactors that may result in changes in our estimates of future cash flows.  Although we believe the assumptions we use intesting for impairment are reasonable, significant changes in any of ourassumptions could produce a significantly different result.

 

**(10)****                         ****Borrowings**

 

Total debt obligations at March 31, 2010 and June 30,2009 consist of the following (in thousands):

 
| ** **                   | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                   | ** ** | **2010**           | ** ** | **2009**          | ** ** |
| 5.375% Senior Notes due 2015 |       | $                  | 199,118    |              | $          | 198,997 |   |
| Industrial revenue bonds     |       | 3,855              |       | 3,855             |       |
| Other debt                   |       | 264                |       | 296               |       |
| Total debt                   |       | 203,237            |       | 203,148           |       |
| Less current maturities      |       | 43                 |       | 42                |       |
| Total long-term debt         |       | $                  | 203,194    |              | $          | 203,106 |   |

 

In September 2005, we completed a private offering of $200.0million in ten-year senior unsecured notes due 2015 (the “Senior Notes”). The SeniorNotes were offered by Global and have an annual coupon rate of 5.375% withinterest payable semi-annually in arrears on April 1 and October 1 ofeach year.  We haveused the net proceeds of $198.4 million to expand our retail network, invest inour manufacturing and logistics operations, and for other general corporatepurposes.

 

OnOctober 23, 2009, the Company expanded to $60 million the three-yearsenior secured asset-based revolving credit facility (the “Facility”)established on May 29, 2009.  TheFacility provides revolving credit financing of up to $60 million, subject toborrowing base availability.  At theCompany’s option, revolving loans under the Agreement bear interest at anannual rate of either:

 

(a) LondonInterbank Offered rate (“LIBOR”) plus 3.25% to 4.25%, based on the averageavailability, or

(b) thehigher of (i) a prime rate, (ii) the federal funds effective rateplus 0.50%, or (iii) a LIBOR rate plus 1.00% plus, in each case, anadditional 2.25% to 3.25%, based on average availability.

 

TheFacility is secured by all property owned, leased or operated by the Company inthe United States excluding any real property owned by the Company and containscustomary covenants which may limit the Company’s 

 

12

----

Table of Contents

 

**ETHANALLEN INTERIORS INC. AND SUBSIDIARIES**

**Notesto Consolidated Financial Statements (Unaudited)**

 

abilityto incur debt; engage in mergers and consolidations; make restricted payments(including dividends); sell certain assets; and make investments.

 

AtMarch 31, 2010, we had no revolving loans, and $1.2 million in standbyletters of credit outstanding under the Facility. During the quarter, theCompany cancelled $11.3 million in standby letters of credit after transferringthe same amount from operating cash into a restricted cash and investmentaccount as security primarily for workmen’s compensation insuranceliabilities.  Remaining availabilityunder the revolver totaled $58.8 million subject to limitations set forth inthe agreement noted above. We are in compliance with the terms and conditionsof the agreement and as a result, the coverage charge ratio, or otherrestricted payment limitations did not apply. As of March 31, 2010, we are in compliance with all covenants ofour credit facility.

 

**(11)****                         ****Litigation**

 

Environmental Matters

We and our subsidiariesare subject to various environmental laws and regulations. Under these laws, weand/or our subsidiaries are, or may be, required to remove or mitigate theeffects on the environment of the disposal or release of certain hazardousmaterials.

 

During the fiscal yearending June 30, 2009, our liability with respect to three active siteslisted, or proposed for inclusion, on the National Priorities List (“NPL”)under the Comprehensive Environmental Response, Compensation and Liability Actof 1980, as amended (“CERCLA”), where we and/or our subsidiaries had been namedas a Potentially Responsive Party (“PRP”) located in Southington, Connecticut;High Point, North Carolina; and Atlanta, Georgia has been resolved.

 

In each case we were nota major contributor based on the very small volume of waste generated by us inrelation to total volume at those sites and were able to take part in deminimus settlement arrangements.  Specifically,with respect to the Southington site, our volumetric share was less than 1% ofover 51 million gallons disposed of at the site and there were more than 1,000PRPs.  With respect to the High Pointsite, our volumetric share was less than 1% of over 18 million gallons disposedof at the site and there are more than 2,000 PRPs, including more than 1,000 deminimis parties (of which we are one). With respect to the Atlanta site, aformer solvent recycling/reclamation facility, our volumetric share was lessthan 1% of over 20 million gallons disposed of at the site by more than 1,700PRPs.

 

In addition to the nowsettled actions discussed above, in July 2000, we were notified by theState 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 Statethat it had conducted an initial environmental study and that we have beennamed as a PRP.  We believe that we arenot a major contributor; however, a review of the initial environmental studyand our contributions, if any, is ongoing.

 

Liability under CERCLAmay be joint and several. As such, to the extent certain named PRPs are unable,or unwilling, to accept responsibility and pay their apportioned costs, wecould be required to pay in excess of our pro rata share of incurredremediation costs. Our understanding of the financial strength of other PRPshas been considered, where appropriate, in the determination of our estimatedliability.

 

As of March 31,2010, we believe that established reserves related to these environmentalcontingencies are adequate to cover probable and reasonably estimable costsassociated with the remediation and restoration of these sites.  We believe our currently anticipated capitalexpenditures for environmental control facility matters are not material.

 

We are subject to otherfederal, state and local environmental protection laws and regulations and areinvolved, from time to time, in investigations and proceedings regardingenvironmental matters.  Suchinvestigations and 

 

13

----

Table of Contents

 

**ETHANALLEN INTERIORS INC. AND SUBSIDIARIES**

**Notesto Consolidated Financial Statements (Unaudited)**

 

proceedings typicallyconcern air emissions, water discharges, and/or management of solid andhazardous wastes.  We believe that our facilities are in materialcompliance with all such applicable laws and regulations.

 

Regulations issued underthe Clean Air Act Amendments of 1990 required the industry to reformulatecertain furniture finishes or institute process changes to reduce emissions ofvolatile organic compounds. Compliance with many of these requirements has beenfacilitated through the introduction of high solids coating technology andalternative formulations. In addition, we have instituted a variety oftechnical and procedural controls, including reformulation of finishingmaterials to reduce toxicity, implementation of high velocity low pressurespray systems, development of storm water protection plans and controls, andfurther development of related inspection/audit teams, all of which have servedto reduce emissions per unit of production. We remain committed to implementingnew waste minimization programs and/or enhancing existing programs with theobjective of (i) reducing the total volume of waste, (ii) limitingthe liability associated with waste disposal, and (iii) continuouslyimproving environmental and job safety programs on the factory floor whichserve to minimize emissions and safety risks for employees. We will continue toevaluate the most appropriate, cost effective, control technologies forfinishing operations and design production methods to reduce the use ofhazardous materials in the manufacturing process.

 

**(12)****                         ****Share-BasedCompensation**

 

On October 10, 2007,the Company’s board of directors and M. Farooq Kathwari, Chairman, Presidentand Chief Executive Officer, agreed to the terms of a new employment agreementexpiring on June 30, 2012 (the “Agreement”).  Pursuant to the terms of the Agreement, Mr. Kathwariwas awarded options to purchase 150,000 shares of our common stock on October 10,2007, an additional 90,000 shares on July 1, 2008, and 60,000 shares on July 1,2009.  The 2007 grant was issued at anexercise price of $34.03, and vests in three equal annual installments on each June 30of 2008 through 2010.  The 2008 grant,issued at an exercise price of $24.62, vests in two equal annual installmentson each June 30 of 2009 and 2010. The 2009 grant, issued at an exercise price of $10.68, vests on June 30,2010.  All options awarded under theAgreement were issued at the closing stock price on each grant date, and have acontractual term of 10 years.

 

In connection with the Agreement, Mr. Kathwari received an awardof 20,000 restricted shares with vesting based on continuing service and theperformance of the Company’s stock price during the 32 month period subsequentto the award date as compared to the Standard and Poor’s 500 index.  An additional 20,000 shares on July 1,2008, and 20,000 shares on July 1, 2009, with the same service,performance, and vesting conditions (over a 36 month period) were granted.  Also in connection with the Agreement, Mr. Kathwarireceived on November 13, 2007 an award of 15,000 restricted shares.  These shares are service-based and vest infive equal annual installments on each June 30 of 2008 through 2012.

 

In recognition of Mr. Kathwari’sextraordinary efforts during the recent challenging times for our industry, on February 3,2010 our Compensation Committee awarded Mr. Kathwari (i) options topurchase an additional 50,000 shares of our common stock at an exercise priceof $14.86 per share, and (ii) an additional 15,000 restricted shares.  The stock options vest in four equal annualinstallments on each February 3 from 2011 through 2014.  The restricted shares are service-based andvest in three equal annual installments on each February 3 from 2011through 2013.  These awards were inaddition to those provided for in the Agreement.

 

On November 12, 2009, the Company awarded options to purchase83,500 shares of our common stock to a large group of associates at the closingstock price on the grant date of $11.74. These grants vest in four equal annual installments on the anniversarydate of the grant. In February 2010, the Company also awarded 33,700restricted shares to a large group of associates.  These shares are service-based and vest inthree equal annual installments each February of 2011 through 2013.

 

14

----

Table of Contents

 

**ETHANALLEN INTERIORS INC. AND SUBSIDIARIES**

**Notesto Consolidated Financial Statements (Unaudited)**

 

All options awarded wereissued at the closing stock price on each grant date, and have a contractualterm of 10 years.

 

**(13)****                         ****EarningsPer Share**

 

Basic and diluted earnings per share are calculated using the followingweighted average share data (in thousands):

 
| ** **                                                                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                    | ** ** | **March 31,**     | ** ** | **March 31,**    | ** ** |
| ** **                                                                    | ** ** | **2010**               | ** ** | **2009**              | ** ** | **2010** | ** ** | **2009** | ** ** |
| Weighted average common  shares outstanding for basic calculation             |       | 29,016                 |       | 28,861                |       | 28,953 |   | 28,768 |   |
| Effect of dilutive stock  options and other share-based awards                |       | —                 |       | —                |       | — |   | — |   |
| Weighted average common  shares outstanding adjusted for dilution calculation |       | 29,016                 |       | 28,861                |       | 28,953 |   | 28,768 |   |

 

Asof March 31, 2010 and 2009, stock options to purchase 2,403,464 and2,276,345 common shares, respectively, were excluded from the respectivediluted earnings per share calculation because their impact was anti-dilutive.

 

**(14)****                         ****ComprehensiveIncome**

 

Totalcomprehensive income represents the sum of net income and items of “othercomprehensive income or loss” that are reported directly in equity.  Such items, which are generally presented ona net of tax basis, may include foreign currency translation adjustments,minimum pension liability adjustments (i.e. gains and losses) on certainderivative instruments, and unrealized gains and losses on certain investmentsin debt and equity securities.  We havereported our total comprehensive income in the Consolidated Statements ofShareholders’ Equity.

 

Accumulatedother comprehensive income, comprised of losses on certain derivativeinstruments and accumulated foreign currency translation adjustments, totaled$1.4 million at March 31, 2010 and $0.5 million at June 30,2009.  Losses on derivative instrumentsare the result of cash flow hedging contracts entered into in connection withthe issuance of the Senior Notes (see Note 10). Foreign currency translation adjustments are the result of changes inforeign currency exchange rates related to our operation of five Ethan Allenowned retail design centers located in Canada and our cut and sew plant locatedin Mexico.  Foreign currency translationadjustments exclude income tax expense (benefit) given that the earnings ofnon-U.S. subsidiaries are deemed to be reinvested for an indefinite period oftime.

 

**(15)****                         ****FinancialInstruments**

 

ACS Topic 820, *“Fair value measurements and disclosures”* (SFAS No. 157)defines fair value as the price that would be received upon sale of an asset orpaid upon transfer of a liability in an orderly transaction between marketparticipants at the measurement date and in the principal or most advantageousmarket for that asset or liability. The fair value should be calculated basedon assumptions that market participants would use in pricing the asset orliability, not on assumptions specific to the entity. In addition, the fairvalue of liabilities should include consideration of non-performance riskincluding our own credit risk.

 

In addition to definingfair value, ASC Topic 820 expands the disclosure requirements around fair valueand establishes a fair value hierarchy for valuation inputs. The hierarchyprioritizes the inputs into three levels based on the extent to which inputsused in measuring fair value are observable in the market. Each fair valuemeasurement is 

 

15

----

Table of Contents

 

**ETHANALLEN INTERIORS INC. AND SUBSIDIARIES**

**Notesto Consolidated Financial Statements (Unaudited)**

 

reported in one of thethree levels which is determined by the lowest level input that is significantto the fair value measurement in its entirety. These levels are:

 

·                  Level 1 — inputs are based upon unadjusted quoted prices for identicalinstruments traded in active markets.

·                  Level 2 — inputs are based upon quoted prices for similar instrumentsin active markets, quoted prices for identical or similar instruments inmarkets that are not active, and model-based valuation techniques for which allsignificant assumptions are observable in the market or can be corroborated byobservable market data for substantially the full term of the assets orliabilities.

·                  Level 3 — inputs are generally unobservable and typically reflectmanagement’s estimates of assumptions that market participants would use inpricing the asset or liability. The fair values are therefore determined usingmodel-based techniques that include option pricing models, discounted cash flowmodels, and similar techniques.

 

The following sectiondescribes the valuation methodologies we use to measure different financialassets and liabilities at fair value.

 

The Company partiallyadopted ASC Topic 820 on July 1, 2008 due to the fact that a portion ofASC Topic 820 was previously deferred for one year for all nonfinancial assetsand nonfinancial liabilities that were not recognized or disclosed at fairvalue in the financial statements on a recurring basis (at leastannually).  On July 1, 2009, theCompany adopted the deferred portion of ACS Topic 820.  There was no impact to the Company’sfinancial position or results of operations resulting from the adoption of thedeferred portion of ACS Topic 820.  TheCompany has now fully adopted ASC Topic 820.

 

***Assets and Liabilities Measured at Fair Value on aRecurring Basis***

 

The following tablepresents our assets and liabilities measured at fair value on a recurring basisat March 31, 2010 (in thousands):

 
| ** **                     | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Net Balance** | ** ** |
|--------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|----------------------|------------|
| Cash equivalents               |       | $                | 83,225     |             | $          | —           |       | $                    | —     |   | $ | 83,225 |   |
| Available-for-sale  securities |       | —           |       | $                | 2,023      |             | —     |                 | 2,023      |   |
| Total                          |       | $                | 83,225     |             | $          | 2,023            |       | $                    | —     |   | $ | 85,248 |   |

 

Cash equivalents consistof money market accounts and mutual funds in U.S. government and agency fixedincome securities.  We use quoted pricesin active markets for identical assets or liabilities to determine fairvalue.  At March 31, 2010, $11.3million of cash equivalents was restricted and is classified as a long-termasset.

 

Available-for-salesecurities consist of U.S. municipal bonds with maturities of less than twoyears.  We obtain fair value from ourinvestment advisors, based upon quoted prices for similar instruments in activemarkets.  Also see note 4, “RestrictedCash and Investments”, and note 5, “Marketable Securities”.

 

***Assets and Liabilities Measured at Fair Value on aNonrecurring Basis***

 

We measure certainassets, including our cost and equity method investments, at fair value on anonrecurring basis. These assets are recognized at fair value when they aredeemed to be other-than-temporarily impaired. During the nine months ended March 31,2010, we did not record any other-than-temporary impairments on those assetsrequired to be measured at fair value on a nonrecurring basis.

 

16

----

Table of Contents

 

**ETHANALLEN INTERIORS INC. AND SUBSIDIARIES**

**Notesto Consolidated Financial Statements (Unaudited)**

 

**(16)****                         ****SegmentInformation**

 

Our operations are classified into two operating segments: wholesaleand retail.  These operating segmentsrepresent strategic business areas which, although they operate separately andprovide their own distinctive services, enable us to more effectively offer ourcomplete line of home furnishings and accessories.

 

The wholesale segment is principally involved in the development of theEthan Allen brand, which encompasses the design, manufacture, domestic andoffshore sourcing, sale and distribution of a full range of home furnishingsand accessories to a network of independently owned and Ethan Allen owneddesign centers as well as related marketing and brand awareness efforts.  Wholesale revenue is generated upon thewholesale sale and shipment of our product to all retail design centers,including those owned by Ethan Allen. Wholesale profitability includes (i) the wholesale gross margin,which represents the difference between the wholesale sales price and the costassociated with manufacturing and/or sourcing the related product, and (ii) otheroperating costs associated with wholesale segment activities.

 

The retail segment sells home furnishings and accessories to consumersthrough a network of Company owned design centers.  Retail revenue is generated upon the retailsale and delivery of our product to our customers.  Retail profitability includes (i) theretail gross margin, which represents the difference between the retail salesprice and the cost of goods purchased from the wholesale segment, and (ii) otheroperating costs associated with retail segment activities.

 

Inter-segment eliminations result, primarily, from the wholesale saleof inventory to the retail segment, including the related profit margin.

 

We evaluate performance of the respective segments based upon revenuesand operating income. While the manner in which our home furnishings andaccessories are marketed and sold is consistent, the nature of the underlyingrecorded sales (i.e. wholesale versus retail) and the specific services thateach operating segment provides (i.e. wholesale manufacturing, sourcing, anddistribution versus retail selling) are different.  Within the wholesale segment, we maintainrevenue information according to each respective product line (i.e. case goods,upholstery, or home accessories and other).

 

A breakdown of wholesale sales by these product lines for the three andnine months ended March 31, 2010 and 2009 is provided as follows:

 

| ** **                  | ** ** | **Three  Months Ended** | ** ** | **Nine  Months Ended** | ** ** |
|-----------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                  | ** ** | **March 31,**      | ** ** | **March 31,**     | ** ** |
| ** **                  | ** ** | **2010**                | ** ** | **2009**               | ** ** | **2010** | ** ** | **2009** | ** ** |
| Case  Goods                 |       | 40                      | %          | 42                     | %          | 40 | % | 41 | % |
| Upholstered  Products       |       | 46                      |       | 40                     |       | 45 |   | 41 |   |
| Home  Accessories and Other |       | 14                      |       | 18                     |       | 15 |   | 18 |   |
|                        |       | 100                     | %          | 100                    | %          | 100 | % | 100 | % |

 

Revenue information by product line is not as easily determined withinthe retail segment. However, because wholesale production and sales arematched, for the most part, to incoming orders, we believe that the allocationof retail sales by product line would be similar to that of the wholesalesegment.

 

17

----

Table of Contents

 

**ETHANALLEN INTERIORS INC. AND SUBSIDIARIES**

**Notesto Consolidated Financial Statements (Unaudited)**

 

Segment information for the three and nine months ended March 31,2010 and 2009 is set forth as follows:

 
| ** **                              | ** ** | **Three  Months Ended** | ** ** | **Nine  Months Ended** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                              | ** ** | **March 31,**      | ** ** | **March 31,**     | ** ** |
| ** **                              | ** ** | **2010**                | ** ** | **2009**               | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Net  sales:**                         |       |                    |       |                   |       |   |   |   |   |
| Wholesale  segment                      |       | $                       | 96,594     |                   | $          | 88,072 |   | $ | 262,374 |   | $ | 318,215 |   |
| Retail  segment                         |       | 107,113                 |       | 103,305                |       | 317,386 |   | 406,358 |   |
| Elimination  of inter-company sales     |       | (56,449                 | )          | (51,156                | )          | (153,010 | ) | (188,953 | ) |
| Consolidated  Total                     |       | $                       | 147,258    |                   | $          | 140,221 |   | $ | 426,750 |   | $ | 535,620 |   |
|                                    |       |                    |       |                   |       |   |   |   |   |
| **Operating  income (loss):**           |       |                    |       |                   |       |   |   |   |   |
| Wholesale  segment (1)(2)               |       | $                       | 6,737      |                   | $          | (6,068 | ) | $ | 3,099 |   | $ | 14,396 |   |
| Retail  segment (3)(4)                  |       | (10,366                 | )          | (71,920                | )          | (31,507 | ) | (78,156 | ) |
| Adjustment  of inter-company profit (5) |       | 806                     |       | 3,281                  |       | 4,214 |   | 11,351 |   |
| Consolidated  Total                     |       | $                       | (2,823     | )                      | $          | (74,707 | ) | $ | (24,194 | ) | $ | (52,409 | ) |
|                                    |       |                    |       |                   |       |   |   |   |   |
| **Capital  expenditures:**              |       |                    |       |                   |       |   |   |   |   |
| Wholesale  segment                      |       | $                       | 1,319      |                   | $          | 350 |   | $ | 2,955 |   | $ | 2,664 |   |
| Retail  segment                         |       | 977                     |       | 3,970                  |       | 4,656 |   | 17,802 |   |
| Acquisitions  (6)                       |       | —                  |       | 94                     |       | — |   | 741 |   |
| Consolidated  Total                     |       | $                       | 2,296      |                   | $          | 4,414 |   | $ | 7,611 |   | $ | 21,207 |   |

 
| ** **                        | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|-----------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                        | ** ** | **2010**           | ** ** | **2009**          | ** ** |
| **Total assets**                  |       |               |       |              |       |
| Wholesale  segment                |       | $                  | 284,468    |              | $          | 276,250 |   |
| Retail  segment                   |       | 383,386            |       | 397,877           |       |
| Inventory  profit elimination (7) |       | (23,468            | )          | (27,642           | )          |
| Consolidated  Total               |       | $                  | 644,386    |              | $          | 646,485 |   |

 

----

| (1) |   | Operating income (loss) for the wholesale segment for the three  months ended March 31, 2009 includes pre-tax restructuring and  impairment charges of $5.5 million.                                                                                                                                                                            |
|-----|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Operating income (loss) for the wholesale segment for the nine months  ended March 31, 2010 and 2009 includes a pre-tax restructuring and  impairment net recovery of $0.2 million and charges of $5.9 million,  respectively.                                                                                                                  |
| (3) |   | Operating income (loss) for the retail segment for the three months  ended March 31, 2010 includes pre-tax restructuring and impairment  charges of $0.4 million. For the three months ended March 31, 2009 it  includes a goodwill impairment charge of $48.4 million and a pre-tax  restructuring and impairment charge of $1.9 million. |
| (4) |   | Operating income (loss) for the retail segment for the nine months ended  March 31, 2010 includes pre-tax restructuring and impairment charges of  $2.2 million. For the nine months ended March 31, 2009 it includes a  goodwill impairment charge of $48.4 million and a pre-tax restructuring and  impairment credit of $0.2 million.   |
| (5) |   | Represents the change in the inventory profit elimination necessary  to adjust for the embedded wholesale profit contained in Ethan Allen-owned  design center inventory existing at the end of the period.                                                                                                                                          |
| (6) |   | Acquisitions for the nine months ended March 31, 2009 include  the purchase of three retail design centers.                                                                                                                                                                                                                                     |
| (7) |   | Represents the wholesale profit contained in Ethan Allen-owned design  center inventory that has not yet been realized. These profits are realized  when the related inventory is sold.                                                                                                                                                              |

 

There were 50 independentretail design centers located outside the United States at March 31, 2010.Less than five percent of our net sales were derived from sales to those retaildesign centers.

 

**(17)****                     ****SubsequentEvents**

 

***Ethan Allen declaresquarterly cash dividend***

Ethan Allen’s Board ofDirectors has declared a quarterly cash dividend of $0.05 per share, which willbe payable to shareholders of record as of July 9, 2010 and paid on July 26,2010.

 

18

----

Table of Contents

 

**ETHANALLEN INTERIORS INC. AND SUBSIDIARIES**

**Notesto Consolidated Financial Statements (Unaudited)**

 

**(18)****                         ****RecentAccounting Pronouncements**

 

In June 2009, the FASB released additional guidance on ASC Topic810, “Consolidation” (SFAS No. 167) which will revise previous guidanceapplicable to variable interest entities (“VIEs”). The new guidance willrequire ongoing assessments of whether an enterprise is the primary beneficiaryof a VIE, as opposed to reconsideration only when specific events occurred, asunder present rules. The new guidance will also replace the quantitativeapproach previously required for determining the primary beneficiary of a VIEwith a qualitative approach, and changes some disclosurerequirements. This revised guidance is effective for fiscal yearsbeginning after November 15, 2009 (July 1, 2010 for theCompany).  The Company is currentlyevaluating the impact, if any, on our financial statements and results ofoperations.

 

**(19)****                     ****FinancialInformation About the Parent, the Issuer and the Guarantors**

 

OnSeptember 27, 2005, Global (the “Issuer”) issued $200 million aggregateprincipal amount of Senior Notes which have been guaranteed on a senior basisby Interiors (the “Parent”), and other wholly owned domestic subsidiaries ofthe Issuer and the Parent, including Ethan Allen Retail, Inc., Ethan AllenOperations, 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, unconditionaland joint and several and the Issuer and each of the Guarantors are 100% ownedby the Parent. Ethan Allen (UK) Ltd. (which was legally dissolved in October 2009),and our other subsidiaries which are not guarantors are called the “Non-Guarantors”.During the quarter ended December 31, 2008, we determined that ourinternational subsidiaries in Canada and Mexico are non-guarantors. The Companyhas reclassified, for all prior periods presented, the financial results ofthese international subsidiaries to reflect their non-guarantor status.

 

Thefollowing tables set forth the condensed consolidating balance sheets as of March 31,2010 and June 30, 2009, the condensed consolidating statements ofoperations for the three and nine months ended March 31, 2010 and 2009,and the condensed consolidating statements of cash flows for the nine monthsended March 31, 2010 and 2009 of the Parent, the Issuer, the Guarantorsand the Non-Guarantors.

 

19

----

Table of Contents

 

**ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements (Unaudited)**

 

**CONDENSED CONSOLIDATING BALANCESHEET**

(In thousands)

**March 31, 2010**

 
| ** **                                       | ** ** | **Parent** | ** ** | **Issuer** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------|------------|------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| **Assets**                                       |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Current  assets:                                 |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Cash  and cash equivalents                       |       | $          | —     |       | $          | 69,765         |       | $                  | 1,704      |             | $          | 456              |       | $ | — |   | $ | 71,925 |   |
| Marketable  securities                           |       | —     |       | 2,023      |       | —         |       | —             |       | —           |       | 2,023            |       |
| Accounts  receivable, net                        |       | —     |       | 15,004     |       | 455            |       | 266                |       | —           |       | 15,725           |       |
| Inventories                                      |       | —     |       | —     |       | 159,138        |       | 4,699              |       | (23,468          | )          | 140,369          |       |
| Prepaid  expenses and other current assets       |       | —     |       | 20,736     |       | 7,007          |       | 862                |       | —           |       | 28,605           |       |
| Intercompany                                     |       | —     |       | 776,902    |       | 232,030        |       | (4,393             | )          | (1,004,539       | )          | —           |       |
| Total  current assets                            |       | —     |       | 884,430    |       | 400,334        |       | 1,890              |       | (1,028,007       | )          | 258,647          |       |
|                                             |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Property,  plant and equipment, net              |       | —     |       | 10,116     |       | 293,973        |       | 6,489              |       | —           |       | 310,578          |       |
| Goodwill  and other intangible assets            |       | —     |       | 19,740     |       | 25,388         |       | —             |       | —           |       | 45,128           |       |
| Restricted  cash and investments                 |       | —     |       | 11,300     |       | —         |       | —             |       | —           |       | 11,300           |       |
| Other  assets                                    |       | —     |       | 18,059     |       | 670            |       | 4                  |       | —           |       | 18,733           |       |
| Investment  in affiliated companies              |       | 597,331    |       | (69,962    | )          | —         |       | —             |       | (527,369         | )          | —           |       |
| Total  assets                                    |       | $          | 597,331    |       | $          | 873,683        |       | $                  | 720,365    |             | $          | 8,383            |       | $ | (1,555,376 | ) | $ | 644,386 |   |
|                                             |       |       |       |       |       |           |       |               |       |             |       |             |       |
| **Liabilities  and Shareholders’ Equity**   |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Current  liabilities:                            |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Current  maturities of long-term debt            |       | $          | —     |       | $          | —         |       | $                  | 43         |             | $          | —           |       | $ | — |   | $ | 43 |   |
| Customer  deposits                               |       | —     |       | —     |       | 47,148         |       | 2,130              |       | —           |       | 49,278           |       |
| Accounts  payable                                |       | —     |       | 8,182      |       | 15,444         |       | 236                |       | —           |       | 23,862           |       |
| Accrued  expenses and other current liabilities  |       | 1,597      |       | 37,012     |       | 16,688         |       | 345                |       | —           |       | 55,642           |       |
| Intercompany                                     |       | 307,184    |       | 597        |       | 692,172        |       | 4,586              |       | (1,004,539       | )          | —           |       |
| Total  current liabilities                       |       | 308,781    |       | 45,791     |       | 771,495        |       | 7,297              |       | (1,004,539       | )          | 128,825          |       |
|                                             |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Long-term  debt                                  |       | —     |       | 199,118    |       | 4,076          |       | —             |       | —           |       | 203,194          |       |
| Other  long-term liabilities                     |       | —     |       | 9,050      |       | 14,630         |       | 137                |       | —           |       | 23,817           |       |
| Total  liabilities                               |       | 308,781    |       | 253,959    |       | 790,201        |       | 7,434              |       | (1,004,539       | )          | 355,836          |       |
|                                             |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Shareholders’  equity                       |       | 288,550    |       | 619,724    |       | (69,836        | )          | 949                |       | (550,837         | )          | 288,550          |       |
| Total  liabilities and shareholders’ equity |       | $          | 597,331    |       | $          | 873,683        |       | $                  | 720,365    |             | $          | 8,383            |       | $ | (1,555,376 | ) | $ | 644,386 |   |

 

20

----

Table of Contents

 

**ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements (Unaudited)**

 

**CONDENSED CONSOLIDATING BALANCESHEET**

(In thousands)

**June 30, 2009**

 
| ** **                                       | ** ** | **Parent** | ** ** | **Issuer** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------|------------|------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| **Assets**                                       |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Current assets:                                  |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Cash and cash equivalents                        |       | $          | —     |       | $          | 47,712         |       | $                  | 3,592      |             | $          | 1,656            |       | $ | — |   | $ | 52,960 |   |
| Accounts receivable, net                         |       | —     |       | 12,049     |       | 783            |       | 254                |       | —           |       | 13,086           |       |
| Inventories                                      |       | —     |       | —     |       | 179,705        |       | 4,456              |       | (27,642          | )          | 156,519          |       |
| Prepaid expenses and other  current assets       |       | —     |       | 20,509     |       | 8,084          |       | 544                |       | —           |       | 29,137           |       |
| Intercompany receivables                         |       | —     |       | 782,736    |       | 227,453        |       | (3,010             | )          | (1,007,179       | )          | —           |       |
| Total current assets                             |       | —     |       | 863,006    |       | 419,617        |       | 3,900              |       | (1,034,821       | )          | 251,702          |       |
|                                             |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Property, plant and  equipment, net              |       | —     |       | 11,748     |       | 317,144        |       | 4,707              |       | —           |       | 333,599          |       |
| Goodwill and other  intangible assets            |       | —     |       | 37,905     |       | 7,223          |       | —             |       | —           |       | 45,128           |       |
| Other assets                                     |       | —     |       | 15,323     |       | 727            |       | 6                  |       | —           |       | 16,056           |       |
| Investment in affiliated  companies              |       | 612,391    |       | (20,616    | )          | —         |       | —             |       | (591,775         | )          | —           |       |
| Total assets                                     |       | 612,391    |       | 907,366    |       | 744,711        |       | 8,613              |       | (1,626,596       | )          | 646,485          |       |
|                                             |       |       |       |       |       |           |       |               |       |             |       |             |       |
| **Liabilities  and Shareholders’ Equity**   |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Current liabilities:                             |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Current maturities of long-term  debt            |       | —     |       | —     |       | 42             |       | —             |       | —           |       | 42               |       |
| Customer deposits                                |       | —     |       | —     |       | 30,412         |       | 1,279              |       | —           |       | 31,691           |       |
| Accounts payable                                 |       | —     |       | 8,851      |       | 13,106         |       | 242                |       | —           |       | 22,199           |       |
| Accrued expenses and other  current liabilities  |       | 1,552      |       | 41,004     |       | 15,707         |       | 268                |       | —           |       | 58,531           |       |
| Intercompany payables                            |       | 304,917    |       | 8,123      |       | 687,826        |       | 6,313              |       | (1,007,179       | )          | —           |       |
| Total current liabilities                        |       | 306,469    |       | 57,978     |       | 747,093        |       | 8,102              |       | (1,007,179       | )          | 112,463          |       |
|                                             |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Long-term debt                                   |       | —     |       | 198,998    |       | 4,108          |       | —             |       | —           |       | 203,106          |       |
| Other long-term liabilities                      |       | —     |       | 10,565     |       | 14,290         |       | 138                |       | —           |       | 24,993           |       |
| Deferred income taxes                            |       | —     |       | —     |       | —         |       | —             |       | —           |       | —           |       |
| Total liabilities                                |       | 306,469    |       | 267,541    |       | 765,491        |       | 8,240              |       | (1,007,179       | )          | 340,562          |       |
|                                             |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Shareholders’ equity                        |       | 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 |   |

 

21

----

 

Table of Contents

 

**ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements (Unaudited)**

 

**CONDENSED CONSOLIDATING STATEMENTOF OPERATIONS**

(In thousands)

**Three months ended March 31,2010**

** **
| ** **                                         | ** ** | **Parent** | ** ** | **Issuer** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------|------------|------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
|                                               |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Net  sales                                         |       | $          | —     |       | $          | 96,955         |       | $                  | 152,446    |             | $          | 5,630            |       | $ | (107,773 | ) | $ | 147,258 |   |
| Cost  of sales                                     |       | —     |       | 74,425     |       | 106,339        |       | 3,033              |       | (108,566         | )          | 75,231           |       |
| Gross  profit                                      |       | —     |       | 22,530     |       | 46,107         |       | 2,597              |       | 793              |       | 72,027           |       |
|                                               |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Selling,  general and administrative expenses      |       | 67         |       | 9,732      |       | 61,953         |       | 2,698              |       | —           |       | 74,450           |       |
| Restructuring  and impairment charge, (credit) net |       | —     |       | —     |       | 400            |       | —             |       | —           |       | 400              |       |
| Total  operating expenses                          |       | 67         |       | 9,732      |       | 62,353         |       | 2,698              |       | —           |       | 74,850           |       |
| Operating  income (loss)                           |       | (67        | )          | 12,798     |       | (16,246        | )          | (101               | )          | 793              |       | (2,823           | )          |
|                                               |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Interest  and other miscellaneous income, net      |       | (788       | )          | (15,519    | )          | 12             |       | —             |       | 17,189           |       | 894              |       |
| Interest  and other related financing costs        |       | —     |       | 2,903      |       | 76             |       | —             |       | —           |       | 2,979            |       |
| Income  (loss) before income tax expense           |       | (855       | )          | (5,624     | )          | (16,310        | )          | (101               | )          | 17,982           |       | (4,908           | )          |
| Income  tax expense                                |       | —     |       | (4,053     | )          | —         |       | —             |       | —           |       | (4,053           | )          |
|                                               |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Net  income (loss)                                 |       | $          | (855       | )          | $          | (1,571         | )          | $                  | (16,310    | )                | $          | (101             | )          | $ | 17,982 |   | $ | (855 | ) |

 

**Three Months Ended March 31,2009**

** **
| ** **                                         | ** ** | **Parent** | ** ** | **Issuer** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------|------------|------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
|                                               |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Net  sales                                         |       | $          | —     |       | $          | 88,573         |       | $                  | 139,264    |             | $          | 3,993            |       | $ | (91,609 | ) | $ | 140,221 |   |
| Cost  of sales                                     |       | —     |       | 67,571     |       | 99,103         |       | 2,646              |       | (95,149          | )          | 74,171           |       |
| Gross  profit                                      |       | —     |       | 21,002     |       | 40,161         |       | 1,347              |       | 3,540            |       | 66,050           |       |
|                                               |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Selling,  general and administrative expenses      |       | 41         |       | 12,611     |       | 70,020         |       | 2,360              |       | —           |       | 85,032           |       |
| Restructuring  and impairment charge, (credit) net |       | —     |       | —     |       | 55,725         |       | —             |       | —           |       | 55,725           |       |
| Total  operating expenses                          |       | 41         |       | 12,611     |       | 125,745        |       | 2,360              |       | —           |       | 140,757          |       |
| Operating  income (loss)                           |       | (41        | )          | 8,391      |       | (85,584        | )          | (1,013             | )          | 3,540            |       | (74,707          | )          |
|                                               |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Interest  and other miscellaneous income, net      |       | (48,633    | )          | (85,859    | )          | 5              |       | 5                  |       | 135,288          |       | 806              |       |
| Interest  and other related financing costs        |       | —     |       | 2,908      |       | 77             |       | —             |       | —           |       | 2,985            |       |
| Income  before income tax expense                  |       | (48,674    | )          | (80,376    | )          | (85,656        | )          | (1,008             | )          | 138,828          |       | (76,886          | )          |
| Income  tax expense                                |       | —     |       | (28,212    | )          | —         |       | —             |       | —           |       | (28,212          | )          |
|                                               |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Net  income (loss)                                 |       | $          | (48,674    | )          | $          | (52,164        | )          | $                  | (85,656    | )                | $          | (1,008           | )          | $ | 138,828 |   | $ | (48,674 | ) |

 

22

----

 

Table ofContents

 

**ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements (Unaudited)**

 

**CONDENSED CONSOLIDATING STATEMENTOF OPERATIONS**

(In thousands)

**Nine Months Ended March 31,2010**

 
| ** **                                    | ** ** | **Parent** | ** ** | **Issuer** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------|------------|------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| ** **                                    |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Net  sales                                    |       | $          | —     |       | $          | 262,830        |       | $                  | 433,442    |             | $          | 16,056           |       | $ | (285,578 | ) | $ | 426,750 |   |
| Cost  of sales                                |       | —     |       | 210,398    |       | 298,227        |       | 8,557              |       | (289,792         | )          | 227,390          |       |
| Gross  profit                                 |       | —     |       | 52,432     |       | 135,215        |       | 7,499              |       | 4,214            |       | 199,360          |       |
|                                          |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Selling,  general and administrative expenses |       | 150        |       | 31,502     |       | 182,115        |       | 7,798              |       | —           |       | 221,565          |       |
| Restructuring  and impairment charge, net     |       | —     |       | —     |       | 1,989          |       | —             |       | —           |       | 1,989            |       |
| Total  operating expenses                     |       | 150        |       | 31,502     |       | 184,104        |       | 7,798              |       | —           |       | 223,554          |       |
| Operating  income (loss)                      |       | (150       | )          | 20,930     |       | (48,889        | )          | (299               | )          | 4,214            |       | (24,194          | )          |
|                                          |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Interest  and other miscellaneous income, net |       | (17,622    | )          | (46,665    | )          | 61             |       | 9                  |       | 66,928           |       | 2,711            |       |
| Interest  and other related financing costs   |       | —     |       | 8,710      |       | 228            |       | —             |       | —           |       | 8,938            |       |
| Income  before income tax expense             |       | (17,772    | )          | (34,445    | )          | (49,056        | )          | (290               | )          | 71,142           |       | (30,421          | )          |
| Income  tax expense                           |       | —     |       | (12,649    | )          | —         |       | —             |       | —           |       | (12,649          | )          |
|                                          |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Net  income (loss)                            |       | $          | (17,772    | )          | $          | (21,796        | )          | $                  | (49,056    | )                | $          | (290             | )          | $ | 71,142 |   | $ | (17,772 | ) |

 

**Nine Months Ended March 31,2009**

** **
| ** **                                    | ** ** | **Parent** | ** ** | **Issuer** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------|------------|------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| ** **                                    |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Net  sales                                    |       | $          | —     |       | $          | 319,295        |       | $                  | 542,712    |             | $          | 16,054           |       | $ | (342,441 | ) | $ | 535,620 |   |
| Cost  of sales                                |       | —     |       | 236,974    |       | 363,840        |       | 9,387              |       | (354,373         | )          | 255,828          |       |
| Gross  profit                                 |       | —     |       | 82,321     |       | 178,872        |       | 6,667              |       | 11,932           |       | 279,792          |       |
|                                          |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Selling,  general and administrative expenses |       | 124        |       | 37,546     |       | 232,400        |       | 8,010              |       | —           |       | 278,080          |       |
| Restructuring  and impairment charge, net     |       | —     |       | —     |       | 54,121         |       | —             |       | —           |       | 54,121           |       |
| Total  operating expenses                     |       | 124        |       | 37,546     |       | 286,521        |       | 8,010              |       | —           |       | 332,201          |       |
| Operating  income (loss)                      |       | (124       | )          | 44,775     |       | (107,649       | )          | (1,343             | )          | 11,932           |       | (52,409          | )          |
|                                          |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Interest  and other miscellaneous income, net |       | (35,640    | )          | (106,152   | )          | 13             |       | 9                  |       | 144,789          |       | 3,019            |       |
| Interest  and other related financing costs   |       | —     |       | 8,589      |       | 229            |       | —             |       | —           |       | 8,818            |       |
| Income  before income tax expense             |       | (35,764    | )          | (69,966    | )          | (107,865       | )          | (1,334             | )          | 156,721          |       | (58,208          | )          |
| Income  tax expense                           |       | —     |       | (22,444    | )          | —         |       | —             |       | —           |       | (22,444          | )          |
|                                          |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Net  income (loss)                            |       | $          | (35,764    | )          | $          | (47,522        | )          | $                  | (107,865   | )                | $          | (1,334           | )          | $ | 156,721 |   | $ | (35,764 | ) |

 

23

----

 

Table of Contents

 

**ETHANALLEN INTERIORS INC. AND SUBSIDIARIES**

**Notesto Consolidated Financial Statements (Unaudited)**

 

**CONDENSED CONSOLIDATING STATEMENTOF CASH FLOWS**

(In thousands)

**Nine months ended March 31,2010**

** **
| ** **                                                   | ** ** | **Parent** | ** ** | **Issuer** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------|------------|------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| ** **                                                   |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Net  cash provided by (used in) operating activities         |       | $          | 4,345      |       | $          | 35,836         |       | $                  | (6,668     | )                | $          | 88               |       | $ | — |   | $ | 33,601 |   |
|                                                         |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Cash  flows from investing activities:                       |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Capital  expenditures                                        |       | —     |       | (286       | )          | (5,445         | )          | (1,880             | )          | —           |       | (7,611           | )          |
| Acquisitions                                                 |       | —     |       | —     |       | —         |       | —             |       | —           |       | —           |       |
| Proceeds  from the disposal of property, plant and equipment |       |       |       |       |       | 10,256         |       |               |       |             |       | 10,256           |       |
| Increase  in restricted cash and investments                 |       | —     |       | (11,300    | )          | —         |       | —             |       | —           |       | (11,300          | )          |
| Purchase  of marketable securities                           |       | —     |       | (2,023     | )          | —         |       | —             |       | —           |       | (2,023           | )          |
| Other                                                        |       | —     |       | 25         |       | —         |       | —             |       | —           |       | 25               |       |
| Net  cash used in investing activities                       |       | —     |       | (13,584    | )          | 4,811          |       | (1,880             | )          | —           |       | (10,653          | )          |
|                                                         |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Cash  flows from financing activities:                       |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Payments  on long-term debt                                  |       | —     |       | —     |       | (31            | )          | —             |       | —           |       | (31              | )          |
| Increase  in deferred financing costs                        |       | —     |       | (199       | )          | —         |       | —             |       | —           |       | (199             | )          |
| Proceeds  from issuance of common stock                      |       | —     |       | —     |       | —         |       | —             |       | —           |       | —           |       |
| Excess  tax benefits from share-based payment arrangements   |       | —     |       | —     |       | —         |       | —             |       | —           |       | —           |       |
| Dividends  paid                                              |       | (4,345     | )          | —     |       | —         |       | —             |       | —           |       | (4,345           | )          |
| Net  cash provided by (used in) financing activities         |       | (4,345     | )          | (199       | )          | (31            | )          | —             |       | —           |       | (4,575           | )          |
|                                                         |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Effect  of exchange rate changes on cash                     |       | —     |       | —     |       | —         |       | 592                |       | —           |       | 592              |       |
|                                                         |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Net  decrease in cash and cash equivalents                   |       | —     |       | 22,053     |       | (1,888         | )          | (1,200             | )          | —           |       | 18,965           |       |
|                                                         |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Cash  and cash equivalents – beginning of period        |       | —     |       | 47,712     |       | 3,592          |       | 1,656              |       | —           |       | 52,960           |       |
|                                                         |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Cash  and cash equivalents – end of period              |       | $          | —     |       | $          | 69,765         |       | $                  | 1,704      |             | $          | 456              |       | $ | — |   | $ | 71,925 |   |

 

24

----

 

Table of Contents

 

**ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements (Unaudited)**

 

**CONDENSED CONSOLIDATING STATEMENTOF CASH FLOWS**

(In thousands)

**Nine months ended March 31,2009**

 
| ** **                                                   | ** ** | **Parent** | ** ** | **Issuer** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------|------------|------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| ** **                                                   |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Net  cash provided by (used in) operating activities         |       | $          | 20,718     |       | $          | (21,503        | )          | $                  | 14,724     |             | $          | (146             | )          | $ | — |   | $ | 13,793 |   |
|                                                         |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Cash  flows from investing activities:                       |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Capital  expenditures                                        |       | —     |       | (1,257     | )          | (19,106        | )          | (103               | )          | —           |       | (20,466          | )          |
| Acquisitions                                                 |       | —     |       | —     |       | (741           | )          | —             |       | —           |       | (741             | )          |
| Proceeds  from the disposal of property, plant and equipment |       | —     |       | 19         |       | 6,264          |       | —             |       | —           |       | 6,283            |       |
| Other                                                        |       | —     |       | 70         |       | (217           | )          | —             |       | —           |       | (147             | )          |
| Net  cash used in investing activities                       |       | —     |       | (1,168     | )          | (13,800        | )          | (103               | )          | —           |       | (15,071          | )          |
|                                                         |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Cash  flows from financing activities:                       |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Payments  on long-term debt                                  |       | —     |       | —     |       | (31            | )          | —             |       | —           |       | (31              | )          |
| Proceeds  from issuance of common stock                      |       | 2          |       | —     |       | —         |       | —             |       | —           |       | 2                |       |
| Payment  of deferred financing costs                         |       | —     |       | (447       | )          | —         |       | —             |       | —           |       | (447             | )          |
| Dividends  paid                                              |       | (20,720    | )          | —     |       | —         |       | —             |       | —           |       | (20,720          | )          |
| Net  cash provided by (used in) financing activities         |       | (20,718    | )          | (447       | )          | (31            | )          | —             |       | —           |       | (21,196          | )          |
|                                                         |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Effect  of exchange rate changes on cash                     |       | —     |       | —     |       | —         |       | (743               | )          | —           |       | (743             | )          |
|                                                         |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Net  increase (decrease) in cash and cash equivalents        |       | —     |       | (23,118    | )          | 893            |       | (992               | )          | —           |       | (23,217          | )          |
|                                                         |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Cash  and cash equivalents – beginning of period        |       | —     |       | 71,117     |       | 1,307          |       | 1,952              |       | —           |       | 74,376           |       |
|                                                         |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Cash  and cash equivalents – end of period              |       | $          | —     |       | $          | 47,999         |       | $                  | 2,200      |             | $          | 960              |       | $ | — |   | $ | 51,159 |   |

 

25

----

 

Table of Contents

 

**Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

The following discussion of financial condition andresults of operations should be read in conjunction with (i) ourConsolidated Financial Statements, and notes thereto, as set forth in thisQuarterly Report on Form 10-Q and (ii) our Annual Report on Form 10-K/Afor the year ended June 30, 2009.

 

**Forward-Looking Statements**

 

Management’s discussion and analysis of financialcondition and results of operations and other sections of this Quarterly Reportcontain forward-looking statements relating to our future results. Suchforward-looking statements are identified by use of forward-looking words suchas “anticipates”, “believes”, “plans”, “estimates”, “expects”, and “intends” orwords or phrases of similar expression. These forward-looking statements aresubject to management decisions and various assumptions, risks and uncertainties,including, but not limited to: the effects of terrorist attacks or conflicts orwars involving the United States or its allies or trading partners; the effectsof labor strikes; weather conditions that may affect sales; volatility in fuel,utility, transportation and security costs; changes in global or regionalpolitical or economic conditions, including changes in governmental and centralbank policies; changes in business conditions in the furniture industry,including changes in consumer spending patterns and demand for homefurnishings; effects of our brand awareness and marketing programs, includingchanges in demand for our existing and new products; our ability to locate newdesign center sites and/or negotiate favorable lease terms for additionaldesign centers or for the expansion of existing design centers; competitivefactors, including changes in products or marketing efforts of others; pricingpressures; fluctuations in interest rates and the cost, availability andquality of raw materials; those matters discussed in Items 1A and 7A of ourAnnual Report on Form 10-K/A for the year ended June 30, 2009 and inour SEC filings; and our future decisions. Accordingly, actual circumstancesand results could differ materially from those contemplated by theforward-looking statements.

 

**Critical Accounting Policies**

 

The Company’s consolidated financial statements arebased on the accounting policies used. Certain accounting polices require that estimates and assumptions bemade by management for use in the preparation of the financial statements.  Critical accounting policies are those thatare central to the presentation of the Company’s financial condition andresults and that require subjective or complex estimates by management.  The Company’s critical accounting policiesregarding Marketable Securities, and Impairment of Long-Lived Assets andGoodwill are described below.  Forinformation regarding the Company’s other critical accounting policies, see theCompany’s 2009 Annual Report on Form 10-K/A filed with the SEC on August 27,2009.

 

***Marketable Securities -***The Company’sinvestments are classified as either available-for-sale or held-to-maturity atthe time of purchase, and reassessed as of each balance sheet date.  Our marketable securities consist ofavailable-for-sale securities, and are marked-to-market based on pricesprovided by our investment advisors, with unrealized gains and temporaryunrealized losses, when material, reported as a component of othercomprehensive income, net of tax until realized.  When realized, the Company recognizes gainsand losses on the sales of the securities on a specific identification methodand includes the realized gains or losses in other income, net, in the consolidatedstatements of operations.  The Companyincludes interest, dividends, and amortization of premium or discount onsecurities classified as available-for-sale in other income, net in theconsolidated statements of operations. We also evaluate our available-for-sale securities to determine whethera decline in fair value of a security below the amortized cost basis is otherthan temporary.  Should the decline beconsidered other than temporary, we write down the cost of the security andinclude the loss in earnings. In making this determination we consider suchfactors as the reason for and significance of the decline, current economicconditions, the length of time for which there has been an unrealized loss, thetime to maturity, and other relevant information.  Available-for-sale securities are classifiedas either short-term or long-term based on management’s intention of when tosell the securities.

 

26

----

Table of Contents

 

***Impairment of Long-Lived Assets and Goodwill –***We periodically evaluate whether events or circumstances have occurredthat indicate that long-lived and indefinite-lived assets may not berecoverable or that the remaining useful life may warrant revision.  When such events or circumstances arepresent, the Company determines whether the carrying value exceeds the fairvalue as described below.

 

In accordance with ASC Topic 360, “Property, Plantand Equipment” (SFAS No. 144), the recoverability of long-lived assets areevaluated for impairment by determining whether the carrying value will berecovered through the expected undiscounted future cash flows resulting fromthe use of the asset.  In the event the sumof the expected undiscounted future cash flows is less than the carrying valueof the asset, an impairment loss equal to the excess of the asset’s carryingvalue over its fair value is recorded. The long-term nature of these assets requires the estimation of cashinflows and outflows several years into the future and only takes intoconsideration technological advances known at the time of the impairment test.

 

In accordance with ASC Topic 350, “Intangibles-Goodwilland Other” (SFAS No. 142), goodwill and other indefinite-lived intangibleassets are evaluated for impairment on an annual basis and between annual testswhenever events or circumstances indicate that the carrying value of thegoodwill or other intangible asset may exceed its fair value. We conduct ourrequired annual impairment test of goodwill and other intangible assets duringthe fourth quarter of each fiscal year.

 

To evaluate goodwill, the Company determines thecurrent fair value of the Reporting Units using a combination of “Market” and “Income”approaches.  In the Market approach, the “GuidelineCompany” method is used, which focuses on comparing the Company’s risk profileand growth prospects to reasonably similar publicly traded companies.  Key assumptions used for the GuidelineCompany method are total invested capital (“TIC”) multiples for revenues andoperating cash flows, as well as consideration of control premiums.  The TIC multiples are determined based onpublic furniture companies within our peer group, and if appropriate, recentcomparable transactions are also considered. Control premiums are determined using recent comparable transactions inthe open market. Under the Income approach, a discounted cash flow method isused, which includes a terminal value, and is based on external analystfinancial projection estimates, as well as internal financial projectionestimates prepared by management. The long-term terminal growth rateassumptions reflect our current long-term view of the market in which wecompete.  Discount rates use the weightedaverage cost of capital for companies within our peer group, adjusted forspecific company risk premium factors.

 

The fair value of our trade name, which is theCompany’s only indefinite-lived intangible asset other than goodwill, is valuedusing the relief-from-royalty method. Significant factors used in trade namevaluation are rates for royalties, future growth, and a discount factor.  Royalty rates are determined using an averageof recent comparable values.  Futuregrowth rates are based on the Company’s perception of the long-term values inthe market in which we compete, and the discount rate is determined using theweighted average cost of capital for companies within our peer group, adjustedfor specific company risk premium factors. The fair value of the trade name substantiallyexceeded the carrying value in fiscal 2009.

 

As a result of the economic downturn that began inthe fall of 2008, the Company’s revenues and operating margins were negativelyimpacted.  In response, the Companyreduced headcount, consolidated its manufacturing, retail, and logisticsfootprint and repositioned its marketing approach.  As a result of these changes, the Company’scash flow forecasts were continually updated to reflect the rapid changes inthe business and the industry.  Duringfiscal 2009, the Companydetermined that $48.4 million of goodwill in the Retail segment was consideredimpaired and fully written off. The cash flow projectionsused in its fair value evaluations are the best estimates of the Company andrequire significant management judgment.

 

27

----

Table of Contents

 

In the fiscal quarter ended June 30, 2009, theCompany performed its annual impairment test and no impairment of goodwill wasappropriate as the fair value of the Wholesale reporting unit net assetsexceeded the book value by approximately 10%. In fiscal 2010,the Company concluded for each of the first three quarters that no interimimpairment test was required.  During thenine months ended March 31, 2010, although financial results were  below management’s expectations, our sales,gross profit, operating income, net income, written orders, and otherindicators improved from the previous quarter, and our long-term outlook hasnot changed significantly.  The Company’saverage quarterly stock price increased 40% (from $12.11 for the quarter ended June 30,2009, to $16.91 for the quarter ended March 31, 2010), and cash (includingrestricted cash) and marketable securities increased to $85.2 million at March 31,2010 from $53.0 million at June 30, 2009. There can be no assurance that the outcome offuture reviews will not result in substantial impairment charges.

 

To calculate fair value of the assets describedabove, management relies on estimates and assumptions which by their naturehave varying degrees of uncertainty. Wherever possible, management thereforelooks for third party transactions as described above to provide the bestpossible support for the assumptions incorporated. Management considers severalfactors to be significant when estimating fair value including expectedfinancial outlook of the business, changes in the Company’s stock price, theimpact of changing market conditions on financial performance and expectedfuture cash flows, and other factors. Deterioration in any of these factors mayresult in a lower fair value assessment, which could lead to impairment of thelong-lived assets and goodwill of the Company.

 

**Results of Operations**

 

Our business has been severely impacted by theeconomic factors in the United States and abroad which we began to feel inearnest during our second quarter of fiscal 2009.  High unemployment, volatile capital markets,depressed housing prices and tight consumer spending all put negative stress onthe economy which continues to have a negative impact on our business.  As we work through these difficult times, wehave taken dramatic actions to significantly reduce costs in all facets of ourbusiness including closing and realigning manufacturing plants, consolidatinglogistics operations, and closing under-performing retail design centers. Theseactions have been taken with appropriate consideration for demand andmanagement believes it has retained sufficient scalable capacity.  We have also launched initiatives to increasesales, such as special savings product promotions, our designer affiliateprogram and conversion of our case goods products to custom.

 

In fiscal 2009, the Company consolidated severaloperations. Upholstery plants in Eldred, Pennsylvania and Chino, Californiawere consolidated into the Maiden, North Carolina operations. Sawmill anddimension mill production in Andover, Maine was transferred to the BeecherFalls, Vermont site.  Our remaining casegoods plants are being converted to produce custom case goods products.Wholesale distribution locations, and several retail service centers wereconsolidated. For these actions, the Company estimates pre-tax restructuring,impairment, accelerated depreciation and other related charges will ultimatelyapproximate $29 million ($23 million wholesale, $6 million retail), consistingof a $17 million impact from long-lived assets, $8 million in employeeseverance and other payroll and benefit costs, and $4 million in otherassociated costs.   In the current fiscal year, total costs were $0.2million of restructuring credits and $6.6 million in accelerated depreciationcharges for Wholesale, and $2.2 million of restructuring charges for the Retailsegment. Cumulative charges to date for these actions totaling $21.2 millionhave been classified in the Statement of Operations as restructuring andimpairment charges, and $6.6 million of accelerated depreciation was recordedin cost of sales.  Adjustments to therestructuring reserve in the current period consist primarily of increasedcosts for severance above initial estimates for both our wholesale and retailsegments, gains on the sale of equipment sold and adjustments onnon-cancellable leases.

 

In fiscal 2008, we announced a plan to consolidatethe operations of certain Ethan Allen-operated retail design centers and retailservice centers. In connection with this initiative, we permanently ceasedoperations at ten

 

28

----

Table of Contents

 

design centers and six retail service centers which,for the most part, were consolidated into other existing operations.  Costs for these actions in the current fiscalyear totaled $0.4 million, all for the Retail segment, due to non-cancellablelease adjustments and net losses on the sale of real estate. Cumulative chargesto date for these actions total $5.9 million, all of which have been classifiedin the Statement of Operations as restructuring and impairment charges of theRetail segment. Adjustments to the restructuring reserve in the current periodconsist primarily of adjustments on non-cancellable leases.

 

Our revenues are comprised of (i) wholesalesales to independently owned and Company-owned retail design centers and (ii) retailsales of Company-owned design centers. See Note 16 to our Consolidated Financial Statements for the threemonths and nine months ended March 31, 2010 and 2009 for the components ofconsolidated revenue and operating income, capital expenditures, and totalassets by segment.

 

***Quarter Ended March 31, 2010Compared to Quarter Ended March 31, 2009***

 

**Consolidatedrevenue** for the three months ended March 31, 2010 increased 5% to $147.3million, from $140.2 million for the three months ended March 31, 2009,with increases in both the wholesale and retail segments. This improvementpartly reflects the strong increase in new orders during the quarter.  We attribute this to (i) continued newmarketing initiatives including our special savings promotions, and ourinteractive web site ethanalleninc.com, (ii) the continued use of nationaltelevision media, where we emphasize to clients our interior design servicesand the full line of our quality product offerings, and (iii) the positiveeffects of efforts to reposition the retail network.  This has been partly offset by the lingeringeffects of the negative economic stresses mentioned earlier, as well as the useof highly promotional pricing strategies by the Company’s competitors.

 

**Wholesale revenue** for the third quarter of fiscal 2010increased 9.7% to $96.6 million from $88.1 million in the prior year comparableperiod.  The quarter-over-quarterincrease was primarily attributable to an increase in the incoming order ratedue to our special savings promotions during the quarter.  The increase was partially offset by thecontinued negative economic stresses for home furnishings noted throughout thecurrent period.  There was one moreindependent retail design center at March 31, 2010, which increased to 132from 131 at March 31, 2009, and thirteen fewer Ethan Allen-operated designcenters as noted below.** **There were the same number ofshipping days in the quarter both this year and last year.

 

**Retail revenue** from Ethan Allen-owned design centers forthe three months ended March 31, 2010 increased 3.7% to $107.1 millionfrom $103.3 million for the three months ended March 31, 2009.  We believe the increase in retail sales byEthan Allen-operated design centers is due to continued use of more aggressivemarketing campaigns including special savings promotions during the quarter, asevidenced by an 8.2% increase in comparable store sales and meaningfulincreases in orders.  These increaseswere partially offset by the same economic stresses experienced by thewholesale segment, a net $3.9 million decrease in new/closed store sales, and anet decrease in the number of Ethan Allen-operated design centers to 146 as of March 31,2010 as compared to 159 as of March 31, 2009. During the quarter, we closed four design centers.

 

Comparable design centers are those which have beenoperating for at least 15 months. Minimal net sales, derived from the delivery of customer orderedproduct, are generated during the first three months of operations of newlyopened (including relocated) design centers. Design centers acquired by us fromindependent retailers are included in comparable design centers sales in their13th full month of Ethan Allen-owned operations.  Quarter-over-quarter, written business ofEthan Allen-owned design centers increased 18.6% while comparable designcenters written business increased 23.7%. Over that same period, there was a 24.2% increase in wholesale orders.

 

We have made considerable investment within theretail network to strengthen the level of service, professionalism, interiordesign competence, efficiency, and effectiveness of the retail design centerpersonnel.

 

29

----

Table of Contents

 

We also believe that over time, we will benefit from(i) our repositioning of the retail network, (ii) new productintroductions, (iii) new marketing initiatives such as our special savingspromotions, and our new interior design affiliate (IDA) program, (iv) continueduse of technology including our state-of-the-art website coupled with personalservice from our design professionals, and (v) ongoing use of national televisionand shelter magazines as advertising media.

 

**Gross profit** increased during the quarter to $72.0 million from$66.1 million in the prior year comparable quarter.  The 9.0% increase in gross profit wasprimarily attributable to (i) the increase in net sales of 5.0%, with anoverall increase in shipments in both market segments, and (ii) increasedabsorption of fixed costs due to fewer manufacturing plants.  These factors were partly offset by (i) planttransition costs related to the restructuring of our manufacturing plants,ramping up upholstery production, and transition to custom case goods, and (ii) discountedsales through our special savings product promotions and sales of discontinuedproduct and floor samples.  The sales mixhad a slightly unfavorable shift with retail sales representing a lowerproportionate share of total sales in the current quarter (73%) compared to theprior year period (74%). Consolidated gross margin increased to 48.9% from47.1% in the prior year as a result, primarily, of the factors set forth above.

 

**Operating profit**, the elements of which are discussed ingreater detail below, was impacted by the following items during the threemonths ended March 31, 2010 and 2009:

 

**Operating expenses** decreased 46.8% to $74.9million, and decreased to 50.8% of sales in the current quarter from $140.8million, or 100.4% of sales in the prior year quarter.  Selling, general and administrative expenseswere down in both absolute terms and as a percent of sales due to cost cuttingactions taken.  Salary related costsdecreased due to the reduced number of employees and other cost cutting effortstaken by the Company.  During the March 2009quarter the Company recorded an impairment charge of $48.4 million due to thewrite-down of goodwill in the retail segment, and restructuring and impairmentcharges of $7.3 million for activities initiated during that quarter.

 

**Consolidated operating income (loss)** for the three month periodended March 31, 2010 was a loss of $2.8 million, or 1.9% of sales, ascompared to a loss of $74.7 million, or 53.3% of sales, for the three monthsended March 31, 2009.  Thisimprovement of $71.9 million is due mostly to the goodwill impairment andrestructuring charges in the prior year of $55.7 million not recurring in thecurrent year, cost savings realized this year and increased sales, as discussedpreviously.

 

**Wholesale operating income**for the three months ended March 31,2010 was $6.7 million, or 7.0% of sales, as compared to a loss of $6.1 million,or 6.9% of sales, in the prior year comparable quarter. The increase of $12.8million was primarily attributable to an increase in sales volume, and savingsrelating to the closure of manufacturing plants as well as restructuring andimpairment charges of $5.5 million in the prior year that did not recur in thecurrent quarter.

 

**Retail operating loss** was $10.4 million, or anegative 9.7% of sales, for the third quarter of fiscal 2010 and a loss of$71.9 million, or a negative 69.6% of sales, for the third quarter of fiscal2009.  The improvement was primarily dueto charges in the prior year for impairment of goodwill and restructuringactivities of $50.3 million not in the current period, as well as current yearcost savings due to the benefit of the cost cutting actions taken.

 

**Interest and other miscellaneous income, net** increased $0.1million from the prior year comparable quarter. The increase was related, primarily to fees incurred in the prior yearnot recurring in the current period.

 

**Interest and other related financing costs** amounted tojust under $3.0 million in both the current and prior year periods.  This amount consists, primarily, of interestexpense incurred in connection with our issuance of senior unsecured debt in September 2005.

 

30

----

Table of Contents

 

**IncomeTax Expense**for the three months ended March 31, 2010totaled a benefit of $4.1 million as compared to a benefit of $28.2 million forthe three months ended March 31, 2009. Our effective tax rate for thecurrent quarter was 82.6% compared to 36.7% in the prior year quarter. In thecurrent quarter, the effective tax rate is related to the tax benefit on thecurrent quarter loss and the expiration of certain statutes of limitationcausing certain unrecognized tax benefits to be recognized. The tax benefit ispartially offset by the foreign valuation allowance on the Canadian netoperating losses, by state valuation allowance on certain state net operatinglosses and by state income tax expense in states where the Company’ssubsidiaries file on a separate company basis.

 

**Net income (loss)** for the three months ended March 31,2010, was a loss of $0.9 million as compared to a loss of $48.7 million in theprior year comparable period.  Thisresulted in net losses per diluted share of $0.03 in the current quarter and$1.69 in the prior year quarter.

 

***Nine Months Ended March 31,2010 Compared to Nine Months Ended March 31, 2009***

 

**Consolidatedrevenue** for the nine months ended March 31, 2010 decreased 20.3% to$426.8 million, from $535.6 million for the nine months ended December 31,2009. During the period, sales continue to be affected by the negative economicstresses mentioned earlier, as well as the use of highly promotional pricingstrategies by the Company’s competitors. These factors were partially offset by (i) several new marketinginitiatives including our special savings promotions, and our new interactiveweb site ethanalleninc.com, (ii) the continued use of national televisionmedia, where we emphasize to clients our interior design services and the fullline of our quality product offerings, (iii) the positive effects ofefforts to reposition the retail network, and (iv) an increase in incomingorders during the third quarter of fiscal 2010.

 

**Wholesale revenue** for the first nine months of fiscal 2010decreased 17.5% to $262.4 million from $318.2 million in the prior yearcomparable period.  Theperiod-over-period decrease wasprimarily attributable to a decline in the incoming order rate in the first twoquarters of fiscal 2010 due to a continued soft retail environment for homefurnishings noted through most of the current period. Thesedecreases were partially offset by our special savings promotions during thequarter.  In addition, there was one more independentretail design center at March 31, 2010, which increased to 132 from 131,and thirteen fewer Ethan Allen-operated design centers as noted below. Therewere the same number of shipping days in the current nine month period boththis year and last year.

 

**Retail revenue** from Ethan Allen-owned design centers forthe nine months ended March 31, 2010 decreased 21.9% to $317.4 millionfrom $406.4 million for the nine months ended March 31, 2009.  We believe the decrease in retail sales byEthan Allen-operated design centers is due to the same soft market conditionsexperienced by the wholesale segment, as evidenced by a 20.6% decrease incomparable store sales, a net $12.1 million decrease in new/closed store sales,and a net decrease in the number of Ethan Allen-operated design centers to 146as of March 31, 2010 as compared to 159 as of March 31, 2009.  These decreases were partially offset by ourspecial savings promotions during the period, and an increase in orders duringthe current fiscal quarter.  During theperiod, we acquired one design center from an independent retailer, opened four(of which two were relocations), and closed sixteen design centers.

 

Comparable design centers are those which have beenoperating for at least 15 months. Minimal net sales, derived from the delivery of customer orderedproduct, are generated during the first three months of operations of newlyopened (including relocated) design centers. Design centers acquired by us fromindependent retailers are included in comparable design centers sales in their13th full month of Ethan Allen-owned operations.

 

Year-over-year, written orders of Ethan Allen-owneddesign centers decreased 4.8% while comparable design centers written ordersdecreased 2.4%.  Over that same period,wholesale orders decreased 7.6%.  Bothretail and wholesale written business reflect the softer retail environment forhome furnishings noted throughout the period as a result of continued negativeeconomic stresses previously discussed.

 

31

----

Table of Contents

 

We have made considerable investment within theretail network to strengthen the level of service, professionalism, interiordesign competence, efficiency, and effectiveness of the retail design centerpersonnel.  We also believe that overtime, we will benefit from (i) our repositioning of the retail network, (ii) newproduct introductions, (iii) new marketing initiatives such as our specialsavings promotions, and our new interior design affiliate (IDA) program, (iv) continueduse of technology including our state-of-the-art website coupled with personalservice from our design professionals, and (iv) ongoing use of nationaltelevision and shelter magazines as advertising media.

 

**Gross profit** decreased during the nine months to $199.4 millionfrom $279.8 million in the prior year comparable period.  The 28.7% decrease in gross profit wasprimarily attributable to (i) the reduction in net sales of 20.3%, with anoverall decrease in shipments in both market segments, (ii) lower marginpercentages within the wholesale segment due to accelerated depreciation fromclosed manufacturing operations totaling $6.6 million, under absorption ofplant overhead costs on the lower production volume, both in the first fiscalquarter, and other plant transition costs related to the restructuring of ourmanufacturing plants throughout the nine month period, and (iii) lowermargins within the retail segment for the first two fiscal quarters of 2010,due to discounted sales through our special savings promotions and sales ofdiscontinued product and floor samples. The sales mix had a slightly unfavorable shift with retail salesrepresenting a lower proportionate share of total sales in the current ninemonth period (74%) compared to the prior year (76%).  Consolidated gross margin decreased to 46.7%from 52.2% in the prior year as a result, primarily, of the factors set forthabove.

 

**Operating profit**, the elements of which are discussed ingreater detail below, was impacted by the following items during the ninemonths ended March 31, 2010 and 2009:

 

**Operating expenses** decreased 32.7% to $223.6million, and decreased to 52.4% of sales in the current quarter from $332.2million, or 62.0% of sales in the prior nine month period.  Selling, general and administrative expenseswere down in absolute terms due to cost cutting actions taken and lower salesvolume.  Salary related costs decreaseddue to the reduced number of employees and other cost cutting efforts taken bythe Company.  Advertising expenses weredown $4.8 million versus the previous year. Goodwill impairment charges of $48.4 million in the prior year did notrecur, and restructuring and impairment charges were reduced significantly asthose activities are winding down.

 

**Consolidated operating income (loss)** for the nine month periodended March 31, 2010 was a loss of $24.2 million, or a negative 5.7% ofsales, as compared to a loss of $52.4 million, or 9.8% of sales, for the ninemonths ended March 31, 2009.  Thisimprovement of $28.2 million is due to the prior year goodwill impairmentcharge which did not recur, and a decrease in period over period operatingexpenses due to restructuring activities, partly offset by a decrease in grossprofit mostly due to reduced sales, and accelerated depreciation charges due torestructuring activities, all discussed previously.

 

**Wholesale operating income** for the nine months ended March 31,2010 totaled $3.1 million, or a 1.2% of sales, as compared to $14.4 million, or4.5% of sales, in the prior year comparable period. The decrease of $11.3million was primarily attributable to a decrease in sales volume, and to planttransition costs including the $6.6 million of accelerated depreciationrelating to the closure of manufacturing plants as discussed previously.

 

**Retail operating loss** was $31.5 million, or anegative 9.9% of sales, for the first nine months of fiscal 2010 and a loss of$78.2 million, or a negative 19.2% of sales, for the comparable period offiscal 2009.  The improvement wasprimarily due to the fiscal 2009 goodwill impairment charge not in the currentperiod, as well as cost cutting actions taken. This was partly offset by reduced sales attributable to the weak retailenvironment for home furnishings.

 

32

----

Table of Contents

 

**Interest and other miscellaneous income, net** decreased $0.3million from the prior year comparable period. The decrease was due, primarily to a decrease in investment incomeresulting from lower rates of interest during the current year-to-date period.

 

**Interest and other related financing costs** amounted tojust under $9.0 million in both the current and prior year periods.  This amount consists, primarily, of interestexpense incurred in connection with our issuance of senior unsecured debt in September 2005.

 

**Income tax expense** for the nine months ended March 31,2010 totaled a benefit of $12.6 million as compared to a benefit of $22.4million for the nine months ended March 31, 2009. Our effective tax ratefor the current period was 41.6% compared to 38.6% in the prior year period. Inthe current period, the effective tax rate is related to the tax benefit on thecurrent period loss and the expiration of certain statutes of limitationcausing certain unrecognized tax benefits to be recognized.  The tax benefit is partially offset by theforeign valuation allowance on the Canadian net operating losses, by statevaluation allowance on certain state net operating losses and by state incometax expense in states where the Company’s subsidiaries file on a separatecompany basis.

 

A valuation allowance must be established fordeferred tax assets when it is more likely than not that they will not berealized. As of March 31, 2010, the Company continues to maintain avaluation allowance for the state deferred tax assets and Canadian netoperating losses in its Retail segment. After considering both positive andnegative evidence, management’s assessment is that a valuation allowance is notneeded for the Company’s other deferred tax assets.  Due to the economic times and recent losses,management will continue to assess the realizability of the tax assets based onactual and forecasted operating results on a quarterly basis, as required underASC topic 740.  It is possible during thecurrent fiscal year, that the realization of tax assets is not reasonablyassured due to a lack of available objective evidence.  Management would then record a valuationallowance against the tax assets which would result in a non-cash charge toearnings.

 

**Net income (loss)** for the nine months ended March 31,2010, was a loss of $17.8 million as compared to a loss of $35.8 million in theprior year comparable period.  Thisresulted in net losses per diluted share of $0.61 in the current period and$1.24 in the prior year period.

 

**Liquidity and Capital Resources**

 

At March 31, 2010, we held cash and cashequivalents of $71.9 million, marketable securities of $2.0 million, andrestricted cash and investments of $11.3 million.  Our principal sources of liquidity include cashand cash equivalents, marketable securities, cash flow from operations, therevolving line of credit, and borrowings.

 

The global economy continues to be unsettled, andcapital markets continue to be disrupted and volatile.  The cost and availability of funding has beenand may continue to be adversely affected by illiquid credit markets. Somelenders have reduced or, in some cases, ceased to provide funding toborrowers.  However, our lenders have notindicated to us that they would not continue to provide funding to us or nothonor or be able to fully perform their obligations under the creditfacility.  Our access to the creditfacility could also be negatively affected if operating results fall belowprescribed levels or if the assets used to determine the borrowing baseavailability fall below the total available credit under the facility.  Continued turbulence in the financial marketscould also adversely affect the cost and availability of financing to us in thefuture.

 

OnOctober 23, 2009, the Company expanded to $60 million the three-yearsenior secured asset-based revolving credit facility (“the “Facility”)established on May 29, 2009.  TheFacility provides revolving credit financing of up to $60 million, subject toborrowing base availability.  At theCompany’s option, revolving loans under the Agreement bear interest at anannual rate of either:

 

33

----

Table of Contents

 

(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) thefederal 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 averageavailability.

 

TheFacility is secured by all property owned, leased or operated by the Company inthe United States excluding any real property owned or leased by theCompany.  The Facility contains customarycovenants which may limit the Company’s ability to incur debt; engage inmergers and consolidations; make restricted payments (including dividends);sell certain assets; and make investments. The Company may make restrictedpayments (including dividends) as long as availability equals or exceeds thegreater of (i) 25% of the aggregate commitment or (ii) $12million.  If the average monthlyavailability is less than the greater of (i) 15% of the aggregatecommitment and (ii) $9 million, the Company is also required to meet a fixedcharge coverage ratio financial covenant which may not be less than 1 to 1 forany period of four consecutive fiscal quarters. The Facility also containscustomary borrowing conditions and events of default, the occurrence of whichwould entitle the lenders to accelerate the maturity of any outstandingborrowings and terminate their commitment to make future loans.

 

TheCompany has not drawn any cash advances against the facility, and has no plansto do so.  At March 31, 2010, afterexcluding the $1.2 million we had utilized in letters of credit, remainingavailability under the revolver totaled $58.8 million subject to limitationsset forth in the agreement noted above. We are in compliance with the terms andconditions of the agreement and as a result, the coverage charge ratio, orother restricted payment limitations did not apply.  As of March 31, 2010, we are incompliance with all covenants of our credit facility.

 

InSeptember 2005, we completed a private offering of $200.0 million inten-year senior unsecured notes due 2015 (the “Senior Notes”). The Senior Noteswere offered by Global and have an annual coupon rate of 5.375% with interestpayable semi-annually in arrears on April 1 and October 1 of eachyear.  We have used the net proceeds of$198.4 million to expand our retail network, invest in our manufacturing andlogistics operations, and for other general corporate purposes.

 

Duringfiscal 2010, the credit rating agencies Moody’s Corporation and Standard andPoor’s (“S&P”) lowered our corporate and senior unsecured credit ratings toBa2 and B+ respectively. Both rating services pointed to the Company’sdepressed operating performance due to lower consumer spending and a toughretail environment as reasons for the downgrades.  These changes in our credit rating had noimpact on our existing credit facilities. However, the issuer of our private label credit cards was enabled by acontract provision to demand a standby letter of credit of up to $12 million,which they have done.  The letter of creditis to be delivered by May 17, 2010. This issuance would reduce availability under the revolving creditagreement.  The Company believes it hassufficient cash and access to credit to fund operations and growth plans.

 

34

----

Table of Contents

 

A summary of net cash provided by (used in)operating, investing, and financing activities for the nine month periods endedMarch 31, 2010 and 2009 is provided below (in millions):

 
| ** **                                                | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                | ** ** | **March 31,**    | ** ** |
| ** **                                                | ** ** | **2010**              | ** ** | **2009** | ** ** |
| **Operating Activities**                                  |       |                  |       |   |   |
| Net income plus  depreciation and amortization            |       | $                     | 6.1        |   | $ | (16.5 | ) |
| Working capital                                           |       | 38.4                  |       | (2.1 | ) |
| Other (non-cash items,  long-term assets and liabilities) |       | (10.9                 | )          | 32.4 |   |
| Total provided by operating  activities                   |       | $                     | 33.6       |   | $ | 13.8 |   |
|                                                      |       |                  |       |   |   |
| **Investing Activities**                                  |       |                  |       |   |   |
| Capital expenditures                                      |       | $                     | (7.6       | ) | $ | (20.5 | ) |
| Acquisitions                                              |       | —                |       | (0.7 | ) |
| Asset sales                                               |       | 10.3                  |       | 6.3 |   |
| Increase in restricted cash  and investments              |       | (11.3                 | )          | — |   |
| Purchases of marketable  securities                       |       | (2.0                  | )          | — |   |
| Other                                                     |       | —                |       | (0.2 | ) |
| Total provided by (used in)  investing activities         |       | $                     | (10.6      | ) | $ | (15.1 | ) |
|                                                      |       |                  |       |   |   |
| **Financing Activities**                                  |       |                  |       |   |   |
| Payment of dividends                                      |       | $                     | (4.4       | ) | $ | (20.7 | ) |
| Payment of deferred  financing costs                      |       | (0.2                  | )          | (0.5 | ) |
| Total provided by (used in)  financing activities         |       | $                     | (4.6       | ) | $ | (21.2 | ) |

 

***Operating Activities***

 

Compared to the same period in fiscal year 2009,cash provided by operating activities increased $19.8 million.  This occurred due to the $40.5 millionimprovement in cash generated from working capital (accounts receivable,inventories, prepaid and other current assets, customer deposits, payables,accrued expenses, and other current liabilities) resulting from an increase incustomer deposits, inventory initiatives taken and income tax refunds, offsetby decreases in accounts receivable and accrued expenses.  Also contributing to the increase was areduction in the net loss of $18.0 million (including $6.6 million indepreciation charges due to restructuring activities).  The $43.3 million year over year change inother non-cash items is mostly a result of a $48.4 million non-cash goodwillimpairment charge during the prior fiscal year.

 

***Investing Activities***

 

During the quarter ended March 31, 2010, weinitiated two actions expected to improve our return on marketableinvestments.  We transferred $11.3million of cash into a restricted cash and investment account and cancelled aletter of credit for the same amount, on which we had been paying interest.  We also placed excess available cash with aninvestment advisor to improve yields on that investment. The funds in bothaccounts will be invested in highly rated money market mutual funds, U.S.Treasuries and U.S. government agency fixed income instruments with maturitiesof two years or less.  As compared to thesame period in fiscal year 2009, cash used in investing activities decreased$4.5 million during the nine months ended March 31, 2010 due, primarily,to a reduction in cash utilized to fund capital expenditures and acquisitionsand an increase in proceeds from the sale of assets.  We anticipate that cash from operations willbe sufficient to fund future capital expenditures.

 

35

----

 

Table of Contents

 

***Financing Activities***

 

As compared to the same period in fiscal year 2009,cash used in financing activities decreased $16.6 million during the ninemonths ended March 31, 2010, primarily as a result of a decrease individend payments.  The Company hascontinuously paid dividends every quarter since 1996.  On November 16, 2009, the Board declareda dividend of $0.05 per common share, payable on January 25, 2010, to shareholdersof record as of January 11, 2010. On January 19, 2010, the Board declared a dividend of $0.05 percommon share, payable on April 26, 2010, to shareholders of record as of April 9,2010.  On April 20, 2010, the Boarddeclared a dividend of $0.05 per common share, payable on July 26, 2010,to shareholders of record as of July 9, 2010.  If adverse economic conditions continue, theCompany may reduce our quarterly dividends.

 

As of March 31, 2010, our outstanding debttotaled $203.2 million, the current and long-term portions of which amounted toless than $0.1 million and $203.2 million, respectively.  The aggregate scheduled maturities oflong-term debt for each of the next five fiscal years are: less than $0.1million in fiscal 2010, $3.9 million in fiscal 2011 and less than $0.1 millionin fiscal 2012 and 2013.  The balance ofour long-term debt ($199.2 million) matures in fiscal years 2014 andthereafter.

 

There has been no material change to the amount ortiming of cash payments related to our outstanding contractual obligations asset forth in Part II, Item 7 – *Management’s Discussionand Analysis of Financial Condition and Results of Operation* of ourAnnual Report on Form 10-K/A for the year ended June 30, 2009 asfiled with the Securities and Exchange Commission on August 27, 2009.

 

We believe that our cash flow from operations,together with our other available sources of liquidity, will be adequate tomake all required payments of principal and interest on our debt, to permitanticipated capital expenditures, and to fund working capital and other cashrequirements.  As of March 31, 2010,we had working capital of $129.8 million compared to $140.0 million at December31, 2010, a decrease of $10.2 million. Our transfer of cash from a current asset to a long-term restricted cashand investment account during the quarter decreased working capital by $11.3million (see Notes 4 and 10).  TheCompany had a current ratio of 2.0 to 1 at March 31, 2010.

 

In addition to using available cash to fund changesin working capital, necessary capital expenditures, acquisition activity, therepayment of debt, and the payment of dividends, we have been authorized by ourBoard of Directors to repurchase our common stock, from time to time, eitherdirectly or through agents, in the open market at prices and on termssatisfactory to us. All of our common stock repurchases and retirements arerecorded as treasury stock and result in a reduction of shareholders’ equity.

 

There were no repurchases during the nine monthsended March 31, 2010 and 2009.  Asof March 31, 2010, we had a remaining Board authorization to repurchase1,567,669 shares.

 

**Off-Balance Sheet Arrangementsand Other Commitments, Contingencies and Contractual Obligations**

 

Except as indicated below, we do not utilize oremploy any off-balance sheet arrangements, including special-purpose entities,in operating our business.  As such, wedo not maintain any (i) retained or contingent interests, (ii) derivativeinstruments (other than as specified below), or (iii) variable interestswhich could serve as a source of potential risk to our future liquidity,capital resources and results of operations.

 

In connection with the issuance of the Senior Notes,Global, in July and August 2005, entered into six separate forwardcontracts to hedge the risk-free interest rate associated with $108.0 millionof the related debt in order to mitigate the negative impact of interest ratefluctuations on earnings, cash flows and equity. The forward contracts wereentered into with a major banking institution thereby mitigating the risk ofcredit loss. Upon issuance of the Senior Notes in September 2005, therelated forward contracts were settled. At the present time we have no currentplans to engage in further hedging activities.

 

36

----

Table of Contents

 

We may, from time to time in the ordinary course ofbusiness, provide guarantees on behalf of selected affiliated entities orbecome contractually obligated to perform in accordance with the terms andconditions of certain business agreements. The nature and extent of theseguarantees and obligations may vary based on our underlying relationship withthe benefiting party and the business purpose for which the guarantee orobligation is being provided. Details of those arrangements for which we act asguarantor or obligor are provided below.

 

**Retailer-Related Guarantees**

 

***Independent Retailer Credit Facility***

 

On June 11, 2009, we obligated ourselves, onbehalf of one of our independent retailers, with respect to a $0.5 millioncredit facility (the “AmendedCredit Facility”). The Company had previously guaranteedon April 9, 2009, on behalf of the independent retailer, a $0.9 millioncredit facility (the “Credit Facility”). This obligation requires us, in the event of the retailer’s defaultunder the Amended Credit Facility, to repurchase the retailer’s inventory atcost, applying such purchase price to the retailer’s outstanding indebtednessunder the Amended Credit Facility. Our obligation remains in effect for thelife of the term loan.  The agreementexpires in April 2011.  The maximumpotential amount of future payments (undiscounted) that we could be required tomake under this obligation is limited to the lesser of the cost of the retailer’sinventory or the amount outstanding under the Amended Credit Facility at thetime of default (subject to pre-determined lending limits based on the value ofthe underlying inventory) and, as such, is not an estimate of future cashflows.  No specific recourse orcollateral provisions exist beyond the right for the Company to take title tothe repurchased inventory. We anticipate that the repurchased inventory couldsubsequently be sold through our retail design center network.

 

As of March 31, 2010, the amount outstandingunder the Amended Credit Facility totaled approximately $0.5 million.  Based on the underlying creditworthiness ofthe retailer, we believe this obligation will expire without requiring fundingby us.  Our non-contingent obligationsunder this arrangement as a result of modifications made to the Credit Facilitysubsequent to January 1, 2003 are not material.

 

***Ethan Allen Consumer Credit Program***

 

Theterms and conditions of our consumer credit program, which is financed andadministered by a third-party financial institution on a non-recourse basis toEthan Allen, are set forth in an agreement between us and that financialservice provider (the “Program Agreement”). On February 16, 2010, theCompany modified the Program Agreement to comply with recent changes in Lawsand made certain other changes to fees payable to the service provider.  Any independent retailer choosing toparticipate in the consumer credit program is required to enter into a separateagreement with that same third-party financial institution which sets forth theterms and conditions under which the retailer is to perform in connection withits offering of consumer credit to its customers (the “Retailer Agreement”). Wehave obligated ourselves on behalf of any independent retailer choosing toparticipate in our consumer credit program by agreeing, in the event ofdefault, breach, or failure of the independent retailer to perform under such RetailerAgreement, to take on certain responsibilities of the independent retailer,including, but not limited to, delivery of goods and reimbursement of customerdeposits. Customer receivables originated by independent retailers remainnon-recourse to Ethan Allen. Our obligation remains in effect for the term ofthe Program Agreement which expires in July 2012. While the maximumpotential amount of future payments (undiscounted) that we could be required tomake under this obligation is indeterminable, recourse provisions exist thatwould enable us to recover, from the independent retailer, any amount paid orincurred by us related to our performance. Based on the underlyingcreditworthiness of our independent retailers, including their historicalability to satisfactorily perform in connection with the terms of our consumercredit program, we believe this obligation will expire without requiringfunding by us.

 

37

----

Table of Contents

 

**Product Warranties**

 

Our products, including our case goods, upholsteryand home accents, generally carry explicit product warranties that extend fromone to ten years and are provided based on terms that are generally accepted inthe industry.  All of our domesticindependent retailers are required to enter into, and perform in accordancewith the terms and conditions of, a warranty service agreement. We recordprovisions for estimated warranty and other related costs at time of sale basedon historical warranty loss experience and make periodic adjustments to thoseprovisions to reflect actual experience. On rare occasion, certain warranty andother related claims involve matters of dispute that ultimately are resolved bynegotiation, arbitration or litigation. In certain cases, a material warranty issue may arise which is beyondthe scope of our historical experience. We provide for such warranty issues asthey become known and are deemed to be both probable and estimable. It isreasonably possible that, from time to time, additional warranty and otherrelated claims could arise from disputes or other matters beyond the scope ofour historical experience. As of March 31, 2010, our product warrantyliability totaled $0.8 million.

 

**Business Outlook**

 

Stresses in the U.S. economy from continued highunemployment, volatile capital markets, depressed housing prices and tightconsumer spending continue to have a negative impact on our business.  We remain cautiously optimistic about ourlong term outlook, as current business conditions have marginally improved inthe nine months ended March 31, 2010. We cannot predict, with any degree of certainty when these difficulteconomic conditions will improve meaningfully.

 

As macro-economic factors change, it is alsopossible that our costs associated with production (including raw materials,labor and utilities), distribution (including freight and fuel charges), andretail operations (including compensation, benefits, delivery, warehousing,occupancy, and advertising expenses) may increase.  We may also experience productiondifficulties as we increase capacity of our manufacturing plants and convertour case goods to custom.  We cannotreasonably predict when, or to what extent, such events may occur or whateffect, if any, such events may have on our consolidated financial condition orresults of operations.

 

The home furnishings industry remains extremelycompetitive with respect to both the sourcing of products and the retail saleof those products. Domestic manufacturers continue to face pricing pressures asa result of the manufacturing capabilities and significant manufacturingcapacities developed during recent years in other countries, specificallywithin Asia. In response to these pressures, a large number of U.S. furnituremanufacturers and retailers, including the Company, source significantly fromoverseas in an attempt to maintain a competitive advantage and retain marketshare. We continue to believe that a balanced approach to product sourcing,which includes the domestic manufacture of certain product offerings coupledwith the import of other selected products, provides the greatest degree offlexibility and is the most effective approach to ensuring that acceptablelevels of quality, service and value are attained.

 

We believe that our existing business model whichincludes: (i) an established brand with a broad offering of Companydesigned quality products; (ii) a comprehensive complement of homedecorating solutions and complimentary interior design services and (iii) avertically-integrated operating structure will position us well to takeadvantage of improved economic conditions when they occur.

 

In addition, we believe that our retail strategy,which involves (i) a continued focus on providing a wide array of productsolutions including custom upholstery and custom case goods products andsuperior customer service coupled with state-of-the-art technology in our newlylaunched website, (ii) the opening of new or relocated design centers inmore prominent locations, while encouraging independent retailers to do thesame, and (iii) the development of a more professional structure withinour retail network, provides an opportunity to grow our business when the currentdifficult economic conditions improve.

 

38

----

Table of Contents

 

**Item 3. Quantitative andQualitative Disclosures About Market Risk**

 

There have been no material changes to the marketrisks disclosed in our Annual Report on Form 10-K/A for the year ended June 30,2009 as filed with the Securities and Exchange Commission on August 27,2009.

 

**Item 4. Controls and Procedures**

 

**Management’s Report on DisclosureControls and Procedures**

 

Our management, including the Chairman of the Boardand Chief Executive Officer (“CEO”) and the Vice President-Finance (“VPF”),conducted an evaluation of the effectiveness of disclosure controls andprocedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of theend of the period covered by this report. Based on such evaluation, the CEO andVPF have concluded that, as of March 31, 2010, our disclosure controls andprocedures were effective in ensuring that material information relating to us(including our consolidated subsidiaries), which is required to be disclosed byus 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’srules and forms, and (ii) accumulated and communicated to management,including the CEO and VPF, as appropriate, to allow timely decisions regardingrequired disclosure.

 

**Changes in Internal Control overFinancial Reporting**

 

There have been no changes in our internal controlover financial reporting (as such term is defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) during the fiscal quarter ended March 31,2010 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**PART II - OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

There have been no material changes to the mattersdiscussed in Part I, Item 3 - *Legal Proceedings*in our Annual Report on Form 10-K/A for the year ended June 30, 2009as filed with the Securities and Exchange Commission on August 27, 2009.

 

**Item 1A. Risk Factors**

 

There have been no material changes to the marketrisks disclosed in our Annual Report on Form 10-K/A for the year ended June 30,2009 as filed with the Securities and Exchange Commission on August 27,2009.

 

**Item 2. Unregistered Sales ofEquity Securities and Use of Proceeds**

 

***Issuer Purchases of EquitySecurities***

 

There were no purchases made by or on behalf of theCompany or any affiliated purchaser (as defined in Rule 10b-18(a)(3) underthe Exchange Act) of our common stock during the three months ended March 31,2010.  The maximum number of shares thatmay yet be purchased under the plans or program is 1,567,669 shares.

 

**Item 3. Defaults Upon SeniorSecurities**

 

Not applicable.

 

**Item 4. Reserved**

 

39

----

Table of Contents

 

**Item 5. Other Information**

 

Not applicable.

 

**Item 6. Exhibits**

 
| **Exhibit Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                   |
|-------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10(e)-1                 |       | First Amendment to Second Amended and Restated Private Label Consumer  Credit Card Program Agreement dated July 25, 2008.                                                                                                                                                                                                                                    |
| 10(e)-2                 |       | Second Amendment to Second Amended and Restated Private Label  Consumer Credit Card Program Agreement dated February 16, 2010 between  Ethan Allen Global, Inc., Ethan Allen Retail, Inc. and GE Money  Bank (confidential treatment requested under Rule 24b-2 as to certain  portions which are omitted and filed separately with the SEC). |
| 31.1                    |       | Rule 13a-14(a)                                                                                                                                                                                                                                                                                                                                               | Certification of Principal Executive Officer |
| 31.2                    |       | Rule 13a-14(a)                                                                                                                                                                                                                                                                                                                                               | Certification of Principal Financial Officer |
| 32.1                    |       | Section 1350                                                                                                                                                                                                                                                                                                                                                 | Certification of Principal Executive Officer |
| 32.2                    |       | Section 1350                                                                                                                                                                                                                                                                                                                                                 | Certification of Principal Financial Officer |

 

40

----

Table of Contents

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 

ETHAN ALLEN INTERIORS INC.

(Registrant)

 

 
| DATE:  May 10, 2010 | BY:                                                             | /s/ M. Farooq Kathwari |
|-------------------------------|-----------------------------------------------------------------|------------------------|
|                          | Farooq Kathwari                                                 |
|                          | Chairman, President and Chief Executive Officer                 |
|                          | (Principal Executive Officer)                                   |
|                          |                                                            |                   |
|                          |                                                            |                   |
| DATE:  May 10, 2010 | BY:                                                             | /s/ David R. Callen    |
|                          | David R. Callen                                                 |
|                          | Vice President, Finance & Treasurer                    |
|                          | (Principal Financial Officer and Principal  Accounting Officer) |

 

41

----

Table of Contents

 

EXHIBITINDEX

 
| **Exhibit  Number** | ** ** | **Exhibit**                                                                                                                                                                                                                                                                                                                                                       |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10(e)-1             |       | First Amendment to Second Amended and Restated Private Label Consumer  Credit Card Program Agreement dated July 25, 2008.                                                                                                                                                                                                                                         |
| 10(e)-2             |       | Second Amendment to Second Amended and Restated Private Label  Consumer Credit Card Program Agreement dated February 16, 2010 between  Ethan Allen Global, Inc., Ethan Allen Retail, Inc. and GE Money  Bank (confidential treatment requested under Rule 24b-2 as to certain  portions which are omitted and filed separately with the SEC). |
| 31.1                |       | Rule 13a-14(a) Certification of Principal Executive Officer                                                                                                                                                                                                                                                                                             |
| 31.2                |       | Rule 13a-14(a) Certification of Principal Financial Officer                                                                                                                                                                                                                                                                                             |
| 32.1                |       | Section 1350    Certification of Principal  Executive Officer                                                                                                                                                                                                                                                                            |

 

42

----