Table ofContents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

 

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

 

**For the quarterly period ended September 30,2010**

 

**OR**

 

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

 

**For the transition period from                    to**

 

**Commission File Number:  1-11692**

 

**Ethan Allen Interiors Inc.**

(Exact name of registrant as specified in its charter)

 

| **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,including area code)

 

**N/A**

(Former name, former address and former fiscal year, if changed sincelast report)

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. x Yes  o No

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T during the preceding 12 months (or such shorter period that theregistrant was required to submit and post such files). o Yes  o No

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See the definitions of “largeaccelerated filer,” “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 mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act). o Yes x No

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date.

 

AtOctober 29, 2010, there were 28,728,575 shares of Class A CommonStock, par value $.01, outstanding.

 

 

 

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Table of Contents

 

**TABLE OF CONTENTS**

 
| **Item**                                      | ** **                                                                                                                                                          | **Page** |
|-----------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
|                                          |                                                                                                                                                                |     |
| **Part I  — Financial Information** |
|                                          |                                                                                                                                                                |     |
| 1.                                            | Financial  Statements as of September 30, 2010 (unaudited) and June 30, 2010  and for the three months ended September 30, 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                                                                         | 21       |
|                                          |                                                                                                                                                                |     |
| 3.                                            | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                         | 28       |
|                                          |                                                                                                                                                                |     |
| 4.                                            | Controls and  Procedures                                                                                                                                            | 29       |
|                                          |                                                                                                                                                                |     |
| **Part II  - Other Information**         |
|                                          |                                                                                                                                                                |     |
| 1.                                            | Legal Proceedings                                                                                                                                                   | 29       |
|                                          |                                                                                                                                                                |     |
| 1A.                                           | Risk Factors                                                                                                                                                        | 29       |
|                                          |                                                                                                                                                                |     |
| 2.                                            | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                                        | 29       |
|                                          |                                                                                                                                                                |     |
| 3.                                            | Defaults  Upon Senior Securities                                                                                                                                    | 30       |
|                                          |                                                                                                                                                                |     |
| 5.                                            | Other Information                                                                                                                                                   | 30       |
|                                          |                                                                                                                                                                |     |
| 6.                                            | Exhibits                                                                                                                                                            | 30       |
|                                          |                                                                                                                                                                |     |
|                                          | Signatures                                                                                                                                                          | 31       |

 

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Table of Contents

 

**PART I - FINANCIALINFORMATION**

**Item 1. Financial Statements**

**ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES**

**Consolidated Balance Sheets**

(In thousands, except share data)

 
| ** **                                                                                                                                                                         | ** ** | **September 30, 2010** | ** ** | **June 30, 2010** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                         | ** ** | **(unaudited)**                  | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                                         |       |                             |       |                        |       |
| Current assets:                                                                                                                                                                    |       |                             |       |                        |       |
| Cash and cash equivalents                                                                                                                                                          |       | $                                | 62,728     |                        | $          | 73,852 |   |
| Marketable securities (note 5)                                                                                                                                                     |       | 11,671                           |       | 11,075                      |       |
| Accounts receivable, less allowance for doubtful accounts of $1,158  at September 30, 2010 and $1,160 at June 30, 2010                                                   |       | 16,484                           |       | 17,105                      |       |
| Inventories (note 6)                                                                                                                                                               |       | 138,518                          |       | 134,040                     |       |
| Prepaid expenses and other current assets                                                                                                                                          |       | 26,565                           |       | 23,620                      |       |
| Total current assets                                                                                                                                                               |       | 255,966                          |       | 259,692                     |       |
|                                                                                                                                                                               |       |                             |       |                        |       |
| Property, plant and equipment, net                                                                                                                                                 |       | 302,095                          |       | 305,747                     |       |
| Goodwill and other intangible assets (notes 8 and 9)                                                                                                                               |       | 45,128                           |       | 45,128                      |       |
| Restricted cash and investments (note 4)                                                                                                                                           |       | 16,329                           |       | 17,318                      |       |
| Other assets                                                                                                                                                                       |       | 3,495                            |       | 3,892                       |       |
| Total assets                                                                                                                                                                       |       | $                                | 623,013    |                        | $          | 631,777 |   |
|                                                                                                                                                                               |       |                             |       |                        |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                      |       |                             |       |                        |       |
| Current liabilities:                                                                                                                                                               |       |                             |       |                        |       |
| Current maturities of long-term debt (note 10)                                                                                                                                     |       | $                                | 3,899      |                        | $          | 3,898 |   |
| Customer deposits                                                                                                                                                                  |       | 51,111                           |       | 52,605                      |       |
| Accounts payable                                                                                                                                                                   |       | 20,422                           |       | 23,952                      |       |
| Accrued compensation and benefits                                                                                                                                                  |       | 24,678                           |       | 28,353                      |       |
| Accrued expenses and other current liabilities (note 7)                                                                                                                            |       | 40,377                           |       | 36,934                      |       |
| Total current liabilities                                                                                                                                                          |       | 140,487                          |       | 145,742                     |       |
|                                                                                                                                                                               |       |                             |       |                        |       |
| Long-term debt (note 10)                                                                                                                                                           |       | 197,042                          |       | 199,369                     |       |
| Other long-term liabilities                                                                                                                                                        |       | 18,060                           |       | 19,123                      |       |
| Deferred income taxes                                                                                                                                                              |       | 8,956                            |       | 9,084                       |       |
| Total liabilities                                                                                                                                                                  |       | 364,545                          |       | 373,318                     |       |
|                                                                                                                                                                               |       |                             |       |                        |       |
| Shareholders’ equity:                                                                                                                                                         |       |                             |       |                        |       |
| Class A common stock, par value $.01, 150,000,000 shares  authorized; 48,347,607 shares issued at September 30, 2010 and  48,346,607 shares issued at June 30, 2010 |       | 483                              |       | 483                         |       |
| Class B common stock, par value $.01, 600,000 shares authorized;  no shares issued and outstanding at September 30, 2010 and June 30,  2010                         |       | —                           |       | —                      |       |
| Preferred stock, par value $.01, 1,055,000 shares authorized; no  shares issued and outstanding at September 30, 2010 and June 30,  2010                                 |       | —                           |       | —                      |       |
| Additional paid-in capital                                                                                                                                                         |       | 358,953                          |       | 358,722                     |       |
|                                                                                                                                                                               |       | 359,436                          |       | 359,205                     |       |
| Less: Treasury stock (at cost), 19,619,032 shares at  September 30, 2010 and 19,414,746 shares at June 30, 2010                                                          |       | (584,119                         | )          | (581,331                    | )          |
| Retained earnings                                                                                                                                                                  |       | 481,723                          |       | 479,341                     |       |
| Accumulated other comprehensive income (note 14)                                                                                                                                   |       | 1,428                            |       | 1,244                       |       |
| Total shareholders’ equity                                                                                                                                                    |       | 258,468                          |       | 258,459                     |       |
| Total liabilities and shareholders’ equity                                                                                                                                    |       | $                                | 623,013    |                        | $          | 631,777 |   |

 

See accompanying notes to consolidated financial statements.

 

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**ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES**

**Consolidated Statements of Operations (Unaudited)**

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

** **
| ** **                                            | ** ** | **Three months ended  September 30,** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                            | ** ** | **2010**                                             | ** ** | **2009** | ** ** |
| Net sales                                             |       | $                                                    | 164,841    |   | $ | 136,190 |   |
| Cost of sales                                         |       | 82,460                                               |       | 77,881 |   |
| Gross profit                                          |       | 82,381                                               |       | 58,309 |   |
|                                                  |       |                                                 |       |   |   |
| Operating expenses:                                   |       |                                                 |       |   |   |
| Selling                                               |       | 39,327                                               |       | 35,934 |   |
| General and administrative                            |       | 37,443                                               |       | 37,651 |   |
| Restructuring and impairment charge , net (note 7)    |       | 225                                                  |       | 812 |   |
| Total operating expenses                              |       | 76,995                                               |       | 74,397 |   |
|                                                  |       |                                                 |       |   |   |
| Operating income (loss)                               |       | 5,386                                                |       | (16,088 | ) |
| Interest and other miscellaneous income, net          |       | 3,157                                                |       | 797 |   |
| Interest and other related financing costs (note  10) |       | 2,974                                                |       | 2,981 |   |
|                                                  |       |                                                 |       |   |   |
| Income (loss) before income taxes                     |       | 5,569                                                |       | (18,272 | ) |
|                                                  |       |                                                 |       |   |   |
| Income tax expense (benefit) (note 3)                 |       | 1,756                                                |       | (4,693 | ) |
|                                                  |       |                                                 |       |   |   |
| Net income (loss)                                     |       | $                                                    | 3,813      |   | $ | (13,579 | ) |
|                                                  |       |                                                 |       |   |   |
| Per share data (note 13):                             |       |                                                 |       |   |   |
| Basic earnings per common share:                      |       |                                                 |       |   |   |
| Net income (loss) per basic share                     |       | $                                                    | 0.13       |   | $ | (0.47 | ) |
| Basic weighted average common shares                  |       | 28,779                                               |       | 28,926 |   |
| Diluted earnings per common share:                    |       |                                                 |       |   |   |
| Net income (loss) per diluted share                   |       | $                                                    | 0.13       |   | $ | (0.47 | ) |
| Diluted weighted average common shares                |       | 28,950                                               |       | 28,926 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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**ETHAN ALLEN INTERIORS INC.AND SUBSIDIARIES**

**ConsolidatedStatements of Cash Flows (Unaudited)**

(In thousands)

 
| ** **                                                                         | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                         | ** ** | **September 30,**           | ** ** |
| ** **                                                                         | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| Operating activities:                                                              |       |                             |       |   |   |
| Net income (loss)                                                                  |       | $                                | 3,813      |   | $ | (13,579 | ) |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                             |       |   |   |
| Depreciation and amortization                                                      |       | 5,607                            |       | 12,697 |   |
| Compensation expense related to share-based awards                                 |       | 231                              |       | 523 |   |
| Provision (benefit) for deferred income taxes                                      |       | (6                               | )          | (5,197 | ) |
| Restructuring and impairment charge (benefit), net                                 |       | —                           |       | 266 |   |
| Loss (gain) on disposal of property, plant and  equipment                          |       | 56                               |       | (470 | ) |
| Other                                                                              |       | (93                              | )          | 55 |   |
| Change in assets and liabilities, net of the  effects of acquired businesses:      |       |                             |       |   |   |
| Accounts receivable                                                                |       | 621                              |       | 33 |   |
| Inventories                                                                        |       | (4,478                           | )          | 9,858 |   |
| Prepaid and other current assets                                                   |       | (3,001                           | )          | 6,427 |   |
| Other assets                                                                       |       | 227                              |       | 186 |   |
| Customer deposits                                                                  |       | (1,494                           | )          | 7,194 |   |
| Accounts payable                                                                   |       | (941                             | )          | (1,122 | ) |
| Accrued expenses and other current liabilities                                     |       | (360                             | )          | (332 | ) |
| Other long-term liabilities                                                        |       | (1,063                           | )          | 456 |   |
| Net cash provided by (used in) operating  activities                               |       | (881                             | )          | 16,995 |   |
|                                                                               |       |                             |       |   |   |
| Investing activities:                                                              |       |                             |       |   |   |
| Proceeds from the disposal of property,  plant & equipment                |       | 57                               |       | 5,935 |   |
| Capital expenditures                                                               |       | (1,504                           | )          | (2,488 | ) |
| Decrease in restricted cash and investments                                        |       | 989                              |       | — |   |
| Purchases of marketable securities                                                 |       | (613                             | )          | — |   |
| Other                                                                              |       | 18                               |       | 6 |   |
| Net cash provided by (used in) investing  activities                               |       | (1,053                           | )          | 3,453 |   |
|                                                                               |       |                             |       |   |   |
| Financing activities:                                                              |       |                             |       |   |   |
| Payments on long-term debt                                                         |       | (2,296                           | )          | (10 | ) |
| Purchase and retirements of company stock                                          |       | (5,377                           | )          | — |   |
| Payment of deferred financing costs                                                |       | —                           |       | (22 | ) |
| Payment of cash dividends                                                          |       | (1,438                           | )          | (1,448 | ) |
| Net cash used in financing activities                                              |       | (9,111                           | )          | (1,480 | ) |
| Effect of exchange rate changes on cash                                            |       | (79                              | )          | 524 |   |
| Net increase (decrease) in cash & cash  equivalents                       |       | (11,124                          | )          | 19,492 |   |
| Cash & cash equivalents - beginning of  period                            |       | 73,852                           |       | 52,960 |   |
| Cash & cash equivalents - end of period                                   |       | $                                | 62,728     |   | $ | 72,452 |   |

 

See accompanying notes to consolidated financial statements.

 

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**ETHAN ALLEN INTERIORS INC.AND SUBSIDIARIES**

**ConsolidatedStatements of Shareholders’ Equity**

**Three  months ended September 30, 2010**

**(Unaudited)**

**(In thousands, exceptshare data)**

 
| ** **                                             | ** ** | **Common  Stock** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Treasury  Stock** | ** ** | **Accumulated  Other  Comprehensive  Income** | ** ** | **Retained  Earnings** | ** ** | **Total** | ** ** |
|--------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|---------------------|------------|-----------------------------------------------|------------|------------------------|------------|-----------|------------|
| Balance at June 30, 2010                          |       | $                 | 483        |                             | $          | 358,722             |       | $                                             | (581,331   | )                      | $          | 1,244     |       | $ | 479,341 |   | $ | 258,459 |   |
|                                                   |       |              |       |                             |       |                |       |                                          |       |                   |       |      |       |
| Share-based compensation expense (note 12)             |       | —            |       | 231                              |       | —              |       | —                                        |       | —                 |       | 231       |       |
|                                                   |       |              |       |                             |       |                |       |                                          |       |                   |       |      |       |
| Purchase/retirement of 204,286 shares of company stock |       | —            |       | —                           |       | (2,788              | )          | —                                        |       | —                 |       | (2,788    | )          |
|                                                   |       |              |       |                             |       |                |       |                                          |       |                   |       |      |       |
| Dividends declared on common stock                     |       | —            |       | —                           |       | —              |       | —                                        |       | (1,431                 | )          | (1,431    | )          |
|                                                   |       |              |       |                             |       |                |       |                                          |       |                   |       |      |       |
| Other comprehensive income (note 14):                  |       |              |       |                             |       |                |       |                                          |       |                   |       |      |       |
| Currency translation adjustments                       |       | —            |       | —                           |       | —              |       | 153                                           |       | —                 |       | 153       |       |
| Unrealized gain (loss) on investments                  |       | —            |       | —                           |       | —              |       | 17                                            |       | —                 |       | 17        |       |
| Loss on derivatives, net of tax and other              |       | —            |       | —                           |       | —              |       | 14                                            |       | —                 |       | 14        |       |
| Net income (loss)                                      |       | —            |       | —                           |       | —              |       | —                                        |       | 3,813                  |       | 3,813     |       |
| Total comprehensive income (loss)                      |       |              |       |                             |       |                |       |                                          |       |                   |       | 3,997     |       |
|                                                   |       |              |       |                             |       |                |       |                                          |       |                   |       |      |       |
| Balance at September 30, 2010                     |       | $                 | 483        |                             | $          | 358,953             |       | $                                             | (584,119   | )                      | $          | 1,428     |       | $ | 481,723 |   | $ | 258,468 |   |

 

See accompanying notes to consolidated financial statements.

 

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**ETHAN ALLEN INTERIORS INC.AND SUBSIDIARIES**

**Notesto Consolidated Financial Statements (Unaudited)**

 

**(1)      Basis of Presentation and 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 Accountings Standards Board (“FASB”)released additional guidance on Accounting Standards Codification Topic (“ASC”)810, “Consolidation” which revised previous guidance applicable to variableinterest entities (“VIEs”). ASC 810 requires ongoing assessments of whether anenterprise is the primary beneficiary of a VIE, as opposed to reconsiderationonly when specific events occurred, as under former rules. The new guidancealso replaced the quantitative approach previously required for determining theprimary beneficiary of a VIE with a qualitative approach, and changes somedisclosure requirements. We have adopted these provisions effective July 1,2010, and there was no significant impact on our financial statements andresults of operations.

 

**(2)      Interim Financial Presentation**

 

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 threemonths ended September 30, 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-Kfor the year ended June 30, 2010. 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.

 

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**ETHAN ALLEN INTERIORS INC.AND SUBSIDIARIES**

**Notes to ConsolidatedFinancial Statements (Unaudited)**

 

The Company’s consolidated effective tax rate was 31.5% and 25.7% forthe three months ended September 30, 2010 and 2009 respectively. In thecurrent quarter, the effective tax rate is related to the tax expense on thecurrent quarter’s net income increased by current quarter interest expense onuncertain tax positions and partially offset by a reduction in valuationallowance driven primarily by utilization of certain deferred tax assets.

 

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 Companyis subject to examination by the taxing authorities in such major jurisdictionsas Canada, Mexico and the U.S. As of September 30, 2010, certainsubsidiaries of the Company are currently under audit from 2001 through 2007 inthe U.S. It is reasonably possible that some of these audits may be completedduring the next twelve months.   It isreasonable to expect that various issues relating to uncertain tax benefitswill be resolved within the next twelve months as exams are completed or asstatutes expire and will impact the effective tax rate.

 

A full valuation allowance was established as of June 30, 2010since the Company had a three year cumulative loss. As of September 30,2010, the Company remains in a three year cumulative loss and the fullvaluation allowance remains in place. Due to the economic times and recentlosses and after considering both positive and negative evidence, management’sassessment is that realization of tax assets is not reasonably assured due to alack of available objective evidence. Management will continue to assess therealizability of the tax assets based on actual and forecasted operatingresults on a quarterly basis.

 

**(4)      Restricted Cash and Investments**

 

During fiscal 2010, we transferred $11.3 million as collateral for ourworkmen’s compensation and other insurance liabilities previously secured byletters of credit, and $6.0 million as collateral for our private label creditcard issuer to ensure funding for delivery of products sold, into tworestricted investment accounts.  During thecurrent quarter, $1.0 million of the collateral for workmen’s compensationliabilities was released by our insurance carrier due to a reduction inprojected reserves.  Both restrictedinvestment accounts, which can be invested by us in money market mutual funds,and U.S. Treasuries and U.S. Government agency fixed income instruments withmaturities of two years or less, cannot be withdrawn without the prior writtenconsent of the secured party.  Theserestricted investments are classified as long-term assets because they are notexpected to be used within one year to fund operations.  The balance is carried at cost, whichapproximates market value.  See alsoNote 15, “Financial Instruments”.

 

**(5)      Marketable Securities**

 

At September 30, 2010, the Company held $11.7 million ofmarketable securities consisting of $5.0 million in U.S. municipal bonds withmaturities of less than one year and $6.7 million in U.S. municipal bonds withmaturities of one year or greater but less than two years.  There are no material unrealized gains orlosses recorded in other comprehensive income. There have been no realized gains or losses for the quarter ended September 30,2010.  We do not believe there are anyimpairments considered to be other than temporary at September 30,2010.  Also see Note 4, “Restricted Cashand Investments” and Note 15, “Financial Instruments”.

 

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**ETHAN ALLEN INTERIORS INC.AND SUBSIDIARIES**

**Notes to ConsolidatedFinancial Statements (Unaudited)**

 

**(6)      Inventories**

 

Inventories at September 30, 2010 and June 30, 2010 aresummarized as follows (in thousands):

 
| ** **      | ** ** | **September 30,  2010** | ** ** | **June 30,  2010** | ** ** |
|-----------------|------------|------------------------------|------------|-------------------------|------------|
|            |       |                         |       |                    |       |
| Finished goods  |       | $                            | 108,290    |                    | $          | 104,782 |   |
| Work in process |       | 8,099                        |       | 8,421                   |       |
| Raw materials   |       | 22,129                       |       | 20,837                  |       |
|            |       | $                            | 138,518    |                    | $          | 134,040 |   |

 

Inventories are presented net of a related valuation allowance of $1.6million at September 30, 2010 and $2.1 million at June 30, 2010.

 

**(7)      Restructuring and Impairment Charges**

 

In recent years, we haveannounced and executed plans to consolidate our operations as part of anoverall strategy to maximize production efficiencies and maintain ourcompetitive advantage. Activity in the Company’s restructuring reserves foractions initiated in fiscal years 2008 and 2009 is combined in the summarizedtable below (in thousands) and is classified within accrued expenses and othercurrent liabilities in the Consolidated Balance Sheets:

 
| ** **                                           | ** ** | **Balance  June 30,  2010** | ** ** | **New  charges  (credits)** | ** ** | **Utilized** | ** ** | **Adjustments** | ** ** | **Balance  September 30,  2010** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|-----------------------------|------------|--------------|------------|-----------------|------------|---------------------------------------|------------|
| Employee  severance, other payroll and benefit costs |       | $                                | 290        |                        | $          | —       |       | $               | (294       | )                                     | $          | 4 |   | $ | — |   |
| Other  property exit costs                           |       | 2,800                            |       | —                      |       | (613         | )          | 221             |       | 2,408                                 |       |
| Write  down of long-lived assets                     |       | —                           |       | —                      |       | —       |       | —          |       | —                                |       |
|                                                 |       | $                                | 3,090      |                        | $          | —       |       | $               | (907       | )                                     | $          | 225 |   | $ | 2,408 |   |

 

In fiscal 2009, the Company announced the consolidation of its domesticcase goods and upholstery manufacturing capacity along with its logisticsoperations in both wholesale and retail. The total pre-tax restructuring, impairment, accelerated depreciationand other related charges for these fiscal 2009 actions was $29 million ($23million in the wholesale segment and $6 million in the retail segment). Thecharges arose from (i) a $17 million impact on long-lived assets, (ii) $8million in employee severance, compensation, and benefit costs, and (iii) $4million in other associated costs. Current fiscal year charges for these actions totaled $0.2 millionprimarily due to adjustments on non-cancellable leases.  In fiscal 2008, we announced a plan toconsolidate ten retail design centers and six retail service centers.  Cumulative charges to date for the fiscal2008 actions total $5.7 million, and there were no charges incurred for theseactions in the current fiscal year. Although the restructuring actions announced in fiscal years 2009 and2008 are now complete, there is a remaining liability at September 30,2010 for non-cancellable lease obligations with expirations of less than oneyear up to 23 years.

 

All charges for therestructuring activities above are included as restructuring and impairmentcharges in the Statement of Operations.

 

**(8)      Business Acquisitions**

 

Therewere no acquisitions completed during the three months ended September 30,2010 or 2009.

 

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**ETHAN ALLEN INTERIORS INC.AND SUBSIDIARIES**

**Notes to ConsolidatedFinancial Statements (Unaudited)**

 

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

 

Therewere no changes to our goodwill, other intangible assets or goodwill impairmentduring the three months ended September 30, 2010.

 

**(10)   Borrowings**

 

Totaldebt obligations at September 30, 2010 and June 30, 2010 consist ofthe following (in thousands):

 
| ** **                    | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
|-------------------------------|------------|------------------------|------------|-------------------|------------|
| ** **                    | ** ** | **2010**               | ** ** | **2010**          | ** ** |
| 5.375% Senior Notes due  2015 |       | $                      | 196,842    |              | $          | 199,158 |   |
| Industrial revenue bonds      |       | 3,855                  |       | 3,855             |       |
| Other debt                    |       | 244                    |       | 254               |       |
| Total debt                    |       | 200,941                |       | 203,267           |       |
| Less current maturities       |       | 3,899                  |       | 3,898             |       |
| Total long-term debt          |       | $                      | 197,042    |              | $          | 199,369 |   |

 

In September 2005, we completed a private offering of $200.0 millionin 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 have used the net proceedsof $198.4 million to expand our retail network, invest in our manufacturing andlogistics operations, and for other general corporate purposes.  In September 2010, the Companyrepurchased $2.4 million of the Senior Notes in three unsolicited open markettransactions.

 

On October 23, 2009, the Company expanded to $60 million thethree-year senior 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) London Interbank Offered rate (“LIBOR”) plus 3.25% to 4.25%,based on the average availability, or

(b) the higher of (i) a prime rate, (ii) the federalfunds effective rate plus 0.50%, or (iii) a LIBOR rate plus 1.00% plus, ineach case, an additional 2.25% to 3.25%, based on average availability.

 

The Facility is secured by all property owned, leased or operated bythe Company in the United States excluding any real property owned by theCompany and contains customary covenants which may limit the Company’s abilityto incur debt; engage in mergers and consolidations; make restricted payments(including dividends); sell certain assets; and make investments.

 

At September 30, 2010, we had no revolving loans, and $1.0 millionin standby letters of credit outstanding under the Facility. Remainingavailability under the revolver totaled $59.0 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 September 30, 2010, we are in compliance with all covenantsof the Facility and our Senior Notes.

 

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**ETHAN ALLEN INTERIORS INC.AND SUBSIDIARIES**

**Notes to ConsolidatedFinancial Statements (Unaudited)**

 

**(11)    Litigation**

 

EnvironmentalMatters

Weand our subsidiaries are subject to various environmental laws and regulations.Under these laws, we and/or our subsidiaries are, or may be, required to removeor mitigate the effects on the environment of the disposal or release ofcertain hazardous materials.

 

During fiscal 2009, three locations where we and/or our subsidiarieshad been named as a Potentially Responsible Party (“PRP”) were resolved. Ineach case, we were not a major contributor based on the very small volume ofwaste generated by us in relation to total volume at those sites and were ableto take part in de minimus settlement arrangements.  One additional site in Carroll, New York continuedto be evaluated as of September 30, 2010. We believe that we are not amajor contributor. Liability under the Comprehensive Environmental Response,Compensation and Liability Act of 1980, as amended may be joint and several. Assuch, to the extent certain named PRPs are unable, or unwilling, to acceptresponsibility and pay their apportioned costs, we could be required to pay inexcess of our pro rata share of incurred remediation costs. Our understandingof the financial strength of other PRPs has been considered, where appropriate,in the determination of our estimated liability.  As of September 30, 2010, we believethat established reserves related to these environmental contingencies areadequate to cover probable and reasonably estimable costs associated with theremediation and restoration of these sites. We believe our currently anticipated capital expenditures forenvironmental control facility matters are not material.

 

We are subject to other federal, state and local environmental protectionlaws and regulations and are involved, from time to time, in investigations andproceedings regarding environmental matters. Such investigations and proceedings typically concern air emissions,water discharges, and/or management of solid and hazardous wastes. We believethat our facilities are in material compliance with all such applicable lawsand regulations.

 

Regulations issued under the Clean Air Act Amendments of 1990 requiredthe industry to reformulate certain furniture finishes or institute processchanges to reduce emissions of volatile organic compounds. Compliance with manyof these requirements has been facilitated through the introduction of highsolids coating technology and alternative formulations. In addition, we haveinstituted a variety of technical and procedural controls, includingreformulation of finishing materials to reduce toxicity, implementation of highvelocity low pressure spray systems, development of storm water protectionplans and controls, and further development of related inspection/audit teams,all of which have served to reduce emissions per unit of production. We remaincommitted to implementing new waste minimization programs and/or enhancingexisting programs with the objective of (i) reducing the total volume ofwaste, (ii) limiting the 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-Based Compensation**

 

On October 10, 2007, the Company’s Board of Directors and M.Farooq Kathwari, our President and Chief Executive Officer, agreed to the termsof a new employment agreement expiring on June 30, 2012 (“the EmploymentAgreement”).  Pursuant to the terms of the Employment Agreement, Mr. Kathwariwas awarded on October 10, 2007, July 1, 2008, and July 1, 2009,options to purchase 150,000, 90,000 and 60,000 shares respectively, of ourcommon stock.  These options were issuedat an exercise price of $34.03, $24.62, and $10.68 per share respectively.  The 2007 grant vested in three equalinstallments on each June 30 of 2008, 2009, and 2010.  The 2008 grant vested in two equalinstallments on June 30, 2009 and June 30, 2010 respectively.  The 2009 grant vested on June 30, 2010.On November 11, 2008, Mr. Kathwari was awarded options to purchase50,000 shares of our common stock at an exercise price of $15.93, which vestsin four equal installments on the anniversary date of the grant.  In addition, in 

 

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**ETHAN ALLEN INTERIORS INC.AND SUBSIDIARIES**

**Notesto Consolidated Financial Statements (Unaudited)**

 

recognition of Mr. Kathwari’s extraordinary efforts during the recentchallenging times for our industry, on February 3, 2010 our CompensationCommittee awarded Mr. Kathwari options to purchase an additional 50,000shares of our common stock at an exercise price of $14.86 per share.  These stock options vest in four equalinstallments on the anniversary date of the grant.  These awards were in addition to thoseprovided for in the Employment Agreement. All options awarded were issued at the closing stock price on each grantdate, and have a contractual term of 10 years.

 

In connection with the Employment Agreement, Mr. Kathwari receivedon each of November 13, 2007, July 1, 2008, and  July 1, 2009, an annual award of 20,000shares of restricted stock (for a total award of 60,000 shares), with vestingbased on the performance of the Company’s stock price during the three yearperiods subsequent to the respective award date as compared to the Standard andPoor’s 500 index.  The measurement periodfor the first tranche ended on June 30, 2010.  The stock performance was partially achieved,and 8,000 shares vested with the balance of 12,000 shares forfeited.  Mr. Kathwari also received on November 13,2007, 15,000 shares of restricted stock which vest ratably over a five yearperiod through June 30, 2012.  Inrecognition of Mr. Kathwari’s extraordinary efforts during the recentchallenging times for our industry and in addition to the provisions of theEmployment Agreement, on February 3, 2010 our Compensation Committeeawarded Mr. Kathwari 15,000 restricted shares.   The restricted shares are service-based andvest in three equal annual installments on the anniversary of the grantdate.  Mr. Kathwari was also awardeddue to his extraordinary efforts 11,000 service-based restricted shares on July 20,2010, which vest in two equal annual installments on the grant dateanniversary.  These awards were inaddition to those provided for in the Employment Agreement.

 

**(13)    Earnings Per Share**

 

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

 
| ** **                                                                    | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                    | ** ** | **September 30,**           | ** ** |
| ** **                                                                    | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| Weighted average common shares outstanding for  basic calculation             |       | 28,779                           |       | 28,926 |   |
| Effect of dilutive stock options and other  share-based awards                |       | 171                              |       | — |   |
| Weighted average common shares outstanding  adjusted for dilution calculation |       | 28,950                           |       | 28,926 |   |

 

Asof September 30, 2010 and 2009, stock options to purchase 2,060,628 and2,251,389 common shares, respectively, were excluded from the respectivediluted earnings per share calculation because their impact was anti-dilutive.

 

**(14)    Comprehensive Income**

 

Total comprehensive income represents the sum of net income and itemsof “other comprehensive income or loss” that are reported directly inequity.  Such items, which are generallypresented on a net-of-tax basis, may include foreign currency translationadjustments, minimum pension liability adjustments, fair value adjustments(i.e. gains and losses) on certain derivative instruments, and unrealized gainsand losses on certain investments in debt and equity securities.  We have reported our total comprehensiveincome in the Consolidated Statements of Shareholders’ Equity.

 

Our accumulated other comprehensive income, comprised of losses oncertain derivative instruments and accumulated foreign currency translationadjustments, totaled $1.4 million at September 30, 2010 and $1.2 millionat 

 

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**ETHAN ALLEN INTERIORS INC.AND SUBSIDIARIES**

**Notesto Consolidated Financial Statements (Unaudited)**

 

June 30, 2010.  Foreigncurrency translation adjustments are the result of changes in foreign currencyexchange rates related to our operations in Canada and Mexico. Foreign currencytranslation adjustments exclude income tax expense (benefit) given that theearnings of non-U.S. subsidiaries are deemed to be reinvested for an indefiniteperiod of time.

 

**(15)    Financial Instruments**

 

ASC820, *“Fair value measurements and disclosures”*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. ASC 820 defines a hierarchy which prioritizesthe inputs into three levels based on the extent to which inputs used inmeasuring fair value are observable in the market. Each fair valuemeasurement is reported in one of the three levels which is determined by thelowest level input that is significant to the fair value measurement in itsentirety. These levels are:

 
| Level  1 | Inputs  are based upon unadjusted quoted prices for identical instruments traded in  active markets.                                                                                                                                                                                                                                                                                          |
|----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |                                                                                                                                                                                                                                                                                                                                                                                          |
| Level  2 | Inputs  are based upon quoted prices for similar instruments in active markets,  quoted prices for identical or similar instruments in markets that are not  active, and model-based valuation techniques for which all significant  assumptions are observable in the market or can be corroborated by observable  market data for substantially the full term of the assets or liabilities. |
|     |                                                                                                                                                                                                                                                                                                                                                                                          |
| Level  3 | Inputs  are generally unobservable and typically reflect management’s estimates of  assumptions that market participants would use in pricing the asset or  liability. The fair values are therefore determined using model-based  techniques that include option pricing models, discounted cash flow models,  and similar techniques.                                                  |

 

Thefollowing section describes the valuation methodologies we use to measuredifferent financial assets and liabilities at fair value.

 

***Assets and Liabilities Measured at Fair Value on a Recurring Basis***

 

Thefollowing table presents our assets and liabilities measured at fair value on arecurring basis at September 30, 2010 (in thousands):

 
| ** **                    | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Balance** | ** ** |
|-------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|-------------|------------|
| Cash equivalents              |       | $                | 79,057     |             | $          | —           |       | $           | —     |   | $ | 79,057 |   |
| Available-for-sale securities |       | —           |       | 11,671           |       | —           |       | 11,671      |       |
| Total                         |       | $                | 79,057     |             | $          | 11,671           |       | $           | —     |   | $ | 90,728 |   |

 

Cashequivalents consist of money market accounts and mutual funds in U.S.government and agency fixed income securities. We use quoted prices in active markets for identical assets orliabilities to determine fair value.  At September 30,2010, $16.3 million of cash equivalents was restricted and is classified as along-term asset.

 

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.  As of September 30, 2010there were no material gross unrealized gains or losses on available-for-salesecurities.

 

Asof September 30, 2010, the contractual maturities of ouravailable-for-sale investments were as follows:

 

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**ETHAN ALLEN INTERIORS INC.AND SUBSIDIARIES**

**Notesto Consolidated Financial Statements (Unaudited)**

 
| ** **                            | ** ** | **Cost** | ** ** | **Estimated Fair Value** | ** ** |
|---------------------------------------|------------|----------|------------|------------------------------------|------------|
| Due in one year or less               |       | $        | 4,905      |                               | $          | 4,910 |   |
| Due after one year through five years |       | $        | 6,597      |                               | $          | 6,618 |   |

 

Noinvestments have been in a continuous loss position for more than one year, andno other-than-temporary impairments were recognized.  Also see note 4, “Restricted Cash andInvestments”, and note 5, “Marketable Securities”.

 

***Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis***

 

Wemeasure certain assets at fair value on a nonrecurring basis. These assets arerecognized at fair value when they are deemed to be other-than-temporarilyimpaired. During the three months ended September 30, 2010, we did notrecord any other-than-temporary impairments on those assets required to bemeasured at fair value on a nonrecurring basis.

 

**(16)    Segment Information**

 

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 operated and Ethan Allen operateddesign 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 operated 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 operated 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 threemonths ended September 30, 2010 and 2009 is provided as follows:

 

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**ETHAN ALLEN INTERIORS INC.AND SUBSIDIARIES**

**Notesto Consolidated Financial Statements (Unaudited)**

 
| ** **                 | ** ** | **Three Months Ended** | ** ** |
|----------------------------|------------|----------------------------------|------------|
| ** **                 | ** ** | **September 30,**           | ** ** |
| ** **                 | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| Case Goods                 |       | 37                               | %          | 40 | % |
| Upholstered Products       |       | 48                               |       | 45 |   |
| Home Accessories and Other |       | 15                               |       | 15 |   |
| *** ***               |       | 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.  Information for the threemonths ended September 30, 2010 and 2009 is provided below (in thousands):

 
| ** **                             | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|
| ** **                             | ** ** | **September 30,**           | ** ** |
| ** **                             | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| **Net sales:**                         |       |                             |       |   |   |
| Wholesale segment                      |       | $                                | 107,555    |   | $ | 81,281 |   |
| Retail segment                         |       | 121,023                          |       | 103,150 |   |
| Elimination of inter-company sales     |       | (63,737                          | )          | (48,241 | ) |
| Consolidated Total                     |       | $                                | 164,841    |   | $ | 136,190 |   |
|                                   |       |                             |       |   |   |
| **Operating income (loss):**           |       |                             |       |   |   |
| Wholesale segment (1)                  |       | $                                | 11,939     |   | $ | (4,660 | ) |
| Retail segment (2)                     |       | (4,290                           | )          | (11,349 | ) |
| Adjustment of inter-company profit (3) |       | (2,263                           | )          | (79 | ) |
| Consolidated Total                     |       | $                                | 5,386      |   | $ | (16,088 | ) |
|                                   |       |                             |       |   |   |
| **Capital expenditures:**              |       |                             |       |   |   |
| Wholesale segment                      |       | $                                | 1,091      |   | $ | 801 |   |
| Retail segment                         |       | 413                              |       | 1,687 |   |
| Consolidated Total                     |       | $                                | 1,504      |   | $ | 2,488 |   |

 
| ** **                       | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
|----------------------------------|------------|------------------------|------------|-------------------|------------|
| **Total assets**            | ** ** | **2010**               | ** ** | **2010**          | ** ** |
| Wholesale segment                |       | $                      | 302,357    |              | $          | 296,363 |   |
| Retail segment                   |       | 348,040                |       | 360,413           |       |
| Inventory profit elimination (4) |       | (27,384                | )          | (24,999           | )          |
| Consolidated Total               |       | $                      | 623,013    |              | $          | 631,777 |   |

 

----

| (1) | Operating  income (loss) for the wholesale segment for the three months ended  September 30, 2009 includes pre-tax restructuring and impairment charges  of $0.2 million.                                      |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Operating  income (loss) for the retail segment for the three months ended  September 30, 2010 and 2009 includes pre-tax restructuring and  impairment charges of $0.2 million and $0.7 million, respectively. |
| (3) | Represents  the change in wholesale profit contained in Ethan Allen operated design  center inventory at the end of the period.                                                                                     |
| (4) | Represents  the wholesale profit contained in Ethan Allen operated design center  inventory that has not yet been realized. These profits are realized when the  related inventory is sold.                         |

 

At September 30, 2010, there were 57 independent retail designcenters located outside the United States compared with 49 at September 30,2009.  Approximately 6.4% of our netsales during the current quarter were derived from sales to these retail designcenters compared with less than five percent in the prior year.

 

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**ETHAN ALLEN INTERIORS INC.AND SUBSIDIARIES**

**Notes to ConsolidatedFinancial Statements (Unaudited)**

 

**(17)    Subsequent Events**

 

***Ethan Allen declares quarterly cash dividend***

Ethan Allen’s Board of Directors has declared a quarterly cash dividendof $0.05 per share, which will be payable to shareholders of record as of October 11,2010 and paid on October 25, 2010.

 

***Ethan Allen repurchases a portion of its SeniorNotes***

The Company repurchased $3.0 million of its’ Senior Notes with a tradedate of October 4, 2010.

 

**(18)    Recently Issued Accounting Pronouncements**

 

There have been no recently issued accounting pronouncements during thethree months ended September 30, 2010 or impending accounting changes thatare expected to have a material effect on the Company’s financial statements.

 

**(19)    Financial Information About the Parent, the Issuer and theGuarantors**

 

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.  Our other subsidiarieswhich are not guarantors are called the “Non-Guarantors”.

 

Thefollowing tables set forth the condensed consolidating balance sheets as of September 30,2010 and June 30, 2010, the condensed consolidating statements of operationsfor the three months ended September 30, 2010 and 2009, and the condensedconsolidating statements of cash flows for the three months ended September 30,2010 and 2009 of the Parent, the Issuer, the Guarantors and the Non-Guarantors.

 

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**ETHAN ALLEN INTERIORS INC.AND SUBSIDIARIES**

**Notes to ConsolidatedFinancial Statements (Unaudited)**

**CONDENSED CONSOLIDATING BALANCE SHEET**

(In thousands)

**September 30, 2010**

 
| ** **                                      | ** ** | **Parent** | ** ** | **Issuer** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------|------------|------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| **Assets**                                      |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Current assets:                                 |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Cash and cash equivalents                       |       | $          | —     |       | $          | 59,095         |       | $                  | 3,106      |             | $          | 527              |       | $ | — |   | $ | 62,728 |   |
| Marketable securities                           |       | —     |       | 11,671     |       | —         |       | —             |       | —           |       | 11,671           |       |
| Accounts receivable, net                        |       | —     |       | 15,799     |       | 247            |       | 438                |       | —           |       | 16,484           |       |
| Inventories                                     |       | —     |       | —     |       | 161,112        |       | 4,790              |       | (27,384          | )          | 138,518          |       |
| Prepaid expenses and other current assets       |       | —     |       | 13,049     |       | 12,848         |       | 668                |       | —           |       | 26,565           |       |
| Intercompany receivables                        |       | —     |       | 778,428    |       | 237,309        |       | (5,182             | )          | (1,010,555       | )          | 0                |       |
| Total current assets                            |       | —     |       | 878,042    |       | 414,622        |       | 1,241              |       | (1,037,939       | )          | 255,966          |       |
|                                            |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Property, plant and equipment, net              |       | —     |       | 9,381      |       | 285,154        |       | 7,560              |       | —           |       | 302,095          |       |
| Goodwill and other intangible assets            |       | —     |       | 37,905     |       | 7,223          |       | —             |       | —           |       | 45,128           |       |
| Restricted cash and investments                 |       | —     |       | 16,329     |       | —         |       | —             |       | —           |       | 16,329           |       |
| Other assets                                    |       | —     |       | 2,747      |       | 744            |       | 4                  |       | —           |       | 3,495            |       |
| Investment in affiliated companies              |       | 575,596    |       | (77,053    | )          | —         |       | —             |       | (498,543         | )          | —           |       |
| Total assets                                    |       | $          | 575,596    |       | $          | 867,351        |       | $                  | 707,743    |             | $          | 8,805            |       | $ | (1,536,482 | ) | $ | 623,013 |   |
| **Liabilities and Shareholders’  Equity**  |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Current liabilities:                            |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Current maturities of long-term debt            |       | $          | —     |       | $          | —         |       | $                  | 3,899      |             | $          | —           |       | $ | — |   | $ | 3,899 |   |
| Customer deposits                               |       | —     |       | —     |       | 48,452         |       | 2,659              |       | —           |       | 51,111           |       |
| Accounts payable                                |       | —     |       | 7,367      |       | 12,824         |       | 231                |       | —           |       | 20,422           |       |
| Accrued expenses and other current liabilities  |       | 1,558      |       | 47,803     |       | 15,211         |       | 483                |       | —           |       | 65,055           |       |
| Intercompany payables                           |       | 315,570    |       | 597        |       | 690,545        |       | 3,843              |       | (1,010,555       | )          | —           |       |
| Total current liabilities                       |       | 317,128    |       | 55,767     |       | 770,931        |       | 7,216              |       | (1,010,555       | )          | 140,487          |       |
|                                            |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Long-term debt                                  |       | —     |       | 196,843    |       | 199            |       | —             |       | —           |       | 197,042          |       |
| Other long-term liabilities                     |       | —     |       | 3,889      |       | 14,048         |       | 123                |       | —           |       | 18,060           |       |
| Deferred income taxes                           |       | —     |       | 8,956      |       | —         |       | —             |       | —           |       | 8,956            |       |
| Total liabilities                               |       | 317,128    |       | 265,455    |       | 785,178        |       | 7,339              |       | (1,010,555       | )          | 364,545          |       |
| Shareholders’ equity                       |       | 258,468    |       | 601,896    |       | (77,435        | )          | 1,466              |       | (525,927         | )          | 258,468          |       |
| Total liabilities and shareholders’ equity |       | $          | 575,596    |       | $          | 867,351        |       | $                  | 707,743    |             | $          | 8,805            |       | $ | (1,536,482 | ) | $ | 623,013 |   |

 

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**ETHAN ALLEN INTERIORS INC.AND SUBSIDIARIES**

**Notes to ConsolidatedFinancial Statements (Unaudited)**

**CONDENSED CONSOLIDATING BALANCE SHEET**

(In thousands)

**June 30, 2010**

 
| ** **                                      | ** ** | **Parent** | ** ** | **Issuer** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------|------------|------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| **Assets**                                      |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Current assets:                                 |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Cash and cash equivalents                       |       | $          | —     |       | $          | 67,269         |       | $                  | 5,720      |             | $          | 863              |       | $ | — |   | $ | 73,852 |   |
| Marketable securities                           |       | —     |       | 11,075     |       | —         |       | —             |       | —           |       | 11,075           |       |
| Accounts receivable, net                        |       | —     |       | 16,385     |       | 274            |       | 446                |       | —           |       | 17,105           |       |
| Inventories                                     |       | —     |       | —     |       | 154,621        |       | 4,418              |       | (24,999          | )          | 134,040          |       |
| Prepaid expenses and other current assets       |       | —     |       | 11,018     |       | 12,011         |       | 591                |       | —           |       | 23,620           |       |
| Intercompany receivables                        |       | —     |       | 756,998    |       | 233,887        |       | (4,815             | )          | (986,070         | )          | —           |       |
| Total current assets                            |       | —     |       | 862,745    |       | 406,513        |       | 1,503              |       | (1,011,069       | )          | 259,692          |       |
|                                            |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Property, plant and equipment, net              |       | —     |       | 9,659      |       | 289,031        |       | 7,057              |       | —           |       | 305,747          |       |
| Goodwill and other intangible assets            |       | —     |       | 37,905     |       | 7,223          |       | —             |       | —           |       | 45,128           |       |
| Restricted cash and investments                 |       | —     |       | 17,318     |       | —         |       | —             |       | —           |       | 17,318           |       |
| Other assets                                    |       | —     |       | 3,179      |       | 709            |       | 4                  |       | —           |       | 3,892            |       |
| Investment in affiliated companies              |       | 571,323    |       | (69,963    | )          | —         |       | —             |       | (501,360         | )          | —           |       |
| Total assets                                    |       | $          | 571,323    |       | $          | 860,843        |       | $                  | 703,476    |             | $          | 8,564            |       | $ | (1,512,429 | ) | $ | 631,777 |   |
| **Liabilities and Shareholders’  Equity**  |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Current liabilities:                            |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Current maturities of long-term debt            |       | $          | —     |       | $          | —         |       | $                  | 3,898      |             | $          | —           |       | $ | — |   | $ | 3,898 |   |
| Customer deposits                               |       | —     |       | —     |       | 49,990         |       | 2,615              |       | —           |       | 52,605           |       |
| Accounts payable                                |       | 2,589      |       | 7,059      |       | 14,117         |       | 187                |       | —           |       | 23,952           |       |
| Accrued expenses and other current liabilities  |       | 1,559      |       | 44,642     |       | 18,540         |       | 546                |       | —           |       | 65,287           |       |
| Intercompany payables                           |       | 308,716    |       | 597        |       | 672,644        |       | 4,113              |       | (986,070         | )          | —           |       |
| Total current liabilities                       |       | 312,864    |       | 52,298     |       | 759,189        |       | 7,461              |       | (986,070         | )          | 145,742          |       |
|                                            |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Long-term debt                                  |       | —     |       | 199,158    |       | 211            |       | —             |       | —           |       | 199,369          |       |
| Other long-term liabilities                     |       | —     |       | 4,912      |       | 14,084         |       | 127                |       | —           |       | 19,123           |       |
| Deferred income taxes                           |       | —     |       | 9,084      |       | —         |       | —             |       | —           |       | 9,084            |       |
| Total liabilities                               |       | 312,864    |       | 265,452    |       | 773,484        |       | 7,588              |       | (986,070         | )          | 373,318          |       |
| Shareholders’ equity                       |       | 258,459    |       | 595,391    |       | (70,008        | )          | 976                |       | (526,359         | )          | 258,459          |       |
| Total liabilities and shareholders’ equity |       | $          | 571,323    |       | $          | 860,843        |       | $                  | 703,476    |             | $          | 8,564            |       | $ | (1,512,429 | ) | $ | 631,777 |   |

 

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**ETHAN ALLEN INTERIORS INC.AND SUBSIDIARIES**

**Notes to ConsolidatedFinancial Statements (Unaudited)**

**CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS**

(In thousands)

**Three months ended September 30, 2010**

** **
| ** **                                        | ** ** | **Parent** | ** ** | **Issuer** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------|------------|------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| Net sales                                         |       | $          | —     |       | $          | 107,518        |       | $                  | 174,970    |             | $          | 6,913            |       | $ | (124,560 | ) | $ | 164,841 |   |
| Cost of sales                                     |       | —     |       | 82,434     |       | 118,562        |       | 3,639              |       | (122,175         | )          | 82,460           |       |
| Gross profit                                      |       | —     |       | 25,084     |       | 56,408         |       | 3,274              |       | (2,385           | )          | 82,381           |       |
|                                              |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Selling, general and administrative expenses      |       | 45         |       | 10,262     |       | 63,521         |       | 2,942              |       | —           |       | 76,770           |       |
| Restructuring and impairment charge, (credit) net |       | —     |       | —     |       | 225            |       | —             |       | —           |       | 225              |       |
| Total operating expenses                          |       | 45         |       | 10,262     |       | 63,746         |       | 2,942              |       | —           |       | 76,995           |       |
| Operating income (loss)                           |       | (45        | )          | 14,822     |       | (7,338         | )          | 332                |       | (2,385           | )          | 5,386            |       |
|                                              |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Interest and other miscellaneous income, net      |       | 3,858      |       | (3,925     | )          | (13            | )          | 5                  |       | 3,232            |       | 3,157            |       |
| Interest and other related financing costs        |       | —     |       | 2,898      |       | 76             |       | —             |       | —           |       | 2,974            |       |
| Income (loss) before income tax expense           |       | 3,813      |       | 7,999      |       | (7,427         | )          | 337                |       | 847              |       | 5,569            |       |
| Income tax expense                                |       | —     |       | 1,756      |       | —         |       | —             |       | —           |       | 1,756            |       |
|                                              |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Net income (loss)                                 |       | $          | 3,813      |       | $          | 6,243          |       | $                  | (7,427     | )                | $          | 337              |       | $ | 847 |   | $ | 3,813 |   |

 

**Three Months Ended September 30, 2009**

** **
| ** **                                        | ** ** | **Parent** | ** ** | **Issuer** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------|------------|------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| Net sales                                         |       | $          | —     |       | $          | 81,410         |       | $                  | 136,996    |             | $          | 4,899            |       | $ | (87,115 | ) | $ | 136,190 |   |
| Cost of sales                                     |       | —     |       | 66,961     |       | 95,200         |       | 2,703              |       | (86,983          | )          | 77,881           |       |
| Gross profit                                      |       | —     |       | 14,449     |       | 41,796         |       | 2,196              |       | (132             | )          | 58,309           |       |
|                                              |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Selling, general and administrative expenses      |       | 41         |       | 11,032     |       | 59,973         |       | 2,539              |       | —           |       | 73,585           |       |
| Restructuring and impairment charge, (credit) net |       | —     |       | —     |       | 812            |       | —             |       | —           |       | 812              |       |
| Total operating expenses                          |       | 41         |       | 11,032     |       | 60,785         |       | 2,539              |       | —           |       | 74,397           |       |
| Operating income (loss)                           |       | (41        | )          | 3,417      |       | (18,989        | )          | (343               | )          | (132             | )          | (16,088          | )          |
|                                              |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Interest and other miscellaneous income, net      |       | (13,538    | )          | (18,596    | )          | 33             |       | —             |       | 32,898           |       | 797              |       |
| Interest and other related financing costs        |       | —     |       | 2,905      |       | 76             |       | —             |       | —           |       | 2,981            |       |
| Income before income tax expense                  |       | (13,579    | )          | (18,084    | )          | (19,032        | )          | (343               | )          | 32,766           |       | (18,272          | )          |
| Income tax expense                                |       | —     |       | (4,693     | )          | —         |       | —             |       | —           |       | (4,693           | )          |
|                                              |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Net income (loss)                                 |       | $          | (13,579    | )          | $          | (13,391        | )          | $                  | (19,032    | )                | $          | (343             | )          | $ | 32,766 |   | $ | (13,579 | ) |

 

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**ETHAN ALLEN INTERIORS INC.AND SUBSIDIARIES**

**Notes to ConsolidatedFinancial Statements (Unaudited)**

**CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

(In thousands)

**Three months ended September 30, 2010**

** **
| ** **                                                  | ** ** | **Parent** | ** ** | **Issuer** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| Net cash provided by (used in) operating activities         |       | $          | 6,815      |       | $          | (5,951         | )          | $                  | (1,888     | )                | $          | 143              |       | $ | — |   | $ | (881 | ) |
|                                                        |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Cash flows from investing activities:                       |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Capital expenditures                                        |       | —     |       | (332       | )          | (772           | )          | (400               | )          | —           |       | (1,504           | )          |
| Proceeds from the disposal of property, plant and equipment |       | —     |       | —     |       | 57             |       | —             |       | —           |       | 57               |       |
| Decrease in restricted cash and investments                 |       | —     |       | 989        |       | —         |       | —             |       | —           |       | 989              |       |
| Purchase of marketable securities                           |       | —     |       | (613       | )          | —         |       | —             |       | —           |       | (613             | )          |
| Other                                                       |       | —     |       | 18         |       | —         |       | —             |       | —           |       | 18               |       |
| Net cash used in investing activities                       |       | —     |       | 62         |       | (715           | )          | (400               | )          | —           |       | (1,053           | )          |
|                                                        |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Cash flows from financing activities:                       |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Payments on long-term debt                                  |       | —     |       | (2,285     | )          | (11            | )          | —             |       | —           |       | (2,296           | )          |
| Purchase and other retirements of company stock             |       | (5,377     | )          | —     |       | —         |       | —             |       | —           |       | (5,377           | )          |
| Dividends paid                                              |       | (1,438     | )          | —     |       | —         |       | —             |       | —           |       | (1,438           | )          |
| Net cash provided by (used in) financing activities         |       | (6,815     | )          | (2,285     | )          | (11            | )          | —             |       | —           |       | (9,111           | )          |
|                                                        |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Effect of exchange rate changes on cash                     |       | —     |       | —     |       | —         |       | (79                | )          | —           |       | (79              | )          |
|                                                        |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Net decrease in cash and cash equivalents                   |       | —     |       | (8,174     | )          | (2,614         | )          | (336               | )          | —           |       | (11,124          | )          |
|                                                        |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Cash and cash equivalents — beginning of period        |       | —     |       | 67,269     |       | 5,720          |       | 863                |       | —           |       | 73,852           |       |
|                                                        |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Cash and cash equivalents — end of period              |       | $          | —     |       | $          | 59,095         |       | $                  | 3,106      |             | $          | 527              |       | $ | — |   | $ | 62,728 |   |

 

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**ETHAN ALLEN INTERIORS INC.AND SUBSIDIARIES**

**Notes to ConsolidatedFinancial Statements (Unaudited)**

**CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

(In thousands)

**Three months ended September 30, 2009**

 
| ** **                                                  | ** ** | **Parent** | ** ** | **Issuer** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
|                                                        |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Net cash provided by (used in) operating activities         |       | $          | 1,448      |       | $          | 20,697         |       | $                  | (4,238     | )                | $          | (912             | )          | $ | — |   | $ | 16,995 |   |
|                                                        |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Cash flows from investing activities:                       |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Capital expenditures                                        |       | —     |       | (97        | )          | (2,391         | )          | —             |       | —           |       | (2,488           | )          |
| Proceeds from the disposal of property, plant and equipment |       | —     |       | —     |       | 5,935          |       | —             |       | —           |       | 5,935            |       |
| Other                                                       |       | —     |       | 6          |       | —         |       | —             |       | —           |       | 6                |       |
| Net cash used in investing activities                       |       | —     |       | (91        | )          | 3,544          |       | —             |       | —           |       | 3,453            |       |
|                                                        |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Cash flows from financing activities:                       |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Payments on long-term debt                                  |       | —     |       | —     |       | (10            | )          | —             |       | —           |       | (10              | )          |
| Payment of deferred financing costs                         |       | —     |       | (22        | )          | —         |       | —             |       | —           |       | (22              | )          |
| Dividends paid                                              |       | (1,448     | )          | —     |       | —         |       | —             |       | —           |       | (1,448           | )          |
| Net cash provided by (used in) financing activities         |       | (1,448     | )          | (22        | )          | (10            | )          | —             |       | —           |       | (1,480           | )          |
|                                                        |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Effect of exchange rate changes on cash                     |       | —     |       | —     |       | —         |       | 524                |       | —           |       | 524              |       |
|                                                        |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Net increase (decrease) in cash and cash equivalents        |       | —     |       | 20,584     |       | (704           | )          | (388               | )          | —           |       | 19,492           |       |
|                                                        |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Cash and cash equivalents — beginning of period        |       | —     |       | 47,712     |       | 3,592          |       | 1,656              |       | —           |       | 52,960           |       |
|                                                        |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Cash and cash equivalents — end of period              |       | $          | —     |       | $          | 68,296         |       | $                  | 2,888      |             | $          | 1,268            |       | $ | — |   | $ | 72,452 |   |

 

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**Item 2.  Management’s Discussionand Analysis of Financial Condition and Results of Operations**

 

The following discussion of financial condition and results of operationsshould be read in conjunction with (i) our Consolidated FinancialStatements, and notes thereto, as set forth in this Quarterly Report on Form 10-Qand (ii) our Annual Report on Form 10-K for the year ended June 30,2010.

 

**Forward-Looking Statements**

 

Management’s discussion and analysis of financial condition and resultsof operations and other sections of this Quarterly Report containforward-looking statements relating to our future results. Such forward-lookingstatements are identified by use of forward-looking words such as “anticipates”,“believes”, “plans”, “estimates”, “expects”, and “intends” or words or phrasesof similar expression. These forward-looking statements are subject tomanagement 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 for the year ended June 30, 2010 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 are based on theaccounting policies used.  Certainaccounting polices require that estimates and assumptions be made by managementfor 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.  There have been no material changes withrespect to the Company’s critical accounting policies from those disclosed inits 2010 Annual Report on Form 10-K filed with the SEC on August 19,2010.

 

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**Results of Operations**

 

OurCompany and the furniture industry have been dramatically affected by theeconomic factors in the United States and abroad.  High unemployment, volatile capital markets,depressed housing markets and tight consumer spending all put negative stresson the economy, which has significantly affected our business.  In response, we took many actions thatsignificantly reduced costs and changed many aspects of our business.  We consolidated our manufacturing footprintto seven facilities in North America where approximately 70% of our productsare made. We also converted our case goods manufacturing to custom, made toorder manufacturing, providing a significant differentiating factor in themarket. We believe we have retained sufficient scalable capacity to meet highervolumes of demand. We consolidated our logistics for both our wholesale andretail divisions resulting in one major wholesale distribution center and 17retail service centers operated by the company.

 

Wehave also changed our retail footprint. Where it made sense, we consolidatedmultiple design centers serving the same market into one, prominently locateddesign center and closed underperforming locations. At September 30, 2010,the Company operated 143 design centers compared with 159 at June 30,2009. Independent retailers operated 138 design centers at September 30,2010 compared with 134 at June 30, 2009, with nine more internationaldesign centers than at June 30, 2009. The increase in international designcenters improved our international net sales to 6.4% of our consolidated netsales in the quarter ended September 30, 2010.

 

Inrecent months, we have seen improvement in new orders and had a quarterlyprofit for the first time since December 2008. As a result, we have begunto hire to associates to support the ramping up of production in ourmanufacturing. We have also begun to add highly skilled interior designers inour retail division, and increased our spending in advertising to driveconsumer traffic.  In taking theseactions to grow the business, we remain cautious but optimistic.

 

***Quarter Ended September 30, 2010 Compared toQuarter Ended September 30, 2009***

 

**Consolidated revenue** for the threemonths ended September 30, 2010 increased 21.0% to $164.8 million, from$136.2 million for the three months ended September 30, 2009, withincreases in both the wholesale and retail segments. This improvement partlyreflects the strong increase in new orders and backlog.  We attribute this to (i) continued newmarketing initiatives including our “two ways to save” promotions, and ourinteractive web site ethanalleninc.com, (ii) the continued use of nationaltelevision media and an increase in direct mail media, emphasizing to targetedaudiences our interior design services and the full line of our quality productofferings, and (iii) increased use of digital communication includingperiodic distribution of e-magazines to increase client exposures and drivetraffic to our website and design centers and (iv) the positive effects ofrepositioning the retail network.  Thishas been partly offset by the lingering effects of the negative economicstresses mentioned earlier, as well as the use of highly promotional pricingstrategies by the Company’s competitors.

 

**Wholesale revenue** for the first quarter of fiscal 2011increased 32.3% to $107.6 million from $81.3 million in the prior yearcomparable period.  The increase wasprimarily attributable to an increase in the incoming order rate due to ourspecial savings promotions during the quarter. The increase was partially offset by the continued negative economicstresses for home furnishings noted throughout the current period.  There were four more independently operatedretail design centers at September 30, 2010, which increased to 138 from134 at September 30, 2009, and twelve 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-operated design centers forthe three months ended September 30, 2010 increased 17.3% to $121.0million from $103.2 million for the three months ended September 30,2009.  We believe the increase in retailsales by Ethan Allen-operated design centers is due to the use of promotionalmarketing 

 

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campaigns.  During the quarter,total written orders decreased 2.4% compared to the prior year period, which webelieve reflects the timing of when savings events end in relation toquarter-end.  There was a net decrease inthe number of Ethan Allen-operated design centers to 143 as of September 30,2010 as compared to 155 as of September 30, 2009.  During the current quarter, we closed twodesign centers.

 

Comparable design centers are those which have been operating for atleast 15 months.  Minimal net sales,derived from the delivery of customer ordered product, are generated during thefirst three months of operations of newly opened (including relocated) designcenters. Design centers acquired by us from independent retailers are includedin comparable design centers sales in their 13th full month of EthanAllen-owned operations. Quarter-over-quarter, written business of Ethan Allen-operated designcenters decreased 2.4% while comparable design centers written businessincreased 3.5%.  Over that same period,there was a 2.0% increase in wholesale orders.

 

We have made considerable investment within the retail network tostrengthen the level of service, professionalism, interior design competence,efficiency, and effectiveness of the retail design center personnel.  We believe that over time, we will benefitfrom (i) our repositioning of the retail network, (ii) new productintroductions, (iii) new marketing initiatives such as our special savingsand “one piece at a time” promotions, and our interior design affiliate (IDA)program, (iv) continued use of technology including our state-of-the-artwebsite coupled with personal service from our design professionals, and (v) ongoinguse of national television and other targeted advertising media.

 

**Gross profit** increased during the quarter to $82.4 million from$58.3 million in the prior year comparable quarter.  The 41.3% increase in gross profit wasprimarily attributable to (i) the increase in net sales of 21.0%, with anoverall increase in shipments in both market segments, and (ii) streamlinedand more efficient manufacturing, resulting in decreased fixed costs due tofewer manufacturing plants, including a $6.6 million reduction due to prioryear accelerated depreciation charges related to restructuring actions.  The sales mix had a slightly unfavorableshift with retail sales representing a lower proportionate share of total salesin the current quarter (73%) compared to the prior year period (76%).  Consolidated gross margin increased to 50.0%from 42.8% 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 threemonths ended September 30, 2010 and 2009:

 

**Operating expenses** increased 3.5% to $77.0million from $74.4 million in the prior year quarter, and decreased as apercent of sales to 46.7% from 54.6% of sales in the prior year quarter.  Operating expenses increased in total due tothe impact of increased sales on selling expenses and an increase inadvertising expenses, but were down as a percentage of sales on the highervolume of sales.

 

**Consolidated operating income (loss)** for the three month periodended September 30, 2010 was income of $5.4 million, or 3.3% of sales, ascompared to a loss of $16.1 million, or a negative 11.8% of sales, for thethree months ended September 30, 2009. This improvement of $21.5 million is due mostly to increased sales aswell as cost savings realized this year.

 

**Wholesale operating income**for the three months ended September 30,2010 was $11.9 million, or 11.1% of sales, as compared to a loss of $4.7million, or a negative 5.7% of sales, in the prior year comparable quarter. Theincrease of $16.6 million was primarily attributable to an increase in salesvolume and current year savings relating to the closure of certainmanufacturing plants, including the accelerated depreciation incurred in theprior year.

 

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**Retail operating loss** was $4.3 million, or anegative 3.5% of sales, for the first quarter of fiscal 2011 compared to a lossof $11.3 million, or a negative 11.0% of sales, for the first quarter of fiscal2010.  The improvement was primarily dueto current year improvement in sales as well as cost savings due to the benefitof the cost cutting actions taken.

 

**Interestand other miscellaneous income, net** increased $2.4 million fromthe prior year comparable quarter.  Theincrease was primarily due to the recording of a $1.5 million out of periodadjustment related to non-operating income recorded in the current period.

 

**Interestand other related financing costs** amounted to just under $3.0million in both the current and prior year periods.  This amount consists primarily of interestexpense on our senior unsecured debt.

 

**Income tax expense**for the three months ended September 30,2010 totaled an expense of $1.8 million as compared to a benefit of $4.7million for the three months ended September 30, 2009. Our effective taxrate for the current quarter was 31.5% compared to 25.7% in the prior yearquarter. In the current quarter, the effective tax rate is related to the taxexpense on the current quarter’s net income increased by current quarterinterest expense on uncertain tax positions and partially offset by a reductionin valuation allowance driven primarily by utilization of certain deferred taxassets.

 

**Net income (loss)** for the three months ended September 30,2010, was income of $3.8 million as compared to a loss of $13.6 million in theprior year comparable period.  Thisresulted in net income per diluted share of $0.13 in the current quartercompared to a loss per diluted share of $0.47 in the prior year quarter.

 

**Liquidity and Capital Resources**

 

At September 30, 2010, we held cash and cash equivalents of $62.7million, marketable securities of $11.7 million, and restricted cash andinvestments of $16.3 million.  Ourprincipal sources of liquidity include cash and cash equivalents, marketablesecurities, cash flow from operations, the revolving line of credit, andborrowings.

 

In September 2005, we completed a private offering of $200.0million in ten-year senior unsecured notes due 2015 (the “Senior Notes”). TheSenior Notes were offered by Global and have an annual coupon rate of 5.375%with interest payable semi-annually in arrears on April 1 and October 1of each year.  We have used the netproceeds of $198.4 million to expand our retail network, invest in ourmanufacturing and logistics operations, and for other general corporatepurposes.  In September 2010, theCompany repurchased $2.4 million of the Senior Notes in three unsolicited openmarket transactions.

 

On October 23, 2009, the Company expanded to $60 million thethree-year senior 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) London Interbank Offered rate (“LIBOR”) plus 3.25% to 4.25%,based on the average availability, or

(b) the higher of (i) a prime rate, (ii) the federalfunds effective rate plus 0.50%, or (iii) a LIBOR rate plus 1.00% plus, ineach case, an additional 2.25% to 3.25%, based on average availability.

 

The Facility is secured by all property owned, leased or operated bythe Company in the United States excluding any real property owned by theCompany and contains customary covenants which may limit the Company’s abilityto incur debt; engage in mergers and consolidations; make restricted payments(including dividends); sell certain assets; and make investments.

 

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At September 30, 2010, we had no revolving loans, and $1.0 millionin standby letters of credit outstanding under the Facility. Remainingavailability under the revolver totaled $59.0 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, or otherrestricted payment limitations did not apply.

 

As of September 30, 2010, we are in compliance with all covenantsof our Facility and our Senior Notes.

 

A summary of net cash provided by (used in) operating, investing, andfinancing activities for the three month periods ended September 30, 2010and 2009 is provided below (in millions):

 
| ** **                                                | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                | ** ** | **September 30,**           | ** ** |
| ** **                                                | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| **Operating Activities**                                  |       |                             |       |   |   |
| Net income plus depreciation and amortization             |       | $                                | 9.4        |   | $ | (0.9 | ) |
| Working capital                                           |       | (9.7                             | )          | 22.1 |   |
| Other (non-cash items, long-term assets and  liabilities) |       | (0.6                             | )          | (4.2 | ) |
| Total provided by (used in) operating activities          |       | $                                | (0.9       | ) | $ | 17.0 |   |
|                                                      |       |                             |       |   |   |
| **Investing Activities**                                  |       |                             |       |   |   |
| Capital expenditures                                      |       | $                                | (1.5       | ) | $ | (2.5 | ) |
| Asset sales                                               |       | 0.1                              |       | 5.9 |   |
| Decrease in restricted cash and investments               |       | 1.0                              |       | — |   |
| Other                                                     |       | (0.7                             | )          | — |   |
| Total provided by (used in) investing activities          |       | $                                | (1.1       | ) | $ | 3.4 |   |
|                                                      |       |                             |       |   |   |
| **Financing Activities**                                  |       |                             |       |   |   |
| Common share repurchases                                  |       | $                                | (5.4       | ) | $ | — |   |
| Early extinguishment of debt                              |       | (2.3                             | )          | — |   |
| Payment of dividends                                      |       | (1.4                             | )          | (1.5 | ) |
| Total used in financing activities                        |       | $                                | (9.1       | ) | $ | (1.5 | ) |

 

***Operating Activities***

Compared to the same period in fiscal year 2010, cash provided byoperating activities decreased $17.9 million. This occurred due to a $31.7 million decrease in cash generated fromworking capital (accounts receivable, inventories, prepaid and other currentassets, customer deposits, payables, accrued expenses, and other currentliabilities) resulting mostly from an increase in inventory and customer depositstotaling $23.0 million related to improved sales and orders, as well as a largetax refund received in July 2009 which did not recur in the currentquarter. Partly offsetting the decrease in working capital was a $17.4 millionimprovement in net income (including $6.6 million in accelerated depreciationin fiscal 2010).

 

***Investing Activities***

 

During the quarter ended September 30, 2010, we continued ourcapital spending at a reduced rate.  Ascompared to the same period in fiscal year 2010, cash used in investingactivities decreased $4.5 million during the three months ended September 30,2010 due, primarily, to a decrease in proceeds from the sale of retailproperties compared to the first quarter of fiscal 2010.  In addition, we transferred a portion ofrestricted cash to our operating cash account during the current quarter due toa reduction in our workmen’s compensation claims.  We anticipate that cash from operations willbe sufficient to fund future capital expenditures.

 

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***Financing Activities***

As compared to the same period in fiscal year 2010, cash used infinancing activities increased $7.6 million during the three months ended September 30,2010, primarily as a result of the resumption of our stock repurchase activitydue to our ability to generate excess cash and the favorable stock price.  We repurchased 386,886 shares during thefourth quarter of fiscal 2010 and first quarter of fiscal 2011, all of whichwere settled during the current fiscal quarter. We also repurchased $2.4 million of our Senior Notes in threeunsolicited open market transactions.  Wemay make additional unsolicited repurchases of our Senior Notes in the future,but we have no specific plans to do so. The Company has continuously paid dividends every quarter since1996.  On July 20, 2010, the Boarddeclared a dividend of $0.05 per common share, payable on October 25,2010, to shareholders of record as of October 11, 2010.  If economic conditions worsen, the Companymay reduce our quarterly dividends.

 

As of September 30, 2010, our outstanding debt totaled $200.9million, the current and long-term portions of which amounted to $3.9 millionand $197.0 million, respectively.  Theaggregate scheduled maturities of long-term debt for each of the next fivefiscal years are: $3.9 million in fiscal 2011, and less than $0.1 million infiscal 2012 through 2015.  The balance ofour long-term Senior Notes ($196.8 million) matures in September 2015(fiscal 2016).

 

Therehas been no material change to the amount or timing of cash payments related toour outstanding contractual obligations as set forth in Part II, Item7 — *Management’s Discussion and Analysis of FinancialCondition and Results of Operation* of our Annual Report on Form 10-Kfor the year ended June 30, 2010 as filed with the Securities and ExchangeCommission on August 19, 2010.

 

We believe that our cash flow from operations, together with our otheravailable sources of liquidity, will be adequate to make all required paymentsof principal and interest on our debt, to permit anticipated capitalexpenditures, and to fund working capital and other cash requirements.  As of September 30, 2010, we had workingcapital of $115.5 million compared to $114.0 million at June 30, 2010, anincrease of $1.5 million (1.3%).    TheCompany had a current ratio of 1.8 to 1 at September 30, 2010 and June 30,2010.

 

In addition to using available cash to fund changes in working capital,necessary capital expenditures, acquisition activity, the repayment of debt,and the payment of dividends, we have been authorized by our Board of Directorsto repurchase our common stock, from time to time, either directly or throughagents, in the open market at prices and on terms satisfactory to us. All ofour common stock repurchases and retirements are recorded as treasury stock andresult in a reduction of shareholders’ equity.

 

During the three months ended September 30, 2010 and 2009, werepurchased and/or retired the following shares of our common stock:

 
| ** **                       | ** ** | **Three Months Ended** | ** ** |
|----------------------------------|------------|----------------------------------|------------|
| ** **                       | ** ** | **September 30,**           | ** ** |
| ** **                       | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| Common shares repurchased        |       | 204,286                          |       | — |   |
| Cost to repurchase common shares |       | $                                | 2,787,777  |   | — |   |
| Average price per share          |       | $                                | 13.65      |   | — |   |

 

As of September 30, 2010, we had a remaining Board authorizationto repurchase 1,180,783 shares.

 

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**Off-Balance Sheet Arrangements and Other Commitments, Contingencies andContractual Obligations**

 

We do not utilize or employ any off-balance sheet arrangements,including special-purpose entities, in operating our business.  As such, we do not maintain any (i) retainedor contingent interests, (ii) derivative instruments (other than asspecified below), or (iii) variable interests which could serve as asource of potential risk to our future liquidity, capital resources and resultsof operations.

 

We may, from time to time in the ordinary course of business, provideguarantees on behalf of selected affiliated entities or become contractuallyobligated to perform in accordance with the terms and conditions of certainbusiness agreements. The nature and extent of these guarantees and obligationsmay vary based on our underlying relationship with the benefiting party and thebusiness purpose for which the guarantee or obligation is being provided.Details of those arrangements for which we act as guarantor or obligor areprovided below.

 

**Retailer-Related Guarantees**

 

***Independent Retailer Credit Facility***

InJune 2009, we obligated ourselves, on behalf of one of our independentretailers, with respect to a $0.5 million credit facility (the “Amended CreditFacility”). 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.  We believethis obligation will expire without requiring funding by us.

 

***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 the Company and thatfinancial service provider (the “Program Agreement”).  In February and June 2010, theCompany modified the Program Agreement to comply with recent changes in lawsand made certain other changes to fees payable to the service provider. Anyindependent retailer choosing to participate in the consumer credit program isrequired to enter into a separate agreement with that same third-partyfinancial institution which sets forth the terms and conditions under which theretailer is to perform in connection with its offering of consumer credit toits customers (the “Retailer Agreement”). We have obligated ourselves on behalfof any independent retailer choosing to participate in our consumer creditprogram by agreeing, in the event of default, breach, or failure of theindependent retailer to perform under such Retailer Agreement, to take oncertain responsibilities of the independent retailer, including, but notlimited to, delivery of goods and reimbursement of customer deposits. Customerreceivables originated by independent retailers remain non-recourse to Ethan Allen.Our obligation remains in effect for the term of the Program Agreement thatexpires in July 2014. While the maximum potential amount of futurepayments (undiscounted) that we could be required to make under this obligationis indeterminable, recourse provisions exist that would enable us to recover,from the independent retailer, any amount paid or incurred by us related to ourperformance. Based on the underlying creditworthiness of our independentretailers, including their historical ability to satisfactorily perform inconnection with the terms of our consumer credit program, we believe thisobligation will expire without requiring funding by us. To ensure funding fordelivery of products sold, the terms of this agreement also contain a right forthe credit card issuer to demand from the Company collateral of up to $12million if the Company does not meet certain covenants.  As of September 30, 2010, the Companyhad established a restricted cash and investment collateral account of $6million to satisfy the current collateral requirement.

 

**ProductWarranties**

Our products, including our case goods, upholstery and home accents,generally carry explicit product warranties that extend from one to ten yearsand are provided based on terms that are generally accepted in theindustry.  All of our domesticindependent retailers are required to enter into, and perform in accordancewith the terms and 

 

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conditions of, a warranty service agreement. We record provisions forestimated warranty and other related costs at time of sale based on historicalwarranty loss experience and make periodic adjustments to those provisions toreflect actual experience. On rare occasion, certain warranty and other relatedclaims involve matters of dispute that ultimately are resolved by negotiation,arbitration or litigation.  In certaincases, a material warranty issue may arise which is beyond the scope of ourhistorical experience. We provide for such warranty issues as they become knownand are deemed to be both probable and estimable. It is reasonably possiblethat, from time to time, additional warranty and other related claims could arisefrom disputes or other matters beyond the scope of our historical experience.As of September 30, 2010, our product warranty liability totaled $0.8million.

 

***Business Outlook***

 

We cannot forecast when thestresses in the U.S. economy from continued high unemployment, depressedhousing market and tight consumer spending, which had a negative impact on ourbusiness, will improve meaningfully.  Asbusiness conditions have gradually improved we have begun to hire for both ourmanufacturing and retail operations as well as to invest in incrementaladvertising to drive traffic to our design centers. While optimistic about ourlong-term outlook, we remain cautious.

 

As macro-economic factors change, it is also possible that our costsassociated with production (including raw materials and labor), distribution(including freight and fuel charges), and retail operations (includingcompensation and benefits, delivery and warehousing, occupancy, and advertisingexpenses) may increase.  We may alsoexperience production difficulties as we continue to increase capacity of ourremaining manufacturing plants to match demand, and improve efficiency in ourcustom case goods production.  We cannotreasonably predict when, or to what extent, such events may occur or what effect,if any, such events may have on our consolidated financial condition or resultsof operations.

 

The home furnishings industry remains extremely competitive withrespect to both the sourcing of products and the wholesale and retail sale ofthose products. Domestic manufacturers continue to face pricing pressuresbecause of the manufacturing capabilities of other countries, particularlywithin Asia. In response to these pressures, a large number of U.S. furnituremanufacturers have increased their overseas sourcing to retain market share.While we have also turned to overseas sourcing to remain competitive, we chooseto differentiate ourselves by maintaining a substantial domestic manufacturingbase.  Consequently  we make and/or assemble approximately 70% ofour products domestically.  We continueto believe that a balanced approach to product sourcing, which includes thedomestic manufacture of certain product offerings coupled with the import ofother selected products, provides the greatest degree of flexibility and is themost effective approach to ensuring that acceptable levels of quality, serviceand value are attained.

 

Our retail strategy involves (i) a continued focus on providing awide array of product solutions and superior customer service, (ii) theopening of new or relocated design centers in more prominent locations, whileencouraging independent retailers to do the same, and (iii) leveraging theuse of technology and personal service within our retail network, and (iv) furtherexpansion internationally.  We believethis strategy provides an opportunity to grow our business.

 

**Item 3. Quantitative and Qualitative Disclosures About Market Risk**

 

There have been no material changes to the market risks disclosed inour Annual Report on Form 10-K for the year ended June 30, 2010 asfiled with the Securities and Exchange Commission on August 19, 2010.

 

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**Item 4. Controls and Procedures**

 

**Management’s Report on Disclosure Controls and Procedures**

 

Our management, including the Chairman of the Board and Chief ExecutiveOfficer (“CEO”) and the Vice President-Finance (“VPF”), conducted an evaluationof the effectiveness of disclosure controls and procedures (as such term isdefined in Rules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”)) as of the end of theperiod covered by this report. Based on such evaluation, the CEO and VPF haveconcluded that, as of September 30, 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 over Financial Reporting**

 

There have been no changes in our internal control over financialreporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) underthe Exchange Act) during the fiscal quarter ended September 30, 2010 thathave materially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

**PART II - OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

Therehave been no material changes to the matters discussed in Part I, Item3 - *Legal Proceedings* in our Annual Reporton Form 10-K for the year ended June 30, 2010 as filed with theSecurities and Exchange Commission on August 19, 2010.

 

**Item 1A. Risk Factors**

 

There have been no material changes to the market risks disclosed inour Annual Report on Form 10-K for the year ended June 30, 2010 asfiled with the Securities and Exchange Commission on August 19, 2010.

 

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

 

***Issuer Purchases of Equity Securities***

Certaininformation regarding purchases made by or on behalf of the Company or any affiliatedpurchaser (as defined in Rule 10b-18(a)(3) under the Exchange Act) ofour common stock during the three months ended September 30, 2010 isprovided below:

 
| **Period** | ** ** | **Total Number of  Shares Purchased** | ** ** | **Average Price Paid  Per Share** | ** ** | **Total Number of  Shares Purchased as  Part of Publicly  Announced Plans or  Programs** | ** ** | **Maximum  Number of Shares  That May Yet Be  Purchased Under  the Plans or  Programs (a)** | ** ** |
|------------|------------|------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------|------------|
| July       |       | 204,286                                              |       | $                                                | 13.65      |                                                                                                                             | 204,286    |                                                                                                                                     | 1,180,783  |   |
| August     |       | —                                               |       | —                                           |       | —                                                                                                                           |       | 1,180,783                                                                                                                                |       |
| September  |       | —                                               |       | —                                           |       | —                                                                                                                           |       | 1,180,783                                                                                                                                |       |
| Total      |       | 204,286                                              |       | $                                                | 13.65      |                                                                                                                             | 204,286    |                                                                                                                                     |       |   |

 

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| (a) | On  November 21, 2002, our Board of Directors approved a share repurchase  program authorizing us to repurchase up to 2,000,000 shares of our common  stock, from time to time, either directly or through agents, in the open  market at prices and on terms satisfactory to us. Subsequent to that date,  the Board of Directors increased the remaining authorization on seven  separate occasions, the last of which was on November 13, 2007. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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**Item 3. Defaults Upon Senior Securities**

 

Notapplicable.

 

**Item 4.Reserved**

 

**Item 5. Other Information**

 

Notapplicable.

 

**Item 6. Exhibits**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                               |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10(e)-3             |       | Third  Amendment to Second Amended and Restated Private Label Consumer Credit Card  Program Agreement dated June 30, 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                                                                                                                                                                                                                                                          |

 

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SIGNATURES

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.

 

 
|   | ETHAN ALLEN INTERIORS INC. |
|--------|----------------------------|
|   | (Registrant)               |
|        |                            |  |

 

 
| DATE:    November 3, 2010 | BY:                                                                                                 | /s/   M. Farooq Kathwari |
|------------------------------------------|-----------------------------------------------------------------------------------------------------|-------------------------------|
|                                     | Farooq  Kathwari

Chairman,  President and Chief Executive Officer 

(Principal  Executive Officer) |

 

 
| DATE:    November 3, 2010 | BY:                                                                                                                                                      | /s/  David R. Callen |
|------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------|
|                                     | David  R. Callen

Vice  President, Finance & Treasurer

(Principal  Financial Officer and Principal Accounting Officer)     |

 

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EXHIBIT INDEX

 
| **Exhibit  Number** | ** ** | **Exhibit**                                                                                                                                                                                                                                                                                                                                                   |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10(e)-3             |       | Third  Amendment to Second Amended and Restated Private Label Consumer Credit Card  Program Agreement dated June 30, 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                                                                                                                                                                                                                                                                                               |

 

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