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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

**(Mark One)**

 

x       **ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**For the fiscal year ended June 30, 2010**

** **

**OR**

 

o          **TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**For the transition period from              to              **

** **

**Commission file number 1-11692**

 

**EthanAllen 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, CT**                             | ** ** | **06811**                            |
| (Address of principal executive offices)                       |       | (Zip Code)                           |

 

Registrant’s telephone number, including area code **(203)743-8000**

 

Securities registered pursuant to Section 12(b) of the Act:

 

| **Title of  Each Class**     | ** ** | **Name of  Each Exchange On Which Registered** |
|------------------------------|------------|------------------------------------------------|
| Common Stock, $.01 par value |       | New York Stock Exchange, Inc.             |

 

Securities registered pursuant to Section 12(g) of the Act:

 

**None**

(Title of Class)

 

Indicate by check mark if the Registrant is a well-known seasonedissuer, as defined in Rule 405 of the Securities Act.  o Yes  x No

 

Indicate by check mark if the Registrant is not required to filereports pursuant to Section 13 or Section 15(d) of the Act.  o Yes  x No

 

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 InteractiveDate File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§232.405 of this chapter) during the preceding 12 months (orsuch shorter period that the registrant was required to submit and post suchfiles).  o Yes  o No

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of Registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K orany amendment to this Form 10-K.  o

 

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 (check one):

 

| 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 Act).  o Yes  x No

 

The aggregate market value of the Registrant’s common stock, par value$.01 per share, held by non-affiliates (based upon the closing sale price onthe New York Stock Exchange) on December 31, 2009, (the last day of theRegistrant’s most recently completed second fiscal quarter) was approximately$388,065,187.  As of July 31, 2010,there were 28,740,575 shares of the Registrant’s common stock, par value $.01per share, outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE: The Registrant’s definitive Proxy Statement for the 2010 Annual Meetingof stockholders, which will be filed with the Securities and ExchangeCommission pursuant to Regulation 14A of the Securities Exchange Act of 1934,is incorporated by reference into Part III hereof.

 

 

 

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**TABLE OF CONTENTS**

 
| **Item**          | ** **                                                                                                          | **Page**   |
|-------------------|---------------------------------------------------------------------------------------------------------------------|------------|
| ** **        | ** **                                                                                                          | ** ** |
| **PART I**   |
| ** **        |                                                                                                                |       |
| 1.                | Business                                                                                                            | 3          |
|              |                                                                                                                |       |
| 1A.               | Risk  Factors                                                                                                       | 11         |
|              |                                                                                                                |       |
| 1B.               | Unresolved  Staff Comments                                                                                          | 16         |
|              |                                                                                                                |       |
| 2.                | Properties                                                                                                          | 16         |
|              |                                                                                                                |       |
| 3.                | Legal  Proceedings                                                                                                  | 17         |
|              |                                                                                                                |       |
| 4.                | Reserved                                                                                                            | 18         |
|              |                                                                                                                |       |
| **PART II**  |
| ** **        |                                                                                                                |       |
| 5.                | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities | 18         |
|              |                                                                                                                |       |
| 6.                | Selected  Financial Data                                                                                            | 20         |
|              |                                                                                                                |       |
| 7.                | Management’s  Discussion and Analysis of Financial Condition and Results of Operation                          | 22         |
|              |                                                                                                                |       |
| 7A.               | Quantitative  and Qualitative Disclosures About Market Risk                                                         | 36         |
|              |                                                                                                                |       |
| 8.                | Financial  Statements and Supplementary Data                                                                        | 37         |
|              |                                                                                                                |       |
| 9.                | Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure                               | 77         |
|              |                                                                                                                |       |
| 9A.               | Controls and  Procedures                                                                                            | 77         |
|              |                                                                                                                |       |
| 9B.               | Other  Information                                                                                                  | 78         |
|              |                                                                                                                |       |
| **PART III** |
| ** **        |                                                                                                                |       |
| 10.               | Directors,  Executive Officers and Corporate Governance                                                             | 78         |
|              |                                                                                                                |       |
| 11.               | Executive Compensation                                                                                              | 78         |
|              |                                                                                                                |       |
| 12.               | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    | 78         |
|              |                                                                                                                |       |
| 13.               | Certain Relationships and Related Transactions, and  Director Independence                                          | 78         |
|              |                                                                                                                |       |
| 14.               | Principal Accountant Fees and Services                                                                              | 78         |
|              |                                                                                                                |       |
| **PART IV**  |
| ** **        |                                                                                                                |       |
| 15.               | Exhibits  and Financial Statement Schedules                                                                         | 79         |
|              |                                                                                                                |       |
|              | Signatures                                                                                                          | 84         |

 

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**PART I**

 

**Item 1. Business**

 

**Background**

 

Incorporated in Delaware in 1989, Ethan Allen Interiors Inc., throughits wholly-owned subsidiary, Ethan Allen Global, Inc., and Ethan AllenGlobal, Inc.’s subsidiaries (collectively, “We,” “Us,” “Our,” “Ethan Allen”or the “Company”), is a leading manufacturer and retailer of quality homefurnishings and accessories, offering a full complement of home decorating anddesign solutions through one of the country’s largest home furnishing retailnetworks.  We refer to our Ethan Allenretail outlets as “design centers” instead of “stores” to better reflect theseexpanded capabilities.  We have made, andcontinue to make, considerable investment in our business in order to expandand improve our interior design capabilities and to leverage our domesticmanufacturing and logistics operations. The Company was founded in 1932 and has sold products under the EthanAllen brand name since 1937.

 

**Mission Statement**

 

Our primary business objective is to provide our customers with aconvenient, full-service, one-stop shopping solution for their home decoratingneeds by offering stylish, high-quality products at good value.  In order to meet our stated objective, wehave developed and adhere to a focused and comprehensive businessstrategy.  The elements of this strategy,each of which is integral to our solutions-based philosophy, include (i) ourvertically integrated operating structure, (ii) our stylish products andrelated marketing initiatives, (iii) our retail design center network, (iv) ourpeople, and (v) our focus on providing design solutions.

 

**Operating Segments**

 

Our products are sold through a dedicated network of 281 retail designcenters. As of June 30, 2010, the Company operated 145 design centers (ourretail segment) and our independent retailers operated 136 design centers (ascompared to 159 and 134, respectively, at the end of the prior fiscal year).Our wholesale segment net sales include sales to our retail segment and salesto our independent retailers.  Our retailsegment net sales accounted for 74% of our consolidated net sales in fiscal2010 while wholesale segment net sales to independent retailers accounted for26%. Our net sales to the ten largest independent retailers, who operate 68design centers, accounted for approximately 15% of our consolidated net salesin fiscal 2010.

 

Our wholesale and retail operating segments represent strategicbusiness areas of our vertically integrated business that operate separatelyand provide their own distinctive services (further outlined below).  This enables us to more effectively offer ourcomplete line of home furnishings and accessories and more efficiently controlquality and cost. For certain financial information regarding our operatingsegments, see Note 16 to the Consolidated Financial Statements included underItem 8 of this Annual Report and incorporated herein by reference.

 

While the manner in which our home furnishings and accessories aremarketed and sold is consistent between our wholesale and retail segments, thenature of the underlying recorded sales (i.e. wholesale versus retail) and thespecific services that each operating segment provides (i.e. wholesalemanufacturing, sourcing, and distribution versus retail selling) aredifferent.  Within the wholesale segment,we maintain revenue information according to each respective product line (i.e.case goods, upholstery, or home accessories and other).  Sales of case good items include, but are notlimited to, beds, dressers, armoires, tables, chairs, buffets, entertainmentunits, home office furniture, and wooden accents. Sales of upholstery homefurnishing items include sleepers, recliners, chairs, sofas, loveseats, cutfabrics and leather.  Skilled craftsmencut, sew and upholster custom-designed upholstery items which are available ina variety of frame and fabric options. Home accessory and

 

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other items include window treatments, wall decor, lighting, clocks,bedding and bedspreads, decorative accessories, area rugs, and home and gardenfurnishings.

 

Revenue information by product line is not as easily determined withinthe retail segment. However, because wholesale sales are matched, for the mostpart, to incoming orders, we believe that the allocation of retail sales by productline would be similar to that of the wholesale segment.

 

We evaluate performance of the respective segments based upon revenuesand operating income. Inter-segment eliminations result, primarily, from thewholesale sale of inventory to the retail segment, including the related profitmargin.

 

***Wholesale Segment Overview:***

Wholesalenet sales for each of the last three fiscal years are summarized below (inmillions):

 
| ** **          | ** ** | **Fiscal Year Ended June 30,** | ** ** |
|---------------------|------------|-------------------------------------|------------|
| ** **          | ** ** | **2010**                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| Wholesale net sales |       | $                                   | 362.5      |   | $ | 403.4 |   | $ | 616.2 |   |
|                     |            |                                     |            |  |  |  |  |  |  |  |

 

Wholesale net sales for each of the last three fiscal years, allocatedby product line, were as follows:

 
| ** **                 | ** ** | **Fiscal Year Ended June 30,** | ** ** |
|----------------------------|------------|-------------------------------------|------------|
| ** **                 | ** ** | **2010**                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| Case Goods                 |       | 40                                  | %          | 41 | % | 43 | % |
| Upholstered Products       |       | 46                                  |       | 41 |   | 40 |   |
| Home Accessories and Other |       | 14                                  |       | 18 |   | 17 |   |
|                       |       | 100                                 | %          | 100 | % | 100 | % |

 

The wholesale segment, principally involved in the development of theEthan Allen brand, encompasses all aspects of design, manufacture, sourcing,sale, and distribution of our broad range of home furnishings andaccessories.  Wholesale revenue isgenerated upon the wholesale sale and shipment of our products to our networkof independently operated design centers and Ethan Allen operated designcenters (see Company operated retail comments below) through its nationaldistribution center and one other smaller fulfillment center.

 

During the past year, independent retailers opened 12 new designcenters (of which two were relocations), and closed seven design centers. Wecontinue to promote the growth and expansion of our independent retailersthrough ongoing support in the areas of market analysis, site selection, andbusiness development.  As in the past,our independent retailers are required to enter into license agreements withus, which (i) authorize the use of certain Ethan Allen service marks and (ii) requireadherence to certain standards of operation, including a requirement to fulfillrelated warranty service agreements.  Weare not subject to any territorial or exclusive retailer agreements in NorthAmerica. The wholesale segment also develops and implements related marketingand brand awareness programs.

 

Wholesale profitability includes (i) the wholesale gross margin,which represents the difference between the wholesale net sales price and thecost associated with manufacturing and/or sourcing the related product, and (ii) otheroperating costs associated with wholesale segment activities.

 

TheCompany’s domestic manufacturing is included in the results of the wholesalesegment. During fiscal years 2009 and 2010, we consolidated two upholsteryplants and one case goods sawmill plant and dramatically reduced operations ofanother case goods plant. All redundant operations were moved into otherexisting plants, thereby improving overall utilization of our domesticmanufacturing. During fiscal 2010, we also converted our domestic case goodsmanufacturing to custom operations. Case goods products are no longer producedto a 

 

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forecastand held in inventory; but rather, are produced to specific customer orderswith the options specified by our clients. We now operate three case goodsplants (including one sawmill), three upholstery plants (two upholstery plantson our Maiden, North Carolina campus and one cut and sew plant in Mexico) andone home accessory plant. We also source selected case good, upholstery, andhome accessory items from third-party suppliers located both domestically andoutside the United States.

 

Asof June 30, 2010, we maintained a wholesale backlog of $57.0 million (ascompared to $20.6 million as of June 30, 2009) which is anticipated to beserviced in the first quarter of fiscal 2011. Backlog at a point in time is a result, primarily, of net orders bookedin prior periods, manufacturing schedules, timing associated with the receiptof sourced product, and the timing and volume of wholesale shipments. Becauseorders may be rescheduled and/or canceled, the measure of backlog at a point intime may not necessarily be indicative of future sales performance.

 

Forthe twelve months ended June 30, 2010, net orders booked at the wholesalelevel, which includes orders generated by independently operated and Companyoperated design centers, totaled $403.7 million as compared to $398.5 millionfor the twelve months ended June 30, 2009. In any given period, net orders booked may be impacted by the timing offloor sample orders received in connection with new product introductions.  New product offerings may be made availableto the retail network at any time during the year, including in connection withour periodic retailer conferences.

 

***Retail Segment Overview****:*

Retailnet sales for each of the last three fiscal years are summarized below (inmillions):

 
| ** **       | ** ** | **Fiscal Year Ended June 30,** | ** ** |
|------------------|------------|-------------------------------------|------------|
| ** **       | ** ** | **2010**                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| Retail net sales |       | $                                   | 438.5      |   | $ | 508.6 |   | $ | 724.6 |   |
|                  |            |                                     |            |  |  |  |  |  |  |  |

 

The retail segment sells home furnishings and accessories to consumersthrough a network of Company-operated design centers. During fiscal 2010 weacquired one design center from an independent retailer, opened four new designcenters (of which three were relocations), and closed sixteen designcenters.  In addition, we recentlyinitiated a program that provides the opportunity for Ethan Allen designers towork with independent interior design affiliates that apply and meet EthanAllen standards. This program provides the opportunity for the Company to reachadditional clients with over 1,300 interior designers (serving both Companyoperated and independent retail operations) not otherwise affiliated with EthanAllen and compensates them for the incremental business. Retail revenue isgenerated upon the retail sale and delivery of our products to our retailcustomers through its network of 18 service centers (as of June 30, 2010).Retail profitability includes (i) the retail gross margin, whichrepresents the difference between the retail net sales price and the cost ofgoods purchased from the wholesale segment, and (ii) other operating costsassociated with retail segment activities.

 

Wepursue further expansion of the Company-operated retail business by opening newdesign centers, relocating existing design centers and, when appropriate,acquiring design centers from independent retailers. The geographicdistribution of retail design center locations is included under Item 2 of Part Iof this Annual Report.

 

**Products**

 

Ourstrategy has been to position Ethan Allen as a preferred brand with superiorstyle, quality and value while, at the same time, providing consumers with acomprehensive, one-stop shopping solution for their home furnishing and designneeds.  In carrying out our strategy, wecontinue to expand our reach to a broader consumer base through a diverseselection of attractively priced products, designed to complement one another,reflecting the popular trend toward eclectic home decorating.  Regular product introductions, a broad rangeof styles and selections within our custom upholstery and case good lines, newfinishes for, and redesigns of, previous product introductions, and expandedproduct offerings to accommodate today’s home decorating trends, continue to 

 

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redefineEthan Allen, positioning us as a leader in style. During fiscal 2010, wefurther enhanced the opportunities to create individualized design solutionsfor our clients with the conversion of our entire domestic case goods productsto custom, made-to-order manufacturing.

 

Inan effort to more effectively position ourselves as a provider of interiordesign solutions, we offer a merchandising strategy which involves the groupingof our product offerings, previously categorized by collection, into sevendistinct product “lifestyles”, each reflecting the diversity and eclecticismthat we believe represents the best in American design.  In accordance with this merchandisingstrategy, new products are designed and developed to reflect unique elementsapplicable to one or more of the following lifestyles: Country House; Estate;Glamour; Global; Loft; Metro; and Villa.

 

Allof our case goods, upholstered products, and home accessories are styled withdistinct design characteristics. Home accessories play an important role in ourmarketing strategy as they enable us to offer the consumer the convenience ofone-stop shopping by creating a comprehensive home furnishing solution. Theinterior of our design centers is organized to facilitate display of ourproduct offerings, both in room settings that project the category lifestyleand by product grouping to facilitate comparisons of the styles and tastes ofour clients. To further enhance the experience, technology is used to expandthe range of products viewed by including content from our award-winningwebsite and advanced large touch-screen flat panel displays.

 

Wecontinuously monitor changes in home design trends through attendance atinternational industry events and fashion shows, internal market research, andregular communication with our retailers and design center design consultantswho provide valuable input on consumer tendencies.  We believe that the observations and inputgathered enables us to incorporate appropriate style details into our productsto react quickly to changing consumer tastes. For example, since 2006, 58% ofour current product lines are new. Much of the balance has been refined andenhanced through product redesign, additions, deletions, and/or finish changes.Such undertakings are indicative of our ability to adapt to the currentconsumer trend toward more casual and eclectic lifestyles while, at the sametime, maintaining a classic appeal.

 

Inresponse to the demands of our clients for even greater values during therecession of 2009 and 2010, the Company began offering special savings on manyproducts during specified marketing initiatives. This was a necessary move awayfrom our discipline of an everyday best price on all of our product offerings.  While we believe that a stable uniformeveryday best price approach best allows us to differentiate ourselves throughstrategies focused on customer credibility and excellence in service, werecognize that in today’s economy, consumers demand the even greater valuesobtained through our periodic savings events. We will continue to monitorconsumer sentiments and adjust our promotional activity accordingly.

 

**Product Sourcing Activities**

 

Weare one of the largest manufacturers of home furnishings in the United States,manufacturing and/or assembling approximately 70% of our products in our sixdomestic manufacturing facilities. Our facilities are located in the Northeastand Southeast regions of the United States where they are close to sources of rawmaterials and skilled craftsmen. Our domestic upholstery manufacturing issupported by our high quality upholstery cut and sew plant in Mexico thatdoubled in size during fiscal 2010. The balance of our production is outsourcedaccording to our own internally-developed design specifications, throughthird-party suppliers, most of which are located outside the United States.These suppliers, primarily in Asia, have been carefully selected and generallyhave supplied us for many years.  Webelieve that strategic investment in our manufacturing facilities, combinedwith an appropriate level of outsourcing through both foreign and domesticsuppliers, will accommodate future sales growth and allow us to maintain anappropriate degree of control over cost, quality and service to our customers.

 

Wealso take pride in our “green” initiatives that include, in select productofferings, the use of responsibly harvested Appalachian woods, water basedfinishes, organic textiles and recycled materials.

 

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**RawMaterials and Other Suppliers**

 

Themost important raw materials we use in furniture manufacturing are lumber,veneers, plywood, hardware, glue, finishing materials, glass, mirrored glass,laminates, fabrics, foam, and filling material. The various types of wood used in our products include cherry, ash, oak,maple, prima vera, mahogany, birch and pine, substantially all of which arepurchased domestically.

 

Fabricsand other raw materials are purchased both domestically and outside the UnitedStates.  We have no significant long-termsupply contracts, and have sufficient alternate sources of supply to preventdisruption in supplying our operations. We maintain a number of sources for our raw materials which, we believe,contributes to our ability to obtain competitive pricing.  Lumber prices fluctuate over time based onfactors such as weather and demand, which, in turn, impact availability.  Higher material prices could have an adverseeffect on margins.

 

Appropriateamounts of lumber and fabric inventory are typically stocked so as to maintainadequate production levels.  We believethat our sources of supply for these materials are sufficient and that we arenot dependent on any one supplier.

 

Weenter into standard purchase agreements with certain foreign and domesticsuppliers to source selected case good, upholstery, and home accessoryitems.  The terms of these arrangementsare customary for the industry and do not contain any long-term contractualobligations on our behalf.  We believe wemaintain good relationships with our suppliers.

 

**Distributionand Logistics**

 

Wecontinued to streamline our logistics operations during fiscal 2010 in both ourwholesale and retail segments.

 

Inthe wholesale segment, the conversion of our domestic case goods to custommanufacturing enabled us to consolidate the warehousing and distribution of ourproducts through one primary distribution center, owned by the Company,strategically located in the Southeast United States. This nationaldistribution center is supported by a smaller Company-owned order fulfillmentcenter located in the South Central United States. Our primary distribution centerprovides efficient cross-dock operations to receive and ship product from ourmanufacturing facilities and third-party suppliers to our network of retaildesign centers and retail service centers. While we manufacture to custom order the majority of our products, wealso stock selected case goods, upholstery and accessories to provide for quickdelivery of in-stock items and to allow for more efficient production runs. Wehave established two large “supermarkets of parts” within our existingmanufacturing sites for the components used in our custom case goodsmanufacturing.

 

Wholesaleshipments utilize our own fleet of trucks and trailers or are subcontractedwith independent carriers.  Approximately45% of our fleet (trucks and trailers) is leased under operating leaseagreements with remaining terms ranging from one to 27 months.

 

Ourpolicy is to sell our products at the same delivered cost to allCompany-operated and independently operated design centers nationwide,regardless of their shipping point. The adoption of this policy has createdpricing credibility with our wholesale customers and provided our retailnetwork the opportunity to achieve more consistent margins as fluctuationsattributable to the cost of shipping have been eliminated.  Further, this policy has eliminated the needfor our independent retailers to carry significant amounts of inventory intheir own warehouses.  As a result, weobtain more accurate end-consumer product demand information.

 

Retailservice centers are operated by the Company and the independent retailers toprepare products for delivery into clients’ homes. We continued to streamlineCompany-operated service centers and reduced the total number 

 

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from26 at the end of fiscal 2009 to 18 at the end of fiscal 2010. We continue toevaluate the entire logistics and distribution model to further improve theseoperations.

 

**MarketingPrograms**

 

Ourmarketing and advertising strategies are developed to drive traffic into ournetwork of design centers or to shop online at ethanallen.com.  We believe these strategies give Ethan Allena strong competitive advantage in the home furnishings industry.  We create and coordinate print and televisioncampaigns nationally, as well as assist in local marketing and promotionalefforts. The Company’s network of approximately 280 retail design centers andmore than 1,300 independent members of the Interior Design Affiliate programbenefit from these marketing efforts, and we believe these efforts position usto consistently fulfill our brand promise.

 

Ourin-house team of advertising specialists in collaboration with outsideprofessionals sends consistent, clear messages that Ethan Allen is a leader instyle and service, with everything for the well-designed home. We use severalforms of media to accomplish this, including television (national and local),direct mail, newspapers, shelter magazines, email, and online, atethanallen.com. A strong national email marketing campaign delivers emails anddesign and product brochures to a growing database of clients.

 

Ournational television and print advertising campaigns are designed to leverageour strong brand equity, finding creative and compelling ways to remindconsumers of our tremendous range of products, services, special programs, andcustom options. We believe that we consistently deliver the most cohesivenational advertising campaign in the home furnishings industry. Coordinatedlocal television and print, to the extent these media are utilized, serve tosupport our national programs.

 

TheEthan Allen direct mail magazine, which brands our product lifestyles andcommunicates the breadth of our products and services, is one of our mostimportant marketing tools. We publish these magazines and sell them to Companyand independently operated design centers who use demographic informationcollected through independent market research to target potential clients.Given the importance of this advertising medium, direct mail marketing listsare continually refined to target those consumers who are most likely topurchase, and improve the return on direct mail expenditures. Approximately 11million copies of our direct mail magazine were distributed to consumers duringfiscal 2010.

 

Ourtelevision advertising and direct mail efforts are supported by strong printcampaigns. We also update our Style Book approximately every six months. Inaddition to its use as a catalog of our case goods and upholstery products, theStyle Book is full of quality, design, and service stories, and looks and ideasto spark inspiration. This publication is a comprehensive and effectiveresource for clients.

 

TheCompany’s award winning website, ethanallen.com, provides our customers anddesign associates a great way to shop and design with videos, feature stories,design and style solutions, and fresh, new looks. Visitors will find all ourlatest news and promotional information here too. The site’s myprojects toollets visitors create idea boards and room plans. If they like, a designprofessional from their local Ethan Allen design center can give them feedback.

 

Thewebsite’s Inspire section includes editorial features, new product stories,design trend information, decorating solutions, and a collection of creativefilms and TV clips showcasing the many looks of Ethan Allen. The As Seen Inarea shows visitors how Ethan Allen products have influenced style around theglobe. Ethan Allen’s direct mail magazines are viewable online with fullbrowsing and shopping capabilities. In the Design section, visitors can findtheir own style with our style quiz and shop the full assortment offurnishings. Nearly all of Ethan Allen’s products are now available forpurchase online.

 

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Wealso have a robust and informative extranet available to our retailers and designprofessionals. It is the primary source of communication in and among membersof our retail network. It provides information about every aspect of thebusiness of Ethan Allen at retail, including advertising materials, prototypefloor plan displays, and extensive product details.

 

**RetailDesign Center Network**

 

EthanAllen design centers are typically located in busy urban settings asfreestanding destinations or as part of suburban strip malls, depending uponthe real estate opportunities in a particular market.  Our design centers average approximately16,000 square feet in size but range from approximately 3,000 square feet to35,000 square feet.

 

Wemaximize uniformity of presentation throughout the retail design center networkthrough a comprehensive set of standards and display planning assistance. Thesestandard interior design formats assist each design center in presenting a highquality image by using focused lifestyle settings and select product categorygroupings to display our products and information to facilitate designsolutions and to educate consumers. We also create a uniform design centerimage with consistent exterior facades in addition to the interiorlayouts.  The adherence to all of these standardshave helped position Ethan Allen as a leader in home furnishings retailing.

 

Wehave strengthened the retail network with many initiatives, including theopening of new and relocated design centers in desirable locations,introduction of Lifestyle presentations and floor plans, strengthening of theprofessionalism of our designers through training and certification, and theconsolidation of certain design centers and service centers. This continuousimprovement resulted in fiscal 2010 with four new Company-operated designcenters and twelve new independently operated design centers during the yearincluding relocations. Sixteen Company-operated and seven independentlyoperated design centers in underperforming markets were closed or consolidatedinto existing design centers. The Company also converted a Company-ownedwholesale distribution center into a regional retail service center andconsolidated nine service centers into larger regional service centers. Theseactions effectively completed the project begun with the consolidation of 27service centers during fiscal 2008 and 2009, significantly reducing the retaillogistics infrastructure needed to provide “white glove” delivery service toour customers.

 

**People**

 

AtJune 30, 2010, the Company had approximately 4,400 employees (“associates”),less than one percent of whom are represented by unions whose collectivebargaining agreements expire within the next year.  We expect no significant changes in ourrelations with the unions and believe we maintain good relationships with ouremployees.

 

Theretail network, which includes both Company-operated and independently operateddesign centers, is staffed with a sales force of design consultants and serviceprofessionals who provide customers with effective home decorating solutions atno additional charge. Our interior design associates receive specialty trainingwith respect to the distinctive design and quality features inherent in each ofour products and programs. This enables them to more effectively communicatethe elements of style and value that serve to differentiate us from ourcompetition. As such, we believe our design consultants, and the complimentaryservice they provide, create a distinct competitive advantage over other homefurnishing retailers. We continue to strengthen the level of service,professionalism, interior design competence, efficiency, and effectiveness ofretail design center personnel.

 

TheCompany’s interior design affiliate program, launched in fiscal 2010, resultedin the registration with the Company of more than 1,300 qualified professionalinterior designers who add strength and breadth to our interior design reach.We believe that this program augments the Company and independent retailerdesign staffs to reach more clients and improve market penetration. Thisstructure, along with the emphasis in our messaging to clients that “we canhelp as little or as much as you like”SM, continues to improve the customer serviceexperience.

 

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Werecognize the importance of our retail design center network to our long-termsuccess. Accordingly, we believe we (i) have established a strongmanagement team within Company-operated design centers and (ii) continueto work closely with our independent retailers in order to assist them.  With this in mind, we make our services availableto every design center, whether independently operated or Company-operated, insupport of their marketing efforts, including coordinated advertising,merchandising and display programs, and extensive training seminars andeducational materials.  We believe thatthe development of design consultants, service and delivery personnel, andretailers is important for the growth of our business. As a result, we havecommitted to make available comprehensive retail training programs intended toincrease the customer service capabilities of each individual.

 

**CustomerService Offerings**

 

Weoffer numerous customer service programs, each of which has been developed andintroduced to consumers in an effort to make their shopping experience easierand more enjoyable.

 

***Gift Card***

Thisprogram****allows customers to purchase, throughour website or at any participating retail design center, gift cards which canbe redeemed for any of our products or services.

 

***On-Line Room Planning***

Weoffer, via our website, an interactive on-line room planning resource whichserves to further assist consumers with their home decorating needs. Throughthe use of this web-based tool, customers can determine which of our productofferings best fit their particular needs based on their own individual homefloor plan.

 

***Ethan Allen Consumer Credit Programs***

TheEthan Allen Finance Plus program offers consumers (clients) a menu of customfinancing options through the use of just one account.  Clients can choose between (i) “Fixed Payment”which offers fixed monthly payments the customer chooses (12, 24, or 36 months)at an interest rate of 9.99% per annum, and (ii) “Deferred Interest” whichoffers clients a way to borrow interest free for six months with small minimummonthly payments. If the purchase is not paid by the due date, interest ischarged from the date of purchase at a fixed interest rate of 29.99% per annum.All plans provide credit lines from $1,000 to $20,000, or greater, if thecustomer qualifies.  Financing offered isadministered by a third-party financial institution and is granted to ourcustomers on a non-recourse basis to the Company.  Clients may apply for an Ethan Allen FinancePlus card at any participating design center or on-line at ethanallen.com.

 

**Competition**

 

Thehome furnishings industry has faced numerous challenges, not the least of whichis an influx of low-priced products from overseas. As a result, we believe atrend toward product commoditization has developed.  In fiscal 2009, the economic recessionresulted in many small furniture retailers going out of business and otherwell-established competitors resorting to heavy discounts to liquidateinventory. Instead of following this trend, we differentiated ourselves as apreferred brand by adhering to a business strategy focused on providing (i)high-quality, well designed and often custom handmade products at good value,(ii) a comprehensive complement of home furnishing design solutions, includingour complimentary design service, and (iii) excellence in customer service. Weconsider our vertical integration a significant competitive advantage in thecurrent environment as it allows us to design, manufacture and source,distribute, market, and sell our products through one of the industry’s largestsingle-source retail networks.

 

Industryglobalization has provided us an opportunity to adhere to a blended sourcingstrategy, establishing relationships with certain manufacturers, bothdomestically and outside the United States, to source selected case 

 

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goods,upholstery, and home accessory items. We intend to continue to balance ourdomestic production with opportunities to source from foreign and domesticmanufacturers, as appropriate, in order to maintain our competitive advantage.

 

Webelieve the home furnishings industry competes primarily on the basis ofproduct styling and quality, personal service, prompt delivery, productavailability and price.  We furtherbelieve that we effectively compete on the basis of each of these factors andthat, more specifically, our retail format, our award winning website, andcomplimentary design service create a distinct competitive advantage, furthersupporting our mission of providing consumers with a complete home decoratingand design solution.  We also believethat we differentiate ourselves further with the quality of our design servicethrough our internal training and certification programs along with ourinterior design affiliate program.  Ourobjective is to continue to develop and strengthen our retail network by (i)expanding the Company-operated retail business through the relocation ofexisting design centers, opening of new design centers, and, when appropriate,acquiring design centers from, or selling design centers to, independentretailers, and (ii) obtaining and retaining independent retailers, encouragingsuch retailers to expand their business through the opening or relocation ofnew design centers with the objective of increasing the volume of their salesand (iii) further expanding our sales network through our interior designeraffiliate program.

 

**Trademarks**

 

Wecurrently hold, or have registration applications pending for, numeroustrademarks, service marks and design patents for the Ethan Allen name, logosand designs in a broad range of classes for both products and services in theUnited States and in many foreign countries. In addition, we have registered,or have applications pending for, many of our major collection names as well ascertain of our slogans utilized in connection with promoting brand awareness,retail sales and other services.  We viewsuch trade and service marks as valuable assets and have an ongoing program todiligently monitor and defend, through appropriate action, against theirunauthorized use.

 

**AvailableInformation**

 

Wemake available, free of charge via our website, all Annual Reports on Form10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and otherinformation filed with, or furnished to, the Securities and Exchange Commission(the “SEC” or the “Commission”), including amendments to such reports. Thisinformation is available at www.ethanallen.com/investors as soon as reasonablypracticable after it is electronically filed with, or furnished to, the SEC.  In addition, the SEC maintains a website thatcontains reports, proxy and information statements, and other informationregarding companies that file electronically with the Commission.  This information is available at www.sec.gov.

 

Inaddition, charters of all committees of our Board of Directors, as well as ourCorporate Governance guidelines, are available on our website atwww.ethanallen.com/governance or, upon written request, in printed hardcopyform. Written requests should be sent to Office of the Secretary, Ethan AllenInteriors Inc., Ethan Allen Drive, Danbury, Connecticut 06811.

 

**Item 1A.  Risk Factors**

 

*Thefollowing information describes certain significant risks and uncertaintiesinherent in our business that should be carefully considered, along with otherinformation contained elsewhere in this report and in other filings, whenmaking an investment decision with respect to us.   If one or more of these risks actuallyoccurs, the impact on our business, including our financial condition, resultsof operations, and cash flows could be adverse.*

 

***A prolonged economic downturn may continue to materially adverselyaffect our business.***

 

Ourbusiness and results of operations are affected by international, national andregional economic conditions.  The UnitedStates and many other international economies experienced a major recession,with continuing effects 

 

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for our industry. Our primary customer base,direct or indirect, is composed of individual consumers.  A hesitant recovery in the U.S. economy, highunemployment, volatile capital markets, depressed housing prices and tightconsumer lending practices have resulted in considerable negative pressure onconsumer spending.  We believe theseevents have impacted consumers in our markets in ways that have negativelyaffected our business.  In the event thecurrent economic conditions worsen, our current and potential customers may beinclined to further delay their purchases. In addition, further tightening of credit markets may restrict ourcustomers’ ability and willingness to make purchases.

 

***Access to consumer credit could be interrupted and reduce sales andprofitability.***

 

Ourability to continue to access consumer credit for our clients could benegatively affected by conditions outside our control. Given the difficultcapital markets, there is a risk that, though we have agreements that do notexpire until July 2014, our business partner which issues our private labelcredit card program, may not be able to fulfill their obligations under thatagreement.

 

***We may be unable to obtain sufficient external funding to finance ouroperations and growth.***

 

Historically,we have relied upon our cash from operations to fund our operations and growth.As we operate and expand our business, we may rely on external funding sources,including the proceeds from the issuance of debt or the $60 millionrevolving bank line of credit under our existing credit facility. Anyunexpected reduction in cash flow from operations could increase our externalfunding requirements to levels above those currently available. During fiscal2010, the credit rating agencies Moody’s Corporation and Standard and Poor’slowered our corporate and senior unsecured credit ratings to Ba2 and B+respectively. If our credit ratings were lowered further, the Company’s accessto debt could be negatively impacted. There can be no assurance that we willnot experience unexpected cash flow shortfalls in the future or that anyincrease in external funding required by such shortfalls will be available.

 

***Continued operating losses could reduce our liquidity and impact ourdividend policy.***

 

Historically,we have relied on our cash from operations to fund our operations and thepayment of cash dividends.  If theCompany continues to experience operating losses we may not be able to fund ashortfall from operations and would require external funding.  Some financing instruments used by theCompany historically may not be available to the Company in the future. Wecannot assure that additional sources of financing would be available to theCompany on commercially favorable terms should the Company’s capital requirementsexceed cash available from operations and existing cash and cashequivalents.  In such circumstances, theCompany may further reduce its quarterly dividends.

 

***Additional impairment charges could reduce our profitability.***

 

Wehave significant long-lived tangible and intangible assets recorded on ourbalance sheets.  If our operating resultsdecline, we may incur additional impairment charges in the future, which couldhave a material impact on our financial results.  We evaluate the recoverability of thecarrying amount of our long-lived tangible and intangible assets on an ongoingbasis.  There can be no assurance thatthe outcome of such future reviews will not result in substantial impairmentcharges.  Impairment assessmentinherently involves judgments as to assumptions about expected future cashflows and the impact of market conditions on those assumptions.  Future events and changing market conditionsmay impact our assumptions as to prices, costs or other factors that may resultin changes in our estimates of future cash flows.  Although we believe the assumptions we use intesting for impairment are reasonable, significant changes in any of ourassumptions could produce a significantly different result.

 

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***We******face changes in global andlocal economic conditions that may adversely affect consumer demand andspending, our manufacturing operations or sources of merchandise.***

 

Historically,the home furnishings industry has been subject to cyclical variations in thegeneral economy and to uncertainty regarding future economic prospects. Suchuncertainty, as well as other variations in global economic conditions such asrising fuel costs and increasing interest rates, may continue to causeinconsistent and unpredictable consumer spending habits, while increasing ourown fuel, utility, transportation or security costs. These risks, as well asindustrial accidents or work stoppages, could also severely disrupt ourmanufacturing operations, which could have a material adverse effect on ourfinancial performance.

 

Weimport a portion of our merchandise from foreign countries. As a result, ourcosts may be increased by events affecting international commerce andbusinesses located outside the United States, including changes ininternational trade, central bank actions, changes in the relationship of theU.S. dollar versus other currencies, and other governmental policies of theU.S. and the countries from which we import a portion of our merchandise. Theinability to import products from certain foreign countries or the impositionof significant tariffs could have a material adverse effect on our results ofoperations.

 

***Competition from overseas manufacturers continues to increase and mayadversely affect our business, operating results or financial condition.***

 

Ourwholesale business segment is involved in the development of our brand, whichencompasses the design, manufacture, sourcing, sales and distribution of ourhome furnishings products, and competes with other U.S. and foreignmanufacturers.  Our retail businesssegment sells home furnishings to consumers through a network of Company-operateddesign centers, and competes against a diverse group of retailers ranging fromspecialty stores to traditional furniture and department stores, any of whichmay operate locally, regionally and nationally. We also compete with these and other retailers for appropriate retaillocations as well as for qualified design consultants and management personnel.Such competition could adversely affect our future financial performance.

 

Industryglobalization has led to increased competitive pressures brought about by theincreasing volume of imported finished goods and components, particularly forcase good products, and the development of manufacturing capabilities in othercountries, specifically within Asia. The increase in overseas productioncapacity has created over-capacity for many U.S. manufacturers, including us,which has led to industry-wide plant consolidation. In addition, because manyforeign manufacturers are able to maintain substantially lower productioncosts, including the cost of labor and overhead, imported product may becapable of being sold at a lower price to consumers, which, in turn, could leadto some measure of further industry-wide price deflation.

 

Wecannot provide assurance that we will be able to establish or maintainrelationships with certain manufacturers, whether foreign or domestic, tosupply us with selected case goods, upholstery and home accessory items toenable us to maintain our competitive advantage. In addition, the emergence offoreign manufacturers has served to broaden the competitive landscape. Some ofthese competitors produce furniture types not manufactured by us and may havegreater financial and other resources available to them. This competition couldadversely affect our future financial performance.

 

***Failure to successfully anticipate or respond to changes in consumertastes and trends in a timely manner could adversely impact our business,operating results and financial condition.***

 

Salesof our products are dependent upon consumer acceptance of our product designs,styles, quality and price. We continuously monitor changes in home designtrends through attendance at international industry events and fashion shows,internal marketing research, and regular communication with our retailers anddesign center design consultants who provide valuable input on consumertendencies.** **However,as with all retailers, our business is susceptible to changes in consumertastes and trends.  Such tastes andtrends can change rapidly and 

 

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anydelay or failure to anticipate or respond to changing consumer tastes andtrends in a timely manner could adversely impact our business, operatingresults and financial condition.

 

***The consolidation of manufacturing and logistics operations into fewersites may increase the exposure to business disruption and could result inhigher transportation costs.***

 

TheCompany has reduced the number of redundant manufacturing sites in both ourcase goods and upholstery operations and operates a single accessories plant.Our upholstery operations consist of two upholstery plants on our Maiden, NorthCarolina campus supported by one cut and sew plant in Mexico. If any of theseupholstery manufacturing sites experience significant business interruption,our ability to manufacture products timely would likely be impacted. TheCompany operates one sawmill in support of our case goods operations. Ourplants require various raw materials and commodities such as logs and lumberfor our case good plants and foam, springs and engineered hardwood board forour upholstery plants. While we have long-standing relationships with multipleoutside suppliers of our raw materials and commodities, there can be noassurance of their ability to fulfill our supply needs on a timely basis. Theconsolidation to fewer wholesale and retail logistics operations has resultedin longer distances for delivery and could result in higher costs to transportproducts if fuel costs increase significantly.

 

***Our current and former manufacturing and retail operations and productsare subject to increasingly stringent environmental, health and safetyrequirements.***

 

Weuse and generate hazardous substances in our manufacturing and retailoperations. In addition, both the manufacturing properties on which wecurrently operate and those on which we have ceased operations are and havebeen used for industrial purposes. Our manufacturing operations and, to alesser extent, our retail operations involve risk of personal injury or death.We are subject to increasingly stringent environmental, health and safety lawsand regulations relating to our products, current and former properties and ourcurrent operations. These laws and regulations provide for substantial finesand criminal sanctions for violations and sometimes require product recallsand/or redesign, the installation of costly pollution control or safetyequipment, or costly changes in operations to limit pollution or decrease thelikelihood of injuries. In addition, we may become subject to potentiallymaterial liabilities for the investigation and cleanup of contaminatedproperties and to claims alleging personal injury or property damage resultingfrom exposure to or releases of hazardous substances or personal injury becauseof an unsafe workplace.

 

Wehave been identified as a potentially responsible party in connection with onesite that is currently listed, or proposed for inclusion, on the NationalPriorities List under the Comprehensive Environmental Response, Compensationand Liability Act of 1980, as amended, or its state counterpart.  In addition, noncompliance with, or stricterenforcement of, existing laws and regulations, adoption of more stringent newlaws and regulations, discovery of previously unknown contamination orimposition of new or increased requirements could require us to incur costs orbecome the basis of new or increased liabilities that could be material.

 

***Fluctuations in the price, availability and quality of raw materialscould result in increased costs or cause production delays which might resultin a decline in sales, either of which could adversely impact our earnings.***

 

Weuse various types of wood, foam, fibers, fabrics, leathers, and other raw materialsin manufacturing our furniture. Certain of our raw materials, includingfabrics, are purchased domestically and outside the United States. Fluctuationsin the price, availability and quality of raw materials could result inincreased costs or a delay in manufacturing our products, which in turn couldresult in a delay in delivering products to our customers. For example, lumberprices fluctuate over time based on factors such as weather and demand, whichin turn, impact availability. Production delays or upward trends in rawmaterial prices could result in lower sales or margins, thereby adverselyimpacting our earnings.

 

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Inaddition, certain suppliers may require extensive advance notice of ourrequirements in order to produce products in the quantities we desire. Thislong lead time may require us to place orders far in advance of the time whencertain products will be offered for sale, thereby exposing us to risksrelating to shifts in consumer demand and trends, and any further downturn inthe U.S. economy.

 

***We depend on key personnel and could be affected by the loss of theirservices***.

 

Thesuccess of our business depends upon the services of certain senior executives,and in particular, the services of M. Farooq Kathwari, Chairman of the Board,President and Chief Executive Officer, who is the only one of our seniorexecutives who operates under a written employment agreement. The loss of anysuch person or other key personnel could have a material adverse effect on ourbusiness and results of operations.

 

***Our business is sensitive to increasing labor costs, competitive labormarkets, our continued ability to retain high-quality personnel and risks ofwork stoppages.***

 

Themarket for qualified employees and personnel in the retail and manufacturingindustries is highly competitive. Our success depends upon our ability toattract, retain and motivate qualified craftsmen, professional and clericalassociates and upon the continued contributions of these individuals. We cannotprovide assurance that we will be successful in attracting and retainingqualified personnel. A shortage of qualified personnel may require us toenhance our wage and benefits package in order to compete effectively in thehiring and retention of qualified employees. Our labor costs may continue to increase and such increases may not berecovered. In addition, some of our employees are covered by collectivebargaining agreements with local labor unions. Although we do not anticipateany difficulty renegotiating these contracts as they expire, a labor-relatedstoppage by these unionized employees could adversely affect our business andresults of operations. The loss of the services of such personnel or ourfailure to attract additional qualified personnel could have a material adverseeffect on our business, operating results and financial condition.

 

***Our success depends upon our brand, marketing and advertising effortsand pricing strategies. If we are not able to maintain and enhance our brand,or if we are not successful in these other efforts, our business and operatingresults could be adversely affected.***

 

Maintainingand enhancing our brand is critical to our ability to expand our base ofcustomers and may require us to make substantial investments. Our advertisingcampaign utilizes television, direct mail, newspapers, magazines and radio tomaintain and enhance our existing brand equity. We cannot provide assurancethat our marketing, advertising and other efforts to promote and maintainawareness of our brand will not require us to incur substantial costs. If theseefforts are unsuccessful or we incur substantial costs in connection with theseefforts, our business, operating results and financial condition could beadversely affected.

 

***We may not be able to maintain our current design center locations atcurrent costs. We may also fail to successfully select and secure design centerlocations.***

 

Ourdesign centers are typically located in busy urban settings as freestandingdestinations or as part of suburban strip malls, depending upon the real estateopportunities in a particular market. Our business competes with otherretailers and as a result, our success may be affected by our ability to renewcurrent design center leases and to select and secure appropriate retaillocations for existing and future design centers.

 

***Our results of operations for any quarter are not necessarily indicativeof our results of operations for a full year.***

 

Salesof furniture and other home furnishing products fluctuate from quarter toquarter due to such factors as changes in global and regional economicconditions, changes in competitive conditions, changes in production schedulesin response to seasonal changes in energy costs and weather conditions, andchanges in consumer order patterns. From time to time, we have experienced, andmay continue to experience, volatility with respect 

 

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to demand for our home furnishing products.Accordingly, results of operations for any quarter are not necessarilyindicative of the results of operations for a full year.

 

***Failure to protect our intellectual property could adversely affect us.***

 

Webelieve that our patents, trademarks, service marks, trade secrets, copyrightsand all of our other intellectual property are important to our success. Werely on patent, trademark, copyright and trade secret laws, and confidentialityand restricted use agreements, to protect our intellectual property and mayseek licenses to intellectual property of others. Some of our intellectualproperty is not covered by any patent, trademark, or copyright or anyapplications for the same. We cannot provide assurance that agreements designedto protect our intellectual property will not be breached, that we will haveadequate remedies for any such breach, or that the efforts we take to protectour proprietary rights will be sufficient or effective. Any significantimpairment of our intellectual property rights or failure to obtain licenses ofintellectual property from third parties could harm our business or our abilityto compete. Moreover, we cannot provide assurance that the use of ourtechnology or proprietary know-how or information does not infringe theintellectual property rights of others. If we have to litigate to protect ordefend any of our rights, such litigation could result in significant expense.

 

**Item 1B. Unresolved Staff Comments**

 

None.

 

**Item 2. Properties**

 

Ourcorporate headquarters, located in Danbury, Connecticut, consists of onebuilding containing 144,000 square feet, situated on approximately 18.0 acresof land, all of which is owned by us. Located adjacent to the corporate headquarters, and situated onapproximately 5.4 acres, is the Ethan Allen Hotel and Conference Center,containing 193 guestrooms. This hotel, owned by a wholly-owned subsidiary ofEthan Allen, is used in connection with Ethan Allen functions and trainingprograms, as well as for functions and accommodations for the general public.

 

Weoperate seven manufacturing facilities located in five states and Mexico. Allof these facilities are owned by the Company and include three case goodsplants (including one sawmill) totaling 1,548,845 square feet, three upholsteryfurniture plants (consisting of two upholstery plants on our Maiden, NorthCarolina campus and one cut and sew plant in Mexico) totaling 649,396 squarefeet, and one home accessory plant of 295,000 square feet. In our wholesaledivision, we own and operate one national distribution center supported by oneowned small parcel and fulfillment center which are a combined 823,414 squarefeet. Our U.S. manufacturing and distribution facilities are located in NorthCarolina, Vermont, Virginia, Oklahoma, and New Jersey, and our Mexico plant islocated in Guanajuato.

 

Weown five and lease 13 retail service centers, totaling 1,099,500 square feet.Our retail service centers are located throughout the United States and Canadaand serve to support our various retail sales districts.

 

Thegeographic distribution of our retail design center network as of June 30, 2010is as follows:

 
| ** **    | ** ** | **Retail Design Center Category** | ** ** |
|---------------|------------|-----------------------------------|------------|
| ** **    | ** ** | **Company  Operated**             | ** ** | **Independently  Operated** | ** ** |
| United States |       | 140                               |       | 81 |   |
| Canada        |       | 5                                 |       | 2 |   |
| Asia          |       | —                            |       | 49 |   |
| Middle East   |       | —                            |       | 4 |   |
| Total         |       | 145                               |       | 136 |   |

 

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Of the 145 Company-operated retail design centers, 68 of the propertiesare owned and 77 of the properties are leased from independent thirdparties.  Of the 68 owned design centers,18 are subject to land leases. We own nine additional retail properties, one ofwhich is leased to an independent Ethan Allen retailer, and two of which areleased to unaffiliated third parties. See Note 8 to the Consolidated FinancialStatements included under Item 8 of this Annual Report for more informationwith respect to our operating lease obligations.

 

Our Ethan Allen Hotel and Conference Center located in Danbury,Connecticut, was financed, in part, with industrial revenue bonds.  The bonds bear interest at a fixed rate of7.50% and have a remaining balance at June 30, 2010 of $3.9 million whichmatures in one year.  The Beecher Falls,Vermont manufacturing facility was financed, in part, by the Town of Canaan,Vermont. The associated remaining debt bears interest at a fixed rate of 3.00%and a balance at June 30, 2010 of $0.3 million, with maturities of two to 17years. We believe that all of our properties are well maintained and in goodcondition.

 

Weestimate that our manufacturing plants are currently operating at approximately65% of capacity.  We believe we haveadditional capacity at selected facilities, which we could utilize with minimaladditional capital expenditures.

 

**Item 3. Legal Proceedings**

 

Weare a party to various legal actions with customers, employees and othersarising in the normal course of our business. We maintain liability insurance,which is deemed to be adequate for our needs and commensurate with othercompanies in the home furnishings industry. We believe that the final resolutionof pending actions (including any potential liability not fully covered byinsurance) will not have a material adverse effect on our financial condition,results of operations, or cash flows.

 

**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 minimis settlement arrangements.  One additional site in Carroll, New Yorkcontinued to be evaluated as of June 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 June 30, 2010, we believe thatestablished reserves related to these environmental contingencies are adequateto cover probable and reasonably estimable costs associated with theremediation and restoration of this site. We believe our currently anticipated capital expenditures forenvironmental control facility matters are not material.

 

We are subject to other federal, state and local environmentalprotection laws and regulations and are involved, from time to time, ininvestigations and proceedings regarding environmental matters.  Such investigations and proceedings typicallyconcern air emissions, water discharges, and/or management of solid andhazardous wastes. We believe that our facilities are in material compliancewith all such applicable laws and 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 

 

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andalternative formulations. In addition, we have instituted a variety oftechnical and procedural controls, including reformulation of finishingmaterials to reduce toxicity, implementation of high velocity low pressurespray systems, development of storm water protection plans and controls, andfurther development of related inspection/audit teams, all of which have servedto reduce emissions per unit of production. We remain committed to implementingnew waste minimization programs and/or enhancing existing programs with theobjective of (i) reducing the total volume of waste, (ii) limiting theliability associated with waste disposal, and (iii) continuously improvingenvironmental and job safety programs on the factory floor which serve tominimize emissions and safety risks for employees. We will continue to evaluatethe most appropriate, cost effective, control technologies for finishingoperations and design production methods to reduce the use of hazardousmaterials in the manufacturing process.

 

**Item 4. Reserved**

 

**PART II**

 

**Item 5. Market for Registrant’s Common Equity, RelatedStockholder Matters and Issuer Purchases of Equity Securities**

 

Our common stock is traded on the New York Stock Exchange under tickersymbol “ETH”. The following table sets forth, for each of the past two fiscalyears, (i) closing, and intraday high and low and stock prices as reported onthe New York Stock Exchange and (ii) the dividend per share paid by us:

 
| ** **      | ** ** | **Market Price** | ** ** | **Dividend** | ** ** |
|-----------------|------------|------------------|------------|--------------|------------|
| ** **      | ** ** | **High**         | ** ** | **Low**      | ** ** | **Close** | ** ** | **Per Share** | ** ** |
| **Fiscal 2010** |       |             |       |         |       |   |   |   |   |
| First Quarter   |       | $                | 17.62      |         | $          | 9.97 |   | $ | 16.50 |   | $ | 0.05 |   |
| Second Quarter  |       | 16.96            |       | 11.00        |       | 13.42 |   | 0.05 |   |
| Third Quarter   |       | 22.00            |       | 13.00        |       | 20.63 |   | 0.05 |   |
| Fourth Quarter  |       | 25.40            |       | 13.82        |       | 13.99 |   | 0.05 |   |
|            |       | ** **       |       | ** **   |       | ** ** |   |   |   |
| **Fiscal 2009** |       |             |       |         |       |   |   |   |   |
| First Quarter   |       | $                | 34.02      |         | $          | 22.34 |   | $ | 28.02 |   | $ | 0.25 |   |
| Second Quarter  |       | 28.90            |       | 11.26        |       | 14.37 |   | 0.25 |   |
| Third Quarter   |       | 15.05            |       | 6.98         |       | 11.26 |   | 0.10 |   |
| Fourth Quarter  |       | 14.47            |       | 9.86         |       | 10.36 |   | 0.05 |   |

 

As of August 13, 2010, there were 336 shareholders of record of ourcommon stock.  Management estimates thereare over eleven thousand beneficial shareholders of the Company’s commonstock.  On July 20, 2010, we declared adividend of $0.05 per common share, payable on October 25, 2010 to shareholdersof record as of October 11, 2010.  Weexpect to continue to declare quarterly dividends for the foreseeable future,business conditions permitting.

 

**Equity Compensation Plan Information**

 

Theinformation required by this Item 5 with respect to Equity Compensation PlanInformation is set forth in Item 12 — Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters, contained in this AnnualReport and incorporated herein by reference.

 

**IssuerPurchases of Equity Securities**

 

Certaininformation regarding purchases made by or on behalf of us or any affiliatedpurchaser (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of1934, as amended) of our common stock during the three months ended June 30,2010 is provided below:

 

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| **Period**           | ** ** | **Total Number of  Shares Purchased** | ** ** | **Average Price  Paid Per Share** | ** ** | **Total Number of Shares  Purchased as Part of  Publicly Announced Plans  or Programs (b)** | ** ** | **Maximum Number of  Shares that May Yet Be  Purchased Under the  Plans or Programs (b)** | ** ** |
|----------------------|------------|---------------------------------------|------------|-----------------------------------|------------|---------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|
| April 2010           |       | —                                |       | —                            |       | —                                                                                      |       | 1,567,669                                                                                 |       |
| May 2010             |       | —                                |       | —                            |       | —                                                                                      |       | 1,567,669                                                                                 |       |
| June 2010   (a) |       | 182,600                               |       | $                                 | 14.18      |                                                                                        | 182,600    |                                                                                      | 1,385,069  |   |
| Total                |       | 182,600                               |       | $                                 | 14.18      |                                                                                        | 182,600    |                                                                                      |       |   |

 

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(a)                Purchased in two separate open markettransactions on two different trading days.

(b)               On November 21, 2002, our Board of Directorsapproved a share repurchase program authorizing us to repurchase up to2,000,000 shares of our common stock, from time to time, either directly orthrough agents, in the open market at prices and on terms satisfactory to us.Subsequent to that date, the Board of Directors increased the remainingauthorization on seven separate occasions, the last of which was on November13, 2007.

 

Subsequent to June 30, 2010 and through August 19, 2010, werepurchased, in three separate open market transactions, an additional 204,286shares of our common stock at a total cost of $2.8 million, representing aweighted average price per share of $13.65. As of August 19, 2009, we had a remaining Board authorization to repurchase1,180,783 million shares.

 

**StockholderRights Plan**

 

Wehave a Stockholder Rights Plan, a description of which is set forth in Note 9to the Consolidated Financial Statements included under Item 8 of this AnnualReport and incorporated herein by reference. Such description contains all of the required information with respectthereto.

 

**Comparative Company Performance**

 

Thefollowing line graph compares cumulative total stockholder return for theCompany with a performance indicator of the overall stock market, theStandard & Poor’s 500 Index, and an industry index, the Peer IssuerGroup Index, assuming $100 was invested on June 30, 2005.

 

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**COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN***

Among Ethan Allen Interiors Inc., the S&P 500 Index

and a Peer Group

 

 

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*$100 invested on 6/30/05 in stock or index,including reinvestment of dividends.

Fiscal years ending June 30.

 

Copyright© 2010 S&P, a division of TheMcGraw-Hill Companies Inc. All rights reserved.

 

Peer group includes Bassett Furniture Industries, Inc.,Chromcraft Revington, Inc., Flexsteel Industries, Inc., FurnitureBrands International, Inc., Haverty Furniture Companies, Inc.,La-Z-boy Inc., Legett & Platt, Inc., and Pier 1 Imports Inc.  The returns of each company have beenweighted according to each company’s market capitalization.

 

**Item 6. Selected Financial Data**

 

The following table presents selected financial data for the fiscalyears ended June 30, 2010, 2009, 2008, 2007 and 2006 which has beenderived from our consolidated financial statements.  The information set forth below should beread in conjunction with Management’s Discussion and Analysis of FinancialCondition and Results of Operations included under Item 7 of this Annual Reportand our Consolidated Financial Statements (including the notes thereto)included under Item 8 of this Annual Report.

 

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| ** **                                      | ** ** | **Fiscal Year Ended June 30,** | ** ** |
|-------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                      | ** ** | **2010**                            | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
| ***Statement  of Operations Data:***            |       |                                |       |   |   |   |   |   |   |   |   |
| Net sales                                       |       | $                                   | 590,054    |   | $ | 674,277 |   | $ | 980,045 |   | $ | 1,005,312 |   | $ | 1,066,390 |   |
| Cost of sales                                   |       | 309,777                             |       | 326,935 |   | 453,980 |   | 478,729 |   | 525,408 |   |
| Selling, general and administrative expenses    |       | 289,575                             |       | 353,112 |   | 423,229 |   | 402,022 |   | 394,069 |   |
| Restructuring and impairment charges, net       |       | 2,437                               |       | 67,001 |   | 6,836 |   | 13,442 |   | 4,241 |   |
| Operating income (loss)                         |       | (11,735                             | )          | (72,771 | ) | 96,000 |   | 111,119 |   | 142,672 |   |
| Interest and other expense, net                 |       | 7,052                               |       | 8,409 |   | 3,822 |   | 1,393 |   | 4,567 |   |
| Income (loss) before income tax expense         |       | (18,787                             | )          | (81,180 | ) | 92,178 |   | 109,726 |   | 138,105 |   |
| Income tax expense (benefit)                    |       | 25,529                              |       | (28,493 | ) | 34,106 |   | 40,499 |   | 52,423 |   |
| Net income (loss)                               |       | $                                   | (44,316    | ) | $ | (52,687 | ) | $ | 58,072 |   | $ | 69,227 |   | $ | 85,682 |   |
| ***Per  Share Data:***                          |       |                                |       |   |   |   |   |   |   |   |   |
| Net income (loss) per basic share               |       | $                                   | (1.53      | ) | $ | (1.83 | ) | $ | 1.98 |   | $ | 2.19 |   | $ | 2.58 |   |
| Basic weighted average shares outstanding       |       | 28,982                              |       | 28,814 |   | 29,267 |   | 31,566 |   | 33,210 |   |
| Net income (loss) per diluted share             |       | $                                   | (1.53      | ) | $ | (1.83 | ) | $ | 1.97 |   | $ | 2.15 |   | $ | 2.51 |   |
| Diluted weighted average shares outstanding     |       | 28,982                              |       | 28,814 |   | 29,470 |   | 32,261 |   | 34,086 |   |
| Cash dividends per share                        |       | $                                   | 0.20       |   | $ | 0.65 |   | $ | 0.88 |   | $ | 0.80 |   | $ | 0.72 |   |
| ***Other  Information:***                       |       |                                |       |   |   |   |   |   |   |   |   |
| Depreciation and amortization                   |       | $                                   | 29,398     |   | $ | 25,635 |   | $ | 24,670 |   | $ | 23,013 |   | $ | 21,599 |   |
| Capital expenditures and acquisitions           |       | $                                   | 9,972      |   | $ | 23,903 |   | $ | 67,815 |   | $ | 74,370 |   | $ | 49,296 |   |
| Working capital                                 |       | $                                   | 113,950    |   | $ | 139,239 |   | $ | 176,796 |   | $ | 234,990 |   | $ | 278,038 |   |
| Current ratio                                   |       | 1.78 to 1                           |       | 2.24 to 1 |   | 2.30 to 1 |   | 2.59 to 1 |   | 2.88 to 1 |   |
| Effective tax rate                              |       | -135.9                              | %          | 35.1 | % | 37.0 | % | 36.9 | % | 38.0 | % |
| ***Balance  Sheet Data (at end of period):***   |       |                                |       |   |   |   |   |   |   |   |   |
| Total assets                                    |       | $                                   | 631,777    |   | $ | 646,485 |   | $ | 764,093 |   | $ | 802,598 |   | $ | 814,100 |   |
| Total debt, including capital lease obligations |       | 203,267                             |       | 203,148 |   | 203,029 |   | 202,908 |   | 202,787 |   |
| Shareholders’ equity                       |       | $                                   | 258,459    |   | $ | 305,923 |   | $ | 375,773 |   | $ | 409,642 |   | $ | 417,442 |   |
| Debt as a percentage of equity                  |       | 78.6                                | %          | 66.4 | % | 54.0 | % | 49.5 | % | 48.6 | % |
| Debt as a percentage of capital                 |       | 44.0                                | %          | 39.9 | % | 35.1 | % | 33.1 | % | 32.7 | % |

 

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**Item 7. Management’s Discussion and Analysis ofFinancial Condition and Results of Operation**

 

The following discussion of financial condition and results ofoperations is based upon, and should be read in conjunction with, ourConsolidated Financial Statements (including the notes thereto) included underItem 8 of this Annual Report.

 

**Forward-Looking Statements**

 

Management’s discussion and analysis of financial condition and resultsof operations and other sections of this Annual Report contain forward-lookingstatements relating to our future results. Such forward-looking statements areidentified by use of forward-looking words such as “anticipates”, “believes”, “plans”,“estimates”, “expects”, and “intends” or words or phrases of similarexpression. These forward-looking statements are subject to managementdecisions and various assumptions, risks and uncertainties, including, but notlimited to: the effects of terrorist attacks or conflicts or wars involving theUnited States or its allies or trading partners; the effects of labor strikes;weather conditions that may affect sales; volatility in fuel, utility,transportation and security costs; changes in global or regional political oreconomic conditions, including changes in governmental and central bankpolicies; changes in business conditions in the furniture industry, includingchanges in consumer spending patterns and demand for home furnishings; effectsof our brand awareness and marketing programs, including changes in demand forour existing and new products; our ability to locate new design center sitesand/or negotiate favorable lease terms for additional design centers or for theexpansion of existing design centers; competitive factors, including changes inproducts or marketing efforts of others; pricing pressures; fluctuations ininterest rates and the cost, availability and quality of raw materials; thosematters discussed in Items 1A and 7A of this Annual Report and in our SECfilings; and our future decisions. Accordingly, actual circumstances andresults could differ materially from those contemplated by the forward-lookingstatements.

 

**CriticalAccounting Policies**

 

Ourconsolidated financial statements have been prepared in conformity with U.S.generally accepted accounting principles that require, in some cases, thatcertain estimates and assumptions be made that affect the amounts anddisclosures reported in those financial statements and the related accompanyingnotes. Estimates are based on currently known facts and circumstances, priorexperience and other assumptions believed to be reasonable. We use our bestjudgment in valuing these estimates and may, as warranted, solicit externaladvice. Actual results could differ from these estimates, assumptions andjudgments, and these differences could be material. The following criticalaccounting policies, some of which are impacted significantly by estimates,assumptions and judgments, affect our consolidated financial statements.

 

***Inventories*** — Inventories (finished goods, work inprocess and raw materials) are stated at the lower of cost, determined on afirst-in, first-out basis, or market. Cost is determined based solely on thosecharges incurred in the acquisition and production of the related inventory(i.e. material, labor and manufacturing overhead costs). We estimate aninventory reserve for excess quantities and obsolete items based on specificidentification and historical write-downs, taking into account future demandand market conditions.  If actual demandor market conditions in the future are less favorable than those estimated,additional inventory write-downs may be required.

 

***Revenue Recognition*** — Revenue is recognizedwhen all of the following have occurred: persuasive evidence of a salesarrangement exists (e.g. a wholesale purchase order or retail sales invoice);the sales arrangement specifies a fixed or determinable sales price; product isshipped or services are provided to the customer; and collectibility is reasonablyassured. As such, revenue recognition occurs upon the shipment of goods toindependent retailers or, in the case of Ethan Allen-operated retail designcenters, upon delivery to the customer. Recorded sales provide for estimatedreturns and allowances. We permit our customers to return defective productsand incorrect shipments, and terms we offer are standard for the industry.

 

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***Allowance for Doubtful Accounts*** — We maintain an allowancefor doubtful accounts for estimated losses resulting from the inability of ourcustomers to make required payments.  Theallowance for doubtful accounts is based on a review of specifically identifiedaccounts in addition to an overall aging analysis.  Judgments are made with respect to thecollectibility of accounts receivable based on historical experience andcurrent economic trends.  Actual lossescould differ from those estimates.

 

***Retail Design Center Acquisitions*** - We accountfor the acquisition of retail design centers and related assets with thepurchase method.  Accounting for thesetransactions as purchase business combinations requires the allocation ofpurchase price paid to the assets acquired and liabilities assumed based ontheir fair values as of the date of the acquisition. The amount paid in excessof the fair value of net assets acquired is accounted for as goodwill.

 

***Impairment of Long-Lived Assets and Goodwill*** — Weperiodically evaluate whether events or circumstances have occurred thatindicate that long-lived and indefinite-lived assets may not be recoverable orthat the remaining useful life may warrant revision.  When such events or circumstances are present,the Company determines whether the carrying value exceeds the fair value asdescribed below.

 

The recoverability of long-lived assets are evaluated for impairment bydetermining whether the carrying value will be recovered through the expectedundiscounted future cash flows resulting from the use of the asset.  In the event the sum of the expectedundiscounted future cash flows is less than the carrying value of the asset, animpairment loss equal to the excess of the asset’s carrying value over its fairvalue is recorded.  The long-term natureof these assets requires the estimation of cash inflows and outflows severalyears into the future and only takes into consideration technological advancesknown at the time of the impairment test.

 

Goodwill and other indefinite-lived intangible assets are evaluated forimpairment on an annual basis and between annual tests whenever events orcircumstances indicate that the carrying value of the goodwill or otherintangible asset may exceed its fair value. We conduct our required annualimpairment test of goodwill and other intangible assets during the fourthquarter of each fiscal year.

 

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

 

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

 

The economic downturn that began in the fall of 2008 negativelyimpacted the Company’s revenues and operating margins.  In response, the Company reduced headcount,consolidated its manufacturing, retail, and

 

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logistics footprint and repositioned its marketing approach.  The Company’s cash flow forecasts wereupdated regularly to reflect the rapid changes in the business and theindustry.  The cash flow projections usedin its fair value evaluations are the best estimates of the Company and requiresignificant management judgment.  Duringfiscal 2009, the Company determined that $48.4 million of goodwill in theRetail segment was considered impaired and fully written off. The Companyperformed its annual impairment test in fiscal 2009 and determined that noimpairment of its remaining goodwill, reported in its wholesale segment wasappropriate as the fair value of its net assets exceeded the book value byapproximately 10%.

 

During fiscal 2010, the Company concluded that no interim impairmenttest of its indefinite lived assets was required.  Net sales, gross profit, operating income,net income, written orders, and other indicators improved from previousquarters, and though some financial metrics were below management forecasts,our long-term outlook had not changed significantly.  The Company’s average quarterly stock priceincreased from $12.11 for the quarter ended June 30, 2009, to $16.91 forthe quarter ended March 31, 2010), and cash (including restricted cash)and marketable securities increased to $85.2 million at March 31, 2010from $53.0 million at June 30, 2009. During the third and fourth quartersof fiscal 2010, business performance improved with net sales up sequentiallyand from the previous year, gross margin improved and cash (includingrestricted cash) and marketable securities increased to $102.2 million byfiscal year end. The average price of our stock during the fourth fiscalquarter of 2010 was $19.67. In the fourth fiscal quarter ended June 30,2010, the Company performed its annual impairment test and determined that thefair values of the Wholesale reporting unit and trade name exceeded their carryingvalue by a substantial margin.

 

To calculate fair value of the assets described above, managementrelies on estimates and assumptions which by their nature have varying degreesof uncertainty. Wherever possible, management therefore looks for third partytransactions as described above to provide the best possible support for theassumptions incorporated. Management considers several factors to besignificant when estimating fair value including expected financial outlook ofthe business, changes in the Company’s stock price, the impact of changingmarket conditions on financial performance and expected future cash flows, andother factors. Deterioration in any of these factors may result in a lower fairvalue assessment, which could lead to impairment of the long-lived assets andgoodwill of the Company.

 

***Income Taxes*** — Income taxes are accounted for under theasset and liability method.  Deferred taxassets and liabilities are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases and operatingloss and tax credit carryforwards. Deferred tax assets and liabilities aremeasured using enacted tax rates expected to apply to taxable income in theyears in which those temporary differences are expected to be recovered orsettled.  The effect on deferred taxassets and liabilities of a change in tax rates is recognized in income in theperiod that includes the enactment date. Additional factors that we considerwhen making judgments about the deferred tax valuation include tax law changes,a recent history of cumulative losses, and variances in future projectedprofitability.

 

The Company evaluates quarterly uncertain tax positions taken orexpected to be taken on tax returns for recognition, measurement, presentation,and disclosure in its financial statements. If an income tax position exceeds a50% probability of success upon tax audit, based solely on the technical meritsof the position, the Company recognizes an income tax benefit in its financialstatements. The tax benefits recognized are measured based on the largestbenefit that has a greater than 50% likelihood of being realized upon ultimatesettlement. The liability associated with an unrecognized tax benefit isclassified as a long-term liability except for the amount for which a cashpayment is expected to be made or tax positions settled within one year. Werecognize interest and penalties related to income tax matters as a componentof income tax expense.

 

***Business Insurance Reserves*** — We have insuranceprograms in place to cover workers’ compensation and property/casualtyclaims.  The insurance programs, whichare funded through self-insured retention, are subject

 

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tovarious stop-loss limitations. We accrue estimated losses using actuarialmodels and assumptions based on historical loss experience.  Although we believe that the insurancereserves are adequate, the reserve estimates are based on historicalexperience, which may not be indicative of current and future losses.  In addition, the actuarial calculations usedto estimate insurance reserves are based on numerous assumptions, some of whichare subjective.  We adjust insurancereserves, as needed, in the event that future loss experience differs fromhistorical loss patterns.

 

***Other Loss Reserves****—*We have anumber of other potential loss exposures incurred in the ordinary course ofbusiness such as environmental claims, product liability, litigation, taxliabilities, restructuring charges, and the recoverability of deferred incometax benefits.  Establishing loss reservesfor these matters requires the use of estimates and judgment with regard tomaximum risk exposure and ultimate liability or realization.  As a result, these estimates are oftendeveloped with our counsel, or other appropriate advisors, and are based on ourcurrent understanding of the underlying facts and circumstances. Because ofuncertainties related to the ultimate outcome of these issues or thepossibilities of changes in the underlying facts and circumstances, additionalcharges related to these issues could be required in the future*.*

 

**Basisof Presentation**

 

As of June 30, 2010, Ethan Allen Interiors Inc. has no material assetsother than its ownership of the capital stock of Ethan Allen Global, Inc. andconducts all significant transactions through Ethan Allen Global, Inc.;therefore, substantially all of the financial information presented herein isthat of Ethan Allen Global, Inc.

 

**Results of Operations**

 

Our business has been severely impacted by the economic factors in theUnited States and abroad which we began to feel in earnest during our secondquarter of fiscal 2009.  Highunemployment, volatile capital markets, depressed housing prices and tightconsumer spending all put negative stress on the economy and continue to have anegative impact on our business.  As wework through these difficult times, we have taken dramatic actions tosignificantly reduce costs in all facets of our business including closing andrealigning manufacturing plants, consolidating logistics operations, andclosing under-performing retail design centers. These actions have been takenwith appropriate consideration for demand and management believes it hasretained sufficient scalable capacity. We have also launched initiatives to increase sales, such as specialsavings product promotions, our designer affiliate program, and completed theconversion of our case goods products to custom this fiscal year.

 

**Income Tax Valuation Allowance:**

 

As a result of losses we sustained for fiscal 2010 and 2009, which werebrought on by the severe economic factors discussed earlier, we reassessed thelikelihood that we would be able to realize the benefits of our deferredfederal, state and foreign deferred tax assets. As a result, we recorded a $34.1 million valuation allowance againstthose assets, with a non-cash charge to earnings in the fourth quarter offiscal 2010.

 

**Restructuring Activities:**

 

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 isclassified with accrued expenses and other current liabilities in theConsolidated Balance Sheets:

 

In fiscal 2009, the Company announced (i) upholstery plants in Eldred,Pennsylvania and Chino, California were consolidated into the Maiden, NorthCarolina and Silao, Mexico operations, (ii) closure of the Andover, Mainesawmill, (iii) the move of assembly and finishing operations from BeecherFalls, Vermont to Orleans, Vermont, and (iv) wholesale distribution and retailservice centers were consolidated. We also began the conversion of our

 

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domestic case goods manufacturing from producing to a forecast toproducing to fill custom orders already written. The total pre-taxrestructuring, impairment, accelerated depreciation and other related chargesfor these fiscal 2009 actions was $29 million ($23 million in the wholesalesegment and $6 million in the retail segment). The charges arose from (i) a $17million impact on long-lived assets, (ii) $8 million in employee severance,compensation, and benefit costs, and (iii) $4 million in other associatedcosts.  Current fiscal year charges forthese actions include $6.6 million in accelerated depreciation charges forWholesale (included in cost of sales in the Statement of Operations) partiallyoffset by $0.2 million of restructuring credits, and $2.7 million of restructuringcharges for the Retail segment (primarily due to adjustments on non-cancellableleases). These restructuring actions announced in fiscal 2009 were completedduring fiscal 2010, with the remaining liability at June 30, 2010 primarily fornon-cancellable lease obligations (expirations of less than one year up to fiveyears).

 

In fiscal 2008, we announced a plan to consolidate the operations ofcertain Ethan Allen-operated retail design centers and retail service centers.In connection with this initiative, we permanently ceased operations at tendesign centers and six retail service centers which, for the most part, wereconsolidated into other existing operations. The restructuring is now complete, with the remaining liability at June30, 2010 primarily for non-cancellable lease obligations (expirations of lessthan one year up to 23 years) and other employee benefit costs.   Costs for these actions in the currentfiscal year resulted in a net $0.2 million credit in the Retail segment dueprimarily to non-cancellable lease adjustments. Cumulative charges to date forthese actions total $5.7 million.

 

All charges for the fiscal2009 and 2008 restructuring activities above are included as restructuring andimpairment charges in the Statement of Operations unless otherwise noted above.

 

**Business Results:**

 

Our revenues are comprised of (i) wholesale sales to independentlyoperated and Company-operated retail design centers and (ii) retail sales ofCompany-operated design centers.  SeeNote 16 to our Consolidated Financial Statements for the year ended June 30,2010 included under Item 8 of this Annual Report.

 

The components of consolidated revenues and operating income (loss) areas follows (in millions):

 

 
| ** **                             | ** ** | **Fiscal Year Ended June 30,** | ** ** |
|----------------------------------------|------------|--------------------------------|------------|
| ** **                             | ** ** | **2010**                       | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Revenue:**                           |       |                           |       |   |   |   |   |
| Wholesale segment                      |       | $                              | 362.5      |   | $ | 403.4 |   | $ | 616.2 |   |
| Retail segment                         |       | 438.5                          |       | 508.6 |   | 724.6 |   |
| Elimination of inter-segment sales     |       | (210.9                         | )          | (237.7 | ) | (360.8 | ) |
| Consolidated revenue                   |       | $                              | 590.1      |   | $ | 674.3 |   | $ | 980.0 |   |
|                                   |       |                           |       |   |   |   |   |
| **Operating Income (loss):**           |       |                           |       |   |   |   |   |
| Wholesale segment (1)                  |       | $                              | 14.2       |   | $ | 6.7 |   | $ | 100.3 |   |
| Retail segment (2)                     |       | (28.7                          | )          | (92.1 | ) | (2.8 | ) |
| Adjustment for inter-company profit(3) |       | 2.8                            |       | 12.6 |   | (1.5 | ) |
| Consolidated operating income          |       | $                              | (11.7      | ) | $ | (72.8 | ) | $ | 96.0 |   |

 

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(1)          Operating income for theWholesale segment for the twelve months ended June 2010 and 2009 includespre-tax restructuring and impairment charges (credit) of ($0.2) million and$17.4 million, respectively.

(2)          Operating income for theRetail segment for the twelve months ended June 2010, 2009 and 2008 includespre-tax restructuring and impairment charges of $2.7 million, $49.6 million and$6.8 million, respectively.

(3)          Represents the change inwholesale profit contained in Ethan Allen-operated design center inventoryexisting at the end of the period.

 

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***Fiscal 2010 Compared to Fiscal 2009***

 

**Consolidated revenue** for the fiscalyear ended June 30, 2010 decreased by $84.2 million, or 12.5%, to $590.1million, from $674.3 million in fiscal 2009. Net sales for the period largelyreflect the delivery of product associated with booked orders and the change inbacklog from the beginning to the end of the period.  Especially in the first half of fiscal 2010,sales continued to be affected by the negative economic stresses mentionedearlier which we experienced since the second quarter of fiscal 2009.  These factors were partially offset by (i)several new marketing initiatives that focus on the exceptional valueproposition of our offerings through special savings promotions and ourinteractive web site ethanalleninc.com, (ii) the continued use of nationaltelevision media supported by direct mail and electronic magazines, and (iii)the positive effects of efforts to reposition the retail network. These effortsresulted in a 21% increase in incoming retail orders during the second half offiscal 2010.

 

**Wholesale revenue** for fiscal 2010 decreased by $40.9 million,or 10.1%, to $362.5 million from $403.4 million in the prior year.  The year-over-year decrease was primarilyattributable to a decline in the incoming order rate during the first half offiscal 2010 as a result of the continued soft retail environment for homefurnishings.  This was partly offset byan increase in the incoming order rate during the second half of fiscal 2010,and from an increase in independent retail design centers to 136 from 134including one location transferred in to the company’s Retail division duringthe year. Wholesale orders increased 30% during the second half of fiscal 2010compared to the second half of fiscal 2009, after decreasing 20% during thefirst half of fiscal 2010 compared to the first half of fiscal 2009.

 

**Retailrevenue** from Ethan Allen-operated design centers for the twelve months endedJune 30, 2010 decreased by $70.1 million, or 13.8%, to $438.5 million from$508.6 million for the twelve months ended June 30, 2009.  The decrease in retail sales by EthanAllen-operated design centers was attributable to a decrease in comparabledesign center delivered sales of $84.6 million, or 30% during the first half ofthe fiscal year. This unfavorable variance was partially offset during thesecond half of the fiscal year by a $31.2 million, or 17% increase incomparable design center delivered sales compared to prior year.  Newly opened (including relocated) oracquired design centers contributed sales of $13.7 million. The number of EthanAllen-operated design centers decreased to 145 at June 30, 2010 from 159 atJune 30, 2009.  During that twelve monthperiod, we acquired one design center from an independent retailer, and openedfour new design centers (of which three were relocations).

 

Comparable design centers are those that 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 usfrom independent retailers are included in comparable design center sales intheir 13th full month of Ethan Allen-operated operations.

 

Year-over-year, written business of Ethan Allen-operated design centersincreased 1.4% for the year, and comparable design center written businessincreased 4.9%, reflecting to some degree the benefit of our retailconsolidation strategy to serve given markets with fewer design centers but toimprove the use of technology and design support.  While written business continues to reflectthe soft retail environment for home furnishings noted throughout the currentyear, retail written orders during the second half of fiscal 2010 haveincreased 21% from the prior year, having decreased 15% from the prior yearduring the first half.   We believe thatover time, we will benefit from our (i) repositioning the retail network, (ii)new product introductions including custom case good products, (iii) severalnew marketing initiatives described previously, and (iv) our continued use ofnational television and shelter magazines as advertising media supported bydirect mail and electronic magazines.

 

**Gross profit** for fiscal 2010 declined to $280.3 million from$347.3 million in fiscal 2009.  The $67.1million decrease in gross profit was primarily attributable to a combineddecline in both wholesale and retail sales of 12.5%, along with a shift insales mix with retail sales representing a lower proportionate share of totalsales in the current full year (74.3%) as compared to the prior full year(75.4%). Gross margin decreased partially due to $6.6 million of accelerateddepreciation recorded in fiscal 2010 related to restructuring actions,temporary manufacturing disruptions caused by restructuring activities, and theconversion of our domestic case goods to 

 

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custom manufacturing. Because of the consolidation of several wholesaledistribution, upholstery and case good plants, we were able to increaseabsorption of overhead costs despite the sales decline, and to operate atapproximately 60% of capacity during fiscal 2010, up from 50% one year prior.The consolidated gross margin decreased to 47.5% for fiscal 2010 from 51.5% infiscal 2009 as a result, primarily, of the factors set forth above.

 

**Operating expenses** decreased $128.1 million,or 30.5%, to $292.0 million, or 49.5% of net sales, in fiscal 2010 from $420.1million, or 62.3% of net sales, in fiscal 2009. Decreases were experienced dueto a non-cash goodwill impairment charge of $48.4 million recorded in the March2009 quarter that did not recur in the current fiscal year and a $16.2 millionyear-over-year decrease in restructuring and impairment charges, both discussedearlier.  There was also a $12.2 millionreduction in commission charges due to changes in the commission plansoccurring in both years. Cost cutting efforts taken by the Company also reducedsalaries, benefits and occupancy costs. Advertising expenses were reduced while still maintaining our nationalpresence, and delivery and warehousing costs were lower due to decreased sales.

 

**Consolidated operating loss** for the year ended June 30,2010 totaled a loss of $11.7 million, or 2.0% of net sales, compared to a lossof $72.8 million, or 10.8% of net sales, in the prior year.  The improvement of $61.1 million was largelyattributable to (i) the one-time nature of the March 2009 $48.4 milliongoodwill impairment charge, (ii) decreased restructuring and impairment chargesand (iii) net declines in other operating expenses, all of which were discussedpreviously and partially offset by the decline in gross profit due in part bythe $6.6 million accelerated depreciation recorded in the first quarter offiscal 2010.

 

**Wholesale operating income** for fiscal 2010 totaled$14.2 million, or 3.9% of net sales, as compared to $6.7 million, or 1.7% ofnet sales, in the prior year. The increase of $7.5 million was primarilyattributable to (i) a $17.6 million decrease in restructuring and impairmentcharges due to the 2009 restructuring actions discussed earlier, partly offsetby the $6.6 million in accelerated depreciation taken during the first quarterof fiscal 2010 as a result of those same restructuring activities.

 

**Retail operating loss** was $28.7 million, or 6.6%of sales, for fiscal 2010,compared to a loss of $92.1 million, or 18.1% ofsales, for fiscal 2009, an improvement of $63.4 million. The primary reasonsfor the improvement was the $48.4 million goodwill impairment charge in March2009, net impact of commission changes in both years, and the positive effectsof cost cutting efforts taken by the Company.

 

**Interestand other income, net** totaled $4.9 million in fiscal 2010 ascompared to $3.4 million in fiscal 2009. The $1.5 million increase was mostlydue to miscellaneous non-operating fees, partly offset by reduced investmentincome resulting from with lower rates of interest during the current year.

 

**Interestand other related financing costs** remained largely unchangedat $11.9 million from $11.8 million in the prior year. This amount mostlyconsists of interest expense on our senior unsecured debt issued in September2005.

 

**Incometax expense** was $25.5 million for fiscal 2010 as compared to abenefit of $28.5 million for fiscal 2009. Our effective tax rate for the current year was a negative (136%)compared to 35.1% in the prior year. The effective tax rate for the currentyear was impacted by an additional valuation allowance recorded during fiscal2010 against all of our federal and certain state deferred tax assets.

 

**Net income** for fiscal 2010 was a loss of $44.3 million ascompared to a loss of $52.7 million in fiscal 2009.  Net loss per diluted share totaled $1.53 inthe current year compared to net loss of $1.83 per diluted share in the prioryear.

 

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***Fiscal 2009 Compared to Fiscal 2008***

 

**Consolidated revenue** for the fiscal year endedJune 30, 2009 decreased by $305.7 million, or 31.2%, to $674.3 million, from$980 million in fiscal 2008. Net sales for the period largely reflect thedelivery of product associated with booked orders and the change in backlogfrom the beginning to the end of the period. During fiscal 2009, sales were negatively affected by a weak retailenvironment for home furnishings which we believe is due to a number of factorsincluding but not limited to continued weakness in the U.S. economy, highunemployment, volatile capital markets, depressed housing prices and tightconsumer lending practices as well as the use of highly-promotional pricingstrategies by the Company’s competitors. These factors were partially offset by (i) the positive effects of ourcontinued efforts to reposition the retail network, (ii) the introduction ofour new American Artisan product line, (iii) several new marketing initiativesincluding the launching of our new interactive web site ethanalleninc.com andour rewards program, and in the latter part of the fiscal year, special savingspricing, and (iv) the continued use of national television media, where weemphasize to clients our interior design services and the full line of ourquality product offerings.

 

**Wholesale revenue** for fiscal 2009 decreased by $212.9 million,or 34.5%, to $403.4 million from $616.2 million in the prior year.  The year-over-year decrease was primarilyattributable to a decline in the incoming order rate as a result of the softerretail environment for home furnishings noted throughout the current period andfrom fewer independent retail design centers, which decreased to 134 from 136including four locations transferred in to the company’s Retail division duringthe year.

 

**Retailrevenue** from Ethan Allen-operated design centers for the twelve months endedJune 30, 2009 decreased by $216.0 million, or 29.8%, to $508.6 million from$724.6 million for the twelve months ended June 30, 2008.  The decrease in retail sales by EthanAllen-operated design centers was attributable to a decrease in comparabledesign center delivered sales of $211.9 million, or 32.5%, and reduced revenuefrom sold and closed design centers of $64.4 million. This unfavorable variancewas partially offset by higher sales generated by newly opened (includingrelocated) or acquired design centers of $60.4 million. The number of EthanAllen-operated design centers remained at 159 at both June 30, 2009 and June30, 2008.  During that twelve monthperiod, we acquired four design centers from independent retailers, and openedsix new design centers (of which three were relocations).

 

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 usfrom independent retailers are included in comparable design center sales in their13th full month of Ethan Allen-operated operations.

 

Year-over-year, written business of Ethan Allen-operated design centersdecreased 32.6% and comparable design center written business decreased35.4%.  Over that same period, wholesaleorders decreased 35.4%.  Retail writtenbusiness reflects the softer retail environment for home furnishings notedthroughout the current year, likely offset, to some degree, by (i) ourcontinued efforts to reposition the retail network, (ii) recent productintroductions, (iii) several new marketing initiatives described previously,and (iv) our continued use of national television as an advertising mediumthroughout much of the year.

 

**Gross profit** for fiscal 2009 declined to $347.3 million from$526.1 million in fiscal 2008.  The$178.7 million decrease in gross profit was primarily attributable to acombined decline in both wholesale and retail sales volume of 31.2%, partiallyoffset by a shift in sales mix with retail sales representing a higherproportionate share of total sales in the current full year (75.4%) as comparedto the prior full year (73.9%). As a result of reduced sales, and to reduceinventories, manufacturing plants were operated at approximately 50% ofcapacity.  This resulted in higherunabsorbed costs in our manufacturing plants which were charged to expenseduring the period. The consolidated gross margin decreased to 51.5% for fiscal2009 from 53.7% in fiscal 2008 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 twelvemonths ended June 30, 2009 and 2008:

 

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**Operating expenses** decreased $10.0 million, or2.3%, to $420.1 million, or 62.3% of net sales, in fiscal 2009 from $430.1million, or 43.9% of net sales, in fiscal 2008. Decreases in salary relatedcosts were experienced due to the reduced number of employees and other costcutting efforts taken by the Company that impacted bonuses and benefits.  Advertising expenses decreased, while stillmaintaining our national TV and shelter magazine presence. Delivery andwarehousing costs were lower due to decreased sales. Partially offsetting thesedecreases were (i) a non-cash goodwill impairment charge of $48.4 millionrecorded in the March 2009 quarter and (ii) an $11.8 million period-over-periodincrease in restructuring and impairment charges, both discussed earlier, and(iii) added costs of $7 million due to the implementation of the team conceptwhich caused a temporary overlap of expenses.

 

**Consolidated operating income** for the year ended June 30,2009 totaled a loss of $72.8 million, or 10.8% of net sales, compared to incomeof $96.0 million, or 9.8% of net sales, in the prior year.  The decrease of $168.8 million was largelyattributable to (i) a 31.2% reduction in net sales, resulting in a $178.7million reduction in gross profit, (ii) a goodwill impairment charge, (iii)increased restructuring and impairment charges and (iv) net declines in otheroperating expenses, all of which were discussed previously.

 

**Wholesale operating income** for fiscal 2009 totaled$6.7 million, or 1.7% of net sales, as compared to $100.3 million, or 16.3% ofnet sales, in the prior year. The decrease of $93.7 million was primarilyattributable to (i) the $212.9 reduction in net sales, and (ii) a $17.4 millionincrease in restructuring and impairment charges due to the 2009 actionsdiscussed earlier.

 

**Retail operating income** decreased $89.3 million toa $92.1 million loss, or 18.1% of sales, for fiscal 2009, from a loss of $2.8million, or 0.4% of sales, for fiscal 2008. The decrease in retail operatingincome generated by Ethan Allen-operated design centers was primarilyattributable to reduced sales caused by the weak retail environment for homefurnishings, as well as the $48.4 million goodwill impairment charge.

 

**Interestand other miscellaneous income, net** totaled $3.4 million infiscal 2009 as compared to $7.9 million in fiscal 2008. The $4.5 milliondecrease was mostly due to lower investment income resulting from reduced cashand cash equivalent balances maintained along with lower rates of interest duringthe current period and by gains recorded in connection with the sale ofselected real estate assets in the prior year.

 

**Interestand other related financing costs** remained largely unchangedat $11.8 million from $11.7 million in the prior year. This amount mostlyconsists of interest expense on our senior unsecured debt issued in September2005.

 

**Incometax**totaled a benefit of $28.5 million for fiscal 2009 as compared to anexpense of $34.1 million for fiscal 2008. Our effective tax rate for the current year was 35.1%, compared to 37.0%in fiscal 2008. The effective tax rate was a result, primarily, of the totalcurrent year loss before tax and the resulting valuation allowance takenagainst certain deferred tax assets and the inability to apply the manufacturers’deduction provided for under The Jobs Creation Act of 2004.

 

**Net income** for fiscal 2009 was a loss of $52.7 million ascompared to income of $58.1 million in fiscal 2008.  Net loss per diluted share totaled $1.83 inthe current year compared to net income of $1.97 per diluted share in the prioryear.

 

**Liquidity and Capital Resources**

 

As of June 30, 2010, we held cash and cash equivalents of $73.9million, marketable securities of $11.1 million, and restricted cash andinvestments of $17.3 million.  Ourprincipal sources of liquidity include cash and cash equivalents, cash flowfrom operations, and borrowing capacity under our revolving credit facility.

 

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In October 2009, the Company expanded to $60 million the three-yearsenior secured asset-based revolving credit facility (the “Facility”)established on May 29, 2009.  TheFacility provides revolving credit financing of up to $60 million, subject toborrowing base availability that at June 30, 2010 was $59.5 million. At theCompany’s option, revolving loans under the Facility bear interest at an annualrate of either:

 

(a)   London interbank offeredrate (“LIBOR”) plus 3.25% to 4.25%, based on the average availability, or

(b)   The higher of (i) a primerate, (ii) the federal funds effective rate plus 0.50%, or (iii) a LIBOR plus1.00% plus, in each case, an additional 2.25% to 3.25%, based on averageavailability.

 

The Company pays a commitment fee of 0.50% per annum on the unusedportion of the Facility and participation fees on issued letters of credit atan annual rate of 1.625% to 4.25%, based on the average availability and theletter of credit type, and a fronting fee of 0.125% per annum.

 

The borrowing base at any time equals the sum of: (i) up to 90% ofeligible credit card receivables; (ii) plus up to 85% of eligible accountsreceivable; and (iii) plus up to 85% of the net orderly liquidation value ofeligible inventory. The Facility is secured by all property owned, leased oroperated by the Company in the United States excluding all real property ownedby the Company.  The Facility containscustomary covenants which may limit the Company’s ability to incur debt, engagein mergers and consolidations, make restricted payments (including dividends),sell certain assets, and make investments. The Company may make restrictedpayments (including dividends) as long as availability equals or exceeds thegreater of 25% of the aggregate commitment or $12 million.  If the average monthly availability is lessthan the greater of 15% of the aggregate commitment and $9 million, the Companyis also required to meet a fixed charge coverage ratio financial covenant whichmay not be less than 1 to 1 for any period of four consecutive fiscal quarters.The Facility also contains customary borrowing conditions and events ofdefault, the occurrence of which would entitle the lenders to accelerate thematurity of any outstanding borrowings and terminate their commitment to makefuture loans. The Company has not drawn any cash advances against the facility,and has no plans to do so.  At June 30,2010, we had $1.0 million in letters of credit outstanding, and $58.5 millionremaining available credit under the revolver subject to limitations set forthin the agreement noted above.  As of June30, 2010, we are in compliance with the terms and conditions and all covenantsof the Facility and as a result, the coverage charge ratio, or other restrictedpayment limitations did not apply.

 

In September 2005 we completed a private offering of $200.0 million inten-year senior unsecured notes due 2015 (the “Senior Notes”).  The Senior Notes were offered by Ethan AllenGlobal, Inc, a wholly owned subsidiary of the Company, and have an annualcoupon rate of 5.375%.  We have used thenet proceeds of $198.4 million to expand our retail network, invest in ourmanufacturing and logistics operations, and for other general corporatepurposes.  As of June 30, 2010, we are incompliance with the terms and conditions and all covenants of the Senior Notes.

 

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A summary of net cash provided by (used in) operating, investing, andfinancing activities for each of the last three fiscal years is provided below(in millions):

 
| ** **                                                 | ** ** | **Fiscal Year Ended June 30,** | ** ** |
|------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                 | ** ** | **2010**                       | ** ** | **2009** | ** ** | **2008** | ** ** |
| Operating Activities                                       |       |                           |       |   |   |   |   |
| Net income plus depreciation and amortization              |       | $                              | (14.9      | ) | $ | (27.1 | ) | $ | 82.7 |   |
| Working capital                                            |       | 37.0                           |       | 24.8 |   | (5.5 | ) |
| Excess tax benefits from share-based payment  arrangements |       | —                         |       | — |   | (2.1 | ) |
| Other (non-cash items, long-term assets and  liabilities)  |       | 29.2                           |       | 24.2 |   | 11.0 |   |
| Total provided by operating activities                     |       | $                              | 51.3       |   | $ | 21.9 |   | $ | 86.1 |   |
|                                                       |       |                           |       |   |   |   |   |
| Investing Activities                                       |       |                           |       |   |   |   |   |
| Capital expenditures                                       |       | $                              | (9.9       | ) | $ | (22.5 | ) | $ | (60.0 | ) |
| Acquisitions                                               |       | (0.1                           | )          | (1.4 | ) | (7.8 | ) |
| Asset sales                                                |       | 13.2                           |       | 6.4 |   | 6.9 |   |
| Increase in restricted cash and investments                |       | (17.3                          | )          | — |   | — |   |
| Purchases of marketable securities (net)                   |       | (11.2                          | )          | — |   | — |   |
| Other                                                      |       | 0.2                            |       | — |   | (0.5 | ) |
| Total used in investing activities                         |       | $                              | (25.1      | ) | $ | (17.5 | ) | $ | (61.3 | ) |
|                                                       |       |                           |       |   |   |   |   |
| Financing Activities                                       |       |                           |       |   |   |   |   |
| Issuances of common stock                                  |       | $                              | —     |   | $ | — |   | $ | 0.5 |   |
| Purchases and retirement of company stock                  |       | —                         |       | — |   | (75.6 | ) |
| Payment of cash dividends                                  |       | (5.8                           | )          | (23.6 | ) | (25.5 | ) |
| Excess tax benefits from share-based payment  arrangements |       | —                         |       | — |   | 2.1 |   |
| Payment of deferred financing costs                        |       | (0.2                           | )          | (1.4 | ) | — |   |
| Total provided by (used in) financing activities           |       | $                              | (6.0       | ) | $ | (25.0 | ) | $ | (98.5 | ) |

 

***Operating Activities***

In fiscal 2010, $29.4 million more cash was generated by operatingactivities than in fiscal 2009.  Thechange in cash arising from customer deposits due to increased written ordersand backlogs especially toward the end of each fiscal year accounted for $37.0million of this change.  This waspartially offset by an $8.6 million lower reduction in inventory that whilesignificant in fiscal 2010, was a lower reduction than achieved in fiscal 2009.

 

***Investing Activities***

In fiscal 2010, $7.6 million more cash was used in investing activitiesthan in fiscal 2009.  This was dueprimarily to the $17.3 million increase in restricted cash and investments and$11.2 million purchase of marketable securities.  This was partly offset by a decrease incapital expenditures and acquisitions of $13.9 million, and an increase inproceeds from sale of property, plant and equipment (primarily retail realestate) of $6.8 million.  The currentlevel of capital spending is principally attributable to continued designcenter development and renovation, but at a reduced level from the prior twoyears, and expansion of our upholstery operations in Mexico.  We anticipate that cash from operations willbe sufficient to fund future capital expenditures, business conditionspermitting.

 

***Financing Activities***

In fiscal 2010, $19.0 million less cash was used in financingactivities than in fiscal 2009 primarily the result of a decrease in dividendpayouts.  On July 20, 2010, we declared adividend of $0.05 per common share, payable on October 25, 2010, toshareholders of record as of October 11, 2010. We expect to continue to declare quarterly dividends for the foreseeablefuture.

 

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As of June 30, 2010, our outstanding debt totaled $203.3 million, thecurrent and long-term portions of which amounted to $3.9 million and $199.4 million,respectively.  The aggregate scheduledmaturities of long-term debt for each of the next five fiscal years are: $3.9million in fiscal 2011; and less than $0.1 million in each of fiscal 2012,2013, 2014 and 2015.  The balance of ourlong-term debt ($199.3 million) matures in fiscal 2016.

 

The following table summarizes, as of June 30, 2010, the timing of cashpayments related to our outstanding contractual obligations (in thousands):

 
| ** **                    | ** ** | **Total** | ** ** | **Less  than 1  Year** | ** ** | **1-3  Years** | ** ** | **4-5  Years** | ** ** | **More  than 5  Years** | ** ** |
|-------------------------------|------------|-----------|------------|------------------------|------------|----------------|------------|----------------|------------|-------------------------|------------|
| Long-term debt obligations:   |       |      |       |                   |       |           |       |           |       |                    |       |
| Debt maturities               |       | $         | 203,267    |                   | $          | 3,898          |       | $              | 30         |                    | $          | 23 |   | $ | 199,316 |   |
| Contractual interest          |       | 59,471    |       | 11,046                 |       | 21,512         |       | 21,510         |       | 5,403                   |       |
| Operating lease obligations   |       | 210,228   |       | 32,336                 |       | 55,728         |       | 34,752         |       | 87,412                  |       |
| Letters of credit             |       | 1,006     |       | 1,006                  |       | —         |       | —         |       | —                  |       |
| Purchase obligations (1)      |       | —    |       | —                 |       | —         |       | —         |       | —                  |       |
| Other long-term liabilities   |       | 237       |       | 4                      |       | 18             |       | 48             |       | 167                     |       |
| Total contractual obligations |       | $         | 474,209    |                   | $          | 48,290         |       | $              | 77,288     |                    | $          | 56,333 |   | $ | 292,298 |   |

 

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(1)  For purposes of this table, purchaseobligations are defined as agreements that are enforceable and legally bindingand that specify all significant terms, including: fixed or minimum quantitiesto be purchased; fixed, minimum or variable price provisions; and theapproximate timing of the transaction. While we are not a party to anysignificant long-term supply contracts or purchase commitments, we do, in thenormal course of business, regularly initiate purchase orders for theprocurement of (i) selected finished goods sourced from third-party suppliers,(ii) lumber, fabric, leather and other raw materials used in production, and(iii) certain outsourced services.  Allpurchase orders are based on current needs and are fulfilled by supplierswithin short time periods. At June 30, 2010, our open purchase orders withrespect to such goods and services totaled approximately $28 million.

 

Furtherdiscussion of our contractual obligations associated with outstanding debt andlease arrangements can be found in Notes 7 and 8, respectively, to theConsolidated Financial Statements included under Item 8 of this Annual Report.

 

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 June 30, 2010, we had working capitalof $114.0 million and a current ratio of 1.78 to 1.

 

In addition to using available cash to fund changes in working capital,necessary capital expenditures, acquisition activity, the repayment of debt,and the payment of dividends, the Company has been authorized by our Board ofDirectors to repurchase our common stock, from time to time, either directly orthrough agents, in the open market at prices and on terms satisfactory to us.

 

**Off-BalanceSheet Arrangements and Other Commitments, Contingencies and ContractualObligations**

 

Exceptas indicated below, we do not utilize or employ any off-balance sheet arrangements,including special-purpose entities, in operating our business.  As such, we do not maintain any (i) retainedor contingent interests, (ii) derivative instruments, or (iii) variableinterests which could serve as a source of potential risk to our futureliquidity, capital resources and results of operations.

 

Wemay, from time to time in the ordinary course of business, provide guaranteeson behalf of selected affiliated entities or become contractually obligated toperform in accordance with the terms and conditions of certain businessagreements. The nature and extent of these guarantees and obligations may varybased on our underlying relationship with the benefiting party and the businesspurpose for which the guarantee or obligation is being provided. Details ofthose arrangements for which we act as guarantor or obligor are provided below.

 

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***Retailer-Related Guarantees***

 

IndependentRetailer 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 default under the Amended Credit Facility, torepurchase the retailer’s inventory, applying such purchase price to theretailer’s outstanding indebtedness under the Amended Credit Facility. Ourobligation remains in effect for the life of the term loan.  The agreement expires in April 2011. Webelieve this obligation will expire without requiring funding by us.

 

EthanAllen 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, the Companymodified the Program Agreement to comply with recent changes in laws and madecertain other changes to fees payable to the service provider. Any independentretailer choosing to participate in the consumer credit program is required toenter into a separate agreement with that same third-party financialinstitution which sets forth the terms and conditions under which the retaileris to perform in connection with its offering of consumer credit to itscustomers (the “Retailer Agreement”). We have obligated ourselves on behalf of anyindependent retailer choosing to participate in our consumer credit program byagreeing, in the event of default, breach, or failure of the independentretailer to perform under such Retailer Agreement, to take on certainresponsibilities of the independent retailer, including, but not limited to,delivery of goods and reimbursement of customer deposits. Customer receivablesoriginated by independent retailers remain non-recourse to Ethan Allen. Ourobligation remains in effect for the term of the Program Agreement that expiresin July 2014. While the maximum potential amount of future payments(undiscounted) that we could be required to make under this obligation isindeterminable, recourse provisions exist that would enable us to recover, fromthe 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 for delivery of productssold, the terms of this agreement also contain a right for the credit cardissuer to demand from the Company collateral of up to $12 million if theCompany does not meet certain covenants. As of June 30, 2010, the Company had established a restricted cash andinvestment collateral account of $6 million to satisfy the current requirement underthis demand.

 

***Product Warranties***

Ourproducts, including our case goods, upholstery and home accents, generallycarry explicit product warranties that extend from three to seven years and areprovided based on terms that are generally accepted in the industry.  All of our domestic independent retailers arerequired to enter into, and perform in accordance with the terms and conditionsof, a warranty service agreement. We record provisions for estimated warrantyand other related costs at time of sale based on historical warranty loss experienceand make periodic adjustments to those provisions to reflect actual experience.On rare occasion, certain warranty and other related claims involve matters ofdispute that ultimately are resolved by negotiation, arbitration or litigation.  In certain cases, a material warranty issuemay arise which is beyond the scope of our historical experience. We providefor such warranty issues as they become known and are deemed to be bothprobable and estimable. It is reasonably possible that, from time to time,additional warranty and other related claims could arise from disputes or othermatters beyond the scope of our historical experience. As of June 30, 2010, theCompany’s product warranty liability totaled $0.8 million.

 

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**Impactof Inflation**

 

Webelieve inflation had an impact on our business the last three fiscal years butwe have generally been able to create operational efficiencies, seek lower costalternatives, or raise selling prices in order to offset increases in productand operating costs. It is possible in the future that we will not besuccessful in our efforts to offset the impacts from inflation.

 

**BusinessOutlook**

 

While we cannot forecast, with any degree of certainty, changes in thevarious macro-economic factors that influence the incoming order rate, webelieve that we are well-positioned to respond to both market weakness andeconomic growth based upon our existing business model which includes: (i) anestablished brand; (ii) a comprehensive complement of home decoratingsolutions; and (iii) a vertically-integrated operating structure.

 

Asmacro-economic factors change, however, it is possible that our costs associatedwith production (including raw materials and labor), distribution (includingfreight and fuel charges), and retail operations (including compensation andbenefits, delivery and warehousing, occupancy, and advertising expenses) mayincrease.  We cannot reasonably predictwhen, or to what extent, such events may occur or what effect, if any, suchevents may have on our consolidated financial condition or results ofoperations.

 

Thehome furnishings industry remains extremely competitive with respect to boththe sourcing of products and the retail sale of those products. Domesticmanufacturers continue to face pricing pressures because of the manufacturingcapabilities of other countries, specifically within Asia. In response to thesepressures, a large number of U.S. furniture manufacturers have increased theiroverseas sourcing activities in an attempt to maintain a competitive advantageand retain market share. While we have also turned to overseas sourcing toremain competitive, we choose to differentiate ourselves by maintaining asubstantial domestic manufacturing base. Consequently, we make and/or assemble approximately 70% of our productsdomestically. We continue to believe that a balanced approach to product sourcing,which includes the domestic manufacture of certain product offerings coupledwith the import of other selected products, provides the greatest degree ofresponsiveness and is the most effective approach to ensuring that acceptablelevels of quality, service and value are attained.

 

Ourretail strategy involves (i) a continued focus on providing a wide arrayof product solutions and superior customer service, (ii) the opening ofnew or relocated design centers in more prominent locations, while encouragingindependent retailers to do the same, (iii) leveraging the use oftechnology with personal service within our retail network, and (iv) furtherexpansion internationally. We believe this strategy provides an opportunity togrow our business.

 

Furtherdiscussion of the home furnishings industry has been included under Item 1 ofthis Annual Report.

 

**RecentAccounting Pronouncements**

 

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

 

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date of this Statement, the ASC superseded all then-existing non-SECaccounting and reporting standards, and all other non-grandfathered non-SECaccounting literature not included in the ASC became non-authoritative.References to the pre-codification pronouncements are noted in parenthesis.

 

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

 

In December 2007, theFASB issued guidance now codified as ASC Topic 805, “*BusinessCombinations”* (SFAS No. 141(R), which replaced SFAS No. 141).  ASC Topic 805 establishes principles andrequirements for how an acquirer in a business combination recognizes andmeasures in its financial statements the identifiable assets acquired, theliabilities assumed, and any controlling interest; recognizes and measures thegoodwill acquired in the business combination or a gain from a bargainpurchase; and determines what information to disclose to enable users of thefinancial statements to evaluate the nature and financial effects of the businesscombination. ASC Topic 805 is to be applied prospectively to businesscombinations for which the acquisition date is on or after an entity’s fiscalyear that begins after December 15, 2008 (July 1, 2009 for theCompany). The implementation of this pronouncement did not have a materialimpact on our consolidated financial position, results of operations or cashflows.

 

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

 

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

 

**Item 7A. Quantitative and Qualitative DisclosuresAbout Market Risk**

 

Weare exposed to market risks relating to fluctuations in interest rates andforeign currency exchange rates.

 

Interestrate risk exists primarily through our borrowing activities. We utilize UnitedStates dollar denominated borrowings to fund substantially all our workingcapital and investment needs. Short-term debt, if required, is used to meetworking capital requirements and long-term debt is generally used to financelong-term investments. There is inherent rollover risk for borrowings as theymature and are renewed at current market

 

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rates.The extent of this risk is not quantifiable or predictable because of thevariability of future interest rates and our future financing requirements.

 

Forfloating-rate obligations, interest rate changes do not affect the fair valueof the underlying financial instrument but would impact future earnings andcash flows, assuming other factors are held constant. Conversely, forfixed-rate obligations, interest rate changes affect the fair value of theunderlying financial instrument but would not impact earnings or cash flows. AtJune 30, 2010, we had no floating-rate debt obligations outstanding.  As of that same date, our fixed-rate debtobligations consist, primarily, of the Senior Notes issued on September 27,2005. The estimated fair value of the Senior Notes as of June 30, 2010,which is based on changes, if any, in interest rates and our creditworthinesssubsequent to the date on which the debt was issued, and which has beendetermined using quoted market prices, was $191 million as compared to acarrying value of $199 million.

 

Foreigncurrency exchange risk is primarily limited to our operation of five EthanAllen-operated retail design centers located in Canada and our plant in Mexico,as substantially all purchases of imported parts and finished goods aredenominated in United States dollars.  Assuch, gains or losses resulting from market changes in the value of foreigncurrencies have not had, nor are they expected to have, a material effect onour consolidated results of operations. A decrease in the value of foreigncurrencies (in particular Asian) relative to the United States dollar mayaffect the profitability of our vendors but as we employ a balanced sourcingstrategy, we believe any impact would be moderated relative to peers in theindustry.

 

**Item 8. Financial Statements and Supplementary Data**

 

OurConsolidated Financial Statements and Supplementary Data are listed under Item15 of this Annual Report.

 

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**Report of Independent Registered Public Accounting Firm**

 

TheBoard of Directors and Shareholders

EthanAllen Interiors Inc.:

 

Wehave audited the accompanying consolidated balance sheets of Ethan AllenInteriors Inc. and subsidiaries (the “Company”) as of June 30, 2010 and2009, and the related consolidated statements of operations, shareholders’equity, and cash flows for each of the years in the three-year period ended June 30,2010. We also have audited the Company’s internal control over financialreporting as of June 30, 2010, based on the criteria established inInternal Control — Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). The Company’s management isresponsible for these consolidated financial statements, for maintainingeffective internal control over financial reporting, and for its assessment ofthe effectiveness of internal control over financial reporting, included in theaccompanying Management’s Report on Internal Control over Financial Reporting.Our responsibility is to express an opinion on these consolidated financialstatements and an opinion on the Company’s internal control over financialreporting based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audits to obtain reasonable assurance about whether thefinancial statements are free of material misstatement and whether effectiveinternal control over financial reporting was maintained in all materialrespects. Our audits of the consolidated financial statements includedexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation. Our audit of internal control over financial reportingincluded obtaining an understanding of internal control over financialreporting, assessing the risk that a material weakness exists, and testing andevaluating the design and operating effectiveness of internal control based onthe assessed risk. Our audits also included performing such other procedures aswe considered necessary in the circumstances. We believe that our auditsprovide a reasonable basis for our opinions.

 

Acompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that(1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assetsof the company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of Ethan AllenInteriors Inc. and subsidiaries as of June 30, 2010 and 2009, and theresults of its operations and its cash flows for each of the years in thethree-year period ended June 30, 2010, in conformity with U.S. generallyaccepted accounting principles. Also in our opinion, Ethan Allen Interiors, Inc.and subsidiaries maintained, in all material respects, effective internalcontrol over financial reporting as of June 30,

 

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2010,based on criteria established in Internal Control — Integrated Framework issuedby the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

EffectiveJuly 1, 2007, the Company adopted Financial Accounting Standards Board (“FASB”)Interpretation No. 48, *Accounting for Uncertaintyin Income Taxes* (included in FASB Accounting Standards CodificationTopic 740, *Income Taxes*).

 

 

/s/KPMG LLP

 

Stamford,Connecticut

August 19,2010

 

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**ETHAN ALLEN INTERIORS INC.AND SUBSIDIARIES**

**Consolidated Balance Sheets**

**June 30, 2010 and 2009**

(In thousands, except share data)

 
| ** **                                                                                                                                                                    | ** ** | **2010** | ** ** | **2009** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ASSETS                                                                                                                                                                        |       |     |       |     |       |
|                                                                                                                                                                          |       |     |       |     |       |
| Current assets:                                                                                                                                                               |       |     |       |     |       |
| Cash and cash equivalents                                                                                                                                                     |       | $        | 73,852     |     | $          | 52,960 |   |
| Marketable Securities                                                                                                                                                         |       | 11,075   |       | —   |       |
| Accounts receivable, less allowance for doubtful  accounts of $1,160 at June 30, 2010 and $1,362 at June 30, 2009                                                   |       | 17,105   |       | 13,086   |       |
| Inventories (note 4)                                                                                                                                                          |       | 134,040  |       | 156,519  |       |
| Prepaid expenses and other current assets                                                                                                                                     |       | 23,620   |       | 21,060   |       |
| Deferred income taxes (note 12)                                                                                                                                               |       | —   |       | 8,077    |       |
| Total current assets                                                                                                                                                          |       | 259,692  |       | 251,702  |       |
|                                                                                                                                                                          |       |     |       |     |       |
| Property, plant and equipment, net (note 5)                                                                                                                                   |       | 305,747  |       | 333,599  |       |
| Goodwill and other intangible assets (notes 3 and  6)                                                                                                                         |       | 45,128   |       | 45,128   |       |
| Restricted cash and investments (note 19)                                                                                                                                     |       | 17,318   |       | —   |       |
| Other assets                                                                                                                                                                  |       | 3,892    |       | 16,056   |       |
| Total assets                                                                                                                                                                  |       | $        | 631,777    |     | $          | 646,485 |   |
|                                                                                                                                                                          |       |     |       |     |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                                     |       |     |       |     |       |
|                                                                                                                                                                          |       |     |       |     |       |
| Current liabilities:                                                                                                                                                          |       |     |       |     |       |
| Current maturities of long-term debt (note 7)                                                                                                                                 |       | $        | 3,898      |     | $          | 42 |   |
| Customer deposits                                                                                                                                                             |       | 52,605   |       | 31,691   |       |
| Accounts payable                                                                                                                                                              |       | 23,952   |       | 22,199   |       |
| Accrued compensation and benefits                                                                                                                                             |       | 28,353   |       | 29,533   |       |
| Accrued expenses and other current liabilities                                                                                                                                |       | 36,934   |       | 28,998   |       |
| Total current liabilities                                                                                                                                                     |       | 145,742  |       | 112,463  |       |
|                                                                                                                                                                          |       |     |       |     |       |
| Long-term debt (note 7)                                                                                                                                                       |       | 199,369  |       | 203,106  |       |
| Other long-term liabilities                                                                                                                                                   |       | 19,123   |       | 24,993   |       |
| Deferred income taxes (note 12)                                                                                                                                               |       | 9,084    |       | —   |       |
| Total liabilities                                                                                                                                                             |       | 373,318  |       | 340,562  |       |
|                                                                                                                                                                          |       |     |       |     |       |
| Shareholders’ equity (notes 9, 10, 11 and 15):                                                                                                                           |       |     |       |     |       |
| Class A common stock, par value $.01,  150,000,000 shares authorized, 48,346,607 shares issued at June 30, 2010  and 48,334,870 shares issued at June 30, 2009 |       | 483      |       | 483      |       |
| Class B common stock, par value $.01, 600,000  shares authorized; no shares issued and outstanding at June 30, 2010 and  June 30, 2009                         |       | —   |       | —   |       |
| Preferred stock, par value $.01, 1,055,000 shares authorized,  no shares issued and outstanding at June 30, 2010 and 2009                                                |       | —   |       | —   |       |
| Additional paid-in capital                                                                                                                                                    |       | 358,722  |       | 356,446  |       |
|                                                                                                                                                                          |       | 359,205  |       | 356,929  |       |
| Less: Treasury stock (at cost), 19,414,746 shares  at June 30, 2010 and 19,380,941 shares at June 30, 2009                                                          |       | (581,331 | )          | (583,220 | )          |
| Retained earnings                                                                                                                                                             |       | 479,341  |       | 531,747  |       |
| Accumulated other comprehensive income                                                                                                                                        |       | 1,244    |       | 467      |       |
| Total shareholders’ equity                                                                                                                                               |       | 258,459  |       | 305,923  |       |
| Total liabilities and shareholders’ equity                                                                                                                               |       | $        | 631,777    |     | $          | 646,485 |   |

 

See accompanying notes to consolidated financial statements.

 

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**ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES**

**Consolidated Statements of Operations**

**For Years Ended June 30, 2010, 2009 and 2008**

(In thousands, except per share data)

 
| ** **                                           | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                 |       |     |       |     |       |     |       |
| Net Sales                                            |       | $        | 590,054    |     | $          | 674,277  |       | $ | 980,045 |   |
| Cost of sales                                        |       | 309,777  |       | 326,935  |       | 453,980  |       |
| Gross profit                                         |       | 280,277  |       | 347,342  |       | 526,065  |       |
|                                                 |       |     |       |     |       |     |       |
| Operating expenses:                                  |       |     |       |     |       |     |       |
| Selling                                              |       | 142,562  |       | 182,800  |       | 229,590  |       |
| General and administrative                           |       | 147,013  |       | 170,312  |       | 193,639  |       |
| Goodwill impairment (note 6)                         |       | —   |       | 48,400   |       | —   |       |
| Restructuring and impairment charge (note 2)         |       | 2,437    |       | 18,601   |       | 6,836    |       |
| Total operating expenses                             |       | 292,012  |       | 420,113  |       | 430,065  |       |
|                                                 |       |     |       |     |       |     |       |
| Operating income (loss)                              |       | (11,735  | )          | (72,771  | )          | 96,000   |       |
|                                                 |       |     |       |     |       |     |       |
| Interest and other miscellaneous income, net         |       | 4,872    |       | 3,355    |       | 7,891    |       |
|                                                 |       |     |       |     |       |     |       |
| Interest and other related financing costs (note  7) |       | 11,924   |       | 11,764   |       | 11,713   |       |
|                                                 |       |     |       |     |       |     |       |
| Income (loss) before income taxes                    |       | (18,787  | )          | (81,180  | )          | 92,178   |       |
|                                                 |       |     |       |     |       |     |       |
| Income tax expense (benefit) (note 12)               |       | 25,529   |       | (28,493  | )          | 34,106   |       |
|                                                 |       |     |       |     |       |     |       |
| Net income (loss)                                    |       | $        | (44,316    | )        | $          | (52,687  | )          | $ | 58,072 |   |
|                                                 |       |     |       |     |       |     |       |
| Per share data (notes 10 and 17):                    |       |     |       |     |       |     |       |
|                                                 |       |     |       |     |       |     |       |
| Net income (loss) per basic share                    |       | $        | (1.53      | )        | $          | (1.83    | )          | $ | 1.98 |   |
|                                                 |       |     |       |     |       |     |       |
| Basic weighted average common shares                 |       | 28,982   |       | 28,814   |       | 29,267   |       |
|                                                 |       |     |       |     |       |     |       |
| Net income (loss) per diluted share                  |       | $        | (1.53      | )        | $          | (1.83    | )          | $ | 1.97 |   |
|                                                 |       |     |       |     |       |     |       |
| Diluted weighted average common shares               |       | 28,982   |       | 28,814   |       | 29,470   |       |
|                                                 |       |     |       |     |       |     |       |
| Dividends declared per common share                  |       | $        | 0.20       |     | $          | 0.65     |       | $ | 0.88 |   |

 

See accompanying notes to consolidated financial statements.

 

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**ETHAN ALLEN INTERIORS INC.AND SUBSIDIARIES**

**Consolidated Statements ofCash Flows**

**For the years Ended June 30,2010, 2009 and 2008**

(In thousands)

 
| ** **                                                                           | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Operating activities                                                                 |       |     |       |     |       |     |       |
| Net income (loss)                                                                    |       | $        | (44,316    | )        | $          | (52,687  | )          | $ | 58,072 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:   |       |     |       |     |       |     |       |
| Depreciation and amortization                                                        |       | 29,398   |       | 25,635   |       | 24,670   |       |
| Compensation expense related to share-based                                          |       | 2,276    |       | 1,719    |       | 1,260    |       |
| Provision (benefit) for deferred income taxes                                        |       | 33,789   |       | (32,158  | )          | (2,364   | )          |
| Excess tax benefits from shared-based awards                                         |       | —   |       | —   |       | (2,093   | )          |
| Goodwill impairment                                                                  |       | —   |       | 48,400   |       | —   |       |
| Restructuring and impairment charge                                                  |       | (230     | )          | 7,038    |       | 1,762    |       |
| (Gain) loss on disposal of property, plant and                                       |       | (1,303   | )          | 1,001    |       | 110      |       |
| Other                                                                                |       | 242      |       | 198      |       | 221      |       |
| Changes in operating assets and liabilities, net  of effects of acquired businesses: |       |     |       |     |       |     |       |
| Accounts receivable                                                                  |       | (4,197   | )          | (776     | )          | 618      |       |
| Inventories                                                                          |       | 22,863   |       | 31,428   |       | (91      | )          |
| Prepaid and other current assets                                                     |       | (5,179   | )          | 10,627   |       | 3,626    |       |
| Other assets                                                                         |       | 304      |       | 1,354    |       | 660      |       |
| Customer deposits                                                                    |       | 20,759   |       | (16,266  | )          | (9,086   | )          |
| Accounts payable                                                                     |       | (836     | )          | (3,835   | )          | 3,230    |       |
| Accrued expenses and other current liabilities                                       |       | 3,631    |       | 3,590    |       | (3,784   | )          |
| Other liabilities                                                                    |       | (5,870   | )          | (3,335   | )          | 9,326    |       |
| Net cash provided by operating activities                                            |       | 51,331   |       | 21,933   |       | 86,137   |       |
|                                                                                 |       |     |       |     |       |     |       |
| Investing activities:                                                                |       |     |       |     |       |     |       |
| Proceeds from the disposal of property, plant and                                    |       | 13,198   |       | 6,384    |       | 6,943    |       |
| Increase in restricted cash and investments                                          |       | (17,318  | )          | —   |       | —   |       |
| Capital expenditures                                                                 |       | (9,922   | )          | (22,537  | )          | (60,038  | )          |
| Acquisitions                                                                         |       | (50      | )          | (1,366   | )          | (7,777   | )          |
| Purchases of marketable securities                                                   |       | (11,364  | )          | —   |       | —   |       |
| Sales of marketable securities                                                       |       | 200      |       | —   |       | —   |       |
| Other                                                                                |       | 165      |       | (7       | )          | (462     | )          |
| Net cash used in investing activities                                                |       | (25,091  | )          | (17,526  | )          | (61,334  | )          |
|                                                                                 |       |     |       |     |       |     |       |
| Financial activities:                                                                |       |     |       |     |       |     |       |
| Payments on long-term debt                                                           |       | (42      | )          | (41      | )          | (40      | )          |
| Purchases and retirements of company stock                                           |       | —   |       | —   |       | (75,577  | )          |
| Proceeds from the issuance of common stock                                           |       | 1        |       | 2        |       | 474      |       |
| Excess tax benefits from share-based payment                                         |       | —   |       | —   |       | 2,093    |       |
| Payment of deferred financing costs                                                  |       | (199     | )          | (1,380   | )          | —   |       |
| Payment of cash dividends                                                            |       | (5,801   | )          | (23,617  | )          | (25,495  | )          |
| Net cash used in financing activities                                                |       | (6,041   | )          | (25,036  | )          | (98,545  | )          |
| Effect of exchange rate changes on cash                                              |       | 693      |       | (787     | )          | 239      |       |
|                                                                                 |       |     |       |     |       |     |       |
| Net increase (decrease) in cash and cash  equivalents                                |       | 20,892   |       | (21,416  | )          | (73,503  | )          |
|                                                                                 |       |     |       |     |       |     |       |
| Cash and cash equivalents — beginning of year                                   |       | 52,960   |       | 74,376   |       | 147,879  |       |
| Cash and cash equivalents — end of year                                         |       | $        | 73,852     |     | $          | 52,960   |       | $ | 74,376 |   |
| Supplemental cash flow information:                                                  |       |     |       |     |       |     |       |
| Income taxes paid (received)                                                         |       | $        | (8,213     | )        | $          | 8,237    |       | $ | 33,618 |   |
| Interest paid                                                                        |       | $        | 11,097     |     | $          | 11,098   |       | $ | 11,132 |   |

 

See accompanying notes to consolidated financial statements.

 

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**ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES**

**Consolidated Statements of Shareholders’ Equity**

**For the Years Ended June 30, 2010, 2009 and 2008**

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

 
| ** **                                                                                  | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Treasury  Stock** | ** ** | **Accumulated  Other  Comprehensive  Income** | ** **     | **Retained  Earnings** | ** ** | **Total**   | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|---------------------|------------|-----------------------------------------------|----------------|------------------------|------------|-------------|------------|
| Balance as of June 30, 2007                                                                 |       | $                 |  474  |                             | $          |  330,268       |       | $                                             |  (496,005 | )                      | $          |  1,370 |       | $ |  573,535 |   | $ |  409,642 |   |
|                                                                                        |       |              |       |                             |       |                |       |                                          |           |                   |       |        |       |
| Issuance of 770,337 common shares upon the exercise  of share-based awards (notes 9 and 11) |       |  8           |       |  21,104                     |       | —              |       | —                                        |           | —                 |       | 21,112      |       |
| Compensation expense associated with share-based  awards (notes 9 and 11)                   |       | —            |       | 1,260                            |       | —              |       | —                                        |           | —                 |       | 1,260       |       |
| Tax benefit associated with exercise of  share-based awards (notes 9, 11 and 12)            |       | —            |       | 2,093                            |       | —              |       | —                                        |           | —                 |       | 2,093       |       |
| FIN 48 transition adjustment                                                                |       | —            |       | —                           |       | —              |       | —                                        |           | 683                    |       | 683         |       |
| Purchase/retirement of 2,921,319 shares of company  stock (note 9)                          |       | —            |       | —                           |       | (92,778             | )          | —                                        |           | —                 |       | (92,778     | )          |
| Dividends declared on common stock                                                          |       | —            |       | —                           |       | —              |       | —                                        |           | (25,642                | )          | (25,642     | )          |
| Other comprehensive income (loss) (notes 7 and 15)                                          |       |              |       |                             |       |                |       |                                          |           |                   |       |        |       |
| Currency translation adjustments                                                            |       | —            |       | —                           |       | —              |       | 1,283                                         |           | —                 |       | 1,283       |       |
| Loss on derivatives, net-of-tax                                                             |       | —            |       | —                           |       | —              |       | 48                                            |           | —                 |       | 48          |       |
| Net income                                                                                  |       | —            |       | —                           |       | —              |       | —                                        |           | 58,072                 |       | 58,072      |       |
| Total comprehensive income                                                                  |       |              |       |                             |       |                |       |                                          |           |                   |       | 59,403      |       |
|                                                                                        |       |              |       |                             |       |                |       |                                          |           |                   |       |        |       |
| Balance as of June 30, 2008                                                                 |       | 482               |       | 354,725                          |       | (588,783            | )          | 2,701                                         |           | 606,648                |       | 375,773     |       |
| Issuance of 90 common shares upon the exercise of  share-based awards (notes 9 and 11)      |       |  1           |       |  2                          |       | —              |       | —                                        |           | —                 |       | 3           |       |
| Compensation expense associated with share-based  awards (notes 9 and 11)                   |       | —            |       | 1,719                            |       | —              |       | —                                        |           | —                 |       | 1,719       |       |
| Issuance of treasury shares for 401k match                                                  |       | —            |       | —                           |       | 5,563               |       | —                                        |           | (3,431                 | )          | 2,132       |       |
| Dividends declared on common stock                                                          |       | —            |       | —                           |       | —              |       | —                                        |           | (18,783                | )          | (18,783     | )          |
| Other comprehensive income (loss) (note 15)                                                 |       |              |       |                             |       |                |       |                                          |           |                   |       |        |       |
| Currency translation adjustments                                                            |       | —            |       | —                           |       | —              |       | (2,282                                        | )              | —                 |       | (2,282      | )          |
| Loss on derivatives, net-of-tax                                                             |       | —            |       | —                           |       | —              |       | 48                                            |           | —                 |       | 48          |       |
| Net income (loss)                                                                           |       | —            |       | —                           |       | —              |       | —                                        |           | (52,687                | )          | (52,687     | )          |
| Total comprehensive income (loss)                                                           |       |              |       |                             |       |                |       |                                          |           |                   |       | (54,921     | )          |
|                                                                                        |       |              |       |                             |       |                |       |                                          |           |                   |       |        |       |
| Balance as of June 30, 2009                                                                 |       | 483               |       | 356,446                          |       | (583,220            | )          | 467                                           |           | 531,747                |       | 305,923     |       |
| Issuance of 37 common shares upon the exercise of  share-based awards (notes 9 and 11)      |       |  —      |       | —                           |       | —              |       | —                                        |           | —                 |       | —      |       |
| Compensation expense associated with share-based  awards (notes 9 and 11)                   |       | —            |       | 2,276                            |       | —              |       | —                                        |           | —                 |       | 2,276       |       |
| Purchase/retirement of 182,600 shares of company  stock                                     |       | —            |       | —                           |       | (2,589              | )          | —                                        |           | —                 |       | (2,589      | )          |
| Issuance of treasury shares for 401k match                                                  |       | —            |       | —                           |       | 4,478               |       | —                                        |           | (2,275                 | )          | 2,203       |       |
| Dividends declared on common stock                                                          |       | —            |       | —                           |       | —              |       | —                                        |           | (5,815                 | )          | (5,815      | )          |
| Other comprehensive income (loss) (note 15)                                                 |       |              |       |                             |       |                |       |                                          |           |                   |       |        |       |
| Currency translation adjustments                                                            |       | —            |       | —                           |       | —              |       | 722                                           |           | —                 |       | 722         |       |
| Unrealized gain (loss) on investments                                                       |       |              |       |                             |       |                |       | 6                                             |           |                   |       | 6           |       |
| Loss on derivatives, net-of-tax                                                             |       | —            |       | —                           |       | —              |       | 49                                            |           | —                 |       | 49          |       |
| Net income (loss)                                                                           |       | —            |       | —                           |       | —              |       | —                                        |           | (44,316                | )          | (44,316     | )          |
| Total comprehensive income (loss)                                                           |       |              |       |                             |       |                |       |                                          |           |                   |       | (43,539     | )          |
| Balance at June 30, 2010                                                                    |       | $                 |  483  |                             | $          |  358,722       |       | $                                             |  (581,331 | )                      | $          |  1,244 |       | $ |  479,341 |   | $ |  258,459 |   |

 

See accompanying notes to consolidated financial statements.

 

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**ETHAN ALLEN INTERIORS INC.AND SUBSIDIARIES**

**Notes to the Consolidated Financial Statements**

**June 30, 2009, 2008 and 2007**

 

**(1)           Summary ofSignificant Accounting Policies**

 

Basisof 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.

 

Nature of Operations

 

We are a leading manufacturer and retailer of quality home furnishingsand accessories, offering a full complement of home decorating and designsolutions.  We sell our products throughone of the country’s largest home furnishing retail networks with a total of281 retail design centers, of which 145 are Company-operated and 136 areindependently operated.  Nearly all ofour Company-operated retail design centers are located in the United States,with the remaining design centers located in Canada. The majority of theindependently operated design centers are also located in the United States,with the remaining design centers located throughout Asia, Canada and theMiddle East.  We have six manufacturingfacilities, one of which includes a separate sawmill operation, locatedthroughout the United States, and one in Mexico.

 

Use of Estimates

 

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 inherentuncertainty involved in making those estimates, actual results could differfrom those estimates.  Areas in which significant estimates have been madeinclude, but are not limited to, revenue recognition, the allowance fordoubtful accounts receivable, inventory obsolescence, tax valuation allowances,useful lives for property, plant and equipment and definite lived 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.

 

Reclassifications

 

Certain prior year amounts have been reclassified in order to conformto the current year’s presentation. These changes were made for disclosurepurposes only and did not have any impact on previously reported results ofoperations or shareholders’ equity.

 

Cash Equivalents

 

Cash and short-term, highly-liquid investments with original maturitiesof three months or less are considered cash and cash equivalents. We investexcess cash in money market accounts, short-term commercial paper, and U.S.Treasury Bills.

 

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Inventories

 

Inventories are stated at the lower of cost (first-in, first-out) ormarket.  Cost is determined based solelyon those charges incurred in the acquisition and production of the relatedinventory (i.e. material, labor and manufacturing overhead costs).

 

Marketable Securities

 

The Company’s investments are classified at the time of purchase as eitheravailable-for-sale or held-to-maturity, and reassessed as of each balance sheetdate.  Our marketable securities consistof available-for-sale securities, and are marked-to-market based on pricesprovided by our investment advisors, with unrealized gains and temporaryunrealized losses reported as a component of other comprehensive income net oftax, until realized.  When realized, theCompany recognizes gains and losses on the sales of the securities on a specificidentification method and includes the realized gains or losses in otherincome, net, in the consolidated statements of operations.  The Company includes interest, dividends, andamortization of premium or discount on securities classified as available-for-salein other income, net in the consolidated statements of operations.  We also evaluate our available-for-salesecurities to determine whether a decline in fair value of a security below theamortized cost basis is other than temporary. Should the decline be considered other than temporary, we write down thecost of the security and include the loss in earnings. In making thisdetermination we consider such factors as the reason for and significance ofthe decline, current economic conditions, the length of time for which therehas been an unrealized loss, the time to maturity, and other relevantinformation.  Available-for-salesecurities are classified as either short-term or long-term based on management’sintention of when to sell the securities.

 

Property, Plant and Equipment

 

Property, plant and equipment are stated at cost, net of accumulateddepreciation and amortization. Depreciation of plant and equipment is provided over the estimateduseful lives of the respective assets on a straight-line basis. Estimateduseful lives of the respective assets typically range from twenty to fortyyears for buildings and improvements and from three to twenty years formachinery and equipment. Leasehold improvements are amortized based on theunderlying lease term, or the asset’s estimated useful life, whichever isshorter.

 

Operating Leases

 

We record expense for operating leases by recognizing the minimum leasepayments on a straight-line basis, beginning on the date that the lessee takespossession or control of the property. A number of our operating leaseagreements contain provisions for tenant improvement allowances, rent holidays,rent concessions, and/or rent escalations.

 

Incentive payments received from landlords are recorded as deferredlease incentives and are amortized over the underlying lease term on astraight-line basis as a reduction of rent expense. When the terms of anoperating lease provide for periods of free rent, rent concessions, and/or rentescalations, we establish a deferred rent liability for the difference betweenthe scheduled rent payment and the straight-line rent expense recognized. Thisdeferred rent liability is also amortized over the underlying lease term on astraight-line basis as a reduction of rent expense.

 

Retail Design Center Acquisitions

 

We account for the acquisition of retail design centers and relatedassets with the purchase method. Accounting for these transactions as purchase business combinationsrequires the allocation of purchase price paid to the assets acquired andliabilities assumed based on their fair values as of the date of theacquisition.  The amount paid in excessof the fair value of net assets acquired is accounted for as goodwill.

 

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Goodwill and Other Intangible Assets

 

Our intangible assets are comprised primarily of goodwill, whichrepresents the excess of cost over the fair value of net assets acquired, andtrademarks.  We determined these assetshave indefinite useful lives, and are therefore not amortized.

 

Impairment of Long-Lived Assets and Goodwill

 

Long-lived assets are regularly evaluated as to whether events orcircumstances have occurred that indicate that they may not be recoverable orthat their remaining useful lives may warrant revision. Goodwill and our tradename (the Company’s only other indefinite-lived intangible asset) are evaluatedfor impairment on an annual basis in the fourth quarter and between annualtests whenever events or circumstances indicate that the carrying value mayexceed its fair value. When such events or circumstances are present for eitherlong-lived or indefinite-lived assets, the Company determines whether thecarrying value exceeds the fair value as described below.

 

The recoverability of long-lived assets are evaluated for impairment bydetermining whether the carrying value will be recovered through the expectedundiscounted future cash flows resulting from the use of the asset.  In the event the sum of the expectedundiscounted future cash flows is less than the carrying value of the asset, animpairment loss equal to the excess of the asset’s carrying value over its fairvalue is recorded.  The long-term natureof these assets requires the estimation of cash inflows and outflows severalyears into the future with assumptions considered at the time of the impairmenttest.

 

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

 

The fair value of our trade name is valued using therelief-from-royalty method. Significant factors used in trade name valuation arerates for royalties, future growth, and a discount factor.  Royalty rates are determined using an averageof recent comparable values.  Futuregrowth rates are based on the Company’s perception of the long-term values inthe market in which we compete, and the discount rate is determined using theweighted average cost of capital for companies within our peer group, adjustedfor specific company risk premium factors.

 

Financial Instruments

 

Due to their short-term nature, the carrying value of our cash and cashequivalents, receivables and payables, short-term debt and customer depositliabilities approximates fair value.  Theestimated fair value of our long-term debt, which is based on changes, if any,in interest rates and our creditworthiness subsequent to the date on which thedebt was issued, and which has been determined using quoted market prices,totaled $191.3 million at June 30, 2010 and $146.0 million at June 30,2009, as compared to a carrying value on those dates of $199.2 million and$199.0 million, respectively.

 

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Income Taxes

 

Income taxes are accounted for under the asset and liabilitymethod.  Deferred tax assets and liabilities are recognized for the futuretax consequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbases and operating loss and tax credit carryforwards.

 

Deferred tax assets and liabilities are measured using enacted taxrates expected to apply to taxable income in the years in which those temporarydifferences are expected to be recovered or settled.  The effect ondeferred tax assets and liabilities of a change in tax rates is recognized inincome in the period that includes the enactment date.

 

A valuation allowance must be established for deferred tax assets whenit is more likely than not that the assets will not be realized. The Companyhas determined that valuation allowances are needed for all of its deferred taxassets and has recorded valuation allowances accordingly which resulted innon-cash charges to earnings during fiscal 2009 and 2010.

 

We recognize the tax benefit from an uncertain tax position only if itis more likely than not that the tax position will be sustained on examinationby the taxing authorities, based on the technical merits of the position. All of the unrecognized tax benefits, if recognized, would be recorded as abenefit to income tax expense.

 

The liability associated with an unrecognized tax benefit is classifiedas a long-term liability except for the amount for which a cash payment isexpected to be made or tax positions settled within one year. We recognizeinterest and penalties related to income tax matters as a component of incometax expense.

 

Revenue Recognition

 

Revenue is recognized when all of the following have occurred:persuasive evidence of a sales arrangement exists (e.g. a wholesale purchase orderor retail sales invoice); the sales arrangement specifies a fixed ordeterminable sales price; product is shipped or services are provided to thecustomer; and collectability is reasonably assured.  As such, revenue recognition occurs upon theshipment of goods to independent retailers or, in the case of EthanAllen-operated retail design centers, upon delivery to the customer.

 

Shipping and Handling Costs

 

Our policy is to sell our products at the same delivered cost to allretailers nationwide, regardless of shipping point. Costs incurred to deliverfinished goods to the consumer are expensed and recorded in selling, generaland administrative expenses. Shipping and handling costs amounted to $56.6million, $68.2 million, and $87.4 million for fiscal years 2010, 2009 and 2008,respectively.

 

Advertising Costs

 

Advertisingcosts are expensed when first aired or distributed. Our total advertising costsincurred in fiscal years 2010, 2009 and 2008, amounted to $20.8 million, $25.1million, and $39.4 million, respectively. These amounts are presented net ofproceeds received by us under our agreement with the third-party financialinstitution responsible for administering our consumer finance programs.  Prepaid advertising costs at June 30,2010 and 2009 totaled $0.6 million and $0.9 million, respectively.

 

Earnings Per Share

 

We compute basic earnings per share by dividing net income by theweighted average number of common shares outstanding during the period.  Diluted earnings per share is calculated similarly,except that the weighted

 

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average outstanding shares are adjusted to include the effects ofconverting all potentially dilutive share-based awards issued under ouremployee stock plans (see Notes 10 and 11). Certain unvested share-based payment awards are participating securitiesbecause they contain rights to receive non-forfeitable dividends (if paid), andeffective July 1, 2009, are included in the two-class method of computingearnings per share. The impact of this change was not material.

 

Share-Based Compensation

 

We estimate, as of the date of grant, the fair value of stock optionsawarded using the Black-Scholes option-pricing model. Use of a valuation modelrequires management to make certain assumptions with respect to selected modelinputs, including anticipated changes in the underlying stock price (i.e.expected volatility) and option exercise activity (i.e. expected life).Expected volatility is based on the historical volatility of our stock andother contributing factors.  The expectedlife of options granted, which represents the period of time that the optionsare expected to be outstanding, is based, primarily, on historical data.

 

Share-based compensation expense is included in the ConsolidatedStatements of Operations within selling, general and administrativeexpenses.  Tax benefits associated withour share-based compensation arrangements are included in the ConsolidatedStatements of Operations within income tax expense.

 

All shares of our common stock received in connection with the exerciseof share-based awards have been recorded as treasury stock and result in areduction in shareholders’ equity.

 

Foreign Currency Translation

 

The functional currency of each Company-operated foreign retaillocation is the respective local currency. Assets and liabilities are translated into United States dollars usingthe current period-end exchange rate and income and expense amounts aretranslated using the average exchange rate for the period in which thetransaction occurred.  Resultingtranslation adjustments are reported as a component of accumulated other comprehensiveincome within shareholders’ equity.

 

Recent Accounting Pronouncements

 

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

 

In September 2006, FASB issued guidance now codified as ASC Topic820, “Fair Value Measurements and Disclosures,” (SFAS No. 157) whichdefines fair value, establishes a framework for measuring fair value andexpands disclosures about fair value measurements and does not require any newfair value measurements.  In February 2008,the FASB released additional ASC Topic 820 guidance (FSP No. 157-2), whichdelayed the effective date of the application of certain guidance related tonon-financial assets and non-financial liabilities until July 1, 2009 forthe Company, except for items that are recognized or disclosed at fair value inthe financial statements on a recurring basis. The Company adopted certain provisions of ASC Topic 820 effective July 1,2008,

 

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except as it relates to those non-financial assets and non-financialliabilities excluded as noted above.  TheCompany adopted the provisions of ASC Topic 820 with respect to ournon-financial assets and non-financial liabilities effective July 1, 2009.The implementation of this pronouncement did not have a material impact on ourconsolidated financial position, results of operations or cash flows.

 

In December 2007, theFASB issued guidance now codified as ASC Topic 805, “*BusinessCombinations”* (SFAS No. 141(R), which replaced SFAS No. 141).  ASC Topic 805 establishes principles andrequirements for how an acquirer in a business combination recognizes andmeasures in its financial statements the identifiable assets acquired, theliabilities assumed, and any controlling interest; recognizes and measures thegoodwill acquired in the business combination or a gain from a bargainpurchase; and determines what information to disclose to enable users of thefinancial statements to evaluate the nature and financial effects of thebusiness combination. ASC Topic 805 is to be applied prospectively to businesscombinations for which the acquisition date is on or after an entity’s fiscalyear that begins after December 15, 2008 (July 1, 2009 for theCompany). The implementation of this pronouncement did not have a materialimpact on our consolidated financial position, results of operations or cashflows.

 

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

 

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

 

**(2)           Restructuring andImpairment Charges**

 

In recent years, we haveannounced and executed plans to consolidate our operations as part of an overallstrategy to maximize production efficiencies and maintain our competitiveadvantage. Activity in the Company’s restructuring reserves is summarized inthe table below (in thousands) and is classified with accrued expenses andother current liabilities in the Consolidated Balance Sheets:

 

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| ** **                                           | ** ** | **Balance  June 30,  2009** | ** ** | **New  charges  (credits)** | ** ** | **Utilized** | ** ** | **Adjustments** | ** ** | **Balance  June 30,  2010** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|-----------------------------|------------|--------------|------------|-----------------|------------|----------------------------------|------------|
| 2009  Actions                                        |       |                             |       |                        |       |         |       |            |       |                             |       |
| Employee  severance, other payroll and benefit costs |       | $                                | 3,864      |                        | $          | 103          |       | $               | (4,283     | )                                | $          | 316 |   | $ | — |   |
| Other  property exit costs                           |       | 654                              |       | 2,581                       |       | (1,490       | )          | 41              |       | 1,786                            |       |
| Write  down of long-lived assets                     |       | —                           |       | 54                          |       | 442          |       | (496            | )          | —                           |       |
|                                                 |       | $                                | 4,518      |                        | $          | 2,738        |       | $               | (5,331     | )                                | $          | (139 | ) | $ | 1,786 |   |
| 2008  Actions                                        |       |                             |       |                        |       |         |       |            |       |                             |       |
| Employee  severance, other payroll and benefit costs |       | $                                | 369        |                        | $          | —       |       | $               | (55        | )                                | $          | (24 | ) | $ | 290 |   |
| Other  property exit costs                           |       | 2,892                            |       | 68                          |       | (1,528       | )          | (418            | )          | 1,014                            |       |
| Write  down of long-lived assets                     |       | —                           |       | —                      |       | (212         | )          | 212             |       | —                           |       |
|                                                 |       | $                                | 3,261      |                        | $          | 68           |       | $               | (1,795     | )                                | $          | (230 | ) | $ | 1,304 |   |

 

In fiscal 2009, the Company announced (i) upholstery plants in Eldred,Pennsylvania and Chino, California were consolidated into the Maiden, NorthCarolina and Silao, Mexico operations, (ii) closure of the Andover, Mainesawmill, (iii) the move of assembly and finishing operations from BeecherFalls, Vermont to Orleans, Vermont, and (iv) wholesale distribution and retailservice centers were consolidated. We also began the conversion of our domesticcase goods manufacturing from producing to a forecast to producing to fillcustom orders already written. The total pre-tax restructuring, impairment,accelerated depreciation and other related charges for these fiscal 2009actions was $29 million ($23 million in the wholesale segment and $6 million inthe retail segment). The charges arose from (i) a $17 million impact onlong-lived assets, (ii) $8 million in employee severance, compensation, andbenefit costs, and (iii) $4 million in other associated costs.  Current fiscal year charges for these actionsinclude $6.6 million in accelerated depreciation charges for Wholesale(included in cost of sales in the Statement of Operations) partially offset by$0.2 million of restructuring credits, and $2.7 million of restructuringcharges for the Retail segment (primarily due to adjustments on non-cancellableleases). These restructuring actions announced in fiscal 2009 were completedduring fiscal 2010, with the remaining liability at June 30, 2010 primarily fornon-cancellable lease obligations (expirations of less than one year up to fiveyears).

 

In fiscal 2008, we announced a plan to consolidate the operations ofcertain Ethan Allen-operated retail design centers and retail service centers.In connection with this initiative, we permanently ceased operations at tendesign centers and six retail service centers which, for the most part, wereconsolidated into other existing operations. The restructuring is now complete, with the remaining liability at June30, 2010 primarily for non-cancellable lease obligations (expirations of lessthan one year up to 23 years) and other employee benefit costs.  Costs for these actions in the current fiscalyear resulted in a net $0.2 million credit in the Retail segment due primarilyto non-cancellable lease adjustments. Cumulative charges to date for theseactions total $5.7 million.

 

All charges for the fiscal2009 and 2008 restructuring activities above are included as restructuring andimpairment charges in the Statement of Operations unless otherwise noted above.

 

**(3)           BusinessAcquisitions**

 

The Company’s business acquisition practice with respect to independentretail design centers is to selectively acquire, at market value, designcenters located in markets of strategic interest to the Company.  The Company does not actively pursueacquisitions, but is sometimes approached by independent retailers who areretiring.  Acquisitions are subject to acontractual holdback, or reconciliation, period, during which the parties tothe transaction may agree to certain normal and customary purchase accountingadjustments.  Goodwill associated withour acquisitions represents the premium paid to the seller related to theacquired business (i.e. market presence). See Note 6 for further discussion of our goodwill and other intangibleassets.

 

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During fiscal 2010, we acquired in one transaction, one Ethan Allenretail design center (“DCs”) from an independent retailer for consideration ofapproximately $0.2 million in cash and forgiveness of receivables, and assumedcustomer deposits of $0.2 million and other liabilities of $0.1 million.

 

Duringfiscal 2009, we acquired, in four separate transactions, four Ethan Allen retaildesign centers (“DCs”) from independent retailers for consideration ofapproximately $1.8 million in cash and forgiveness of receivables, and assumedcustomer deposits of $0.7 million and other liabilities of $0.2 million.

 

Duringfiscal 2008, we acquired, in two separate transactions, five Ethan Allen retaildesign centers (“DCs”) from independent retailers for consideration ofapproximately $4.2 million in cash and forgiveness of receivables, and assumedcustomer deposits of $4.3 million and other liabilities of $0.1 million. Alsoin fiscal 2008, we acquired a cut and sew upholstery facility from AmericraftLeather in order to strengthen the Company’s vertically integrated structureand secure an additional reliable source for our leather products.  Total consideration of approximately $4.3million was paid in cash for the acquisition. The facility, which contains 40,000 square feet of manufacturing spaceand employs 165 people, is located in Guanajuato, Mexico.

 

Asummary of our allocation of purchase price in each of the last three fiscalyears is provided below (in thousands):

 
| ** **                            | ** ** | **Fiscal Year Ended June 30,** | ** ** |
|---------------------------------------|------------|--------------------------------|------------|
| ** **                            | ** ** | **2010**                       | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                            | ** ** | **Retail**                     | ** ** | **Retail** | ** ** | **Wholesale** | ** ** | **Retail** | ** ** |
| Business segment                      |       |                           |       |   |   |   |   |   |   |
| Total consideration                   |       | $                              | 228        |   | $ | 1,841 |   | $ | 4,298 |   | $ | 4,182 |   |
| Assets acquired (liabilities assumed) |       |                           |       |   |   |   |   |   |   |
| Inventory                             |       | 384                            |       | 1,682 |   | 1,054 |   | 3,236 |   |
| PP&E and other assets             |       | 99                             |       | 242 |   | 2,707 |   | 1,029 |   |
| Customer deposits                     |       | (155                           | )          | (660 | ) | — |   | (4,311 | ) |
| A/P and other liabilities             |       | (100                           | )          | (186 | ) | (100 | ) | 34 |   |
| Goodwill                              |       | $                              | —     |   | $ | 763 |   | $ | 637 |   | $ | 4,194 |   |

 

**(4)           Inventories**

 

Inventories at June 30 are summarized as follows (in thousands):

 
| ** **      | ** ** | **2010** | ** ** | **2009** | ** ** |
|-----------------|------------|----------|------------|----------|------------|
| Finished goods  |       | $        | 104,782    |     | $          | 130,180 |   |
| Work in process |       | 8,421    |       | 7,476    |       |
| Raw materials   |       | 20,837   |       | 18,863   |       |
|            |       | $        | 134,040    |     | $          | 156,519 |   |

 

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

 

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**(5)           Property, Plant andEquipment**

 

Property, plant and equipment at June 30 are summarized as follows (inthousands):

 
| ** **                                      | ** ** | **2010** | ** ** | **2009** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Land and improvements                           |       | $        | 88,174     |     | $          | 92,903 |   |
| Buildings and improvements                      |       | 373,452  |       | 392,940  |       |
| Machinery and equipment                         |       | 107,438  |       | 110,057  |       |
|                                            |       | 569,064  |       | 595,900  |       |
| Less: accumulated depreciation and amortization |       | (263,317 | )          | (262,301 | )          |
|                                            |       | $        | 305,747    |     | $          | 333,599 |   |

 

**(6)           Goodwill and OtherIntangible Assets**

 

As of June 30, 2010 and 2009, we had goodwill and otherindefinite-lived intangible assets, Ethan Allen trade names of $25.4 millionand $19.7 million, respectively.  Theseassets are reported in the Company’s wholesale segment for both periods.

 

The economic downturn that began in the fall of 2008 negativelyimpacted the Company’s revenues and operating margins.  In response, the Company reduced headcount,consolidated its manufacturing, retail, and logistics footprint andrepositioned its marketing approach.  TheCompany’s cash flow forecasts were updated regularly to reflect the rapidchanges in the business and the industry. The cash flow projections used in its fair value evaluations are thebest estimates of the Company and require significant management judgment.  During fiscal 2009, the Company determinedthat the entire $48.4 million of goodwill in the Retail segment was consideredimpaired and wrote it off. The Company performed its annual impairment test infiscal 2009 and determined that no impairment of its remaining goodwill,reported in its wholesale segment was appropriate as the fair value of its netassets exceeded the book value by approximately 10%.

 

During fiscal 2010, the Company concluded that no interim impairmenttest of its indefinite lived assets was required.  Net sales, gross profit, operating income, netincome, written orders, and other indicators improved from previous quarters,and though some financial metrics were below management forecasts, ourlong-term outlook had not changed significantly.  The Company’s average quarterly stock priceincreased from $12.11 for the quarter ended June 30, 2009, to $16.91 for thequarter ended March 31, 2010), and cash (including restricted cash) andmarketable securities increased to $85.2 million at March 31, 2010 from $53.0million at June 30, 2009. During the third and fourth quarters of fiscal 2010,business performance improved with net sales up sequentially and from theprevious year, gross margin improved and cash (including restricted cash) andmarketable securities increased to $102.2 million by fiscal year end. Theaverage price of our stock during the fourth fiscal quarter of 2010 was $19.67.In the fourth fiscal quarter ended June 30, 2010, the Company performed itsannual impairment test and determined that the fair values of the Wholesalereporting unit and trade name exceeded their carrying value by a substantialmargin.

 

To calculate fair value of the assets described above, managementrelies on estimates and assumptions which by their nature have varying degreesof uncertainty. Wherever possible, management therefore looks for third partytransactions as described above to provide the best possible support for theassumptions incorporated. Management considers several factors to besignificant when estimating fair value including expected financial outlook ofthe business, changes in the Company’s stock price, the impact of changingmarket conditions on financial performance and expected future cash flows, andother factors. Deterioration in any of these factors may result in a lower fairvalue assessment, which could lead to impairment of the long-lived assets andgoodwill of the Company.

 

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**(7)****                                ****Borrowings**

 

Total debt obligations at June 30 consist of the following (inthousands):

 
| ** **                   | ** ** | **2010** | ** ** | **2009** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|
| 5.375% Senior Notes due 2015 |       | $        | 199,158    |     | $          | 198,997 |   |
| Industrial revenue bonds     |       | 3,855    |       | 3,855    |       |
| Other debt obligations       |       | 254      |       | 296      |       |
| Total debt                   |       | 203,267  |       | 203,148  |       |
| Less: current maturities     |       | 3,898    |       | 42       |       |
| Total long-term debt         |       | $        | 199,369    |     | $          | 203,106 |   |

 

Senior Notes

On September 27, 2005, we completed a private offering of $200.0million of 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 1 of eachyear.  Proceeds received in connectionwith the issuance of the Senior Notes, net of a related discount of $1.6million, totaled $198.4 million. We used the net proceeds from the offering toexpand our retail network, invest in our manufacturing and logisticsoperations, and for other general corporate purposes.  As of June 30, 2010, outstanding borrowingsrelated to this transaction have been included in the Consolidated BalanceSheets within long-term debt. The discount on the Senior Notes is beingamortized to interest expense over the life of the related debt as is debtissuance costs of $2.0 million primarily for banking, legal, accounting, ratingagency, and printing services and $0.8 million of losses on settled forwardcontracts entered in conjunction with this debt issuance.

 

The Senior Notes may be redeemed in whole or in part, at Global’soption at any time at the greater of (i) 100% of the principal amount of thenotes to be redeemed and (ii) the sum of the present values of the remainingscheduled payments of principal and interest on the Senior Notes to beredeemed, discounted to the date of redemption on a semi-annual basis at theapplicable treasury rate plus 20 basis points, plus, in each case, accrued andunpaid interest to the redemption date. In the event of default, the trustee or the holders of 25% of theoutstanding principal amount of the Senior Notes may accelerate payment ofprincipal, premium, if any, and accrued and unpaid interest.  Events of default include failure to pay inaccordance with the terms of the indenture, including failure, under certaincircumstances, to pay indebtedness other than the Senior Notes.  As of June 30, 2010, we are in compliancewith the terms and conditions and all covenants of the Senior Notes.

 

Revolving Credit Facility

On October 23, 2009, the Company expanded to $60 million the three-yearsenior secured asset-based revolving credit facility (the “Facility”)established on May 29, 2009.  TheFacility provides revolving credit financing of up to $60 million, subject toborrowing base availability that at June 30, 2010 was $59.5 million. At theCompany’s option, revolving loans under the Facility bear interest at an annualrate of either:

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

(b)               The higher of(i) a prime rate, (ii) the federal funds effective rate plus 0.50%, or (iii) aLIBOR plus 1.00% plus, in each case, an additional 2.25% to 3.25%, based onaverage availability.

The Company pays a commitment fee of 0.50% per annum on the unusedportion of the Facility and participation fees on issued letters of credit atan annual rate of 1.625% to 4.25%, based on the average availability and theletter of credit type, and a fronting fee of 0.125% per annum.

 

The borrowing base at any time equals the sum of: (i) up to 90% ofeligible credit card receivables; (ii) plus up to 85% of eligible accountsreceivable; and (iii) plus up to 85% of the net orderly liquidation value ofeligible inventory. The Facility is secured by all property owned, leased oroperated by the Company in the United States excluding all real property ownedby the Company.  The Facility containscustomary covenants which may limit the Company’s ability to incur debt, engagein mergers and consolidations, make restricted payments (including

 

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dividends), sell certain assets, and make investments. The Company maymake restricted payments (including dividends) as long as availability equalsor exceeds the greater of 25% of the aggregate commitment or $12 million.  If the average monthly availability is lessthan the greater of 15% of the aggregate commitment and $9 million, the Companyis also required to meet a fixed charge coverage ratio financial covenant whichmay not be less than 1 to 1 for any period of four consecutive fiscal quarters.The Facility also contains customary borrowing conditions and events ofdefault, the occurrence of which would entitle the lenders to accelerate thematurity of any outstanding borrowings and terminate their commitment to makefuture loans. The Company has not drawn any cash advances against the facility,and has no plans to do so.  At June 30,2010, we had $1.0 million in letters of credit outstanding, and $58.5 millionremaining available credit under the revolver subject to limitations set forthin the agreement noted above.  As of June30, 2010, we are in compliance with the terms and conditions and all covenantsof the Facility and as a result, the coverage charge ratio, or other restrictedpayment limitations did not apply.

 

Other Borrowings

Approximately $3.9 million of our outstanding debt is related toindustrial revenue bonds that were issued to finance capital improvements atthe Ethan Allen Hotel and Conference Center, which is adjacent to our corporateheadquarters in Danbury, Connecticut. These bonds bear interest at a fixed rateof 7.50% and have a remaining maturity of one year.  For fiscal years ended June 30, 2010, 2009and 2008, the weighted-average interest rates applicable under our outstandingdebt obligations for each year was 5.53%.

 

Aggregate scheduled maturities of our debt obligations for each of thefive fiscal years subsequent to June 30, 2010, and thereafter are as follows(in thousands):

 
| **Fiscal  Year Ended June 30** | ** ** | ** ** | ** ** |
|--------------------------------|------------|------------|------------|
| 2011                           |       | $          | 3,898      |   |
| 2012                           |       | 19         |       |
| 2013                           |       | 11         |       |
| 2014                           |       | 11         |       |
| 2015                           |       | 12         |       |
| Subsequent to 2015             |       | 199,316    |       |
| Total scheduled debt payments  |       | $          | 203,267    |   |

 

IndependentRetailer Credit Facility

InJune 2009, we obligated ourselves, on behalf of one of our independent retailers,with respect to a $0.5 million non-revolving line of credit facility on whichthere is no further availability for borrowing (the “Amended Credit Facility”).This obligation requires us, in the event of the retailer’s default under theAmended Credit Facility, to repurchase the retailer’s inventory, applying suchpurchase price to the retailer’s outstanding indebtedness under the AmendedCredit Facility. The agreement expires in April 2011.  We believe this obligation will expirewithout requiring funding by us.

 

**(8)           Leases**

 

We lease real property and equipment under various operating leaseagreements expiring through 2033. Leases covering retail design centerlocations and equipment may require, in addition to stated minimums, contingentrentals based on retail sales or equipment usage. Generally, the leases providefor renewal for various periods at stipulated rates. Future minimum leasepayments under non-cancelable operating leases for each of the five fiscalyears subsequent to June 30, 2010, and thereafter are as follows (inthousands):

 
| **Fiscal  Year Ended June 30** | ** ** | ** ** | ** ** |
|--------------------------------|------------|------------|------------|
| 2011                           |       | $          | 32,336     |   |
| 2012                           |       | 30,364     |       |
| 2013                           |       | 25,364     |       |
| 2014                           |       | 18,643     |       |
| 2015                           |       | 16,109     |       |
| Subsequent to 2015             |       | 87,412     |       |
| Total minimum lease payments   |       | $          | 210,228    |   |

 

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The above amounts will be offset in the aggregate by minimum futurerentals from subleases of $11.2 million, which is due to be received asfollows: $1.5 million in 2011; $1.7 million in 2012; $1.8 million in 2013; $1.5million in 2014; $1.4 million in 2015; and $3.3 million subsequent to 2015.

 

Total rent expense for each of the past three fiscal years ended June30 was as follows (in thousands):

 
| ** **                               | ** ** | **2010** | ** **   | **2009** | ** ** | **2008**     | ** ** |
|------------------------------------------|------------|----------|--------------|----------|------------|--------------|------------|
| Basic rentals under operating leases     |       | $        |  33,334 |     | $          |  38,522 |       | $ |  40,387 |   |
| Contingent rentals under operating lease |       | 121      |         | 182      |       | 589          |       |
|                                     |       | 33,455   |         | 38,704   |       | 40,976       |       |
| Less: sublease rent                      |       | (957     | )            | (1,256   | )          | (2,395       | )          |
| Total rent expense                       |       | $        |  32,498 |     | $          |  37,448 |       | $ |  38,580 |   |

 

As of June 30, 2010 and 2009, deferred rent credits totaling $11.8million and $11.6 million, respectively, and deferred lease incentives totaling$2.4 million and $2.8 million, respectively, are reflected in the ConsolidatedBalance Sheets.  These amounts areamortized over the respective underlying lease terms on a straight-line basisas a reduction of rent expense.

 

**(9)           Shareholders’ Equity**

 

Our authorized capital stock consists of (a) 150,000,000 shares ofClass A Common Stock, par value $.01 per share, (b) 600,000 shares of Class BCommon Stock, par value $.01 per share, and (c) 1,055,000 shares of PreferredStock, par value $.01 per share, of which (i) 30,000 shares have beendesignated Series A Redeemable Convertible Preferred Stock, (ii) 30,000 shareshave been designated Series B Redeemable Convertible Preferred Stock, (iii)155,010 shares have been designated as Series C Junior Participating PreferredStock, and (iv) the remaining 839,990 shares may be designated by the Board ofDirectors with such rights and preferences as they determine (all suchpreferred stock, collectively, the “Preferred Stock”).  Shares of Class B Common Stock areconvertible to shares of our Common Stock upon the occurrence of certain eventsor other specified conditions being met. As of June 30, 2010 and 2009, therewere no shares of Preferred Stock or Class B Common Stock issued oroutstanding.

 

Share Repurchase Program

 

OnNovember 21, 2002, the Company’s Board of Directors approved a share repurchaseprogram authorizing us to repurchase up to 2.0 million shares of our commonstock, from time to time, either directly or through agents, in the open marketat prices and on terms satisfactory to us. Subsequent to that date, the Board of Directors increased the then remainingshare repurchase authorization on seven separate occasions the last of whichwas on November 13, 2007.  As of June 30,2010 we had a remaining Board authorization to repurchase 1.4 million shares.

 

During the fourth quarter of fiscal 2010, we resumed our stockrepurchase activity due to our ability to generate excess cash and thefavorable stock price.  Between 2010 and2008, we repurchased and/or retired the following shares of our common stock:

 
| ** **                       | ** ** | **2010 (1)** | ** ** | **2009** | ** ** | **2008 (2)** | ** ** |
|----------------------------------|------------|--------------|------------|----------|------------|--------------|------------|
| Common shares repurchased        |       | 182,600      |       | —   |       | 2,259,631    |       |
| Cost to repurchase common shares |       | $            | 2,588,519  |     | —     |         | $          |  69,745,024 |   |
| Average price per share          |       | $            | 14.18      |     | —     |         | $          |  30.87 |   |

 

----

(1)          The cost torepurchase shares in fiscal 2010 all had a June 2010 trade date and a July 2010settlement date.

(2)          During fiscal2008, we also retired 661,688 shares of common stock tendered upon the exerciseof outstanding employee stock options (592,861 to cover share exercise and68,827 to cover related employee tax withholding liabilities).  The market value when redeemed was$23,033,359; an average per share of $34.81.

 

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For the fiscal years presented above, we funded our purchases oftreasury stock with existing cash on hand and cash generated through currentperiod operations. All of our common stock repurchases and retirements arerecorded as treasury stock and result in a reduction of shareholders’ equity.

 

Stockholder Rights Plan

On May 20, 1996, the Board of Directors adopted a Stockholder RightsPlan (the “Rights Plan”) and declared a dividend of one right for each share ofour common stock outstanding as of July 10, 1996. Under the Rights Plan, eachshare of our common stock issued after July 10, 1996 is accompanied by oneright (or such other number of rights as results from the adjustments for stocksplits and other events described below). Each right entitles its holder, undercertain circumstances, to purchase one one-hundredth of a share of our Series CJunior Participating Preferred Stock at a purchase price of $125.  The rights may not be exercised until 10 daysafter a person or group acquires 15% or more of our common stock, or 15 daysafter the commencement or the announcement of the intent to commence a tenderoffer, which, if consummated, would result in acquisition by a person or groupof 15% or more of our common stock. Until then, separate rights certificates will not be issued and therights will not be traded separately from shares of our common stock.

 

If the rights become exercisable, then, upon exercise of a right, ourstockholders (other than the acquirer) would have the right to receive, in lieuof our Series C Junior Participating Preferred Stock, a number of shares of ourcommon stock (or a number of shares of the common stock of the acquirer, if weare acquired, or other assets under various circumstances) having a marketvalue equal to two times the purchase price. Under the Rights Plan, as amended by the Board of Directors on July 27,2004, the rights will expire on May 31, 2011, unless redeemed prior to thatdate. The redemption price is $0.01 per right. The Board of Directors mayredeem the rights at its option any time prior to the time when the rightsbecome exercisable.

 

The Rights Plan provides for adjustment to the number of rights whichaccompanies each share of our common stock (whether then outstanding orthereafter issued) upon the occurrence of various events after July 10, 1996,including stock splits.  We effected a2-for-1 stock split on September 3, 1997 and a 3-for-2 stock split on May 24,1999.  Accordingly, at June 30, 2010,each share of our common stock was accompanied by one-third of one right.

 

**(10)         Earnings per Share**

 

The following table sets forth the calculation of weighted averageshares for the fiscal years ended June 30 (in thousands):

 
| ** **                                                                   | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Weighted average common shares outstanding for basic  calculation            |       | 28,982   |       | 28,814   |       | 29,267   |       |
| Effect of dilutive stock options and share based  awards                     |       | —   |       | —   |       | 203      |       |
| Weighted average common shares outstanding adjusted  for diluted calculation |       | 28,982   |       | 28,814   |       | 29,470   |       |

 

Certain restricted stock awards and the potential exercise of certainstock options were excluded from the respective diluted earnings per sharecalculation because their impact is anti-dilutive.  In 2010, 2009 and 2008, stock options andshare based awards of 2,336,984, 2,228,121 and 1,713,323, respectively, havebeen excluded.

 

**(11)         Share-Based Compensation**

 

For the twelve months ended June 30, 2010, 2009, and 2008, share-basedcompensation expense totaled $2.3 million, $1.7 million, and $1.3 millionrespectively.  These amounts have beenincluded in the Consolidated Statements of Operations within selling, generaland administrative expenses.  During thetwelve months ended June 30, 2010, 2009, and 2008, we recognized related taxbenefits associated with our share-based compensation arrangements totaling$0.8 million, $0.6

 

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million and $0.5 million, respectively (before valuationallowances).  Such amounts have beenincluded in the Consolidated Statements of Operations within income taxexpense.

 

We estimate, as of the date of grant, the fair value of stock optionsawarded using the Black-Scholes option-pricing model. Use of a valuation modelrequires management to make certain assumptions with respect to selected modelinputs, including anticipated changes in the underlying stock price (i.e.expected volatility) and option exercise activity (i.e. expected life).Expected volatility is based on the historical volatility of our stock. Therisk-free rate of return is based on the U.S. Treasury bill rate for the termclosest matching the expected life of the grant. The dividend yield is based onthe annualized dividend rate at the grant date relative to the grant date stockprice. The expected life of options granted, which represents the period oftime that the options are expected to be outstanding, is based, primarily, onhistorical data.  The weighted averageassumptions used for fiscal years ended June 30 are noted in the followingtable:

 
| ** **               | ** ** | **2010**  | ** ** | **2009**  | ** ** | **2008**  | ** ** |
|--------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| Volatility               |       | 43.7      | %          | 34.4      | %          | 35.8      | %          |
| Risk-free rate of return |       | 3.05      | %          | 3.21      | %          | 4.51      | %          |
| Dividend yield           |       | 1.67      | %          | 5.11      | %          | 2.69      | %          |
| Expected average life    |       | 7.8 years |       | 7.4 years |       | 9.3 years |       |

 

At June 30, 2010, we had 6,487,867 shares of common stock reserved forissuance pursuant to the 1992 Stock Option Plan (the “Plan”).  Following is a description of grants madeunder the Plan.

 

Stock Option Awards

 

The Plan provides for the grant of non-compensatory stock options toeligible employees and non-employee directors. Stock options granted under the Plan are non-qualified under Section 422of the Internal Revenue code and allow for the purchase of shares of our commonstock.  The maximum number of shares ofcommon stock reserved for issuance under the Plan is 6,487,867 shares. The Planalso provides for the issuance of stock appreciation rights (“SARs”) on issuedoptions, however, no SARs have been issued as of June 30, 2010.  The awarding of such options is determined bythe Compensation Committee of the Board of Directors after consideration ofrecommendations proposed by the Chief Executive Officer.  Option awards are generally granted with anexercise price equal to the market price of our common stock at the date ofgrant, vest ratably over a specified service period (4 years for awards toemployees; 2 years for awards to independent directors), and have a contractualterm of 10 years.

 

On October 10, 2007, the Company’s Board of Directors and M. FarooqKathwari, our President and Chief Executive Officer, agreed to the terms of anew employment agreement expiring on June 30, 2012 (“the Employment Agreement”).  Pursuantto the terms of the Employment Agreement, Mr. Kathwari was awarded on October10, 2007, July 1, 2008, and July 1, 2009, options to purchase 150,000, 90,000 and60,000 shares respectively, of our common stock.  These options were issued at an exerciseprice of $34.03, $24.62, and $10.68 per share respectively.  The 2007 grant vested in three installmentsof 33 1/3% on each June 30 of 2008, 2009, and 2010.  The 2008 grant vested in two installments of50% on each June 30 of 2009 and 2010. The 2009 grant vested on June 30, 2010. On November 11, 2008, Mr.Kathwari was awarded options to purchase 50,000 shares of our common stock atan exercise price of $15.93, which vests in four equal installments on theanniversary date of the grant.

 

In recognition of Mr. Kathwari’s extraordinary efforts during therecent challenging times for our industry, on February 3, 2010 our CompensationCommittee awarded Mr. Kathwari options to purchase an additional 50,000 sharesof our common stock at an exercise price of $14.86 per share.  The 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.

 

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On November 12, 2009, the Company awarded options to purchase 83,500shares of our common stock to a large group of associates at the closing stockprice on the grant date of $11.74.  Thesegrants vest in four equal annual installments on the anniversary date of thegrant.

 

All options awarded were issued at the closing stock price on each grantdate, and have a contractual term of 10 years. A summary of stock optionactivity occurring during the fiscal year ended June 30, 2010 is presentedbelow:

 
| **Options**                      | ** ** | **Shares** | ** ** | **Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term (yrs)** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|----------------------------------|------------|------------|------------|---------------------|------------|-----------------------------------------------------------|------------|--------------------------------|------------|
| Outstanding - June 30, 2009      |       | 1,986,136  |       | $                   | 31.45      |                                                      |       |                           |       |   |
| Granted                          |       | 199,500    |       | 12.19               |       |                                                      |       |                           |       |
| Exercised                        |       | (37        | )          | 17.60               |       |                                                      |       |                           |       |
| Canceled (forfeited/expired)     |       | (72,315    | )          | 26.78               |       |                                                      |       |                           |       |
| Outstanding - June 30, 2010      |       | 2,113,284  |       | 29.79               |       | 4.6                                                       |       | —                         |       |
| Exercisable — June 30, 2010 |       | 1,818,625  |       | $                   | 32.08      |                                                      | 4.0        |                           | —     |   |

 

The weighted average grant-date fair value of options granted duringfiscal 2010, 2009, and 2008 was $5.17, $4.58 and $12.06 respectively.  The total intrinsic value of optionsexercised during 2010, 2009 and 2008 was $0.0 million, $0.0 million, and $5.7million, respectively. As of June 30, 2010, there was $1.1 million of totalunrecognized compensation cost related to nonvested options granted under thePlan. That cost is expected to be recognized over a weighted average period of2.9 years.  A summary of the nonvestedshares as of June 30, 2010 and changes during the year then ended is presentedbelow:

 
| **Options**                  | ** ** | **Shares** | ** ** | **Weighted Average  Grant Date Fair Value** | ** ** |
|------------------------------|------------|------------|------------|-----------------------------------------------------------------|------------|
| Nonvested June 30, 2009      |       | 318,756    |       | $                                                               | 5.80       |   |
| Granted                      |       | 199,500    |       | 5.17                                                            |       |
| Vested                       |       | (222,484   | )          | 7.21                                                            |       |
| Canceled (forfeited/expired) |       | (1,113     | )          | 4.32                                                            |       |
| Nonvested at June 30, 2010   |       | 294,659    |       | $                                                               | 4.32       |   |

 

Restricted Stock Awards

In connection with the Employment Agreement, Mr. Kathwari received onNovember 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 award date as compared to the Standard and Poor’s 500index.  The measurement period for thefirst tranche ended on June 30, 2010. The stock performance was partially achieved, and 8,000 shares wereawarded.  Mr. Kathwari also received onNovember 13, 2007, 15,000 shares of restricted stock which vest ratably over afive year period through June 30, 2012.

 

In recognition of Mr. Kathwari’s extraordinary efforts during therecent challenging times for our industry and in addition to the provisions ofthe Agreement, on February 3, 2010 our Compensation Committee awarded Mr.Kathwari 15,000 restricted shares.  Therestricted shares are service-based and vest in three equal annual installmentson each February 3 from 2011 through 2013.

 

In February 2010, the Company also awarded 33,700 restricted shares toa large group of associates which vest in three equal annual installments eachFebruary of 2011 through 2013. All these shares are service-based.

 

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A summary of nonvested restricted share activity occurring during thefiscal year ended June 30, 2009 is presented below.

 
| **Restricted  Awards**       | ** ** | **Shares** | ** ** | **Weighted Average  Grant-Date  Fair Value** | ** ** |
|------------------------------|------------|------------|------------|----------------------------------------------|------------|
| Nonvested - June 30, 2009    |       | 53,000     |       | $                                            | 18.56      |   |
| Granted                      |       | 71,700     |       | 12.51                                        |       |
| Vested                       |       | (15,000    | )          | 20.96                                        |       |
| Canceled (forfeited/expired) |       | (12,000    | )          | 15.92                                        |       |
| Nonvested - June 30, 2010    |       | 97,700     |       | $                                            | 14.07      |   |

 

As of June 30, 2010, there was $1.0 million of total unrecognizedcompensation cost related to restricted shares granted under the Plan.  That cost is expected to be recognized over aweighted average period of 2.2 years. The total fair value of restricted shares vested during the fiscal yearsending June 30, 2010 and 2009 was $0.4 million and $0.2 million respectively.

 

Stock Unit Awards

In connection with previous employment agreements, Mr. Kathwari wasdeemed to have earned 126,000 stock units. In the event of the termination of his employment, regardless of thereason for termination, Mr. Kathwari will receive shares of common stock equalto the number of stock units earned.

 

**(12)         Income Taxes**

 

Total income taxes were allocated as follows for the fiscal years endedJune 30 (in thousands):

 
| ** **                    | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Income (loss) from operations |       | $        | 25,529     |     | $          | (28,493  | )          | $ | 34,106 |   |
| Shareholders’ equity     |       | —   |       | —   |       | (2,093   | )          |
| Total                         |       | $        | 25,529     |     | $          | (28,493  | )          | $ | 32,013 |   |

 

The income taxes credited to shareholders’ equity relate to the excesstax benefit arising from the exercise of employee stock options.

 

Income tax expense (benefit) attributable to income from operationsconsists of the following for the fiscal years ended June 30 (in thousands):

 
| ** **         | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------|------------|----------|------------|----------|------------|----------|------------|
| Current:           |       |     |       |     |       |     |       |
| Federal            |       | $        | (11,497    | )        | $          | 2,657    |       | $ | 32,431 |   |
| State              |       | 3,106    |       | 975      |       | 4,151    |       |
| Foreign            |       | 131      |       | 33       |       | (112     | )          |
| Total current      |       | (8,260   | )          | 3,665    |       | 36,470   |       |
| Deferred:          |       |     |       |     |       |     |       |
| Federal            |       | 33,290   |       | (30,200  | )          | (2,172   | )          |
| State              |       | 490      |       | (1,958   | )          | (192     | )          |
| Foreign            |       | 9        |       | —   |       | —   |       |
| Total deferred     |       | 33,789   |       | (32,158  | )          | (2,364   | )          |
| Income tax expense |       | $        | 25,529     |     | $          | (28,493  | )          | $ | 34,106 |   |

 

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The following is a reconciliation of expected income tax expense(benefit) (computed by applying the federal statutory income tax rate to incomebefore taxes) to actual income tax expense (benefit) (in thousands):

 
| ** **                                               | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Expected income tax expense (benefit)                    |       | $        | (6,575     | )        | 35.0       | %        | $          | (28,413 | ) | 35.0 | % | $ |  32,262 |   | 35.0 | % |
| State income taxes (benefit), net of federal  income tax |       | (717     | )          | 3.8      | %          | (3,237   | )          | 4.0 | % | 2,698 |   | 2.9 | % |
| Valuation allowance                                      |       | 34,139   |       | (181.7   | )%         | 2,088    |       | (2.6 | )% | — |   | 0.0 | % |
| Goodwill impairment                                      |       | —   |       | 0.0      | %          | 1,402    |       | (1.7 | )% | — |   | 0.0 | % |
| Section 199 Qualified Production Activities  deduction   |       | —   |       | 0.0      | %          | —   |       | 0.0 | % | (1,100 | ) | (1.2 | )% |
| Unrecognized tax benefit                                 |       | (2,232   | )          | 11.9     | %          | 47       |       | 0.0 | % | 527 |   | 0.6 | % |
| Other, net                                               |       | 914      |       | (4.9     | )%         | (380     | )          | 0.4 | % | (281 | ) | (0.3 | )% |
| Actual income tax expense (benefit)                      |       | $        | 25,529     |     | (135.9     | )%       | $          | (28,493 | ) | 35.1 | % | $ |  34,106 |   | 37.0 | % |

 

The significant components of the deferred tax expense (benefit) are asfollows (in thousands):

 
| ** **                                      | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Deferred tax expense (benefit):                 |       |     |       |     |       |     |       |
| Commissions                                     |       | $        | 2,732      |     | $          | (3,045   | )          | $ | (426 | ) |
| Restructuring costs                             |       | 4,551    |       | (4,469   | )          | (1,238   | )          |
| Acquired goodwill                               |       | 475      |       | (16,191  | )          | 1,018    |       |
| Amortization and depreciation                   |       | (4,813   | )          | (7,126   | )          | (1,767   | )          |
| Federal, foreign and state net operating losses |       | (1,896   | )          | (2,870   | )          | —   |       |
| Other                                           |       | (1,399   | )          | (545     | )          | 49       |       |
| Total deferred tax benefit                      |       | (350     | )          | (34,246  | )          | (2,364   | )          |
| Less: Valuation allowance                       |       | 34,139   |       | 2,088    |       | —   |       |
| Net deferred tax expense (benefit)              |       | $        | 33,789     |     | $          | (32,158  | )          | $ | (2,364 | ) |

 

The deferred income tax asset and liability balances at June 30 (inthousands) include:

 

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| ** **                            | ** ** | **2010** | ** ** | **2009** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax assets:                  |       |     |       |     |       |
| Accounts receivable                   |       | $        | 437        |     | $          | 531 |   |
| Property, plant and equipment         |       | 7,204    |       | 2,391    |       |
| Employee compensation accruals        |       | 6,377    |       | 6,436    |       |
| Stock based compensation              |       | 3,008    |       | 2,227    |       |
| Deferred rent credits                 |       | 5,444    |       | 5,439    |       |
| Restructuring charges                 |       | 1,211    |       | 5,762    |       |
| Net operating loss carryforwards      |       | 4,766    |       | 2,870    |       |
| Goodwill                              |       | 8,640    |       | 9,603    |       |
| Other, net                            |       | 5,100    |       | 3,301    |       |
| Total deferred tax asset              |       | 42,187   |       | 38,560   |       |
| Less: Valuation allowance             |       | (36,226  | )          | (2,088   | )          |
| Net deferred tax assets               |       | 5,961    |       | 36,472   |       |
|                                  |       |     |       |     |       |
| Deferred tax liabilities:             |       |     |       |     |       |
| Inventories                           |       | 2,824    |       | 1,425    |       |
| Property, plant and equipment         |       | —   |       | —   |       |
| Intangible assets other than goodwill |       | 14,295   |       | 14,783   |       |
| Commissions                           |       | 3,085    |       | 353      |       |
| Other accrued liabilities             |       | —   |       | —   |       |
| Other, net                            |       | 66       |       | 37       |       |
| Total deferred tax liability          |       | 20,270   |       | 16,598   |       |
|                                  |       |     |       |     |       |
| Net deferred tax asset (liability)    |       | $        | (14,309    | )        | $          | 19,874 |   |

 

The deferred income tax balances are classified in the ConsolidatedBalance Sheets as follows at June 30 (in thousands):

 
| ** **                               | ** ** | **2010** | ** ** | **2009** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
| Current assets                           |       | $        | —     |     | $          | 8,077 |   |
| Non-current assets                       |       | —   |       | 11,797   |       |
| Current liabilities                      |       | (5,225   | )          | —   |       |
| Non-current liabilities                  |       | (9,084   | )          | —   |       |
| Total net deferred tax asset (liability) |       | $        | (14,309    | )        | $          | 19,874 |   |

 

Note: Current deferred tax assetsand liabilities and non-current deferred tax assets and liabilities have beenpresented net in the Consolidated Balance Sheets.

 

We evaluate our deferred taxes to determine if the “more likely thannot” standard of evidence has not been met thereby supporting the need for avaluation allowance.

 

In fiscal 2009, due to significant losses incurred in our retailsegment, the uncertain outlook regarding the current economic recession, andthe lack of carry-back availability, we established valuation allowances of$2.1 million against all of our state and Canadian deferred tax assets in ourretail segment, primarily for net operating losses.

 

As of June 30, 2010, the Company has a three year cumulative taxableloss.  Due to the economic times andrecent losses and after considering both positive and negative evidence,management’s assessment is that the realization of tax assets is not reasonablyassured due to a lack of available objective evidence. Accordingly, the Companyhas recorded a full valuation allowance against remaining deferred tax assetswhich resulted in a $34.1 million non-cash charge to earnings.

 

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The Company’s deferred income tax assets at June 30, 2010 with respectto the net operating losses expire as follows (in thousands):

 
| ** **                                             | ** ** | **Deferred  Income  Tax Assets** | ** ** | **Net Operating  Loss  Carryforwards** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|----------------------------------------|------------|
| United States (Federal), expiring 2029                 |       | $                                | 1,923      |                                   | $          | 5,408 |   |
| United States (State), expiring between 2012 and  2039 |       | 2,047                            |       | 43,189                                 |       |
| Foreign, expiring between 2029 and 2030                |       | 796                              |       | 2,430                                  |       |
|                                                        |            |                                  |            |                                        |            |  |  |

 

Deferred U.S. federal income taxes are not provided for unremittedforeign earnings of our foreign subsidiaries because we expect those earningswill be permanently reinvested.

 

***Uncertain Tax Positions***

 

We recognize interest and penalties related to income tax matters as acomponent of income tax expense. If the $11.5 million of unrecognized taxbenefits and related interest and penalties as of June 30, 2010 wererecognized, approximately $8.2 million would be recorded as a benefit to incometax expense. A reconciliation of the beginning and ending amount ofunrecognized tax benefits including related interest and penalties as of June30, 2010 and 2009 is as follows (in thousands):

 
| ** **                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|
| Beginning balance                                     |       | $        | 13,060     |     | $          | 13,633 |   |
| Additions based on tax positions in the current  year |       | 3,247    |       | 399      |       |
| Additions for tax positions in prior years            |       | 585      |       | 1,264    |       |
| Reductions for tax positions of prior years due  to:  |       |     |       |     |       |
| Statute expiration                                    |       | (5,120   | )          | (895     | )          |
| Settlements                                           |       | (296     | )          | (1,341   | )          |
| Ending balance                                        |       | $        | 11,476     |     | $          | 13,060 |   |

 

It is reasonably possible that various issues relating to approximately$7.2 million of the total gross unrecognized tax benefits as of June 30, 2010will be resolved within the next twelve months as exams are completed orstatutes expire. If recognized, approximately $5.4 million of unrecognized taxbenefits would reduce our tax expense in the period realized. However, actualresults could differ from those currently anticipated.

 

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 thenormal course of business, the Company is subject to examination by the taxingauthorities in such major jurisdictions as Canada, Mexico and the U.S.  As of June 30, 2010 certain subsidiaries ofthe Company are currently under audit from 2001 through 2009 in the U.S.  While the amount of uncertain tax benefitswith respect to the entities and years under audit may change within the nexttwelve months, it is not anticipated that any of the changes will besignificant.

 

**(13)         Employee RetirementPrograms**

 

The Ethan Allen Retirement Savings Plan

The Ethan Allen Retirement Savings Plan (the “Savings Plan”) is adefined contribution plan, which is offered to substantially all of ouremployees who have completed three consecutive months of service regardless ofhours worked. We may, at our discretion, make a matching contribution to the401(k) portion of the Savings Plan on behalf of each participant.  Total 401(k) Company match expense amountedto $2.3 million in 2010, $1.3 million in 2009, and $3.7 million in 2008.  The contribution was made in shares of theCompany’s common stock in 2010 and 2009 and in cash in 2008.

 

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Other Retirement Plans and Benefits

Ethan Allen provides additional benefits to selected members of seniorand middle management in the form of previously entered deferred compensationarrangements and a management cash bonus and other incentive programs.  The total cost (credit) of these benefits was$1.2 million, ($0.7) million, and $1.2 million in 2010, 2009 and 2008,respectively.

 

**(14)         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 Yorkcontinued to be evaluated as of June 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 June 30, 2010, we believe thatestablished reserves related to these environmental contingencies are adequateto 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 environmentalprotection laws and regulations and are involved, from time to time, ininvestigations and proceedings regarding environmental matters.  Such investigations and proceedings typicallyconcern air emissions, water discharges, and/or management of solid andhazardous wastes. We believe that our facilities are in material compliancewith all such applicable laws and 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 of waste,(ii) limiting the liability associated with waste disposal, and (iii)continuously improving environmental and job safety programs on the factoryfloor which serve to minimize emissions and safety risks for employees. We willcontinue to evaluate the most appropriate, cost effective, control technologiesfor finishing operations and design production methods to reduce the use ofhazardous materials in the manufacturing process.

 

**(15)         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

 

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debt and equity securities.  Wehave reported our total comprehensive income in the Consolidated Statements ofShareholders’ Equity.

 

Our accumulated other comprehensive income, which is comprised oflosses on certain derivative instruments and accumulated foreign currencytranslation adjustments, totaled $1.2 million at June 30, 2010 and $0.5 millionat June 30, 2009.  Foreign currencytranslation adjustments are the result of changes in foreign currency exchangerates 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.

 

**(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 andoff-shore 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, whichrepresents the difference between the wholesale sales price and the costassociated with manufacturing and/or sourcing the related product, and (ii)other operating costs associated with wholesale segment activities.

 

The retail segment sells home furnishings and accessories to 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) the retailgross margin, which represents the difference between the retail sales priceand 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 product line for each of the lastthree fiscal years ended June 30 is provided below:

 
| ** **                 | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|----------|------------|
| Case Goods                 |       | 40       | %          | 41       | %          | 43       | %          |
| Upholstered Products       |       | 46       |       | 41       |       | 40       |       |
| Home Accessories and Other |       | 14       |       | 18       |       | 17       |       |
|                       |       | 100      | %          | 100      | %          | 100      | %          |

 

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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 each of thelast three fiscal years ended June 30 is provided below (in thousands):

 
| ** **                              | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net Sales:                              |       |     |       |     |       |     |       |
| Wholesale segment                       |       | $        | 362,468    |     | $          | 403,378  |       | $ | 616,230 |   |
| Retail segment                          |       | 438,539  |       | 508,621  |       | 724,586  |       |
| Elimination of inter-company sales      |       | (210,953 | )          | (237,722 | )          | (360,771 | )          |
| Consolidated Total                      |       | $        | 590,054    |     | $          | 674,277  |       | $ | 980,045 |   |
|                                    |       |     |       |     |       |     |       |
| Operating Income:                       |       |     |       |     |       |     |       |
| Wholesale segment (1)                   |       | $        | 14,201     |     | $          | 6,670    |       | $ | 100,324 |   |
| Retail segment (2)                      |       | (28,764  | )          | (92,100  | )          | (2,800   | )          |
| Adjustment for inter-company profit (3) |       | 2,828    |       | 12,659   |       | (1,524   | )          |
| Consolidated Total                      |       | $        | (11,735    | )        | $          | (72,771  | )          | $ | 96,000 |   |
|                                    |       |     |       |     |       |     |       |
| Capital Expenditures:                   |       |     |       |     |       |     |       |
| Wholesale segment                       |       | $        | 4,553      |     | $          | 3,246    |       | $ | 7,347 |   |
| Retail segment                          |       | 5,369    |       | 19,291   |       | 52,691   |       |
| Acquisitions (4)                        |       | 50       |       | 1,366    |       | 7,168    |       |
| Consolidated Total                      |       | $        | 9,972      |     | $          | 23,903   |       | $ | 67,206 |   |

 
| ** **                       | ** ** | **June 30** | ** ** | **June 30** | ** ** | **June 30** | ** ** |
|----------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                       | ** ** | **2010**    | ** ** | **2009**    | ** ** | **2008**    | ** ** |
| Total Assets:                    |       |        |       |        |       |        |       |
| Wholesale segment                |       | $           | 296,363    |        | $          | 276,250     |       | $ | 345,080 |   |
| Retail segment                   |       | 360,413     |       | 397,877     |       | 459,842     |       |
| Inventory profit elimination (5) |       | (24,999     | )          | (27,642     | )          | (40,829     | )          |
| Consolidated Total               |       | $           | 631,777    |        | $          | 646,485     |       | $ | 764,093 |   |

 

----

(1) Operating income for thewholesale segment for the twelve months ended June 30, 2010 and 2009 includespre-tax restructuring and impairment charges (credit) of ($0.2) million and$17.4 million, respectively.

(2) Operating income for theretail segment for the twelve months ended June 30, 2010, 2009 and 2008includes pre-tax restructuring and impairment charges of $2.6 million, $49.6million and $6.8 million respectively.

(3) The change in wholesale profitcontained in Ethan Allen-operated design center inventory at the end of theperiod.

(4) Acquisitions include thepurchase of one retail design center in 2010, four retail design centers in2009 and five retail design centers and a cut and sew upholstery facility in2008.  See Note 3.

(5) The wholesale profit containedin Ethan Allen-operated design center inventory that has not yet been realized.These profits are realized when the related inventory is sold.

 

There are 55 independent retail design centers located outside theUnited States.  Approximately 4.7% of ournet sales are derived from sales to these retail design centers.

 

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** **

**(17)         Selected QuarterlyFinancial Data (Unaudited)**

 

Tabulated below is selected financial data for each quarter of thefiscal years ended June 30, 2010, 2009, and 2008 (in thousands, except pershare data):

 
| ** **                            | ** ** | **Quarter Ended** | ** **    |
|---------------------------------------|------------|-------------------|---------------|
| ** **                            | ** ** | **September 30**  | ** **    | **December 31** | ** ** | **March 31** | ** ** | **June 30** | ** ** |
| Fiscal 2010:                          |       |              |          |   | ** ** | ** ** |   |   |   |
| Net sales                             |       | $                 |  136,190 |   | $ |  143,302 |   | $ |  147,258 |   | $ |  163,304 |   |
| Gross profit                          |       | 58,309            |          | 69,024 |   | 72,027 |   | 80,917 |   |
| Net income (loss)                     |       | (13,579           | )             | (3,338 | ) | (855 | ) | (26,544 | ) |
| Earnings (loss) per basic share (1)   |       | (0.47             | )             | (0.12 | ) | (0.03 | ) | (0.91 | ) |
| Earnings (loss) per diluted share (1) |       | (0.47             | )             | (0.12 | ) | (0.03 | ) | (0.91 | ) |
| Dividend per common share             |       | 0.05              |          | 0.05 |   | 0.05 |   | 0.05 |   |
|                                  |       |              |          |   |   |   |   |   |   |
| Fiscal 2009:                          |       |              |          |   |   |   |   |   |   |
| Net sales                             |       | $                 |  205,841 |   | $ |  189,558 |   | $ |  140,221 |   | $ |  138,657 |   |
| Gross profit                          |       | 111,941           |          | 101,801 |   | 66,050 |   | 67,550 |   |
| Net income (loss)                     |       | 7,422             |          | 5,488 |   | (48,674 | ) | (16,923 | ) |
| Earnings (loss) per basic share (1)   |       | 0.26              |          | 0.19 |   | (1.69 | ) | (0.58 | ) |
| Earnings (loss) per diluted share (1) |       | 0.26              |          | 0.19 |   | (1.69 | ) | (0.58 | ) |
| Dividend per common share             |       | 0.25              |          | 0.25 |   | 0.10 |   | 0.05 |   |
|                                  |       |              |          |   |   |   |   |   |   |
| Fiscal 2008:                          |       |              |          |   |   |   |   |   |   |
| Net sales                             |       | $                 |  248,727 |   | $ |  259,510 |   | $ |  235,901 |   | $ |  235,907 |   |
| Gross profit                          |       | 133,457           |          | 139,453 |   | 125,187 |   | 127,968 |   |
| Net income                            |       | 17,504            |          | 20,622 |   | 8,846 |   | 11,100 |   |
| Earnings per basic share (1)          |       | 0.58              |          | 0.70 |   | 0.31 |   | 0.39 |   |
| Earnings per diluted share (1)        |       | 0.57              |          | 0.70 |   | 0.30 |   | 0.39 |   |
| Dividend per common share             |       | 0.22              |          | 0.22 |   | 0.22 |   | 0.22 |   |

 

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(1)   The sum of the quarterlyearnings per share may not equal the full-year total due to rounding and/orchanges in share count.

 

**(18)         Financial Instruments**

 

ASCTopic 820, “*Fair value measurements and disclosures”*(SFAS No. 157) defines fair value as the price that would be received uponsale of an asset or paid upon transfer of a liability in an orderly transactionbetween market participants at the measurement date and in the principal ormost advantageous market for that asset or liability. The fair value should becalculated based on assumptions that market participants would use in pricingthe asset or liability, not on assumptions specific to the entity. In addition,the fair value of liabilities should include consideration of non-performancerisk including our own credit risk.

 

Inaddition to defining fair value, ASC Topic 820 expands the disclosurerequirements around fair value and establishes a fair value hierarchy for valuationinputs. The hierarchy prioritizes the inputs into three levels based on theextent to which inputs used in measuring fair value are observable in themarket. Each fair value measurement is reported in one of the three levelswhich is determined by the lowest level input that is significant to the fairvalue measurement in its entirety. These levels are:

 

·      Level 1 — inputs are basedupon unadjusted quoted prices for identical instruments traded in activemarkets.

 

·      Level 2 — inputs are basedupon quoted prices for similar instruments in active markets, quoted prices foridentical or similar instruments in markets that are not active, andmodel-based valuation techniques for which all significant assumptions areobservable in the market or can be corroborated by observable market data forsubstantially the full term of the assets or liabilities.

 

·      Level 3 — inputs aregenerally unobservable and typically reflect management’s estimates ofassumptions that market participants would use in pricing the asset orliability. The fair values are therefore determined using

 

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model-basedtechniques that include option pricing models, discounted cash flow models, andsimilar techniques.

 

TheCompany partially adopted ASC Topic 820 on July 1, 2008 due to the fact that aportion of ASC Topic 820 was previously deferred for one year for allnonfinancial assets and nonfinancial liabilities that were not recognized ordisclosed at fair value in the financial statements on a recurring basis (atleast annually).  On July 1, 2009, theCompany adopted the deferred portion of ASC Topic 820.  There was no impact on the Company’sfinancial position or results of operations resulting from the adoption of thedeferred portion of ASC Topic 820.  TheCompany has now fully adopted ASC Topic 820.

 

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

 

Assetsand Liabilities Measured at Fair Value on a Recurring Basis

 

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

 
| ** **                    | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Balance** | ** ** |
|-------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| Cash equivalents              |       | $           | 91,170     |        | $          | —      |       | $           | —     |   | $ | 91,170 |   |
|                          |       |        |       |        |       |        |       |        |       |
| Available-for-sale securities |       | —      |       | 11,075      |       | —      |       | 11,075      |       |
|                          |       |        |       |        |       |        |       |        |       |
| Total                         |       | $           | 91,170     |        | $          | 11,075      |       | $           | —     |   | $ | 102,245 |   |

 

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.  AtJune 30, 2010, $17.3 million of cash equivalents was restricted and isclassified as a long-term asset.

 

Available-for-salesecurities consist of U.S. municipal bonds with maturities of less than twoyears.

 

Asof June 30, 2010, additional information on available-for-sale securitiesbalances are provided in the following table (in thousands).  There were no available-for-sale securitiesat June 30, 2009.

 
| **Cost**  | ** **   | **Gross Unrealized** | ** ** | **Market** | ** ** |
|-----------|--------------|----------------------|------------|------------|------------|
| **Basis** | ** **   | **Gains**            | ** ** | **Losses** | ** ** | **Value** | ** ** |
| $         |  10,976 |                 | $          | 17         |       | $ | 7 |   | $ | 10,986 |   |
|           |              |                      |            |            |            |  |  |  |  |  |  |

 

Asof June 30, 2010, the contractual maturities of our available-for-saleinvestments were as follows:

 
| ** **                            | ** ** | **Cost** | ** ** | **Estimated Fair  Value** | ** ** |
|---------------------------------------|------------|----------|------------|---------------------------|------------|
| Due in one year or less               |       | $        | 2,932      |                      | $          | 2,933 |   |
| Due after one year through five years |       | $        | 8,044      |                      | $          | 8,053 |   |

 

Proceedsfrom sales of investments available for sale during fiscal 2010 were $0.2million, resulting in no gain or loss. There were no investments that have been in a continuous loss positionfor more than one year, and there have been no other-than-temporary impairmentsrecognized.

 

Assetsand Liabilities Measured at Fair Value on a Nonrecurring Basis

 

Wemeasure certain assets, including our cost and equity method investments, atfair value on a nonrecurring basis. These assets are recognized at fair valuewhen they are deemed to be other-than-temporarily impaired.

 

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Duringthe year ended June 30, 2010, we did not record any other-than-temporaryimpairments on those assets required to be measured at fair value on anonrecurring basis.  During the thirdquarter of fiscal, 2009, we determined that the goodwill for the Retail segmentwas impaired, and a goodwill impairment charge of $48.4 million was recorded(also see note 6).

 

**(19)**         **Restricted Cash and Investments**

 

During fiscal 2010, we transferred $17.3 million of cash into tworestricted accounts.  We transferred$11.3 million as collateral for our workmen’s compensation and other insuranceliabilities, previously secured by a letter of credit.  We also transferred $6.0 million into aseparate restricted account as collateral for the issuer of our private labelcredits to ensure funding for delivery of products sold.  These restricted funds, which can be investedby us in money market mutual funds, and U.S. Treasuries and U.S. Governmentagency fixed income instruments with maturities of two years or less, cannot bewithdrawn from our account without the prior written consent of the securedparties.  These restricted funds areclassified as long-term assets because they are not expected to be used withinone year to fund operations.

 

**(20)         Subsequent Events**

 

In July 2010, a jury entered an award of $1.5 million against theCompany related to an ongoing litigation with a former independent retailer.The Company believes that the jury’s verdict is not supported by the evidencein the record and is reviewing its options. The Company believes it isadequately reserved for this matter.

 

In August 2010, the Company resolved the remaining environmental casein Carroll, New York in which it had been named as a potentially responsibleparty. The Company believes it is adequately reserved for this matter.

 

**(21)         Financial InformationAbout the Parent, the Issuer and the Guarantors**

 

OnSeptember 27, 2005, Global (the “Issuer”) issued $200 million aggregateprincipal amount of Senior Notes which have been guaranteed on a senior basisby Interiors (the “Parent”), and other wholly owned domestic subsidiaries ofthe Issuer and the Parent, including Ethan Allen Retail, Inc., Ethan AllenOperations, Inc., Ethan Allen Realty, LLC, Lake AvenueAssociates, Inc. and Manor House, Inc. The subsidiary guarantors(other than the Parent) are collectively called the “Guarantors”.  Theguarantees of the Guarantors are unsecured.  All of the guarantees arefull, unconditional and joint and several and the Issuer and each of theGuarantors are 100% owned by the Parent. Ethan Allen (UK) Ltd. and our othersubsidiaries which are not guarantors are called the “Non-Guarantors”. Duringthe quarter ended December 31, 2008, we determined that our internationalsubsidiaries in Canada and Mexico are non-guarantors. The Company hasreclassified, for all prior periods presented, the financial results of theseinternational subsidiaries to reflect their non-guarantor status.

 

Thefollowing tables set forth the condensed consolidating balance sheets as ofJune 30, 2010 and June 30, 2009, the condensed consolidating statements ofoperations for the twelve months ended June 30, 2010, 2009 and 2008, and thecondensed consolidating statements of cash flows for the twelve months endedJune 30, 2010, 2009 and 2008 of the Parent, the Issuer, the Guarantors and theNon-Guarantors.

 

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**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         | )          | 0                |       |
| 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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**CONDENSED CONSOLIDATING BALANCE SHEET**

(in thousands)

**June 30, 2009**

 
| ** **                                      | ** ** | **Parent** | ** ** | **Issuer** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------|------------|------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| **Assets**                                      |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Current assets:                                 |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Cash and cash equivalents                       |       | $          | —     |       | $          | 47,712         |       | $                  | 3,592      |             | $          | 1,656            |       | $ | — |   | $ | 52,960 |   |
| Accounts receivable, net                        |       | —     |       | 12,049     |       | 783            |       | 254                |       | —           |       | 13,086           |       |
| Inventories                                     |       | —     |       | —     |       | 179,705        |       | 4,456              |       | (27,642          | )          | 156,519          |       |
| Prepaid expenses and other current assets       |       | —     |       | 20,509     |       | 8,084          |       | 544                |       | —           |       | 29,137           |       |
| Intercompany receivables                        |       | —     |       | 782,736    |       | 227,453        |       | (3,010             | )          | (1,007,179       | )          | 0                |       |
| Total current assets                            |       | —     |       | 863,006    |       | 419,617        |       | 3,900              |       | (1,034,821       | )          | 251,702          |       |
|                                            |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Property, plant and equipment, net              |       | —     |       | 11,748     |       | 317,144        |       | 4,707              |       | —           |       | 333,599          |       |
| Goodwill and other intangible assets            |       | —     |       | 37,905     |       | 7,223          |       | —             |       | —           |       | 45,128           |       |
| Other assets                                    |       | —     |       | 15,323     |       | 727            |       | 6                  |       | —           |       | 16,056           |       |
| Investment in affiliated companies              |       | 612,392    |       | (20,616    | )          | —         |       | —             |       | (591,776         | )          | —           |       |
| Total assets                                    |       | 612,392    |       | 907,366    |       | 744,711        |       | 8,613              |       | (1,626,597       | )          | 646,485          |       |
|                                            |       |       |       |       |       |           |       |               |       |             |       |             |       |
| **Liabilities and Shareholders’  Equity**  |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Current liabilities:                            |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Current maturities of long-term debt            |       | —     |       | —     |       | 42             |       | —             |       | —           |       | 42               |       |
| Customer deposits                               |       | —     |       | —     |       | 30,412         |       | 1,279              |       | —           |       | 31,691           |       |
| Accounts payable                                |       | —     |       | 8,851      |       | 13,106         |       | 242                |       | —           |       | 22,199           |       |
| Accrued expenses and other current liabilities  |       | 1,552      |       | 41,004     |       | 15,707         |       | 268                |       | —           |       | 58,531           |       |
| Intercompany payables                           |       | 304,917    |       | 8,123      |       | 687,826        |       | 6,313              |       | (1,007,179       | )          | —           |       |
| Total current liabilities                       |       | 306,469    |       | 57,978     |       | 747,093        |       | 8,102              |       | (1,007,179       | )          | 112,463          |       |
|                                            |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Long-term debt                                  |       | —     |       | 198,998    |       | 4,108          |       | —             |       | —           |       | 203,106          |       |
| Other long-term liabilities                     |       | —     |       | 10,565     |       | 14,290         |       | 138                |       | —           |       | 24,993           |       |
| Deferred income taxes                           |       | —     |       | —     |       | —         |       | —             |       | —           |       | —           |       |
| Total liabilities                               |       | 306,469    |       | 267,541    |       | 765,491        |       | 8,240              |       | (1,007,179       | )          | 340,562          |       |
|                                            |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Shareholders’ equity                       |       | 305,923    |       | 639,825    |       | (20,780        | )          | 373                |       | (619,418         | )          | 305,923          |       |
| Total liabilities and shareholders’ equity |       | $          | 612,392    |       | $          | 907,366        |       | $                  | 744,711    |             | $          | 8,613            |       | $ | (1,626,597 | ) | $ | 646,485 |   |

 

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**CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS**

(in thousands)

**Year Ended June 30, 2010**

 
| ** **                                              | ** ** | **Parent** | ** ** | **Issuer** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------|------------|------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
| Net sales                                               |       | $          | —     |       | $          | 363,038        |       | $                  | 603,191    |             | $          | 22,463           |       | $ | (398,638 | ) | $ | 590,054 |   |
| Cost of sales                                           |       | —     |       | 286,185    |       | 412,992        |       | 11,939             |       | (401,339         | )          | 309,777          |       |
| Gross profit                                            |       | —     |       | 76,853     |       | 190,199        |       | 10,524             |       | 2,701            |       | 280,277          |       |
|                                                    |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Selling, general and administrative expenses            |       | 195        |       | 41,930     |       | 236,791        |       | 10,659             |       | —           |       | 289,575          |       |
| Restructuring and impairment charges                    |       | —     |       | —     |       | 2,437          |       | —             |       | —           |       | 2,437            |       |
| Total operating expenses                                |       | 195        |       | 41,930     |       | 239,228        |       | 10,659             |       | —           |       | 292,012          |       |
| Operating income (loss)                                 |       | (195       | )          | 34,923     |       | (49,029        | )          | (135               | )          | 2,701            |       | (11,735          | )          |
|                                                    |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Interest and other miscellaneous income (expense),  net |       | (44,121    | )          | (44,539    | )          | 106            |       | 16                 |       | 93,410           |       | 4,872            |       |
| Interest and other related financing costs              |       | —     |       | 11,619     |       | 305            |       | —             |       | —           |       | 11,924           |       |
| Income (loss) before income tax expense                 |       | (44,316    | )          | (21,235    | )          | (49,228        | )          | (119               | )          | 96,111           |       | (18,787          | )          |
| Income tax expense (benefit)                            |       | —     |       | 25,529     |       | —         |       | —             |       | —           |       | 25,529           |       |
| Net income/(loss)                                       |       | $          | (44,316    | )          | $          | (46,764        | )          | $                  | (49,228    | )                | $          | (119             | )          | $ | 96,111 |   | $ | (44,316 | ) |

 

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**CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS**

(in thousands)

**Year Ended June 30, 2009**

 
| ** **                                              | ** ** | **Parent** | ** ** | **Issuer** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------|------------|------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
| Net sales                                               |       | $          | —     |       | $          | 404,543        |       | $                  | 676,740    |             | $          | 21,042           |       | $ | (428,048 | ) | $ | 674,277 |   |
| Cost of sales                                           |       | —     |       | 302,359    |       | 453,868        |       | 12,007             |       | (441,299         | )          | 326,935          |       |
| Gross profit                                            |       | —     |       | 102,184    |       | 222,872        |       | 9,035              |       | 13,251           |       | 347,342          |       |
|                                                    |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Selling, general and administrative expenses            |       | 165        |       | 49,191     |       | 293,296        |       | 10,460             |       | —           |       | 353,112          |       |
| Restructuring and impairment charges                    |       | —     |       | —     |       | 67,001         |       | —             |       | —           |       | 67,001           |       |
| Total operating expenses                                |       | 165        |       | 49,191     |       | 360,297        |       | 10,460             |       | —           |       | 420,113          |       |
| Operating income (loss)                                 |       | (165       | )          | 52,993     |       | (137,425       | )          | (1,425             | )          | 13,251           |       | (72,771          | )          |
|                                                    |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Interest and other miscellaneous income (expense),  net |       | (52,522    | )          | (135,736   | )          | 43             |       | 83                 |       | 191,487          |       | 3,355            |       |
| Interest and other related financing costs              |       | —     |       | 11,459     |       | 305            |       | —             |       | —           |       | 11,764           |       |
| Income (loss) before income tax expense                 |       | (52,687    | )          | (94,202    | )          | (137,687       | )          | (1,342             | )          | 204,738          |       | (81,180          | )          |
| Income tax expense (benefit)                            |       | —     |       | (28,493    | )          | —         |       | —             |       | —           |       | (28,493          | )          |
| Net income/(loss)                                       |       | $          | (52,687    | )          | $          | (65,709        | )          | $                  | (137,687   | )                | $          | (1,342           | )          | $ | 204,738 |   | $ | (52,687 | ) |

 

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**CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS**

(in thousands)

**Year Ended June 30, 2008**

 
| ** **                                              | ** ** | **Parent** | ** ** | **Issuer** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------|------------|------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
| Net sales                                               |       | $          | —     |       | $          | 617,547        |       | $                  | 982,404    |             | $          | 27,192           |       | $ | (647,098 | ) | $ | 980,045 |   |
| Cost of sales                                           |       | —     |       | 436,642    |       | 648,437        |       | 14,279             |       | (645,378         | )          | 453,980          |       |
| Gross profit                                            |       | —     |       | 180,905    |       | 333,967        |       | 12,913             |       | (1,720           | )          | 526,065          |       |
|                                                    |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Selling, general and administrative expenses            |       | 166        |       | 50,555     |       | 359,719        |       | 12,789             |       | —           |       | 423,229          |       |
| Restructuring and impairment charges                    |       | —     |       | —     |       | 6,836          |       | —             |       | —           |       | 6,836            |       |
| Total operating expenses                                |       | 166        |       | 50,555     |       | 366,555        |       | 12,789             |       | —           |       | 430,065          |       |
| Operating income (loss)                                 |       | (166       | )          | 130,350    |       | (32,588        | )          | 124                |       | (1,720           | )          | 96,000           |       |
|                                                    |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Interest and other miscellaneous income (expense),  net |       | 58,238     |       | (24,901    | )          | 603            |       | 121                |       | (26,170          | )          | 7,891            |       |
| Interest and other related financing costs              |       | —     |       | 11,408     |       | 305            |       | —             |       | —           |       | 11,713           |       |
| Income (loss) before income tax expense                 |       | 58,072     |       | 94,041     |       | (32,290        | )          | 245                |       | (27,890          | )          | 92,178           |       |
| Income tax expense (benefit)                            |       | —     |       | 33,995     |       | 111            |       | —             |       | —           |       | 34,106           |       |
| Net income/(loss)                                       |       | $          | 58,072     |       | $          | 60,046         |       | $                  | (32,401    | )                | $          | 245              |       | $ | (27,890 | ) | $ | 58,072 |   |

 

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**CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

(in thousands)

**Year Ended June 30, 2010**

 
| ** **                                                   | ** ** | **Parent** | ** ** | **Issuer** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------|------------|------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| Net  cash provided by (used in) operating activities         |       | $          | 5,800      |       | $          | 48,466         |       | $                  | (4,272     | )                | $          | 1,337            |       | $ | — |   | $ | 51,331 |   |
|                                                         |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Cash  flows from investing activities:                       |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Capital  expenditures                                        |       | —     |       | (393       | )          | (6,706         | )          | (2,823             | )          | —           |       | (9,922           | )          |
| Acquisitions                                                 |       | —     |       | —     |       | (50            | )          | —             |       | —           |       | (50              | )          |
| Proceeds  from the disposal of property, plant and equipment |       | —     |       | —     |       | 13,198         |       | —             |       | —           |       | 13,198           |       |
| Increase  in restricted cash and investments                 |       | —     |       | (17,318    | )          | —         |       | —             |       | —           |       | (17,318          | )          |
| Purchases  of marketable securities                          |       | —     |       | (11,364    | )          | —         |       | —             |       | —           |       | (11,364          | )          |
| Sales  of marketable securities                              |       | —     |       | 200        |       | —         |       | —             |       | —           |       | 200              |       |
| Other                                                        |       | —     |       | 165        |       | —         |       | —             |       | —           |       | 165              |       |
| Net  cash used in investing activities                       |       | —     |       | (28,710    | )          | 6,442          |       | (2,823             | )          | —           |       | (25,091          | )          |
|                                                         |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Cash  flows from financing activities:                       |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Payments  on long-term debt                                  |       | —     |       | —     |       | (42            | )          | —             |       | —           |       | (42              | )          |
| Purchases  and other retirements of company stock            |       | —     |       | —     |       | —         |       | —             |       | —           |       | —           |       |
| Proceeds  from issuance of common stock                      |       | 1          |       | —     |       | —         |       | —             |       | —           |       | 1                |       |
| (Increase)  decrease in deferred financing costs             |       | —     |       | (199       | )          | —         |       | —             |       | —           |       | (199             | )          |
| Dividends  paid                                              |       | (5,801     | )          | —     |       | —         |       | —             |       | —           |       | (5,801           | )          |
| Net  cash provided by (used in) financing activities         |       | (5,800     | )          | (199       | )          | (42            | )          | —             |       | —           |       | (6,041           | )          |
| Effect  of exchange rate changes on cash                     |       | —     |       | —     |       | —         |       | 693                |       | —           |       | 693              |       |
|                                                         |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Net  increase (decrease) in cash and cash equivalents        |       | —     |       | 19,557     |       | 2,128          |       | (793               | )          | —           |       | 20,892           |       |
|                                                         |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Cash  and cash equivalents — beginning of period        |       | —     |       | 47,712     |       | 3,592          |       | 1,656              |       | —           |       | 52,960           |       |
|                                                         |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Cash  and cash equivalents — end of period              |       | $          | —     |       | $          | 67,269         |       | $                  | 5,720      |             | $          | 863              |       | $ | — |   | $ | 73,852 |   |

 

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**CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

(in thousands)

**Year Ended June 30, 2009**

 
| ** **                                                   | ** ** | **Parent** | ** ** | **Issuer** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------|------------|------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| Net  cash provided by (used in) operating activities         |       | $          | 23,615     |       | $          | (20,986        | )          | $                  | 18,710     |             | $          | 594              |       | $ | — |   | $ | 21,933 |   |
|                                                         |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Cash  flows from investing activities:                       |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Capital  expenditures                                        |       | —     |       | (1,337     | )          | (21,097        | )          | (103               | )          | —           |       | (22,537          | )          |
| Acquisitions                                                 |       | —     |       | —     |       | (1,366         | )          | —             |       | —           |       | (1,366           | )          |
| Proceeds  from the disposal of property, plant and equipment |       | —     |       | 88         |       | 6,296          |       | —             |       | —           |       | 6,384            |       |
| Other                                                        |       | —     |       | 210        |       | (217           | )          | —             |       | —           |       | (7               | )          |
| Net  cash used in investing activities                       |       | —     |       | (1,039     | )          | (16,384        | )          | (103               | )          | —           |       | (17,526          | )          |
|                                                         |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Cash flows  from financing activities:                       |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Payments  on long-term debt                                  |       | —     |       | —     |       | (41            | )          | —             |       | —           |       | (41              | )          |
| Purchases  and other retirements of company stock            |       | —     |       | —     |       | —         |       | —             |       | —           |       | —           |       |
| Proceeds  from issuance of common stock                      |       | 2          |       | —     |       | —         |       | —             |       | —           |       | 2                |       |
| (Increase)  decrease in deferred financing costs             |       | —     |       | (1,380     | )          | —         |       | —             |       | —           |       | (1,380           | )          |
| Dividends  paid                                              |       | (23,617    | )          | —     |       | —         |       | —             |       | —           |       | (23,617          | )          |
| Net  cash provided by (used in) financing activities         |       | (23,615    | )          | (1,380     | )          | (41            | )          | —             |       | —           |       | (25,036          | )          |
| Effect  of exchange rate changes on cash                     |       | —     |       | —     |       | —         |       | (787               | )          | —           |       | (787             | )          |
|                                                         |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Net  increase (decrease) in cash and cash equivalents        |       | —     |       | (23,405    | )          | 2,285          |       | (296               | )          | —           |       | (21,416          | )          |
|                                                         |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Cash  and cash equivalents — beginning of period        |       | —     |       | 71,117     |       | 1,307          |       | 1,952              |       | —           |       | 74,376           |       |
|                                                         |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Cash  and cash equivalents — end of period              |       | $          | —     |       | $          | 47,712         |       | $                  | 3,592      |             | $          | 1,656            |       | $ | — |   | $ | 52,960 |   |

 

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**CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

(in thousands)

**Year Ended June 30, 2008**

 
| ** **                                                   | ** ** | **Parent** | ** ** | **Issuer** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------|------------|------------|------------|------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| Net  cash provided by (used in) operating activities         |       | $          | 100,598    |       | $          | (68,050        | )          | $                  | 52,512     |             | $          | 1,077            |       | $ | — |   | $ | 86,137 |   |
|                                                         |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Cash  flows from investing activities:                       |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Capital  expenditures                                        |       | —     |       | (5,217     | )          | (54,784        | )          | (37                | )          | —           |       | (60,038          | )          |
| Acquisitions                                                 |       | —     |       | —     |       | (7,777         | )          | —             |       | —           |       | (7,777           | )          |
| Proceeds  from the disposal of property, plant and equipment |       | —     |       | —     |       | 6,943          |       | —             |       | —           |       | 6,943            |       |
| Other                                                        |       | —     |       | 38         |       | (500           | )          | —             |       | —           |       | (462             | )          |
| Net  cash used in investing activities                       |       | —     |       | (5,179     | )          | (56,118        | )          | (37                | )          | —           |       | (61,334          | )          |
|                                                         |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Cash  flows from financing activities:                       |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Payments  on long-term debt                                  |       | —     |       | —     |       | (40            | )          | —             |       | —           |       | (40              | )          |
| Purchases  and other retirements of company stock            |       | (75,577    | )          | —     |       | —         |       | —             |       | —           |       | (75,577          | )          |
| Proceeds  from issuance of common stock                      |       | 474        |       | —     |       | —         |       | —             |       | —           |       | 474              |       |
| Excess  tax benefits from share-based payment arrangements   |       | —     |       | 2,093      |       | —         |       | —             |       | —           |       | 2,093            |       |
| Dividends  paid                                              |       | (25,495    | )          | —     |       | —         |       | —             |       | —           |       | (25,495          | )          |
| Net  cash provided by (used in) financing activities         |       | (100,598   | )          | 2,093      |       | (40            | )          | —             |       | —           |       | (98,545          | )          |
| Effect  of exchange rate changes on cash                     |       | —     |       | —     |       | —         |       | 239                |       | —           |       | 239              |       |
|                                                         |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Net  increase (decrease) in cash and cash equivalents        |       | —     |       | (71,136    | )          | (3,646         | )          | 1,279              |       | —           |       | (73,503          | )          |
|                                                         |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Cash  and cash equivalents — beginning of period        |       | —     |       | 142,253    |       | 4,953          |       | 673                |       | —           |       | 147,879          |       |
|                                                         |       |       |       |       |       |           |       |               |       |             |       |             |       |
| Cash  and cash equivalents — end of period              |       | $          | —     |       | $          | 71,117         |       | $                  | 1,307      |             | $          | 1,952            |       | $ | — |   | $ | 74,376 |   |

 

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**(22)         VALUATION ANDQUALIFYING ACCOUNTS**

 

Thefollowing table provides information regarding the Company’s sales discounts,sales returns and allowance for doubtful accounts, and inventory valuationallowances (in thousands):

 
| ** **                                                          | ** ** | **Balance at  Beginning  of Period** | ** ** | **Additions  (Reductions)  Charged to  Income** | ** ** | **Adjustments  and/or  Deductions** | ** ** | **Balance at  End of Period** | ** ** |
|---------------------------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------------|------------|-------------------------------------|------------|----------------------------------------------|------------|
| Accounts Receivable:                                                |       |                                           |       |                                                 |       |                                |       |                                         |       |
| Sales discounts, sales returns and allowance for doubtful accounts: |       |                                           |       |                                                 |       |                                |       |                                         |       |
|                                                                |       |                                           |       |                                                 |       |                                |       |                                         |       |
| June 30, 2010                                                  |       | $                                              | 1,362      |                                                 | $          | (202                                | )          | $                                            | —     |   | $ | 1,160 |   |
| June 30, 2009                                                  |       | $                                              | 2,535      |                                                 | $          | (773                                | )          | $                                            | (400       | ) | $ | 1,362 |   |
| June 30, 2008                                                  |       | $                                              | 2,042      |                                                 | $          | 493                                 |       | $                                            | —     |   | $ | 2,535 |   |
|                                                                |       |                                           |       |                                                 |       |                                |       |                                         |       |
| Inventory:                                                          |       |                                           |       |                                                 |       |                                |       |                                         |       |
| Inventory valuation allowance:                                      |       |                                           |       |                                                 |       |                                |       |                                         |       |
|                                                                |       |                                           |       |                                                 |       |                                |       |                                         |       |
| June 30, 2010                                                  |       | $                                              | 2,204      |                                                 | $          | 400                                 |       | $                                            | (532       | ) | $ | 2,072 |   |
| June 30, 2009                                                  |       | $                                              | 2,260      |                                                 | $          | —                              |       | $                                            | (56        | ) | $ | 2,204 |   |
| June 30, 2008                                                  |       | $                                              | 2,930      |                                                 | $          | —                              |       | $                                            | (670       | ) | $ | 2,260 |   |

 

**Item 9. Changes in and Disagreements with Accountantson Accounting and Financial Disclosure**

 

No changes in, or disagreements with, accountants as a result ofaccounting or financial disclosure matters, occurred during fiscal years 2010,2009 or 2008.

 

**Item 9A. Controls and Procedures**

 

**Management’sReport 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 June 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.

 

**Management’s Report on Internal Control over Financial Reporting**

 

Ourmanagement is responsible for establishing and maintaining adequate internalcontrol over financial reporting, as such term is defined in Exchange ActRule 13a-15(f) and 15d-15(f). Under the supervision and with theparticipation of management, including the CEO and VPF, we conducted anevaluation of the effectiveness of our internal control over financialreporting based on the framework in *Internal Control -Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission (“COSO”).  Based on that 

 

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evaluation,management concluded that our internal control over financial reporting waseffective as of June 30, 2010. 

 

KPMGLLP, the independent registered public accounting firm that audited theconsolidated financial statements included in this Annual Report on Form 10-K,has also audited the effectiveness of our internal control over financialreporting as of June 30, 2010, as stated in their report included underItem 8 of this Annual Report.

 

**Changesin Internal Control over Financial Reporting**

 

Therehave been no changes in our internal control over financial reporting (as suchterm is defined in Rules 13a-15(f) and 15d-15(f) under theExchange Act) during the fourth fiscal quarter ended June 30, 2010 thathave materially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

**Item 9B. Other Information**

 

None.

 

**PART III**

 

Except as set forth below, the information required by Items 10, 11,12, 13 and 14 will appear in the Ethan Allen Interiors Inc. proxy statement forthe Annual Meeting of Shareholders scheduled to be held on November 16,2010 (the “Proxy Statement”).  The ProxyStatement, which will be filed pursuant to Regulation 14A under the SecuritiesExchange Act of 1934, is incorporated by reference in this Annual Reportpursuant to General Instruction G(3) of Form 10-K (other than theportions thereof not deemed to be “filed” for the purpose of Section 18 ofthe Securities Exchange Act of 1934).  Inaddition, the information set forth below is provided as required by Item 10and the listing standards of the New York Stock Exchange (“NYSE”).

 

**Item 10. Directors, Executive Officers and CorporateGovernance**

 

**Code of Ethics**

 

Wehave adopted a code of ethics that applies to our principal executive officer,principal financial officer, principal accounting officer or controller, orpersons performing similar functions. Our code of ethics can be accessed viaour website at www.ethanallen.com/governance.

 

Weintend to disclose any amendment of our Code of Ethics, or waiver of provisionthereof, applicable to our principal executive officer and/or principalfinancial officer, or persons performing similar functions, on our websitewithin 4 days of the date of such amendment or waiver.  In the case of a waiver, the nature of thewaiver, the name of the person to whom the waiver was granted, and the date ofthe waiver will also be disclosed.

 

Informationcontained on, or connected to, our website is not incorporated by referenceinto this Form 10-K and should not be considered part of this or any otherreport that we file with, or furnish to, the SEC.

 

**AuditCommittee Financial Expert**

 

OurBoard of Directors has determined that we have three “audit committee financialexperts”, as defined under Item 407(d)(5)(ii) of Regulation S-K of theSecurities Exchange Act of 1934, currently serving on our Audit Committee.  Those members of our Audit Committee who aredeemed to be audit committee financial experts are as follows:

 

JohnP. Birkelund

ClintonA. Clark

KristenGamble

 

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Allpersons identified as audit committee financial experts are independent frommanagement as defined by Item 7(d)(3), of Schedule 14A.

 

**Item 12. Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters**

 

**Equity Compensation Plan Information**

 

The following table sets forth certain information regarding our equitycompensation plans at June 30, 2010.

 
| **Plan  Category**                                              | ** ** | **Number of securities to  be issued upon exercise  of outstanding options,  warrants and rights** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation  plans (excluding  securities reflected in   first column)** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity compensation plans approved by security  holders (1)     |       | 2,336,984                                                                                          |       | $                                                                                  | 26.94      |                                                                                                                                                     | 814.217    |   |
| Equity compensation plans not approved by security  holders (2) |       | —                                                                                             |       | —                                                                             |       | —                                                                                                                                                   |       |
| Total                                                           |       | 2,336,984                                                                                          |       | $                                                                                  | 26.94      |                                                                                                                                                     | 814.217    |   |

 

----

(1)          Amount includesstock options outstanding under our 1992 Stock Option Plan (the “Plan”) as wellas nonvested shares of restricted stock and vested Stock Units which have beenprovided for under the provisions of the Plan. See Note 11 to our Consolidated Financial Statements included under Item8 of this Annual Report.

(2)          As of June 30,2010, we do not maintain any equity compensation plans which have not beenapproved by our shareholders.

 

**NYSE Certification**

 

Mr. Kathwari, Chief Executive Officer and President, has certifiedto the NYSE, pursuant to Section 303A.12 of the NYSE’s Listing CompanyManual, that he is unaware of any violation by the Company of the NYSE’scorporate governance listing standards.

 

**PART IV**

 

**Item 15. Exhibits and Financial Statement Schedules**

 

I.                                         Listing ofDocuments

 

(1)                                  *FinancialStatements*. Our Consolidated Financial Statements, includedunder Item 8 hereof, as required at June 30, 2010 and 2009, and for theyears ended June 30, 2010, 2009 and 2008 consist of the following:

 

Consolidated Balance Sheets

 

Consolidated Statements of Operations

 

Consolidated Statements of Cash Flows

 

Consolidated Statements of Shareholders’ Equity

 

Notes to Consolidated Financial Statements

 

(2)                                  *FinancialStatement Schedule.* The schedules listed in Reg. 210.5-04 have beenomitted because they are not applicable or the required information is shown inthe consolidated financial statements or notes thereto.

 

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(3)                                  The followingExhibits are filed as part of this report on Form 10-K:

 
| ** ** | ** ** | **Exhibit** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                       |
|------------|------------|-------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | **Number**  | ** ** | **Exhibit**                                                                                                                                                                                                                                                                                                                                                      |
|       |       | 3 (a)       |       | Restated  Certificate of Incorporation of the Company (incorporated by reference to  Exhibit 3(c) to the Registration Statement on Form S-1 of the  Company filed with the SEC on March 16, 1993)                                                                                                                                            |
|       |       | 3 (a)-1     |       | Certificate  of Amendment to Restated Certificate of Incorporation as of August 5,  1997 (incorporated by reference to Exhibit 3(c)-2 to the Quarterly  Report on Form 10-Q of the Company filed with the SEC on May 13,  1999)                                                                                                              |
|       |       | 3 (a)-2     |       | Second  Certificate of Amendment to Restated Certificate of Incorporation as of  March 27, 1998 (incorporated by reference to Exhibit 3(c)-3 to the  Quarterly Report on Form 10-Q of the Company filed with the SEC on  May 13, 1999)                                                                                                       |
|       |       | 3 (a)-3     |       | Third  Certificate of Amendment to Restated Certificate of Incorporation as of  April 28, 1999 (incorporated by reference to Exhibit 3(c)-4 to the  Quarterly Report on Form 10-Q of the Company filed with the SEC on  May 13, 1999)                                                                                                        |
|       |       | 3 (b)       |       | Certificate  of Designation relating to the New Convertible Preferred Stock (incorporated  by reference to the Registration Statement on Form S-1 of the Company  filed with the SEC on March 16, 1993)                                                                                                                                                |
|       |       | 3 (c)       |       | Certificate  of Designation relating to the Series C Junior Participating Preferred  Stock (incorporated by reference to Exhibit 1 to Form 8-A of the  Company filed with the SEC on July 3, 1996)                                                                                                                                           |
|       |       | 3 (c)-1     |       | Certificate  of Amendment of Certificate of Designation of Series C Junior  Participating Preferred Stock (incorporated by reference to  Exhibit 3(c)-1 to the Annual Report on Form 10-K of the Company  filed with the SEC on September 13, 2005                                                                                           |
|       |       | 3 (d)       |       | Amended  and Restated By-laws of the Company (incorporated by reference to  Exhibit 3(d) to the Registration Statement on Form S-1 of the  Company filed with the SEC on March 16, 1993)                                                                                                                                                     |
|       |       | 3 (e)       |       | Certificate  of Incorporation of Ethan Allen Global, Inc. (incorporated by reference  to Exhibit 3(e) to the Registration Statement on Form S-4 of  Ethan Allen Global, Inc. filed with the SEC on February 3, 2006)                                                                                                               |
|       |       | 3 (f)       |       | By-laws  of Ethan Allen Global, Inc. (incorporated by reference to  Exhibit 3(f) to the Registration Statement on Form S-4 of  Ethan Allen Global, Inc. filed with the SEC on February 3, 2006)                                                                                                                                    |
|       |       | 3 (g)       |       | Restated  Certificate of Incorporation of Ethan Allen Inc. (now known as, Ethan Allen  Retail, Inc.) (incorporated by reference to Exhibit 3(g) to  the Registration Statement on Form S-4 of Ethan Allen Global, Inc.  filed with the SEC on February 3, 2006)                                                                    |
|       |       | 3 (g)-1     |       | Certificate  of Amendment of Restated Certificate of Incorporation of Ethan Allen Inc.  (now known as Ethan Allen Retail, Inc.) as of June 29, 2005  (incorporated by reference to Exhibit 3(g)-1 to the Registration  Statement on Form S-4 of Ethan Allen Global, Inc. filed with the  SEC on February 3, 2006)                  |
|       |       | 3 (h)       |       | Amended  and Restated By-laws of Ethan Allen Inc. (now known as Ethan Allen  Retail, Inc.) (incorporated by reference to Exhibit 3(h) to  the Registration Statement on Form S-4 of Ethan Allen Global, Inc.  filed with the SEC on February 3, 2006)                                                                              |
|       |       | 3 (i)       |       | Certificate  of Incorporation of Ethan Allen Manufacturing Corporation (now known as Ethan  Allen Operations, Inc.) (incorporated by reference to  Exhibit 3(i) to the Registration Statement on Form S-4 of  Ethan Allen Global, Inc. filed with the SEC on February 3, 2006)                                                     |
|       |       | 3 (i)-1     |       | Certificate  of Amendment of Certificate of Incorporation of Ethan Allen Manufacturing Corporation  (now known as, Ethan Allen Operations, Inc.) as of June 29, 2005  (incorporated by reference to Exhibit 3(i)-1 to the Registration  Statement on Form S-4 of Ethan Allen Global, Inc. filed with the  SEC on February 3, 2006) |

 

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|   |   | 3 (j)    |   | By-laws  of Ethan Allen Manufacturing Corporation (now known as, Ethan Allen  Operations, Inc.) (incorporated by reference to Exhibit 3(j) to  the Registration Statement on Form S-4 of Ethan Allen Global, Inc.  filed with the SEC on February 3, 2006)                                                                   |
|--------|--------|----------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   | 3 (k)    |   | Certificate  of Formation of Ethan Allen Realty, LLC (incorporated by reference to  Exhibit 3(k) to the Registration Statement on Form S-4 of  Ethan Allen Global, Inc. filed with the SEC on February 3, 2006)                                                                                                                   |
|   |   | 3 (l)    |   | Limited  Liability Company Operating Agreement of Ethan Allen Realty, LLC  (incorporated by reference to Exhibit 3(l) to the Registration  Statement on Form S-4 of Ethan Allen Global, Inc. filed with the  SEC on February 3, 2006)                                                                                             |
|   |   | 3 (l)-1  |   | Amendment  No. 1 to Operating Agreement of Ethan Allen Realty, LLC as of  June 30, 2005 (incorporated by reference to Exhibit 3(l)-1 to the  Registration Statement on Form S-4 of Ethan Allen Global, Inc.  filed with the SEC on February 3, 2006)                                                                         |
|   |   | 3 (m)    |   | Certificate  of Incorporation of Lake Avenue Associates, Inc. (incorporated by  reference to Exhibit 3(m) to the Registration Statement on  Form S-4 of Ethan Allen Global, Inc. filed with the SEC on  February 3, 2006)                                                                                                    |
|   |   | 3 (n)    |   | By-laws  of Lake Avenue Associates, Inc. (incorporated by reference to  Exhibit 3(n) to the Registration Statement on Form S-4 of  Ethan Allen Global, Inc. filed with the SEC on February 3, 2006)                                                                                                                          |
|   |   | 3 (o)    |   | Certificate  of Incorporation of Manor House, Inc. (incorporated by reference to  Exhibit 3(o) to the Registration Statement on Form S-4 of  Ethan Allen Global, Inc. filed with the SEC on February 3, 2006)                                                                                                                |
|   |   | 3 (p)    |   | Restated  By-laws of Manor House, Inc. (incorporated by reference to  Exhibit 3(p) to the Registration Statement on Form S-4 of  Ethan Allen Global, Inc. filed with the SEC on February 3, 2006)                                                                                                                            |
|   |   | 4 (a)    |   | Rights  Agreement, dated July 26, 1996, between the Company and Harris Trust and  Savings Bank (incorporated by reference to Exhibit 10.1 to the Current  Report on Form 8-K of the Company filed with the SEC on July 3,  1996)                                                                                                       |
|   |   | 4 (a)-1  |   | Amendment  No. 1 to Rights Agreement, dated as of December 23, 2004 between  the Company and Harris Trust Savings Bank and Computershare Investor  Services, LLC (incorporated by reference to Exhibit 4(a)-1 to the Annual  Report on Form 10-K of the Company filed with the SEC on  September 13, 2005                         |
|   |   | 4 (b)    |   | Form of  outstanding 5.375% Senior Note due 2015 pursuant to Rule 144A of the  Securities Act (incorporated by reference to Exhibit A to  Exhibit 10.2 to the Current Report on Form 8-K of the Company filed  with the SEC on September 30, 2005)                                                                           |
|   |   | 4 (c)    |   | Indenture  dated September 27, 2005, by and among Ethan Allen Global, Inc.,  the Guarantors named therein, and the Initial Purchaser named therein,  relating to the Notes (incorporated by reference to Exhibit 10.2 to the  Current Report on Form 8-K of Ethan Allen Interiors Inc. filed with the  SEC on September 30, 2005) |
|   |   | 4 (d)    |   | Form of  Exchange Note (incorporated by reference to Exhibit 4(d) to the  Registration Statement on Form S-4 of Ethan Allen Global, Inc.  filed with the SEC on February 3, 2006)                                                                                                                                            |
|   |   | 10 (a)   |   | Restated  Directors Indemnification Agreement dated March 1993, among the Company  and Ethan Allen and their Directors (incorporated by reference to  Exhibit 10(c) to the Registration Statement on Form S-1 of the  Company filed with the SEC on March 16, 1993)                                                               |
|   |   | 10 (b)   |   | The  Ethan Allen Retirement Savings Plan as Amended and Restated, effective  January 1, 2006 (incorporated by reference to Exhibit 10(b)-7 to  the Quarterly Report on Form 10-Q of the Company filed with the SEC on  November 5, 2007                                                                                                |
|   |   | 10 (c)   |   | General  Electric Capital Corporation Credit Card Program Agreement dated  August 25, 1995 (incorporated by reference from  Exhibit 10(h) to the Annual Report on Form 10-K of the Company  filed with the SEC on September 21, 1995)                                                                                             |
|   |   | 10 (c)-1 |   | First  Amendment to Credit Card Program Agreement dated February 22, 2000  (incorporated by reference to Exhibit 10(h)-1 to the Annual Report on  Form 10-K of the Company filed with the SEC on September 13, 2000)                                                                                                                   |

 

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|   |   | 10 (d)    |   | Sales  Finance Agreement, dated June 25, 1999, between the Company and MBNA  America Bank, N.A. (incorporated by reference to Exhibit 10(j) to  the Annual Report on Form 10-K of the Company filed with the SEC on  September 13, 2000)                                                                                                                                                                                                                                                                                                                            |
|--------|--------|-----------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   | 10 (e)    |   | Second  Amended and Restated Private Label Consumer Credit Card Program Agreement,  dated as of July 23, 2007, by and between Ethan Allen Global, Inc.,  Ethan Allen Retail, Inc. and GE Money Bank (incorporated by reference to  Exhibit 10(e)-3 to the Quarterly Report on Form 10-Q of the Company  filed with the SEC on November 5, 2007)(confidential treatment granted  under Rule 24b-2 as to certain portions which are omitted and filed  separately with the SEC.)                                                                            |
|   |   | 10(e)-1   |   | First Amendment to Second  Amended and Restated Private Label Consumer Credit Card Program Agreement,  dated as of July 25, 2008, by and between Ethan Allen Global, Inc.,  Ethan Allen Retail, Inc. and GE Money Bank (incorporated by reference as  Exhibit 10(e)-1 to the Quarterly Report on Form 10-Q of the Company  filed with the SEC on May 10, 2010)                                                                                                                                                                                                 |
|   |   | 10(e)-2   |   | Second Amendment to Second  Amended and Restated Private Label Consumer Credit Card Program Agreement,  dated as of February 16, 2010, by and between Ethan Allen  Global, Inc., Ethan Allen Retail, Inc. and GE Money Bank (incorporated  by reference as Exhibit 10(e)-2 to the Quarterly Report on  Form 10-Q of the Company filed with the SEC on May 10, 2010)  (confidential treatment granted under Rule 24b-2 as to certain portions  which are omitted and filed separately with the SEC).                                                       |
|   |   | 10(e)-3   |   | Third Amendment to Second  Amended and Restated Private Label Consumer Credit Card Program Agreement,  dated as of June 30, 2010, by and between Ethan Allen Global, Inc.,  Ethan Allen Retail, Inc. and GE Money Bank (incorporated by reference to  Exhibit 10(e)-3 to the Annual Report on Form 10-K of the Company  filed with the SEC on August 19, 2010) (Confidential treatment under  Rule 24b-2 requested as to certain portions which are omitted and filed  separately with the SEC).                                                          |
|   |   | 10 (f)    |   | Employment  Agreement, dated As of November 13, 2007, between Mr. Kathwari and  Ethan Allen Interiors Inc. (incorporated by reference to  Exhibit 10(h) to the Current Report on Form 8-K of the Company  filed with the SEC on November 19, 2007                                                                                                                                                                                                                                                                                                              |
|   |   | 10 (g)-1  |   | Credit  Agreement, dated as of July 21, 2005, by and among Ethan Allen  Global, Inc., Ethan Allen Interiors Inc., the J.P. Morgan Chase Bank,  N.A., Citizens Bank of Massachusetts, Wachovia Bank, N.A. and certain other  lenders (incorporated by reference to Exhibit 10 (g) to Amendment  No. 4 to the Registration Statement on Form S-4 of Ethan Allen  Global, Inc. filed with the SEC on March 9, 2006) (confidential  treatment granted under Rule 24b-2 as to certain portions which are  omitted and filed separately with the SEC) |
|   |   | 10. (g)-2 |   | Credit  Agreement, dated as of May 29, 2009, among Ethan Allen  Global, Inc., Ethan Allen Interiors Inc., J.P. Morgan Chase Bank, N.A.,  and Capital One Leverage Finance Corp (confidential treatment requested as to  certain portions. Incorporated by reference to Exhibit 10(g)-2 to the  Annual Report on Form 10-K of the Company filed with the SEC on  August 24, 2009)                                                                                                                                                                                    |
|   |   | 10 (h)    |   | Amended  and Restated 1992 Stock Option Plan (incorporated by reference to  Exhibit 10(f) to the Current Report on Form 8-K of the Company  filed with the SEC on November 19, 2007)                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   | 10 (h)-1  |   | Form of  Option Agreement for Grants to Independent Directors (incorporated by  reference to Exhibit 10(h)-4 to the Annual Report on Form 10-K of  the Company filed with the SEC on September 13, 2005                                                                                                                                                                                                                                                                                                                                                                  |
|   |   | 10 (h)-2  |   | Form of  Option Agreement for Grants to Employees (incorporated by reference to  Exhibit 10(h)-5 to the Annual Report on Form 10-K of the Company  filed with the SEC on September 13, 2005                                                                                                                                                                                                                                                                                                                                                                              |

 

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|   |   | 10(h)-3 |   | Form of  Restricted Stock Agreement for Executives (incorporated by reference to  Exhibit 10(f)-1 to the Current Report on Form 10-8 of the Company  filed with the SEC on November 19, 2007                                                                                                                                                               |
|--------|--------|---------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   | 10(h)-4 |   | Form of  Restricted Stock Agreement for Directors (incorporated by reference to  Exhibit 10(f)-2 to the Current Report on Form 8-K of the Company  filed with the SEC on November 19, 2007                                                                                                                                                                 |
|   |   | 10 (i)  |   | Purchase  Agreement dated September 22, 2005, by and between Ethan Allen  Global, Inc., the Guarantors named therein, and the Initial Purchaser  named therein, relating to the Initial Notes (incorporated by reference to  Exhibit 10.1 to the Current Report on Form 8-K of the Company filed  with the SEC on September 30, 2005)                 |
|   |   | 10 (j)  |   | Registration  Rights Agreement dated September 27, 2005, by and among Ethan Allen  Global, Inc., the Guarantors named therein, and the Initial Purchaser  named therein, relating to the Notes (incorporated by reference to  Exhibit 10.3 to the Current Report on Form 8-K of Ethan Allen  Interiors Inc. filed with the SEC on September 30, 2005) |
|   |   | 12. (a) |   | Computation  of Ratio of Earnings to Fixed Charges (Incorporated by reference to  Exhibit 12.(a) to the Annual Report on Form 10-K of the  Company filed with the SEC on August 19, 2010)                                                                                                                                                                  |
|   |   | 21      |   | List  of wholly-owned subsidiaries of the Company (Incorporated by reference to  Exhibit 21 to the Annual Report on Form 10-K of the Company filed  with the SEC on August 19, 2010)                                                                                                                                                                            |
|   | *      | 23      |   | Consent  of KPMG LLP                                                                                                                                                                                                                                                                                                                                                           |
|   | *      | 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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|   |   |   |   | *  Filed herewith. |
|--------|--------|--------|--------|-------------------------|

 

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the Registrant has duly caused this Report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 
|   | ETHAN  ALLEN INTERIORS INC. |
|--------|-----------------------------|
|   | (Registrant)                |
|   |                        |
|   | By                          | /s/  M. Farooq Kathwari |
|   |                        | (M.  Farooq Kathwari) |
|   |                        | Chairman,  President and |
|   |                        | Chief  Executive Officer |
|   |                        | (Principal  Executive Officer) |
|   |                        |   |
|   | By                          | /s/  David R. Callen |
|   |                        | (David  R. Callen) |
|   |                        | Vice  President, Finance and Treasurer |
|   |                        | (Principal  Financial Officer and |
|   |                        | Principal  Accounting Officer) |

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this Report has been signed below by the following persons on behalf of theRegistrant and in the capacities and on the date indicated.

 

 
| /s/ M. Farooq Kathwari         | Chairman, President and               |
|--------------------------------|---------------------------------------|
| (M. Farooq Kathwari)           | Chief Executive Officer               |
|                           | (Principal Executive Officer)         |
|                           |                                  |
|                           |                                  |
| /s/ David R. Callen            | Vice President, Finance and Treasurer |
| (David R. Callen)              | (Principal Financial Officer and      |
|                           | Principal Accounting Officer)         |
|                           |                                  |
|                           |                                  |
| /s/ John P. Birkelund          | Director                              |
| (John P. Birkelund)            |                                  |
|                           |                                  |
|                           |                                  |
| /s/ Clinton A. Clark           | Director                              |
| (Clinton A. Clark)             |                                  |
|                           |                                  |
|                           |                                  |
| /s/ Kristin Gamble             | Director                              |
| (Kristin Gamble)               |                                  |
|                           |                                  |
|                           |                                  |
| /s/ Edward H. Meyer            | Director                              |
| (Edward H. Meyer)              |                                  |
|                           |                                  |
|                           |                                  |
| /s/Dr. James W. Schmotter | Director                              |
| (Dr. James W. Schmotter)  |                                  |
|                           |                                  |
|                           |                                  |
| /s/ Frank G. Wisner            | Director                              |
| (Frank G. Wisner)              |                                  |
|                           |                                  |
|                           |                                  |
| Date:  August 19, 2010    |                                  |

 

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