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** **

 

** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K/A**

**(Amendment No. 1)**

 

**(Mark One)**

 

| **x**                                               | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**     |
|-----------------------------------------------------|---------------------------------------------------------------------------------------------------------|
|                                                |                                                                                                    |
| **For the fiscal year ended June 30, 2009 OR** |
|                                                |                                                                                                    |
| **o**                                               | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition period from            to            **

 

**Commission file number 1-11692**

 

**Ethan Allen Interiors Inc.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                              | ** ** | **06-1275288**      |
|-------------------------------------------|------------|---------------------|
| (State or other jurisdiction of           |       | (I.R.S. Employer    |
| incorporation or organization)            |       | 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:

 

| ** **                   | ** ** | **Name of Each Exchange**          |
|------------------------------|------------|------------------------------------|
| **Title of Each Class**      | ** ** | **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)

 

IndicatebycheckmarkiftheRegistrantisawell-knownseasonedissuer,asdefinedinRule405oftheSecuritiesAct.xYesoNo

 

IndicatebycheckmarkiftheRegistrantisnotrequiredtofilereportspursuanttoSection13orSection15(d)oftheAct.oYesxNo

 

Indicate by check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the Registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. x Yes o No

 

Indicate by check mark whether the Registranthas submitted electronically and posted on its corporate Web site, if any,every Interactive Date File required to be submitted and posted pursuant to Rule 405of Regulation 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 ofdelinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,and will not be contained, to the best of Registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III ofthis Form 10-K or any amendment to this Form 10-K. o

 

Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer, a non-accelerated filer, ora smaller reporting company.  See thedefinitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of 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 Registrantis a shell company (as defined in Rule 12b-2 of the Act). o Yes x No

 

The aggregate market value of the Registrant’scommon stock, par value $.01 per share, held by non-affiliates (based upon theclosing sale price on the New York Stock Exchange) on December 31, 2008,(the last day of the Registrant’s most recently completed second fiscalquarter) was approximately $413,411,234. As of July 31, 2009, there were 28,916,929 shares of theRegistrant’s common stock, par value $.01 per share, outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE:  The Registrant’s definitive Proxy Statementfor the 2009 Annual Meeting of stockholders, which will be filed with theSecurities and Exchange Commission pursuant to Regulation 14A of the SecuritiesExchange Act of 1934, is incorporated by reference into Part III hereof.

 

 

 

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**EXPLANATORY NOTE**

 

Ethan AllenInteriors, , Inc. (the “Company”) is filing this Amendment No. 1 on Form 10-K/A(the “Form 10-K/A”) to the Company’s Annual Report on Form 10-K forthe year ended June 30, 2009 (the “Original Filing”), to correct atypographical error in the description and subtotal for total comprehensiveincome (loss) appearing in the Consolidated Statements of Shareholders’ Equityfor the year ended June 30, 2009. See the Consolidated Statements of Shareholders’ Equity appearing on page 43of the audited consolidated financial statements contained in this form 10-K/A.

 

For theconvenience of the reader, this Form 10-K/A sets forth the Original Filingin its entirety.  However, this form 10-K/Aonly amends Item 8 of part II of the Original Filing, to correct atypographical error in the description and subtotal for other comprehensiveincome (loss), and no other information in the Original Filing is amendedhereby .  In addition, Item 15 of Part IVof the Original Filing has been amended to contain currently dated consent, andcertifications from the Company’s Chief Executive Officer and Chief FinancialOfficer, and are attached to this form 10-K/A as Exhibits 23, 31.1, 31.2, 32.1and 32.2

 

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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.                | Submission of  Matters to a Vote of Security Holders                                                                | 18         |
|              |                                                                                                                |       |
| **PART II**  |                                                                                                                |
|              |                                                                                                                |       |
| 5.                | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities | 19         |
|              |                                                                                                                |       |
| 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                                                         | 37         |
|              |                                                                                                                |       |
| 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                                                                                                   | 77         |
|              |                                                                                                                |       |
| **PART III** |                                                                                                                |
|              |                                                                                                                |       |
| 10.               | Directors, Executive Officers and  Corporate Governance                                                             | 77         |
|              |                                                                                                                |       |
| 11.               | Executive Compensation                                                                                              | 77         |
|              |                                                                                                                |       |
| 12.               | Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder Matters                     | 77         |
|              |                                                                                                                |       |
| 13.               | Certain Relationships and Related  Transactions, and Director Independence                                          | 77         |
|              |                                                                                                                |       |
| 14.               | Principal Accountant Fees and Services                                                                              | 77         |
|              |                                                                                                                |       |
| **PART IV**  |                                                                                                                |
|              |                                                                                                                |       |
| 15.               | Exhibits and  Financial Statement Schedules                                                                         | 79         |
|              |                                                                                                                |       |
|              | Signatures                                                                                                          | 84         |

 

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**PART I**

 

# **Item1. 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,” “EthanAllen” or the “Company”), is a leading manufacturer and retailer of qualityhome furnishings and accessories, offering a full complement of home decoratingand design solutions through one of the country’s largest home furnishingretail networks.  In recent years, we havemade, and continue to make, considerable investment in our business in order toexpand and improve our interior design capabilities.  In order to better reflect these expandedcapabilities, we have changed the designation of our Ethan Allen retail outletsfrom “stores” to “design centers”.  TheCompany was founded in 1932 and has sold products under the Ethan Allen brandname 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 business strategy.  The elements of this strategy, each of whichis integral to our solutions-based philosophy, include (i) our verticallyintegrated operating structure, (ii) our products and related marketinginitiatives, (iii) our retail design center network, (iv) our people,and (v) our numerous customer service offerings.

 

**Operating Segments**

 

Our operations are classified into two operating segments: 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.  For certain financial information regardingour operating segments, see Note 16 to the Consolidated Financial Statementsincluded under Item 8 of this Annual Report and incorporated herein by reference.

 

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, includingthose operated by Ethan Allen.  Wholesaleprofitability includes (i) the wholesale gross margin, which representsthe difference between the wholesale sales price and the cost associated withmanufacturing and/or sourcing the related product, and (ii) otheroperating costs associated with wholesale segment activities.

 

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

 

While the manner in which our home furnishings and accessories aremarketed and sold is consistent, the nature of the underlying recorded sales(i.e. wholesale versus retail) and the specific services that each operatingsegment provides (i.e. wholesale manufacturing, sourcing, and distributionversus retail selling) are different. Within the wholesale segment, we maintain revenue information accordingto each respective product line (i.e. case goods, upholstery, or homeaccessories and other).  Sales of casegood items include, but are not limited to, 

 

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beds, dressers, armoires, tables, chairs, buffets, entertainment units,home office furniture, and wood accents. Sales of upholstery home furnishing items include sleepers, recliners,chairs, sofas, loveseats, cut fabrics and leather.  Skilled craftsmen cut, sew and upholstercustom-designed upholstery items which are available in a variety of frame andfabric options.  Home accessory and otheritems include window treatments, wall decor, lighting, clocks, bedding andbedspreads, decorative accessories, area rugs, and home and garden furnishings.

 

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.

 

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.

 

In fiscal 2009, wholesale sales to independent retailers and retailsales of Company-operated design centers accounted for approximately 25% and75%, respectively, of our c consolidated net sales.

 

***WholesaleSegment Overview:***

Wholesale netsales for each of the last three fiscal years are summarized below (inmillions):

 
| ** **          | ** ** | **Fiscal Year Ended June 30,** | ** ** |
|---------------------|------------|-------------------------------------|------------|
| ** **          | ** ** | **2009**                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Wholesale net sales |       | $                                   | 403.4      |   | $ | 616.2 |   | $ | 656.0 |   |
|                     |            |                                     |            |  |  |  |  |  |  |  |

 

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

 
| ** **                 | ** ** | **Fiscal Year Ended June 30,** | ** ** |
|----------------------------|------------|-------------------------------------|------------|
| ** **                 | ** ** | **2009**                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Case Goods                 |       | 41                                  | %          | 43 | % | 44 | % |
| Upholstered Products       |       | 41                                  |       | 40 |   | 38 |   |
| Home Accessories and Other |       | 18                                  |       | 17 |   | 18 |   |
|                       |       | 100                                 | %          | 100 | % | 100 | % |

 

During fiscal2009, we operated as many as ten manufacturing facilities, including four casegood plants (two of which include separate sawmill operations), four upholsteryplants and one home accessory plant, located within the United States and onecut and sew operation in Mexico.  Asannounced during the fiscal year, we are consolidating two upholstery plantsinto existing operations and one case goods plant including its sawmilloperation.  By the end of our firstfiscal quarter of 2010, we plan to operate three case goods plants (includingone sawmill), three upholstery plants (two upholstery plants on our Maiden,North Carolina campus and one cut and sew plant in Mexico) and one homeaccessory plant. We also source selected case good, upholstery, and homeaccessory items from third-party suppliers located both domestically andoutside the United States.

 

As of June 30,2009, we maintained a wholesale backlog of $20.6 million (as compared to $33.0million as of June 30, 2008) which is anticipated to be serviced in thefirst quarter of fiscal 2010.  Backlog ata point in time is a result, primarily, of net orders booked in prior periods,manufacturing schedules, timing associated with the receipt of sourced product,and the timing and volume of wholesale shipments. Because orders may berescheduled and/or canceled, the measure of backlog at a point in time may notnecessarily be indicative of future sales performance.

 

For the twelvemonths ended June 30, 2009, net orders booked at the wholesale level,which includes orders generated by independently operated and Company-operateddesign centers, totaled $398.5 million as compared to $617.1 million for thetwelve months ended June 30, 2008. In any given period, net orders booked may be 

 

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impacted by thetiming of floor sample orders received in connection with new productintroductions.  New product offerings maybe made available to the retail network at any time during the year, includingin connection with our periodic retailer conferences.

 

***RetailSegment Overview****:*

Retail net salesfor each of the last three fiscal years are summarized below (in millions):

 
| ** **       | ** ** | **Fiscal Year Ended June 30,** | ** ** |
|------------------|------------|-------------------------------------|------------|
| ** **       | ** ** | **2009**                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Retail net sales |       | $                                   | 508.6      |   | $ | 724.6 |   | $ | 698.6 |   |
|                  |            |                                     |            |  |  |  |  |  |  |  |

 

We sell ourproducts through a dedicated network of 293 retail design centers.  As of June 30, 2009, we operated 159design centers and independent retailers operated 134 design centers (ascompared to 159 and 136, respectively, at the end of the prior fiscal year).The ten largest independent retailers own a total of 62 design centers, which,based on net orders booked, accounted for approximately 11% of total net salesin fiscal 2009.

 

During fiscal 2009we acquired four design centers from independent retailers, opened six newdesign centers (of which three were relocations), and closed seven designcenters.  In addition, during the pastyear, independent retailers opened fourteen new design centers (of which threewere relocations), and closed nine design centers.  In the past five years, we and ourindependent retailers have, on a combined basis, opened 107 new design centers(of which 44 were relocations), and closed 81. The geographic distribution of all retail design center locations isincluded under Item 2 of Part I of this Annual Report.

 

We pursue furtherexpansion of the Company-operated retail business by opening new designcenters, relocating existing design centers and, when appropriate, acquiringdesign centers from independent retailers. In addition, we continue to promotethe growth and expansion of our independent retailers through ongoing supportin the areas of market analysis, site selection, and business development. Allretailers are required to enter into license agreements with us which (i) authorizethe use of certain Ethan Allen service marks and (ii) require adherence tocertain standards of operation, including a requirement to fulfill relatedwarranty service agreements.  We are notsubject to any territorial or exclusive retailer agreements in North America.

 

**Products**

 

Our strategy has been to position Ethan Allen as a preferred brand withsuperior quality and value while, at the same time, providing consumers with acomprehensive, one-stop shopping solution for their home furnishing needs.  In carrying out our strategy, we continue toexpand our reach to a broader consumer base through a diverse selection ofattractively priced products, many of which have been designed to complementone another, reflecting the recent trend toward more eclectic homedecorating.  Recent productintroductions, as well as increased styles and fabric selections within our customupholstery line, new finishes for, and redesigns of, previous productintroductions, and expanded product offerings to accommodate today’s homedecorating trends, are serving to redefine Ethan Allen, positioning us as aleader in style.

 

In an effort tomore effectively position ourselves as a provider of interior design solutions,we introduced a merchandising strategy which involves the grouping of ourproduct offerings, previously categorized by collection, into seven distinctproduct “lifestyles”, each reflecting the diversity and eclecticism that webelieve represents the best in American design. In accordance with this merchandising strategy, new products aredesigned and developed to reflect unique elements applicable to one or more ofthe following lifestyles: Country House; Estate; Glamour; Global; Loft; Metro;and Villa.

 

All of our casegoods, upholstered products, and home accessories are styled with distinctdesign characteristics. Home accessories play an important role in ourmarketing strategy as they enable us to offer the consumer the 

 

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convenience ofone-stop shopping by creating a comprehensive home furnishing solution. Theinterior of our design centers is designed to facilitate display of our productofferings in complete room settings in order to project the category lifestyle.

 

We continuouslymonitor changes in home design trends through attendance at internationalindustry events and fashion shows, internal market research, and regularcommunication with our retailers and design center design consultants whoprovide valuable input on consumer tendencies. Observations and input gathered as a result of our efforts enable us toincorporate appropriate style details into our products thereby allowing us, webelieve, to react quickly to changing consumer tastes. For example, since 2005,approximately 70% of our current complement of product offerings is new.  Much of the balance has been refined 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.

 

In fiscal 2005, wealso introduced an innovative pricing program, eliminating periodic sale eventsin lieu of a nation-wide uniform everyday best price on all of our productofferings.  We believe that this approachdemonstrates our commitment to differentiating ourselves through strategiesfocused on customer credibility and excellence in service. In addition,everyday best pricing provided us the opportunity to critically examine allfacets of our business, making substantive changes, where necessary, in orderto more effectively carry out our solutions-based approach to homedecorating.  In response to therecession, in the latter part of fiscal 2009 the Company offered specialsavings mostly on select initiatives including new product introductions.

 

**Product Sourcing Activities**

 

We are one of thelargest manufacturers of home furnishings in the United States, manufacturingand/or assembling approximately 65% of our products within six manufacturingfacilities, one of which includes separate sawmill operations. Our facilitiesare located in the Northeast and Southeast regions of the United States and inMexico where they are close to sources of raw materials and skilledcraftsmen.  The balance of our productionis outsourced according to our own internally-developed design specifications,through third-party suppliers, most of which are located outside the UnitedStates. These suppliers, primarily in Asia, have been carefully selected andgenerally have supplied us for many years.  We believe that continued investment in ourmanufacturing facilities, combined with an appropriate level of outsourcingthrough both foreign and domestic suppliers, will accommodate future salesgrowth and allow us to maintain an appropriate degree of control over cost,quality and service to our customers.

 

We also take pridein our “green” initiatives which include the use of responsibly harvestedAppalachian woods, water based finishes, organic textiles and recycledmaterials.

 

**RawMaterials and Other Suppliers**

 

The most importantraw materials we use in furniture manufacturing are lumber, veneers, plywood,hardware, glue, finishing materials, glass, mirrored glass, laminates, fabrics,foam, and filling material.  The varioustypes of wood used in our products include cherry, ash, oak, maple, prima vera,mahogany, birch and pine, substantially all of which are purchaseddomestically.

 

Fabrics and otherraw 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.

 

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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.

 

We enter intostandard purchase agreements with certain foreign and domestic suppliers tosource selected case good, upholstery, and home accessory items.  The terms of these arrangements are customaryfor the industry and do not contain any long-term contractual obligations onour behalf.  We believe we maintain goodrelationships with our suppliers.

 

**Distributionand Logistics**

 

Within thewholesale segment, we warehouse and distribute our products primarily through anational network of four primary distribution centers (three of which areowned) strategically located throughout the United States. These distributioncenters hold finished product received from our manufacturing facilities andour third-party suppliers, for shipment to retail design centers and retailservice centers.  From time to time, wemay also rent temporary warehouse space and/or utilize third-party logisticsservice providers to accommodate our additional storage needs.  We stock selected case goods, upholstery andaccessories to provide for quick delivery of in-stock items and to allow formore efficient production runs.

 

Wholesaleshipments are made utilizing our own fleet of trucks and trailers or throughsubcontracting agreements with independent carriers.  Approximately 45% of our fleet (trucks andtrailers) is leased under operating lease agreements with terms ranging fromone to 72 months.

 

Our policy is tosell our products at the same delivered cost to all Company-operated andindependently operated design centers nationwide, regardless of their shippingpoint. The adoption of this policy has created pricing credibility with ourcustomers and provided our retail network the opportunity to achieve moreconsistent margins as fluctuations attributable to the cost of shipping havebeen eliminated.  Further, this policyhas eliminated the need for our independent retailers to carry significantamounts of inventory in their own warehouses. As a result, we obtain more accurate information regarding productdemand in order to better plan production runs and manage inventory levels.

 

Retail servicecenters are operated by the Company and the independent retailers to prepareproducts for delivery into clients’ homes. The Company-operated service centershave been made more efficient and enabled us to reduce the total number from 50at the beginning of fiscal 2008 to 26 at the end of fiscal 2009. We continue toevaluate the entire logistics and distribution model to further streamlinethese operations.

 

**MarketingPrograms**

 

We believe thatour ability to create high-quality marketing programs and coordinateadvertising efforts for Ethan Allen design centers, including, from time totime, coordination of local market advertising, provides a competitiveadvantage over other home furnishing manufacturers and retailers.  With a dedicated network of about 300 retaildesign centers taking advantage of such internally-developed marketing efforts,we believe we are better positioned to fulfill our brand promise on a moreconsistent basis.

 

The objectives ofour marketing campaign are to (i) communicate our position as both aleader in style and a full-service provider of home decorating and designsolutions, and (ii) drive traffic into the retail design centernetwork.  In support of these objectives,several forms of media are utilized, including television (both national andlocal), direct mail, newspapers, magazines, radio, and our internet website.  We also conduct a national email marketingcampaign which serves to distribute electronic newsletters containinginspirational interior design ideas to a growing database of consumers.

 

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Our nationaltelevision and print advertising campaigns are designed to capitalize on ourexisting brand equity and maintain top-of-mind awareness of the breadth of ourproduct and service offerings.  With thisis mind, our in-house team of advertising specialists has developed what webelieve is the most cohesive national advertising campaign in the homefurnishings industry.  Coordinated localtelevision and print, to the extent these media are utilized, serve to supportour national programs.

 

The Ethan Allendirect mail magazine, which brands our product lifestyles and communicates thebreadth of our services, is one of our most important marketing tools.  We publish and sell the magazines to bothCompany-operated and independently operated design centers, which, withdemographic information collected through independent market research, are ableto target potential customers.  Given theimportance of this advertising medium, direct mail marketing lists continue tobe refined in order to target those consumers that are most likely to purchase,with the objective of improving our return on direct mail expenditures.  Approximately 12 million copies of our directmail magazine were distributed to consumers during fiscal 2009.

 

Our televisionadvertising and direct mail efforts are supported by strong print and radiocampaigns in various markets.  Duringfiscal 2009, we also updated our 200-page “Ethan Allen Style” book.  This publication, which includes a catalogueof our home furnishings and accessories, projects our seven product lifestylesto our clients and helps customers identify their own personal style using ourproduct offerings. We believe this publication represents one of the mostcomprehensive and effective home decorating resources in the home furnishingsindustry.

 

In 2009, theCompany launched the all-new ethanallen.com website which combines personalservice and technology.  The new state-of-the-art website provides a newway to shop for Ethan Allen and is designed to inspire visitors with videos,feature stories, design and style solutions, new photography, and Ethan Allen’sportfolio for livable design—the Seven Lifestyles.  It offers a new interactivedesign tool called *My Projects*that allows site visitors to create idea boards and room plans and get feedbackonline from a design consultant at a local design center.  The website’s *Inspire* section includes editorial features, new productstories, design trend information, decorating solutions, and a collection ofcreative films and TV clips showcasing Ethan Allen’s Lifestyles and looks. The *As Seen In* column shows visitors how Ethan Allen productshave influenced style around the globe.  Ethan Allen’s direct mailmagazines are viewable online with full browsing and shopping capabilities. Inthe *Design* section, visitors can explore theSeven Lifestyles in depth and after finding their own style with our stylequiz, shop the furnishings featured in the fully designed rooms.  For thefirst time, visitors to ethanallen.com can now access nearly all of theCompany’s more than 3,000 products online. The new ethanallen.com receivedrecognition at the 2008 IAC Awards (Internet Advertising Committee) as “outstandingwebsite”.

 

We have also developed an extranet website which links the retaildesign centers with consumer information captured on-line, such as customerrequests for design assistance and copies of our direct mail magazine. Thismedium has become the primary source of communications within our retailnetwork providing a variety of information, including a Company-wide daily newsflash, downloads of current advertising materials, prototype design centerdisplay floor plans and detailed product information.

 

**RetailDesign Center Network**

 

Ethan Allen designcenters 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.  Atthe present time, our design centers average approximately 16,000 square feetin size.  While the footprint for most ofour retail network is similar, our design centers currently range in size fromapproximately 3,000 square feet to 35,000 square feet.

 

Wemaximize uniformity of presentation throughout the retail design center networkthrough a comprehensive set of standards. These standards assist each design center in presenting a high qualityimage and offer retail customers consistent levels of product selection andservice. A uniform design centerimage is conveyed through 

 

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our ongoingprogram to model all retail design centers with similar and consistent exteriorfacades and interior layouts.  Thisprogram is carried out at all design centers, including those that areindependently operated.

 

We provide displayplanning assistance to all Company-operated design centers and independentretailers to support them in updating the interior projection and to maintain aconsistent image.  We have developed astandard interior design format for our retail network which, through the useof focused lifestyle settings to display our products and information displaysto educate consumers, has positioned Ethan Allen as a leader in homefurnishings retailing.

 

We havestrengthened the retail division with many initiatives, including the openingof new and relocated design centers in desirable locations, introduction ofLifestyle presentations and floor plans, strengthening of the professionalismof our designers through training and a team approach, and the consolidation ofcertain design centers and service centers. The bulk of this effort wascompleted by the end of fiscal 2008, but continued in fiscal 2009 with six newCompany-operated design centers during the year including relocations and sevenin underperforming markets closed. We consolidated 16 Company-operated retailservice centers into larger service centers in fiscal 2008 and another elevenin fiscal 2009. We also opened three Company-operated service centers in fiscal2009.  This effort continues to reducethe retail logistics infrastructure needed to provide “white glove” deliveryservice to our customers.

 

**People**

 

At June 30,2009, we had approximately 4,300 employees (“associates”), less than onepercent of whom are represented by unions. These collective bargaining agreements expire at various times withinthe next two years.  We expect nosignificant changes in our relations with these unions and believe we maintaingood relationships with our employees.

 

The retailnetwork, which includes both Company-operated and independently operated designcenters, is staffed with a sales force of design consultants and serviceprofessionals who operate in teams to provide customers with an effective homedecorating solution at no additional charge. Our associates receive appropriate training with respect to thedistinctive design and quality features inherent in each of our products andprograms, allowing them to more effectively communicate the elements of styleand value that serve to differentiate us from the competition. As such, webelieve our design consultants, and the complimentary service they provide,create a distinct competitive advantage over other home furnishing retailers.

 

We have madeconsiderable investment within the retail network to strengthen the level ofservice, professionalism, interior design competence, efficiency, andeffectiveness of retail design center personnel. The implementation of the“team” concept is the latest phase of that progression, which resulted in thedevelopment of over 280 interior design teams within the Company designcenters. We believe that with this structure, along with the emphasis in ourmessaging to clients that “we can help as little or as much as you like”, aswell as offering the benefit of making appointments with our designprofessionals, we continue to improve the customer service experience.

 

We recognize theimportance of our retail design center network to our long-term success.Accordingly, we believe we (i) have established strong management teamswithin Company-operated design centers and (ii) continue to work closely withour independent retailers in order to assist them in strengthening theirteams.  With this in mind, we make ourservices available to every design center, whether independently operated orCompany-operated, in support of their marketing efforts, including coordinatedadvertising, merchandising and display programs, and extensive trainingseminars and educational materials.  Webelieve that the development of design teams, design consultants, service anddelivery personnel, and retailers is important for the growth of our business.As a result, we have committed to make available a comprehensive retailtraining program which is intended to increase the customer servicecapabilities of each individual.

 

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**CustomerService Offerings**

 

We offer numerouscustomer service programs, each of which has been developed and introduced toconsumers in an effort to make their shopping experience easier and moreenjoyable.

 

***GiftCard***

This program****allows customers to purchase, through our website or at anyparticipating retail design center, gift cards which can be redeemed for any ofour products or services.

 

***Rewards***

In celebration ofthe new website, the Company recently launched its “Become a Member”campaign.  Members who are eligible receive 500 reward points.  Eachpoint is redeemable toward future qualifying purchases for up to the lesser of$500 or 5% of the total qualifying purchase price. Shoppers can redeem theirpoints both in Design Centers or online, through a limited time.

 

***On-LineRoom Planning***

We offer, via ourwebsite, an interactive on-line room planning resource which serves to furtherassist consumers with their home decorating needs. Through the use of thisweb-based tool, customers can determine which of our product offerings best fittheir particular needs based on their own individual home floor plan.

 

***EthanAllen Consumer Credit Programs***

The Ethan AllenFinance Plus program offers consumers (clients) a menu of three customfinancing options through the use of just one account.  Clients can choose between (1) “TermChoice” which offers fixed monthly payments the customer chooses from 12 to 60months at an interest rate from 3.99% to 9.99% per annum, (2) “No Payment/ Deferred Interest” which offers clients a way to borrow interest free forthree or six months with no monthly payments. If the purchase is not paid bythe due date, interest is charged from the date of purchase at a fixed interestrate of 24.99% per annum, and (3) “Ethan Allen Prime” which offers thelowest minimum monthly payment plan including no payments the first threemonths; interest is accrued at a rate that matches the current prime rate.  All plans provide credit lines from $1,000 to$20,000, or greater, if the customer qualifies. Financing offered is administered by a third-party financial institutionand is granted to our customers 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**

 

In recent years,the home furnishings industry has faced numerous challenges, not the least ofwhich is an influx of low-priced competition from overseas.  As a result, we believe a trend towardproduct commoditization has developed. In fiscal 2009, the economic recession resulted in many small furnitureretailers going out of business and other well-established competitorsresorting to heavy discounts to liquidate inventory. Instead of following thistrend, we differentiate ourselves as a preferred brand by adhering to abusiness strategy focused on providing (i) high-quality, well designed andoften custom handmade products at good value, (ii) a comprehensivecomplement of home furnishing design solutions, including our complimentarydesign service, and (iii) excellence in customer service. We consider ourvertical integration a significant competitive advantage in the currentenvironment 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 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.

 

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We believe thehome furnishings industry competes primarily on the basis of product stylingand quality, personal service, prompt delivery, product availability andprice.  We further believe that weeffectively compete on the basis of each of these factors and that, morespecifically, our retail format, our award winning website, and complimentarydesign service create a distinct competitive advantage, further supporting ourmission of providing consumers with a complete home decorating and designsolution.  Our objective is to continueto develop and strengthen our retail network by (i) expanding theCompany-operated retail business through the relocation of existing designcenters, opening of new design centers, and, when appropriate, acquiring designcenters from, or selling design centers to, independent retailers, and (ii) obtainingand retaining independent retailers, encouraging such retailers to expand theirbusiness through the opening or relocation of new design centers with theobjective of increasing the volume of their sales.

 

**Trademarks**

 

We currently hold,or have registration applications pending for, numerous trademarks, servicemarks and design patents for the Ethan Allen name, logos and designs in a broadrange of classes for both products and services in the United States and inmany foreign countries. In addition, we have registered, or have applicationspending for, many of our major collection names as well as certain of ourslogans utilized in connection with promoting brand awareness, retail sales andother services.  We view such trade andservice marks as valuable assets and have an ongoing program to diligentlymonitor and defend, through appropriate action, against their unauthorized use.

 

**AvailableInformation**

 

We make available, free of charge via our website, allAnnual Reports on Form 10-K, Quarterly Reports on Form 10-Q, CurrentReports on Form 8-K and other information filed with, or furnished to, theSecurities and Exchange Commission (the “SEC” or the “Commission”), including amendmentsto such reports. This information is available at www.ethanallen.com/investorsas soon as reasonably practicable after it is electronically filed with, orfurnished to, the SEC.  In addition, theSEC maintains a website that contains reports, proxy and informationstatements, and other information regarding companies that file electronicallywith the Commission.  This information isavailable at www.sec.gov.

 

In addition, charters of all committees of our Boardof Directors, as well as our Corporate Governance guidelines, are available onour website at www.ethanallen.com/governance or, upon written request, inprinted hardcopy form. Written requests should be sent to Office of theSecretary, Ethan Allen Interiors Inc., Ethan Allen Drive, Danbury, Connecticut06811.

 

# **Item 1A.  Risk Factors**

# ** **

*The following information describes certainsignificant risks and uncertainties inherent in our business that should becarefully considered, along with other information contained elsewhere in thisreport and in other filings, when making an investment decision with respect tous.   If one or more of these risksactually occurs, the impact on our business, including our financial condition,results of operations, and cash flows could be adverse.*

 

***Aprolonged economic downturn may continue to materially adversely affect ourbusiness.***

 

Our business andresults of operations are affected by international, national and regionaleconomic conditions.  The United Statesand many other international economies have entered a recession. Our primarycustomer base, direct or indirect, is composed of individual consumers.  Continued weakness 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 

 

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downturncontinues, or worsens, our current and potential customers may be inclined tofurther delay their purchases.  Inaddition, further tightening of credit markets may restrict our customers’ability and willingness to make purchases.

 

***Accessto consumer credit could be interrupted and reduce sales and profitability.***

 

Our ability tocontinue to access consumer credit for our clients could be negatively affectedby conditions outside our control. Given the difficult capital markets, thereis a risk that, though we have agreements that do not expire until July 2012,our business partner which issues our private label credit card program, maynot be able to fulfill their obligations under that agreement.

 

***Wemay be unable to obtain sufficient external funding to finance our operationsand growth.***

 

Historically, wehave relied upon our cash from operations to fund our operations and growth. Aswe operate and expand our business, we may rely on external funding sources,including the proceeds from the issuance of debt or the $40 millionrevolving bank line of credit (expandable to $60 million) under our existingcredit facility. Any unexpected reduction in cash flow from operations couldincrease our external funding requirements to levels above those currentlyavailable. If our Standard & Poor’s credit rating remains belowinvestment grade through March 2010, the issuer of our private labelcredit cards may exercise a right to demand up to $12 million in letters ofcredit which would reduce the credit available for borrowings from the $27.5 million remainingavailable at June 30, 2009. If the totalremaining availability of the revolver is below $17.5 million, a lien by thebanks would be imposed on the Company’s intellectual property. If our creditratings were lowered further, the Company’s access to debt (including itsability to expand the current revolver from $40 million to up to $60 million)could be negatively impacted. There can be no assurance that we will notexperience unexpected cash flow shortfalls in the future or that any increasein external funding required by such shortfalls will be available.

 

***Continuedoperating losses could reduce our liquidity and impact our dividend policy.***

 

Historically, wehave relied on our cash from operations to fund our operations and the paymentof cash dividends.  If the Companycontinues to experience operating losses we may not be able to fund a shortfallfrom operations and would require external funding.  Due to recent changes in the capital markets,some financing instruments used by the Company in the past are currently notavailable to the Company. We cannot assure that additional sources of financingwould be available to the Company on commercially favorable terms should theCompany’s capital requirements exceed cash available from operations andexisting cash and cash equivalents.  Insuch circumstances the Company may further reduce its quarterly dividends.

 

***Additionalimpairment charges could reduce our profitability.***

 

We havesignificant long-lived tangible and intangible assets recorded on our balancesheets.  If our operating resultscontinue to decline, we may incur additional impairment charges in the future,which could have a material impact on our financial results.  Although any such impairment charge would bea non-cash expense, it could materially increase our expenses and reduce ourprofitability in the period recorded. We will continue to evaluate therecoverability of the carrying amount of our long-lived tangible and intangibleassets on an ongoing basis.  There can beno assurance that the outcome of such future reviews will not result insubstantial impairment charges. Impairment assessment inherently involves judgments as to assumptionsabout expected future cash flows and the impact of market conditions on thoseassumptions.  Future events and changingmarket conditions may impact our assumptions as to prices, costs or otherfactors that may result in changes in our estimates of future cash flows.  Although we believe the assumptions we use intesting for impairment are reasonable, significant changes in any of ourassumptions could produce a significantly different result.

 

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***We******face changes in global and local economicconditions that may adversely affect consumer demand and spending, ourmanufacturing operations or sources of merchandise.***

 

Historically, thehome 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.

 

We import aportion of our merchandise from foreign countries. As a result, our costs maybe increased by events affecting international commerce and businesses locatedoutside the United States, including changes in international trade, centralbank actions, changes in the relationship of the U.S. dollar versus othercurrencies, and other governmental policies of the U.S. and the countries fromwhich we import a portion of our merchandise. The inability to import productsfrom certain foreign countries or the imposition of significant tariffs couldhave a material adverse effect on our results of operations.

 

***Competitionfrom overseas manufacturers continues to increase and may adversely affect ourbusiness, operating results or financial condition.***

 

Our wholesalebusiness segment is involved in the development of our brand, which encompassesthe design, manufacture, sourcing, sales and distribution of our homefurnishings products, and competes with other U.S. and foreignmanufacturers.  Our retail businesssegment sells home furnishings to consumers through a network ofCompany-operated design centers, and competes against a diverse group ofretailers ranging from specialty stores to traditional furniture and departmentstores, any of which may operate locally, regionally and nationally.  We also compete with these and otherretailers for appropriate retail locations as well as for qualified designconsultants and management personnel. Such competition could adversely affectour 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 in recent years has created over-capacity for many U.S. manufacturers,including us, which has led to industry-wide plant consolidation. In addition,because many foreign manufacturers are able to maintain substantially lowerproduction costs, including the cost of labor and overhead, imported productmay be capable of being sold at a lower price to consumers, which, in turn,could lead to some measure of further industry-wide price deflation.

 

We cannot provideassurance that we will be able to establish or maintain relationships withcertain manufacturers, whether foreign or domestic, to supply us with selectedcase goods, upholstery and home accessory items to enable us to maintain ourcompetitive advantage. In addition, the recent emergence of foreign manufacturershas served to broaden the competitive landscape. Some of these competitorsproduce furniture types not manufactured by us and may have greater financialand other resources available to them. This competition could adversely affectour future financial performance.

 

***Failureto successfully anticipate or respond to changes in consumer tastes and trendsin a timely manner could adversely impact our business, operating results andfinancial condition.***

 

Sales of ourproducts are dependent upon consumer acceptance of our product designs, styles,quality and price. We continuously monitor changes in home design trendsthrough attendance at international industry events and fashion shows, internalmarketing research, and regular communication with our retailers and designcenter design consultants who provide valuable input on consumer tendencies.** **However, as with allretailers, our 

 

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business issusceptible to changes in consumer tastes and trends.  Such tastes and trends can change rapidly andany delay or failure to anticipate or respond to changing consumer tastes andtrends in a timely manner could adversely impact our business, operatingresults and financial condition.

 

***Theconsolidation of manufacturing and logistics operations into fewer sites mayincrease the exposure to business disruption and could result in highertransportation costs.***

 

The Company hasreduced the number of redundant manufacturing sites in both our case goods andupholstery operations. Our upholstery operations consist of two upholsteryplants on our Maiden, North Carolina campus supported in part by one cut andsew plant in Mexico. If any of these upholstery manufacturing sites experiencesignificant business interruption, our ability to manufacture products timelywould likely be impacted. Our plants require various raw materials andcommodities such as logs and lumber for our case goods plants and foam, springsand engineered hardwood board for our upholstery plants. While we have longstanding relationships with multiple outside suppliers of our raw materials andcommodities, there can be no assurance of their ability to fulfill our supply needson a timely basis. The consolidation to fewer retail logistics operations hasresulted in longer distances for delivery and could result in higher costs totransport products if fuel costs increase significantly.

 

***Ourcurrent and former manufacturing and retail operations are subject toincreasingly stringent environmental, health and safety requirements.***

 

We use andgenerate hazardous substances in our manufacturing and retail operations. Inaddition, both the manufacturing properties on which we currently operate andthose on which we have ceased operations are and have been used for industrialpurposes. Our manufacturing operations and, to a lesser extent, our retailoperations involve risk of personal injury or death. We are subject toincreasingly stringent environmental, health and safety laws and regulationsrelating to our current and former properties and our current operations. Theselaws and regulations provide for substantial fines and criminal sanctions forviolations and sometimes require the installation of costly pollution controlor safety equipment or costly changes in operations to limit pollution ordecrease the likelihood of injuries. In addition, we may become subject topotentially material liabilities for the investigation and cleanup ofcontaminated properties and to claims alleging personal injury or propertydamage resulting from exposure to or releases of hazardous substances orpersonal injury as a result of an unsafe workplace.

 

We have beenidentified as a potentially responsible party in connection with one site thatis currently listed, or proposed for inclusion, on the National Priorities Listunder the Comprehensive Environmental Response, Compensation and Liability Actof 1980, as amended, or its state counterpart. In addition, noncompliance with, or stricter enforcement of, existinglaws and regulations, adoption of more stringent new laws and regulations,discovery of previously unknown contamination or imposition of new or increasedrequirements could require us to incur costs or become the basis of new orincreased liabilities that could be material.

 

***Fluctuationsin the price, availability and quality of raw materials could result inincreased costs or cause production delays which might result in a decline insales, either of which could adversely impact our earnings.***

 

We use varioustypes of wood, foam, fibers, fabrics, leathers, and other raw materials inmanufacturing our furniture. Certain of our raw materials, including fabrics,are purchased both outside the United States and domestically. Fluctuations inthe price, availability and quality of raw materials could result in increasedcosts or a delay in manufacturing our products, which in turn could result in adelay in delivering products to our customers. For example, lumber pricesfluctuate over time based on factors such as weather and demand, which in turn,impact availability. Production delays or upward trends in raw material pricescould result in lower sales or margins, thereby adversely impacting our earnings.

 

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In addition,certain suppliers may require extensive advance notice of our requirements inorder to produce products in the quantities we desire. This long lead time mayrequire us to place orders far in advance of the time when certain productswill be offered for sale, thereby exposing us to risks relating to shifts inconsumer demand and trends, and any further downturn in the U.S. economy.

 

***Ourbusiness is sensitive to increasing labor costs, competitive labor markets, ourcontinued ability to retain high-quality personnel and risks of work stoppages.***

 

The market forqualified employees and personnel in the retail and manufacturing industries ishighly competitive. Our success depends upon our ability to attract, retain andmotivate qualified craftsmen, management, marketing and sales personnel andupon the continued contributions of these individuals. We cannot provideassurance that we will be successful in attracting and retaining qualifiedpersonnel. A shortage of qualified personnel may require us to enhance our wageand benefits package in order to compete effectively in the hiring andretention of qualified employees.  Ourlabor costs may continue to increase and such increases may not be recovered.In addition, some of our employees are covered by collective bargainingagreements with local labor unions. Although we do not anticipate anydifficulty renegotiating these contracts as they expire, a labor-related stoppage bythese unionized employees could adversely affect our business and results ofoperations. The loss of the services of key personnel or our failure to attractadditional qualified personnel could have a material adverse effect on ourbusiness, operating results and financial condition.

 

***Oursuccess depends upon our brand, marketing and advertising efforts and pricingstrategies, and if we are not able to maintain and enhance our brand, or if weare not successful in these other efforts, our business and operating resultscould be adversely affected.***

 

Maintaining andenhancing our brand is critical to our ability to expand our base of customersand may require us to make substantial investments. Our advertising campaignutilizes television, direct mail, newspapers, magazines and radio to maintainand enhance our existing brand equity. We cannot provide assurance that ourmarketing, advertising and other efforts to promote and maintain awareness ofour brand will not require us to incur substantial costs. If these efforts areunsuccessful or we incur substantial costs in connection with these efforts,our business, operating results and financial condition could be adverselyaffected.

 

***We maynot be able to maintain our current design center locations at current costs.We may also fail to successfully select and secure design center locations.***

 

Our design centersare typically located in busy urban settings as freestanding destinations or aspart of suburban strip malls, depending upon the real estate opportunities in aparticular market. Our business competes with other retailers and as a result,our success may be affected by our ability to renew current design centerleases and to select and secure appropriate retail locations for existing andfuture design centers.

 

***Wedepend on key personnel and could be affected by the loss of their services***.

 

The success of ourbusiness depends upon the services of certain senior executives, and in particular,the services of M. Farooq Kathwari, Chairman of the Board, President and ChiefExecutive Officer, who is the only one of our senior executives who operatesunder a written employment agreement. The loss of any such person or other keypersonnel could have a material adverse effect on our business and results ofoperations.

 

***Ourresults of operations for any quarter are not necessarily indicative of ourresults of operations for a full year.***

 

Sales of furnitureand other home furnishing products fluctuate from quarter to quarter due tosuch factors as changes in global and regional economic conditions, changes incompetitive conditions, changes in production schedules in response to seasonalchanges in energy costs and weather conditions, and changes in consumer orderpatterns. From time to time, we have experienced, and may continue toexperience, volatility with respect 

 

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to demand for ourhome furnishing products. Accordingly, results of operations for any quarterare not necessarily indicative of the results of operations for a full year.

 

***Failureto protect our intellectual property could adversely affect us.***

 

We believe thatour patents, trademarks, service marks, trade secrets, copyrights and all ofour other intellectual property are important to our success. We rely onpatent, trademark, copyright and trade secret laws, and confidentiality andrestricted use agreements, to protect our intellectual property and may seeklicenses to intellectual property of others. Some of our intellectual propertyis not covered by any patent, trademark, or copyright or any applications forthe same. We cannot provide assurance that agreements designed to protect ourintellectual property will not be breached, that we will have adequate remediesfor any such breach, or that the efforts we take to protect our proprietaryrights will be sufficient or effective. Any significant impairment of ourintellectual property rights or failure to obtain licenses of intellectualproperty from third parties could harm our business or our ability to compete.Moreover, we cannot provide assurance that the use of our technology orproprietary know-how or information does not infringe the intellectual propertyrights of others. If we have to litigate to protect or defend any of ourrights, such litigation could result in significant expense.

 

# **Item 1B.Unresolved Staff Comments**

# ** **

None.

 

# **Item2. Properties**

# ** **

Our corporateheadquarters, located in Danbury, Connecticut, consists of one buildingcontaining 144,000 square feet, situated on approximately 18.0 acres of land,all of which is owned by us.  Locatedadjacent to the corporate headquarters, and situated on approximately 5.4acres, is the Ethan Allen Hotel and Conference Center, containing 195guestrooms. This hotel, owned by a wholly-owned subsidiary of Ethan Allen, isused in connection with Ethan Allen functions and training programs, as well asfor functions and accommodations for the general public.

 

During fiscal2009, we operated as many as ten manufacturing facilities located in six statesand Mexico. All of these facilities are owned, with the exception of a 145,636square foot leased upholstery plant in California which will be closed by January 2010.As announced during fiscal year 2009, we are consolidating select upholsteryand case goods plants into existing operations. By the end of our first quarter of fiscal 2010, we plan to operate threecase goods plants (including one sawmill) totaling 1,644,522 square feet, threeupholstery furniture plants (consisting of two upholstery plants on our Maiden,North Carolina campus and one cut and sew plant in Mexico) totaling 649,396square feet, and one home accessory plant that is 295,000 square feet all ofwhich are owned by the company.

 

In addition, weoperate four primary distribution centers, totaling 1,179,029 square feet.  All of these facilities are owned, with theexception of one leased distribution facility in California, which is 80,000square feet.  Our U.S. manufacturing anddistribution facilities for future operations are located in North Carolina,Vermont, Virginia, Oklahoma, California, New Jersey and Indiana, and our Mexicoplant is located in Guanajuato.

 

We own four andlease 22 retail service centers, totaling 1,268,631 square feet. Our retailservice centers are located throughout the United States and Canada and serveto support our various retail sales districts.

 

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The geographicdistribution of our retail design center network as of June 30, 2009 is asfollows:

 
| ** **              | ** ** | **Retail Design Center Category** | ** ** |
|-------------------------|------------|-----------------------------------|------------|
| ** **              | ** ** | **Company  Operated**             | ** ** | **Independently  Operated** | ** ** |
| United States           |       | 154                               |       | 88 |   |
| North America-Other (1) |       | 5                                 |       | 2 |   |
| Asia                    |       | —                            |       | 41 |   |
| Middle East             |       | —                            |       | 3 |   |
| Total                   |       | 159                               |       | 134 |   |

 

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(1)          We own and operate five retail designcenters located in Canada.

 

Of the 159 retail design centers operated by us, 76 of the propertiesare owned and 83 of the properties are leased from independent thirdparties.  Of the 76 design centerlocations owned by us, 20 are subject to land leases. We own three additionalretail properties, two of which are leased to independent Ethan Allenretailers, and one of which is leased to an unaffiliated third party.  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, 2009 of $3.9 million whichmatures in two years.  The Beecher Falls,Vermont manufacturing facility was financed, in part, by the State of VermontEconomic Development Authority (“VEDA”) and the Town of Canaan, Vermont.  The VEDA debt matured in June 2006 andwas repaid in full at that time.  TheTown of Canaan debt bears interest at a fixed rate of 3.00% and has a remainingbalance at June 30, 2009 of $0.3 million, with maturities of three to 18years.  We believe that all of ourproperties are well maintained and in good condition.

 

We estimate thatour manufacturing division is currently operating at approximately 50% ofcapacity.   As a result, we announced theconsolidation of our Eldred, Pennsylvania and Chino, California upholsteryplants into existing operations as well as the closure of our Andover, Mainecase goods plant and realignment of other case goods operations in theNortheast. We believe we have additional capacity at selected facilities, whichwe could utilize with minimal additional capital expenditures.

 

# **Item3. Legal Proceedings**

# ** **

We are a party tovarious legal actions with customers, employees and others arising in thenormal course of our business. We maintain liability insurance, which is deemedto be adequate for our needs and commensurate with other companies in the homefurnishings industry. We believe that the final resolution of pending actions(including any potential liability not fully covered by insurance) will nothave a material adverse effect on our financial condition, results ofoperations, or cash flows.

 

**EnvironmentalMatters**

 

We and oursubsidiaries are subject to various environmental laws and regulations. Underthese laws, we and/or our subsidiaries are, or may be, required to remove ormitigate the effects on the environment of the disposal or release of certainhazardous materials.

 

During the fiscal year ending June 30, 2009, our liability withrespect to three active sites currently listed, or proposed for inclusion, onthe National Priorities List (“NPL”) under the Comprehensive EnvironmentalResponse, Compensation and Liability Act of 1980, as amended (“CERCLA”), wherewe and/or our subsidiaries had been named as a Potentially Responsive Party(“PRP”) located in Southington, Connecticut; High Point, North Carolina; andAtlanta, Georgia has been resolved.

 

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In each case we were not a major contributor based on the very smallvolume of waste generated by us in relation to total volume at those sites andwere able to take part in de minimus settlement arrangements.  Specifically, with respect to the Southingtonsite, our volumetric share is less than 1% of over 51 million gallons disposedof at the site and there are more than 1,000 PRPs.  With respect to the High Point site, ourvolumetric share is less than 1% of over 18 million gallons disposed of at thesite and there are more than 2,000 PRPs, including more than 1,000 de minimisparties (of which we are one). With respect to the Atlanta site, a formersolvent recycling/reclamation facility, our volumetric share is less than 1% ofover 20 million gallons disposed of at the site by more than 1,700 PRPs.

 

In addition to the now settled actions discussed above, in July 2000,we were notified by the State of New York (the “State”) that we may be named aPRP in a separate, unrelated matter with respect to a site located in Carroll,New York.   In May, 2009, we werenotified by the State that it had conducted an initial environmental study andthat we have been named as a PRP.  Webelieve that we are not a major contributor; however, a review of the initialenvironmental study is ongoing.

 

Liability under CERCLA may be joint and several. As such, to the extentcertain named PRPs are unable, or unwilling, to accept responsibility and paytheir apportioned costs, we could be required to pay in excess of our pro ratashare of incurred remediation costs. Our understanding of the financialstrength of other PRPs has been considered, where appropriate, in thedetermination of our estimated liability.

 

As of June 30, 2009, we believe that established reserves relatedto these environmental contingencies are adequate to cover probable andreasonably estimable costs associated with the remediation and restoration ofthese sites.  We believe our currentlyanticipated capital expenditures for environmental control facility matters arenot material.

 

We are subject to other federal, state and local environmentalprotection laws and regulations and are involved, from time to time, in investigationsand 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 ofwaste, (ii) limiting the liability associated with waste disposal, and (iii) continuouslyimproving environmental and job safety programs on the factory floor whichserve to minimize emissions and safety risks for employees. We will continue toevaluate the most appropriate, cost effective, control technologies forfinishing operations and design production methods to reduce the use ofhazardous materials in the manufacturing process.

 

# **Item4. Submission of Matters to a Vote of Security Holders**

# ** **

No matters were submitted for vote by our security holders during thefourth quarter of fiscal 2009.

 

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** **

**PART II**

 

# **Item5. Market for Registrant’s Common Equity, Related Stockholder Matters andIssuer 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) the high and low stock prices as reported on the New York StockExchange and (ii) the dividend per share paid by us:

 
| ** **       | ** ** | **Market  Price** | ** ** | **Dividend** | ** ** |
|------------------|------------|-------------------|------------|--------------|------------|
| ** **       | ** ** | **High**          | ** ** | **Low**      | ** ** | **Close** | ** ** | **Per Share** | ** ** |
| **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 |   |
| ** **       | ** ** | ** **        | ** ** | ** **   |       |   |   |   |   |
| **Fiscal  2008** |       |              |       |         |       |   |   |   |   |
| First  Quarter   |       | $                 | 36.55      |         | $          | 31.57 |   | $ | 32.69 |   | $ | 0.22 |   |
| Second  Quarter  |       | 35.41             |       | 25.87        |       | 28.50 |   | 0.22 |   |
| Third  Quarter   |       | 31.98             |       | 22.67        |       | 28.43 |   | 0.22 |   |
| Fourth  Quarter  |       | 31.37             |       | 24.48        |       | 24.60 |   | 0.22 |   |

 

As of August 13, 2009, there were 328 shareholders of record ofour common stock.  Management estimatesthere are over eleven thousand beneficial shareholders of the Company’s commonstock.  On July 21, 2009, wedeclared a dividend of $0.05 per common share, payable on October 26, 2009to shareholders of record as of October 9, 2009.  We expect to continue to declare quarterlydividends for the foreseeable future, business conditions permitting.

 

**Equity Compensation Plan Information**

 

The information required by this Item 5 with respect to EquityCompensation Plan Information is set forth in Item 12 — Security Ownership ofCertain Beneficial Owners and Management and Related Stockholder Matters,contained in this Annual Report and incorporated herein by reference.

 

**Issuer Purchases of Equity Securities**

 

On November 21, 2002, our Board of Directors approved a sharerepurchase program authorizing us to repurchase up to 2,000,000 shares of ourcommon stock, from time to time, either directly or through agents, in the openmarket at prices and on terms satisfactory to us. Subsequent to that date, theBoard of Directors increased the remaining authorization as follows: from904,755 shares to 2,500,000 shares on April 27, 2004; from 753,600 sharesto 2,000,000 shares on November 16, 2004; from 691,100 shares to 2,000,000shares on April 26, 2005; from 393,100 shares to 2,500,000 shares on November 15,2005; from 1,110,400 shares to 2,500,000 shares on July 25, 2006; from707,300 to 2,500,000 shares on July 24, 2007,  and from 1,368,000 to 2,000,000 shares on November 13,2007.  As of June 30, 2009 we had aremaining Board authorization to repurchase 1,567,669 shares. There were no share repurchases duringthe quarter or fiscal year ended June 30, 2009.

 

**Stockholder Rights Plan**

 

We have a StockholderRights Plan, a description of which is set forth in Note 9 to the ConsolidatedFinancial Statements included under Item 8 of this Annual Report andincorporated herein by reference.  Suchdescription contains all of the required information with respect thereto.

 

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** **

**ComparativeCompany Performance**

** **

The following line graph comparescumulative total stockholder return for the Company with a performanceindicator of the overall stock market, the Standard & Poor’s 500Index, and an industry index, the Peer Issuer Group Index, assuming $100 wasinvested on June 30, 2004.

 

**COMPARISON OF 5 YEAR CUMULATIVETOTAL RETURN***

Among Ethan AllenInteriors Inc., The S&P 500 Index

And A Peer Group

 

 

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*$100invested on 6/30/04 in stock or index, including reinvestment of dividends.  Fiscal year ending June 30.

 

Copyright©2009 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.

 

Peergroup includes Bassett Furniture Industries, Inc., Chromcraft Revington, Inc.,Flexsteel Industries, Inc., Furniture Brands International, Inc., HavertyFurniture Companies, Inc., La-Z-boy Inc., Legett & Platt, Inc., and Pier 1Imports Inc.  The returns of each companyhave been weighted according to each company’s market capitalization.

 

# **Item6. Selected Financial Data**

# ** **

The following table presents selected financial data for the fiscalyears ended June 30, 2009, 2008, 2007, 2006 and 2005 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 Report and our Consolidated Financial Statements (including the notes thereto)included under Item 8 of this AnnualReport.

 

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| ** **                                      | ** ** | **Fiscal Year Ended June 30,** | ** ** |
|-------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                      | ** ** | **2009**                            | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ***Statement of  Operations Data:***            |       |                                |       |   |   |   |   |   |   |   |   |
| Net sales                                       |       | $                                   | 674,277    |   | $ | 980,045 |   | $ | 1,005,312 |   | $ | 1,066,390 |   | $ | 949,012 |   |
| Cost of sales                                   |       | 326,935                             |       | 453,980 |   | 478,729 |   | 525,408 |   | 487,958 |   |
| Selling, general and administrative expenses    |       | 353,112                             |       | 423,229 |   | 402,022 |   | 394,069 |   | 332,295 |   |
| Restructuring and impairment charges, net       |       | 67,001                              |       | 6,836 |   | 13,442 |   | 4,241 |   | (219 | ) |
| Operating income (loss)                         |       | (72,771                             | )          | 96,000 |   | 111,119 |   | 142,672 |   | 128,978 |   |
| Interest and other expense (income), net        |       | 8,409                               |       | 3,822 |   | 1,393 |   | 4,567 |   | (442 | ) |
| Income (loss) before income tax expense         |       | (81,180                             | )          | 92,178 |   | 109,726 |   | 138,105 |   | 129,420 |   |
| Income tax expense (benefit)                    |       | (28,493                             | )          | 34,106 |   | 40,499 |   | 52,423 |   | 50,082 |   |
| Net income (loss)                               |       | $                                   | (52,687    | ) | $ | 58,072 |   | $ | 69,227 |   | $ | 85,682 |   | $ | 79,338 |   |
| ***Per Share Data:***                           |       |                                |       |   |   |   |   |   |   |   |   |
| Net income (loss) per basic share               |       | $                                   | (1.83      | ) | $ | 1.98 |   | $ | 2.19 |   | $ | 2.58 |   | $ | 2.24 |   |
| Basic weighted average shares outstanding       |       | 28,814                              |       | 29,267 |   | 31,566 |   | 33,210 |   | 35,400 |   |
| Net income (loss) per diluted share             |       | $                                   | (1.83      | ) | $ | 1.97 |   | $ | 2.15 |   | $ | 2.51 |   | $ | 2.19 |   |
| Diluted weighted average shares outstanding     |       | 28,814                              |       | 29,470 |   | 32,261 |   | 34,086 |   | 36,193 |   |
| Cash dividends per share                        |       | $                                   | 0.65       |   | $ | 0.88 |   | $ | 0.80 |   | $ | 0.72 |   | $ | 0.60 |   |
| ***Other  Information:***                       |       |                                |       |   |   |   |   |   |   |   |   |
| Depreciation and amortization                   |       | $                                   | 25,635     |   | $ | 24,670 |   | $ | 23,013 |   | $ | 21,599 |   | $ | 21,338 |   |
| Capital expenditures and acquisitions           |       | $                                   | 23,903     |   | $ | 67,815 |   | $ | 74,370 |   | $ | 49,296 |   | $ | 34,381 |   |
| Working capital                                 |       | $                                   | 139,239    |   | $ | 176,796 |   | $ | 234,990 |   | $ | 278,038 |   | $ | 130,423 |   |
| Current ratio                                   |       | 2.24 to 1                           |       | 2.30 to 1 |   | 2.59 to 1 |   | 2.88 to 1 |   | 1.97 to 1 |   |
| Effective tax rate                              |       | 35.1                                | %          | 37.0 | % | 36.9 | % | 38.0 | % | 38.7 | % |
| ***Balance Sheet  Data (at end of period):***   |       |                                |       |   |   |   |   |   |   |   |   |
| Total assets                                    |       | $                                   | 646,485    |   | $ | 764,093 |   | $ | 802,598 |   | $ | 814,100 |   | $ | 628,386 |   |
| Total debt, including capital lease obligations |       | 203,148                             |       | 203,029 |   | 202,908 |   | 202,787 |   | 12,510 |   |
| Shareholders’ equity                       |       | $                                   | 305,923    |   | $ | 375,773 |   | $ | 409,642 |   | $ | 417,442 |   | $ | 434,068 |   |
| Debt as a percentage of equity                  |       | 66.4                                | %          | 54.0 | % | 49.5 | % | 48.6 | % | 2.9 | % |
| Debt as a percentage of capital                 |       | 39.9                                | %          | 35.1 | % | 33.1 | % | 32.7 | % | 2.8 | % |

 

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# **Item7. Management’s Discussion and Analysis of Financial Condition and Results ofOperation**

# ** **

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.

 

**Critical Accounting Policies**

 

Our consolidated financial statements have been prepared in conformitywith U.S. generally accepted accounting principles which require, in somecases, that certain estimates and assumptions be made that affect the amountsand disclosures reported in those financial statements and the relatedaccompanying notes. Estimates are based on currently known facts andcircumstances, prior experience and other assumptions believed to bereasonable. We use our best judgment in valuing these estimates and may, aswarranted, solicit external advice. Actual results could differ from theseestimates, assumptions and judgments, and these differences could be material.The following critical accounting policies, some of which are impactedsignificantly by estimates, assumptions and judgments, affect our consolidatedfinancial statements.

 

***Inventories*** — Inventories (finishedgoods, work in process and raw materials) are stated at the lower of cost,determined on a first-in, first-out basis, or market. Cost is determined basedsolely on those charges incurred in the acquisition and production of therelated inventory (i.e. material, labor and manufacturing overhead costs). Weestimate an inventory reserve for excess quantities and obsolete items based onspecific identification and historical write-downs, taking into account futuredemand and market conditions.  If actualdemand or market conditions in the future are less favorable than thoseestimated, additional inventory write-downs may be required.

 

***Revenue Recognition*** — Revenue is recognized when all of the following have occurred:persuasive evidence of a sales arrangement exists (e.g. a wholesale purchaseorder or retail sales invoice); the sales arrangement specifies a fixed ordeterminable sales price; product is shipped or services are provided to thecustomer; and collectibility is reasonably assured. As such, revenuerecognition occurs upon the shipment of goods to independent retailers or, inthe case of Ethan Allen-operated retail design centers, upon delivery to thecustomer. Recorded sales provide for estimated returns and allowances. Wepermit our customers to return defective products and incorrect shipments, andterms we offer are standard for the industry.

 

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***Allowance for Doubtful Accounts*** — We maintain an allowance for doubtful accounts for estimated lossesresulting from the inability of our customers to make required payments.  The allowance for doubtful accounts is basedon a review of specifically identified accounts in addition to an overall aginganalysis.  Judgments are made withrespect to the collectibility of accounts receivable based on historicalexperience and current economic trends. Actual losses could differ from those estimates.

 

***Retail Design Center Acquisitions*** - We account for the acquisition of retail design centers and relatedassets in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141,*Business Combinations*, which requiresapplication of the purchase method for all business combinations initiatedafter June 30, 2001.  Accounting forthese transactions 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*** — We periodically evaluate whether events or circumstances haveoccurred that indicate that long-lived assets may not be recoverable or thatthe remaining useful life may warrant revision. When such events or circumstances are present, we assess therecoverability of long-lived assets by determining whether the carrying valuewill be recovered through the expected undiscounted future cash flows resultingfrom the use of the asset.  In the eventthe sum of the expected undiscounted future cash flows is less than thecarrying value of the asset, an impairment loss equal to the excess of theasset’s carrying value over its fair value is recorded.  The long-term nature of these assets requiresthe estimation of cash inflows and outflows several years into the future andonly takes into consideration technological advances known at the time of theimpairment test.

 

In accordance with SFAS No. 142, *Goodwill andOther Intangible Assets*, goodwill and other indefinite-livedintangible assets are evaluated for impairment on an annual basis and betweenannual tests whenever events or circumstances indicate that the carrying valueof the goodwill or other intangible asset may exceed its fair value. We conductour required annual impairment test during the fourth quarter of each fiscalyear and use a discounted cash flow model to estimate fair value. This modelrequires the use of long-term planning forecasts and assumptions regardingindustry-specific economic conditions that are outside our control.

 

***Income Taxes*** — Income taxesare accounted for under the asset and liability method.  Deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differences betweenthe financial statement carrying amounts of existing assets and liabilities andtheir respective tax bases and operating loss and tax credit carryforwards.Deferred tax assets and liabilities are measured using enacted tax ratesexpected to apply to taxable income in the years in which those temporarydifferences are expected to be recovered or settled.  The effect on deferred tax assets andliabilities of a change in tax rates is recognized in income in the period thatincludes the enactment date. Additional factors that we consider when makingjudgments about the deferred tax valuation include tax law changes, a recenthistory of cumulative losses, and variances in future projected profitability.

 

Effective July 1, 2007, we adopted Financial Accounting StandardsBoard (“FASB”) Interpretation No. (“FIN”) 48, *Accountingfor Uncertainty in Income Taxes*, an interpretation of FASB StatementNo. 109, *Accounting for Income Taxes*,which provides a comprehensive model for the recognition, measurement,presentation, and disclosure in a company’s financial statements of uncertaintax positions taken, or expected to be taken, on a tax return. If an income taxposition exceeds a 50% probability of success upon tax audit, based solely onthe technical merits of the position, the company recognizes an income taxbenefit in its financial statements. The tax benefits recognized are measuredbased on the largest benefit that has a greater than 50% likelihood of beingrealized upon ultimate settlement. The liability associated with anunrecognized tax benefit is classified as a long-term liability except for theamount for which a cash payment is expected to be made or tax positions settledwithin one year. We recognize interest and penalties related to income taxmatters as a component of income tax expense.

 

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***Business Insurance Reserves*** — We have insurance programs in place to cover workers’ compensationand property/casualty claims.  Theinsurance programs, which are funded through self-insured retention, aresubject to various stop-loss limitations. We accrue estimated losses usingactuarial models 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 a number of other potential loss exposures incurred in theordinary course of business such as environmental claims, product liability,litigation, tax liabilities, restructuring charges, and the recoverability ofdeferred income tax benefits. Establishing loss reserves for these matters requires the use ofestimates and judgment with regard to maximum risk exposure and ultimateliability or realization.  As a result,these estimates are often developed with our counsel, or other appropriateadvisors, and are based on our current understanding of the underlying factsand circumstances. Because of uncertainties related to the ultimate outcome ofthese issues or the possibilities of changes in the underlying facts andcircumstances, additional charges related to these issues could be required inthe future*.*

 

**Basis of Presentation**

 

As of June 30, 2009, Ethan Allen Interiors Inc. has no materialassets other than its ownership of the capital stock of Ethan Allen Global, Inc.and conducts all significant transactions through Ethan Allen Global, Inc.;therefore, substantially all of the financial information presented herein isthat of Ethan Allen Global, Inc.

 

**Results of Operations**

 

Our Company has been severely impacted by the ongoing recession in theUnited States and abroad.  Continuedweakness in the U.S. economy, high unemployment, volatile capital markets,depressed housing prices and tight consumer lending practices have drivenconsumer confidence down to, or near, historical lows and resulted inconsiderable negative pressure on spending by individual consumers, our primarycustomer base.  The Company is continuingto adjust our infrastructure to match our sales volumes as we work throughthese difficult times.

 

**Restructuring Activities:**

 

In 2009, the Company made several announcements onchanges to our operations as we continue to improve the structure of ourbusiness especially in light of the recent economic downturn.  In January 2009, the Company announced aplan to consolidate the operations of its Eldred, Pennsylvania upholsterymanufacturing plant and several of its retail service centers. In June 2009,the Company announced the consolidation of its Chino, California operationsinto its Maiden, North Carolina facility and the consolidation of its Andover,Maine sawmill and dimension mill to its Beecher Falls, Vermont sawmill anddimension mill operations. For these fiscal 2009 actions, the Company estimatespre-tax restructuring, impairment, and other related charges will ultimatelyapproximate $30 million, consisting of $15 million in write down of long-livedassets, $8 million in employee severance and other payroll and benefit costs,and $7 million in other associated costs.  By segment, we expect $23million in costs for the wholesale segment and $7 million for the retailsegment.  Total costs for these 2009 actions in the current fiscal year bysegment are $17.0 million for Wholesale, and $2.6 million for Retail all ofwhich have been classified in the Statement of Operations as restructuring andimpairment charges. Approximately 800 employee positions and 140 contractworker positions will be eliminated due to these actions.

 

In January 2008, we announced a plan toconsolidate the operations of certain Company-operated retail design centersand retail service centers. In connection with this initiative, we havepermanently ceased operations at ten

 

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design centers and six retail service centers which,for the most part, were consolidated into other existing operations.  We also implemented our design team conceptacross the Retail division at the end of the fiscal year.  We recorded pre-tax restructuring,impairment, and other related charges of $6.8 million for fiscal 2008, with$3.3 million for lease cancellation and other costs which will be paid out overperiods ranging from less than one to seven years, $2.7 million, which wasnon-cash in nature, related to fixed asset impairment charges, primarily forreal property and leasehold improvements, and $0.9 million was related toemployee severance and benefits.  Duringfiscal 2009, we recorded a net reduction of pre-tax restructuring, impairment,and other related charges of $1.0 million, primarily due to net gains on thesale of real estate of $4.2 million, partly offset by additional charges andadjustments to previous estimates for leased facilities of $2.3 million andemployee severance, benefits and other charges of $0.5 million. Cumulativecharges to date for these actions total $5.5 million, all of which have beenclassified in the Statement of Operations as restructuring and impairment charges.In addition to the Retail charges, $0.4 million was recorded in the firstquarter of fiscal 2009 to update the fair value of a wholesale plant site heldfor sale.

 

On September 6, 2006, we announced a plan toclose our Spruce Pine, North Carolina case goods manufacturing facility andconvert our Atoka, Oklahoma upholstery manufacturing facility into a regionaldistribution center.  The decisionimpacted approximately 465 employees.  Werecorded a pre-tax restructuring and impairment charge of $14.1 million duringthe quarter ended September 30, 2006, of which $4.0 million was related toemployee severance and benefits and other plant exit costs, and $10.1 millionof fixed asset impairment charges. During the first six months of fiscal 2007,adjustments totaling $0.4 million were recorded to reverse remaining previouslyestablished accruals which were no longer deemed necessary.

 

**Analysis of Goodwill and Other Intangible Assets:**

 

We conduct an annual impairment analysis of goodwill and otherindefinite lived intangible assets the first of April each fiscal year,unless events occur or circumstances change that would more likely than notreduce the fair value of the goodwill or other indefinite lived intangibleassets below their carrying value. In determining whether an interim test isappropriate, management considers several factors including changes in theCompany’s stock price, financial performance, third party ratings on its longterm debt, and expected financial outlook of the business. Methods employed tovalue the enterprise and the Company’s retail and wholesale segments includethe market approach and the income approach, which are reconciled with thetotal market capitalization of the Company. These valuation methods usehistorical revenues and cash flows, as well as Company and external analysts’financial projections and apply discount rates, weighted average cost ofcapital rates, total invested capital multiples, and premium control multiples.Fair value of our trade name is valued using the relief-from-royalty method.Significant factors used in trade name valuation are royalty rates, futuregrowth and discount rates, and expense rates.

 

In the fiscal quarter ended December 31, 2008, net sales declined7.9% from the previous quarter and there was a meaningful decline (34.5%) inthe company’s average stock price from the first fiscal quarter to the second(from $26.35 to $17.27). This decline coupled with the sudden and dramaticchange in the business climate as seen through the financial crisis with globalbanking institutions led to an interim evaluation of goodwill and otherintangible assets. As a result of these tests, management concluded that theestimated value of the wholesale and retail segments exceeded their carryingvalues and no impairment was indicated.

 

In the fiscal quarter ended March 31, 2009, net sales declined26.0% from the previous quarter resulting in a 660 basis point decline in grossmargin plus a further decline (36.2%) in the company’s average stock price(from $17.27 to $11.02). These declines coupled with a significant loss fromoperations led to a second interim evaluation of goodwill and other intangibleassets. As a result of these tests, management concluded the carrying value ofgoodwill on our retail division’s books exceeded its fair value. Therefore, werecorded a non-cash impairment charge of $48.4 million. No impairment of thegoodwill or other indefinite lived assets on our wholesale division’s books wasappropriate.

 

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In the fiscal quarter ended June 30, 2009, the Company performedits annual impairment test on April 1 and noted no additional impairmentwas appropriate. During the quarter, business performance stabilized with netsales slightly lower (1%) than the previous quarter, gross margin improved 160basis points and there was a slight increase in cash on hand (to $53 million).The average price of our stock increased 9.8% (from $11.02 to $12.11). Theratings on the Company’s long term debt were lowered by third parties tospeculative grade and the Company updated its forecasts. The Company consideredthese factors and concluded that an interim impairment test was not required onthe wholesale segment. No additional evaluation of the retail segment wasappropriate as all goodwill was written off in the previous fiscal quarter.

 

There can be noassurance that the outcome of future reviews will not result in substantialimpairment charges.  Impairmentassessment inherently involves judgments as to assumptions about expectedfuture cash flows and the impact of market conditions on thoseassumptions.  Future events and changingmarket conditions may impact our assumptions as to prices, costs or otherfactors that may result in changes in our estimates of future cash flows.  Although we believe the assumptions we use intesting for impairment are reasonable, significant changes in any of ourassumptions could produce a significantly different result.

 

**Business Results:**

 

Our revenues arecomprised of (i) wholesale sales to independently operated andCompany-operated retail design centers and (ii) retail sales ofCompany-operated design centers.  SeeNote 16 to our Consolidated Financial Statements for the year ended June 30,2009 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,** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|
| ** **                              | ** ** | **2009**                             | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                    |       |                                 |       |   |   |   |   |
| **Revenue:**                            |       |                                 |       |   |   |   |   |
| Wholesale segment                       |       | $                                    | 403.4      |   | $ | 616.2 |   | $ | 656.0 |   |
| Retail segment                          |       | 508.6                                |       | 724.6 |   | 698.6 |   |
| Elimination of  inter-segment sales     |       | (237.7                               | )          | (360.8 | ) | (349.3 | ) |
| Consolidated revenue                    |       | $                                    | 674.3      |   | $ | 980.0 |   | $ | 1,005.3 |   |
|                                    |       |                                 |       |   |   |   |   |
| **Operating Income (loss):**            |       |                                 |       |   |   |   |   |
| Wholesale segment (1)                   |       | $                                    | 6.7        |   | $ | 100.3 |   | $ | 99.2 |   |
| Retail segment (2)                      |       | (92.1                                | )          | (2.8 | ) | 15.2 |   |
| Adjustment for  inter-company profit(3) |       | 12.6                                 |       | (1.5 | ) | (3.3 | ) |
| Consolidated operating  income          |       | $                                    | (72.8      | ) | $ | 96.0 |   | $ | 111.1 |   |

 

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(1)   Operating income for the Wholesale segment forthe twelve months ended June 2009 and 2007 includes pre-tax restructuringand impairment charges of $17.4 million and $13.4 million, respectively.

(2)   Operating income for the Retail segment forthe twelve months ended June 2009 and 2008 includes pre-tax restructuringand impairment charges of $49.6 million and $6.8 million, respectively.

(3)   Represents the change in the inventory profit elimination entrynecessary to adjust for the embedded wholesale profit contained in EthanAllen-operated design center inventory existing at the end of the period.

 

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

 

**Consolidated revenue** for the fiscal year ended June 30, 2009 decreased by $305.7million, or 31.2%, to $674.3 million, from $980 million in fiscal 2008. Netsales for the period largely reflect the delivery of product associated withbooked orders and backlog existing as of beginning of the period.  During the year, sales were negatively

 

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affected by a weak retail environment for home furnishings which webelieve is due to a number of factors including but not limited to continuedweakness in the U.S. economy, high unemployment, volatile capital markets,depressed housing prices and tight consumer lending practices as well as theuse of highly-promotional pricing strategies by the Company’s competitors.  These factors were partially offset by (i) thepositive effects of our continued efforts to reposition the retail network, (ii) theintroduction of our new American Artisan product line, (iii) several newmarketing initiatives including the launching of our new interactive web siteethanalleninc.com and our rewards program, and in the latter part of the fiscalyear, special savings pricing, and (iv) the continued use of nationaltelevision media, where we emphasize to clients our interior design servicesand the full line of our quality product offerings.

 

**Wholesale revenue** for fiscal 2009 decreased by $212.9 million, or 34.5%, to $403.4million from $616.2 million in the prior year. The year-over-year decrease was primarily attributable to a decline inthe incoming order rate as a result of the softer retail environment for homefurnishings noted throughout the current period and from fewer independentretail design centers, which decreased to 134 from 136 including four locationstransferred in to the company’s Retail division during the year.

 

**Retail revenue** from Ethan Allen-operated design centers for the twelve months ended June 30,2009 decreased by $216.0 million, or 29.8%, to $508.6 million from $724.6million 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 June 30,2008.  During that twelve month period,we acquired four design centers from independent retailers, and opened six newdesign 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 intheir 13th 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 describedpreviously, and (iv) our continued use of national television as anadvertising medium throughout much of the year.

 

**Gross profit** for fiscal 2009 declined to $347.3 million from $526.1 million infiscal 2008.  The $178.7 million decreasein gross profit was primarily attributable to a combined decline in bothwholesale and retail sales volume of 31.2%, partially offset by a shift insales mix with retail sales representing a higher proportionate share of totalsales in the current full year (75.4%) as compared to the prior full year(73.9%). As a result of reduced sales, and to reduce inventories, manufacturingplants were operated at approximately 50% of capacity.  This resulted in higher unabsorbed costs inour manufacturing plants which were charged to expense during the period. Theconsolidated gross margin decreased to 51.5% for fiscal 2009 from 53.7% infiscal 2008 as a result, primarily, of the factors set forth above.

 

**Operating profit**, the elements of which are discussed in greater detail below, wasimpacted by the following items during the twelve months ended June 30,2009 and 2008:

 

**Operating expenses** decreased $10.0 million, or 2.3%, to $420.1 million, or 62.3% of netsales, in fiscal 2009 from $430.1 million, or 43.9% of net sales, in fiscal2008. Decreases in salary related costs were experienced due to the reducednumber of employees and other cost cutting efforts taken by the Company thatimpacted bonuses and

 

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benefits.  Advertising expensesdecreased, while still maintaining our national TV and shelter magazinepresence. Delivery and warehousing costs were lower due to decreased sales.Partially offsetting these decreases were (i) a non-cash goodwillimpairment charge of $48.4 million recorded in the March 2009 quarter and (ii) an$11.8 million period-over-period increase in restructuring and impairmentcharges, both discussed earlier, and (iii) added costs of $7 million dueto the implementation of the team concept which caused a temporary overlap ofexpenses and is now concluded.

 

**Consolidated operating income** for the year ended June 30, 2009 totaled a loss of $72.8 million,or 10.8% of net sales, compared to income of $96.0 million, or 9.8% of netsales, in the prior year.  The decreaseof $168.8 million was largely attributable to (i) a 31.2% reduction in netsales, resulting in a $178.7 million reduction in gross profit, (ii) a goodwillimpairment charge, (iii) increased restructuring and impairment chargesand (iv) net declines in other operating expenses, all of which werediscussed previously.

 

**W****holesale operating income** for fiscal 2009 totaled $6.7 million, or 1.7% of net sales, ascompared to $100.3 million, or 16.3% of net sales, in the prior year. Thedecrease of $93.7 million was primarily attributable to (i) the $212.9reduction in net sales, and (ii) a $17.4 million increase in restructuringand impairment charges due to the 2009 actions discussed earlier.

 

**Retail operating income** decreased $89.3 million to a $92.1 million loss, or 18.1% of sales,for fiscal 2009, from a loss of $2.8 million, or 0.4% of sales, for fiscal2008. The decrease in retail operating income generated by Ethan Allen-operateddesign centers was primarily attributable to reduced sales caused by the weakretail environment for home furnishings, as well as the $48.4 million goodwillimpairment charge.

 

**Interest and other miscellaneous income, net** totaled $3.4 million in fiscal 2009 as compared to $7.9 million infiscal 2008. The $4.5 million decrease was mostly due to lower investmentincome resulting from reduced cash and cash equivalent balances maintainedalong with lower rates of interest during the current period and by gainsrecorded in connection with the sale of selected real estate assets in theprior year.

 

**Interest and other related financing costs** remained largely unchanged at $11.8 million from $11.7 million in theprior year. This amount mostly consists of interest expense on our seniorunsecured debt issued in September 2005.

 

**Income tax**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 the prior year. 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 as compared to income of$58.1 million in fiscal 2008.  Net lossper diluted share totaled $1.83 in the current year compared to net income of$1.97 per diluted share in the prior year.

 

***Fiscal 2008 Compared to Fiscal 2007***

 

**Consolidated revenue** for the fiscal year ended June 30, 2008 decreased by $25.3million, or 2.5%, to $980 million, from $1.005 billion in fiscal 2007. Netsales for the period largely reflect the delivery of product associated withbooked orders and backlog existing as of beginning of the period.  During the year, sales were impacted by aweak retail environment for home furnishings, particularly during the latterhalf of the year.  We believe this is dueto continued weakening of consumer confidence with the current economicconditions in the U.S. and abroad.  Thesefactors were partially offset by (i) the positive effects of our continuedefforts to reposition the retail network, (ii) new product introductions,and (iii) an increase in the continued use of national television as

 

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an advertising medium, where we emphasize to clients our interiordesign services and the full line of our quality product offerings.

 

We have made considerable investment within the retail network tostrengthen the level of service, professionalism, interior design competence,efficiency, and effectiveness of retail design center personnel. Theimplementation of the “team” concept is the latest phase of that progression,which resulted in the development of over 280 interior design teams. We believethat with this structure along with the emphasis in our messaging to clientsthat we are here to “help as little or as much” as they like, as well asoffering the benefit of making appointments with our design professionals, wecontinue to improve the customer service experience.

 

**Wholesale revenue** for fiscal 2008 decreased by $39.8 million, or 6.1%, to $616.2 millionfrom $656.0 million in the prior year. The year-over-year decrease was primarily attributable to a decline inthe incoming order rate as a result of the softer retail environment for homefurnishings noted throughout much of the current period and from fewerindependent retail design centers, which decreased to 136 from 155 includingsix locations transferred in to the company’s Retail division during the year.

 

**Retail revenue** from Ethan Allen-operated design centers for the twelve months ended June 30,2008 increased by $26.0 million, or 3.7%, to $724.6 million from $698.6 millionfor the twelve months ended June 30, 2007. The increase in retail sales by Ethan Allen-operated design centers wasattributable to higher sales generated by newly opened (including relocated) oracquired design centers of $66.8 million. This favorable variance was partially offset by unfavorable variancesrelated to a decrease in comparable design center delivered sales of $21.3million, or 3.2%, and reduced revenue from sold and closed design centers of$19.5 million. The number of Ethan Allen-operated design centers increased to159 as of June 30, 2008 as compared to 158 as of June 30, 2007.  During that twelve month period, we acquiredfive design centers from, and opened one previously operated by independentretailers, and opened eighteen new design centers (of which eleven wererelocations).

 

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 intheir 13th full month of Ethan Allen-operated operations.

 

Year-over-year, written business of Ethan Allen-operated design centersincreased 0.6% and comparable design center written business decreased5.6%.  Over that same period, wholesaleorders decreased 8.0%.  Retail writtenbusiness reflects the softer retail environment for home furnishings notedthroughout much of the current year, likely offset, to some degree, by (i) ourcontinued efforts to reposition the retail network, (ii) recent productintroductions, and (iii) our continued use of national television as anadvertising medium throughout much of the year.

 

**Gross profit** for fiscal 2008 declined slightly to $526.1 million from $526.6million in fiscal 2007.  The $0.5 milliondecrease in gross profit was primarily attributable to a decline in wholesalesales volume partially offset by a shift in sales mix with retail salesrepresenting a higher proportionate share of total sales in the current fullyear (74%) as compared to the prior full year (69%). The consolidated grossmargin increased to 53.7% for fiscal 2008 from 52.4% in fiscal 2007 as aresult, primarily, of the factors set forth above.

 

**Operating profit**, the elements of which are discussed in greater detail below, wasimpacted by the following items during the twelve months ended June 30,2008 and 2007:

 

**Operating expenses** increased $14.6 million, or 3.5%, to $430.1 million, or 43.9% of netsales, in fiscal 2008 from $415.5 million, or 41.3% of net sales, in fiscal2007. This increase was primarily attributable to increased costs associatedwith (i) occupancy, managerial salaries and benefits, and designercompensation largely because of our continued efforts to be located in moreprominent locations and to upgrade our ability to provide professional serviceduring the year, as well as (ii) the impact of higher fuel costs onwarehousing and delivery.  Partially

 

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offsetting these increases were (i) decreases in workerscompensation insurance and health insurance and compensation costs as a resultof improved claim experience, and (ii) a period-over-period reduction inthe restructuring and impairment charges mentioned earlier.

 

**Consolidated operating income** for the year ended June 30, 2008 totaled $96.0 million, or 9.8%of net sales, compared to $111.1 million, or 11.1% of net sales, in the prioryear.  The decrease of $15.1 million wasprimarily attributable to higher period-over-period operating expensesdiscussed above, partially offset by (i) a reduction in restructuring andimpairment charges and (ii) a small decline in gross profit, all of whichwere discussed previously.

 

**W****holesale operating income** for fiscal 2008 totaled $100.3 million, or 16.3% of net sales, ascompared to $99.2 million, or 15.1% of net sales, in the prior year. Theimprovement of $1.1 million was primarily attributable to (i) thereduction in restructuring and impairment charges mentioned above, and (ii) improvedperformance within our remaining product sourcing operations, including areduction in overhead as a result of past plant closures.  These factors were partially offset by anoverall decrease in wholesale shipments during the year.

 

**Retail operating income** decreased $18.0 million to a $2.8 million loss, or 0.4% of sales, forfiscal 2008, from $15.2 million, or 2.2% of sales, for fiscal 2007. Thedecrease in retail operating income generated by Ethan Allen-operated designcenters was primarily attributable to higher operating expenses as a result ofour continued efforts to reposition the retail network including the $6.8million restructuring and impairment charges recorded in the year.  These unfavorable variances were partiallyoffset by higher gross profit on the higher sales recorded during the year.

 

**Interest and other miscellaneous income, net** totaled $7.9 million in fiscal 2008 as compared to $10.4 million infiscal 2007. The $2.5 million decrease was mostly due to decreased investmentincome resulting from lower cash and short term investment balances maintainedduring the current period coupled with lower rates of interest.

 

**Interest and other related financing costs** remained largely unchanged at $11.7 million from $11.8 million in theprior year. This amount mostly consists of interest expense on our seniorunsecured debt issued in September 2005.

 

**Income tax expense** totaled $34.1 million for fiscal 2008 as compared to $40.5 million forfiscal 2007.  Our effective tax rate forthe current year was 37.0%, compared to 36.9% in the prior year. The effective tax rate was a result,primarily, of the adverse effects of recently-enacted changes within certainstate tax legislation, increased state income tax liability arising inconnection with the operation of a greater number of Company-operated designcenters, and increased foreign income tax liability associated with our fiveretail design centers operating in Canada and our manufacturing operation inMexico.  Partially offsetting these itemswere the benefits derived from the manufacturers’ deduction provided for underThe Jobs Creation Act of 2004 and certain tax planning initiatives.

 

**Net income** for fiscal 2008 was of $58.1 million as compared to $69.2 million infiscal 2007.  Net income per dilutedshare totaled $1.97 in the current year and $2.15 per diluted share in theprior year.

 

**Liquidity and Capital Resources**

 

As of June 30, 2009, we held cash and cash equivalents totaling$53.0 million.  Our principal sources ofliquidity include cash and cash equivalents, cash flow from operations, andborrowing capacity under revolving credit facility.

 

During fiscal 2009, the Company terminated its unsecured $200 millionrevolving credit facility which had never been used for other than support ofoutstanding letters of credit. On May 29, 2009, we entered into athree-year secured $40 million asset-based revolving credit facility (the “Facility”)with fewer covenant restrictions which

 

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the Company believes to be more appropriate in the current creditenvironment. The Facility is subject to borrowing base availability andincludes an opportunity for expansion of up to an additional $20 million offinancing.

 

At the Company’s option, revolving loans under the Agreement bearinterest at an annual rate of either:

 

(a)     London Interbank Offered rate (“LIBOR”) plus 3.25% to 4.25%, based onthe average availability, or

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

 

The Company will pay a commitment fee of 0.50% per annum on the 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: up to 90% of eligiblecredit card receivables; plus up to 85% of eligible accounts receivable; plusup to 85% of the net orderly liquidation value of eligible inventory. TheFacility is secured by all property owned, leased or operated by the Company inthe United States excluding any real property owned by the Company and alsoexcludes any intellectual property owned by the Company unless availability isless than or equal to $17.5 million.

 

The Facility contains customary covenants which may limit the Company’sability to incur debt; engage in mergers and consolidations; make restrictedpayments (including dividends); sell certain assets; and make investments. TheCompany may make restricted payments (including dividends) as long asavailability equals or exceeds the greater of (i) 25% of the aggregatecommitment or (ii) $12 million.  Ifthe average monthly availability is less than the greater of (i) 15% ofthe aggregate commitment and (ii) $9 million, the Company is also requiredto meet a fixed charge coverage ratio financial covenant which may not be lessthan 1 to 1 for any period of four consecutive fiscal quarters. The Facilityalso contains customary borrowing conditions and events of default, theoccurrence of which would entitle the lenders to accelerate the maturity of anyoutstanding borrowings and terminate their commitment to make future loans.

 

In addition, on September 27, 2005, we completed a privateoffering of $200.0 million in ten-year senior unsecured notes due 2015 (the “SeniorNotes”). The Senior Notes were offered by Ethan Allen Global, Inc. (“Global”),a wholly-owned subsidiary of the Company, and have an annual coupon rate of5.375%.  We have used the net proceeds of$198.4 million to expand our retail network, invest in our manufacturing andlogistics operations, and for other general corporate purposes.

 

In June 2009, Moodys Investors Service lowered our corporate andsenior unsecured credit ratings to Ba1 from Baa3, and Standard & Poor’s(“S&P”) lowered our corporate and senior unsecured credit ratings to BBfrom BBB-. Both rating services cited the weak economy and the resultant pressureon the home furnishings industry as reasons for the downgrade.  While the change in our credit rating had noimpact on our existing credit facilities, the S&P downgrade, if notimproved to investment grade by March 2010, the issuer of our private labelcredit cards has a right to demand a standby letter of credit of up to $12million. At June 30, 2009, we had $12.5 million in letters of creditoutstanding, leaving $27.5 million remaining available credit under therevolver. Any additional letters of credit would reduce the credit availablefor borrowings under the revolver.

 

The Company believes it has sufficient cash and access to credit(including its ability to expand the $40 million credit facility to up to $60million) to fund its operations and growth plans.

 

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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,** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                 | ** ** | **2009**                             | ** ** | **2008** | ** ** | **2007** | ** ** |
| Operating  Activities                                      |       |                                 |       |   |   |   |   |
| Net  income plus depreciation and amortization             |       | $                                    | (27.1      | ) | $ | 82.7 |   | $ | 92.2 |   |
| Working  capital                                           |       | 24.8                                 |       | (5.5 | ) | 20.9 |   |
| Excess  tax benefits from share-based payment arrangements |       | —                               |       | (2.1 | ) | (5.0 | ) |
| Other  (non-cash items, long-term assets and liabilities)  |       | 24.2                                 |       | 11.0 |   | 11.1 |   |
| Total  provided by operating activities                    |       | $                                    | 21.9       |   | $ | 86.1 |   | $ | 119.2 |   |
|                                                       |       |                                 |       |   |   |   |   |
| Investing  Activities                                      |       |                                 |       |   |   |   |   |
| Capital  expenditures                                      |       | $                                    | (22.5      | ) | $ | (60.0 | ) | $ | (59.0 | ) |
| Acquisitions                                               |       | (1.4                                 | )          | (7.8 | ) | (15.3 | ) |
| Asset  sales                                               |       | 6.4                                  |       | 6.9 |   | 5.4 |   |
| Other                                                      |       | —                               |       | (0.5 | ) | 0.2 |   |
| Total  used in investing activities                        |       | $                                    | (17.5      | ) | $ | (61.3 | ) | $ | (68.7 | ) |
|                                                       |       |                                 |       |   |   |   |   |
| Financing  Activities                                      |       |                                 |       |   |   |   |   |
| Issuances  of common stock                                 |       | $                                    | —     |   | $ | 0.5 |   | $ | 0.5 |   |
| Purchases  and retirement of company stock                 |       | —                               |       | (75.6 | ) | (57.2 | ) |
| Payment  of cash dividends                                 |       | (23.6                                | )          | (25.5 | ) | (24.8 | ) |
| Excess  tax benefits from share-based payment arrangements |       | —                               |       | 2.1 |   | 5.0 |   |
| Payment  of deferred financing costs                       |       | (1.4                                 | )          | — |   | (0.1 | ) |
| Total  provided by (used in) financing activities          |       | $                                    | (25.0      | ) | $ | (98.5 | ) | $ | (76.6 | ) |

 

***Operating Activities***

 

During fiscal 2009, cash provided by operating activities decreased$64.2 million, mostly because of the decrease in net income. While expenseswere reduced and restructuring actions were taken to counteract theseconditions, cash savings in the current year were not enough to offset reducedincome.  Cash generated from workingcapital (accounts receivable, inventories, prepaid and other current assets,customer deposits, payables, accrued expenses, and other current liabilities)reduction, increased cash by $30.3 million largely from inventory reductioninitiatives taken. The $13.2 million change from other operating activities waslargely driven by the non-cash restructuring and goodwill impairment chargesnet of tax effects recorded this fiscal year.

 

***Investing Activities***

 

In fiscal 2009, cash used in investing activities was lower by $43.8million due, primarily, to a $37.5 million decrease in cash utilized to fundcapital expenditures.  The level ofacquisitions decreased $6.4 million in fiscal 2009 as compared to fiscal2008.  The current level of capitalspending is principally attributable to (i) continued design centerdevelopment and renovation, but at a reduced level from the prior two years,and (ii) entity-wide technology initiatives including the new interactivewebsite.  We anticipate that cash fromoperations will be sufficient to fund future capital expenditures, businessconditions permitting.

 

***Financing Activities***

 

For fiscal 2009, cash used in financing activities decreased $73.5million as a result, primarily, of a curtailment in payments for theacquisition of treasury stock.  On July 21,2009, we declared a dividend of $0.05 per common share, payable on October 26,2009, to shareholders of record as of October 9, 2009.  We expect to continue to declare quarterlydividends for the foreseeable future.

 

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As of June 30, 2009, our outstanding debt totaled $203.1 million,the current and long-term portions of which amounted to less than $0.1 millionand $203.1 million, respectively.  Theaggregate scheduled maturities of long-term debt for each of the next fivefiscal years are: less than $0.1 million in fiscal 2010; $3.9 million in fiscal2011; and less than $0.1 million in fiscal 2012, 2013 and 2014.  The balance of our long-term debt ($199.2million) matures in fiscal 2015.  We hadno revolving loans outstanding under the credit facility as of June 30,2009, and stand-by letters of credit outstanding under the facility at thatdate totaled $12.5 million.  Remainingavailable borrowing capacity under the facility was $27.5 million at June 30,2009.

 

The following table summarizes, as of June 30, 2009, the timing ofcash payments related to our outstanding contractual obligations (inthousands):

 
| ** **                    | ** ** | **Total** | ** ** | **Less  than 1  Year** | ** ** | **1-3  Years** | ** ** | **4-5  Years** | ** ** | **More  than 5  Years** | ** ** |
|-------------------------------|------------|-----------|------------|------------------------|------------|----------------|------------|----------------|------------|-------------------------|------------|
| Long-term debt obligations:   |       |      |       |                   |       |           |       |           |       |                    |       |
| Debt maturities               |       | $         | 203,148    |                   | $          | 42             |       | $              | 3,917      |                    | $          | 22 |   | $ | 199,167 |   |
| Contractual interest          |       | 70,519    |       | 11,048                 |       | 21,802         |       | 21,511         |       | 16,158                  |       |
| Operating lease obligations   |       | 234,518   |       | 36,863                 |       | 59,636         |       | 41,068         |       | 96,951                  |       |
| Letters of credit             |       | 12,460    |       | 12,460                 |       | —         |       | —         |       | —                  |       |
| Purchase obligations (1)      |       | —    |       | —                 |       | —         |       | —         |       | —                  |       |
| Other long-term liabilities   |       | 249       |       | 30                     |       | 51             |       | 48             |       | 120                     |       |
| Total contractual obligations |       | $         | 520,894    |                   | $          | 60,443         |       | $              | 85,406     |                    | $          | 62,649 |   | $ | 312,396 |   |

 

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(1)  For purposes ofthis table, purchase obligations are defined as agreements that are enforceableand legally binding and that specify all significant terms, including: fixed orminimum quantities to be purchased; fixed, minimum or variable priceprovisions; and the approximate timing of the transaction. While we are not aparty to any significant long-term supply contracts or purchase commitments, wedo, in the normal course of business, regularly initiate purchase orders forthe procurement of (i) selected finished goods sourced from third-partysuppliers, (ii) lumber, fabric, leather and other raw materials used inproduction, and (iii) certain outsourced services.  All purchase orders are based on currentneeds and are fulfilled by suppliers within short time periods. At June 30,2009, our open purchase orders with respect to such goods and services totaledapproximately $22 million.

 

Further discussion of ourcontractual obligations associated with outstanding debt and lease arrangementscan be found in Notes 7 and 8, respectively, to the Consolidated FinancialStatements included under Item 8 of this Annual Report.

 

We believe thatour cash flow from operations, together with our other available sources ofliquidity, will be adequate to make all required payments of principal andinterest on our debt, to permit anticipated capital expenditures, and to fundworking capital and other cash requirements. As of June 30, 2009, we had working capital of $139.2 million and acurrent ratio of 2.24 to 1.

 

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

 

During fiscal 2009, 2008 and 2007, we repurchased and/or retired thefollowing shares of our common stock:

 
| ** **                        | ** ** | **2009** | ** ** | **2008  (1)** | ** ** | **2007(2)(3)** | ** ** |
|-----------------------------------|------------|----------|------------|---------------|------------|----------------|------------|
| Common shares  repurchased        |       | —   |       | 2,259,631     |       | 1,548,700      |       |
| Cost to repurchase  common shares |       | —   |       | $             | 69,745,024 |           | $          | 53,955,970 |   |
| Average price per share           |       | —   |       | $             | 30.87      |           | $          | 34.84 |   |

 

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(1)   During fiscal 2008, we also retired 661,688 shares of common stock tenderedupon the exercise of outstanding employee stock options (592,861 to cover shareexercise and 68,827 to cover related employee tax withholdingliabilities).  The value of such shareson the date redeemed was $23,033,359, representing an average price per shareof $34.81.

(2)   The cost to repurchase shares in fiscal 2008 reflects $3,436,230 incommon stock repurchases with a June 2007 trade date and a July 2007settlement date.

(3)   During fiscal 2008, we also retired 555,531 shares of common stocktendered upon the exercise of outstanding employee stock options (410,073 tocover share exercise and 145,458 to cover related employee tax withholdingliabilities).  The value of such shareson the date redeemed was $21,506,193, representing an average price per shareof $38.71.

 

For each of thefiscal years presented above, we funded our purchases of treasury stock withexisting cash on hand and cash generated through current period operations.During the last three fiscal years, the Board of Directors increased the thenremaining share repurchase authorization as follows: to 2.5 million shares on November 15,2005; to 2.5 million shares on July 25, 2006; to 2.5 million shares on July 24,2007 and to 2.0 million shares on November 13, 2007.  As of June 30, 2009, we had a remainingBoard authorization to repurchase 1.6 million shares.

 

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

 

Except as indicatedbelow, 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.

 

We may, from time to timein the ordinary course of business, provide guarantees on behalf of selectedaffiliated entities or become contractually obligated to perform in accordancewith the terms and conditions of certain business agreements. The nature andextent of these guarantees and obligations may vary based on our underlyingrelationship with the benefiting party and the business purpose for which theguarantee or obligation is being provided. Details of those arrangements forwhich we act as guarantor or obligor are provided below.

 

***Retailer-RelatedGuarantees***

 

IndependentRetailer Credit Facility

 

On June 11, 2009, weobligated ourselves, on behalf of one of our independent retailers, withrespect to a $0.5 million credit facility (the “Amended CreditFacility”). The Company had previously guaranteed on April 9,2009, on behalf of the independent retailer, a $0.9 million credit facility(the “Credit Facility”).  This obligationrequires us, in the event of the retailer’s default under the Amended CreditFacility, to repurchase the retailer’s inventory, applying such purchase priceto the retailer’s outstanding indebtedness under the Amended Credit Facility.Our obligation remains in effect for the life of the term loan.  The agreement expires in April 2011.  The maximum potential amount of futurepayments (undiscounted) that we could be required to make under this obligationis limited to the amount outstanding under the Credit Facility at the time ofdefault (subject to pre-determined lending limits based on the value of theunderlying inventory) and, as such, is not an estimate of future cashflows.  No specific recourse orcollateral provisions exist that would enable recovery of any portion ofamounts paid under this obligation, except to the extent that we maintain theright to take title to the repurchased inventory. We anticipate that therepurchased inventory could subsequently be sold through our retail designcenter network.

 

As of June 30, 2009, the amount outstanding underthe Amended Credit Facility totaled approximately $0.5 million.  Based on the underlying creditworthiness ofthe respective retailer, we believe this obligation will expire without requiringfunding by us. However, in accordance with the provisions of FASBInterpretation No. 45, *Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others*, a liability has been established to reflectour non-contingent obligation under this arrangement as a result ofmodifications made to the Credit Facility subsequent to January 1,2003.  As of June 30,2009, the carrying amount of such liability is less than$50,000.

 

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Ethan Allen Consumer CreditProgram

 

## ***The terms and conditions of our consumer credit program, which isfinanced and administered by a third-party financial institution on anon-recourse basis to Ethan Allen, are set forth in an agreement between us andthat financial service provider (the “Program Agreement”). 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 ofany independent retailer choosing to participate in our consumer credit programby agreeing, in the event of default, breach, or failure of the independentretailer to perform under such Retailer Agreement, to take on certain responsibilitiesof the independent retailer, including, but not limited to, delivery of goodsand reimbursement of customer deposits. Customer receivables originated byindependent retailers remain non-recourse to Ethan Allen. Our obligationremains in effect for the term of the Program Agreement which expires in July 2012.While the maximum potential amount of future payments (undiscounted) that wecould be required to make under this obligation is indeterminable, recourseprovisions exist that would enable us to recover, from the independentretailer, any amount paid or incurred by us related to our performance. Basedon the underlying creditworthiness of our independent retailers, includingtheir historical ability to satisfactorily perform in connection with the termsof our consumer credit program, we believe this obligation will expire withoutrequiring funding by us.*** To ensure funding for delivery of products sold,the terms of this agreement also contain a right for the credit card issuer todemand from the Company a letter of credit of up to $12 million if the Company’scredit rating is below investment grade for more than 270 consecutive days. Seethe Liquidity and Capital Resourcesection above for more information.

## *** ***

## ***Product Warranties***

## *** ***

Our products, includingour case goods, upholstery and home accents, generally carry explicit productwarranties that extend from three to five years and are provided based on termsthat are generally accepted in the industry. All of our domestic independent retailers are required to enter into,and perform in accordance with the terms and conditions of, a warranty serviceagreement. We record provisions for estimated warranty and other related costsat time of sale based on historical warranty loss experience and make periodicadjustments to those provisions to reflect actual experience. On rare occasion,certain warranty and other related claims involve matters of dispute thatultimately 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 30,2009, the Company’s product warranty liability totaled $1.0 million.

 

**Impact of Inflation**

 

We believe inflation had animpact on our business the last three fiscal years but we have generally beenable to increase prices, create operational efficiencies, or seek lower costalternatives in order to offset increases in operating costs and effectivelymanage our working capital.

 

**Business Outlook**

 

While we cannotforecast, with any degree of certainty, changes in the various macro-economicfactors that influence the incoming order rate, we believe that we arewell-positioned both for the possibility of continued market weakness and thenext phase of economic growth based upon our existing business model whichincludes: (i) an established brand; (ii) a comprehensive complementof home decorating solutions; and (iii) a vertically-integrated operatingstructure.

 

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As macro-economicfactors change, however, it is also possible that our costs associated withproduction (including raw materials and labor), distribution (including freightand fuel charges), and retail operations (including compensation and benefits,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.

 

The homefurnishings industry remains extremely competitive with respect to both thesourcing of products and the retail sale of those products. Domestic manufacturerscontinue to face pricing pressures as a result of the manufacturingcapabilities developed during recent years in other countries, specificallywithin Asia. In response to these pressures, a large number of U.S. furnituremanufacturers and retailers, including us, have increased their overseassourcing activities in an attempt to maintain a competitive advantage andretain market share. At the present time, we domestically manufacture and/orassemble approximately 65% of our products. We continue to believe that abalanced approach to product sourcing, which includes the domestic manufactureof certain product offerings coupled with the import of other selectedproducts, provides the greatest degree of flexibility and is the most effectiveapproach to ensuring that acceptable levels of quality, service and value areattained.

 

In addition, webelieve that our retail strategy, which involves (i) a continued focus onproviding a wide array of product solutions and superior customer service, (ii) theopening of new or relocated design centers in more prominent locations, whileencouraging independent retailers to do the same, (iii) the implementationof design teams within our retail network, and (iv) further expansioninternationally, provides an opportunity to further grow our business.

 

Further discussion of thehome furnishings industry has been included under Item 1 of thisAnnual Report.

 

**RecentAccounting Pronouncements**

 

In December 2007, the FASB issued SFAS No. 141(revised 2007), *Business Combinations* (SFAS No. 141(R)),which replaces SFAS No. 141. SFAS No. 141(R) establishesprinciples and requirements for how an acquirer in a business combinationrecognizes and measures in its financial statements the identifiable assetsacquired, the liabilities assumed, and any controlling interest; recognizes andmeasures the goodwill acquired in the business combination or a gain from abargain purchase; and determines what information to disclose to enable usersof the financial statements to evaluate the nature and financial effects of thebusiness combination. SFAS No. 141(R) is to be applied prospectivelyto business combinations for which the acquisition date is on or after anentity’s fiscal year that begins after December 15, 2008 (July 1,2009 for the Company). The impact of this Statement on the Company’s financialposition, results of operations and cash flows will be dependent on the terms,conditions and details of such acquisitions.

 

In February 2007,the FASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities*, which allows the Companyto choose to measure selected financial assets and financial liabilities atfair value. Unrealized gains and losses on items for which the fair valueoption has been elected are reported in earnings.  We adopted SFAS No. 159 on July 1,2008 and have not elected the permitted fair value measurement provisions ofthis statement.

 

In September 2006, the FASB issued SFAS No. 157,*Fair Value Measurements* (“SFAS No. 157”),which defines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles, and expands disclosures about fairvalue measurements, yet does not require any new fair value measurements. In February 2008, the FASB issued FASB Staff Position No. 157-2 (“FSPNo. 157-2”), which delayed the effective date of SFAS No. 157 as itrelates to non-financial assets and non-financial liabilities until July 1,2009 for the Company, except for items that are recognized or disclosed at fairvalue by the Company on a recurring basis.  Effective July 1, 2008,the Company adopted the provisions of SFAS No. 157, except as it relatesto those non-financial assets and non-financial liabilities excluded under FSP No. 157-2. Those excluded items for which the 

 

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Company has not applied the fair value provisions ofSFAS No. 157 include goodwill and other intangible assets (note 6), assetsheld for sale (note 2), liabilities for exit or disposal activities (note 2),and business acquisitions (note 3).  The Company is currently evaluatingthe impact of this statement on the Company’s financial position, results ofoperations and cash flows as it relates to non-financial assets andnon-financial liabilities.  This pronouncement became effective for us on July 1,2008.  See note 18 for more information.

 

In June 2008, theFASB issued FASB Staff Position No. EITF 03-6-1, *DeterminingWhether Instruments Granted in Share-Based Payment Transactions areParticipating Securities*, which requires that unvested share-basedpayment awards containing non-forfeited rights to dividends be included in thecomputation of earnings per common share. The adoption of FSB EITF 03-6-1 is effective for fiscal years beginningafter December 15, 2008 and interim periods within those fiscal years (July 1,2009 for the Company).  Retrospectiveapplication is required.  We are evaluatingthis pronouncement but do not expect it to impact basic or diluted earnings pershare.

 

# **Item7A. Quantitative and Qualitative Disclosures About MarketRisk**

# ** **

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

 

Interestrate risk exists primarily through our borrowing activities. Our policy hasbeen to utilize United States dollar denominated borrowings to fund 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 rates. The extent of this risk is notquantifiable or predictable because of the variability of future interest ratesand our future financing requirements.

 

Forfloating-rate obligations, interest rate changes do not affect the fair valueof the underlying financial instrument but do impact future earnings and cashflows, assuming other factors are held constant. Conversely, for fixed-rateobligations, interest rate changes affect the fair value of the underlyingfinancial instrument but do not impact earnings or cash flows. At June 30,2009, we had no floating-rate debt obligations outstanding.  As of that same date, our fixed-rate debtobligations consist, primarily, of the Senior Notes issued on September 27,2005. The estimated fair value of the Senior Notes as of June 30, 2009,which is based on changes, if any, in interest rates and our creditworthinesssubsequent to the date on which the debt was issued, and which has beendetermined using quoted market prices, was $146 million as compared to a carryingvalue of $199 million.

 

Foreigncurrency exchange risk is primarily limited to our operation of five EthanAllen-operated retail design centers located in Canada as substantially allpurchases of imported parts and finished goods are denominated in United Statesdollars.  As such, gains or lossesresulting from market changes in the value of foreign currencies have not had,nor are they expected to have, a material effect on our consolidated results ofoperations.

 

Historically,we have not entered into financial instrument, including derivative,transactions for trading or other speculative purposes or to manage interestrate or currency exposure. However, in connection with the issuance of theSenior Notes, Global, in July and August 2005, entered into 6separate forward contracts to hedge the risk-free interest rate associated with$108.0 million of the related debt in order to minimize the negative impact ofinterest rate fluctuations on earnings, cash flows and equity. The forwardcontracts were entered into with a major banking institution thereby mitigatingthe risk of credit loss. Upon issuance of the Senior Notes in September 2005,the related forward contracts were settled. At the present time, we have nocurrent plans to engage in further hedging activities.

 

# **Item8. Financial Statements andSupplementary Data**

# ** **

Our ConsolidatedFinancial Statements and Supplementary Data are listed under Item 15 of thisAnnual Report.

 

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**Report of IndependentRegistered Public Accounting Firm**

** **

TheBoard of Directors and Shareholders

EthanAllen Interiors Inc.:

 

We haveaudited the accompanying consolidated balance sheets of Ethan Allen InteriorsInc. and subsidiaries (the “Company”) as of June 30, 2009 and 2008, andthe related consolidated statements of operations, shareholders’ equity, andcash flows for each of the years in the three-year period ended June 30,2009. We also have audited the Company’s internal control over financialreporting as of June 30, 2009, 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) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material 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.

 

In ouropinion, 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, 2009 and 2008, and theresults of its operations and their cash flows for each of the years in thethree-year period ended June 30, 2009, in conformity with U.S. generallyaccepted accounting principles. Also in our opinion, Ethan Allen Interiors, Inc.and 

 

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subsidiariesmaintained, in all material respects, effective internal control over financialreporting as of June 30, 2009, based on criteria established in InternalControl — Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).

 

Asdiscussed in Notes 1 and 12 to the consolidated financial statements, effectiveJuly 1, 2007, the Company adopted FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes, an interpretation of FASB StatementNo. 109.

 

 

/s/ KPMG LLP

 

Stamford, ConnecticutAugust 24, 2009

 

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**ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES**

**Consolidated Balance Sheets**

**June 30, 2009 and 2008**

(In thousands, except share data)

 
| ** **                                                                                                                                                                    | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ASSETS                                                                                                                                                                        |       |     |       |     |       |
|                                                                                                                                                                          |       |     |       |     |       |
| Current assets:                                                                                                                                                               |       |     |       |     |       |
| Cash and cash equivalents                                                                                                                                                     |       | $        | 52,960     |     | $          | 74,376 |   |
| Accounts receivable, less allowance for doubtful  accounts of $1,362 at June 30, 2009 and $2,535 at June 30, 2008                                                   |       | 13,086   |       | 12,672   |       |
| Inventories (note 4)                                                                                                                                                          |       | 156,519  |       | 186,265  |       |
| Prepaid expenses and other current assets                                                                                                                                     |       | 21,060   |       | 32,860   |       |
| Deferred income taxes (note 12)                                                                                                                                               |       | 8,077    |       | 6,125    |       |
| Total current assets                                                                                                                                                          |       | 251,702  |       | 312,298  |       |
|                                                                                                                                                                          |       |     |       |     |       |
| Property, plant and equipment, net (note 5)                                                                                                                                   |       | 333,599  |       | 350,432  |       |
| Goodwill and other intangible assets (notes 3 and 6)                                                                                                                          |       | 45,128   |       | 96,823   |       |
| Other assets                                                                                                                                                                  |       | 16,056   |       | 4,540    |       |
| Total assets                                                                                                                                                                  |       | $        | 646,485    |     | $          | 764,093 |   |
|                                                                                                                                                                          |       |     |       |     |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                                     |       |     |       |     |       |
|                                                                                                                                                                          |       |     |       |     |       |
| Current liabilities:                                                                                                                                                          |       |     |       |     |       |
| Current maturities of long-term debt (note 7)                                                                                                                                 |       | $        | 42         |     | $          | 41 |   |
| Customer deposits                                                                                                                                                             |       | 31,691   |       | 47,297   |       |
| Accounts payable                                                                                                                                                              |       | 22,199   |       | 26,444   |       |
| Accrued compensation and benefits                                                                                                                                             |       | 29,533   |       | 32,568   |       |
| Accrued expenses and other current liabilities                                                                                                                                |       | 28,998   |       | 29,152   |       |
| Total current liabilities                                                                                                                                                     |       | 112,463  |       | 135,502  |       |
|                                                                                                                                                                          |       |     |       |     |       |
| Long-term debt (note 7)                                                                                                                                                       |       | 203,106  |       | 202,988  |       |
| Other long-term liabilities                                                                                                                                                   |       | 24,993   |       | 27,924   |       |
| Deferred income taxes (note 12)                                                                                                                                               |       | —   |       | 21,906   |       |
| Total liabilities                                                                                                                                                             |       | 340,562  |       | 388,320  |       |
|                                                                                                                                                                          |       |     |       |     |       |
| Shareholders’ equity (notes 9, 10, 11 and 15):                                                                                                                           |       |     |       |     |       |
| Class A common stock, par value $.01,  150,000,000 shares authorized, 48,334,870 shares issued at June 30, 2009  and 48,251,780 shares issued at June 30, 2008 |       | 483      |       | 482      |       |
| Class B common stock, par value $.01, 600,000  shares authorized; no shares issued and outstanding at June 30, 2009 and  June 30, 2008                         |       | —   |       | —   |       |
| Preferred stock, par value $.01, 1,055,000 shares authorized,  no shares issued and outstanding at June 30, 2009 and 2008                                                |       | —   |       | —   |       |
| Additional paid-in capital                                                                                                                                                    |       | 356,446  |       | 354,725  |       |
|                                                                                                                                                                          |       | 356,929  |       | 355,207  |       |
| Less: Treasury stock (at cost), 19,380,941 shares at  June 30, 2009 and 19,656,901 shares at June 30, 2008                                                          |       | (583,220 | )          | (588,783 | )          |
| Retained earnings                                                                                                                                                             |       | 531,747  |       | 606,648  |       |
| Accumulated other comprehensive income                                                                                                                                        |       | 467      |       | 2,701    |       |
| Total shareholders’ equity                                                                                                                                               |       | 305,923  |       | 375,773  |       |
| Total liabilities and shareholders’ equity                                                                                                                               |       | $        | 646,485    |     | $          | 764,093 |   |

 

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, 2009, 2008 and 2007**

(In thousands, except per share data)

 
| ** **                                          | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                |       |     |       |     |       |     |       |
| Net Sales                                           |       | $        | 674,277    |     | $          | 980,045  |       | $ | 1,005,312 |   |
| Cost of sales                                       |       | 326,935  |       | 453,980  |       | 478,729  |       |
| Gross profit                                        |       | 347,342  |       | 526,065  |       | 526,583  |       |
|                                                |       |     |       |     |       |     |       |
| Operating expenses:                                 |       |     |       |     |       |     |       |
| Selling                                             |       | 182,800  |       | 229,590  |       | 223,146  |       |
| General and administrative                          |       | 170,312  |       | 193,639  |       | 178,876  |       |
| Goodwill impairment (note 6)                        |       | 48,400   |       | —   |       | —   |       |
| Restructuring and impairment charge (note 2)        |       | 18,601   |       | 6,836    |       | 13,442   |       |
| Total operating expenses                            |       | 420,113  |       | 430,065  |       | 415,464  |       |
|                                                |       |     |       |     |       |     |       |
| Operating income (loss)                             |       | (72,771  | )          | 96,000   |       | 111,119  |       |
|                                                |       |     |       |     |       |     |       |
| Interest and other miscellaneous income, net        |       | 3,355    |       | 7,891    |       | 10,369   |       |
|                                                |       |     |       |     |       |     |       |
| Interest and other related financing costs (note 7) |       | 11,764   |       | 11,713   |       | 11,762   |       |
|                                                |       |     |       |     |       |     |       |
| Income (loss) before income taxes                   |       | (81,180  | )          | 92,178   |       | 109,726  |       |
|                                                |       |     |       |     |       |     |       |
| Income tax expense (benefit) (note 12)              |       | (28,493  | )          | 34,106   |       | 40,499   |       |
|                                                |       |     |       |     |       |     |       |
| Net income (loss)                                   |       | $        | (52,687    | )        | $          | 58,072   |       | $ | 69,227 |   |
|                                                |       |     |       |     |       |     |       |
| Per share data (notes 10 and 17):                   |       |     |       |     |       |     |       |
|                                                |       |     |       |     |       |     |       |
| Net income (loss) per basic share                   |       | $        | (1.83      | )        | $          | 1.98     |       | $ | 2.19 |   |
|                                                |       |     |       |     |       |     |       |
| Basic weighted average common shares                |       | 28,814   |       | 29,267   |       | 31,566   |       |
|                                                |       |     |       |     |       |     |       |
|                                                |       |     |       |     |       |     |       |
| Net income (loss) per diluted share                 |       | $        | (1.83      | )        | $          | 1.97     |       | $ | 2.15 |   |
|                                                |       |     |       |     |       |     |       |
| Diluted weighted average common shares              |       | 28,814   |       | 29,470   |       | 32,261   |       |
|                                                |       |     |       |     |       |     |       |
|                                                |       |     |       |     |       |     |       |
| Dividends declared per common share                 |       | $        | 0.65       |     | $          | 0.88     |       | $ | 0.80 |   |

 

See accompanying notes to consolidated financial statements.

 

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**ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES**

**Consolidated Statements of Cash Flows**

**For the years Ended June 30, 2009, 2008 and 2007**

(Inthousands)

 
| ** **                                                                           | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Operating activities                                                                 |       |     |       |     |       |     |       |
| Net income (loss)                                                                    |       | $        | (52,687    | )        | $          | 58,072   |       | $ | 69,227 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:   |       |     |       |     |       |     |       |
| Depreciation and amortization                                                        |       | 25,635   |       | 24,670   |       | 23,013   |       |
| Compensation expense related to share-based awards                                   |       | 1,719    |       | 1,260    |       | 821      |       |
| Provision (benefit) for deferred income taxes                                        |       | (32,158  | )          | (2,364   | )          | 200      |       |
| Excess tax benefits from shared-based awards                                         |       | —   |       | (2,093   | )          | (5,015   | )          |
| Goodwill impairment                                                                  |       | 48,400   |       | —   |       | —   |       |
| Restructuring and impairment charge                                                  |       | 7,038    |       | 1,762    |       | 9,439    |       |
| (Gain) loss on disposal of property, plant and  equipment                            |       | 1,001    |       | 110      |       | (391     | )          |
| Other                                                                                |       | 198      |       | 221      |       | 500      |       |
| Changes in operating assets and liabilities, net of  effects of acquired businesses: |       |     |       |     |       |     |       |
| Accounts receivable                                                                  |       | (776     | )          | 618      |       | 6,677    |       |
| Inventories                                                                          |       | 31,428   |       | (91      | )          | 14,531   |       |
| Prepaid and other current assets                                                     |       | 10,627   |       | 3,626    |       | 220      |       |
| Other assets                                                                         |       | 1,354    |       | 660      |       | 657      |       |
| Customer deposits                                                                    |       | (16,266  | )          | (9,086   | )          | (4,201   | )          |
| Accounts payable                                                                     |       | (3,835   | )          | 3,230    |       | (4,334   | )          |
| Accrued expenses and other current liabilities                                       |       | 3,590    |       | (3,784   | )          | 7,993    |       |
| Other liabilities                                                                    |       | (3,335   | )          | 9,326    |       | (148     | )          |
|                                                                                 |       |     |       |     |       |     |       |
| Net cash provided by operating activities                                            |       | 21,933   |       | 86,137   |       | 119,189  |       |
|                                                                                 |       |     |       |     |       |     |       |
| Investing activities:                                                                |       |     |       |     |       |     |       |
| Proceeds from the disposal of property, plant and  equipment                         |       | 6,384    |       | 6,943    |       | 5,431    |       |
| Capital expenditures                                                                 |       | (22,537  | )          | (60,038  | )          | (59,073  | )          |
| Acquisitions                                                                         |       | (1,366   | )          | (7,777   | )          | (15,297  | )          |
| Other                                                                                |       | (7       | )          | (462     | )          | 198      |       |
|                                                                                 |       |     |       |     |       |     |       |
| Net cash used in investing activities                                                |       | (17,526  | )          | (61,334  | )          | (68,741  | )          |
|                                                                                 |       |     |       |     |       |     |       |
| Financial activities:                                                                |       |     |       |     |       |     |       |
| Payments on long-term debt and capital lease  obligations                            |       | (41      | )          | (40      | )          | (38      | )          |
| Purchases and retirements of company stock                                           |       | —   |       | (75,577  | )          | (57,152  | )          |
| Proceeds from the issuance of common stock                                           |       | 2        |       | 474      |       | 521      |       |
| Excess tax benefits from share-based payment  arrangements                           |       | —   |       | 2,093    |       | 5,015    |       |
| Payment of deferred financing costs                                                  |       | (1,380   | )          | —   |       | (107     | )          |
| Payment of cash dividends                                                            |       | (23,617  | )          | (25,495  | )          | (24,797  | )          |
|                                                                                 |       |     |       |     |       |     |       |
| Net cash used in financing activities                                                |       | (25,036  | )          | (98,545  | )          | (76,558  | )          |
|                                                                                 |       |     |       |     |       |     |       |
| Effect of exchange rate changes on cash                                              |       | (787     | )          | 239      |       | 188      |       |
|                                                                                 |       |     |       |     |       |     |       |
| Net increase (decrease) in cash and cash equivalents                                 |       | (21,416  | )          | (73,503  | )          | (25,922  | )          |
|                                                                                 |       |     |       |     |       |     |       |
| Cash and cash equivalents — beginning of year                                   |       | 74,376   |       | 147,879  |       | 173,801  |       |
| Cash and cash equivalents — end of year                                         |       | $        | 52,960     |     | $          | 74,376   |       | $ | 147,879 |   |
|                                                                                 |       |     |       |     |       |     |       |
| Supplemental cash flow information:                                                  |       |     |       |     |       |     |       |
| Income taxes paid                                                                    |       | $        | 8,237      |     | $          | 33,618   |       | $ | 37,561 |   |
| Interest paid                                                                        |       | $        | 11,098     |     | $          | 11,132   |       | $ | 11,173 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

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**ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES**

**Consolidated Statements of Shareholders’ Equity**

**For the Years Ended June 30, 2009, 2008 and2007**

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

 
| ** **                                                                                           | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | **Accumulated**   | ** ** | ** **   | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------|------------|-------------------|------------|--------------|------------|------------|------------|
| ** **                                                                                           | ** ** | ** ** | ** ** | **Additional** | ** ** | ** **   | ** ** | **Other**         | ** ** | ** **   | ** ** | ** ** | ** ** |
| ** **                                                                                           | ** ** | **Common** | ** ** | **Paid-in**    | ** ** | **Treasury** | ** ** | **Comprehensive** | ** ** | **Retained** | ** ** | ** ** | ** ** |
| ** **                                                                                           | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **Stock**    | ** ** | **Income**        | ** ** | **Earnings** | ** ** | **Total**  | ** ** |
|                                                                                                 |       |       |       |           |       |         |       |              |       |         |       |       |       |
| Balance as of June 30, 2006                                                                     |       | $          | 467        |           | $          | 307,852      |       | $                 | (421,308   | )            | $          | 935        |       | $ | 529,496 |   | $ | 417,442 |   |
|                                                                                                 |       |       |       |           |       |         |       |              |       |         |       |       |       |
| Issuance of 767,938 common shares upon the exercise  of share-based awards (notes 9 and 11)          |       | 7          |       | 16,388         |       | —       |       | —            |       | —       |       | 16,395     |       |
| Compensation expense associated with share-based  awards (notes 9 and 11)                            |       | —     |       | 821            |       | —       |       | —            |       | —       |       | 821        |       |
| Tax benefit associated with exercise of share-based  awards (notes 9, 11 and 12)                     |       | —     |       | 5,015          |       | —       |       | —            |       | —       |       | 5,015      |       |
| Charge for early vesting of share-based awards                                                       |       | —     |       | 22             |       | —       |       | —            |       | —       |       | 22         |       |
| Treasury shares issued in connection with retail  design center acquisition (26,269 shares) (note 3) |       | —     |       | 170            |       | 765          |       | —            |       | —       |       | 935        |       |
| Purchase/retirement of 2,104,231 shares of company  stock (note 9)                                   |       | —     |       | —         |       | (75,462      | )          | —            |       | —       |       | (75,462    | )          |
| Dividends declared on common stock                                                                   |       | —     |       | —         |       | —       |       | —            |       | (25,188      | )          | (25,188    | )          |
| Other comprehensive income (loss) (notes 7 and 15)                                                   |       |       |       |           |       |         |       |              |       |         |       |       |       |
| Currency translation adjustments                                                                     |       | —     |       | —         |       | —       |       | 387               |       | —       |       | 387        |       |
| Loss on derivatives, net-of-tax                                                                      |       | —     |       | —         |       | —       |       | 48                |       | —       |       | 48         |       |
| Net income                                                                                           |       | —     |       | —         |       | —       |       | —            |       | 69,227       |       | 69,227     |       |
| Total comprehensive income                                                                           |       |       |       |           |       |         |       |              |       |         |       | 69,662     |       |
| 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      |       |
| Tax benefit associated with exercise of share-based  awards (notes 9, 11 and 12)                     |       | —     |       | —         |       | —       |       | —            |       | —       |       | —     |       |
| 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 at June 30, 2009                                                                        |       | $          | 483        |           | $          | 356,446      |       | $                 | (583,220   | )            | $          | 467        |       | $ | 531,747 |   | $ | 305,923 |   |

 

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)           Summaryof Significant Accounting Policies**

 

Basis ofPresentation

 

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 of293 retail design centers, of which 159 are Company-operated and 134 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 ten manufacturingfacilities, two of which include separate sawmill operations, locatedthroughout the United States and one in Mexico.

 

Use of Estimates

 

We prepare ourconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States, which requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe consolidated financial statements and the reported amounts of revenues andexpenses during the reporting period.  Due to the inherent uncertaintyinvolved in making those estimates, actual results could differ from thoseestimates.  Areas in which significant estimates have been made include,but are not limited to, revenue recognition, the allowance for doubtfulaccounts receivable, inventory obsolescence, tax valuation allowances, usefullives for property, plant and equipment and definite lived intangible assets,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).

 

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 account for our operating leases in accordance with the provisionsof Statement of Financial Accounting Standards (“SFAS”) No. 13, *Accounting for Leases*, which require minimum lease paymentsbe recognized on a straight-line basis, beginning on the date that the lesseetakes possession 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 an operatinglease 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 in accordance with SFAS No. 141, *BusinessCombinations*, which requires application of the purchase method forall business combinations initiated after June 30, 2001.  Accounting for these transactions as purchasebusiness combinations requires the allocation of purchase price paid to the assetsacquired and liabilities assumed based on their fair values as of the date ofthe acquisition.  The amount paid inexcess of the fair value of net assets acquired is accounted for as goodwill.

 

Goodwill and Other Intangible Assets

 

Our intangible assets are accounted for in accordance with SFAS No. 142,*Goodwill and Other Intangible Assets*,and are comprised, primarily, of goodwill, which represents the excess of costover the fair value of net assets acquired, and trademarks. In re-assessing theuseful lives of our goodwill and other intangible assets upon adoption of SFAS No. 142,we determined these assets to have indefinite useful lives. Accordingly,amortization of these assets ceased on that date.  Prior to the adoption date (July 1,2001), these assets were amortized on a straight-line basis over fortyyears.  We conduct an annual impairmentanalysis the first of April each fiscal year, unless events occur orcircumstances change that would more likely than not reduce the fair value ofthe goodwill or other intangible asset below its carrying value. See note 6 foradditional information.

 

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, whichis based on changes, if any, in interest rates and our creditworthinesssubsequent to the date on 

 

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which the debt was issued, and which has beendetermined using quoted market prices, totaled $146.0 million at June 30,2009 and $182.1million and at June 30, 2008, as compared to a carrying value onthose dates of $199.0 million and $198.8 million, respectively.  See Note 7 for a discussion of the change in July 2007of our credit rating.

 

Income Taxes

 

Income taxes are accounted for under the asset and liability method.  Deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differences betweenthe financial statement carrying amounts of existing assets and liabilities andtheir respective tax bases 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 on deferred tax assets andliabilities of a change in tax rates is recognized in income in the period thatincludes the enactment date.

 

Effective July 1, 2007, we adopted Financial Accounting StandardsBoard (“FASB”) Interpretation No. (“FIN”) 48, *Accountingfor Uncertainty in Income Taxes*, an interpretation of FASB StatementNo. 109, Accounting for Income Taxes, which provides a comprehensive modelfor the recognition, measurement, presentation, and disclosure in a company’sfinancial statements of uncertain tax positions taken, or expected to be taken,on a tax return. If an income tax position exceeds a 50% probability of successupon tax audit, based solely on the technical merits of the position, thecompany recognizes an income tax benefit in its financial statements. The taxbenefits recognized are measured based on the largest benefit that has agreater than 50% likelihood of being realized upon ultimate settlement.

 

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 purchaseorder or retail sales invoice); the sales arrangement specifies a fixed ordeterminable sales price; product is shipped or services are provided to thecustomer; and collectibility 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 $68.2million, $87.4 million, and $87.6 million for fiscal years 2009, 2008, and2007, respectively.

 

Advertising Costs

 

Advertising costsare expensed when first aired or distributed. Our total advertising costsincurred in fiscal years 2009, 2008 and 2007, amounted to $25.1 million, $39.4million, and $35.9 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 30,2009 and 2008 totaled $0.9 million and $1.6 million, respectively.

 

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Earnings Per Share

 

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

 

Share-BasedCompensation

 

Effective July 1,2005, share-based awards are accounted for in accordance with the recognitionand measurement provisions of SFAS No. 123 (revised 2004), *Share-Based Payment* (“SFAS No. 123(R)”), which replacedSFAS No. 123, *Accounting for Stock-BasedCompensation*, and superseded Accounting Principles Board Opinion(“APB”) No. 25, *Accounting for StockIssued to Employees*, and related interpretations. SFAS No. 123(R) requirescompensation costs related to share-based payment transactions, includingemployee stock options, to be recognized in the financial statements.

 

In adopting SFAS No. 123(R) onJuly 1, 2005, we applied the modified prospective approach to transition.Under the modified prospective approach, the provisions of SFAS No. 123(R) areto be applied to new awards and to awards modified, repurchased, or cancelledafter the required effective date. Additionally, compensation cost for theportion of awards for which the requisite service has not been rendered thatare outstanding as of the required effective date is recognized as therequisite service is rendered on or after the required effective date. Thecompensation cost for that portion of awards is based on the grant-date fairvalue of those awards as calculated for either recognition or pro-formadisclosures under SFAS No. 123.

 

We estimate, as ofthe date of grant, the fair value of stock options awarded using theBlack-Scholes option-pricing model. Use of a valuation model requiresmanagement to make certain assumptions with respect to selected model inputs,including anticipated changes in the underlying stock price (i.e. expectedvolatility) and option exercise activity (i.e. expected life). Expectedvolatility is based on the historical volatility of our stock and othercontributing factors.  The expected lifeof options granted, which represents the period of time that the options areexpected to be outstanding, is based, primarily, on historical data.

 

Share-basedcompensation expense is included in the Consolidated Statements of Operationswithin selling, general and administrative expenses.  Tax benefits associated with our share-basedcompensation arrangements are included in the Consolidated Statements ofOperations within income tax expense.

 

All shares of ourcommon stock received in connection with the exercise of share-based awardshave been recorded as treasury stock and result in a reduction in shareholders’equity.

 

Foreign CurrencyTranslation

 

The functionalcurrency of each Company-operated foreign retail location is the respectivelocal currency.  Assets and liabilitiesare translated into United States dollars using the current period-end exchangerate and income and expense amounts are translated using the average exchangerate for the period in which the transaction occurred.  Resulting translation adjustments arereported as a component of accumulated other comprehensive income withinshareholders’ equity.

 

DerivativeInstruments

 

We account for derivativeinstruments in accordance with SFAS No. 133, *Accountingfor Certain Derivative Instruments and Certain Hedging Activities*,and SFAS No. 138, which later amended SFAS No. 133.  Upon review of our contracts as of June 30,2009, we have determined that we have no derivative instruments.

 

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Recent AccountingPronouncements

 

In December 2007, the FASB issued SFAS No. 141(revised 2007), *Business Combinations* (SFAS No. 141(R)),which replaces SFAS No. 141. SFAS No. 141(R) establishesprinciples and requirements for how an acquirer in a business combinationrecognizes and measures in its financial statements the identifiable assetsacquired, the liabilities assumed, and any controlling interest; recognizes andmeasures the goodwill acquired in the business combination or a gain from abargain purchase; and determines what information to disclose to enable usersof the financial statements to evaluate the nature and financial effects of thebusiness combination. SFAS No. 141(R) is to be applied prospectivelyto business combinations for which the acquisition date is on or after anentity’s fiscal year that begins after December 15, 2008 (July 1,2009 for the Company). The impact of this Statement on the Company’s financialposition, results of operations and cash flows will be dependent on the terms,conditions and details of such acquisitions.

 

In February 2007,the FASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities*, which allows the Companyto choose to measure selected financial assets and financial liabilities atfair value. Unrealized gains and losses on items for which the fair valueoption has been elected are reported in earnings.  We adopted SFAS No. 159 on July 1,2008 and have not elected the permitted fair value measurement provisions ofthis statement.

 

In September 2006, the FASB issued SFAS No. 157,*Fair Value Measurements* (“SFAS No. 157”),which defines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles, and expands disclosures about fairvalue measurements, yet does not require any new fair value measurements. In February 2008, the FASB issued FASB Staff Position No. 157-2 (“FSPNo. 157-2”), which delayed the effective date of SFAS No. 157 as itrelates to non-financial assets and non-financial liabilities until July 1,2009 for the Company, except for items that are recognized or disclosed at fairvalue by the Company on a recurring basis.  Effective July 1, 2008,the Company adopted the provisions of SFAS No. 157, except as it relatesto those non-financial assets and non-financial liabilities excluded under FSP No. 157-2. Those excluded items for which the Company has not applied the fair valueprovisions of SFAS No. 157 include goodwill and other intangible assets(note 6), assets held for sale (note 2), liabilities for exit or disposalactivities (note 2), and business acquisitions (note 3).  The Company iscurrently evaluating the impact of this statement on the Company’s financialposition, results of operations and cash flows as it relates to non-financialassets and non-financial liabilities.  This pronouncement became effectivefor us on July 1, 2008.  See note 18for more information.

 

In June 2008, theFASB issued FASB Staff Position No. EITF 03-6-1, *DeterminingWhether Instruments Granted in Share-Based Payment Transactions areParticipating Securities*, which requires that unvested share-basedpayment awards containing non-forfeited rights to dividends be included in thecomputation of earnings per common share. The adoption of FSB EITF 03-6-1 is effective for fiscal years beginningafter December 15, 2008 and interim periods within those fiscal years (July 1,2009 for the Company).  Retrospectiveapplication is required.  We areevaluating this pronouncement but do not expect it to impact basic or dilutedearnings per share.

 

**(2)           Restructuring and Impairment Charges**

 

In recent years, we have announced and executed plansto consolidate our operations as part of an overall strategy to maximizeproduction efficiencies and maintain our competitive advantage.

 

In 2009, the Company madeseveral announcements on changes to our operations as we continue to improvethe structure of our business especially in light of the recent economicdownturn.  In January 2009, theCompany announced a plan to consolidate the operations of its Eldred,Pennsylvania upholstery manufacturing plant and several of its retail servicecenters. In June 2009, the Company announced the consolidation of itsChino, California operations into its Maiden, North Carolina facility and theconsolidation of its Andover, Maine sawmill and dimension mill to its BeecherFalls, Vermont sawmill and dimension mill operations. For these fiscal 

 

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2009 actions, the Companyestimates pre-tax restructuring, impairment, and other related charges willultimately approximate $30 million, consisting of $15 million in write down oflong-lived assets, $8 million in employee severance and other payroll andbenefit costs, and $7 million in other associated costs.  By segment, weexpect $23 million in costs for the wholesale segment and $7 million for theretail segment.  Total costs for these 2009 actions in the current fiscalyear by segment are $17.0 million for Wholesale, and $2.6 million for Retailall of which have been classified in the Statement of Operations asrestructuring and impairment charges. Approximately 800 employee positions and140 contract worker positions will be eliminated due to these actions.

 

In January 2008, we announced a plan toconsolidate the operations of certain Company-operated retail design centersand retail service centers. In connection with this initiative, we havepermanently ceased operations at ten design centers and six retail servicecenters which, for the most part, were consolidated into other existingoperations.  We also implemented ourdesign team concept across the Retail division at the end of the fiscalyear.  We recorded pre-tax restructuring,impairment, and other related charges of $6.8 million for fiscal 2008, with$3.3 million for lease cancellation and other costs which will be paid out overperiods ranging from less than one to seven years, $2.7 million, which wasnon-cash in nature, related to fixed asset impairment charges, primarily forreal property and leasehold improvements, and $0.9 million was related toemployee severance and benefits.  Duringfiscal 2009, we recorded a net reduction of pre-tax restructuring, impairment,and other related charges of $1.0 million, primarily due to net gains on thesale of real estate of $4.2 million, partly offset by additional charges andadjustments to previous estimates for leased facilities of $2.3 million andemployee severance, benefits and other charges of $0.5 million. Cumulativecharges to date for these actions total $5.5 million, all of which have beenclassified in the Statement of Operations as restructuring and impairmentcharges. In addition to the Retail charges, $0.4 million was recorded in thefirst quarter of fiscal 2009 to update the fair value of a wholesale plant siteheld for sale.  These charges arereported to together in the following table.

 

On September 6, 2006, we announced a plan toclose our Spruce Pine, North Carolina case goods manufacturing facility andconvert our Atoka, Oklahoma upholstery manufacturing facility into a regionaldistribution center.  The decisionimpacted approximately 465 employees.  Werecorded a pre-tax restructuring and impairment charge of $14.1 million duringthe quarter ended September 30, 2006, of which $4.0 million was related toemployee severance and benefits and other plant exit costs, and $10.1 millionof fixed asset impairment charges. During the first six months of fiscal 2007,adjustments totaling $0.4 million were recorded to reverse remaining previouslyestablished accruals which were no longer deemed necessary.

 

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Activity in the Company’s restructuring reserves issummarized in the table below (in thousands) and is classified with accruedexpenses and other current liabilities in the Consolidated Balance Sheets:

 
| ** **                                           | ** ** | **Balance  June 30,  2008** | ** ** | **New   charges  (credits)** | ** ** | **Utilized** | ** ** | **Adjust-  ments** | ** ** | **Balance  June 30,  2009** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|------------------------------|------------|--------------|------------|--------------------|------------|----------------------------------|------------|
| 2009 Actions                                         |       |                             |       |                         |       |         |       |               |       |                             |       |
| Employee severance,  other payroll and benefit costs |       | $                                | —     |                         | $          | 7,849        |       | $                  | (3,985     | )                                | $          | — |   | $ | 3,864 |   |
| Other plant exit costs                               |       | —                           |       | 825                          |       | (171         | )          | —             |       | 654                              |       |
| Write down of  long-lived assets                     |       | —                           |       | 11,347                       |       | (10,921      | )          | (426               | )          | —                           |       |
|                                                 |       | $                                | —     |                         | $          | 20,021       |       | $                  | (15,077    | )                                | $          | (426 | ) | $ | 4,518 |   |
|                                                 |       |                             |       |                         |       |         |       |               |       |                             |       |
| 2008 Actions                                         |       |                             |       |                         |       |         |       |               |       |                             |       |
| Employee severance,  other payroll and benefit costs |       | $                                | —     |                         | $          | 369          |       | $                  | —     |                             | $          | — |   | $ | 369 |   |
| Other plant exit costs                               |       | 3,358                            |       | 1,677                        |       | (2,769       | )          | 626                |       | 2,892                            |       |
| Write down of  long-lived assets                     |       | —                           |       | (4,080                       | )          | 3,664        |       | 416                |       | —                           |       |
|                                                 |       | $                                | 3,358      |                         | $          | (2,034       | )          | $                  | 895        |                             | $          | 1,042 |   | $ | 3,261 |   |

 

**(3)           Business Acquisitions**

 

The Company’sbusiness acquisition practice with respect to independent retail design centersis to selectively acquire, at market value, design centers located in marketsof strategic interest to the Company. The Company does not actively pursue acquisitions, but is sometimesapproached by independent retailers who are retiring.  Acquisitions are subject to a contractualholdback, or reconciliation, period, during which the parties to thetransaction 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.

 

During fiscal2009, 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.

 

During fiscal2008, we acquired, in two separate transactions, five Ethan Allen retail designcenters (“DCs”) from independent retailers for consideration of approximately$4.2 million in cash and forgiveness of receivables, and assumed customerdeposits of $4.3 million and other liabilities of $0.1 million.

 

Also in fiscal2008, we acquired a cut and sew upholstery facility from Americraft Leather inorder to strengthen the Company’s vertically integrated structure and secure anadditional 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.

 

During fiscal2007, we acquired, in seven separate transactions, twelve Ethan Allen retaildesign centers from independent retailers for total consideration ofapproximately $17.0 million in cash and forgiveness of receivables.

 

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A summary of ourallocation of purchase price in each of the last three fiscal years is providedbelow (in thousands):                                                                                          

 
| ** **                            | ** ** | ** ** | ** ** | **Fiscal Year Ended June 30,** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|------------|------------|-------------------------------------|------------|------------|------------|
| ** **                            | ** ** | **2009**   | ** ** | **2008**                            | ** ** | **2007**   | ** ** |
| ** **                            | ** ** | **Retail** | ** ** | **Wholesale**                       | ** ** | **Retail** | ** ** | **Retail** | ** ** |
| Business segment                      |       |       |       |                                |       |       |       |   |   |
| Total consideration                   |       | $          | 1,841      |                                | $          | 4,298      |       | $ | 4,182 |   | $ | 16,957 |   |
| Assets acquired (liabilities assumed) |       |       |       |                                |       |       |       |   |   |
| Inventory                             |       | 1,682      |       | 1,054                               |       | 3,236      |       | 6,765 |   |
| PP&E and other assets             |       | 242        |       | 2,707                               |       | 1,029      |       | 9,177 |   |
| Customer deposits                     |       | (660       | )          | —                              |       | (4,311     | )          | (3,070 | ) |
| A/P and other liabilities             |       | (186       | )          | (100                                | )          | 34         |       | (425 | ) |
| Goodwill                              |       | $          | 763        |                                | $          | 637        |       | $ | 4,194 |   | $ | 4,510 |   |

 

**(4)           Inventories**

 

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

 
| ** **      | ** ** | **2009** | ** **    | **2008** | ** ** |    |   |   |   |
|-----------------|------------|----------|---------------|----------|------------|---------|--------|--------|--------|
| Finished goods  |       | $        | 130,180       |     | $          | 153,981 |   |   |   |   |   |
| Work in process |       | 7,476    |          | 5,985    |       |    |   |   |   |
| Raw materials   |       | 18,863   |          | 26,299   |       |    |   |   |   |
|            |       | $        |  156,519 |     | $          | 186,265 |   |   |   |   |   |

 

Inventories are presentednet of a related valuation allowance of $2.2 million at June 30, 2009 and$2.3 million at June 30, 2008

 

**(5)           Property, Plant and Equipment**

 

Property, plantand equipment at June 30 are summarized as follows (in thousands):

 
| ** **                                      | ** ** | **2009** | ** **    | **2008** | ** ** |
|-------------------------------------------------|------------|----------|---------------|----------|------------|
| Land and improvements                           |       | $        | 92,903        |     | $          | 89,352 |   |
| Buildings and improvements                      |       | 392,940  |          | 382,354  |       |
| Machinery and equipment                         |       | 110,057  |          | 120,243  |       |
|                                            |       | 595,900  |          | 591,949  |       |
| Less: accumulated depreciation and amortization |       | (262,301 | )             | (241,517 | )          |
|                                            |       | $        |  333,599 |     | $          | 350,432 |   |

 

**(6)           Goodwill and Other Intangible Assets**

 

As of June 30,2009, we had goodwill and other indefinite-lived intangible assets of $25.4million and $19.7 million, respectively. Comparable balances as of June 30, 2008 were $77.1 million and$19.7 million, respectively. Goodwill in the wholesale and retail segments was$25.4 million and $0 million, respectively, at June 30, 2009 and $28.2million and $48.9 million, respectively, at June 30, 2008. The wholesalesegment, at both dates, includes additional indefinite-lived intangible assetsof $19.7 million, which represent Ethan Allen trade names.

 

In accordance withSFAS No. 142, we do not amortize goodwill or other indefinite-livedintangible assets but, rather, we conduct an annual impairment analysis ofgoodwill and other indefinite lived intangible assets the first of April eachfiscal year, unless events occur or circumstances change that would more likelythan not reduce the fair value of the goodwill or other indefinite livedintangible assets below their carrying value. In determining whether an interimtest is appropriate, management considers several factors including changes in theCompany’s stock price, financial performance, third party ratings on its longterm debt, and expected financial outlook of the business. Methods employed tovalue the enterprise and the Company’s retail and wholesale segments includethe market approach and the income approach, which are reconciled with thetotal market capitalization of the Company. These valuation methods usehistorical revenues and cash flows, as well as Company and external 

 

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analysts’financial projections and apply discount rates, weighted average cost ofcapital rates, total invested capital multiples, and premium control multiples.Fair value of our trade name is valued using the relief-from-royalty method.Significant factors used in trade name valuation are royalty rates, futuregrowth and discount rates, and expense rates.

 

In the fiscalquarter ended December 31, 2008, net sales declined 7.9% from the previousquarter and there was a meaningful decline (34.5%) in the company’s averagestock price from the first fiscal quarter to the second (from $26.35 to$17.27). This decline coupled with the sudden and dramatic change in the businessclimate as seen through the financial crisis with global banking institutionsled to an interim evaluation of goodwill and other intangible assets. As aresult of these tests, management concluded that the estimated value of thewholesale and retail segments exceeded their carrying values and no impairmentwas indicated.

 

In the fiscalquarter ended March 31, 2009, net sales declined 26.0% from the previousquarter resulting in a 660 basis point decline in gross margin plus a furtherdecline (36.2%) in the company’s average stock price (from $17.27 to $11.02).These declines coupled with a significant loss from operations led to a secondinterim evaluation of goodwill and other intangible assets. As a result ofthese tests, management concluded the carrying value of goodwill on our retaildivision’s books exceeded its fair value. Therefore, we recorded a non-cashimpairment charge of $48.4 million. No impairment of the goodwill or otherindefinite lived assets on our wholesale division’s books was appropriate.

 

In the fiscalquarter ended June 30, 2009, the Company performed its annual impairmenttest on April 1 and noted no additional impairment was appropriate. Duringthe quarter, business performance stabilized with net sales slightly lower (1%)than the previous quarter, gross margin improved 160 basis points and there wasa slight increase in cash on hand (to $53 million). The average price of ourstock increased 9.8% (from $11.02 to $12.11). The ratings on the Company’s longterm debt were lowered by third parties to speculative grade and the Companyupdated its forecasts. The Company considered these factors and concluded thatan interim impairment test was not required on the wholesale segment. Noadditional evaluation of the retail segment was appropriate as all goodwill waswritten off in the previous fiscal quarter.

 

There can be noassurance that the outcome of future reviews will not result in substantialimpairment charges.  Impairmentassessment inherently involves judgments as to assumptions about expectedfuture cash flows and the impact of market conditions on thoseassumptions.  Future events and changingmarket conditions may impact our assumptions as to prices, costs or otherfactors that may result in changes in our estimates of future cash flows.  Although we believe the assumptions we use intesting for impairment are reasonable, significant changes in any of ourassumptions could produce a significantly different result.

 

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

 

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

 
| ** **                   | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|
| 5.375% Senior Notes due 2015 |       | $        | 198,997    |     | $          | 198,837 |   |
| Industrial revenue bonds     |       | 3,855    |       | 3,855    |       |
| Other debt obligations       |       | 296      |       | 337      |       |
| Total debt                   |       | 203,148  |       | 203,029  |       |
| Less: current maturities     |       | 42       |       | 41       |       |
| Total long-term debt         |       | $        | 203,106    |     | $          | 202,988 |   |

 

Senior Notes

 

On September 27,2005, we completed a private offering of $200.0 million of ten-year seniorunsecured notes due 2015 (the “Senior Notes”). The Senior Notes were offered byGlobal and have an annual coupon rate of 5.375% with interest payablesemi-annually in arrears on April 1 and October 1 of each year.  Proceeds received in connection with theissuance of the Senior Notes, net of a related discount of $1.6 million,totaled $198.4 million. 

 

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We used the netproceeds from the offering to expand our retail network, invest in ourmanufacturing and logistics operations, and for other general corporatepurposes.  As of June 30, 2009,outstanding borrowings related to this transaction have been included in theConsolidated Balance Sheets within long-term debt. The discount on the SeniorNotes is being amortized to interest expense over the life of the related debtas is debt issuance costs of $2.0 million primarily for banking, legal,accounting, rating agency, and printing services and $0.8 million of losses onsettled forward contracts entered in conjunction with this debt issuance.

 

The Senior Notesmay be redeemed in whole or in part, at Global’s option at any time at thegreater of (i) 100% of the principal amount of the notes to be redeemedand (ii) the sum of the present values of the remaining scheduled paymentsof principal and interest on the Senior Notes to be redeemed, discounted to thedate of redemption on a semi-annual basis at the applicable treasury rate plus20 basis points, plus, in each case, accrued and unpaid interest to theredemption date.  In the event of default,the trustee or the holders of 25% of the outstanding principal amount of theSenior Notes may accelerate payment of principal, premium, if any, and accruedand unpaid interest.  Events of defaultinclude failure to pay in accordance with the terms of the indenture, includingfailure, under certain circumstances, to pay indebtedness other than the SeniorNotes.

 

Revolving CreditFacility

 

On January 29,2009, the Company amended its July 2005 five-year, $200 million unsecuredrevolving credit facility.  The Amendmentreduced the line to $100 million, and contained various operating and financialcovenants. On April 29, 2009 the Company terminated the revolving creditfacility, due to the Company’s desire to have in place a revolver that providedgreater flexibility.  On May 29,2009, the Company entered into a new three-year, $40 million senior securedasset-based revolving credit facility (“the “Facility”). The Facility providesrevolving credit financing of up to $40 million, subject to borrowing base availability,and includes an accordion feature which, if exercised, would provide up to anadditional $20 million of financing.

 

At the Company’soption, revolving loans under the Agreement bear interest at an annual rate ofeither:

 

(a)                London Interbank Offered rate (“LIBOR”) plus 3.25% to 4.25%, based onthe average availability, or

(b)               the higher of (i) a prime rate, (ii) the federal fundseffective rate plus 0.50%, or (iii) a LIBOR rate plus 1.00% plus, in eachcase, an additional 2.25% to 3.25%, based on average availability.

 

The Company willpay a commitment fee of 0.50% per annum on the unused portion of the Facilityand participation fees on issued letters of credit at an annual rate of 1.625%to 4.25%, based on the average availability and the letter of credit type, anda fronting fee of 0.125% per annum.

 

The borrowing baseat any time equals the sum of: up to 90% of eligible credit card receivables;plus up to 85% of eligible accounts receivable; plus up to 85% of the netorderly liquidation value of eligible inventory.

The Facility issecured by all property owned, leased or operated by the Company in the UnitedStates excluding any real property owned by the Company and also excludes anyintellectual property owned by the Company unless availability is less than orequal to $17.5 million.

 

The Facilitycontains customary covenants which may limit the Company’s ability to incurdebt; engage in mergers and consolidations; make restricted payments (includingdividends); sell certain assets; and make investments. The Company may makerestricted payments (including dividends) as long as availability equals orexceeds the greater of (i) 25% of the aggregate commitment or (ii) $12million.  If the average monthlyavailability is less than the greater of (i) 15% of the aggregatecommitment and (ii) $9 million, the Company is also required to meet afixed charge coverage ratio financial covenant which may not be less than 1 to1 for any period of four consecutive fiscal quarters.

 

The Facilitycontains customary borrowing conditions and events of default (the occurrenceof which would entitle the lenders to accelerate the maturity of anyoutstanding borrowings and terminate their commitment to make future loans).

 

At June 30,2009, we had no revolving loans and $12.5 million in trade and standby lettersof credit outstanding under the Credit Agreement. Remaining available borrowingcapacity under the Credit Agreement was $27.5 

 

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million at thatdate. During fiscal 2009, Standard & Poor’s (“S&P”) lowered ourcorporate and senior unsecured credit ratings to BB from BBB-. While the changein our credit rating had no impact on our existing credit facilities, theS&P downgrade, if not improved to investment grade by March 2010,gives a right to the issuer of our private label credit cards to demand astandby letter of credit of up to $12 million. Any additional letters of creditwould reduce the credit available for borrowings under the revolver.

 

Other Borrowings

 

Approximately $3.9million of our outstanding debt is related to industrial revenue bonds whichwere issued to finance capital improvements at the Ethan Allen Hotel andConference Center, which is adjacent to our corporate headquarters in Danbury,Connecticut. These bonds bear interest at a fixed rate of 7.50% and have aremaining maturity of three years.  Forfiscal years ended June 30, 2009, 2008 and 2007, the weighted-averageinterest rates applicable under our outstanding debt obligations for each yearwere 5.53%.

 

Aggregatescheduled maturities of our debt obligations for each of the five fiscal yearssubsequent to June 30, 2009, and thereafter are as follows (in thousands):

 
| **Fiscal Year Ended  June 30** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|------------|------------|
| 2010                                |       | $          | 42         |   |
| 2011                                |       | 3,898      |       |
| 2012                                |       | 19         |       |
| 2013                                |       | 11         |       |
| 2014                                |       | 11         |       |
| Subsequent to 2014                  |       | 199,167    |       |
| Total scheduled debt payments       |       | $          | 203,148    |   |

 

Independent RetailerCredit Facility

 

On June 11, 2009, weobligated ourselves, on behalf of one of our independent retailers, withrespect to a $0.5 million non-revolving line of credit facility on which thereis no further availability for borrowing (the “Amended CreditFacility”). The Company had previously guaranteed on April 9,2009, on behalf of the independent retailer, a $0.9 million credit facilitycomprised of a $0.6 million revolving line of credit and a $0.3 million termloan (the “Credit Facility”).  On June 11,2009, the Company purchased from the independent retailer one of the designcenters which was collateral under the Credit Facility.  Some of the proceeds were used by theindependent retailer to pay down a portion of the Credit Facility, whereuponthe Company entered into the Amended Credit Facility.  This obligation requires us, in the event ofthe retailer’s default under the Amended Credit Facility, to repurchase theretailer’s inventory, applying such purchase price to the retailer’soutstanding indebtedness under the Amended Credit Facility. Our obligation remainsin effect for the life of the term loan. The agreement expires in April 2011.  The original agreement, which expired in April 2008,was replaced with a new agreement with the same terms and conditions dated December 2008,and amended on April 9, 2009.  Themaximum potential amount of future payments (undiscounted) that we could berequired to make under this obligation is limited to the amount outstandingunder the Credit Facility at the time of default (subject to pre-determinedlending limits based on the value of the underlying inventory) and, as such, isnot an estimate of future cash flows.  Nospecific recourse or collateral provisions exist that would enable recovery ofany portion of amounts paid under this obligation, except to the extent that wemaintain the right to take title to the repurchased inventory. We anticipatethat the repurchased inventory could subsequently be sold through our retaildesign center network.

 

As of June 30, 2009, the amount outstanding underthe Amended Credit Facility totaled approximately $0.5 million.  Based on the underlying creditworthiness ofthe respective retailer, we believe this obligation will expire withoutrequiring funding by us. However, in accordance with the provisions of FASBInterpretation No. 45, *Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others*, a liability has been established to reflectour non-contingent obligation under this arrangement as a result ofmodifications made to the Credit Facility subsequent to January 1,2003.  As of June 30,2009, the carrying amount of such liability is less than$50,000.

 

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**(8)           Leases**

 

We lease realproperty and equipment under various operating lease agreements expiringthrough 2033. Leases covering retail design center locations and equipment mayrequire, in addition to stated minimums, contingent rentals based on retailsales or equipment usage. Generally, the leases provide for renewal for variousperiods at stipulated rates. Future minimum lease payments under non-cancelableoperating leases for each of the five fiscal years subsequent to June 30,2009, and thereafter are as follows (in thousands):

 
| **Fiscal Year Ended  June 30** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|------------|------------|
| 2010                                |       | $          | 36,863     |   |
| 2011                                |       | 31,057     |       |
| 2012                                |       | 28,579     |       |
| 2013                                |       | 24,059     |       |
| 2014                                |       | 17,009     |       |
| Subsequent to 2014                  |       | 96,951     |       |
| Total minimum lease payments        |       | $          | 234,518    |   |

 

The above amountswill be offset in the aggregate by minimum future rentals from subleases of$6.2 million, which is due to be received as follows: $1.0 million in 2010;$0.9 million in 2011; $0.9 million in 2012; $0.9 million in 2013; $0.5 millionin 2014; and $2.0 million subsequent to 2014.

 

Total rent expensefor each of the past three fiscal years ended June 30 was as follows (inthousands):

 
| ** **                               | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Basic rentals under operating leases     |       | $        | 38,522     |     | $          | 40,387   |       | $ | 35,637 |   |
| Contingent rentals under operating lease |       | 182      |       | 589      |       | 524      |       |
|                                     |       | 38,704   |       | 40,976   |       | 36,161   |       |
| Less: sublease rent                      |       | (1,256   | )          | (2,395   | )          | (2,899   | )          |
| Total rent expense                       |       | $        | 37,448     |     | $          | 38,580   |       | $ | 33,262 |   |

 

As of June 30,2009 and 2008, deferred rent credits totaling $11.6 million and $9.8 million,respectively, and deferred lease incentives totaling $2.8 million at both yearends, are reflected in the Consolidated Balance Sheets.  These amounts are amortized over therespective underlying lease terms on a straight-line basis as a reduction ofrent expense.

 

**(9)           Shareholders’ Equity**

 

Our authorizedcapital stock consists of (a) 150,000,000 shares of Class A CommonStock, par value $.01 per share, (b) 600,000 shares of Class B CommonStock, 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) 30,000shares have been designated Series B Redeemable Convertible PreferredStock, (iii) 155,010 shares have been designated as Series C JuniorParticipating Preferred Stock, and (iv) the remaining 839,990 shares maybe designated by the Board of Directors with such rights and preferences asthey determine (all such preferred stock, collectively, the “PreferredStock”).  Shares of Class B CommonStock are convertible to shares of our Common Stock upon the occurrence ofcertain events or other specified conditions being met. As of June 30,2009 and 2008, there were no shares of Preferred Stock or Class B CommonStock issued or outstanding.

 

Share RepurchaseProgram

 

On November 21,2002, the Company’s Board of Directors approved a share repurchase programauthorizing us to repurchase up to 2.0 million shares of our common stock, fromtime to time, either directly or through agents, in the open market at pricesand on terms satisfactory to us. Subsequent to that date, the Board of Directors increased the thenremaining share repurchase authorization as follows: to 2.5 million shares on April 27,2004; to 2.0 million shares on November 16, 2004; to 2.0 million shares onApril 26, 2005; to 2.5 million shares on November 15, 2005; to 2.5million shares on July 25, 2006; to 2.5 million shares on July 24,2007, and to 2.0 million 

 

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shares on November 13,2007.  As of June 30, 2009 we had aremaining Board authorization to repurchase 1.6 million shares.

 

All of our commonstock repurchases and retirements are recorded as treasury stock and result ina reduction of shareholders’ equity. During fiscal years 2009, 2008 and 2007,we repurchased and/or retired the following shares of our common stock:

 
| ** **                       | ** ** | **2009** | ** ** | **2008 (1)** | ** ** | **2007(2)(3)** | ** ** |
|----------------------------------|------------|----------|------------|--------------|------------|----------------|------------|
| Common shares repurchased        |       | —   |       | 2,259,631    |       | 1,548,700      |       |
| Cost to repurchase common shares |       | —   |       | $            | 69,745,024 |           | $          | 53,955,970 |   |
| Average price per share          |       | —   |       | $            | 30.87      |           | $          | 34.84 |   |

 

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(1)   During fiscal 2008, we also retired 661,688 shares of common stocktendered upon the exercise of outstanding employee stock options (592,861 tocover share exercise and 68,827 to cover related employee tax withholdingliabilities).  The value of such shareson the date redeemed was $23,033,359, representing an average price per share of$34.81.

(2)   The cost to repurchase shares in fiscal 2007 reflects $3,436,230 incommon stock repurchases with a June 2007 trade date and a July 2007settlement date.

(3)   During fiscal 2007, we also retired 555,531 shares of common stocktendered upon the exercise of outstanding employee stock options (410,073 tocover share exercise and 145,458 to cover related employee tax withholdingliabilities).  The value of such shareson the date redeemed was $21,506,193, representing an average price per shareof $38.71.

 

For each of thefiscal years presented above, we funded our purchases of treasury stock withexisting cash on hand and cash generated through current period operations.

 

Stockholder RightsPlan

 

On May 20,1996, the Board of Directors adopted a Stockholder Rights Plan (the “RightsPlan”) and declared a dividend of one Right for each share of our common stockoutstanding as of July 10, 1996. Under the Rights Plan, each share of ourcommon stock issued after July 10, 1996 is accompanied by one Right (orsuch other number of Rights as results from the adjustments for stock splitsand 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 Rightsbecome exercisable, then, upon exercise of a Right, our stockholders (otherthan the acquirer) would have the right to receive, in lieu of our Series CJunior Participating Preferred Stock, a number of shares of our common stock(or a number of shares of the common stock of the acquirer, if we are acquired,or other assets under various circumstances) having a market value equal to twotimes the purchase price.  Under theRights Plan, as amended by the Board of Directors on July 27, 2004, theRights will expire on May 31, 2011, unless redeemed prior to that date.The redemption price is $0.01 per Right. The Board of Directors may redeem theRights at its option any time prior to the time when the Rights becomeexercisable.

 

The Rights Planprovides for adjustment to the number of Rights which accompanies each share ofour common stock (whether then outstanding or thereafter issued) upon theoccurrence of various events after July 10, 1996, including stocksplits.  We effected a 2-for-1 stocksplit on September 3, 1997 and a 3-for-2 stock split on May 24,1999.  Accordingly, at June 30,2009, each share of our common stock was accompanied by one-third of one Right.

 

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**(10)         Earnings per Share**

 

The followingtable sets forth the calculation of weighted average shares for the fiscalyears ended June 30 (in thousands):

 
| ** **                                                                   | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Weighted average common shares outstanding for basic  calculation            |       | 28,814   |       | 29,267   |       | 31,566   |       |
| Effect of dilutive stock options and share based  awards                     |       | —   |       | 203      |       | 695      |       |
| Weighted average common shares outstanding adjusted  for diluted calculation |       | 28,814   |       | 29,470   |       | 32,261   |       |

 

Certain restrictedstock awards and the potential exercise of certain stock options were excludedfrom the respective diluted earnings per share calculation because their impactis anti-dilutive.  In 2009, 2008 and2007, stock options and share based awards of 2,228,121, 1,713,323 and 750,981,respectively, have been excluded.

 

**(11)         Share-Based Compensation**

 

For the twelvemonths ended June 30, 2009, 2008, and 2007, share-based compensationexpense totaled $1.7 million, $1.3 million, and $0.8 million respectively.  These amounts have been included in theConsolidated Statements of Operations within selling, general andadministrative expenses.  During thetwelve months ended June 30, 2009, 2008, and 2007, we recognized relatedtax benefits associated with our share-based compensation arrangements totaling$0.6 million, $0.5 million and $0.3 million, respectively.  Such amounts have been included in theConsolidated Statements of Operations within income tax expense.

 

We estimate, as ofthe date of grant, the fair value of stock options awarded using the Black-Scholesoption-pricing model. Use of a valuation model requires management to makecertain assumptions with respect to selected model inputs, includinganticipated changes in the underlying stock price (i.e. expected volatility)and option exercise activity (i.e. expected life). Expected volatility is basedon the historical volatility of our stock. The risk-free rate of return isbased on the U.S. Treasury bill rate for the term closest matching the expectedlife of the grant. The dividend yield is based on the annualized dividend rateat the grant date relative to the grant date stock price. The expected life ofoptions granted, which represents the period of time that the options areexpected to be outstanding, is based, primarily, on historical data.  The weighted average assumptions used forfiscal years ended June 30 are noted in the following table:

 
| ** **               | ** ** | **2009**  | ** ** | **2008**  | ** ** | **2007**  | ** ** |
|--------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| Volatility               |       | 34.4      | %          | 35.8      | %          | 28.14     | %          |
| Risk-free rate of return |       | 3.21      | %          | 4.51      | %          | 4.97      | %          |
| Dividend yield           |       | 5.11      | %          | 2.69      | %          | 2.18      | %          |
| Expected average life    |       | 7.4 years |       | 9.3 years |       | 6.0 years |       |

 

At June 30,2009, we had 7,317,409 shares of common stock reserved for issuance pursuant tothe following share-based compensation plans:

 

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1992 Stock OptionPlan

 

The Plan providesfor the grant of non-compensatory stock options to eligible employees andnon-employee directors.  Stock optionsgranted under the Plan are non-qualified under Section 422 of the InternalRevenue code and allow for the purchase of shares of our common stock.  The maximum number of shares of common stockreserved for issuance under the Plan is 6,487,867 shares. The Plan alsoprovides for the issuance of stock appreciation rights (“SARs”) on issuedoptions, however, no SARs have been issued as of June 30, 2009.  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.Farooq Kathwari, our President and Chief Executive Officer, agreed to the termsof a new employment agreement expiring on June 30, 2012 (“2007 EmploymentAgreement”).  This agreement was effective as of October 1, 2007and served to supersede all terms and conditions set forth in his previousemployment agreement dated August 1, 2002 (the “2002 EmploymentAgreement”). Pursuant to the terms of the 2007 Employment Agreement, Mr. Kathwariwas awarded on October 10, 2007, July 1, 2008, and July 1, 2009,options to purchase 150,000, 90,000 and 60,000 shares respectively, of ourcommon stock.  These options were issuedat an exercise price of $34.03, $24.62, and $10.68 per share respectively (theprice of a share of our common stock on the New York Stock Exchange on thosedates).  The 2007 grant vests in threeinstallments of 33 1/3% on each June 30 of 2008, 2009, and 2010.  The 2008 grant vests in two installments of50% on each June 30 of 2009 and 2010. The 2009 grant vests on June 30, 2010. On November 11, 2008 Mr. Kathwariwas awarded options to purchase 50,000 shares of our common stock at an exerciseprice of $15.93 (the price of a share of our common stock on the New York StockExchange on that date). This grant vests in four equal installments on theanniversary date of the grant.

 

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A summary of stockoption activity occurring during the fiscal year ended June 30, 2009 ispresented below:

 
| **Options**                           | ** ** | **Shares** | ** ** | **Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term (yrs)** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|---------------------------------------|------------|------------|------------|---------------------|------------|-----------------------------------------------------------|------------|--------------------------------|------------|
| Outstanding - June 30, 2008      |       | 1,768,457  |       | $                   | 33.23      |                                                      |       |                           |       |   |
| Granted                               |       | 291,060    |       | 19.58               |       |                                                      |       |                           |       |
| Exercised                             |       | (90        | )          | 25.00               |       |                                                      |       |                           |       |
| Canceled (forfeited/expired)          |       | (73,291    | )          | 27.22               |       |                                                      |       |                           |       |
| Outstanding - June 30, 2009      |       | 1,986,136  |       | 31.45               |       | 5.0                                                       |       | —                         |       |
| Exercisable – June 30, 2009 |       | 1,667,380  |       | $                   | 33.19      |                                                      | 4.2        |                           | —     |   |

 

The weightedaverage grant-date fair value of options granted during fiscal 2009, 2008, and2007 was $4.58, $12.06 and $9.91 respectively. The total intrinsic value of options exercised during 2009, 2008 and2007 was $0.0 million, $5.7 million, and $13.5 million, respectively. As of June 30,2009, there was $1.9 million of total unrecognized compensation cost related tononvested options granted under the Plan. That cost is expected to berecognized over a weighted average period of 1.7 years.  A summary of the nonvested shares as of June 30,2009 and changes during the year then ended is presented below:

 
| **Nonvested Shares**            | ** ** | **Shares** | ** ** | **Weighted Average  Grant Date Fair Value** | ** ** |
|---------------------------------|------------|------------|------------|---------------------------------------------|------------|
| Nonvested June 30, 2008    |       | 170,276    |       | $                                           | 11.16      |   |
| Granted                         |       | 291,060    |       | 4.58                                        |       |
| Vested                          |       | (130,820   | )          | 10.18                                       |       |
| Canceled (forfeited/expired)    |       | (11,760    | )          | 4.32                                        |       |
| Nonvested at June 30, 2009 |       | 318,756    |       | $                                           | 5.80       |   |

 

In connection withthe 1992 Stock Option Plan, the following two stock award plans have also beenestablished:

 

Restricted StockAwards

 

In connection withthe 2007 Employment Agreement, Mr. Kathwari received on November 13,2007 and July 1, 2008, and will be awarded on July 1, 2009, an annualaward of 20,000 shares of restricted stock (for a total award of 60,000shares), with vesting based on the performance of the Company’s stock priceduring the three year periods subsequent to the award date as compared to theStandard and Poor’s 500 index.  Mr. Kathwarialso received on November 13, 2007, 15,000 shares of restricted stockwhich vest ratably over a five year period through June 30, 2012.  On November 11, 2008 Mr. Kathwarireceived an award of 60,000 shares of restricted stock, which provided forvesting to occur if specific financial objectives were achieved during thefinal three quarters of fiscal 2009.  Thefinancial objectives were not achieved and the shares were forfeited. A summaryof nonvested restricted share activity occurring during the fiscal year ended June 30,2009 is presented below.

 
| ** **                       | ** ** | ** ** | ** ** | **Weighed Average** | ** ** |
|----------------------------------|------------|------------|------------|---------------------|------------|
| ** **                       | ** ** | ** ** | ** ** | **Grant-Date**      | ** ** |
| **Nonvested Restricted  Shares** | ** ** | **Shares** | ** ** | **Fair Value**      | ** ** |
| Nonvested - June 30, 2008   |       | 35,000     |       | $                   | 22.19      |   |
| Granted                          |       | 83,000     |       | 10.28               |       |
| Vested                           |       | (5,000     | )          | 30.55               |       |
| Canceled (forfeited/expired)     |       | (60,000    | )          | 8.22                |       |
| Nonvested - June 30, 2009   |       | 53,000     |       | $                   | 18.56      |   |

 

As of June 30,2009, there was $0.5 million of total unrecognized compensation cost related torestricted shares granted under the Plan. That cost is expected to be recognized over a weighted average period of2.7 years.  The 

 

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total fair valueof restricted shares vested during the fiscal years ending June 30, 2009and 2008 was $0.2 million and $0.1 million respectively.

 

Stock Unit Awards

 

In connection withprevious employment agreements, Mr. Kathwari was deemed to have earned126,000 stock units.  In the event of thetermination of his employment, regardless of the reason for termination, Mr. Kathwariwill receive shares of common stock equal to the number of stock units earned.

 

**(12)         Income Taxes**

 

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

 
| ** **                    | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Income (loss) from operations |       | $        | (28,493    | )        | $          | 34,106   |       | $ | 40,499 |   |
| Shareholders’ equity     |       | —   |       | (2,093   | )          | (5,015   | )          |
| Total                         |       | $        | (28,493    | )        | $          | 32,013   |       | $ | 35,484 |   |

 

The income taxescredited to shareholders’ equity relate to the excess tax benefit arising fromthe exercise of employee stock options.

 

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

 
| ** **         | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------|------------|----------|------------|----------|------------|----------|------------|
| Current:           |       |     |       |     |       |     |       |
| Federal            |       | $        | 2,657      |     | $          | 32,431   |       | $ | 34,768 |   |
| State              |       | 975      |       | 4,151    |       | 5,125    |       |
| Foreign            |       | 33       |       | (112     | )          | 406      |       |
| Total current      |       | 3,665    |       | 36,470   |       | 40,299   |       |
| Deferred:          |       |     |       |     |       |     |       |
| Federal            |       | (30,200  | )          | (2,172   | )          | 190      |       |
| State              |       | (1,958   | )          | (192     | )          | 10       |       |
| Total deferred     |       | (32,158  | )          | (2,364   | )          | 200      |       |
| Income tax expense |       | $        | (28,493    | )        | $          | 34,106   |       | $ | 40,499 |   |

 

The following is areconciliation of expected income tax expense (benefit) (computed by applyingthe federal statutory income tax rate to income before taxes) to actual incometax expense (benefit) (in thousands):

 
| ** **                                                  | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Expected income tax expense (benefit)                       |       | $        | (28,413    | )        | 35.0       | %        | $          | 32,262 |   | 35.0 | % | $ | 38,404 |   | 35.0 | % |
| State income taxes (benefit), net of federal income  tax    |       | (3,237   | )          | 4.0      | %          | 2,698    |       | 2.9 | % | 3,331 |   | 3.0 | % |
| Valuation allowance                                         |       | 2,088    |       | (2.6     | )%         | —   |       | 0.0 | % | — |   | 0.0 | % |
| Goodwill impairment                                         |       | 1,402    |       | (1.7     | )%         | —   |       | 0.0 | % | — |   | 0.0 | % |
| Section 199 Qualified Production Activities  deduction |       | —   |       | 0.0      | %          | (1,100   | )          | (1.2 | )% | (630 | ) | (0.6 | )% |
| Other, net                                                  |       | (333     | )          | 0.4      | %          | 246      |       | 0.3 | % | (606 | ) | (0.5 | )% |
| Actual income tax expense (benefit)                         |       | $        | (28,493    | )        | 35.1       | %        | $          | 34,106 |   | 37.0 | % | $ | 40,499 |   | 36.9 | % |

 

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

 
| ** **                                                      | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Deferred tax expense (benefit):                                 |       |     |       |     |       |     |       |
| Commissions                                                     |       | $        | (3,045     | )        | $          | (426     | )          | $ | 211 |   |
| Restructuring costs                                             |       | (4,469   | )          | (1,238   | )          | —   |       |
| Acquired goodwill                                               |       | (16,191  | )          | 1,018    |       | 927      |       |
| Amortization and depreciation                                   |       | (7,126   | )          | (1,767   | )          | (1,515   | )          |
| Federal, foreign and state net operating losses                 |       | (2,870   | )          | —   |       | —   |       |
| Other                                                           |       | (545     | )          | 10       |       | 538      |       |
| Utilization of net operating loss and tax credit  carryforwards |       | —   |       | 39       |       | 39       |       |
| Total deferred tax expense (benefit)                            |       | $        | (34,246    | )        | $          | (2,364   | )          | $ | 200 |   |
| Less: Valuation allowance                                       |       | 2,088    |       | —   |       | —   |       |
| Net deferred tax expense (benefit)                              |       | $        | (32,158    | )        | $          | (2,364   | )          | $ | 200 |   |

 

The deferred income tax asset and liability balancesat June 30 (in thousands) include:

 
| ** **                            | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax assets:                  |       |     |       |     |       |
| Accounts receivable                   |       | $        | 531        |     | $          | 963 |   |
| Property, plant and equipment         |       | 2,391    |       | —   |       |
| Employee compensation accruals        |       | 6,436    |       | 10,236   |       |
| Stock based compensation              |       | 2,227    |       | 1,514    |       |
| Deferred rent credits                 |       | 5,439    |       | 4,619    |       |
| Restructuring charges                 |       | 5,762    |       | 1,345    |       |
| Net operating loss carryforwards      |       | 2,870    |       | 30       |       |
| Other, net                            |       | 3,301    |       | 2,670    |       |
| Total deferred tax asset              |       | 28,957   |       | 21,377   |       |
| Less: Valuation allowance             |       | (2,088   | )          | —   |       |
| Net deferred tax assets               |       | 26,869   |       | 21,377   |       |
|                                  |       |     |       |     |       |
| Deferred tax liabilities:             |       |     |       |     |       |
| Inventories                           |       | 1,425    |       | 2,719    |       |
| Property, plant and equipment         |       | —   |       | 7,577    |       |
| Intangible assets other than goodwill |       | 5,180    |       | 20,737   |       |
| Commissions                           |       | 353      |       | 3,642    |       |
| Other accrued liabilities             |       | —   |       | 2,483    |       |
| Other, net                            |       | 37       |       | —   |       |
| Total deferred tax liability          |       | 6,995    |       | 37,158   |       |
|                                  |       |     |       |     |       |
| Net deferred tax asset (liability)    |       | $        | 19,874     |     | $          | (15,781 | ) |

 

The deferredincome tax balances are classified in the Consolidated Balance Sheets asfollows at June 30 (in thousands):

 
| ** **                               | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
| Current assets                           |       | $        | 9,502      |     | $          | 11,111 |   |
| Non-current assets                       |       | 17,367   |       | 10,266   |       |
| Current liabilities                      |       | 1,425    |       | 4,986    |       |
| Non-current liabilities                  |       | 5,570    |       | 32,172   |       |
| Total net deferred tax asset (liability) |       | $        | 19,874     |     | $          | (15,781 | ) |

 

Note:   Current deferred taxassets and liabilities and non-current deferred tax assets and liabilities havebeen presented net in the Consolidated Balance Sheets.

 

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In accordance withSFAS No. 109, *Accounting for Income*Taxes,we evaluate our deferred taxes to determine if the “more likely than not”standard of evidence has not been met thereby supporting the need for avaluation allowance. In fiscal 2009, due to significant losses incurred in ourretail segment, the uncertain outlook regarding the current economic recession,and the lack of carry-back availability due to limitations imposed by certainstates and Canada, we established valuation allowances of $2.1 million againstcertain state and Canada deferred tax assets primarily for net operatinglosses. Our state net operating losses and credits expire between fiscal year2014 and 2029 and for Canada expire in fiscal 2029. At June 30, 2009 wehad, for U.S. federal income tax purposes, a net operating loss of $4.3 millionwhich expires in 2029. We believe it is more likely than not that our deferredtax assets and credits for U.S. federal income tax purposes will be realizeddue to sufficient historical and anticipated future pre-tax earnings and wetherefore have not established valuation allowances for these assets.

 

Uncertain Tax Positions

 

Effective July 1,2007, we adopted Financial Accounting Standards Board (“FASB”) Interpretation No. (“FIN”)48, *Accounting for Uncertainty in Income Taxes*,an interpretation of FASB Statement No. 109, *Accountingfor Income Taxes*. As a result of the adoption of FIN 48, we recordeda cumulative effect of a change in accounting principle adjustment of $0.7million as an increase to beginning retained earnings. Our continuing practiceis to recognize interest and penalties related to income tax matters as acomponent of income tax expense. If the $13.1 million of unrecognized taxbenefits and related interest and penalties as of June 30, 2009 wererecognized, approximately $10.8 million would be recorded as a benefit toincome tax expense.

 
| ** **                                                                                                                                                                         | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| A reconciliation of the beginning and ending amount  of unrecognized tax benefits including related interest and penalties as of  June 30, 2009 is as follows (in thousands): |       |     |       |     |       |
| Beginning balance                                                                                                                                                                  |       | $        | 13,633     |     | $          | 13,988 |   |
| Additions based on tax positions in the current year                                                                                                                               |       | 399      |       | 458      |       |
| Additions for tax positions in prior years                                                                                                                                         |       | 1,264    |       | 2,377    |       |
| Reductions for tax positions of prior years due to:                                                                                                                                |       |     |       |     |       |
| Statute expiration                                                                                                                                                                 |       | (895     | )          | (360     | )          |
| Settlements                                                                                                                                                                        |       | (1,341   | )          | (2,830   | )          |
|                                                                                                                                                                               |       |     |       |     |       |
| Ending balance                                                                                                                                                                     |       | $        | 13,060     |     | $          | 13,633 |   |

 

It is reasonably possiblethat various issues relating to approximately $3.7 million of the total grossunrecognized tax benefits as of June 30, 2009 will be resolved within thenext twelve months as exams are completed or statutes expire. If recognized, approximately$3.7 million of unrecognized tax benefits would reduce our tax expense in theperiod realized. However, actual results could differ from those currentlyanticipated.

 

The Companyconducts business globally and, as a result, the Company or one or more of itssubsidiaries files income tax returns in the U.S., various state, and foreignjurisdictions.  In the normal course ofbusiness, the Company is subject to examination by the taxing authorities insuch major jurisdictions as Canada, Mexico and the U.S.   As of June 30, 2009 certainsubsidiaries of the Company are currently under audit from 2001 through 2008 inthe U.S.  While the amount of uncertaintax benefits with respect to the entities and years under audit may change withinthe next twelve months, it is not anticipated that any of the changes will besignificant.

 

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**(13)         Employee Retirement Programs**

 

The Ethan Allen Retirement Savings Plan

 

The Ethan AllenRetirement Savings Plan (the “Savings Plan”) is a defined contribution plan,which is offered to substantially all of our employees who have completed threeconsecutive months of service regardless of hours worked.

 

We may, at ourdiscretion, make a matching contribution to the 401(k) portion of theSavings Plan on behalf of each participant, provided the contribution does notexceed the lesser of 50% of the participant’s contribution or $500 per participantper Savings Plan year.  Total profitsharing and 401(k) Company match expense amounted to $1.3 million in 2009,$3.7 million in 2008, and $4.3 million in 2007. The contribution was made in shares of the Company’s common stock in2009 and in cash in 2008 and 2007.

 

Other RetirementPlans and Benefits

 

Ethan Allenprovides additional benefits to selected members of senior and middlemanagement in the form of previously entered deferred compensation arrangementsand a management cash bonus and other incentive programs.  The total cost (credit) of these benefits was($0.7) million, $1.2 million, and $2.7 million in 2009, 2008 and 2007,respectively.

 

**(14)         Litigation**

 

EnvironmentalMatters

 

We and oursubsidiaries are subject to various environmental laws and regulations. Underthese laws, we and/or our subsidiaries are, or may be, required to remove ormitigate the effects on the environment of the disposal or release of certainhazardous materials.

 

During the fiscalyear ending June 30, 2009, our liability with respect to three activesites currently listed, or proposed for inclusion, on the National PrioritiesList (“NPL”) under the Comprehensive Environmental Response, Compensation andLiability Act of 1980, as amended (“CERCLA”), where we and/or our subsidiarieshad been named as a Potentially Responsive Party (“PRP”) located inSouthington, Connecticut; High Point, North Carolina; and Atlanta, Georgia hasbeen resolved.

 

In each case wewere not a major contributor based on the very small volume of waste generatedby us in relation to total volume at those sites and were able to take part inde minimus settlement arrangements. Specifically, with respect to the Southington site, our volumetric shareis less than 1% of over 51 million gallons disposed of at the site and thereare more than 1,000 PRPs.  With respectto the High Point site, our volumetric share is less than 1% of over 18 milliongallons disposed of at the site and there are more than 2,000 PRPs, includingmore than 1,000 de minimis parties (of which we are one). With respect to theAtlanta site, a former solvent recycling/reclamation facility, our volumetricshare is less than 1% of over 20 million gallons disposed of at the site bymore than 1,700 PRPs.

 

In addition to thenow settled actions discussed above, in July 2000, we were notified by theState of New York (the “State”) that we may be named a PRP in a separate,unrelated matter with respect to a site located in Carroll, New York.   In May, 2009, we were notified by the Statethat it had conducted an initial environmental study and that we have beennamed as a PRP.  We believe that we arenot a major contributor; however, a review of the initial environmental studyis ongoing.

 

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

 

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As of June 30,2009, we believe that established reserves related to these environmentalcontingencies are adequate to cover probable and reasonably estimable costsassociated with the remediation and restoration of these sites.  We believe our currently anticipated capitalexpenditures for environmental control facility matters are not material.

 

We are subject toother federal, state and local environmental protection laws and regulationsand are involved, from time to time, in investigations and proceedings regardingenvironmental matters.  Suchinvestigations and proceedings typically concern air emissions, waterdischarges, and/or management of solid and hazardous wastes. We believe thatour facilities are in material compliance with all such applicable laws andregulations.

 

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

 

**(15)         Comprehensive Income**

 

Totalcomprehensive income represents the sum of net income and items of “othercomprehensive income or loss” that are reported directly in equity.  Such items, which are generally presented ona net-of-tax basis, may include foreign currency translation adjustments,minimum pension liability adjustments, fair value adjustments (i.e. gains andlosses) on certain derivative instruments, and unrealized gains and losses oncertain investments in debt and equity securities.  We have reported our total comprehensiveincome in the Consolidated Statements of Shareholders’ Equity.

 

Our accumulatedother comprehensive income, which is comprised of losses on certain derivativeinstruments and accumulated foreign currency translation adjustments, totaled$0.5 million at June 30, 2009 and $2.7 million at June 30, 2008.  Foreign currency translation adjustments arethe result of changes in foreign currency exchange rates related to ouroperation of five Ethan Allen-operated retail design centers located in Canada.Foreign currency translation adjustments exclude income tax expense (benefit)given that the earnings of non-U.S. subsidiaries are deemed to be reinvestedfor an indefinite period of time.

 

**(16)         Segment Information**

 

Our operations areclassified into two operating segments: wholesale and retail.  These operating segments represent strategicbusiness areas which, although they operate separately and provide their owndistinctive services, enable us to more effectively offer our complete line ofhome furnishings and accessories.

 

The wholesalesegment is principally involved in the development of the Ethan Allen brand,which encompasses the design, manufacture, domestic and off-shore sourcing,sale and distribution of a full range of home furnishings and accessories to anetwork of independently operated and Ethan Allen-operated design centers aswell as related marketing and brand awareness efforts.  Wholesale revenue is generated upon thewholesale sale and shipment of our product to all retail design centers,including those operated by Ethan Allen. Wholesale profitability includes (i) the wholesale gross margin,which represents the difference between the wholesale sales 

 

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price and the costassociated with manufacturing and/or sourcing the related product, and (ii) otheroperating costs associated with wholesale segment activities.

 

The retail segmentsells home furnishings and accessories to consumers through a network ofCompany-operated design centers.  Retailrevenue is generated upon the retail sale and delivery of our product to ourcustomers.  Retail profitability includes(i) the retail gross margin, which represents the difference between theretail sales price and the cost of goods purchased from the wholesale segment,and (ii) other operating costs associated with retail segment activities.

 

Inter-segmenteliminations result, primarily, from the wholesale sale of inventory to theretail segment, including the related profit margin.

 

We evaluateperformance of the respective segments based upon revenues and operatingincome. While the manner in which our home furnishings and accessories aremarketed and sold is consistent, the nature of the underlying recorded sales(i.e. wholesale versus retail) and the specific services that each operatingsegment provides (i.e. wholesale manufacturing, sourcing, and distributionversus retail selling) are different. Within the wholesale segment, we maintain revenue information accordingto each respective product line (i.e. case goods, upholstery, or homeaccessories and other).

 

A breakdown ofwholesale sales by product line for each of the last three fiscal years ended June 30is provided below:

 
| ** **                 | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|----------|------------|
| Case Goods                 |       | 41       | %          | 43       | %          | 44       | %          |
| Upholstered Products       |       | 41       |       | 40       |       | 38       |       |
| Home Accessories and Other |       | 18       |       | 17       |       | 18       |       |
|                       |       | 100      | %          | 100      | %          | 100      | %          |

 

Revenueinformation by product line is not as easily determined within the retailsegment. However, because wholesale production and sales are matched, for themost part, to incoming orders, we believe that the allocation of retail salesby product line would be similar to that of the wholesale segment.  Information for each of the last three fiscalyears ended June 30 is provided below (in thousands):

 
| ** **                              | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net Sales:                              |       |     |       |     |       |     |       |
| Wholesale segment                       |       | $        | 403,378    |     | $          | 616,230  |       | $ | 656,035 |   |
| Retail segment                          |       | 508,621  |       | 724,586  |       | 698,611  |       |
| Elimination of inter-company sales      |       | (237,722 | )          | (360,771 | )          | (349,334 | )          |
| Consolidated Total                      |       | $        | 674,277    |     | $          | 980,045  |       | $ | 1,005,312 |   |
|                                    |       |     |       |     |       |     |       |
| Operating Income:                       |       |     |       |     |       |     |       |
| Wholesale segment (1)                   |       | $        | 6,670      |     | $          | 100,324  |       | $ | 99,215 |   |
| Retail segment (2)                      |       | (92,100  | )          | (2,800   | )          | 15,162   |       |
| Adjustment for inter-company profit (3) |       | 12,659   |       | (1,524   | )          | (3,258   | )          |
| Consolidated Total                      |       | $        | (72,771    | )        | $          | 96,000   |       | $ | 111,119 |   |
|                                    |       |     |       |     |       |     |       |
| Capital Expenditures:                   |       |     |       |     |       |     |       |
| Wholesale segment                       |       | $        | 3,246      |     | $          | 7,347    |       | $ | 8,791 |   |
| Retail segment                          |       | 19,291   |       | 52,691   |       | 50,282   |       |
| Acquisitions (4) (5)               |       | 1,366    |       | 7,168    |       | 15,906   |       |
| Consolidated Total                      |       | $        | 23,903     |     | $          | 67,206   |       | $ | 74,979 |   |

 

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| ** **                       | ** ** | **June 30** | ** ** | **June 30** | ** ** | **June 30,** | ** ** |
|----------------------------------|------------|------------------|------------|------------------|------------|-------------------|------------|
| ** **                       | ** ** | **2009**         | ** ** | **2008**         | ** ** | **2007**          | ** ** |
| Total Assets:                    |       |             |       |             |       |              |       |
| Wholesale segment                |       | $                | 276,250    |             | $          | 345,080           |       | $ | 416,237 |   |
| Retail segment                   |       | 397,877          |       | 459,842          |       | 425,382           |       |
| Inventory profit elimination (6) |       | (27,642          | )          | (40,829          | )          | (39,021           | )          |
| Consolidated Total               |       | $                | 646,485    |             | $          | 764,093           |       | $ | 802,598 |   |

 

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(1)   Operating income for the wholesale segment forthe twelve months ended June 30, 2009 and 2007 includes pre-taxrestructuring and impairment charges of $17.4 million and $13.4 million,respectively.

(2)   Operating income for the retail segment forthe twelve months ended June 30, 2009 and 2008 includes pre-taxrestructuring and impairment charges of $49.6 million and $6.8 millionrespectively.

(3)   Represents the change in the inventory profitelimination entry necessary to adjust for the embedded wholesale profitcontained in Ethan Allen-operated design center inventory existing at the endof the period.  See footnote 6 below.

(4)   Acquisitions include the purchase of fourretail design centers in 2009, five retail design centers and a cut and sewupholstery facility in 2008 and 12 retail design centers in 2007.   See Note 3.

(5)   Amount reflected as acquisitions for 2007includes purchase of a retail design center with an effective (closing) date ofJune 30, 2007.  However, theconsideration paid in connection with this acquisition was not funded until July 2,2007.

(6)   Represents the embedded wholesale profitcontained in Ethan Allen-operated design center inventory that has not yet beenrealized. These profits are realized when the related inventory is sold.

 

There are 46 independent retail design centers located outside theUnited States.  Approximately 3.3% of ournet sales are derived from sales to these retail design centers.

 

**(17)         Selected Quarterly Financial Data(Unaudited)**

 

Tabulated below is selected financial data for each quarter of thefiscal years ended June 30, 2009, 2008, and 2007 (in thousands, except pershare data):

 
| ** **                            | ** ** | **Quarter Ended**     | ** ** |
|---------------------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **September 30** | ** ** | **December 31** | ** ** | **March 31** | ** ** | **June 30** | ** ** |
| 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 |   |
|                                  |       |                  |       |   |   |   |   |   |   |
| Fiscal 2007:                          |       |                  |       |   |   |   |   |   |   |
| Net sales                             |       | $                     | 242,823    |   | $ | 257,419 |   | $ | 246,539 |   | $ | 258,531 |   |
| Gross profit                          |       | 126,329               |       | 133,750 |   | 128,516 |   | 137,988 |   |
| Net income                            |       | 8,452                 |       | 22,792 |   | 17,499 |   | 20,484 |   |
| Earnings per basic share (1)          |       | 0.27                  |       | 0.72 |   | 0.55 |   | 0.66 |   |
| Earnings per diluted share (1)        |       | 0.26                  |       | 0.70 |   | 0.54 |   | 0.65 |   |
| Dividend per common share             |       | 0.20                  |       | 0.20 |   | 0.20 |   | 0.20 |   |

 

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(1)    The sum of the quarterly earnings per sharemay not equal the full-year total due to rounding and/or changes in sharecount.

 

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**(18)         Financial Instruments**

 

We adopted SFAS No. 157on July 1, 2008 for all financial assets and liabilities and non-financialassets and liabilities that are recognized or disclosed at fair value in thefinancial statements on a recurring basis (at least annually). SFAS No. 157defines fair value, establishes a framework for measuring fair value, andexpands disclosures about fair value measurements.

 

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

 

In addition to definingfair value, SFAS No. 157 expands the disclosure requirements around fairvalue and establishes a fair value hierarchy for valuation inputs. Thehierarchy prioritizes the inputs into three levels based on the extent to whichinputs used in measuring fair value are observable in the market. Eachfair value measurement is reported in one of the three levels which isdetermined by the lowest level input that is significant to the fair valuemeasurement in its entirety. These levels are:

 

·   Level 1 – inputs are based upon unadjusted quotedprices for identical instruments traded in active markets.

 

·   Level 2 – inputs are based upon quoted prices forsimilar instruments in active markets, quoted prices for identical or similarinstruments in markets that are not active, and model-based valuationtechniques for which all significant assumptions are observable in the marketor can be corroborated by observable market data for substantially the fullterm of the assets or liabilities.

 

·   Level 3 – inputs are generally unobservable andtypically reflect management’s estimates of assumptions that marketparticipants would use in pricing the asset or liability. The fair values aretherefore determined using model-based techniques that include option pricingmodels, discounted cash flow models, and similar techniques.

 

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

 

**Cash Equivalents**

 

Cash equivalents consistof money market accounts and mutual funds in U.S. government and agencysecurities.  We use quoted prices inactive markets for identical assets or liabilities to determine fair value.  This pricing methodology applies to our Level1 cash equivalents.  We do not hold anyLevel 2 or Level 3 investments in our cash equivalents.

 

**Assets and Liabilities Measuredat Fair Value on a Recurring Basis**

 

At June 30, 2009,the Company’s assets and liabilities measured at fair value on a recurringbasis consist of $53.0 million in cash equivalents, which were valued usingLevel 1 inputs.

 

**Assets and Liabilities Measuredat Fair Value on a Nonrecurring Basis**

 

We measure certainassets, including our cost and equity method investments, at fair value on anonrecurring basis. These assets are recognized at fair value when they aredeemed to be other-than-temporarily impaired. During the third quarter offiscal, 2009, we determined that the goodwill for the Retail segment wasimpaired, and a goodwill impairment charge of $48.4 million was recorded (alsosee note 6).

 

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**(19)         Subsequent Events**

 

The Company hasevaluated events and transactions subsequent to June 30, 2009 through August 24,2009, which was the date the financial statements were issued (filed with theSEC).

 

**(20)         Financial Information About the Parent,the Issuer and the Guarantors**

 

On September 27,2005, Global (the “Issuer”) issued $200 million aggregate principal amount ofSenior Notes which have been guaranteed on a senior basis by Interiors (the“Parent”), and other wholly owned domestic subsidiaries of the Issuer and theParent, including Ethan Allen Retail, Inc., Ethan Allen Operations, Inc.,Ethan Allen Realty, LLC, Lake Avenue Associates, Inc. and Manor House, Inc.The subsidiary guarantors (other than the Parent) are collectively called the“Guarantors”.  The guarantees of the Guarantors are unsecured.  Allof the guarantees are full, unconditional and joint and several and the Issuerand each of the Guarantors are 100% owned by the Parent. Ethan Allen (UK) Ltd.and our other subsidiaries which are not guarantors are called the“Non-Guarantors”. During the quarter ended December 31, 2008, wedetermined that our international subsidiaries in Canada and Mexico arenon-guarantors. The Company has reclassified, for all prior periods presented,the financial results of these international subsidiaries to reflect their non-guarantorstatus.

 

The followingtables set forth the condensed consolidating balance sheets as of June 30,2009 and June 30, 2008, the condensed consolidating statements ofoperations for the twelve months ended June 30, 2009, 2008 and 2007, andthe condensed consolidating statements of cash flows for the twelve monthsended June 30, 2009, 2008 and 2007of the Parent, the Issuer, theGuarantors and the Non-Guarantors.

 

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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              |       | 612,391    |          | (20,616    | )          | —         |       | —             |          | (591,775         | )          | —           |       |
| Total assets                                    |       | 612,391    |          | 907,366    |       | 744,711        |       | 8,613              |          | (1,626,596       | )          | 646,485          |       |
|                                            |       |       |          |       |       |           |       |               |          |             |       |             |       |
| **Liabilities and Shareholders’  Equity**  |       |       |          |       |       |           |       |               |          |             |       |             |       |
| Current liabilities:                            |       |       |          |       |       |           |       |               |          |             |       |             |       |
| Current maturities of long-term debt            |       | —     |          | —     |       | 42             |       | —             |          | —           |       | 42               |       |
| Customer deposits                               |       | —     |          | —     |       | 30,412         |       | 1,279              |          | —           |       | 31,691           |       |
| Accounts payable                                |       | —     |          | 8,851      |       | 13,106         |       | 242                |          | —           |       | 22,199           |       |
| Accrued expenses and other current liabilities  |       | 1,552      |          | 41,004     |       | 15,707         |       | 268                |          | —           |       | 58,531           |       |
| Intercompany payables                           |       | 304,917    |          | 8,123      |       | 687,826        |       | 6,313              |          | (1,007,179       | )          | —           |       |
| Total current liabilities                       |       | 306,469    |          | 57,978     |       | 747,093        |       | 8,102              |          | (1,007,179       | )          | 112,463          |       |
|                                            |       |       |          |       |       |           |       |               |          |             |       |             |       |
| Long-term debt                                  |       | —     |          | 198,998    |       | 4,108          |       | —             |          | —           |       | 203,106          |       |
| Other long-term liabilities                     |       | —     |          | 10,565     |       | 14,290         |       | 138                |          | —           |       | 24,993           |       |
| Deferred income taxes                           |       | —     |          | —     |       | —         |       | —             |          | —           |       | —           |       |
| Total liabilities                               |       | 306,469    |          | 267,541    |       | 765,491        |       | 8,240              |          | (1,007,179       | )          | 340,562          |       |
|                                            |       |       |          |       |       |           |       |               |          |             |       |             |       |
| Shareholders’ equity                       |       | 305,922    |          | 639,825    |       | (20,780        | )          | 373                |          | (619,417         | )          | 305,923          |       |
| Total liabilities and shareholders’ equity |       | $          |  612,391 |       | $          |  907,366  |       | $                  |  744,711 |             | $          |  8,613      |       | $ | (1,626,596 | ) | $ |  646,485 |   |

 

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**CONDENSED CONSOLIDATING BALANCE SHEET**

(in thousands)

**June 30,2008**

 
| ** **                                      | ** ** | **Parent** | ** **    | **Issuer** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** **    | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------|------------|------------|---------------|------------|------------|----------------|------------|--------------------|---------------|------------------|------------|------------------|------------|
| **Assets**                                      |       |       |          |       |       |           |       |               |          |             |       |             |       |
| Current assets:                                 |       |       |          |       |       |           |       |               |          |             |       |             |       |
| Cash and cash equivalents                       |       | $          |  —  |       | $          |  71,117   |       | $                  |  1,307   |             | $          |  1,952      |       | $ |  — |   | $ |  74,376 |   |
| Accounts receivable, net                        |       | —     |          | 11,937     |       | 431            |       | 304                |          | —           |       | 12,672           |       |
| Inventories                                     |       | —     |          | —     |       | 222,130        |       | 4,964              |          | (40,829          | )          | 186,265          |       |
| Prepaid expenses and other current assets       |       | —     |          | 17,475     |       | 21,020         |       | 490                |          | —           |       | 38,985           |       |
| Intercompany receivables                        |       | —     |          | 712,981    |       | 209,471        |       | —             |          | (922,452         | )          | —           |       |
| Total current assets                            |       | —     |          | 813,510    |       | 454,359        |       | 7,710              |          | (963,281         | )          | 312,298          |       |
|                                            |       |       |          |       |       |           |       |               |          |             |       |             |       |
| Property, plant and equipment, net              |       | —     |          | 13,186     |       | 331,581        |       | 5,665              |          | —           |       | 350,432          |       |
| Goodwill and other intangible assets            |       | —     |          | 37,905     |       | 55,189         |       | 3,729              |          | —           |       | 96,823           |       |
| Other assets                                    |       | —     |          | 3,604      |       | 929            |       | 7                  |          | —           |       | 4,540            |       |
| Investment in affiliated companies              |       | 665,427    |          | 118,371    |       | —         |       | —             |          | (783,798         | )          | —           |       |
| Total assets                                    |       | 665,427    |          | 986,576    |       | 842,058        |       | 17,111             |          | (1,747,079       | )          | 764,093          |       |
|                                            |       |       |          |       |       |           |       |               |          |             |       |             |       |
| **Liabilities and Shareholders’  Equity**  |       |       |          |       |       |           |       |               |          |             |       |             |       |
| Current liabilities:                            |       |       |          |       |       |           |       |               |          |             |       |             |       |
| Current maturities of long-term debt            |       | —     |          | —     |       | 41             |       | —             |          | —           |       | 41               |       |
| Customer deposits                               |       | —     |          | —     |       | 45,486         |       | 1,811              |          | —           |       | 47,297           |       |
| Accounts payable                                |       | —     |          | 9,785      |       | 15,936         |       | 723                |          | —           |       | 26,444           |       |
| Accrued expenses and other current liabilities  |       | 6,438      |          | 36,885     |       | 18,022         |       | 375                |          | —           |       | 61,720           |       |
| Intercompany payables                           |       | 283,216    |          | 597        |       | 628,925        |       | 9,714              |          | (922,452         | )          | —           |       |
| Total current liabilities                       |       | 289,654    |          | 47,267     |       | 708,410        |       | 12,623             |          | (922,452         | )          | 135,502          |       |
|                                            |       |       |          |       |       |           |       |               |          |             |       |             |       |
| Long-term debt                                  |       | —     |          | 198,837    |       | 4,151          |       | —             |          | —           |       | 202,988          |       |
| Other long-term liabilities                     |       | —     |          | 15,360     |       | 12,380         |       | 184                |          | —           |       | 27,924           |       |
| Deferred income taxes                           |       | —     |          | 21,906     |       | —         |       | —             |          | —           |       | 21,906           |       |
| Total liabilities                               |       | 289,654    |          | 283,370    |       | 724,941        |       | 12,807             |          | (922,452         | )          | 388,320          |       |
|                                            |       |       |          |       |       |           |       |               |          |             |       |             |       |
| Shareholders’ equity                       |       | 375,773    |          | 703,206    |       | 117,117        |       | 4,304              |          | (824,627         | )          | 375,773          |       |
| Total liabilities and shareholders’ equity |       | $          |  665,427 |       | $          |  986,576  |       | $                  |  842,058 |             | $          |  17,111     |       | $ | (1,747,079 | ) | $ |  764,093 |   |

 

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**CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS**

(in thousands)

**YearEnded 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)

**YearEnded 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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**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS**

(in thousands)

**YearEnded June 30, 2007**

 
| ** **                                              | ** ** | **Parent** | ** **   | **Issuer** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** **    | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------|------------|------------|--------------|------------|------------|----------------|------------|--------------------|---------------|------------------|------------|------------------|------------|
| Net  sales                                              |       | $          |  — |       | $          |  655,967  |       | $                  | 959,799       |             | $          |  22,704     |       | $ |  (633,158 | ) | $ |  1,005,312 |   |
| Cost  of sales                                          |       | —     |         | 461,479    |       | 636,246        |       | 11,018             |          | (630,014         | )          | 478,729          |       |
| Gross  profit                                           |       | —     |         | 194,488    |       | 323,553        |       | 11,686             |          | (3,144           | )          | 526,583          |       |
|                                                    |       |       |         |       |       |           |       |               |          |             |       |             |       |
| Selling,  general and administrative expenses           |       | 166        |         | 45,232     |       | 346,051        |       | 10,573             |          | —           |       | 402,022          |       |
| Restructuring  and impairment charges                   |       | —     |         | —     |       | 13,442         |       | —             |          | —           |       | 13,442           |       |
| Total  operating expenses                               |       | 166        |         | 45,232     |       | 359,493        |       | 10,573             |          | —           |       | 415,464          |       |
| Operating  income (loss)                                |       | (166       | )            | 149,256    |       | (35,940        | )          | 1,113              |          | (3,144           | )          | 111,119          |       |
|                                                    |       |       |         |       |       |           |       |               |          |             |       |             |       |
| Interest  and other miscellaneous income (expense), net |       | 69,393     |         | (26,137    | )          | (97            | )          | (55                | )             | (32,735          | )          | 10,369           |       |
| Interest  and other related financing costs             |       | —     |         | 11,457     |       | 305            |       | —             |          | —           |       | 11,762           |       |
| Income  (loss) before income tax expense                |       | 69,227     |         | 111,662    |       | (36,342        | )          | 1,058              |          | (35,879          | )          | 109,726          |       |
| Income  tax expense (benefit)                           |       | —     |         | 39,013     |       | 1,486          |       | —             |          | —           |       | 40,499           |       |
| Net  income/(loss)                                      |       | $          |  69,227 |       | $          |  72,649   |       | $                  |  (37,828 | )                | $          |  1,058      |       | $ |  (35,879 | ) | $ |  69,227 |   |

 

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**CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOWS**

(in thousands)

**YearEnded 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)

**YearEnded 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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**CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

(in thousands)

**YearEnded June 30, 2007**

 
| ** **                                                   | ** ** | **Parent** | ** **   | **Issuer** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** **   | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------|------------|------------|--------------|------------|------------|----------------|------------|--------------------|--------------|------------------|------------|------------------|------------|
| ** **                                                   |       |       |         |       |       |           |       |               |         |             |       |             |       |
| Net  cash provided by (used in) operating activities         |       | $          |  81,428 |       | $          |  (32,386  | )          | $                  |  69,841 |             | $          |  306        |       | $ |  — |   | $ |  119,189 |   |
|                                                         |       |       |         |       |       |           |       |               |         |             |       |             |       |
| Cash  flows from investing activities:                       |       |       |         |       |       |           |       |               |         |             |       |             |       |
| Capital  expenditures                                        |       | —     |         | (2,713     | )          | (56,084        | )          | (276               | )            | —           |       | (59,073          | )          |
| Acquisitions                                                 |       | —     |         | —     |       | (15,297        | )          | —             |         | —           |       | (15,297          | )          |
| Proceeds  from the disposal of property, plant and equipment |       | —     |         | —     |       | 5,431          |       | —             |         | —           |       | 5,431            |       |
| Other                                                        |       | —     |         | 198        |       | —         |       | —             |         | —           |       | 198              |       |
| Net  cash used in investing activities                       |       | —     |         | (2,515     | )          | (65,950        | )          | (276               | )            | —           |       | (68,741          | )          |
|                                                         |       |       |         |       |       |           |       |               |         |             |       |             |       |
| Cash  flows from financing activities:                       |       |       |         |       |       |           |       |               |         |             |       |             |       |
| Payments  on long-term debt                                  |       | —     |         | —     |       | (38            | )          | —             |         | —           |       | (38              | )          |
| Payment  of deferred financing costs                         |       | —     |         | (107       | )          | —         |       | —             |         | —           |       | (107             | )          |
| Purchases  and other retirements of company stock            |       | (57,152    | )            | —     |       | —         |       | —             |         | —           |       | (57,152          | )          |
| Proceeds  from the issuance of common stock                  |       | 521        |         | —     |       | —         |       | —             |         | —           |       | 521              |       |
| Excess  tax benefits from share-based payment arrangements   |       | —     |         | 5,015      |       | —         |       | —             |         | —           |       | 5,015            |       |
| Dividends  paid                                              |       | (24,797    | )            | —     |       | —         |       | —             |         | —           |       | (24,797          | )          |
| Net  cash provided by (used in) financing activities         |       | (81,428    | )            | 4,908      |       | (38            | )          | —             |         | —           |       | (76,558          | )          |
|                                                         |       |       |         |       |       |           |       |               |         |             |       |             |       |
| Effect  of exchange rate changes on cash                     |       | —     |         | —     |       | —         |       | 188                |         | —           |       | 188              |       |
|                                                         |       |       |         |       |       |           |       |               |         |             |       |             |       |
| Net  increase (decrease) in cash and cash equivalents        |       | —     |         | (29,993    | )          | 3,853          |       | 218                |         | —           |       | (25,922          | )          |
|                                                         |       |       |         |       |       |           |       |               |         |             |       |             |       |
| Cash  and cash equivalents — beginning of period        |       | —     |         | 172,246    |       | 1,100          |       | 455                |         | —           |       | 173,801          |       |
|                                                         |       |       |         |       |       |           |       |               |         |             |       |             |       |
| Cash  and cash equivalents — end of period              |       | $          |  — |       | $          |  142,253  |       | $                  |  4,953  |             | $          |  673        |       | $ |  — |   | $ |  147,879 |   |

 

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# **Item9. Changes in and Disagreements with Accountants on Accounting and FinancialDisclosure**

# ** **

No changes in, or disagreements with, accountants as a result of accountingor financial disclosure matters, occurred during fiscal years 2009, 2008 or2007.

 

# **Item9A. Controls and Procedures**

# ** **

**Management’s Report on DisclosureControls 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, 2009, 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 theSEC’s rules and forms, and (ii) accumulated and communicated tomanagement, including the CEO and VPF, as appropriate, to allow timelydecisions regarding required disclosure.

 

**Management’sReport on Internal Control over Financial Reporting**

 

Our management is responsiblefor establishing and maintaining adequate internal control over financialreporting, as such term is defined in Exchange Act Rule 13a-15(f) and15d-15(f). Under the supervision and with the participation of management,including the CEO and VPF, we conducted an evaluation of the effectiveness ofour internal control over financial reporting based on the framework in *Internal Control - Integrated Framework*issued by theCommittee of Sponsoring Organizations of the Treadway Commission (“COSO”).  Based on that evaluation, managementconcluded that our internal control over financial reporting was effective asof June 30, 2009.

 

KPMG LLP, the independentregistered public accounting firm that audited the consolidated financialstatements included in this Annual Report on Form 10-K, has also auditedthe effectiveness of our internal control over financial reporting as of June 30,2009, as stated in their report included under Item 8 of this Annual Report.

 

**Changes in Internal Control overFinancial Reporting**

 

There have been nochanges in our internal control over financial reporting (as such term isdefined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)during the fourth fiscal quarter ended June 30, 2009 that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

 

# **Item9B. 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 17,2009 (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”).

 

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# **Item10. Directors, Executive Officers and Corporate Governance**

# ** **

# **Codeof Ethics**

# ** **

We have adopted acode of ethics that applies to our principal executive officer, principalfinancial officer, principal accounting officer or controller, or personsperforming similar functions. Our code of ethics can be accessed via ourwebsite at www.ethanallen.com/governance.

 

We intend todisclose any amendment of our Code of Ethics, or waiver of provision thereof,applicable to our principal executive officer and/or principal financialofficer, or persons performing similar functions, on our website within 4 daysof the date of such amendment or waiver. In the case of a waiver, the nature of the waiver, the name of theperson to whom the waiver was granted, and the date of the waiver will also bedisclosed.

 

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.

 

**Audit Committee Financial Expert**

 

Our Board ofDirectors 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:

 

Clinton A. Clark

Kristin Gamble

Richard A. Sandberg

 

All personsidentified as audit committee financial experts are independent from managementas defined by Item 7(d)(3), of Schedule 14A.

 

# **Item12. Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters**

# ** **

# **EquityCompensation Plan Information**

# ** **

The following table sets forth certain information regarding our equitycompensation plans at June 30, 2009.

 
| **Plan Category**                                          | ** ** | **Number of securities to  be issued upon exercise  of outstanding options,  warrants and rights** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation  plans (excluding  securities reflected in  first column)** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity compensation plans approved by security  holders (1)     |       | 2,165,136                                                                                                                                            |       | $                                                                                                           | 28.85      |                                                                                                                                                                                                           | 1,105,260  |   |
| Equity compensation plans not approved by security  holders (2) |       | —                                                                                                                                               |       | —                                                                                                      |       | —                                                                                                                                                                                                         |       |
| Total                                                           |       | 2,165,136                                                                                                                                            |       | $                                                                                                           | 28.85      |                                                                                                                                                                                                           | 1,105,260  |   |

 

----

(1)                    Amount includes stock options outstanding under our 1992 Stock OptionPlan (the “Plan”) as well as nonvested shares of restricted stock and vestedStock Units which have been provided for under the provisions of the Plan.  See Note 11 to our Consolidated FinancialStatements included under Item 8 of this Annual Report.

(2)                    As of June 30, 2009, we do not maintain any equity compensationplans which have not been approved by our shareholders.

 

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# **NYSECertification**

# ** **

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**

 

# **Item15. Exhibits and Financial Statement Schedules**

# ** **

I.                                        Listing of Documents

 

(1)                                  *Financial Statements*. Our Consolidated Financial Statements, included under Item 8 hereof,as required at June 30, 2009 and 2008, and for the years ended June 30,2009, 2008 and 2007 consist of the following:

 

Consolidated Balance Sheets

 

Consolidated Statements of Operations

 

Consolidated Statements of Cash Flows

 

Consolidated Statements of Shareholders’ Equity

 

Notes to Consolidated Financial Statements

 

(2)                                  *Financial Statement Schedule.* Our Financial Statement Schedule, appended hereto, as required for theyears ended June 30, 2009, 2008 and 2007 consists of the following:

 

Valuation and Qualifying Accounts

 

The schedules listed in Reg. 210.5-04, except those listed above, havebeen omitted because they are not applicable or the required information is shownin the consolidated financial statements or notes thereto.

 

(3)                                  The following Exhibits 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)                                     |

 

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|   |   | 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) |
|   |   | 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)                                                                                                                            |

 

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|   |   | 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)                                                                                                                                                                                  |
|   |   | 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)                                             |
|   |   | 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 |

 

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|   |   |     |   | 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                                                                                                                                                                           |
|   |   | 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 24, 2009)                                                                                                                                                                                                 |
|   |   | 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 24, 2009)                                                                                                                                                                                                      |
|   | *      | 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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**ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES**

**SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS**

**As of and for the Fiscal Years Ended June 30,2009, 2008 and 2007**

**(In thousands)**

 
| ** **                                                           | ** ** | **Balance at  Beginning  of Period** | ** **  | **Additions  (Reductions)  Charged to  Income** | ** ** | **Adjustments  and/or  Deductions** | ** ** | **Balance at  End of Period** | ** **   |
|----------------------------------------------------------------------|------------|------------------------------------------------|-------------|------------------------------------------------------|------------|-------------------------------------|------------|----------------------------------------------|--------------|
| Accounts Receivable:                                                 |       |                                           |        |                                                 |       |                                |       |                                         |         |
| Sales discounts, sales returns and allowance for  doubtful accounts: |       |                                           |        |                                                 |       |                                |       |                                         |         |
|                                                                 |       |                                           |        |                                                 |       |                                |       |                                         |         |
| June 30, 2009                                                        |       | $                                              | 2,535       |                                                 | $          |  (773                          | )          | $                                            |  (400   | ) | $ |  1,362 |   |
| June 30, 2008                                                        |       | $                                              | 2,042       |                                                 | $          |  493                           |       | $                                            |  — |   | $ |  2,535 |   |
| June 30, 2007                                                        |       | $                                              | 2,074       |                                                 | $          |  10                            |       | $                                            |  (42    | ) | $ |  2,042 |   |
|                                                                 |       |                                           |        |                                                 |       |                                |       |                                         |         |
| Inventory:                                                           |       |                                           |        |                                                 |       |                                |       |                                         |         |
| Inventory valuation allowance:                                       |       |                                           |        |                                                 |       |                                |       |                                         |         |
|                                                                 |       |                                           |        |                                                 |       |                                |       |                                         |         |
| June 30, 2009                                                        |       | $                                              |  2,260 |                                                 | $          |  —                        |       | $                                            |  (56    | ) | $ |  2,204 |   |
| June 30, 2008                                                        |       | $                                              |  2,930 |                                                 | $          |  —                        |       | $                                            |  (670   | ) | $ |  2,260 |   |
| June 30, 2007                                                        |       | $                                              |  2,930 |                                                 | $          |  —                        |       | $                                            |  — |   | $ |  2,930 |   |

 

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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/ Richard A. Sandberg     |   | Director                               |
| (Richard A. Sandberg)       |   |                                   |
|                        |   |                                   |
|                        |   |                                   |
| /s/ Frank G. Wisner         |   | Director                               |
| (Frank G. Wisner)           |   |                                   |
|                        |   |                                   |
|                        |   |                                   |
| Date:  August 27, 2009 |   |                                   |

 

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