THE ETHAN ALLEN
RETIREMENT SAVINGS PLAN
Notes to Financial Statements
December 31, 2007 and 2006
(2)
|
Summary of Significant Accounting Policies
|
The accompanying financial statements have been prepared on the accrual basis of
accounting.
Use of Estimates
The
preparation of financial statements in conformity with U.S generally accepted
accounting principles requires management to make estimates and assumptions that affect
the reported amounts of assets, liabilities, and changes therein, and disclosure of
contingent assets and liabilities. Actual results may differ from those
estimates.
Recent Accounting Pronouncements
In September 2006, the FASB issued Statement on Financial Accounting Standards
(SFAS) No. 157, “Fair Value Measurements”. This standard
establishes a single authoritative definition of fair value, sets out a framework
for measuring fair value and requires additional disclosures about fair value
measurements. SAS No. 157 applies to fair value measurements already
required or permitted by existing standards. SFAS No. 157 is effective
for financial statements issued for fiscal years beginning after November 15, 2007
and interim periods within those fiscal years. The changes to current
U.S. generally accepted accounting principles from the application of this
statement relate to the definition of fair value, the methods used to measure fair
value, and the expanded disclosures about fair value measurements. As of
December 31, 2007, we do not believe the adoption of SFAS No. 157 will impact the
amounts reported in the financial statements; however, additional disclosures may
be required about the inputs used to develop the measurements and the effect of
certain measurements reported on the financial statements for a fiscal
period.
The
Plan provides participants with various investment options that invest in any
combination of stocks, bonds, fixed income securities and other investment
securities. Such investment securities are exposed to various risks and
uncertainties, including interest rate risk, credit risk, market volatility, changes in
the economic and political environment, regulatory changes and foreign currency
risk. The Plan invests in securities with contractual cash flows, such as
asset backed securities, collateralized mortgage obligations and commercial mortgage
backed securities, including securities backed by subprime mortgage
loans. The value, liquidity and related income of these securities are
sensitive to changes in economic conditions, including real estate value, delinquencies
or defaults, or both, and may be adversely affected by shifts in the market’s
perception of the issuers and changes in interest rates. Due to the level of
risk and uncertainty associated with certain investment securities, it is at least
reasonably possible that changes in the values of investment securities will occur in
the near term and that such changes could materially affect participants’ account
balances and the amounts reported in the Statement of Net Assets Available for Plan
Benefits and the Statement of Changes in Net Assets Available for Plan Benefits.
Valuation of Investments Held in Trust and Income Recognition
Under
the terms of a trust agreement between JP Morgan Chase Bank (the “Trustee”)
and the Company, the Trustee administers a trust fund on behalf of the Plan. The value
of the investments and changes therein of this trust have been reported to the Plan by
the Trustee.
8
THE ETHAN ALLEN
RETIREMENT SAVINGS PLAN
Notes to Financial Statements
December 31, 2007 and 2006
Shares
of mutual funds and Company common stock are reported at fair value as determined based
on quoted market prices. Plan interests in benefit responsive investment
contracts and the shares of the American Century Stable Asset Fund are stated
at fair value, with a corresponding adjustment to contract value for investment
contracts that are deemed to be fully benefit-responsive. Contract value represents
contributions made under the contract plus earnings on the underlying investments, less
Plan withdrawals and administrative expenses. Shares in the Collective Trust are
valued at fair value based on the net asset value as reported by the fund
investment manager. Loans to participants are stated at cost (equal to their
outstanding balances on the last day of the year) which approximates fair value.
Purchases
and sales of securities are recorded on a trade–date basis. Dividends are
recorded on the ex-dividend date and interest is accrued as earned.
Payment of Benefits
Benefits
are recorded when paid.
The
following table presents, at fair value, Plan investments which represent 5% or more of
the Plan’s net assets available for plan benefits at December 31:
|
|
|
|
|
|
|
2007
|
|
2006
|
Mutual funds:
|
|
|
|
|
|
American Funds Growth Fund of America
|
28,667,624
|
|
28,193,311
|
|
American Funds AMCAP Fund
|
22,197,396
|
|
22,578,978
|
|
T Rowe Price Retirement 2020 - Adv
|
12,304,434
|
|
—
|
|
Dodge & Cox International Stock Fund
|
12,287,317
|
|
—
|
|
JPMorgan MidCap Value Fund
|
10,961,981
|
|
11,220,908
|
|
Artisan MidCap Growth Fund
|
10,801,321
|
|
—
|
|
T Rowe Price Retirement 2010 - Adv
|
9,655,254
|
|
—
|
|
American Century Strategic Allocation Moderate Fund
|
—
|
|
20,338,761
|
|
Templeton Foreign Fund
|
—
|
|
11,084,902
|
Common stock:
|
|
|
|
|
|
Ethan Allen Interiors, Inc. Common Stock
|
13,963,629
|
|
18,403,854
|
Collective trusts:
|
|
|
|
|
|
American Century Stable Asset Fund
|
|
—
|
|
27,701,313
|
|
|
(Contract value $28,221,877)
|
|
|
|
|
Benefit responsive investment contract:*
|
|
|
|
|
|
JPMorgan Stable Value Fund
|
26,455,809
|
|
—
|
|
|
(Contract value $27,536,938)
|
|
|
|
|
*These
underlying assets are backed by three equally divided wrap contracts with State Street
Bank and Trust Company, Natixis Financial Products Inc. and AEGON Institutional
Markets, Inc., each with a crediting rate yield of 5.00%. The Plan's JPMorgan Stable
Value Fund is comprised of these investment contracts.
9
During 2007 and 2006, the Plan’s investments (including realized gains and
losses on investments bought and sold, as well as held during the year) appreciated
(depreciated) in value as follows:
|
|
2007
|
|
|
2006
|
|
Mutual funds
|
|
$
|
1,000,532
|
|
|
|
5,917,255
|
|
Common stock
|
|
|
(3,699,237
|
)
|
|
|
(72,362
|
)
|
Fully benefit responsive investments
|
|
|
767,053
|
|
|
|
–
|
|
Collective trusts
|
|
|
79,157
|
|
|
|
158,518
|
|
|
|
|
|
|
|
|
|
|
Net appreciation (depreciation) in fair value of investments
|
|
$
|
(1,852,495
|
)
|
|
|
6,003,411
|
|
Benefit Responsive Investment Contracts
The JPMorgan Stable Value Fund and the American Century Stable Asset Fund (the
“Stable Asset Funds”) hold investments in Synthetic Guaranteed
Investment Contracts (“GICs”) as direct investments.
A Synthetic GIC, also known as a wrap contract, is an investment contract issued by
an insurance company or other financial institution, backed by a portfolio of bonds
or other fixed income securities that are owned by the issuer. The assets
underlying the contract are maintained separate from the issuer’s general
assets, usually by a third party custodian. The contract provides an interest rate
not less than zero. Such contracts typically provide that realized and unrealized
gains and losses on the underlying assets are not reflected immediately in the
value of the contract, but rather are amortized, usually over the time to maturity
or the duration of the underlying investments, through adjustments to the future
interest crediting rate.
Primary variables impacting future crediting rates of the Synthetic GICs include
current yield of the assets within the contract, duration of the assets covered by
the contract, and existing difference between the market value and contract value
of the assets within the contract. Synthetic GICs are designed to reset the
respective crediting rate, typically on a quarterly basis. The crediting rate
of Synthetic GICs will track current market yields on a trailing basis. The
rate reset allows the contract value of the wrapped portfolio to converge to the
market value over time, assuming the market value continues to earn the current
portfolio yield for a period of time equal to the current portfolio duration.
The issuer guarantees that all qualified participant withdrawals will occur at
contract value.
Certain events limit the ability of the Plan to transact at contract value with the
issuer. While the events may differ from contract to contract, the events
typically include: (i) amendments to the Plan documents; (ii) changes to
the Plan’s prohibition on competing investment options or deletion of equity
wash provisions; (iii) complete or partial termination of the Plan or its
merger with another plan; (iv) the failure of the Plan or its trust to qualify
for exemption from federal income taxes or any required prohibited transaction
exemption under ERISA; (v) unless made in accordance with the withdrawal
provisions of the Plan, the withdrawal from the wrap contract at the direction of
the Company, including withdrawals due to the removal of a specifically
identifiable group of employees from coverage under the Plan (such as a group
layoff or early retirement incentive program), or the closing or sale of a
subsidiary, employing unit or affiliate, the bankruptcy or insolvency of the
Company, or the Company’s establishment of another tax qualified defined
contribution plan; (vi) any change in law, regulation, ruling, administrative
or judicial position or accounting requirement, in any case applicable to the Plan
or Fund, and (vii) the delivery of any communication to Plan participants
designed to influence a participant not to invest in the Fund. The Company
does not believe that the occurrence of any events, such as those described
above, which would limit the Plan’s ability to transact at contract
value with participants, are probable.
The Synthetic GICs generally are evergreen contracts that permit termination upon
notice at any time, and provide for automatic termination if the contract value or
the market value of the contract equals zero. If the market value of the
contract equals zero, the issuer is not excused from paying the excess above
contract value. If the Plan defaults in its obligations under the contract,
and the default is not cured within a cure period, the issuer may terminate the
contract, and the Plan will receive the market value as of the date of
termination.
10
THE ETHAN ALLEN
RETIREMENT SAVINGS PLAN
Notes to Financial Statements
December 31, 2007 and 2006
The assets underlying the contracts primarily consist of commingled trust funds
sponsored by JP Morgan Chase Bank, NA. The fair value of those funds at December
31, 2007 was $26,455,809 for the JP Morgan Intermediate Bond Fund and $256,439 for
the JP Morgan Liquidity Fund.
The Synthetic GICs are placed with financial institutions whose Standard &
Poors credit rating is A or higher.
The average yield earned by the Stable Asset Funds for all fully benefit-responsive
investment contracts at December 31, 2007 and 2006 are presented in the following
table.
|
2007
|
|
2006
|
|
|
|
|
Weighted
average yield earned
|
6.67%
|
|
5.38%
|
Weighted
average yield credited
|
|
|
|
to
participants accounts
|
5.15%
|
|
4.86%
|
Although
the Company has not expressed any intent to do so, it has the right under the Plan, to
the extent permitted by law, to discontinue its contributions, and to terminate the
Plan in accordance with the provisions of ERISA. If the Plan is terminated, each
participant’s interest will be payable in full according to the Plan provisions.
The Company also has the right under the Plan, to the extent permitted by law, to amend
or replace it for any reason.
Certain
Plan investments represent shares of mutual funds managed by JP Morgan Chase & Co.
(“JP Morgan”), whose affiliates serve as both Trustee and Recordkeeper of
the Plan. Therefore, transactions involving these mutual funds qualify as
party-in-interest transactions.
At
December 31, 2007, approximately 8% of Plan assets are held in the form of shares of
the Company’s common stock. Transactions involving the Company’s common
stock qualify as party-in-interest transactions under the provisions of
ERISA. During 2007 and 2006, the Plan received dividend income on Company
common stock totaling $406,396 and $399,063, respectively.
(6)
|
Administrative Expenses
|
In
2007 and 2006, administrative expenses, other than (i) certain transaction fees borne
by the participants and (ii) audit, legal and investment advisory fees borne by the
Company, were paid by the Plan, in accordance with Plan provisions, and allocated to
participant accounts based upon their account balances. Fees paid to JP Morgan for
recordkeeping and trust services amounted to $81,052 and $89,938 for the years ended
December 31, 2007 and 2006, respectively.
The
Company has received a determination letter from the Internal Revenue Service dated
May 21, 2002 stating that the Plan is a qualified plan under Section 401(a)
of the Internal Revenue Code and the corresponding trust is exempt from income tax
under Section 501(a) of the Internal Revenue Code. The Plan has been amended since
receiving the determination letter. However, the Plan Sponsor and legal counsel believe
that the Plan is currently designed and being operated in compliance with the
applicable requirements of the Internal Revenue Code.
11
THE ETHAN ALLEN
RETIREMENT SAVINGS PLAN
Notes to Financial Statements
December 31, 2007 and 2006
(8)
|
Reconciliation of Financial Statements to Form
5500
|
The following is a reconciliation of net assets available for plan benefits per the
financial statements to the Form 5500:
|
|
Years Ended
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Net assets available for plan benefits per the financial
statements
|
|
$
|
185,264,112
|
|
|
$
|
183,444,572
|
|
Less: Adjustment from fair value to contract value for fully
|
|
|
|
|
|
|
|
|
benefit-responsive investment contracts held by collective
trust
|
|
|
(824,690
|
)
|
|
|
(520,564
|
)
|
Net assets available for plan benefits per the Form 5500
|
|
$
|
184,439,422
|
|
|
$
|
182,924,008
|
|
The
following is a reconciliation of investment income per the financial statements to the
Form 5500:
|
|
Years Ended
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Total investment income per the financial statements
|
|
$
|
8,524,909
|
|
|
$
|
15,412,961
|
|
Less: Adjustment from fair value to contract value for fully
|
|
|
|
|
|
|
|
|
benefit-responsive investment contracts - current year
|
|
|
(824,690
|
)
|
|
|
(520,564
|
)
|
Add: Adjustment from fair value to contract value for fully
|
|
|
|
|
|
|
|
|
benefit-responsive
investment contracts - prior year
|
|
|
520,564
|
|
|
|
–
|
|
Total investment income per the Form 5500
|
|
$
|
8,220,783
|
|
|
$
|
14,892,397
|
|
12
THE ETHAN ALLEN
RETIREMENT SAVINGS PLAN
Notes to Financial Statements
December 31, 2007 and 2006
THE
ETHAN ALLEN
|
|
RETIREMENT
SAVINGS PLAN
|
|
Schedule
H, Line 4i – Schedule of Assets (Held at End of Year)
|
|
December
31, 2007
|
|
|
|
|
|
|
|
|
Identity
of issue, borrower,
|
Number
of
|
|
Current
|
|
|
lessor,
or similar party
|
Shares/Units
|
|
Value
|
|
Mutual
Funds:
|
|
|
|
|
|
American
Beacon Small Cap Value Fund
|
51,627
|
$
|
889,015
|
|
|
American
Funds AMCAP Fund
|
1,105,448
|
|
22,197,396
|
|
|
American
Funds Growth Fund of America
|
849,090
|
|
28,667,624
|
|
|
Artisan
MidCap Growth Fund
|
349,105
|
|
10,801,321
|
|
|
Columbia
Acorn Fund
|
215,113
|
|
6,369,497
|
|
|
Dodge
& Cox International Stock Fund
|
267,090
|
|
12,287,317
|
|
|
JPMorgan
Invest Self-Directed Brokerage Fund (1)
|
n/a
|
|
1,645,499
|
|
|
JPMorgan
MidCap Value Fund (1)
|
449,628
|
|
10,961,981
|
|
|
PIMCO
Total Return - Inst
|
209,328
|
|
2,237,721
|
|
|
T
Rowe Price Retirement 2010 - Adv
|
597,847
|
|
9,655,254
|
|
|
T
Rowe Price Retirement 2020 - Adv
|
696,346
|
|
12,304,434
|
|
|
T
Rowe Price Retirement 2030 - Adv
|
382,880
|
|
7,267,517
|
|
|
T
Rowe Price Retirement 2040 - Adv
|
197,315
|
|
3,772,655
|
|
|
T
Rowe Price Retirement 2050 - Adv
|
83,264
|
|
871,774
|
|
|
T
Rowe Price Retirement Income - Adv
|
97,557
|
|
1,297,510
|
|
|
Van
Kampen Growth and Income Fund
|
63,520
|
|
1,349,803
|
|
Common
Stock:
|
|
|
|
|
|
Ethan
Allen Interiors, Inc. Common Stock (1)
|
489,952
|
|
13,963,629
|
|
Collective
Trusts:
|
|
|
|
|
|
Barclays
Global Investors S&P 500 Equity Index Fund
|
38,210
|
|
1,756,882
|
|
Fully
Benefit Responsive Investment Contracts :
|
|
|
|
|
|
JPMorgan
Intermediate Bond Fund (1) (2)
|
2,236,543
|
|
26,455,809
|
|
|
JP
Morgan Liquidity Fund (1) (2)
|
300,553
|
|
256,439
|
|
Participant
loans (1) (3)
|
n/a
|
|
5,317,166
|
|
|
|
|
$
|
180,326,243
|
|
(1)
|
Denotes
a party-in-interest to the Plan.
|
|
|
|
|
(2)
|
These
underlying assets are backed by three equally divided wrap contracts
with State Street bank and Trust Company, Natixis Financial Products
Inc. and AEGON Institutional Markets, Inc., each with a crediting rate
yield of 5.00%. The Plan's JP Morgan Stable Value Fund is
comprised of these investments and wrap contracts.
|
|
|
|
|
(3)
|
1,465
loans made to Plan participants; rates range from 5.00% to
10.50%; maturities from 1/1/2008 to 8/30/2017.
|
|
|
n/a
|
Not
applicable
|
|
|
|
|
See
accompanying Report of Independent Registered Public Accounting
Firm.
|
|
|
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Ethan Allen
Interiors Inc., as administrator of, and issuer of the securities held pursuant to, The
Ethan Allen Retirement Savings Plan, has duly caused this annual report to be signed on
its behalf by the undersigned hereunto duly authorized.
|
THE ETHAN ALLEN RETIREMENT SAVINGS PLAN
|
|
By:
|
Ethan Allen Interiors Inc.
|
Date: June 26, 2008
|
By:
|
/s/ David R.
Callen
|
|
Name: David R. Callen
Title: Vice President, Finance &
Treasurer
|
14
EXHIBIT INDEX
Exhibit
No
.
|
Description
|
23
|
Consent of KPMG LLP.
|
15
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