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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended June 30, 2009 OR
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o
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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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
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06-1275288
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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Ethan Allen Drive, Danbury, CT
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06811
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(Address of principal
executive offices)
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(Zip Code)
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Registrants telephone number, including area code
(203) 743-8000
Securities registered pursuant to Section 12(b) of the Act:
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Name of Each Exchange
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Title of Each Class
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On Which Registered
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Common Stock, $.01 par value
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New York Stock Exchange, Inc.
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Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate
by
check
mark
if
the
Registrant
is
a
well-known
seasoned
issuer,
as
defined
in
Rule
405
of
the
Securities
Act.
x
Yes
o
No
Indicate
by
check
mark
if
the
Registrant
is
not
required
to
file
reports
pursuant
to
Section
13
or
Section
15(d)
of
the
Act.
o
Yes
x
No
Indicate by check mark whether the Registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
x
Yes
o
No
Indicate by check mark whether the Registrant
has submitted electronically and posted on its corporate Web site, if any,
every Interactive Date File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or
such shorter period that the registrant was required to submit and post such
files).
o
Yes
o
No
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrants knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.
o
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or
a smaller reporting company. See the
definitions of large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer
o
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Accelerated filer
x
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Non-accelerated filer
o
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Smaller reporting company
o
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Indicate by check mark whether the Registrant
is a shell company (as defined in Rule 12b-2 of the Act).
o
Yes
x
No
The aggregate market value of the Registrants
common stock, par value $.01 per share, held by non-affiliates (based upon the
closing sale price on the New York Stock Exchange) on December 31, 2008,
(the last day of the Registrants most recently completed second fiscal
quarter) was approximately $413,411,234.
As of July 31, 2009, there were 28,916,929 shares of the
Registrants common stock, par value $.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: The Registrants definitive Proxy Statement
for the 2009 Annual Meeting of stockholders, which will be filed with the
Securities and Exchange Commission pursuant to Regulation 14A of the Securities
Exchange Act of 1934, is incorporated by reference into Part III hereof.
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of Contents
EXPLANATORY NOTE
Ethan Allen
Interiors, , Inc. (the Company) is filing this Amendment No. 1 on Form 10-K/A
(the Form 10-K/A) to the Companys Annual Report on Form 10-K for
the year ended June 30, 2009 (the Original Filing), to correct a
typographical error in the description and subtotal for total comprehensive
income (loss) appearing in the Consolidated Statements of Shareholders Equity
for the year ended June 30, 2009.
See the Consolidated Statements of Shareholders Equity appearing on page 43
of the audited consolidated financial statements contained in this form 10-K/A.
For the
convenience of the reader, this Form 10-K/A sets forth the Original Filing
in its entirety. However, this form 10-K/A
only amends Item 8 of part II of the Original Filing, to correct a
typographical error in the description and subtotal for other comprehensive
income (loss), and no other information in the Original Filing is amended
hereby . In addition, Item 15 of Part IV
of the Original Filing has been amended to contain currently dated consent, and
certifications from the Companys Chief Executive Officer and Chief Financial
Officer, and are attached to this form 10-K/A as Exhibits 23, 31.1, 31.2, 32.1
and 32.2
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Contents
PART I
Item
1. Business
Background
Incorporated in Delaware in 1989, Ethan Allen Interiors Inc., through
its wholly-owned subsidiary, Ethan Allen Global, Inc., and Ethan Allen
Global, Inc.s subsidiaries (collectively, We, Us, Our, Ethan
Allen or the Company), is a leading manufacturer and retailer of quality
home furnishings and accessories, offering a full complement of home decorating
and design solutions through one of the countrys largest home furnishing
retail networks. In recent years, we have
made, and continue to make, considerable investment in our business in order to
expand and improve our interior design capabilities. In order to better reflect these expanded
capabilities, we have changed the designation of our Ethan Allen retail outlets
from stores to design centers. The
Company was founded in 1932 and has sold products under the Ethan Allen brand
name since 1937.
Mission Statement
Our primary business objective is to provide our customers with a
convenient, full-service, one-stop shopping solution for their home decorating
needs by offering stylish, high-quality products at good value. In order to meet our stated objective, we
have developed and adhere to a focused and comprehensive business strategy. The elements of this strategy, each of which
is integral to our solutions-based philosophy, include (i) our vertically
integrated operating structure, (ii) our products and related marketing
initiatives, (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: wholesale
and retail. These operating segments
represent strategic business areas which, although they operate separately and
provide their own distinctive services, enable us to more effectively offer our
complete line of home furnishings and accessories. For certain financial information regarding
our operating segments, see Note 16 to the Consolidated Financial Statements
included under Item 8 of this Annual Report
and incorporated herein by reference.
The wholesale segment 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 a network of independently operated and Ethan Allen operated
design centers as well as related marketing and brand awareness efforts. Wholesale revenue is generated upon the
wholesale sale and shipment of our product to all retail design centers, including
those operated by Ethan Allen. Wholesale
profitability includes (i) the wholesale gross margin, which represents
the difference between the wholesale sales price and the cost associated with
manufacturing and/or sourcing the related product, and (ii) other
operating costs associated with wholesale segment activities.
The retail segment sells home furnishings and accessories to consumers
through a network of Company-operated design centers. Retail revenue is generated upon the retail
sale and delivery of our product to our customers. Retail profitability includes (i) the
retail gross margin, which represents the difference between the retail sales
price and the cost of goods purchased from the wholesale segment, and (ii) other
operating costs associated with retail segment activities.
While the manner in which our home furnishings and accessories are
marketed and sold is consistent, the nature of the underlying recorded sales
(i.e. wholesale versus retail) and the specific services that each operating
segment provides (i.e. wholesale manufacturing, sourcing, and distribution
versus retail selling) are different.
Within the wholesale segment, we maintain revenue information according
to each respective product line (i.e. case goods, upholstery, or home
accessories and other). Sales of case
good items include, but are 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 upholster
custom-designed upholstery items which are available in a variety of frame and
fabric options. Home accessory and other
items include window treatments, wall decor, lighting, clocks, bedding and
bedspreads, decorative accessories, area rugs, and home and garden furnishings.
Revenue information by product line is not as easily determined within
the retail segment. However, because wholesale production and sales are
matched, for the most part, to incoming orders, we believe that the allocation
of retail sales by product line would be similar to that of the wholesale
segment.
We evaluate performance of the respective segments based upon revenues
and operating income. Inter-segment eliminations result, primarily, from the
wholesale sale of inventory to the retail segment, including the related profit
margin.
In fiscal 2009, wholesale sales to independent retailers and retail
sales of Company-operated design centers accounted for approximately 25% and
75%, respectively, of our c consolidated net sales.
Wholesale
Segment Overview:
Wholesale net
sales for each of the last three fiscal years are summarized below (in
millions):
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Fiscal Year Ended June 30,
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2009
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2008
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2007
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Wholesale net sales
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$
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403.4
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$
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616.2
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$
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656.0
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Wholesale net sales for each of the last three fiscal years, allocated
by product line, were as follows:
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Fiscal Year Ended June 30,
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2009
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2008
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2007
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Case Goods
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41
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%
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43
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%
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44
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%
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Upholstered Products
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41
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40
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38
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Home Accessories and Other
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18
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17
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18
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100
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%
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100
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%
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100
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%
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During fiscal
2009, we operated as many as ten manufacturing facilities, including four case
good plants (two of which include separate sawmill operations), four upholstery
plants and one home accessory plant, located within the United States and one
cut and sew operation in Mexico. As
announced during the fiscal year, we are consolidating two upholstery plants
into existing operations and one case goods plant including its sawmill
operation. By the end of our first
fiscal quarter of 2010, we plan to operate three case goods plants (including
one sawmill), three upholstery plants (two upholstery plants on our Maiden,
North Carolina campus and one cut and sew plant in Mexico) and one home
accessory plant. We also source selected case good, upholstery, and home
accessory items from third-party suppliers located both domestically and
outside the United States.
As of June 30,
2009, we maintained a wholesale backlog of $20.6 million (as compared to $33.0
million as of June 30, 2008) which is anticipated to be serviced in the
first quarter of fiscal 2010. Backlog at
a 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 be
rescheduled and/or canceled, the measure of backlog at a point in time may not
necessarily be indicative of future sales performance.
For the twelve
months ended June 30, 2009, net orders booked at the wholesale level,
which includes orders generated by independently operated and Company-operated
design centers, totaled $398.5 million as compared to $617.1 million for the
twelve months ended June 30, 2008.
In any given period, net orders booked may be
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impacted by the
timing of floor sample orders received in connection with new product
introductions. New product offerings may
be made available to the retail network at any time during the year, including
in connection with our periodic retailer conferences.
Retail
Segment Overview
:
Retail net sales
for each of the last three fiscal years are summarized below (in millions):
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Fiscal Year Ended June 30,
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2009
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2008
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2007
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Retail net sales
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$
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508.6
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$
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724.6
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$
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698.6
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We sell our
products through a dedicated network of 293 retail design centers. As of June 30, 2009, we operated 159
design centers and independent retailers operated 134 design centers (as
compared 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 sales
in fiscal 2009.
During fiscal 2009
we acquired four design centers from independent retailers, opened six new
design centers (of which three were relocations), and closed seven design
centers. In addition, during the past
year, independent retailers opened fourteen new design centers (of which three
were relocations), and closed nine design centers. In the past five years, we and our
independent 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 is
included under Item 2 of Part I of this Annual Report.
We pursue further
expansion of the Company-operated retail business by opening new design
centers, relocating existing design centers and, when appropriate, acquiring
design centers from independent retailers. In addition, we continue to promote
the growth and expansion of our independent retailers through ongoing support
in the areas of market analysis, site selection, and business development. All
retailers are required to enter into license agreements with us which (i) authorize
the use of certain Ethan Allen service marks and (ii) require adherence to
certain standards of operation, including a requirement to fulfill related
warranty service agreements. We are not
subject to any territorial or exclusive retailer agreements in North America.
Products
Our strategy has been to position Ethan Allen as a preferred brand with
superior quality and value while, at the same time, providing consumers with a
comprehensive, one-stop shopping solution for their home furnishing needs. In carrying out our strategy, we continue to
expand our reach to a broader consumer base through a diverse selection of
attractively priced products, many of which have been designed to complement
one another, reflecting the recent trend toward more eclectic home
decorating. Recent product
introductions, as well as increased styles and fabric selections within our custom
upholstery line, new finishes for, and redesigns of, previous product
introductions, and expanded product offerings to accommodate todays home
decorating trends, are serving to redefine Ethan Allen, positioning us as a
leader in style.
In an effort to
more effectively position ourselves as a provider of interior design solutions,
we introduced a merchandising strategy which involves the grouping of our
product offerings, previously categorized by collection, into seven distinct
product lifestyles, each reflecting the diversity and eclecticism that we
believe represents the best in American design.
In accordance with this merchandising strategy, new products are
designed and developed to reflect unique elements applicable to one or more of
the following lifestyles: Country House; Estate; Glamour; Global; Loft; Metro;
and Villa.
All of our case
goods, upholstered products, and home accessories are styled with distinct
design characteristics. Home accessories play an important role in our
marketing strategy as they enable us to offer the consumer the
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convenience of
one-stop shopping by creating a comprehensive home furnishing solution. The
interior of our design centers is designed to facilitate display of our product
offerings in complete room settings in order to project the category lifestyle.
We continuously
monitor changes in home design trends through attendance at international
industry events and fashion shows, internal market research, and regular
communication with our retailers and design center design consultants who
provide valuable input on consumer tendencies.
Observations and input gathered as a result of our efforts enable us to
incorporate appropriate style details into our products thereby allowing us, we
believe, 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 and
enhanced through product redesign, additions, deletions, and/or finish changes.
Such undertakings are indicative of our ability to adapt to the current
consumer trend toward more casual and eclectic lifestyles while, at the same
time, maintaining a classic appeal.
In fiscal 2005, we
also introduced an innovative pricing program, eliminating periodic sale events
in lieu of a nation-wide uniform everyday best price on all of our product
offerings. We believe that this approach
demonstrates our commitment to differentiating ourselves through strategies
focused on customer credibility and excellence in service. In addition,
everyday best pricing provided us the opportunity to critically examine all
facets of our business, making substantive changes, where necessary, in order
to more effectively carry out our solutions-based approach to home
decorating. In response to the
recession, in the latter part of fiscal 2009 the Company offered special
savings mostly on select initiatives including new product introductions.
Product Sourcing Activities
We are one of the
largest manufacturers of home furnishings in the United States, manufacturing
and/or assembling approximately 65% of our products within six manufacturing
facilities, one of which includes separate sawmill operations. Our facilities
are located in the Northeast and Southeast regions of the United States and in
Mexico where they are close to sources of raw materials and skilled
craftsmen. The balance of our production
is outsourced according to our own internally-developed design specifications,
through third-party suppliers, most of which are located outside the United
States. These suppliers, primarily in Asia, have been carefully selected and
generally have supplied us for many years. We believe that continued investment in our
manufacturing facilities, combined with an appropriate level of outsourcing
through both foreign and domestic suppliers, will accommodate future sales
growth and allow us to maintain an appropriate degree of control over cost,
quality and service to our customers.
We also take pride
in our green initiatives which include the use of responsibly harvested
Appalachian woods, water based finishes, organic textiles and recycled
materials.
Raw
Materials and Other Suppliers
The most important
raw materials we use in furniture manufacturing are lumber, veneers, plywood,
hardware, glue, finishing materials, glass, mirrored glass, laminates, fabrics,
foam, and filling material. The various
types of wood used in our products include cherry, ash, oak, maple, prima vera,
mahogany, birch and pine, substantially all of which are purchased
domestically.
Fabrics and other
raw materials are purchased both domestically and outside the United
States. We have no significant long-term
supply contracts, and have sufficient alternate sources of supply to prevent
disruption 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 on
factors such as weather and demand, which, in turn, impact availability. Higher material prices could have an adverse
effect on margins.
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Appropriate
amounts of lumber and fabric inventory are typically stocked so as to maintain
adequate production levels. We believe
that our sources of supply for these materials are sufficient and that we are
not dependent on any one supplier.
We enter into
standard purchase agreements with certain foreign and domestic suppliers to
source selected case good, upholstery, and home accessory items. The terms of these arrangements are customary
for the industry and do not contain any long-term contractual obligations on
our behalf. We believe we maintain good
relationships with our suppliers.
Distribution
and Logistics
Within the
wholesale segment, we warehouse and distribute our products primarily through a
national network of four primary distribution centers (three of which are
owned) strategically located throughout the United States. These distribution
centers hold finished product received from our manufacturing facilities and
our third-party suppliers, for shipment to retail design centers and retail
service centers. From time to time, we
may also rent temporary warehouse space and/or utilize third-party logistics
service providers to accommodate our additional storage needs. We stock selected case goods, upholstery and
accessories to provide for quick delivery of in-stock items and to allow for
more efficient production runs.
Wholesale
shipments are made utilizing our own fleet of trucks and trailers or through
subcontracting agreements with independent carriers. Approximately 45% of our fleet (trucks and
trailers) is leased under operating lease agreements with terms ranging from
one to 72 months.
Our policy is to
sell our products at the same delivered cost to all Company-operated and
independently operated design centers nationwide, regardless of their shipping
point. The adoption of this policy has created pricing credibility with our
customers and provided our retail network the opportunity to achieve more
consistent margins as fluctuations attributable to the cost of shipping have
been eliminated. Further, this policy
has eliminated the need for our independent retailers to carry significant
amounts of inventory in their own warehouses.
As a result, we obtain more accurate information regarding product
demand in order to better plan production runs and manage inventory levels.
Retail service
centers are operated by the Company and the independent retailers to prepare
products for delivery into clients homes. The Company-operated service centers
have been made more efficient and enabled us to reduce the total number from 50
at the beginning of fiscal 2008 to 26 at the end of fiscal 2009. We continue to
evaluate the entire logistics and distribution model to further streamline
these operations.
Marketing
Programs
We believe that
our ability to create high-quality marketing programs and coordinate
advertising efforts for Ethan Allen design centers, including, from time to
time, coordination of local market advertising, provides a competitive
advantage over other home furnishing manufacturers and retailers. With a dedicated network of about 300 retail
design centers taking advantage of such internally-developed marketing efforts,
we believe we are better positioned to fulfill our brand promise on a more
consistent basis.
The objectives of
our marketing campaign are to (i) communicate our position as both a
leader in style and a full-service provider of home decorating and design
solutions, and (ii) drive traffic into the retail design center
network. In support of these objectives,
several forms of media are utilized, including television (both national and
local), direct mail, newspapers, magazines, radio, and our internet website. We also conduct a national email marketing
campaign which serves to distribute electronic newsletters containing
inspirational interior design ideas to a growing database of consumers.
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Our national
television and print advertising campaigns are designed to capitalize on our
existing brand equity and maintain top-of-mind awareness of the breadth of our
product and service offerings. With this
is mind, our in-house team of advertising specialists has developed what we
believe is the most cohesive national advertising campaign in the home
furnishings industry. Coordinated local
television and print, to the extent these media are utilized, serve to support
our national programs.
The Ethan Allen
direct mail magazine, which brands our product lifestyles and communicates the
breadth of our services, is one of our most important marketing tools. We publish and sell the magazines to both
Company-operated and independently operated design centers, which, with
demographic information collected through independent market research, are able
to target potential customers. Given the
importance of this advertising medium, direct mail marketing lists continue to
be 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 direct
mail magazine were distributed to consumers during fiscal 2009.
Our television
advertising and direct mail efforts are supported by strong print and radio
campaigns in various markets. During
fiscal 2009, we also updated our 200-page Ethan Allen Style book. This publication, which includes a catalogue
of our home furnishings and accessories, projects our seven product lifestyles
to our clients and helps customers identify their own personal style using our
product offerings. We believe this publication represents one of the most
comprehensive and effective home decorating resources in the home furnishings
industry.
In 2009, the
Company launched the all-new ethanallen.com website which combines personal
service and technology. The new state-of-the-art website provides a new
way to shop for Ethan Allen and is designed to inspire visitors with videos,
feature stories, design and style solutions, new photography, and Ethan Allens
portfolio for livable designthe Seven Lifestyles. It offers a new interactive
design tool called
My Projects
that allows site visitors to create idea boards and room plans and get feedback
online from a design consultant at a local design center. The websites
Inspire
section includes editorial features, new product
stories, design trend information, decorating solutions, and a collection of
creative films and TV clips showcasing Ethan Allens Lifestyles and looks. The
As Seen In
column shows visitors how Ethan Allen products
have influenced style around the globe. Ethan Allens direct mail
magazines are viewable online with full browsing and shopping capabilities. In
the
Design
section, visitors can explore the
Seven Lifestyles in depth and after finding their own style with our style
quiz, shop the furnishings featured in the fully designed rooms. For the
first time, visitors to ethanallen.com can now access nearly all of the
Companys more than 3,000 products online. The new ethanallen.com received
recognition at the 2008 IAC Awards (Internet Advertising Committee) as outstanding
website.
We have also developed an extranet website which links the retail
design centers with consumer information captured on-line, such as customer
requests for design assistance and copies of our direct mail magazine. This
medium has become the primary source of communications within our retail
network providing a variety of information, including a Company-wide daily news
flash, downloads of current advertising materials, prototype design center
display floor plans and detailed product information.
Retail
Design Center Network
Ethan Allen design
centers are typically located in busy urban settings as freestanding
destinations or as part of suburban strip malls, depending upon the real estate
opportunities in a particular market. At
the present time, our design centers average approximately 16,000 square feet
in size. While the footprint for most of
our retail network is similar, our design centers currently range in size from
approximately 3,000 square feet to 35,000 square feet.
We
maximize uniformity of presentation throughout the retail design center network
through a comprehensive set of standards.
These standards assist each design center in presenting a high quality
image and offer retail customers consistent levels of product selection and
service
. A uniform design center
image is conveyed through
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our ongoing
program to model all retail design centers with similar and consistent exterior
facades and interior layouts. This
program is carried out at all design centers, including those that are
independently operated.
We provide display
planning assistance to all Company-operated design centers and independent
retailers to support them in updating the interior projection and to maintain a
consistent image. We have developed a
standard interior design format for our retail network which, through the use
of focused lifestyle settings to display our products and information displays
to educate consumers, has positioned Ethan Allen as a leader in home
furnishings retailing.
We have
strengthened the retail division with many initiatives, including the opening
of new and relocated design centers in desirable locations, introduction of
Lifestyle presentations and floor plans, strengthening of the professionalism
of our designers through training and a team approach, and the consolidation of
certain design centers and service centers. The bulk of this effort was
completed by the end of fiscal 2008, but continued in fiscal 2009 with six new
Company-operated design centers during the year including relocations and seven
in underperforming markets closed. We consolidated 16 Company-operated retail
service centers into larger service centers in fiscal 2008 and another eleven
in fiscal 2009. We also opened three Company-operated service centers in fiscal
2009. This effort continues to reduce
the retail logistics infrastructure needed to provide white glove delivery
service to our customers.
People
At June 30,
2009, we had approximately 4,300 employees (associates), less than one
percent of whom are represented by unions.
These collective bargaining agreements expire at various times within
the next two years. We expect no
significant changes in our relations with these unions and believe we maintain
good relationships with our employees.
The retail
network, which includes both Company-operated and independently operated design
centers, is staffed with a sales force of design consultants and service
professionals who operate in teams to provide customers with an effective home
decorating solution at no additional charge.
Our associates receive appropriate training with respect to the
distinctive design and quality features inherent in each of our products and
programs, allowing them to more effectively communicate the elements of style
and value that serve to differentiate us from the competition. As such, we
believe our design consultants, and the complimentary service they provide,
create a distinct competitive advantage over other home furnishing retailers.
We have made
considerable investment within the retail network to strengthen the level of
service, professionalism, interior design competence, efficiency, and
effectiveness of retail design center personnel. The implementation of the
team concept is the latest phase of that progression, which resulted in the
development of over 280 interior design teams within the Company design
centers. We believe that with this structure, along with the emphasis in our
messaging to clients that we can help as little or as much as you like, as
well as offering the benefit of making appointments with our design
professionals, we continue to improve the customer service experience.
We recognize the
importance of our retail design center network to our long-term success.
Accordingly, we believe we (i) have established strong management teams
within Company-operated design centers and (ii) continue to work closely with
our independent retailers in order to assist them in strengthening their
teams. With this in mind, we make our
services available to every design center, whether independently operated or
Company-operated, in support of their marketing efforts, including coordinated
advertising, merchandising and display programs, and extensive training
seminars and educational materials. We
believe that the development of design teams, design consultants, service and
delivery personnel, and retailers is important for the growth of our business.
As a result, we have committed to make available a comprehensive retail
training program which is intended to increase the customer service
capabilities of each individual.
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Customer
Service Offerings
We offer numerous
customer service programs, each of which has been developed and introduced to
consumers in an effort to make their shopping experience easier and more
enjoyable.
Gift
Card
This program
allows customers to purchase, through our website or at any
participating retail design center, gift cards which can be redeemed for any of
our products or services.
Rewards
In celebration of
the new website, the Company recently launched its Become a Member
campaign. Members who are eligible receive 500 reward points. Each
point is redeemable toward future qualifying purchases for up to the lesser of
$500 or 5% of the total qualifying purchase price. Shoppers can redeem their
points both in Design Centers or online, through a limited time.
On-Line
Room Planning
We offer, via our
website, an interactive on-line room planning resource which serves to further
assist consumers with their home decorating needs. Through the use of this
web-based tool, customers can determine which of our product offerings best fit
their particular needs based on their own individual home floor plan.
Ethan
Allen Consumer Credit Programs
The Ethan Allen
Finance Plus program offers consumers (clients) a menu of three custom
financing options through the use of just one account. Clients can choose between (1) Term
Choice which offers fixed monthly payments the customer chooses from 12 to 60
months 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 for
three or six months with no monthly payments. If the purchase is not paid by
the due date, interest is charged from the date of purchase at a fixed interest
rate of 24.99% per annum, and (3) Ethan Allen Prime which offers the
lowest minimum monthly payment plan including no payments the first three
months; 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 institution
and is granted to our customers on a non-recourse basis to the Company. Clients may apply for an Ethan Allen Finance
Plus 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 of
which is an influx of low-priced competition from overseas. As a result, we believe a trend toward
product commoditization has developed.
In fiscal 2009, the economic recession resulted in many small furniture
retailers going out of business and other well-established competitors
resorting to heavy discounts to liquidate inventory. Instead of following this
trend, we differentiate ourselves as a preferred brand by adhering to a
business strategy focused on providing (i) high-quality, well designed and
often custom handmade products at good value, (ii) a comprehensive
complement of home furnishing design solutions, including our complimentary
design service, and (iii) excellence in customer service. We consider our
vertical integration a significant competitive advantage in the current
environment as it allows us to design, manufacture and source, distribute,
market, and sell our products through one of the industrys largest
single-source retail networks.
Industry
globalization has provided us an opportunity to adhere to a blended sourcing
strategy, establishing relationships with certain manufacturers, both
domestically and outside the United States, to source selected case goods,
upholstery, and home accessory items. We intend to continue to balance our
domestic production with opportunities to source from foreign and domestic
manufacturers, as appropriate, in order to maintain our competitive advantage.
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We believe the
home furnishings industry competes primarily on the basis of product styling
and quality, personal service, prompt delivery, product availability and
price. We further believe that we
effectively compete on the basis of each of these factors and that, more
specifically, our retail format, our award winning website, and complimentary
design service create a distinct competitive advantage, further supporting our
mission of providing consumers with a complete home decorating and design
solution. Our objective is to continue
to develop and strengthen our retail network by (i) expanding the
Company-operated retail business through the relocation of existing design
centers, opening of new design centers, and, when appropriate, acquiring design
centers from, or selling design centers to, independent retailers, and (ii) obtaining
and retaining independent retailers, encouraging such retailers to expand their
business through the opening or relocation of new design centers with the
objective of increasing the volume of their sales.
Trademarks
We currently hold,
or have registration applications pending for, numerous trademarks, service
marks and design patents for the Ethan Allen name, logos and designs in a broad
range of classes for both products and services in the United States and in
many foreign countries. In addition, we have registered, or have applications
pending for, many of our major collection names as well as certain of our
slogans utilized in connection with promoting brand awareness, retail sales and
other services. We view such trade and
service marks as valuable assets and have an ongoing program to diligently
monitor and defend, through appropriate action, against their unauthorized use.
Available
Information
We make available, free of charge via our website, all
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K and other information filed with, or furnished to, the
Securities and Exchange Commission (the SEC or the Commission), including amendments
to such reports. This information is available at www.ethanallen.com/investors
as soon as reasonably practicable after it is electronically filed with, or
furnished to, the SEC. In addition, the
SEC maintains a website that contains reports, proxy and information
statements, and other information regarding companies that file electronically
with the Commission. This information is
available at www.sec.gov.
In addition, charters of all committees of our Board
of Directors, as well as our Corporate Governance guidelines, are available on
our website at www.ethanallen.com/governance or, upon written request, in
printed hardcopy form. Written requests should be sent to Office of the
Secretary, Ethan Allen Interiors Inc., Ethan Allen Drive, Danbury, Connecticut
06811.
Item 1A. Risk Factors
The following information describes certain
significant risks and uncertainties inherent in our business that should be
carefully considered, along with other information contained elsewhere in this
report and in other filings, when making an investment decision with respect to
us. If one or more of these risks
actually occurs, the impact on our business, including our financial condition,
results of operations, and cash flows could be adverse.
A
prolonged economic downturn may continue to materially adversely affect our
business.
Our business and
results of operations are affected by international, national and regional
economic conditions. The United States
and many other international economies have entered a recession. Our primary
customer base, direct or indirect, is composed of individual consumers. Continued weakness in the U.S. economy, high
unemployment, volatile capital markets, depressed housing prices and tight
consumer lending practices have resulted in considerable negative pressure on
consumer spending. We believe these
events have impacted consumers in our markets in ways that have negatively
affected our business. In the event the
current economic
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downturn
continues, or worsens, our current and potential customers may be inclined to
further delay their purchases. In
addition, further tightening of credit markets may restrict our customers
ability and willingness to make purchases.
Access
to consumer credit could be interrupted and reduce sales and profitability.
Our ability to
continue to access consumer credit for our clients could be negatively affected
by conditions outside our control. Given the difficult capital markets, there
is 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, may
not be able to fulfill their obligations under that agreement.
We
may be unable to obtain sufficient external funding to finance our operations
and growth.
Historically, we
have relied upon our cash from operations to fund our operations and growth. As
we operate and expand our business, we may rely on external funding sources,
including the proceeds from the issuance of debt or the $40 million
revolving bank line of credit (expandable to $60 million) under our existing
credit facility. Any unexpected reduction in cash flow from operations could
increase our external funding requirements to levels above those currently
available. If our Standard & Poors credit rating remains below
investment grade through March 2010, the issuer of our private label
credit cards may exercise a right to demand up to $12 million in letters of
credit which would reduce the credit available for borrowings
from the $27.5 million remaining
available at June 30, 2009
. If the total
remaining availability of the revolver is below $17.5 million, a lien by the
banks would be imposed on the Companys intellectual property. If our credit
ratings were lowered further, the Companys access to debt (including its
ability 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 not
experience unexpected cash flow shortfalls in the future or that any increase
in external funding required by such shortfalls will be available.
Continued
operating losses could reduce our liquidity and impact our dividend policy.
Historically, we
have relied on our cash from operations to fund our operations and the payment
of cash dividends. If the Company
continues to experience operating losses we may not be able to fund a shortfall
from 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 not
available to the Company. We cannot assure that additional sources of financing
would be available to the Company on commercially favorable terms should the
Companys capital requirements exceed cash available from operations and
existing cash and cash equivalents. In
such circumstances the Company may further reduce its quarterly dividends.
Additional
impairment charges could reduce our profitability.
We have
significant long-lived tangible and intangible assets recorded on our balance
sheets. If our operating results
continue 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 be
a non-cash expense, it could materially increase our expenses and reduce our
profitability in the period recorded. We will continue to evaluate the
recoverability of the carrying amount of our long-lived tangible and intangible
assets on an ongoing basis. There can be
no assurance that the outcome of such future reviews will not result in
substantial impairment charges.
Impairment assessment inherently involves judgments as to assumptions
about expected future cash flows and the impact of market conditions on those
assumptions. Future events and changing
market conditions may impact our assumptions as to prices, costs or other
factors that may result in changes in our estimates of future cash flows. Although we believe the assumptions we use in
testing for impairment are reasonable, significant changes in any of our
assumptions could produce a significantly different result.
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We
face changes in global and local economic
conditions that may adversely affect consumer demand and spending, our
manufacturing operations or sources of merchandise.
Historically, the
home furnishings industry has been subject to cyclical variations in the
general economy and to uncertainty regarding future economic prospects. Such
uncertainty, as well as other variations in global economic conditions such as
rising fuel costs and increasing interest rates, may continue to cause
inconsistent and unpredictable consumer spending habits, while increasing our
own fuel, utility, transportation or security costs. These risks, as well as
industrial accidents or work stoppages, could also severely disrupt our
manufacturing operations, which could have a material adverse effect on our
financial performance.
We import a
portion of our merchandise from foreign countries. As a result, our costs may
be increased by events affecting international commerce and businesses located
outside the United States, including changes in international trade, central
bank actions, changes in the relationship of the U.S. dollar versus other
currencies, and other governmental policies of the U.S. and the countries from
which we import a portion of our merchandise. The inability to import products
from certain foreign countries or the imposition of significant tariffs could
have a material adverse effect on our results of operations.
Competition
from overseas manufacturers continues to increase and may adversely affect our
business, operating results or financial condition.
Our wholesale
business segment is involved in the development of our brand, which encompasses
the design, manufacture, sourcing, sales and distribution of our home
furnishings products, and competes with other U.S. and foreign
manufacturers. Our retail business
segment sells home furnishings to consumers through a network of
Company-operated design centers, and competes against a diverse group of
retailers ranging from specialty stores to traditional furniture and department
stores, any of which may operate locally, regionally and nationally. We also compete with these and other
retailers for appropriate retail locations as well as for qualified design
consultants and management personnel. Such competition could adversely affect
our future financial performance.
Industry
globalization has led to increased competitive pressures brought about by the
increasing volume of imported finished goods and components, particularly for
case good products, and the development of manufacturing capabilities in other
countries, specifically within Asia. The increase in overseas production
capacity 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 lower
production costs, including the cost of labor and overhead, imported product
may 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 provide
assurance that we will be able to establish or maintain relationships with
certain manufacturers, whether foreign or domestic, to supply us with selected
case goods, upholstery and home accessory items to enable us to maintain our
competitive advantage. In addition, the recent emergence of foreign manufacturers
has served to broaden the competitive landscape. Some of these competitors
produce furniture types not manufactured by us and may have greater financial
and other resources available to them. This competition could adversely affect
our future financial performance.
Failure
to successfully anticipate or respond to changes in consumer tastes and trends
in a timely manner could adversely impact our business, operating results and
financial condition.
Sales of our
products are dependent upon consumer acceptance of our product designs, styles,
quality and price. We continuously monitor changes in home design trends
through attendance at international industry events and fashion shows, internal
marketing research, and regular communication with our retailers and design
center design consultants who provide valuable input on consumer tendencies.
However, as with all
retailers, our
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business is
susceptible to changes in consumer tastes and trends. Such tastes and trends can change rapidly and
any delay or failure to anticipate or respond to changing consumer tastes and
trends in a timely manner could adversely impact our business, operating
results and financial condition.
The
consolidation of manufacturing and logistics operations into fewer sites may
increase the exposure to business disruption and could result in higher
transportation costs.
The Company has
reduced the number of redundant manufacturing sites in both our case goods and
upholstery operations. Our upholstery operations consist of two upholstery
plants on our Maiden, North Carolina campus supported in part by one cut and
sew plant in Mexico. If any of these upholstery manufacturing sites experience
significant business interruption, our ability to manufacture products timely
would likely be impacted. Our plants require various raw materials and
commodities such as logs and lumber for our case goods plants and foam, springs
and engineered hardwood board for our upholstery plants. While we have long
standing relationships with multiple outside suppliers of our raw materials and
commodities, there can be no assurance of their ability to fulfill our supply needs
on a timely basis. The consolidation to fewer retail logistics operations has
resulted in longer distances for delivery and could result in higher costs to
transport products if fuel costs increase significantly.
Our
current and former manufacturing and retail operations are subject to
increasingly stringent environmental, health and safety requirements.
We use and
generate hazardous substances in our manufacturing and retail operations. In
addition, both the manufacturing properties on which we currently operate and
those on which we have ceased operations are and have been used for industrial
purposes. Our manufacturing operations and, to a lesser extent, our retail
operations involve risk of personal injury or death. We are subject to
increasingly stringent environmental, health and safety laws and regulations
relating to our current and former properties and our current operations. These
laws and regulations provide for substantial fines and criminal sanctions for
violations and sometimes require the installation of costly pollution control
or safety equipment or costly changes in operations to limit pollution or
decrease the likelihood of injuries. In addition, we may become subject to
potentially material liabilities for the investigation and cleanup of
contaminated properties and to claims alleging personal injury or property
damage resulting from exposure to or releases of hazardous substances or
personal injury as a result of an unsafe workplace.
We have been
identified as a potentially responsible party in connection with one site that
is currently listed, or proposed for inclusion, on the National Priorities List
under the Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended, or its state counterpart.
In addition, noncompliance with, or stricter enforcement of, existing
laws and regulations, adoption of more stringent new laws and regulations,
discovery of previously unknown contamination or imposition of new or increased
requirements could require us to incur costs or become the basis of new or
increased liabilities that could be material.
Fluctuations
in the price, availability and quality of raw materials could result in
increased costs or cause production delays which might result in a decline in
sales, either of which could adversely impact our earnings.
We use various
types of wood, foam, fibers, fabrics, leathers, and other raw materials in
manufacturing our furniture. Certain of our raw materials, including fabrics,
are purchased both outside the United States and domestically. Fluctuations in
the price, availability and quality of raw materials could result in increased
costs or a delay in manufacturing our products, which in turn could result in a
delay in delivering products to our customers. For example, lumber prices
fluctuate over time based on factors such as weather and demand, which in turn,
impact availability. Production delays or upward trends in raw material prices
could result in lower sales or margins, thereby adversely impacting our earnings.
14
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In addition,
certain suppliers may require extensive advance notice of our requirements in
order to produce products in the quantities we desire. This long lead time may
require us to place orders far in advance of the time when certain products
will be offered for sale, thereby exposing us to risks relating to shifts in
consumer demand and trends, and any further downturn in the U.S. economy.
Our
business is sensitive to increasing labor costs, competitive labor markets, our
continued ability to retain high-quality personnel and risks of work stoppages.
The market for
qualified employees and personnel in the retail and manufacturing industries is
highly competitive. Our success depends upon our ability to attract, retain and
motivate qualified craftsmen, management, marketing and sales personnel and
upon the continued contributions of these individuals. We cannot provide
assurance that we will be successful in attracting and retaining qualified
personnel. A shortage of qualified personnel may require us to enhance our wage
and benefits package in order to compete effectively in the hiring and
retention of qualified employees. Our
labor costs may continue to increase and such increases may not be recovered.
In addition, some of our employees are covered by collective bargaining
agreements with local labor unions. Although we do not anticipate any
difficulty renegotiating these contracts as they expire, a labor-related stoppage by
these unionized employees could adversely affect our business and results of
operations. The loss of the services of key personnel or our failure to attract
additional qualified personnel could have a material adverse effect on our
business, operating results and financial condition.
Our
success depends upon our brand, marketing and advertising efforts and pricing
strategies, and if we are not able to maintain and enhance our brand, or if we
are not successful in these other efforts, our business and operating results
could be adversely affected.
Maintaining and
enhancing our brand is critical to our ability to expand our base of customers
and may require us to make substantial investments. Our advertising campaign
utilizes television, direct mail, newspapers, magazines and radio to maintain
and enhance our existing brand equity. We cannot provide assurance that our
marketing, advertising and other efforts to promote and maintain awareness of
our brand will not require us to incur substantial costs. If these efforts are
unsuccessful or we incur substantial costs in connection with these efforts,
our business, operating results and financial condition could be adversely
affected.
We may
not 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 centers
are typically located in busy urban settings as freestanding destinations or as
part of suburban strip malls, depending upon the real estate opportunities in a
particular market. Our business competes with other retailers and as a result,
our success may be affected by our ability to renew current design center
leases and to select and secure appropriate retail locations for existing and
future design centers.
We
depend on key personnel and could be affected by the loss of their services
.
The success of our
business depends upon the services of certain senior executives, and in particular,
the services of M. Farooq Kathwari, Chairman of the Board, President and Chief
Executive Officer, who is the only one of our senior executives who operates
under a written employment agreement. The loss of any such person or other key
personnel could have a material adverse effect on our business and results of
operations.
Our
results of operations for any quarter are not necessarily indicative of our
results of operations for a full year.
Sales of furniture
and other home furnishing products fluctuate from quarter to quarter due to
such factors as changes in global and regional economic conditions, changes in
competitive conditions, changes in production schedules in response to seasonal
changes in energy costs and weather conditions, and changes in consumer order
patterns. From time to time, we have experienced, and may continue to
experience, volatility with respect
15
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to demand for our
home furnishing products. Accordingly, results of operations for any quarter
are not necessarily indicative of the results of operations for a full year.
Failure
to protect our intellectual property could adversely affect us.
We believe that
our patents, trademarks, service marks, trade secrets, copyrights and all of
our other intellectual property are important to our success. We rely on
patent, trademark, copyright and trade secret laws, and confidentiality and
restricted use agreements, to protect our intellectual property and may seek
licenses to intellectual property of others. Some of our intellectual property
is not covered by any patent, trademark, or copyright or any applications for
the same. We cannot provide assurance that agreements designed to protect our
intellectual property will not be breached, that we will have adequate remedies
for any such breach, or that the efforts we take to protect our proprietary
rights will be sufficient or effective. Any significant impairment of our
intellectual property rights or failure to obtain licenses of intellectual
property from third parties could harm our business or our ability to compete.
Moreover, we cannot provide assurance that the use of our technology or
proprietary know-how or information does not infringe the intellectual property
rights of others. If we have to litigate to protect or defend any of our
rights, such litigation could result in significant expense.
Item 1B.
Unresolved Staff Comments
None.
Item
2. Properties
Our corporate
headquarters, located in Danbury, Connecticut, consists of one building
containing 144,000 square feet, situated on approximately 18.0 acres of land,
all of which is owned by us. Located
adjacent to the corporate headquarters, and situated on approximately 5.4
acres, is the Ethan Allen Hotel and Conference Center, containing 195
guestrooms. This hotel, owned by a wholly-owned subsidiary of Ethan Allen, is
used in connection with Ethan Allen functions and training programs, as well as
for functions and accommodations for the general public.
During fiscal
2009, we operated as many as ten manufacturing facilities located in six states
and Mexico. All of these facilities are owned, with the exception of a 145,636
square foot leased upholstery plant in California which will be closed by January 2010.
As announced during fiscal year 2009, we are consolidating select upholstery
and case goods plants into existing operations.
By the end of our first quarter of fiscal 2010, we plan to operate three
case goods plants (including one sawmill) totaling 1,644,522 square feet, three
upholstery furniture plants (consisting of two upholstery plants on our Maiden,
North Carolina campus and one cut and sew plant in Mexico) totaling 649,396
square feet, and one home accessory plant that is 295,000 square feet all of
which are owned by the company.
In addition, we
operate four primary distribution centers, totaling 1,179,029 square feet. All of these facilities are owned, with the
exception of one leased distribution facility in California, which is 80,000
square feet. Our U.S. manufacturing and
distribution facilities for future operations are located in North Carolina,
Vermont, Virginia, Oklahoma, California, New Jersey and Indiana, and our Mexico
plant is located in Guanajuato.
We own four and
lease 22 retail service centers, totaling 1,268,631 square feet. Our retail
service centers are located throughout the United States and Canada and serve
to support our various retail sales districts.
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The geographic
distribution of our retail design center network as of June 30, 2009 is as
follows:
|
|
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
|
|
(1)
We own and operate five retail design
centers located in Canada.
Of the 159 retail design centers operated by us, 76 of the properties
are owned and 83 of the properties are leased from independent third
parties. Of the 76 design center
locations owned by us, 20 are subject to land leases. We own three additional
retail properties, two of which are leased to independent Ethan Allen
retailers, and one of which is leased to an unaffiliated third party. See Note 8 to the Consolidated Financial
Statements included under Item 8 of this Annual Report for more information
with 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 of
7.50% and have a remaining balance at June 30, 2009 of $3.9 million which
matures in two years. The Beecher Falls,
Vermont manufacturing facility was financed, in part, by the State of Vermont
Economic Development Authority (VEDA) and the Town of Canaan, Vermont. The VEDA debt matured in June 2006 and
was repaid in full at that time. The
Town of Canaan debt bears interest at a fixed rate of 3.00% and has a remaining
balance at June 30, 2009 of $0.3 million, with maturities of three to 18
years. We believe that all of our
properties are well maintained and in good condition.
We estimate that
our manufacturing division is currently operating at approximately 50% of
capacity. As a result, we announced the
consolidation of our Eldred, Pennsylvania and Chino, California upholstery
plants into existing operations as well as the closure of our Andover, Maine
case goods plant and realignment of other case goods operations in the
Northeast. We believe we have additional capacity at selected facilities, which
we could utilize with minimal additional capital expenditures.
Item
3. Legal Proceedings
We are a party to
various legal actions with customers, employees and others arising in the
normal course of our business. We maintain liability insurance, which is deemed
to be adequate for our needs and commensurate with other companies in the home
furnishings industry. We believe that the final resolution of pending actions
(including any potential liability not fully covered by insurance) will not
have a material adverse effect on our financial condition, results of
operations, or cash flows.
Environmental
Matters
We and our
subsidiaries are subject to various environmental laws and regulations. Under
these laws, we and/or our subsidiaries are, or may be, required to remove or
mitigate the effects on the environment of the disposal or release of certain
hazardous materials.
During the fiscal year ending June 30, 2009, our liability with
respect to three active sites currently listed, or proposed for inclusion, on
the National Priorities List (NPL) under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended (CERCLA), where
we and/or our subsidiaries had been named as a Potentially Responsive Party
(PRP) located in Southington, Connecticut; High Point, North Carolina; and
Atlanta, Georgia has been resolved.
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In each case we were not a major contributor based on the very small
volume of waste generated by us in relation to total volume at those sites and
were able to take part in de minimus settlement arrangements. Specifically, with respect to the Southington
site, our volumetric share is less than 1% of over 51 million gallons disposed
of at the site and there are more than 1,000 PRPs. With respect to the High Point site, our
volumetric share is less than 1% of over 18 million gallons disposed of at the
site and there are more than 2,000 PRPs, including more than 1,000 de minimis
parties (of which we are one). With respect to the Atlanta site, a former
solvent recycling/reclamation facility, our volumetric share is less than 1% of
over 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 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 State that it had conducted an initial environmental study and
that we have been named as a PRP. We
believe that we are not a major contributor; however, a review of the initial
environmental study is ongoing.
Liability under CERCLA may be joint and several. As such, to the extent
certain named PRPs are unable, or unwilling, to accept responsibility and pay
their apportioned costs, we could be required to pay in excess of our pro rata
share of incurred remediation costs. Our understanding of the financial
strength of other PRPs has been considered, where appropriate, in the
determination of our estimated liability.
As of June 30, 2009, we believe that established reserves related
to these environmental contingencies are adequate to cover probable and
reasonably estimable costs associated with the remediation and restoration of
these sites. We believe our currently
anticipated capital expenditures for environmental control facility matters are
not material.
We are subject to other federal, state and local environmental
protection laws and regulations and are involved, from time to time, in investigations
and proceedings regarding environmental matters. Such investigations and proceedings typically
concern air emissions, water discharges, and/or management of solid and
hazardous wastes. We believe that our facilities are in material compliance
with all such applicable laws and regulations.
Regulations issued under the Clean Air Act Amendments of 1990 required
the industry to reformulate certain furniture finishes or institute process
changes to reduce emissions of volatile organic compounds. Compliance with many
of these requirements has been facilitated through the introduction of high
solids coating technology and alternative formulations. In addition, we have
instituted a variety of technical and procedural controls, including
reformulation of finishing materials to reduce toxicity, implementation of high
velocity low pressure spray systems, development of storm water protection
plans and controls, and further development of related inspection/audit teams,
all of which have served to reduce emissions per unit of production. We remain
committed to implementing new waste minimization programs and/or enhancing
existing programs with the objective of (i) reducing the total volume of
waste, (ii) limiting the liability associated with waste disposal, and (iii) continuously
improving environmental and job safety programs on the factory floor which
serve to minimize emissions and safety risks for employees. We will continue to
evaluate the most appropriate, cost effective, control technologies for
finishing operations and design production methods to reduce the use of
hazardous materials in the manufacturing process.
Item
4. Submission of Matters to a Vote of Security Holders
No matters were submitted for vote by our security holders during the
fourth quarter of fiscal 2009.
18
Table of Contents
PART II
Item
5. Market for Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Our common stock is traded on the New York Stock Exchange under ticker
symbol ETH. The following table sets forth, for each of the past two fiscal
years, (i) the high and low stock prices as reported on the New York Stock
Exchange 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 of
our common stock. Management estimates
there are over eleven thousand beneficial shareholders of the Companys common
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 quarterly
dividends for the foreseeable future, business conditions permitting.
Equity Compensation Plan Information
The information required by this Item 5 with respect to Equity
Compensation Plan Information is set forth in Item 12 Security Ownership of
Certain 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 share
repurchase program authorizing us to repurchase up to 2,000,000 shares of our
common stock, from time to time, either directly or through agents, in the open
market at prices and on terms satisfactory to us. Subsequent to that date, the
Board of Directors increased the remaining authorization as follows: from
904,755 shares to 2,500,000 shares on April 27, 2004; from 753,600 shares
to 2,000,000 shares on November 16, 2004; from 691,100 shares to 2,000,000
shares 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; from
707,300 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 a
remaining Board authorization to repurchase 1,567,669 shares.
There were no share repurchases during
the quarter or fiscal year ended June 30, 2009.
Stockholder Rights Plan
We have a Stockholder
Rights Plan, a description of which is set forth in Note 9 to the Consolidated
Financial Statements included under Item 8 of this Annual Report and
incorporated herein by reference. Such
description contains all of the required information with respect thereto.
19
Table of Contents
Comparative
Company Performance
The following line graph compares
cumulative total stockholder return for the Company with a performance
indicator of the overall stock market, the Standard & Poors 500
Index, and an industry index, the Peer Issuer Group Index, assuming $100 was
invested on June 30, 2004.
COMPARISON OF 5 YEAR CUMULATIVE
TOTAL RETURN*
Among Ethan Allen
Interiors Inc., The S&P 500 Index
And A Peer Group
*$100
invested 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.
Peer
group includes Bassett Furniture Industries, Inc., Chromcraft Revington, Inc.,
Flexsteel Industries, Inc., Furniture Brands International, Inc., Haverty
Furniture Companies, Inc., La-Z-boy Inc., Legett & Platt, Inc., and Pier 1
Imports Inc. The returns of each company
have been weighted according to each companys market capitalization.
Item
6. Selected Financial Data
The following table presents selected financial data for the fiscal
years ended June 30, 2009, 2008, 2007, 2006 and 2005 which has been
derived from our consolidated financial statements. The information set forth below should be
read in conjunction with Managements Discussion and Analysis of Financial
Condition 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 Annual
Report.
20
Table
of Contents
|
|
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
|
%
|
21
Table of
Contents
Item
7. Managements Discussion and Analysis of Financial Condition and Results of
Operation
The following discussion of financial condition and results of
operations is based upon, and should be read in conjunction with, our
Consolidated Financial Statements (including the notes thereto) included under
Item 8 of this Annual Report.
Forward-Looking Statements
Managements discussion and analysis of financial condition and results
of operations and other sections of this Annual Report contain forward-looking
statements relating to our future results. Such forward-looking statements are
identified by use of forward-looking words such as anticipates, believes, plans,
estimates, expects, and intends or words or phrases of similar
expression. These forward-looking statements are subject to management
decisions and various assumptions, risks and uncertainties, including, but not
limited to: the effects of terrorist attacks or conflicts or wars involving the
United 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 or
economic conditions, including changes in governmental and central bank
policies; changes in business conditions in the furniture industry, including
changes in consumer spending patterns and demand for home furnishings; effects
of our brand awareness and marketing programs, including changes in demand for
our existing and new products; our ability to locate new design center sites
and/or negotiate favorable lease terms for additional design centers or for the
expansion of existing design centers; competitive factors, including changes in
products or marketing efforts of others; pricing pressures; fluctuations in
interest rates and the cost, availability and quality of raw materials; those
matters discussed in Items 1A and 7A of this Annual Report and in our SEC
filings; and our future decisions. Accordingly, actual circumstances and
results could differ materially from those contemplated by the forward-looking
statements.
Critical Accounting Policies
Our consolidated financial statements have been prepared in conformity
with U.S. generally accepted accounting principles which require, in some
cases, that certain estimates and assumptions be made that affect the amounts
and disclosures reported in those financial statements and the related
accompanying notes. Estimates are based on currently known facts and
circumstances, prior experience and other assumptions believed to be
reasonable. We use our best judgment in valuing these estimates and may, as
warranted, solicit external advice. Actual results could differ from these
estimates, assumptions and judgments, and these differences could be material.
The following critical accounting policies, some of which are impacted
significantly by estimates, assumptions and judgments, affect our consolidated
financial statements.
Inventories
Inventories (finished
goods, 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 based
solely on those charges incurred in the acquisition and production of the
related inventory (i.e. material, labor and manufacturing overhead costs). We
estimate an inventory reserve for excess quantities and obsolete items based on
specific identification and historical write-downs, taking into account future
demand and market conditions. If actual
demand or market conditions in the future are less favorable than those
estimated, 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 purchase
order or retail sales invoice); the sales arrangement specifies a fixed or
determinable sales price; product is shipped or services are provided to the
customer; and collectibility is reasonably assured. As such, revenue
recognition occurs upon the shipment of goods to independent retailers or, in
the case of Ethan Allen-operated retail design centers, upon delivery to the
customer. Recorded sales provide for estimated returns and allowances. We
permit our customers to return defective products and incorrect shipments, and
terms we offer are standard for the industry.
22
Table of
Contents
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. The allowance for doubtful accounts is based
on a review of specifically identified accounts in addition to an overall aging
analysis. Judgments are made with
respect to the collectibility of accounts receivable based on historical
experience 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 related
assets in accordance with Statement of Financial Accounting Standards (SFAS) No. 141,
Business Combinations
, which requires
application of the purchase method for all business combinations initiated
after June 30, 2001. Accounting for
these transactions as purchase business combinations requires the allocation of
purchase price paid to the assets acquired and liabilities assumed based on
their fair values as of the date of the acquisition. The amount paid in excess
of 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 have
occurred that indicate that long-lived assets may not be recoverable or that
the remaining useful life may warrant revision.
When such events or circumstances are present, we assess the
recoverability of long-lived assets by determining whether the carrying value
will be recovered through the expected undiscounted future cash flows resulting
from the use of the asset. In the event
the sum of the expected undiscounted future cash flows is less than the
carrying value of the asset, an impairment loss equal to the excess of the
assets carrying value over its fair value is recorded. The long-term nature of these assets requires
the estimation of cash inflows and outflows several years into the future and
only takes into consideration technological advances known at the time of the
impairment test.
In accordance with SFAS No. 142,
Goodwill and
Other Intangible Assets
, goodwill and other indefinite-lived
intangible assets are evaluated for impairment on an annual basis and between
annual tests whenever events or circumstances indicate that the carrying value
of the goodwill or other intangible asset may exceed its fair value. We conduct
our required annual impairment test during the fourth quarter of each fiscal
year and use a discounted cash flow model to estimate fair value. This model
requires the use of long-term planning forecasts and assumptions regarding
industry-specific economic conditions that are outside our control.
Income Taxes
Income taxes
are accounted for under the asset and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. Additional factors that we consider when making
judgments about the deferred tax valuation include tax law changes, a recent
history of cumulative losses, and variances in future projected profitability.
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,
Accounting for Income Taxes
,
which provides a comprehensive model for the recognition, measurement,
presentation, and disclosure in a companys financial 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 success upon tax audit, based solely on
the technical merits of the position, the company recognizes an income tax
benefit in its financial statements. The tax benefits recognized are measured
based on the largest benefit that has a greater than 50% likelihood of being
realized upon ultimate settlement. The liability associated with an
unrecognized tax benefit is classified as a long-term liability except for the
amount for which a cash payment is expected to be made or tax positions settled
within one year. We recognize interest and penalties related to income tax
matters as a component of income tax expense.
23
Table of
Contents
Business Insurance Reserves
We have insurance programs in place to cover workers compensation
and property/casualty claims. The
insurance programs, which are funded through self-insured retention, are
subject to various stop-loss limitations. We accrue estimated losses using
actuarial models and assumptions based on historical loss experience. Although we believe that the insurance
reserves are adequate, the reserve estimates are based on historical
experience, which may not be indicative of current and future losses. In addition, the actuarial calculations used
to estimate insurance reserves are based on numerous assumptions, some of which
are subjective. We adjust insurance
reserves, as needed, in the event that future loss experience differs from
historical loss patterns.
Other Loss Reserves
We have a number of other potential loss exposures incurred in the
ordinary course of business such as environmental claims, product liability,
litigation, tax liabilities, restructuring charges, and the recoverability of
deferred income tax benefits.
Establishing loss reserves for these matters requires the use of
estimates and judgment with regard to maximum risk exposure and ultimate
liability or realization. As a result,
these estimates are often developed with our counsel, or other appropriate
advisors, and are based on our current understanding of the underlying facts
and circumstances. Because of uncertainties related to the ultimate outcome of
these issues or the possibilities of changes in the underlying facts and
circumstances, additional charges related to these issues could be required in
the future
.
Basis of Presentation
As of June 30, 2009, Ethan Allen Interiors Inc. has no material
assets 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 is
that of Ethan Allen Global, Inc.
Results of Operations
Our Company has been severely impacted by the ongoing recession in the
United States and abroad. Continued
weakness in the U.S. economy, high unemployment, volatile capital markets,
depressed housing prices and tight consumer lending practices have driven
consumer confidence down to, or near, historical lows and resulted in
considerable negative pressure on spending by individual consumers, our primary
customer base. The Company is continuing
to adjust our infrastructure to match our sales volumes as we work through
these difficult times.
Restructuring Activities:
In 2009, the Company made several announcements on
changes to our operations as we continue to improve the structure of our
business especially in light of the recent economic downturn. In January 2009, the Company announced a
plan to consolidate the operations of its Eldred, Pennsylvania upholstery
manufacturing plant and several of its retail service centers. In June 2009,
the Company announced the consolidation of its Chino, California operations
into its Maiden, North Carolina facility and the consolidation of its Andover,
Maine sawmill and dimension mill to its Beecher Falls, Vermont sawmill and
dimension mill operations. For these fiscal 2009 actions, the Company estimates
pre-tax restructuring, impairment, and other related charges will ultimately
approximate $30 million, consisting of $15 million in write down of long-lived
assets, $8 million in employee severance and other payroll and benefit costs,
and $7 million in other associated costs. By segment, we expect $23
million in costs for the wholesale segment and $7 million for the retail
segment. Total costs for these 2009 actions in the current fiscal year by
segment are $17.0 million for Wholesale, and $2.6 million for Retail all of
which have been classified in the Statement of Operations as restructuring and
impairment charges. Approximately 800 employee positions and 140 contract
worker positions will be eliminated due to these actions.
In January 2008, we announced a plan to
consolidate the operations of certain Company-operated retail design centers
and retail service centers. In connection with this initiative, we have
permanently ceased operations at ten
24
Table of Contents
design centers and six retail service centers which,
for the most part, were consolidated into other existing operations. We also implemented our design team concept
across 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 over
periods ranging from less than one to seven years, $2.7 million, which was
non-cash in nature, related to fixed asset impairment charges, primarily for
real property and leasehold improvements, and $0.9 million was related to
employee severance and benefits. During
fiscal 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 the
sale of real estate of $4.2 million, partly offset by additional charges and
adjustments to previous estimates for leased facilities of $2.3 million and
employee severance, benefits and other charges of $0.5 million. Cumulative
charges to date for these actions total $5.5 million, all of which have been
classified in the Statement of Operations as restructuring and impairment charges.
In addition to the Retail charges, $0.4 million was recorded in the first
quarter of fiscal 2009 to update the fair value of a wholesale plant site held
for sale.
On September 6, 2006, we announced a plan to
close our Spruce Pine, North Carolina case goods manufacturing facility and
convert our Atoka, Oklahoma upholstery manufacturing facility into a regional
distribution center. The decision
impacted approximately 465 employees. We
recorded a pre-tax restructuring and impairment charge of $14.1 million during
the quarter ended September 30, 2006, of which $4.0 million was related to
employee severance and benefits and other plant exit costs, and $10.1 million
of fixed asset impairment charges. During the first six months of fiscal 2007,
adjustments totaling $0.4 million were recorded to reverse remaining previously
established accruals which were no longer deemed necessary.
Analysis of Goodwill and Other Intangible Assets:
We conduct an annual impairment analysis of goodwill and other
indefinite lived intangible assets the first of April each fiscal year,
unless events occur or circumstances change that would more likely than not
reduce the fair value of the goodwill or other indefinite lived intangible
assets below their carrying value. In determining whether an interim test is
appropriate, management considers several factors including changes in the
Companys stock price, financial performance, third party ratings on its long
term debt, and expected financial outlook of the business. Methods employed to
value the enterprise and the Companys retail and wholesale segments include
the market approach and the income approach, which are reconciled with the
total market capitalization of the Company. These valuation methods use
historical revenues and cash flows, as well as Company and external analysts
financial projections and apply discount rates, weighted average cost of
capital 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, future
growth and discount rates, and expense rates.
In the fiscal quarter ended December 31, 2008, net sales declined
7.9% from the previous quarter and there was a meaningful decline (34.5%) in
the companys average stock 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 business climate as seen through the financial crisis with global
banking institutions led to an interim evaluation of goodwill and other
intangible assets. As a result of these tests, management concluded that the
estimated value of the wholesale and retail segments exceeded their carrying
values and no impairment was indicated.
In the fiscal quarter ended March 31, 2009, net sales declined
26.0% from the previous quarter resulting in a 660 basis point decline in gross
margin plus a further decline (36.2%) in the companys average stock price
(from $17.27 to $11.02). These declines coupled with a significant loss from
operations led to a second interim evaluation of goodwill and other intangible
assets. As a result of these tests, management concluded the carrying value of
goodwill on our retail divisions books exceeded its fair value. Therefore, we
recorded a non-cash impairment charge of $48.4 million. No impairment of the
goodwill or other indefinite lived assets on our wholesale divisions books was
appropriate.
25
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In the fiscal quarter ended June 30, 2009, the Company performed
its annual impairment test on April 1 and noted no additional impairment
was appropriate. During the quarter, business performance stabilized with net
sales slightly lower (1%) than the previous quarter, gross margin improved 160
basis 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). The
ratings on the Companys long term debt were lowered by third parties to
speculative grade and the Company updated its forecasts. The Company considered
these factors and concluded that an interim impairment test was not required on
the wholesale segment. No additional evaluation of the retail segment was
appropriate as all goodwill was written off in the previous fiscal quarter.
There can be no
assurance that the outcome of future reviews will not result in substantial
impairment charges. Impairment
assessment inherently involves judgments as to assumptions about expected
future cash flows and the impact of market conditions on those
assumptions. Future events and changing
market conditions may impact our assumptions as to prices, costs or other
factors that may result in changes in our estimates of future cash flows. Although we believe the assumptions we use in
testing for impairment are reasonable, significant changes in any of our
assumptions could produce a significantly different result
.
Business Results:
Our revenues are
comprised of (i) wholesale sales to independently operated and
Company-operated retail design centers and (ii) retail sales of
Company-operated design centers. See
Note 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) are
as 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
|
|
(1)
Operating income for the Wholesale segment for
the twelve months ended June 2009 and 2007 includes pre-tax restructuring
and impairment charges of $17.4 million and $13.4 million, respectively.
(2)
Operating income for the Retail segment for
the twelve months ended June 2009 and 2008 includes pre-tax restructuring
and impairment charges of $49.6 million and $6.8 million, respectively.
(3)
Represents the change in the inventory profit elimination entry
necessary to adjust for the embedded wholesale profit contained in Ethan
Allen-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 $305.7
million, or 31.2%, to $674.3 million, from $980 million in fiscal 2008. Net
sales for the period largely reflect the delivery of product associated with
booked orders and backlog existing as of beginning of the period. During the year, sales were negatively
26
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affected by a weak retail environment for home furnishings which we
believe is due to a number of factors including but not limited to continued
weakness in the U.S. economy, high unemployment, volatile capital markets,
depressed housing prices and tight consumer lending practices as well as the
use of highly-promotional pricing strategies by the Companys competitors. These factors were partially offset by (i) the
positive effects of our continued efforts to reposition the retail network, (ii) the
introduction of our new American Artisan product line, (iii) several new
marketing initiatives including the launching of our new interactive web site
ethanalleninc.com and our rewards program, and in the latter part of the fiscal
year, special savings pricing, and (iv) the continued use of national
television media, where we emphasize to clients our interior design services
and the full line of our quality product offerings.
Wholesale revenue
for fiscal 2009 decreased by $212.9 million, or 34.5%, to $403.4
million from $616.2 million in the prior year.
The year-over-year decrease was primarily attributable to a decline in
the incoming order rate as a result of the softer retail environment for home
furnishings noted throughout the current period and from fewer independent
retail design centers, which decreased to 134 from 136 including four locations
transferred in to the companys 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 $724.6
million for the twelve months ended June 30, 2008. The decrease in retail sales by Ethan
Allen-operated design centers was attributable to a decrease in comparable
design center delivered sales of $211.9 million, or 32.5%, and reduced revenue
from sold and closed design centers of $64.4 million. This unfavorable variance
was partially offset by higher sales generated by newly opened (including
relocated) or acquired design centers of $60.4 million. The number of Ethan
Allen-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 new
design centers (of which three were relocations).
Comparable design centers are those which have been operating for at
least 15 months. Minimal net sales,
derived from the delivery of customer ordered product, are generated during the
first three months of operations of newly opened (including relocated) design
centers. Design centers acquired by us
from independent retailers are included in comparable design center sales in
their 13th full month of Ethan Allen-operated operations.
Year-over-year, written business of Ethan Allen-operated design centers
decreased 32.6% and comparable design center written business decreased
35.4%. Over that same period, wholesale
orders decreased 35.4%. Retail written
business reflects the softer retail environment for home furnishings noted
throughout the current year, likely offset, to some degree, by (i) our
continued efforts to reposition the retail network, (ii) recent product
introductions, (iii) several new marketing initiatives described
previously, and (iv) our continued use of national television as an
advertising medium throughout much of the year.
Gross profit
for fiscal 2009 declined to $347.3 million from $526.1 million in
fiscal 2008. The $178.7 million decrease
in gross profit was primarily attributable to a combined decline in both
wholesale and retail sales volume of 31.2%, partially offset by a shift in
sales mix with retail sales representing a higher proportionate share of total
sales 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, manufacturing
plants were operated at approximately 50% of capacity. This resulted in higher unabsorbed costs in
our manufacturing plants which were charged to expense during the period. The
consolidated gross margin decreased to 51.5% for fiscal 2009 from 53.7% in
fiscal 2008 as a result, primarily, of the factors set forth above.
Operating profit
, the elements of which are discussed in greater detail below, was
impacted 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 net
sales, in fiscal 2009 from $430.1 million, or 43.9% of net sales, in fiscal
2008. Decreases in salary related costs were experienced due to the reduced
number of employees and other cost cutting efforts taken by the Company that
impacted bonuses and
27
Table of
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benefits. Advertising expenses
decreased, while still maintaining our national TV and shelter magazine
presence. Delivery and warehousing costs were lower due to decreased sales.
Partially offsetting these decreases were (i) a non-cash goodwill
impairment charge of $48.4 million recorded in the March 2009 quarter and (ii) an
$11.8 million period-over-period increase in restructuring and impairment
charges, both discussed earlier, and (iii) added costs of $7 million due
to the implementation of the team concept which caused a temporary overlap of
expenses 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 net
sales, in the prior year. The decrease
of $168.8 million was largely attributable to (i) a 31.2% reduction in net
sales, resulting in a $178.7 million reduction in gross profit, (ii) a goodwill
impairment charge, (iii) increased restructuring and impairment charges
and (iv) net declines in other operating expenses, all of which were
discussed previously.
W
holesale operating income
for fiscal 2009 totaled $6.7 million, or 1.7% of net sales, as
compared to $100.3 million, or 16.3% of net sales, in the prior year. The
decrease of $93.7 million was primarily attributable to (i) the $212.9
reduction in net sales, and (ii) a $17.4 million increase in restructuring
and 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 fiscal
2008. The decrease in retail operating income generated by Ethan Allen-operated
design centers was primarily attributable to reduced sales caused by the weak
retail environment for home furnishings, as well as the $48.4 million goodwill
impairment charge.
Interest and other miscellaneous income, net
totaled $3.4 million in fiscal 2009 as compared to $7.9 million in
fiscal 2008. The $4.5 million decrease was mostly due to lower investment
income resulting from reduced cash and cash equivalent balances maintained
along with lower rates of interest during the current period and by gains
recorded in connection with the sale of selected real estate assets in the
prior year.
Interest and other related financing costs
remained largely unchanged at $11.8 million from $11.7 million in the
prior year. This amount mostly consists of interest expense on our senior
unsecured debt issued in September 2005.
Income tax
totaled a benefit of $28.5 million for fiscal 2009 as compared to an
expense 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 total
current year loss before tax and the resulting valuation allowance taken
against 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 loss
per 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 $25.3
million, or 2.5%, to $980 million, from $1.005 billion in fiscal 2007. Net
sales for the period largely reflect the delivery of product associated with
booked orders and backlog existing as of beginning of the period. During the year, sales were impacted by a
weak retail environment for home furnishings, particularly during the latter
half of the year. We believe this is due
to continued weakening of consumer confidence with the current economic
conditions in the U.S. and abroad. These
factors were partially offset by (i) the positive effects of our continued
efforts to reposition the retail network, (ii) new product introductions,
and (iii) an increase in the continued use of national television as
28
Table of
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an advertising medium, where we emphasize to clients our interior
design services and the full line of our quality product offerings.
We have made considerable investment within the retail network to
strengthen the level of service, professionalism, interior design competence,
efficiency, and effectiveness of retail design center personnel. The
implementation of the team concept is the latest phase of that progression,
which resulted in the development of over 280 interior design teams. We believe
that with this structure along with the emphasis in our messaging to clients
that we are here to help as little or as much as they like, as well as
offering the benefit of making appointments with our design professionals, we
continue to improve the customer service experience.
Wholesale revenue
for fiscal 2008 decreased by $39.8 million, or 6.1%, to $616.2 million
from $656.0 million in the prior year.
The year-over-year decrease was primarily attributable to a decline in
the incoming order rate as a result of the softer retail environment for home
furnishings noted throughout much of the current period and from fewer
independent retail design centers, which decreased to 136 from 155 including
six locations transferred in to the companys 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 million
for the twelve months ended June 30, 2007.
The increase in retail sales by Ethan Allen-operated design centers was
attributable to higher sales generated by newly opened (including relocated) or
acquired design centers of $66.8 million.
This favorable variance was partially offset by unfavorable variances
related to a decrease in comparable design center delivered sales of $21.3
million, 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 to
159 as of June 30, 2008 as compared to 158 as of June 30, 2007. During that twelve month period, we acquired
five design centers from, and opened one previously operated by independent
retailers, and opened eighteen new design centers (of which eleven were
relocations).
Comparable design centers are those which have been operating for at
least 15 months. Minimal net sales,
derived from the delivery of customer ordered product, are generated during the
first three months of operations of newly opened (including relocated) design
centers. Design centers acquired by us
from independent retailers are included in comparable design center sales in
their 13th full month of Ethan Allen-operated operations.
Year-over-year, written business of Ethan Allen-operated design centers
increased 0.6% and comparable design center written business decreased
5.6%. Over that same period, wholesale
orders decreased 8.0%. Retail written
business reflects the softer retail environment for home furnishings noted
throughout much of the current year, likely offset, to some degree, by (i) our
continued efforts to reposition the retail network, (ii) recent product
introductions, and (iii) our continued use of national television as an
advertising medium throughout much of the year.
Gross profit
for fiscal 2008 declined slightly to $526.1 million from $526.6
million in fiscal 2007. The $0.5 million
decrease in gross profit was primarily attributable to a decline in wholesale
sales volume partially offset by a shift in sales mix with retail sales
representing a higher proportionate share of total sales in the current full
year (74%) as compared to the prior full year (69%). The consolidated gross
margin increased to 53.7% for fiscal 2008 from 52.4% in fiscal 2007 as a
result, primarily, of the factors set forth above.
Operating profit
, the elements of which are discussed in greater detail below, was
impacted 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 net
sales, in fiscal 2008 from $415.5 million, or 41.3% of net sales, in fiscal
2007. This increase was primarily attributable to increased costs associated
with (i) occupancy, managerial salaries and benefits, and designer
compensation largely because of our continued efforts to be located in more
prominent locations and to upgrade our ability to provide professional service
during the year, as well as (ii) the impact of higher fuel costs on
warehousing and delivery. Partially
29
Table of
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offsetting these increases were (i) decreases in workers
compensation insurance and health insurance and compensation costs as a result
of improved claim experience, and (ii) a period-over-period reduction in
the 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 prior
year. The decrease of $15.1 million was
primarily attributable to higher period-over-period operating expenses
discussed above, partially offset by (i) a reduction in restructuring and
impairment charges and (ii) a small decline in gross profit, all of which
were discussed previously.
W
holesale operating income
for fiscal 2008 totaled $100.3 million, or 16.3% of net sales, as
compared to $99.2 million, or 15.1% of net sales, in the prior year. The
improvement of $1.1 million was primarily attributable to (i) the
reduction in restructuring and impairment charges mentioned above, and (ii) improved
performance within our remaining product sourcing operations, including a
reduction in overhead as a result of past plant closures. These factors were partially offset by an
overall 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, for
fiscal 2008, from $15.2 million, or 2.2% of sales, for fiscal 2007. The
decrease in retail operating income generated by Ethan Allen-operated design
centers was primarily attributable to higher operating expenses as a result of
our continued efforts to reposition the retail network including the $6.8
million restructuring and impairment charges recorded in the year. These unfavorable variances were partially
offset 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 in
fiscal 2007. The $2.5 million decrease was mostly due to decreased investment
income resulting from lower cash and short term investment balances maintained
during 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 the
prior year. This amount mostly consists of interest expense on our senior
unsecured debt issued in September 2005.
Income tax expense
totaled $34.1 million for fiscal 2008 as compared to $40.5 million for
fiscal 2007. Our effective tax rate for
the 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 certain
state tax legislation, increased state income tax liability arising in
connection with the operation of a greater number of Company-operated design
centers, and increased foreign income tax liability associated with our five
retail design centers operating in Canada and our manufacturing operation in
Mexico. Partially offsetting these items
were the benefits derived from the manufacturers deduction provided for under
The 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 in
fiscal 2007. Net income per diluted
share totaled $1.97 in the current year and $2.15 per diluted share in the
prior year.
Liquidity and Capital Resources
As of June 30, 2009, we held cash and cash equivalents totaling
$53.0 million. Our principal sources of
liquidity include cash and cash equivalents, cash flow from operations, and
borrowing capacity under revolving credit facility.
During fiscal 2009, the Company terminated its unsecured $200 million
revolving credit facility which had never been used for other than support of
outstanding letters of credit. On May 29, 2009, we entered into a
three-year secured $40 million asset-based revolving credit facility (the Facility)
with fewer covenant restrictions which
30
Table of
Contents
the Company believes to be more appropriate in the current credit
environment. The Facility is subject to borrowing base availability and
includes an opportunity for expansion of up to an additional $20 million of
financing.
At the Companys option, revolving loans under the Agreement bear
interest at an annual rate of either:
(a)
London Interbank Offered rate (LIBOR) plus 3.25% to 4.25%, based on
the average availability, or
(b)
the higher of (i) a prime rate, (ii) the federal funds
effective 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 unused
portion of the Facility and 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, and a fronting fee of 0.125% per annum.
The borrowing base at 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 net orderly liquidation value of eligible inventory. The
Facility is secured by all property owned, leased or operated by the Company in
the United States excluding any real property owned by the Company and also
excludes any intellectual property owned by the Company unless availability is
less than or equal to $17.5 million.
The Facility contains customary covenants which may limit the Companys
ability to incur debt; engage in mergers and consolidations; make restricted
payments (including dividends); sell certain assets; and make investments. The
Company may make restricted payments (including dividends) as long as
availability equals or exceeds the greater of (i) 25% of the aggregate
commitment or (ii) $12 million. If
the average monthly availability is less than the greater of (i) 15% of
the aggregate commitment and (ii) $9 million, the Company is also required
to meet a fixed charge coverage ratio financial covenant which may not be less
than 1 to 1 for any period of four consecutive fiscal quarters. The Facility
also contains customary borrowing conditions and events of default, the
occurrence of which would entitle the lenders to accelerate the maturity of any
outstanding borrowings and terminate their commitment to make future loans.
In addition, on September 27, 2005, we completed a private
offering of $200.0 million in ten-year senior unsecured notes due 2015 (the Senior
Notes). The Senior Notes were offered by Ethan Allen Global, Inc. (Global),
a wholly-owned subsidiary of the Company, and have an annual coupon rate of
5.375%. We have used the net proceeds of
$198.4 million to expand our retail network, invest in our manufacturing and
logistics operations, and for other general corporate purposes.
In June 2009, Moodys Investors Service lowered our corporate and
senior unsecured credit ratings to Ba1 from Baa3, and Standard & Poors
(S&P) lowered our corporate and senior unsecured credit ratings to BB
from BBB-. Both rating services cited the weak economy and the resultant pressure
on the home furnishings industry as reasons for the downgrade. While the change in our credit rating had no
impact on our existing credit facilities, the S&P downgrade, if not
improved to investment grade by March 2010, the issuer of our private label
credit cards has a right to demand a standby letter of credit of up to $12
million. At June 30, 2009, we had $12.5 million in letters of credit
outstanding, leaving $27.5 million remaining available credit under the
revolver. Any additional letters of credit would reduce the credit available
for 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 $60
million) to fund its operations and growth plans.
31
Table of
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A summary of net cash provided by (used in) operating, investing, and
financing 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 expenses
were reduced and restructuring actions were taken to counteract these
conditions, cash savings in the current year were not enough to offset reduced
income. Cash generated from working
capital (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 reduction
initiatives taken. The $13.2 million change from other operating activities was
largely driven by the non-cash restructuring and goodwill impairment charges
net of tax effects recorded this fiscal year.
Investing Activities
In fiscal 2009, cash used in investing activities was lower by $43.8
million due, primarily, to a $37.5 million decrease in cash utilized to fund
capital expenditures. The level of
acquisitions decreased $6.4 million in fiscal 2009 as compared to fiscal
2008. The current level of capital
spending is principally attributable to (i) continued design center
development and renovation, but at a reduced level from the prior two years,
and (ii) entity-wide technology initiatives including the new interactive
website. We anticipate that cash from
operations will be sufficient to fund future capital expenditures, business
conditions permitting.
Financing Activities
For fiscal 2009, cash used in financing activities decreased $73.5
million as a result, primarily, of a curtailment in payments for the
acquisition 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 quarterly
dividends for the foreseeable future.
32
Table of
Contents
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 million
and $203.1 million, respectively. The
aggregate scheduled maturities of long-term debt for each of the next five
fiscal years are: less than $0.1 million in fiscal 2010; $3.9 million in fiscal
2011; and less than $0.1 million in fiscal 2012, 2013 and 2014. The balance of our long-term debt ($199.2
million) matures in fiscal 2015. We had
no revolving loans outstanding under the credit facility as of June 30,
2009, and stand-by letters of credit outstanding under the facility at that
date totaled $12.5 million. Remaining
available borrowing capacity under the facility was $27.5 million at June 30,
2009.
The following table summarizes, as of June 30, 2009, the timing of
cash payments related to our outstanding contractual obligations (in
thousands):
|
|
Total
|
|
Less
than 1
Year
|
|
1-3
Years
|
|
4-5
Years
|
|
More
than 5
Years
|
|
Long-term debt obligations:
|
|
|
|
|
|
|
|
|
|
|
|
Debt maturities
|
|
$
|
203,148
|
|
$
|
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
|
|
(1) For purposes of
this table, purchase obligations are defined as agreements that are enforceable
and legally binding and that specify all significant terms, including: fixed or
minimum quantities to be purchased; fixed, minimum or variable price
provisions; and the approximate timing of the transaction. While we are not a
party to any significant long-term supply contracts or purchase commitments, we
do, in the normal course of business, regularly initiate purchase orders for
the procurement of (i) selected finished goods sourced from third-party
suppliers, (ii) lumber, fabric, leather and other raw materials used in
production, and (iii) certain outsourced services. All purchase orders are based on current
needs and are fulfilled by suppliers within short time periods. At June 30,
2009, our open purchase orders with respect to such goods and services totaled
approximately $22 million.
Further discussion of our
contractual obligations associated with outstanding debt and lease arrangements
can be found in Notes 7 and 8, respectively, to the Consolidated Financial
Statements
included under Item 8 of this Annual Report.
We believe that
our cash flow from operations, together with our other available sources of
liquidity, will be adequate to make all required payments of principal and
interest on our debt, to permit anticipated capital expenditures, and to fund
working capital and other cash requirements.
As of June 30, 2009, we had working capital of $139.2 million and a
current 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 Directors
to repurchase our common stock, from time to time, either directly or through
agents, in the open market at prices and on terms satisfactory to us. All of
our common stock repurchases and retirements are recorded as treasury stock and
result in a reduction of shareholders equity.
During fiscal 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
|
|
33
Table
of Contents
(1)
During fiscal 2008, we also retired 661,688 shares of common stock tendered
upon the exercise of outstanding employee stock options (592,861 to cover share
exercise and 68,827 to cover related employee tax withholding
liabilities). The value of such shares
on the date redeemed was $23,033,359, representing an average price per share
of $34.81.
(2)
The cost to repurchase shares in fiscal 2008 reflects $3,436,230 in
common stock repurchases with a June 2007 trade date and a July 2007
settlement date.
(3)
During fiscal 2008, we also retired 555,531 shares of common stock
tendered upon the exercise of outstanding employee stock options (410,073 to
cover share exercise and 145,458 to cover related employee tax withholding
liabilities). The value of such shares
on the date redeemed was $21,506,193, representing an average price per share
of $38.71.
For each of the
fiscal years presented above, we funded our purchases of treasury stock with
existing cash on hand and cash generated through current period operations.
During the last three fiscal years, the Board of Directors increased the then
remaining 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 remaining
Board authorization to repurchase 1.6 million shares.
Off-Balance
Sheet Arrangements and Other Commitments, Contingencies and Contractual
Obligations
Except as indicated
below, we do not utilize or employ any off-balance sheet arrangements,
including special-purpose entities, in operating our business. As such, we do not maintain any (i) retained
or contingent interests, (ii) derivative instruments, or (iii) variable
interests which could serve as a source of potential risk to our future
liquidity, capital resources and results of operations.
We may, from time to time
in the ordinary course of business, provide guarantees on behalf of selected
affiliated entities or become contractually obligated to perform in accordance
with the terms and conditions of certain business agreements. The nature and
extent of these guarantees and obligations may vary based on our underlying
relationship with the benefiting party and the business purpose for which the
guarantee or obligation is being provided. Details of those arrangements for
which we act as guarantor or obligor are provided below.
Retailer-Related
Guarantees
Independent
Retailer Credit Facility
On June 11, 2009, we
obligated ourselves, on behalf of one of our independent retailers, with
respect to a $0.5 million credit facility (the
Amended Credit
Facility
). 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 obligation
requires us, in the event of the retailers default under the Amended Credit
Facility, to repurchase the retailers inventory, applying such purchase price
to the retailers 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 future
payments (undiscounted) that we could be required to make under this obligation
is limited to the amount outstanding under the Credit Facility at the time of
default (subject to pre-determined lending limits based on the value of the
underlying inventory) and, as such, is not an estimate of future cash
flows. No specific recourse or
collateral provisions exist that would enable recovery of any portion of
amounts paid under this obligation, except to the extent that we maintain the
right to take title to the repurchased inventory. We anticipate that the
repurchased inventory could subsequently be sold through our retail design
center network.
As of
June 30, 2009
, the amount outstanding under
the Amended Credit Facility totaled approximately $0.5 million. Based on the underlying creditworthiness of
the respective retailer, we believe this obligation will expire without requiring
funding by us. However, in accordance with the provisions of FASB
Interpretation No. 45,
Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others
, a liability has been established to reflect
our non-contingent obligation under this arrangement as a result of
modifications 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.
34
Table of Contents
Ethan Allen Consumer Credit
Program
The terms and conditions of our consumer credit program, which is
financed and administered by a third-party financial institution on a
non-recourse basis to Ethan Allen, are set forth in an agreement between us and
that financial service provider (the Program Agreement). Any independent
retailer choosing to participate in the consumer credit program is required to
enter into a separate agreement with that same third-party financial
institution which sets forth the terms and conditions under which the retailer
is to perform in connection with its offering of consumer credit to its
customers (the Retailer Agreement). We have obligated ourselves on behalf of
any independent retailer choosing to participate in our consumer credit program
by agreeing, in the event of default, breach, or failure of the independent
retailer to perform under such Retailer Agreement, to take on certain responsibilities
of the independent retailer, including, but not limited to, delivery of goods
and reimbursement of customer deposits. Customer receivables originated by
independent retailers remain non-recourse to Ethan Allen. Our obligation
remains in effect for the term of the Program Agreement which expires in July 2012.
While the maximum potential amount of future payments (undiscounted) that we
could be required to make under this obligation is indeterminable, recourse
provisions exist that would enable us to recover, from the independent
retailer, any amount paid or incurred by us related to our performance. Based
on the underlying creditworthiness of our independent retailers, including
their historical ability to satisfactorily perform in connection with the terms
of our consumer credit program, we believe this obligation will expire without
requiring 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 to
demand from the Company a letter of credit of up to $12 million if the Companys
credit rating is below investment grade for more than 270 consecutive days. See
the
Liquidity and Capital Resource
section above for more information.
Product Warranties
Our products, including
our case goods, upholstery and home accents, generally carry explicit product
warranties that extend from three to five years and are provided based on terms
that 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 service
agreement. We record provisions for estimated warranty and other related costs
at time of sale based on historical warranty loss experience and make periodic
adjustments to those provisions to reflect actual experience. On rare occasion,
certain warranty and other related claims involve matters of dispute that
ultimately are resolved by negotiation, arbitration or litigation. In certain cases, a material warranty issue
may arise which is beyond the scope of our historical experience. We provide
for such warranty issues as they become known and are deemed to be both
probable and estimable. It is reasonably possible that, from time to time,
additional warranty and other related claims could arise from disputes or other
matters beyond the scope of our historical experience. As of June 30,
2009, the Companys product warranty liability totaled $1.0 million.
Impact of Inflation
We believe inflation had an
impact on our business the last three fiscal years but we have generally been
able to increase prices, create operational efficiencies, or seek lower cost
alternatives in order to offset increases in operating costs and effectively
manage our working capital.
Business Outlook
While we cannot
forecast, with any degree of certainty, changes in the various macro-economic
factors that influence the incoming order rate, we believe that we are
well-positioned both for the possibility of continued market weakness and the
next phase of economic growth based upon our existing business model which
includes: (i) an established brand; (ii) a comprehensive complement
of home decorating solutions; and (iii) a vertically-integrated operating
structure.
35
Table of Contents
As macro-economic
factors change, however, it is also possible that our costs associated with
production (including raw materials and labor), distribution (including freight
and fuel charges), and retail operations (including compensation and benefits,
delivery and warehousing, occupancy, and advertising expenses) may
increase. We cannot reasonably predict
when, or to what extent, such events may occur or what effect, if any, such
events may have on our consolidated financial condition or results of
operations.
The home
furnishings industry remains extremely competitive with respect to both the
sourcing of products and the retail sale of those products. Domestic manufacturers
continue to face pricing pressures as a result of the manufacturing
capabilities developed during recent years in other countries, specifically
within Asia. In response to these pressures, a large number of U.S. furniture
manufacturers and retailers, including us, have increased their overseas
sourcing activities in an attempt to maintain a competitive advantage and
retain market share. At the present time, we domestically manufacture and/or
assemble approximately 65% of our products. We continue to believe that a
balanced approach to product sourcing, which includes the domestic manufacture
of certain product offerings coupled with the import of other selected
products, provides the greatest degree of flexibility and is the most effective
approach to ensuring that acceptable levels of quality, service and value are
attained.
In addition, we
believe that our retail strategy, which involves (i) a continued focus on
providing a wide array of product solutions and superior customer service, (ii) the
opening of new or relocated design centers in more prominent locations, while
encouraging independent retailers to do the same, (iii) the implementation
of design teams within our retail network, and (iv) further expansion
internationally, provides an opportunity to further grow our business.
Further discussion of the
home furnishings industry has been included under
Item 1 of this
Annual Report.
Recent
Accounting 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) establishes
principles and requirements for how an acquirer in a business combination
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any controlling interest; recognizes and
measures the goodwill acquired in the business combination or a gain from a
bargain purchase; and determines what information to disclose to enable users
of the financial statements to evaluate the nature and financial effects of the
business combination. SFAS No. 141(R) is to be applied prospectively
to business combinations for which the acquisition date is on or after an
entitys fiscal year that begins after December 15, 2008 (July 1,
2009 for the Company). The impact of this Statement on the Companys financial
position, 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 for
Financial Assets and Financial Liabilities
, which allows the Company
to choose to measure selected financial assets and financial liabilities at
fair value. Unrealized gains and losses on items for which the fair value
option 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 of
this 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 in
generally accepted accounting principles, and expands disclosures about fair
value measurements, yet does not require any new fair value measurements.
In February 2008, the FASB issued FASB Staff Position No. 157-2 (FSP
No. 157-2), which delayed the effective date of SFAS No. 157 as it
relates to non-financial assets and non-financial liabilities until July 1,
2009 for the Company, except for items that are recognized or disclosed at fair
value by the Company on a recurring basis. Effective July 1, 2008,
the Company adopted the provisions of SFAS No. 157, except as it relates
to those non-financial assets and non-financial liabilities excluded under FSP No. 157-2.
Those excluded items for which the
36
Table of Contents
Company has not applied the fair value provisions of
SFAS No. 157 include goodwill and other intangible assets (note 6), assets
held for sale (note 2), liabilities for exit or disposal activities (note 2),
and business acquisitions (note 3). The Company is currently evaluating
the impact of this statement on the Companys financial position, results of
operations and cash flows as it relates to non-financial assets and
non-financial liabilities. This pronouncement became effective for us on July 1,
2008. See note 18 for more information.
In June 2008, the
FASB issued FASB Staff Position No. EITF 03-6-1,
Determining
Whether Instruments Granted in Share-Based Payment Transactions are
Participating Securities
, which requires that unvested share-based
payment awards containing non-forfeited rights to dividends be included in the
computation of earnings per common share.
The adoption of FSB EITF 03-6-1 is effective for fiscal years beginning
after December 15, 2008 and interim periods within those fiscal years (July 1,
2009 for the Company). Retrospective
application is required. We are evaluating
this pronouncement but do not expect it to impact basic or diluted earnings per
share.
Item
7A. Quantitative and Qualitative
Disclosures About Market
Risk
We
are exposed to market risks relating to fluctuations in interest rates and
foreign currency exchange rates.
Interest
rate risk exists primarily through our borrowing activities. Our policy has
been to utilize United States dollar denominated borrowings to fund our working
capital and investment needs. Short-term debt, if required, is used to meet
working capital requirements and long-term debt is generally used to finance
long-term investments. There is inherent rollover risk for borrowings as they
mature and are renewed at current market rates. The extent of this risk is not
quantifiable or predictable because of the variability of future interest rates
and our future financing requirements.
For
floating-rate obligations, interest rate changes do not affect the fair value
of the underlying financial instrument but do impact future earnings and cash
flows, assuming other factors are held constant. Conversely, for fixed-rate
obligations, interest rate changes affect the fair value of the underlying
financial 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 debt
obligations 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 creditworthiness
subsequent to the date on which the debt was issued, and which has been
determined using quoted market prices, was $
146
million as compared to a carrying
value of $199 million.
Foreign
currency exchange risk is primarily limited to our operation of five Ethan
Allen-operated retail design centers located in Canada as substantially all
purchases of imported parts and finished goods are denominated in United States
dollars. As such, gains or losses
resulting 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 of
operations.
Historically,
we have not entered into financial instrument, including derivative,
transactions for trading or other speculative purposes or to manage interest
rate or currency exposure. However, in connection with the issuance of the
Senior Notes, Global, in July and August 2005, entered into 6
separate 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 of
interest rate fluctuations on earnings, cash flows and equity. The forward
contracts were entered into with a major banking institution thereby mitigating
the 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 no
current plans to engage in further hedging activities.
Item
8. Financial Statements
and
Supplementary Data
Our Consolidated
Financial Statements and Supplementary Data are listed under Item 15 of this
Annual Report.
37
Table of Contents
Report of Independent
Registered Public Accounting Firm
The
Board of Directors and Shareholders
Ethan
Allen Interiors Inc.:
We have
audited the accompanying consolidated balance sheets of Ethan Allen Interiors
Inc. and subsidiaries (the Company) as of June 30, 2009 and 2008, and
the related consolidated statements of operations, shareholders equity, and
cash flows for each of the years in the three-year period ended June 30,
2009. We also have audited the Companys internal control over financial
reporting as of June 30, 2009, based on the criteria established in
Internal Control Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Companys management is
responsible for these consolidated financial statements, for maintaining
effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting, included in the
accompanying Managements Report on Internal Control over Financial Reporting.
Our responsibility is to express an opinion on these consolidated financial
statements and an opinion on the Companys internal control over financial
reporting based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the consolidated financial statements included
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
A
companys internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A companys internal control
over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our
opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Ethan Allen
Interiors Inc. and subsidiaries as of June 30, 2009 and 2008, and the
results of its operations and their cash flows for each of the years in the
three-year period ended June 30, 2009, in conformity with U.S. generally
accepted accounting principles. Also in our opinion, Ethan Allen Interiors, Inc.
and
38
Table
of Contents
subsidiaries
maintained, in all material respects, effective internal control over financial
reporting as of June 30, 2009, based on criteria established in Internal
Control Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
As
discussed in Notes 1 and 12 to the consolidated financial statements, effective
July 1, 2007, the Company adopted FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement
No. 109.
/s/ KPMG LLP
Stamford, Connecticut
August 24, 2009
39
Table of Contents
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.
40
Table of Contents
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.
41
Table of Contents
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years Ended June 30, 2009, 2008 and 2007
(In
thousands)
|
|
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 consolidated
financial statements.
42
Table of Contents
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders Equity
For the Years Ended June 30, 2009, 2008 and
2007
(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.
43
Table of Contents
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 2009, 2008 and 2007
(1) Summary
of Significant Accounting Policies
Basis of
Presentation
Ethan Allen Interiors Inc. (Interiors) is a Delaware corporation
incorporated on May 25, 1989. The consolidated financial statements
include the accounts of Interiors, its wholly-owned subsidiary Ethan Allen
Global, Inc. (Global), and Globals subsidiaries (collectively We,
Us, Our, Ethan Allen or the Company).
All intercompany accounts and transactions have been eliminated in the
consolidated financial statements. All
of Globals capital stock is owned by Interiors, which has no assets or
operating results other than those associated with its investment in Global.
Nature of Operations
We are a leading manufacturer and retailer of quality home furnishings
and accessories, offering a full complement of home decorating and design
solutions. We sell our products through
one of the countrys largest home furnishing retail networks with a total of
293 retail design centers, of which 159 are Company-operated and 134 are
independently operated. Nearly all of
our Company-operated retail design centers are located in the United States,
with the remaining design centers located in Canada. The majority of the
independently operated design centers are also located in the United States,
with the remaining design centers located throughout Asia, Canada and the
Middle East. We have ten manufacturing
facilities, two of which include separate sawmill operations, located
throughout the United States and one in Mexico.
Use of Estimates
We prepare our
consolidated financial statements in conformity with accounting principles
generally accepted in the United States, which requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Due to the inherent uncertainty
involved in making those estimates, actual results could differ from those
estimates. Areas in which significant estimates have been made include,
but are not limited to, revenue recognition, the allowance for doubtful
accounts receivable, inventory obsolescence, tax valuation allowances, useful
lives for property, plant and equipment and definite lived intangible assets,
goodwill and indefinite lived intangible asset impairment analyses, the
evaluation of uncertain tax positions and the fair value of assets acquired and
liabilities assumed in business combinations.
Reclassifications
Certain prior year amounts have been reclassified in order to conform
to the current years presentation. These changes were made for disclosure
purposes only and did not have any impact on previously reported results of
operations or shareholders equity.
Cash Equivalents
Cash and short-term, highly-liquid investments with original maturities
of three months or less are considered cash and cash equivalents. We invest
excess cash in money market accounts, short-term commercial paper, and U.S.
Treasury Bills.
44
Table of Contents
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. Cost is determined based solely
on those charges incurred in the acquisition and production of the related
inventory (i.e. material, labor and manufacturing overhead costs).
Property, Plant and Equipment
Property, plant and equipment are stated at cost, net of accumulated
depreciation and amortization.
Depreciation of plant and equipment is provided over the estimated
useful lives of the respective assets on a straight-line basis. Estimated
useful lives of the respective assets typically range from twenty to forty
years for buildings and improvements and from three to twenty years for
machinery and equipment. Leasehold improvements are amortized based on the
underlying lease term, or the assets estimated useful life, whichever is
shorter.
Operating Leases
We account for our operating leases in accordance with the provisions
of Statement of Financial Accounting Standards (SFAS) No. 13,
Accounting for Leases
, which require minimum lease payments
be recognized on a straight-line basis, beginning on the date that the lessee
takes possession or control of the property. A number of our operating lease
agreements contain provisions for tenant improvement allowances, rent holidays,
rent concessions, and/or rent escalations.
Incentive payments received from landlords are recorded as deferred
lease incentives and are amortized over the underlying lease term on a
straight-line basis as a reduction of rent expense. When the terms of an operating
lease provide for periods of free rent, rent concessions, and/or rent
escalations, we establish a deferred rent liability for the difference between
the scheduled rent payment and the straight-line rent expense recognized. This
deferred rent liability is also amortized over the underlying lease term on a
straight-line basis as a reduction of rent expense.
Retail Design Center Acquisitions
We account for the acquisition of retail design centers and related
assets in accordance with SFAS No. 141,
Business
Combinations
, which requires application of the purchase method for
all business combinations initiated after June 30, 2001. Accounting for these transactions as purchase
business combinations requires the allocation of purchase price paid to the assets
acquired and liabilities assumed based on their fair values as of the date of
the acquisition. The amount paid in
excess 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 cost
over the fair value of net assets acquired, and trademarks. In re-assessing the
useful 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 forty
years. We conduct an annual impairment
analysis the first of April each fiscal year, unless events occur or
circumstances change that would more likely than not reduce the fair value of
the goodwill or other intangible asset below its carrying value. See note 6 for
additional information.
Financial Instruments
Due to their short-term nature, the carrying value of our cash and cash
equivalents, receivables and payables, short-term debt and customer deposit
liabilities approximates fair value. The
estimated fair value of our long-term debt,
which
is based on changes, if any, in interest rates and our creditworthiness
subsequent to the date on
45
Table of
Contents
which the debt was issued, and which has been
determined using quoted market prices, totaled $146.0 million at June 30,
2009 and $182.1
million and at June 30, 2008, as compared to a carrying value on
those dates of $199.0 million and $198.8 million, respectively. See Note 7 for a discussion of the change in July 2007
of our credit rating.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
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, Accounting for Income Taxes, which provides a comprehensive model
for the recognition, measurement, presentation, and disclosure in a companys
financial 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 success
upon tax audit, based solely on the technical merits of the position, the
company recognizes an income tax benefit in its financial statements. The tax
benefits recognized are measured based on the largest benefit that has a
greater than 50% likelihood of being realized upon ultimate settlement.
The liability associated with an unrecognized tax benefit is classified
as a long-term liability except for the amount for which a cash payment is
expected to be made or tax positions settled within one year. We recognize
interest and penalties related to income tax matters as a component of income
tax expense.
Revenue Recognition
Revenue is recognized when all of the following have occurred:
persuasive evidence of a sales arrangement exists (e.g. a wholesale purchase
order or retail sales invoice); the sales arrangement specifies a fixed or
determinable sales price; product is shipped or services are provided to the
customer; and collectibility is reasonably assured. As such, revenue recognition occurs upon the
shipment of goods to independent retailers or, in the case of Ethan
Allen-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 all
retailers nationwide, regardless of shipping point. Costs incurred to deliver
finished goods to the consumer are expensed and recorded in selling, general
and administrative expenses. Shipping and handling costs amounted to $68.2
million, $87.4 million, and $87.6 million for fiscal years 2009, 2008, and
2007, respectively.
Advertising Costs
Advertising costs
are expensed when first aired or distributed. Our total advertising costs
incurred in fiscal years 2009, 2008 and 2007, amounted to $25.1 million, $39.4
million, and $35.9 million, respectively. These amounts are presented net of
proceeds received by us under our agreement with the third-party financial
institution 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.
46
Table of Contents
Earnings Per Share
We compute basic
earnings per share by dividing net income by the weighted average number of
common shares outstanding during the period.
Diluted earnings per share is calculated similarly, except that the
weighted average outstanding shares are adjusted to include the effects of
converting all potentially dilutive share-based awards issued under our
employee stock plans (see Notes 10 and 11).
Share-Based
Compensation
Effective July 1,
2005, share-based awards are accounted for in accordance with the recognition
and measurement provisions of SFAS No. 123 (revised 2004),
Share-Based Payment
(SFAS No. 123(R)), which replaced
SFAS No. 123,
Accounting for Stock-Based
Compensation
, and superseded Accounting Principles Board Opinion
(APB) No. 25,
Accounting for Stock
Issued to Employees
, and related interpretations. SFAS No. 123(R) requires
compensation costs related to share-based payment transactions, including
employee stock options, to be recognized in the financial statements.
In adopting SFAS No. 123(R) on
July 1, 2005, we applied the modified prospective approach to transition.
Under the modified prospective approach, the provisions of SFAS No. 123(R) are
to be applied to new awards and to awards modified, repurchased, or cancelled
after the required effective date. Additionally, compensation cost for the
portion of awards for which the requisite service has not been rendered that
are outstanding as of the required effective date is recognized as the
requisite service is rendered on or after the required effective date. The
compensation cost for that portion of awards is based on the grant-date fair
value of those awards as calculated for either recognition or pro-forma
disclosures under SFAS No. 123.
We estimate, as of
the date of grant, the fair value of stock options awarded using the
Black-Scholes option-pricing model. Use of a valuation model requires
management to make certain assumptions with respect to selected model inputs,
including anticipated changes in the underlying stock price (i.e. expected
volatility) and option exercise activity (i.e. expected life). Expected
volatility is based on the historical volatility of our stock and other
contributing factors. The expected life
of options granted, which represents the period of time that the options are
expected to be outstanding, is based, primarily, on historical data.
Share-based
compensation expense is included in the Consolidated Statements of Operations
within selling, general and administrative expenses. Tax benefits associated with our share-based
compensation arrangements are included in the Consolidated Statements of
Operations within income tax expense.
All shares of our
common stock received in connection with the exercise of share-based awards
have been recorded as treasury stock and result in a reduction in shareholders
equity.
Foreign Currency
Translation
The functional
currency of each Company-operated foreign retail location is the respective
local currency. Assets and liabilities
are translated into United States dollars using the current period-end exchange
rate and income and expense amounts are translated using the average exchange
rate for the period in which the transaction occurred. Resulting translation adjustments are
reported as a component of accumulated other comprehensive income within
shareholders equity.
Derivative
Instruments
We account for derivative
instruments in accordance with SFAS No. 133,
Accounting
for 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.
47
Table
of Contents
Recent Accounting
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) establishes
principles and requirements for how an acquirer in a business combination
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any controlling interest; recognizes and
measures the goodwill acquired in the business combination or a gain from a
bargain purchase; and determines what information to disclose to enable users
of the financial statements to evaluate the nature and financial effects of the
business combination. SFAS No. 141(R) is to be applied prospectively
to business combinations for which the acquisition date is on or after an
entitys fiscal year that begins after December 15, 2008 (July 1,
2009 for the Company). The impact of this Statement on the Companys financial
position, 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 for
Financial Assets and Financial Liabilities
, which allows the Company
to choose to measure selected financial assets and financial liabilities at
fair value. Unrealized gains and losses on items for which the fair value
option 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 of
this 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 in
generally accepted accounting principles, and expands disclosures about fair
value measurements, yet does not require any new fair value measurements.
In February 2008, the FASB issued FASB Staff Position No. 157-2 (FSP
No. 157-2), which delayed the effective date of SFAS No. 157 as it
relates to non-financial assets and non-financial liabilities until July 1,
2009 for the Company, except for items that are recognized or disclosed at fair
value by the Company on a recurring basis. Effective July 1, 2008,
the Company adopted the provisions of SFAS No. 157, except as it relates
to 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 value
provisions of SFAS No. 157 include goodwill and other intangible assets
(note 6), assets held for sale (note 2), liabilities for exit or disposal
activities (note 2), and business acquisitions (note 3). The Company is
currently evaluating the impact of this statement on the Companys financial
position, results of operations and cash flows as it relates to non-financial
assets and non-financial liabilities. This pronouncement became effective
for us on July 1, 2008. See note 18
for more information.
In June 2008, the
FASB issued FASB Staff Position No. EITF 03-6-1,
Determining
Whether Instruments Granted in Share-Based Payment Transactions are
Participating Securities
, which requires that unvested share-based
payment awards containing non-forfeited rights to dividends be included in the
computation of earnings per common share.
The adoption of FSB EITF 03-6-1 is effective for fiscal years beginning
after December 15, 2008 and interim periods within those fiscal years (July 1,
2009 for the Company). Retrospective
application is required. We are
evaluating this pronouncement but do not expect it to impact basic or diluted
earnings per share.
(2) Restructuring and Impairment Charges
In recent years, we have announced and executed plans
to consolidate our operations as part of an overall strategy to maximize
production efficiencies and maintain our competitive advantage.
In 2009, the Company made
several announcements on changes to our operations as we continue to improve
the structure of our business especially in light of the recent economic
downturn. In January 2009, the
Company announced a plan to consolidate the operations of its Eldred,
Pennsylvania upholstery manufacturing plant and several of its retail service
centers. In June 2009, the Company announced the consolidation of its
Chino, California operations into its Maiden, North Carolina facility and the
consolidation of its Andover, Maine sawmill and dimension mill to its Beecher
Falls, Vermont sawmill and dimension mill operations. For these fiscal
48
Table of Contents
2009 actions, the Company
estimates pre-tax restructuring, impairment, and other related charges will
ultimately approximate $30 million, consisting of $15 million in write down of
long-lived assets, $8 million in employee severance and other payroll and
benefit costs, and $7 million in other associated costs. By segment, we
expect $23 million in costs for the wholesale segment and $7 million for the
retail segment. Total costs for these 2009 actions in the current fiscal
year by segment are $17.0 million for Wholesale, and $2.6 million for Retail
all of which have been classified in the Statement of Operations as
restructuring and impairment charges. Approximately 800 employee positions and
140 contract worker positions will be eliminated due to these actions.
In January 2008, we announced a plan to
consolidate the operations of certain Company-operated retail design centers
and retail service centers. In connection with this initiative, we have
permanently ceased operations at ten design centers and six retail service
centers which, for the most part, were consolidated into other existing
operations. We also implemented our
design team concept across 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 over
periods ranging from less than one to seven years, $2.7 million, which was
non-cash in nature, related to fixed asset impairment charges, primarily for
real property and leasehold improvements, and $0.9 million was related to
employee severance and benefits. During
fiscal 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 the
sale of real estate of $4.2 million, partly offset by additional charges and
adjustments to previous estimates for leased facilities of $2.3 million and
employee severance, benefits and other charges of $0.5 million. Cumulative
charges to date for these actions total $5.5 million, all of which have been
classified in the Statement of Operations as restructuring and impairment
charges. In addition to the Retail charges, $0.4 million was recorded in the
first quarter of fiscal 2009 to update the fair value of a wholesale plant site
held for sale. These charges are
reported to together in the following table.
On September 6, 2006, we announced a plan to
close our Spruce Pine, North Carolina case goods manufacturing facility and
convert our Atoka, Oklahoma upholstery manufacturing facility into a regional
distribution center. The decision
impacted approximately 465 employees. We
recorded a pre-tax restructuring and impairment charge of $14.1 million during
the quarter ended September 30, 2006, of which $4.0 million was related to
employee severance and benefits and other plant exit costs, and $10.1 million
of fixed asset impairment charges. During the first six months of fiscal 2007,
adjustments totaling $0.4 million were recorded to reverse remaining previously
established accruals which were no longer deemed necessary.
49
Table of Contents
Activity in the Companys restructuring reserves is
summarized in the table below (in thousands) and is classified with accrued
expenses 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 Companys
business acquisition practice with respect to independent retail design centers
is to selectively acquire, at market value, design centers located in markets
of strategic interest to the Company.
The Company does not actively pursue acquisitions, but is sometimes
approached by independent retailers who are retiring. Acquisitions are subject to a contractual
holdback, or reconciliation, period, during which the parties to the
transaction may agree to certain normal and customary purchase accounting
adjustments. Goodwill associated with
our acquisitions represents the premium paid to the seller related to the
acquired business (i.e. market presence).
See Note 6 for further discussion of our goodwill and other intangible
assets.
During fiscal
2009, we acquired, in four separate transactions, four Ethan Allen retail
design centers (DCs) from independent retailers for consideration of
approximately $1.8 million in cash and forgiveness of receivables, and assumed
customer deposits of $0.7 million and other liabilities of $0.2 million.
During fiscal
2008, we acquired, in two separate transactions, five Ethan Allen retail design
centers (DCs) from independent retailers for consideration of approximately
$4.2 million in cash and forgiveness of receivables, and assumed customer
deposits of $4.3 million and other liabilities of $0.1 million.
Also in fiscal
2008, we acquired a cut and sew upholstery facility from Americraft Leather in
order to strengthen the Companys vertically integrated structure and secure an
additional reliable source for our leather products. Total consideration of approximately $4.3
million was paid in cash for the acquisition.
The facility, which contains 40,000 square feet of manufacturing space
and employs 165 people, is located in Guanajuato, Mexico.
During fiscal
2007, we acquired, in seven separate transactions, twelve Ethan Allen retail
design centers from independent retailers for total consideration of
approximately $17.0 million in cash and forgiveness of receivables.
50
Table of Contents
A summary of our
allocation of purchase price in each of the last three fiscal years is provided
below (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 30
are 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 presented
net 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, plant
and 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 $25.4
million 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 $28.2
million and $48.9 million, respectively, at June 30, 2008. The wholesale
segment, at both dates, includes additional indefinite-lived intangible assets
of $19.7 million, which represent Ethan Allen trade names.
In accordance with
SFAS No. 142, we do not amortize goodwill or other indefinite-lived
intangible assets but, rather, we conduct an annual impairment analysis of
goodwill and other indefinite lived intangible assets the first of April each
fiscal year, unless events occur or circumstances change that would more likely
than not reduce the fair value of the goodwill or other indefinite lived
intangible assets below their carrying value. In determining whether an interim
test is appropriate, management considers several factors including changes in the
Companys stock price, financial performance, third party ratings on its long
term debt, and expected financial outlook of the business. Methods employed to
value the enterprise and the Companys retail and wholesale segments include
the market approach and the income approach, which are reconciled with the
total market capitalization of the Company. These valuation methods use
historical revenues and cash flows, as well as Company and external
51
Table of Contents
analysts
financial projections and apply discount rates, weighted average cost of
capital 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, future
growth and discount rates, and expense rates.
In the fiscal
quarter ended December 31, 2008, net sales declined 7.9% from the previous
quarter and there was a meaningful decline (34.5%) in the companys average
stock 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 business
climate as seen through the financial crisis with global banking institutions
led to an interim evaluation of goodwill and other intangible assets. As a
result of these tests, management concluded that the estimated value of the
wholesale and retail segments exceeded their carrying values and no impairment
was indicated.
In the fiscal
quarter ended March 31, 2009, net sales declined 26.0% from the previous
quarter resulting in a 660 basis point decline in gross margin plus a further
decline (36.2%) in the companys average stock price (from $17.27 to $11.02).
These declines coupled with a significant loss from operations led to a second
interim evaluation of goodwill and other intangible assets. As a result of
these tests, management concluded the carrying value of goodwill on our retail
divisions books exceeded its fair value. Therefore, we recorded a non-cash
impairment charge of $48.4 million. No impairment of the goodwill or other
indefinite lived assets on our wholesale divisions books was appropriate.
In the fiscal
quarter ended June 30, 2009, the Company performed its annual impairment
test on April 1 and noted no additional impairment was appropriate. During
the quarter, business performance stabilized with net sales slightly lower (1%)
than the previous quarter, gross margin improved 160 basis 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). The ratings on the Companys long
term debt were lowered by third parties to speculative grade and the Company
updated its forecasts. The Company considered these factors and concluded that
an interim impairment test was not required on the wholesale segment. No
additional evaluation of the retail segment was appropriate as all goodwill was
written off in the previous fiscal quarter.
There can be no
assurance that the outcome of future reviews will not result in substantial
impairment charges. Impairment
assessment inherently involves judgments as to assumptions about expected
future cash flows and the impact of market conditions on those
assumptions. Future events and changing
market conditions may impact our assumptions as to prices, costs or other
factors that may result in changes in our estimates of future cash flows. Although we believe the assumptions we use in
testing for impairment are reasonable, significant changes in any of our
assumptions could produce a significantly different result.
(7)
Borrowings
Total debt obligations at June 30 consist of the following (in
thousands):
|
|
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 senior
unsecured notes due 2015 (the Senior Notes). The Senior Notes were offered by
Global and have an annual coupon rate of 5.375% with interest payable
semi-annually in arrears on April 1 and October 1 of each year. Proceeds received in connection with the
issuance of the Senior Notes, net of a related discount of $1.6 million,
totaled $198.4 million.
52
Table of Contents
We used the net
proceeds from the offering to expand our retail network, invest in our
manufacturing and logistics operations, and for other general corporate
purposes. As of June 30, 2009,
outstanding borrowings related to this transaction have been included in the
Consolidated Balance Sheets within long-term debt. The discount on the Senior
Notes is being amortized to interest expense over the life of the related debt
as is debt issuance costs of $2.0 million primarily for banking, legal,
accounting, rating agency, and printing services and $0.8 million of losses on
settled forward contracts entered in conjunction with this debt issuance.
The Senior Notes
may be redeemed in whole or in part, at Globals option at any time at the
greater of (i) 100% of the principal amount of the notes to be redeemed
and (ii) the sum of the present values of the remaining scheduled payments
of principal and interest on the Senior Notes to be redeemed, discounted to the
date of redemption on a semi-annual basis at the applicable treasury rate plus
20 basis points, plus, in each case, accrued and unpaid interest to the
redemption date. In the event of default,
the trustee or the holders of 25% of the outstanding principal amount of the
Senior Notes may accelerate payment of principal, premium, if any, and accrued
and unpaid interest. Events of default
include failure to pay in accordance with the terms of the indenture, including
failure, under certain circumstances, to pay indebtedness other than the Senior
Notes.
Revolving Credit
Facility
On January 29,
2009, the Company amended its July 2005 five-year, $200 million unsecured
revolving credit facility. The Amendment
reduced the line to $100 million, and contained various operating and financial
covenants. On April 29, 2009 the Company terminated the revolving credit
facility, due to the Companys desire to have in place a revolver that provided
greater flexibility. On May 29,
2009, the Company entered into a new three-year, $40 million senior secured
asset-based revolving credit facility (the Facility). The Facility provides
revolving credit financing of up to $40 million, subject to borrowing base availability,
and includes an accordion feature which, if exercised, would provide up to an
additional $20 million of financing.
At the Companys
option, revolving loans under the Agreement bear interest at an annual rate of
either:
(a)
London Interbank Offered rate (LIBOR) plus 3.25% to 4.25%, based on
the average availability, or
(b)
the higher of (i) a prime rate, (ii) the federal funds
effective rate plus 0.50%, or (iii) a LIBOR rate plus 1.00% plus, in each
case, an additional 2.25% to 3.25%, based on average availability.
The Company will
pay a commitment fee of 0.50% per annum on the unused portion of the Facility
and 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, and
a fronting fee of 0.125% per annum.
The borrowing base
at 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 net
orderly liquidation value of eligible inventory.
The Facility is
secured by all property owned, leased or operated by the Company in the United
States excluding any real property owned by the Company and also excludes any
intellectual property owned by the Company unless availability is less than or
equal to $17.5 million.
The Facility
contains customary covenants which may limit the Companys ability to incur
debt; engage in mergers and consolidations; make restricted payments (including
dividends); sell certain assets; and make investments. The Company may make
restricted payments (including dividends) as long as availability equals or
exceeds the greater of (i) 25% of the aggregate commitment or (ii) $12
million. If the average monthly
availability is less than the greater of (i) 15% of the aggregate
commitment and (ii) $9 million, the Company is also required to meet a
fixed charge coverage ratio financial covenant which may not be less than 1 to
1 for any period of four consecutive fiscal quarters.
The Facility
contains customary borrowing conditions and events of default (the occurrence
of which would entitle the lenders to accelerate the maturity of any
outstanding 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 letters
of credit outstanding under the Credit Agreement. Remaining available borrowing
capacity under the Credit Agreement was $27.5
53
Table of Contents
million at that
date. During fiscal 2009, Standard & Poors (S&P) lowered our
corporate and senior unsecured credit ratings to BB from BBB-. While the change
in our credit rating had no impact on our existing credit facilities, the
S&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 a
standby letter of credit of up to $12 million. Any additional letters of credit
would reduce the credit available for borrowings under the revolver.
Other Borrowings
Approximately $3.9
million of our outstanding debt is related to industrial revenue bonds which
were issued to finance capital improvements at the Ethan Allen Hotel and
Conference Center, which is adjacent to our corporate headquarters in Danbury,
Connecticut. These bonds bear interest at a fixed rate of 7.50% and have a
remaining maturity of three years. For
fiscal years ended June 30, 2009, 2008 and 2007, the weighted-average
interest rates applicable under our outstanding debt obligations for each year
were 5.53%.
Aggregate
scheduled maturities of our debt obligations 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
|
|
$
|
42
|
|
2011
|
|
3,898
|
|
2012
|
|
19
|
|
2013
|
|
11
|
|
2014
|
|
11
|
|
Subsequent to 2014
|
|
199,167
|
|
Total scheduled debt payments
|
|
$
|
203,148
|
|
Independent Retailer
Credit Facility
On June 11, 2009, we
obligated ourselves, on behalf of one of our independent retailers, with
respect to a $0.5 million non-revolving line of credit facility on which there
is no further availability for borrowing (the
Amended Credit
Facility
). The Company had previously guaranteed on April 9,
2009, on behalf of the independent retailer, a $0.9 million credit facility
comprised of a $0.6 million revolving line of credit and a $0.3 million term
loan (the Credit Facility). On June 11,
2009, the Company purchased from the independent retailer one of the design
centers which was collateral under the Credit Facility. Some of the proceeds were used by the
independent retailer to pay down a portion of the Credit Facility, whereupon
the Company entered into the Amended Credit Facility. This obligation requires us, in the event of
the retailers default under the Amended Credit Facility, to repurchase the
retailers inventory, applying such purchase price to the retailers
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 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. The
maximum potential amount of future payments (undiscounted) that we could be
required to make under this obligation is limited to the amount outstanding
under the Credit Facility at the time of default (subject to pre-determined
lending limits based on the value of the underlying inventory) and, as such, is
not an estimate of future cash flows. No
specific recourse or collateral provisions exist that would enable recovery of
any portion of amounts paid under this obligation, except to the extent that we
maintain the right to take title to the repurchased inventory. We anticipate
that the repurchased inventory could subsequently be sold through our retail
design center network.
As of
June 30, 2009
, the amount outstanding under
the Amended Credit Facility totaled approximately $0.5 million. Based on the underlying creditworthiness of
the respective retailer, we believe this obligation will expire without
requiring funding by us. However, in accordance with the provisions of FASB
Interpretation No. 45,
Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others
, a liability has been established to reflect
our non-contingent obligation under this arrangement as a result of
modifications 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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Table of Contents
(8) Leases
We lease real
property and equipment under various operating lease agreements expiring
through 2033. Leases covering retail design center locations and equipment may
require, in addition to stated minimums, contingent rentals based on retail
sales or equipment usage. Generally, the leases provide for renewal for various
periods at stipulated rates. Future minimum lease payments under non-cancelable
operating 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 amounts
will 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 million
in 2014; and $2.0 million subsequent to 2014.
Total rent expense
for each of the past three fiscal years ended June 30 was as follows (in
thousands):
|
|
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 year
ends, are reflected in the Consolidated Balance Sheets. These amounts are amortized over the
respective underlying lease terms on a straight-line basis as a reduction of
rent expense.
(9) Shareholders Equity
Our authorized
capital stock consists of (a) 150,000,000 shares of Class A Common
Stock, par value $.01 per share, (b) 600,000 shares of Class B Common
Stock, par value $.01 per share, and (c) 1,055,000 shares of Preferred
Stock, par value $.01 per share, of which (i) 30,000 shares have been
designated Series A Redeemable Convertible Preferred Stock, (ii) 30,000
shares have been designated Series B Redeemable Convertible Preferred
Stock, (iii) 155,010 shares have been designated as Series C Junior
Participating Preferred Stock, and (iv) the remaining 839,990 shares may
be designated by the Board of Directors with such rights and preferences as
they determine (all such preferred stock, collectively, the Preferred
Stock). Shares of Class B Common
Stock are convertible to shares of our Common Stock upon the occurrence of
certain events or other specified conditions being met. As of June 30,
2009 and 2008, there were no shares of Preferred Stock or Class B Common
Stock issued or outstanding.
Share Repurchase
Program
On November 21,
2002, the Companys Board of Directors approved a share repurchase program
authorizing us to repurchase up to 2.0 million shares of our common stock, from
time to time, either directly or through agents, in the open market at prices
and on terms satisfactory to us.
Subsequent to that date, the Board of Directors increased the then
remaining 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 on
April 26, 2005; 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
55
Table of Contents
shares on November 13,
2007. As of June 30, 2009 we had a
remaining Board authorization to repurchase 1.6 million shares.
All of our common
stock repurchases and retirements are recorded as treasury stock and result in
a 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
|
|
(1)
During fiscal 2008, we also retired 661,688 shares of common stock
tendered upon the exercise of outstanding employee stock options (592,861 to
cover share exercise and 68,827 to cover related employee tax withholding
liabilities). The value of such shares
on 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 in
common stock repurchases with a June 2007 trade date and a July 2007
settlement date.
(3)
During fiscal 2007, we also retired 555,531 shares of common stock
tendered upon the exercise of outstanding employee stock options (410,073 to
cover share exercise and 145,458 to cover related employee tax withholding
liabilities). The value of such shares
on the date redeemed was $21,506,193, representing an average price per share
of $38.71.
For each of the
fiscal years presented above, we funded our purchases of treasury stock with
existing cash on hand and cash generated through current period operations.
Stockholder Rights
Plan
On May 20,
1996, the Board of Directors adopted a Stockholder Rights Plan (the Rights
Plan) and declared a dividend of one Right for each share of our common stock
outstanding as of July 10, 1996. Under the Rights Plan, each share of our
common stock issued after July 10, 1996 is accompanied by one Right (or
such other number of Rights as results from the adjustments for stock splits
and other events described below). Each Right entitles its holder, under
certain circumstances, to purchase one one-hundredth of a share of our Series C
Junior Participating Preferred Stock at a purchase price of $125. The Rights may not be exercised until 10 days
after a person or group acquires 15% or more of our common stock, or 15 days
after the commencement or the announcement of the intent to commence a tender
offer, which, if consummated, would result in acquisition by a person or group
of 15% or more of our common stock.
Until then, separate Rights certificates will not be issued and the
Rights will not be traded separately from shares of our common stock.
If the Rights
become exercisable, then, upon exercise of a Right, our stockholders (other
than the acquirer) would have the right to receive, in lieu of our Series C
Junior 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 two
times the purchase price. Under the
Rights Plan, as amended by the Board of Directors on July 27, 2004, the
Rights will expire on May 31, 2011, unless redeemed prior to that date.
The redemption price is $0.01 per Right. The Board of Directors may redeem the
Rights at its option any time prior to the time when the Rights become
exercisable.
The Rights Plan
provides for adjustment to the number of Rights which accompanies each share of
our common stock (whether then outstanding or thereafter issued) upon the
occurrence of various events after July 10, 1996, including stock
splits. We effected a 2-for-1 stock
split 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.
56
Table of Contents
(10) Earnings per Share
The following
table sets forth the calculation of weighted average shares for the fiscal
years 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 restricted
stock awards and the potential exercise of certain stock options were excluded
from the respective diluted earnings per share calculation because their impact
is anti-dilutive. In 2009, 2008 and
2007, 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 twelve
months ended June 30, 2009, 2008, and 2007, share-based compensation
expense totaled $1.7 million, $1.3 million, and $0.8 million respectively. These amounts have been included in the
Consolidated Statements of Operations within selling, general and
administrative expenses. During the
twelve months ended June 30, 2009, 2008, and 2007, we recognized related
tax 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 the
Consolidated Statements of Operations within income tax expense.
We estimate, as of
the date of grant, the fair value of stock options awarded using the Black-Scholes
option-pricing model. Use of a valuation model requires management to make
certain assumptions with respect to selected model inputs, including
anticipated changes in the underlying stock price (i.e. expected volatility)
and option exercise activity (i.e. expected life). Expected volatility is based
on the historical volatility of our stock. The risk-free rate of return is
based on the U.S. Treasury bill rate for the term closest matching the expected
life of the grant. The dividend yield is based on the annualized dividend rate
at the grant date relative to the grant date stock price. The expected life of
options granted, which represents the period of time that the options are
expected to be outstanding, is based, primarily, on historical data. The weighted average assumptions used for
fiscal 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 to
the following share-based compensation plans:
57
Table
of Contents
1992 Stock Option
Plan
The Plan provides
for the grant of non-compensatory stock options to eligible employees and
non-employee directors. Stock options
granted under the Plan are non-qualified under Section 422 of the Internal
Revenue code and allow for the purchase of shares of our common stock. The maximum number of shares of common stock
reserved for issuance under the Plan is 6,487,867 shares. The Plan also
provides for the issuance of stock appreciation rights (SARs) on issued
options, however, no SARs have been issued as of June 30, 2009. The awarding of such options is determined by
the Compensation Committee of the Board of Directors after consideration of
recommendations proposed by the Chief Executive Officer. Option awards are generally granted with an
exercise price equal to the market price of our common stock at the date of
grant, vest ratably over a specified service period (4 years for awards to
employees; 2 years for awards to independent directors), and have a contractual
term of 10 years.
On October 10, 2007, the Companys Board of Directors and M.
Farooq Kathwari, our President and Chief Executive Officer, agreed to the terms
of a new employment agreement expiring on June 30, 2012 (2007 Employment
Agreement). This agreement was effective as of October 1, 2007
and served to supersede all terms and conditions set forth in his previous
employment agreement dated August 1, 2002 (the 2002 Employment
Agreement). Pursuant to the terms of the 2007 Employment Agreement, Mr. Kathwari
was 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 our
common stock. These options were issued
at an exercise price of $34.03, $24.62, and $10.68 per share respectively (the
price of a share of our common stock on the New York Stock Exchange on those
dates). The 2007 grant vests in three
installments of 33 1/3% on each June 30 of 2008, 2009, and 2010. The 2008 grant vests in two installments of
50% on each June 30 of 2009 and 2010.
The 2009 grant vests on June 30, 2010. On November 11, 2008 Mr. Kathwari
was awarded options to purchase 50,000 shares of our common stock at an exercise
price of $15.93 (the price of a share of our common stock on the New York Stock
Exchange on that date). This grant vests in four equal installments on the
anniversary date of the grant.
58
Table
of Contents
A summary of stock
option activity occurring during the fiscal year ended June 30, 2009 is
presented 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 weighted
average grant-date fair value of options granted during fiscal 2009, 2008, and
2007 was $4.58, $12.06 and $9.91 respectively.
The total intrinsic value of options exercised during 2009, 2008 and
2007 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 to
nonvested options granted under the Plan. That cost is expected to be
recognized 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 with
the 1992 Stock Option Plan, the following two stock award plans have also been
established:
Restricted Stock
Awards
In connection with
the 2007 Employment Agreement, Mr. Kathwari received on November 13,
2007 and July 1, 2008, and will be awarded on July 1, 2009, an annual
award of 20,000 shares of restricted stock (for a total award of 60,000
shares), with vesting based on the performance of the Companys stock price
during the three year periods subsequent to the award date as compared to the
Standard and Poors 500 index. Mr. Kathwari
also received on November 13, 2007, 15,000 shares of restricted stock
which vest ratably over a five year period through June 30, 2012. On November 11, 2008 Mr. Kathwari
received an award of 60,000 shares of restricted stock, which provided for
vesting to occur if specific financial objectives were achieved during the
final three quarters of fiscal 2009. The
financial objectives were not achieved and the shares were forfeited. A summary
of 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 to
restricted shares granted under the Plan.
That cost is expected to be recognized over a weighted average period of
2.7 years. The
59
Table
of Contents
total fair value
of restricted shares vested during the fiscal years ending June 30, 2009
and 2008 was $0.2 million and $0.1 million respectively.
Stock Unit Awards
In connection with
previous employment agreements, Mr. Kathwari was deemed to have earned
126,000 stock units. In the event of the
termination of his employment, regardless of the reason for termination, Mr. Kathwari
will 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 ended
June 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 taxes
credited to shareholders equity relate to the excess tax benefit arising from
the exercise of employee stock options.
Income tax expense
(benefit) attributable to income from operations consists of the following for
the 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 a
reconciliation of expected income tax expense (benefit) (computed by applying
the federal statutory income tax rate to income before taxes) to actual income
tax 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
|
%
|
60
Table
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The significant components of the deferred tax expense (benefit) are as
follows (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 balances
at 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 deferred
income tax balances are classified in the Consolidated Balance Sheets as
follows 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 tax
assets and liabilities and non-current deferred tax assets and liabilities have
been presented net in the Consolidated Balance Sheets.
61
Table
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In accordance with
SFAS 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 a
valuation allowance. In fiscal 2009, due to significant losses incurred in our
retail segment, the uncertain outlook regarding the current economic recession,
and the lack of carry-back availability due to limitations imposed by certain
states and Canada, we established valuation allowances of $2.1 million against
certain state and Canada deferred tax assets primarily for net operating
losses. Our state net operating losses and credits expire between fiscal year
2014 and 2029 and for Canada expire in fiscal 2029. At June 30, 2009 we
had, for U.S. federal income tax purposes, a net operating loss of $4.3 million
which expires in 2029. We believe it is more likely than not that our deferred
tax assets and credits for U.S. federal income tax purposes will be realized
due to sufficient historical and anticipated future pre-tax earnings and we
therefore 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,
Accounting
for Income Taxes
. As a result of the adoption of FIN 48, we recorded
a cumulative effect of a change in accounting principle adjustment of $0.7
million as an increase to beginning retained earnings. Our continuing practice
is to recognize interest and penalties related to income tax matters as a
component of income tax expense. If the $13.1 million of unrecognized tax
benefits and related interest and penalties as of June 30, 2009 were
recognized, approximately $10.8 million would be recorded as a benefit to
income 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 possible
that various issues relating to approximately $3.7 million of the total gross
unrecognized tax benefits as of June 30, 2009 will be resolved within the
next 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 the
period realized. However, actual results could differ from those currently
anticipated.
The Company
conducts business globally and, as a result, the Company or one or more of its
subsidiaries files income tax returns in the U.S., various state, and foreign
jurisdictions. In the normal course of
business, the Company is subject to examination by the taxing authorities in
such major jurisdictions as Canada, Mexico and the U.S. As of June 30, 2009 certain
subsidiaries of the Company are currently under audit from 2001 through 2008 in
the U.S. While the amount of uncertain
tax benefits with respect to the entities and years under audit may change within
the next twelve months, it is not anticipated that any of the changes will be
significant.
62
Table
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(13) Employee Retirement Programs
The Ethan Allen Retirement Savings Plan
The Ethan Allen
Retirement Savings Plan (the Savings Plan) is a defined contribution plan,
which is offered to substantially all of our employees who have completed three
consecutive months of service regardless of hours worked.
We may, at our
discretion, make a matching contribution to the 401(k) portion of the
Savings Plan on behalf of each participant, provided the contribution does not
exceed the lesser of 50% of the participants contribution or $500 per participant
per Savings Plan year. Total profit
sharing 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 Companys common stock in
2009 and in cash in 2008 and 2007.
Other Retirement
Plans and Benefits
Ethan Allen
provides additional benefits to selected members of senior and middle
management in the form of previously entered deferred compensation arrangements
and 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
Environmental
Matters
We and our
subsidiaries are subject to various environmental laws and regulations. Under
these laws, we and/or our subsidiaries are, or may be, required to remove or
mitigate the effects on the environment of the disposal or release of certain
hazardous materials.
During the fiscal
year ending June 30, 2009, our liability with respect to three active
sites currently listed, or proposed for inclusion, on the National Priorities
List (NPL) under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended (CERCLA), where we and/or our subsidiaries
had been named as a Potentially Responsive Party (PRP) located in
Southington, Connecticut; High Point, North Carolina; and Atlanta, Georgia has
been resolved.
In each case we
were not a major contributor based on the very small volume of waste generated
by us in relation to total volume at those sites and were able to take part in
de minimus settlement arrangements.
Specifically, with respect to the Southington site, our volumetric share
is less than 1% of over 51 million gallons disposed of at the site and there
are more than 1,000 PRPs. With respect
to the High Point site, our volumetric share is less than 1% of over 18 million
gallons disposed of at the site and there are more than 2,000 PRPs, including
more than 1,000 de minimis parties (of which we are one). With respect to the
Atlanta site, a former solvent recycling/reclamation facility, our volumetric
share is less than 1% of over 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 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 State
that it had conducted an initial environmental study and that we have been
named as a PRP. We believe that we are
not a major contributor; however, a review of the initial environmental study
is ongoing.
Liability under
CERCLA may be joint and several. As such, to the extent certain named PRPs are
unable, or unwilling, to accept responsibility and pay their apportioned costs,
we could be required to pay in excess of our pro rata share of incurred
remediation costs. Our understanding of the financial strength of other PRPs
has been considered, where appropriate, in the determination of our estimated
liability.
63
Table
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As of June 30,
2009, we believe that established reserves related to these environmental
contingencies are adequate to cover probable and reasonably estimable costs
associated with the remediation and restoration of these sites. We believe our currently anticipated capital
expenditures for environmental control facility matters are not material.
We are subject to
other federal, state and local environmental protection laws and regulations
and are involved, from time to time, in investigations and proceedings regarding
environmental matters. Such
investigations and proceedings typically concern air emissions, water
discharges, and/or management of solid and hazardous wastes. We believe that
our facilities are in material compliance with all such applicable laws and
regulations.
Regulations issued
under the Clean Air Act Amendments of 1990 required the industry to reformulate
certain furniture finishes or institute process changes to reduce emissions of
volatile organic compounds. Compliance with many of these requirements has been
facilitated through the introduction of high solids coating technology and
alternative formulations. In addition, we have instituted a variety of
technical and procedural controls, including reformulation of finishing
materials to reduce toxicity, implementation of high velocity low pressure
spray systems, development of storm water protection plans and controls, and
further development of related inspection/audit teams, all of which have served
to reduce emissions per unit of production. We remain committed to implementing
new waste minimization programs and/or enhancing existing programs with the
objective of (i) reducing the total volume of waste, (ii) limiting
the liability associated with waste disposal, and (iii) continuously
improving environmental and job safety programs on the factory floor which
serve to minimize emissions and safety risks for employees. We will continue to
evaluate the most appropriate, cost effective, control technologies for
finishing operations and design production methods to reduce the use of
hazardous materials in the manufacturing process.
(15) Comprehensive Income
Total
comprehensive income represents the sum of net income and items of other
comprehensive income or loss that are reported directly in equity. Such items, which are generally presented on
a net-of-tax basis, may include foreign currency translation adjustments,
minimum pension liability adjustments, fair value adjustments (i.e. gains and
losses) on certain derivative instruments, and unrealized gains and losses on
certain investments in debt and equity securities. We have reported our total comprehensive
income in the Consolidated Statements of Shareholders Equity.
Our accumulated
other comprehensive income, which is comprised of losses on certain derivative
instruments 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 are
the result of changes in foreign currency exchange rates related to our
operation 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 reinvested
for an indefinite period of time.
(16) Segment Information
Our operations are
classified into two operating segments: wholesale and retail. These operating segments represent strategic
business areas which, although they operate separately and provide their own
distinctive services, enable us to more effectively offer our complete line of
home furnishings and accessories.
The wholesale
segment 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 a
network of independently operated and Ethan Allen-operated design centers as
well as related marketing and brand awareness efforts. Wholesale revenue is generated upon the
wholesale 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
64
Table
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price and the cost
associated with manufacturing and/or sourcing the related product, and (ii) other
operating costs associated with wholesale segment activities.
The retail segment
sells home furnishings and accessories to consumers through a network of
Company-operated design centers. Retail
revenue is generated upon the retail sale and delivery of our product to our
customers. Retail profitability includes
(i) the retail gross margin, which represents the difference between the
retail sales price and the cost of goods purchased from the wholesale segment,
and (ii) other operating costs associated with retail segment activities.
Inter-segment
eliminations result, primarily, from the wholesale sale of inventory to the
retail segment, including the related profit margin.
We evaluate
performance of the respective segments based upon revenues and operating
income. While the manner in which our home furnishings and accessories are
marketed and sold is consistent, the nature of the underlying recorded sales
(i.e. wholesale versus retail) and the specific services that each operating
segment provides (i.e. wholesale manufacturing, sourcing, and distribution
versus retail selling) are different.
Within the wholesale segment, we maintain revenue information according
to each respective product line (i.e. case goods, upholstery, or home
accessories and other).
A breakdown of
wholesale sales by product line for each of the last three fiscal years ended June 30
is 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
|
%
|
Revenue
information by product line is not as easily determined within the retail
segment. However, because wholesale production and sales are matched, for the
most part, to incoming orders, we believe that the allocation of retail sales
by product line would be similar to that of the wholesale segment. Information for each of the last three fiscal
years 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
|
|
65
Table
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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
|
|
(1) Operating income for the wholesale segment for
the twelve months ended June 30, 2009 and 2007 includes pre-tax
restructuring and impairment charges of $17.4 million and $13.4 million,
respectively.
(2) Operating income for the retail segment for
the twelve months ended June 30, 2009 and 2008 includes pre-tax
restructuring and impairment charges of $49.6 million and $6.8 million
respectively.
(3) Represents the change in the inventory profit
elimination entry necessary to adjust for the embedded wholesale profit
contained in Ethan Allen-operated design center inventory existing at the end
of the period. See footnote 6 below.
(4) Acquisitions include the purchase of four
retail design centers in 2009, five retail design centers and a cut and sew
upholstery facility in 2008 and 12 retail design centers in 2007. See Note 3.
(5) Amount reflected as acquisitions for 2007
includes purchase of a retail design center with an effective (closing) date of
June 30, 2007. However, the
consideration paid in connection with this acquisition was not funded until July 2,
2007.
(6) Represents the embedded wholesale profit
contained in Ethan Allen-operated design center inventory that has not yet been
realized. These profits are realized when the related inventory is sold.
There are 46 independent retail design centers located outside the
United States. Approximately 3.3% of our
net 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 the
fiscal years ended June 30, 2009, 2008, and 2007 (in thousands, except per
share 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
|
|
(1)
The sum of the quarterly earnings per share
may not equal the full-year total due to rounding and/or changes in share
count.
66
Table
of Contents
(18) Financial Instruments
We adopted SFAS No. 157
on July 1, 2008 for all financial assets and liabilities and non-financial
assets and liabilities that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). SFAS No. 157
defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements.
SFAS No. 157 defines
fair value as the price that would be received upon sale of an asset or paid
upon transfer of a liability in an orderly transaction between market
participants at the measurement date and in the principal or most advantageous
market for that asset or liability. The fair value should be calculated based
on assumptions that market participants would use in pricing the asset or
liability, not on assumptions specific to the entity. In addition, the fair
value of liabilities should include consideration of non-performance risk
including our own credit risk.
In addition to defining
fair value, SFAS No. 157 expands the disclosure requirements around fair
value and establishes a fair value hierarchy for valuation inputs. The
hierarchy prioritizes the inputs into three levels based on the extent to which
inputs used in measuring fair value are observable in the market. Each
fair value measurement is reported in one of the three levels which is
determined by the lowest level input that is significant to the fair value
measurement in its entirety. These levels are:
·
Level 1 inputs are based upon unadjusted quoted
prices for identical instruments traded in active markets.
·
Level 2 inputs are based upon quoted prices for
similar instruments in active markets, quoted prices for identical or similar
instruments in markets that are not active, and model-based valuation
techniques for which all significant assumptions are observable in the market
or can be corroborated by observable market data for substantially the full
term of the assets or liabilities.
·
Level 3 inputs are generally unobservable and
typically reflect managements estimates of assumptions that market
participants would use in pricing the asset or liability. The fair values are
therefore determined using model-based techniques that include option pricing
models, discounted cash flow models, and similar techniques.
The following section
describes the valuation methodologies we use to measure different financial
assets and liabilities at fair value.
Cash Equivalents
Cash equivalents consist
of money market accounts and mutual funds in U.S. government and agency
securities. We use quoted prices in
active markets for identical assets or liabilities to determine fair value. This pricing methodology applies to our Level
1 cash equivalents. We do not hold any
Level 2 or Level 3 investments in our cash equivalents.
Assets and Liabilities Measured
at Fair Value on a Recurring Basis
At June 30, 2009,
the Companys assets and liabilities measured at fair value on a recurring
basis consist of $53.0 million in cash equivalents, which were valued using
Level 1 inputs.
Assets and Liabilities Measured
at Fair Value on a Nonrecurring Basis
We measure certain
assets, including our cost and equity method investments, at fair value on a
nonrecurring basis. These assets are recognized at fair value when they are
deemed to be other-than-temporarily impaired. During the third quarter of
fiscal, 2009, we determined that the goodwill for the Retail segment was
impaired, and a goodwill impairment charge of $48.4 million was recorded (also
see note 6).
67
Table
of Contents
(19) Subsequent Events
The Company has
evaluated events and transactions subsequent to June 30, 2009 through August 24,
2009, which was the date the financial statements were issued (filed with the
SEC).
(20) Financial Information About the Parent,
the Issuer and the Guarantors
On September 27,
2005, Global (the Issuer) issued $200 million aggregate principal amount of
Senior Notes which have been guaranteed on a senior basis by Interiors (the
Parent), and other wholly owned domestic subsidiaries of the Issuer and the
Parent, 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. All
of the guarantees are full, unconditional and joint and several and the Issuer
and 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, we
determined that our international subsidiaries in Canada and Mexico are
non-guarantors. The Company has reclassified, for all prior periods presented,
the financial results of these international subsidiaries to reflect their non-guarantor
status.
The following
tables set forth the condensed consolidating balance sheets as of June 30,
2009 and June 30, 2008, the condensed consolidating statements of
operations for the twelve months ended June 30, 2009, 2008 and 2007, and
the condensed consolidating statements of cash flows for the twelve months
ended June 30, 2009, 2008 and 2007of the Parent, the Issuer, the
Guarantors and the Non-Guarantors.
68
Table
of Contents
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
|
|
69
Table
of Contents
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
|
|
70
Table
of Contents
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(in thousands)
Year
Ended June 30, 2009
|
|
Parent
|
|
Issuer
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Consolidated
|
|
Net
sales
|
|
$
|
|
|
$
|
404,543
|
|
$
|
676,740
|
|
$
|
21,042
|
|
$
|
(428,048
|
)
|
$
|
674,277
|
|
Cost
of sales
|
|
|
|
302,359
|
|
453,868
|
|
12,007
|
|
(441,299
|
)
|
326,935
|
|
Gross
profit
|
|
|
|
102,184
|
|
222,872
|
|
9,035
|
|
13,251
|
|
347,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
165
|
|
49,191
|
|
293,296
|
|
10,460
|
|
|
|
353,112
|
|
Restructuring
and impairment charges
|
|
|
|
|
|
67,001
|
|
|
|
|
|
67,001
|
|
Total
operating expenses
|
|
165
|
|
49,191
|
|
360,297
|
|
10,460
|
|
|
|
420,113
|
|
Operating
income (loss)
|
|
(165
|
)
|
52,993
|
|
(137,425
|
)
|
(1,425
|
)
|
13,251
|
|
(72,771
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other miscellaneous income (expense), net
|
|
(52,522
|
)
|
(135,736
|
)
|
43
|
|
83
|
|
191,487
|
|
3,355
|
|
Interest
and other related financing costs
|
|
|
|
11,459
|
|
305
|
|
|
|
|
|
11,764
|
|
Income
(loss) before income tax expense
|
|
(52,687
|
)
|
(94,202
|
)
|
(137,687
|
)
|
(1,342
|
)
|
204,738
|
|
(81,180
|
)
|
Income
tax expense (benefit)
|
|
|
|
(28,493
|
)
|
|
|
|
|
|
|
(28,493
|
)
|
Net
income/(loss)
|
|
$
|
(52,687
|
)
|
$
|
(65,709
|
)
|
$
|
(137,687
|
)
|
$
|
(1,342
|
)
|
$
|
204,738
|
|
$
|
(52,687
|
)
|
71
Table of Contents
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(in thousands)
Year
Ended June 30, 2008
|
|
Parent
|
|
Issuer
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Consolidated
|
|
Net
sales
|
|
$
|
|
|
$
|
617,547
|
|
$
|
982,404
|
|
$
|
27,192
|
|
$
|
(647,098
|
)
|
$
|
980,045
|
|
Cost
of sales
|
|
|
|
436,642
|
|
648,437
|
|
14,279
|
|
(645,378
|
)
|
453,980
|
|
Gross
profit
|
|
|
|
180,905
|
|
333,967
|
|
12,913
|
|
(1,720
|
)
|
526,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
166
|
|
50,555
|
|
359,719
|
|
12,789
|
|
|
|
423,229
|
|
Restructuring
and impairment charges
|
|
|
|
|
|
6,836
|
|
|
|
|
|
6,836
|
|
Total
operating expenses
|
|
166
|
|
50,555
|
|
366,555
|
|
12,789
|
|
|
|
430,065
|
|
Operating
income (loss)
|
|
(166
|
)
|
130,350
|
|
(32,588
|
)
|
124
|
|
(1,720
|
)
|
96,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other miscellaneous income (expense), net
|
|
58,238
|
|
(24,901
|
)
|
603
|
|
121
|
|
(26,170
|
)
|
7,891
|
|
Interest
and other related financing costs
|
|
|
|
11,408
|
|
305
|
|
|
|
|
|
11,713
|
|
Income
(loss) before income tax expense
|
|
58,072
|
|
94,041
|
|
(32,290
|
)
|
245
|
|
(27,890
|
)
|
92,178
|
|
Income
tax expense (benefit)
|
|
|
|
33,995
|
|
111
|
|
|
|
|
|
34,106
|
|
Net
income/(loss)
|
|
$
|
58,072
|
|
$
|
60,046
|
|
$
|
(32,401
|
)
|
$
|
245
|
|
$
|
(27,890
|
)
|
$
|
58,072
|
|
72
Table of Contents
CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
(in thousands)
Year
Ended 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
|
|
73
Table
of Contents
CONDENSED
CONSOLIDATING STATEMENT OF CASH FLOWS
(in thousands)
Year
Ended June 30, 2009
|
|
Parent
|
|
Issuer
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Consolidated
|
|
Net
cash provided by (used in) operating activities
|
|
$
|
23,615
|
|
$
|
(20,986
|
)
|
$
|
18,710
|
|
$
|
594
|
|
$
|
|
|
$
|
21,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
|
(1,337
|
)
|
(21,097
|
)
|
(103
|
)
|
|
|
(22,537
|
)
|
Acquisitions
|
|
|
|
|
|
(1,366
|
)
|
|
|
|
|
(1,366
|
)
|
Proceeds
from the disposal of property, plant and equipment
|
|
|
|
88
|
|
6,296
|
|
|
|
|
|
6,384
|
|
Other
|
|
|
|
210
|
|
(217
|
)
|
|
|
|
|
(7
|
)
|
Net
cash used in investing activities
|
|
|
|
(1,039
|
)
|
(16,384
|
)
|
(103
|
)
|
|
|
(17,526
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
on long-term debt
|
|
|
|
|
|
(41
|
)
|
|
|
|
|
(41
|
)
|
Purchases
and other retirements of company stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock
|
|
2
|
|
|
|
|
|
|
|
|
|
2
|
|
(Increase)
decrease in deferred financing costs
|
|
|
|
(1,380
|
)
|
|
|
|
|
|
|
(1,380
|
)
|
Dividends
paid
|
|
(23,617
|
)
|
|
|
|
|
|
|
|
|
(23,617
|
)
|
Net
cash provided by (used in) financing activities
|
|
(23,615
|
)
|
(1,380
|
)
|
(41
|
)
|
|
|
|
|
(25,036
|
)
|
Effect
of exchange rate changes on cash
|
|
|
|
|
|
|
|
(787
|
)
|
|
|
(787
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
|
(23,405
|
)
|
2,285
|
|
(296
|
)
|
|
|
(21,416
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents beginning of period
|
|
|
|
71,117
|
|
1,307
|
|
1,952
|
|
|
|
74,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents end of period
|
|
$
|
|
|
$
|
47,712
|
|
$
|
3,592
|
|
$
|
1,656
|
|
$
|
|
|
$
|
52,960
|
|
74
Table of Contents
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(in thousands)
Year
Ended June 30, 2008
|
|
Parent
|
|
Issuer
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Consolidated
|
|
Net
cash provided by (used in) operating activities
|
|
$
|
100,598
|
|
$
|
(68,050
|
)
|
$
|
52,512
|
|
$
|
1,077
|
|
$
|
|
|
$
|
86,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
|
(5,217
|
)
|
(54,784
|
)
|
(37
|
)
|
|
|
(60,038
|
)
|
Acquisitions
|
|
|
|
|
|
(7,777
|
)
|
|
|
|
|
(7,777
|
)
|
Proceeds
from the disposal of property, plant and equipment
|
|
|
|
|
|
6,943
|
|
|
|
|
|
6,943
|
|
Other
|
|
|
|
38
|
|
(500
|
)
|
|
|
|
|
(462
|
)
|
Net
cash used in investing activities
|
|
|
|
(5,179
|
)
|
(56,118
|
)
|
(37
|
)
|
|
|
(61,334
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
on long-term debt
|
|
|
|
|
|
(40
|
)
|
|
|
|
|
(40
|
)
|
Purchases
and other retirements of company stock
|
|
(75,577
|
)
|
|
|
|
|
|
|
|
|
(75,577
|
)
|
Proceeds
from issuance of common stock
|
|
474
|
|
|
|
|
|
|
|
|
|
474
|
|
Excess
tax benefits from share-based payment arrangements
|
|
|
|
2,093
|
|
|
|
|
|
|
|
2,093
|
|
Dividends
paid
|
|
(25,495
|
)
|
|
|
|
|
|
|
|
|
(25,495
|
)
|
Net
cash provided by (used in) financing activities
|
|
(100,598
|
)
|
2,093
|
|
(40
|
)
|
|
|
|
|
(98,545
|
)
|
Effect
of exchange rate changes on cash
|
|
|
|
|
|
|
|
239
|
|
|
|
239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
|
(71,136
|
)
|
(3,646
|
)
|
1,279
|
|
|
|
(73,503
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents beginning of period
|
|
|
|
142,253
|
|
4,953
|
|
673
|
|
|
|
147,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents end of period
|
|
$
|
|
|
$
|
71,117
|
|
$
|
1,307
|
|
$
|
1,952
|
|
$
|
|
|
$
|
74,376
|
|
75
Table
of Contents
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(in thousands)
Year
Ended 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
|
|
76
Table
of Contents
Item
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
No changes in, or disagreements with, accountants as a result of accounting
or financial disclosure matters, occurred during fiscal years 2009, 2008 or
2007.
Item
9A. Controls and Procedures
Managements Report on Disclosure
Controls and Procedures
Our management, including the Chairman of the Board and Chief Executive
Officer (CEO) and the Vice President-Finance (VPF), conducted an evaluation
of the effectiveness of disclosure controls and procedures (as such term is
defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the
period covered by this report. Based on such evaluation, the CEO and VPF have
concluded that, as of June 30, 2009, our disclosure controls and
procedures were effective in ensuring that material information relating to us
(including our consolidated subsidiaries), which is required to be disclosed by
us in our periodic reports filed or submitted under the Exchange Act is (i) recorded,
processed, summarized and reported within the time periods specified in the
SECs rules and forms, and (ii) accumulated and communicated to
management, including the CEO and VPF, as appropriate, to allow timely
decisions regarding required disclosure.
Managements
Report on Internal Control over Financial Reporting
Our management is responsible
for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act Rule 13a-15(f) and
15d-15(f). Under the supervision and with the participation of management,
including the CEO and VPF, we conducted an evaluation of the effectiveness of
our internal control over financial reporting based on the framework in
Internal Control - Integrated Framework
issued by the
Committee of Sponsoring Organizations of the Treadway Commission (
COSO
). Based on that evaluation, management
concluded that our internal control over financial reporting was effective as
of June 30, 2009.
KPMG LLP, the independent
registered public accounting firm that audited the consolidated financial
statements included in this Annual Report on Form 10-K, has also audited
the 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 over
Financial Reporting
There have been no
changes in our internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
during the fourth fiscal quarter ended June 30, 2009 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
Item
9B. Other Information
None.
PART III
Except as set forth below, the information required by Items 10, 11,
12, 13 and 14 will appear in the Ethan Allen Interiors Inc. proxy statement for
the Annual Meeting of Shareholders scheduled to be held on November 17,
2009 (the Proxy Statement). The Proxy
Statement, which will be filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934, is incorporated by reference in this Annual Report
pursuant to General Instruction G(3) of Form 10-K (other than the
portions thereof not deemed to be filed for the purpose of Section 18 of
the Securities Exchange Act of 1934). In
addition, the information set forth below is provided as required by Item 10
and the listing standards of the New York Stock Exchange (NYSE).
77
Table
of Contents
Item
10. Directors, Executive Officers and Corporate Governance
Code
of Ethics
We have adopted a
code of ethics that applies to our principal executive officer, principal
financial officer, principal accounting officer or controller, or persons
performing similar functions. Our code of ethics can be accessed via our
website at
www.ethanallen.com/governance
.
We intend to
disclose any amendment of our Code of Ethics, or waiver of provision thereof,
applicable to our principal executive officer and/or principal financial
officer, or persons performing similar functions, on our website within 4 days
of the date of such amendment or waiver.
In the case of a waiver, the nature of the waiver, the name of the
person to whom the waiver was granted, and the date of the waiver will also be
disclosed.
Information
contained on, or connected to, our website is not incorporated by reference
into this Form 10-K and should not be considered part of this or any other
report that we file with, or furnish to, the SEC.
Audit Committee Financial Expert
Our Board of
Directors has determined that we have three audit committee financial
experts, as defined under Item 407(d)(5)(ii) of Regulation S-K of the
Securities Exchange Act of 1934, currently serving on our Audit Committee. Those members of our Audit Committee who are
deemed to be audit committee financial experts are as follows:
Clinton A. Clark
Kristin Gamble
Richard A. Sandberg
All persons
identified as audit committee financial experts are independent from management
as defined by Item 7(d)(3), of Schedule 14A.
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Equity
Compensation Plan Information
The following table sets forth certain information regarding our equity
compensation 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 Option
Plan (the Plan) as well as nonvested shares of restricted stock and vested
Stock Units which have been provided for under the provisions of the Plan. See Note 11 to our Consolidated Financial
Statements included under Item 8 of this Annual Report.
(2)
As of June 30, 2009, we do not maintain any equity compensation
plans which have not been approved by our shareholders.
78
Table
of Contents
NYSE
Certification
Mr. Kathwari, Chief Executive Officer and President, has certified
to the NYSE, pursuant to Section 303A.12 of the NYSEs Listing Company
Manual, that he is unaware of any violation by the Company of the NYSEs
corporate governance listing standards.
PART IV
Item
15. 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 the
years 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, have
been omitted because they are not applicable or the required information is shown
in 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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Table
of Contents
|
|
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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Table
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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
|
81
Table
of Contents
|
|
|
|
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
|
82
Table
of Contents
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
|
|
83
Table
of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this Report to
be 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 the
Registrant 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
|
|
|
84
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