UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 2002 Commission File No. 0-209
BASSETT FURNITURE INDUSTRIES, INCORPORATED
(Exact name of registrant as specified in its charter)
VIRGINIA 54-0135270
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3525 FAIRYSTONE PARK HIGHWAY
BASSETT, VIRGINIA 24055
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 276/629-6000
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Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange
Title of each class: on which registered
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Common Stock ($5.00 par value) NASDAQ
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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, and (2) has been subject to such
filing requirements for at least the past 90 days.
[X] Yes [ ] 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 registrant's 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. [ X]
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant as of February 18, 2003 was
$150,794,189.
The number of shares of the Registrant's common stock outstanding on
February 18, 2003 was 11,599,553.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Bassett Furniture Industries, Incorporated Annual
Report to Stockholders for the year ended November 30, 2002 (the
"Annual Report") are incorporated by reference into Parts I and II of
this Form 10-K.
(2) Portions of the Bassett Furniture Industries, Incorporated definitive
Proxy Statement for its 2003 Annual Meeting of Stockholders to be held
March 25, 2003, filed with the Securities and exchange Commission
pursuant to Regulation 14A under the Securities Exchange Act of 1934
(the "Proxy Statement") are incorporated by reference into Part III of
this Form 10-K.
PAGE 2
PART I
ITEM 1. BUSINESS
(dollar amounts in thousands except per share data)
GENERAL DEVELOPMENT OF BUSINESS
Bassett Furniture Industries Inc., ("Bassett" or the "Company") based
in Bassett, Va., is a leading manufacturer and marketer of branded
home furnishings. Bassett's products, designed to provide quality,
style and value, are sold through Bassett Furniture Direct(TM)
stores, @t Home with Bassett(R) galleries, and other furniture and
department stores. Bassett was founded in 1902 and incorporated under
the laws of Virginia in 1930.
Material Changes in the Development of Business in the last five
years are as follows:
The Bassett Furniture Direct store program, which began in 1997,
entailed not only the creation of a new prototype store, but also
includes an internal, cultural transformation aimed at re-focusing
company practices and strategies to the ultimate end user, the
consumer. The strategy also focused on re-styling the Bassett lines
and suites with accessories. Bassett Furniture Direct acts as both a
furniture design center and a moderate price point leader - two
characteristics that combined with custom product and quick delivery
offer the Company a unique selling proposition in the furniture
industry.
There have been two significant business developments that have
materially affected the Company's operations over the last five
years. First, the Company has created and re-channeled sales through
a vertically integrated retail sales network. This strategy both
builds on the Company's strengths (brand name, balance sheet, product
offerings) and better positions the Company to capitalize on the
changing furniture retail environment. The independently owned
licensee stores, known as Bassett Furniture Direct, accounted for 45%
of the Company's sales in 2002. There were 85 stores operating at
November 30, 2002. Second, the Company has restructured production
capacities and eliminated costs to closely align manufacturing
capabilities with the Company's target markets. These efforts have
resulted in the elimination of approximately 4,200 salaried and
hourly positions over the last five years.
The Company closed its California upholstery plant during the fourth
quarter of 2002 and consolidated production in its two remaining
upholstery manufacturing facilities in North Carolina. The Company
incurred restructuring charges of $1,251, which relate entirely to
severance and employee benefit costs for approximately 200 employees.
Effective March 4, 2002, the Company purchased five stores in North
Carolina and Virginia from LRG Furniture, LLC, an affiliate of the
Company, for net book value (which approximated $0). Included in this
transaction were inventories of $3,439, payables of $4,213 and notes
payable to bank of $1,189.
Subsequent to November 30, 2002, the Company announced that it would
close its wood manufacturing plant in Dublin, Georgia, in order to
better match production capacity to current demand levels. The
Company anticipates recording a charge of approximately $3,200 in the
first quarter of 2003 representing a $1,500 write-down of property
and equipment and $1,700 of severance and related employee benefit
costs for 320 employees associated with the closure.
The Company restructured production capacities for its Wood Division
in 2001. During the first quarter, production was moved from one
facility to another and a wood manufacturing facility was identified
for closure and was subsequently closed in the second quarter.
Additionally, 60 corporate office positions were eliminated in the
first and second quarters of 2001. Ongoing efforts to match
production with demand, offer more competitively priced products and
operate more efficient manufacturing facilities resulted in the
announcement and subsequent closure of
PAGE 3
two additional facilities in Bassett, Virginia during the third
quarter of 2001. Production has been moved to other manufacturing
facilities in Virginia or has been outsourced. Approximately 800
positions were eliminated as a result of this restructuring activity.
Restructuring charges of $6,952 were recognized in 2001. The Company
also recorded unusual and non-recurring charges of $1,051 for
inventory losses related to discontinued product. This amount is
included in 2001 cost of sales.
The Company made a decision in late 2000 to consolidate production in
its Wood Division. This included transferring certain products to
different facilities, reducing one facility to rough-end operations
only, and eliminating approximately 300 salaried and hourly
positions. As a result, the Company recorded a restructuring charge
in 2000 of $6,680, of which, $5,800 related to the write-down of
property and equipment and $880 related to severance and related
employee benefits costs.
Early in fiscal year 2000, the Company merged all of its eight
Company-owned Bassett Furniture Direct (BFD) stores with a licensee's
five BFD stores to form a joint venture known as the LRG Furniture,
LLC ("LRG"). Refer to Note F of the Consolidated Financial Statements
included in the Annual Report for more information about the joint
venture.
During 1999, the Company sold substantially all of the assets of its
Bedding Division to Premier Bedding Group LLC ("PBG"). The net assets
sold, which totaled $8,400, were exchanged for $6,500 in cash and a
$1,900 convertible note receivable. Refer to Note B of the
Consolidated Financial Statements included in the Annual Report for
more information about the bedding sale.
Refer to Note M of the Consolidated Financial Statements included in
the Annual Report for a detail of restructuring activity and refer to
the Management's Discussion and Analysis section of the Annual Report
for additional discussion on these topics.
OPERATING SEGMENTS
The Company's primary business is in wholesale home furnishings. The
wholesale home furnishings business is involved principally in the
manufacture, sale and distribution of furniture products to a network
of independently owned stores and stores owned by the Company and by
affiliates of the Company. The wholesale business consists primarily
of three operating segments: wood, upholstery and import. Stores
operated by the Company are included in the retail segment.
Refer to Note R of the Consolidated Financial Statements included in
the Annual Report for more information about segment information for
2000, 2001 and 2002 and refer to the Management's Discussion and
Analysis section of the Annual Report for additional discussion on
this topic.
DESCRIPTION OF BUSINESS
Bassett Furniture Industries, Incorporated (together with its
consolidated subsidiaries, "Bassett" or the "Company") is a
manufacturer, retailer and importer of quality home furnishings.
Bassett's full range of furniture products and accessories are sold
through an exclusive network of 79 independently owned and six
company-owned retail stores known as Bassett Furniture Direct ("BFD")
and over 2,000 furniture and department stores located throughout the
United States. The Company has nine domestic manufacturing
facilities.
The wood segment is engaged in the manufacture and sale of wood
furniture, including bedroom and dining suites and accent pieces, to
independent and affiliated retailers. The wood segment accounted for
49%, 57% and 62% of total net sales during 2002, 2001 and 2000,
respectively. The Company currently has six wood manufacturing
facilities. The upholstery segment is involved in the manufacture and
sale of upholstered frames and cut upholstery items having a variety
of frame and fabric options, including sofas, chairs, and love seats.
The Company
PAGE 4
currently has two upholstery manufacturing facilities. The upholstery
segment accounted for 32%, 29% and 27% of total net sales during
2002, 2001 and 2000, respectively. The import segment sources
product, principally from Asia, and sells this product to independent
and affiliated retailers. The import segment accounted for 13%, 11%
and 8% of total net sales during 2002, 2001 and 2000, respectively.
The retail segment operates six Bassett Furniture Direct stores in
North Carolina and Virginia acquired in 2001 and 2002. The retail
segment accounted for 5% of total net sales in 2002.
Raw materials used by the Company are generally available from
numerous sources and are obtained from domestic and foreign sources.
The Company sources component parts from overseas markets when it is
economically advantageous. The Company currently assembles and
finishes these imported components in several of its plants in the
United States.
The Company's trademarks, including "Bassett" and the names of its
marketing divisions, products and collections are significant to the
conduct of its business. This importance is due to consumer
recognition of the names and identification with the Company's broad
range of products. Certain of the Company's trademarks are licensed
to independent retailers for use in full store presentations and in
store gallery presentations of the Company's products. The Company
also owns certain patents and licenses that are important in the
conduct of the Company's business.
The furniture industry in which the Company competes is not
considered to be a seasonal industry. However, working capital levels
will fluctuate based on overall business conditions, and desired
service levels.
Sales to one customer (JCPenney Company) amounted to approximately
9%, 15% and 16% of gross sales in 2002, 2001 and 2000, respectively.
Additionally, sales to LRG Furniture, LLC ("LRG"), an affiliate of
the Company, were 7%, 10% and 7% of net sales in 2002, 2001, and
2000, respectively. The Company's backlog of orders believed to be
firm was $18,014 at November 30, 2002 and $19,000 at November 24,
2001. It is expected that the November 30, 2002 backlog will be
filled within the 2003 fiscal year.
The furniture industry is very competitive and there are a large
number of manufacturers both within the United States and offshore
who compete in the market on the basis of product quality, price,
style, delivery and service. Additionally, certain retailers are
increasingly sourcing imported product directly, thus bypassing
domestic furniture manufacturers. Based on annual sales revenue, the
Company is one of the largest furniture manufacturers located in the
United States. The Company has been successful in this competitive
environment because its products represent excellent value combining
attractive prices, quality and styling; prompt delivery; and
courteous service.
The furniture industry is considered to be a "fashion" industry
subject to constant fluctuations to meet changing consumer
preferences and tastes. As such, the Company is continuously involved
in the development of new designs and products. Due to the nature of
these efforts and the close relationship to the manufacturing
operations, these costs are considered normal operating costs and are
not segregated. The Company is not otherwise involved in
"traditional" research and development activities nor does the
Company sponsor research and development activities of any of its
customers.
In management's view, the Company has complied in all material
respects with all federal, state and local standards in the area of
safety, health and pollution and environmental controls. Compliance
with these standards did result in a charge to earnings in 1997 and
capital spending in 1998 and 1999, but otherwise, has not had a
material adverse effect on past earnings or competitive position. The
Company is involved in environmental matters at certain of its plant
facilities, which arise in the normal course of business. Although
the final outcome of these
PAGE 5
environmental matters cannot be determined, based on the facts
presently known, it is management's opinion that the final resolution
of these matters will not have a material adverse effect on the
Company's financial position or future results of operations.
The Company had approximately 2,700 employees at November 30, 2002.
The Company has several investments in affiliated companies,
including a minority interest in International Home Furnishings
Center, Inc. (IHFC) which is a lessor of permanent exhibition space
to furniture and accessory manufacturers. The IHFC financial
statements are included on pages F-1 to F-15. The Company owns a
majority interest in LRG Furniture, LLC, (LRG), which is a retailer
of home furnishings. The LRG financial statements are included on
pages F-16 to F-28.
FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
The Company has no foreign operations, and its export sales were
approximately $2.9 million, $3.2 million, and $4.9 million in 2002,
2001, and 2000 respectively.
ITEM 2. PROPERTIES
At November 30, 2002 the Company owned the following manufacturing
facilities, by segment:
Wood Segment:
J. D. Bassett Manufacturing Company *
Bassett, VA
Bassett Superior Lines
Bassett, VA
Bassett Chair Company *
Bassett, VA
Bassett Table Company *
Bassett, VA
Bassett Furniture Industries
Macon, GA
Bassett Dining Table Top
Martinsville, VA
Bassett Furniture Industries
Dublin, GA
Bassett Furniture Industries
Mt. Airy, NC
Bassett Fiberboard
Bassett, VA
Upholstery Segment:
Bassett Upholstery Division
Newton, NC
Bassett Upholstery Division
Hiddenite, NC
Bassett Upholstery **
Los Angeles, CA
PAGE 6
Other:
Weiman Upholstery
Christiansburg, VA
Properties designated by a single asterisk "*" have ceased manufacturing
operations and are currently either held for sale or are idle facilities in
connection with restructuring efforts. "**" Denotes held for sale.
The Company owned the real estate of certain Bassett Furniture Direct retail
stores, approximating 25,000 square feet each, in the following cities:
Real Estate:
Greenville, SC
Concord, NC
Greensboro, NC
Fredericksburg, VA
Knoxville, TN
Gulfport, MS
Chesterfield, VA
Louisville, KY
Houston, TX
In addition, the Company owns leasehold improvements in Hickory, NC,
Arlington, TX, Portland, OR, Redmond, WA, and Atlanta, GA. All of the
properties noted above are operated as Bassett Furniture Direct
stores.
The Company owns its general corporate office building, three
warehouses, and an outlet store all located in Bassett, Virginia. The
Company also owns leasehold improvements in its High Point, NC
showroom.
In general, these facilities are suitable and are considered to be
adequate for the continuing operations involved. All facilities,
except those held for sale, are in regular use and provide more than
adequate capacity for the Company's manufacturing needs.
The following facilities were sold or disposed of during 2001:
Showroom
Thomasville, NC
Bassett Upholstery
Conover, NC
Bassett Upholstery
Claremont, NC
Warehouse
Los Angeles, CA
PAGE 7
ITEM 3. LEGAL PROCEEDINGS
Subsequent to November 30, 2002, the Company reached a final
settlement with the IRS regarding the non-deductibility of interest
expense on loans associated with the Company's corporate owned life
insurance plan ("COLI" plan). The Company had sufficient reserves on
hand at November 30, 2002 to cover the negotiated settlement amount
and, as such, there will be no further tax related charges associated
with the COLI.
The Company is also involved in various claims and actions, including
environmental matters, which arise in the normal course of business.
Although the final outcome of these matters cannot be determined,
based on the facts presently known, it is management's opinion that
the final resolution of these matters will not have a material
adverse effect on the Company's financial position or future results
of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PAGE 8
ITEM 4b. EXECUTIVE OFFICERS OF THE REGISTRANT
John E. Bassett III, 44, served from 1988 to 1997 as the Vice
President and General Manager of Bassett Table and as Vice President
of Wood Manufacturing since 1997.
Jay R. Hervey, Esq., 43, was an Associate with the Richmond Office of
McGuireWoods, LLP from 1992 to 1997 and has been the General Counsel,
Vice President and Secretary for the Company since 1997.
Dennis Hoy, 44, was a furniture buyer with Marlo Furniture from 1987
until 1996 and has been with the Company since 1996, as Casegoods and
Merchandise Manager and as Vice President of Merchandising. In 1999,
he was promoted to Vice President and General Manager, Upholstery.
Matthew S. Johnson, 41, has been with the Company for 16 years, most
recently as Vice President of Wood Merchandising. In 2000, he was
promoted to Vice President of Merchandising and Design.
Mark Jordan, 49, was Director of Product Development and Plant
Manager for Ethan Allen from 1974 to 1999. In 1999 he joined the
Company as Plant Manager. In 2001, he was promoted to Vice President
of Upholstery Manufacturing and in 2002 he was elevated to Vice
President and General Manager of Upholstery.
Charles T. King, 40, was with Coopers and Lybrand from 1985 to 1988,
and McMillan, Pate and King, CPA's from 1989 to 1998 and joined the
Company in 1998 as Retail Controller. In 2001, he was promoted to
Vice President and Controller.
Barry C. Safrit, 40, was with CHF Industries from 1995 until 1998 as
Controller and as Chief Financial Officer and joined the Company as
Vice President and Chief Accounting Officer in 1998 and was promoted
to Chief Financial Officer in 2001.
Keith R. Sanders, 58, was with Ethan Allen from 1995 until 1998 as
the Vice President of Manufacturing and Vice President of Upholstery
and has been the Vice President of Upholstery Manufacturing for the
Company from 1998 to 1999. In 1999, he was promoted to Executive Vice
President, Operations.
Robert H. Spilman, Jr., 46, has been with the Company since 1984. He
was the Company's Executive Vice President of Marketing and
Merchandising from 1994 until 1997 and served as President and Chief
Operating Officer from 1997 to 2000. In 2000, he was promoted to
Chief Executive Officer and President.
Thomas R. Swanston, 71, was with Ethan Allen from 1992 until 1999 as
General Manager of Business Development, and later served as advisor
to the chairman. He joined the Company as Executive Vice President of
Sales and Marketing in 2001.
PAGE 9
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The information contained in the Annual Report under the caption
"Investor Information" with respect to number of stockholders, market
prices and dividends paid is incorporated herein by reference
thereto.
ITEM 6. SELECTED FINANCIAL DATA
The information for the five years ended November 30, 2002, contained
in "Other Business Data" in the Annual Report is incorporated herein
by reference thereto.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information contained in "Management's Discussion and Analysis of
Financial Condition and Result of Operations" in the Annual Report is
incorporated herein by reference thereto.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The information contained in "Management's Discussion and Analysis of
Financial Condition and Result of Operations" in the Annual Report is
incorporated herein by reference thereto.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and notes to consolidated
financial statements of the Registrant and its subsidiaries contained
in the Annual Report are incorporated herein by reference thereto. In
addition, financial statements of the registrant's significant
non-consolidated subsidiaries are included in this Form 10-K on pages
F-1 to F-17 and F-18 to F-36. Quarterly results of operations are
included under the caption "Other Business Data" in the Annual Report
to Shareholders and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained on pages 3 through 5 and page 12 of the
Proxy Statement under the "Election of Directors" and "Section 16 (a)
Beneficial Ownership Reporting Compliance" is incorporated herein by
reference thereto. Please see section entitled "Executive Officers of
the Registrant" in Item 4b of Part I of this report for information
concerning executive officers.
ITEM 11. EXECUTIVE COMPENSATION
The information contained on pages 6 through 12 of the Proxy
Statement under the captions "Organization, Compensation and
Nominating Committee Report," "Stockholder Return Performance Graph,"
"Executive Compensation," "Supplemental Retirement Income Plan,"
"Deferred Compensation Agreement," and "Director Compensation" is
incorporated herein by reference thereto.
PAGE 10
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained on pages 1 through 5 of the Proxy Statement
under the headings "Principal Stockholders and Holdings of
Management" and "Election of Directors" is incorporated herein by
reference thereto.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of November 30, 2002
with respect to shares of Company Common stock that may be issued
under existing equity compensation plans, including the 1993 Long
Term Incentive Stock Option Plan, the 1997 Employee Stock Plan, the
1993 Stock Plan for Non-Employee Directors, and the 2000 Employee
Stock Purchase Plan (ESPP). All equity compensation plans currently
in place have been approved by the stockholders.
(a) (b) (c)
Plan Number of Securities to Weighted Average Number of Securities
be Issued upon Exercise Exercise Price of Remaining Available for
of Outstanding Options Outstanding Options Future Issuance Under
Equity Compensation Plans
(excluding securities
reflected in column (a))
- -----------------------------------------------------------------------------------------------------------
Equity Compensation Plans 1,859,445 $21.07 659,278 (2)
Approved by Stockholders (1)
Equity Compensation Plans 0 n/a 0
Not Approved by
Stockholders (3)
==============================================================================
Total 1,859,445 659,278
==============================================================================
(1) Includes the following plans: 1993 Long Term Incentive Stock Option Plan;
1997 Employee Stock Plan; 1993 Stock Plan for Non-Employee Directors; 2000
Employee Stock Purchase Plan
(2) Includes shares available under the 1997 Plan (275,675), the 1993
Non-Employee Directors Plan (10,644) and the 2000 ESPP (372,959)
(3) There are no equity compensation plans in place not approved by
stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. CONTROLS AND PROCEDURES
a. Quarterly evaluation of the Company's Disclosure Controls. Within the
90 days prior to the date of this Annual Report on Form 10-K, the
Company evaluated the effectiveness of the design and operation of
its "disclosure controls and procedures" ("Disclosure Controls").
Disclosure Controls are procedures that are designed with the
objective of ensuring that information required to be disclosed in
our reports filed under the Securities Exchange Act of 1934 (the
"Exchange Act"), such as this Annual Report, is recorded, processed,
summarized and reported within the time periods specified in the
Securities and Exchange Commission's (SEC) rules and forms.
Disclosure Controls are also designed with the objective of ensuring
that such
PAGE 11
information is accumulated and communicated to our management,
including the CEO and CFO, as appropriate to allow timely decisions
regarding required disclosure.
The Company's management, including the CEO and CFO, does not expect
that our Disclosure Controls will prevent all error and all fraud. A
control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives
of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs.
Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company
have been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. The design of any
system of controls also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all
potential future conditions.
Based upon our controls evaluation, our CEO and CFO have concluded
that, subject to the limitations noted above, our Disclosure Controls
are effective to ensure that the information required to be disclosed
by the Company in its periodic reports is accumulated and
communicated to our management, including the CEO and CFO, as
appropriate to allow timely decisions regarding disclosure and is
recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms.
b. Changes in internal controls. There have been no significant changes
in the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of the
controls evaluation.
PAGE 12
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The following consolidated financial statements of the
registrant and its subsidiaries, included in the Annual
Report are incorporated herein by reference thereto:
Consolidated Balance Sheets--November 30, 2002 and
November 24, 2001
Consolidated Statements of Income--Years Ended
November 30, 2002, November 24, 2001 and November 25,
2000
Consolidated Statements of Stockholders' Equity--
Years Ended November 30, 2002, November 24, 2001 and
November 25, 2000
Consolidated Statements of Cash Flows-- Years Ended
November 30, 2002, November 24, 2001 and November 25,
2000
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
International Home Furnishings Center, Inc. Financial
Statements are included herein on pages F-1 to F-17.
LRG Furniture, LLC Financial Statements are included
herein on pages F-18 in F-36.
(2) Financial Statement Schedule:
Schedule II - Analysis of Valuation and Qualifying Accounts
for the years ended November 30, 2002, November 24, 2001,
and November 25, 2000
(3) Listing of Exhibits
3A. Articles of Incorporation as amended are incorporated
herein by reference to Form 10-Q for the fiscal
quarter ended February 28, 1994.
3B. By-laws as amended are incorporated herein by
reference to Form 10-K for the fiscal year ended
November 24, 2001.
4A. Credit Agreement with a Bank Group dated October 25,
2000 is incorporated herein by reference to Form 10-K
for the fiscal year ended November 25, 2000.
4B. First Amendment to Credit Agreement with a Bank Group
dated October 5, 2001, is incorporated herein by
reference to Form 10-K for the fiscal year ended
November 24, 2001.
** 10A. Bassett 1993 Long Term Incentive Stock Option Plan is
incorporated herein by reference to the Registrant's
Registration Statement on Form S-8 (no.33-52405)
filed on February 25, 1994.
** 10B. Bassett Executive Deferred Compensation Plan is
incorporated herein by reference to Form 10-K for the
fiscal year ended November 30, 1997.
PAGE 13
** 10C. Bassett Supplemental Retirement Income Plan is
incorporated herein by reference to Form 10-K for
the fiscal year ended November 30, 1997.
** 10D. Bassett 1993 Stock Plan for Non-Employee
Directors as amended is incorporated herein by
reference to Form 10-K for the fiscal year ended
November 25, 2000.
** 10E. Bassett 1997 Employee Stock Plan is incorporated
herein by reference to the Registrant's Registration
Statement on Form S-8 (no. 333-60327) filed on
July 31, 1998.
13. Portions of the Registrant's Annual Report to
Stockholders for the year ended November 30, 2002.
21. List of subsidiaries of the Registrant
23A. Consent of Independent Auditors.
23B. Consent of Independent Auditors.
23C. Notice Regarding Lack of Consent of Arthur Andersen
**Management contract or compensatory plan or arrangement of the
Company.
(b) Form 8-K was filed May 14, 2002 indicating a change in the
Company's auditors.
PAGE 14
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.
BASSETT FURNITURE INDUSTRIES, INCORPORATED (Registrant)
By: /s/ Paul Fulton Date: 2-21-03
--------------------------------------- ------------------
Paul Fulton
Chairman of the Board of Directors
By: /s/ Robert H. Spilman Jr. Date: 2-20-03
--------------------------------------- ------------------
Robert H. Spilman Jr.
President and Chief Executive Officer
Director
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 dates indicated.
By: /s/ Peter W. Brown Date: 2-20-03
------------------------------------------ ------------------
Peter W. Brown
Director
By: /s/ Willie D. Davis Date: 2-20-03
------------------------------------------ ------------------
Willie D. Davis
Director
By: /s/ Alan T. Dickson Date: 2-20-03
------------------------------------------ ------------------
Alan T. Dickson
Director
By: Date:
------------------------------------------ ------------------
Howard H. Haworth
Director
By: /s/ Michael E. Murphy Date: 2-20-03
------------------------------------------ ------------------
Michael E. Murphy
Director
By: /s/ Dale C. Pond Date: 2-20-03
------------------------------------------ ------------------
Dale C. Pond
Director
By: /s/ David A. Stonecipher Date: 2/20/03
------------------------------------------ ------------------
David A. Stonecipher
Director
By: /s/ Barry C. Safrit Date: 2-20-03
------------------------------------------ ------------------
Barry C. Safrit
Vice President and Chief Financial Officer
PAGE 15
CERTIFICATIONS
I, Robert H. Spilman, Jr., President and Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Bassett Furniture
Industries, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
February 20, 2003
/s/ Robert H. Spilman, Jr.
-------------------------------------
Robert H. Spilman, Jr.
President, Chief Executive Officer
PAGE 16
CERTIFICATIONS
I, Barry C. Safrit, Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Bassett Furniture
Industries, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
February 20, 2003
/s/ Barry C. Safrit
-----------------------------------------
Barry C. Safrit
Vice President, Chief Financial Officer
PAGE 17
ANNUAL REPORT ON FORM 10-K
ITEM 15(a)(1)
CERTAIN EXHIBITS
YEAR ENDED NOVEMBER 30, 2002
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
BASSETT, VIRGINIA
INTERNATIONAL HOME FURNISHINGS
CENTER, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 2002, 2001 AND 2000
INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Page No.
--------
INDEPENDENT AUDITORS' REPORT........................................................ 1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets...................................................... 2
Consolidated Statements of Income................................................ 3
Consolidated Statements of Stockholders' Equity (Deficit)........................ 4
Consolidated Statements of Cash Flows............................................ 5
Notes to Consolidated Financial Statements....................................... 7
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
International Home Furnishings Center, Inc.
High Point, North Carolina
We have audited the accompanying consolidated balance sheets of International
Home Furnishings Center, Inc. and subsidiary as of October 31, 2002 and 2001 and
the related consolidated statements of income, stockholders' equity (deficit),
and cash flows for each of the three years in the period ended October 31, 2002.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of International Home
Furnishings Center, Inc. and subsidiary at October 31, 2002 and 2001 and the
results of their operations and their cash flows for each of the three years in
the period ended October 31, 2002 in conformity with accounting principles
generally accepted in the United States of America.
/s/ Dixon Odom, PLLC
High Point, North Carolina
November 25, 2002
----------
PAGE 1
F-2
INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 2002 AND 2001
===============================================================================
ASSETS 2002 2001
-------------- --------------
CURRENT ASSETS
Cash and cash equivalents $ 4,637,147 $ 8,848,172
Restricted cash 18,956,684 24,479,827
Short-term investments 103,993 98,570
Receivables
Trade 2,528,957 2,552,434
Interest 7,126 10,677
Deferred income tax benefit 2,959,000 3,028,000
Prepaid expenses 302,233 192,271
-------------- --------------
TOTAL CURRENT ASSETS 29,495,140 39,209,951
-------------- --------------
PROPERTY AND EQUIPMENT, at cost
Land and land improvements 3,380,218 3,293,772
Buildings, exclusive of theater complex 88,959,454 88,350,771
Furniture and equipment 3,827,883 3,707,139
Construction in progress 179,518 -
-------------- --------------
96,347,073 95,351,682
Accumulated depreciation (48,481,947) (46,121,761)
-------------- --------------
47,865,126 49,229,921
-------------- --------------
OTHER ASSETS
Theater complex, at cost less amortization 847,089 890,344
Deferred income tax benefit 600,680 -
Deferred financing costs, net of accumulated amortization of $1,121,845 and
$508,803 at October 31, 2002 and 2001, respectively 1,858,390 2,411,052
Interest rate cap agreement, at fair value 149,636 46,613
-------------- --------------
3,455,795 3,348,009
-------------- --------------
$ 80,816,061 $ 91,787,881
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES $ 1,017,609 $ 1,014,684
Accounts payable, trade
Accrued property taxes 1,877,578 1,840,732
Other accrued expenses 802,814 851,281
Rents received in advance 7,586,834 7,765,348
Income taxes payable 1,308,304 1,949,956
Current maturities of long-term debt 2,880,770 2,627,187
-------------- --------------
TOTAL CURRENT LIABILITIES 15,473,909 16,049,188
-------------- --------------
LONG-TERM DEBT 127,674,565 130,555,336
-------------- --------------
OTHER LONG-TERM LIABILITIES
Supplemental retirement benefits 2,525,475 1,924,223
Interest rate floor agreement, at fair value 3,035,082 -
Deferred income taxes - 587,000
-------------- --------------
5,560,557 2,511,223
-------------- --------------
COMMITMENTS (Notes G and L)
STOCKHOLDERS' DEFICIT
Common stock, $5 par value, 1,000,000 shares authorized, 481,628 and 527,638
shares issued in 2002 and 2001, respectively 2,408,140 2,638,190
Additional paid-in capital 154,592 169,360
Accumulated deficit (68,604,302) (60,135,416)
Accumulated other comprehensive loss (1,851,400) -
-------------- --------------
(67,892,970) (57,327,866)
-------------- --------------
$ 80,816,061 $ 91,787,881
============== ==============
PAGE 2
F-3
INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED OCTOBER 31, 2002, 2001 AND 2000
===============================================================================
2002 2001 2000
-------------- -------------- --------------
OPERATING REVENUES
Rental income $ 35,822,245 $ 34,682,203 $ 31,620,514
Other revenues 6,943,477 6,973,398 6,922,474
-------------- -------------- --------------
TOTAL OPERATING REVENUES 42,765,722 41,655,601 38,542,988
-------------- -------------- --------------
OPERATING EXPENSES
Compensation and benefits 5,293,040 4,642,208 4,242,802
Market and promotional 2,348,642 2,589,746 2,593,966
Maintenance and building costs 1,211,953 1,012,997
858,194
Depreciation expense 2,387,170 2,647,449 2,179,109
Rent 152,234 152,234 152,234
Property taxes and insurance 2,546,391 2,269,932 1,997,121
Utilities 1,739,924 1,872,132 1,655,730
Other operating costs 1,069,496 1,373,183
535,776
-------------- -------------- --------------
TOTAL OPERATING EXPENSES 16,748,850 16,559,881 14,214,932
-------------- -------------- --------------
INCOME FROM OPERATIONS 26,016,872 25,095,720 24,328,056
-------------- -------------- --------------
NONOPERATING INCOME
Interest income 393,601 1,071,901 808,703
Dividend income 6,275 4,597 4,652
-------------- -------------- --------------
TOTAL NONOPERATING INCOME 399,876 1,076,498 813,355
-------------- -------------- --------------
NONOPERATING EXPENSES
Interest expense 6,130,042 7,870,387 4,109,489
-------------- -------------- --------------
TOTAL NONOPERATING EXPENSES 6,130,042 7,870,387 4,109,489
-------------- -------------- --------------
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 20,286,706 18,301,831 21,031,922
PROVISION FOR INCOME TAXES 8,000,000 7,166,000 8,101,000
-------------- -------------- --------------
INCOME BEFORE EXTRAORDINARY ITEM 12,286,706 11,135,831 12,930,922
EXTRAORDINARY ITEM
Loss on early extinguishment of debt, net
of income tax benefit of $1,217,000 (1,886,426)
- -
-------------- -------------- --------------
NET INCOME $ 12,286,706 $ 9,249,405 $ 12,930,922
============== ============== ==============
BASIC EARNINGS PER COMMON SHARE
Income before extraordinary item $ 25.13 $ 21.11 $ 24.51
Extraordinary item - (3.58) -
-------------- -------------- --------------
Net income $ 25.13 $ 17.53 $ 24.51
============== ============== ==============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 488,939 527,638 527,638
============== ============== ==============
PAGE 3
F-4
INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED OCTOBER 31, 2002, 2001 AND 2000
===============================================================================
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN ACCUMULATED COMPREHENSIVE
STOCK CAPITAL DEFICIT LOSS TOTAL
---------- ---------- ------------ ------------- ------------
BALANCE (DEFICIT), OCTOBER 31, 1999 $2,638,190 $169,360 $(21,637,373) $ - $(18,829,823)
Net income - - 12,930,922 - 12,930,922
---------- -------- ------------ ----------- ------------
BALANCE (DEFICIT), OCTOBER 31, 2000 2,638,190 169,360 (8,706,451) - (5,898,901)
Net income - - 9,249,405 - 9,249,405
Dividends paid ($115.00 per common share) - - (60,678,370) - (60,678,370)
---------- -------- ------------ ----------- ------------
BALANCE (DEFICIT), OCTOBER 31, 2001 2,638,190 169,360 (60,135,416) - (57,327,866)
Purchase and retirement of 46,010 shares
of common stock (230,050) (14,768) (8,755,349) - (9,000,167)
Dividends paid ($24.916 per common share)
- - (12,000,243) - (12,000,243)
Comprehensive income (loss):
Net income
- - 12,286,706 - 12,286,706
Other comprehensive loss:
Increase in fair value of interest
rate floor hedging activity, net of
deferred tax of $1,491,866 - - - (2,333,431) (2,333,431)
Reclassification adjustment for
losses recognized in net income,
net of deferred tax of $308,184 - - - 482,031 482,031
---------- -------- ------------ ----------- ------------
Total comprehensive income 10,435,306
------------
BALANCE (DEFICIT), OCTOBER 31, 2002 $2,408,140 $154,592 $(68,604,302) $(1,851,400) $(67,892,970)
========== ======== ============ =========== ============
PAGE 4
F-5
INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 2002, 2001 AND 2000
2002 2001 2000
---------------- ---------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 12,286,706 $ 9,249,405 $ 12,930,922
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 3,043,467 3,209,295 2,301,760
Decrease in fair value of interest rate cap agreement 729,979 265,887 -
Decrease in fair value of interest rate floor agreement (833,000) - -
Loss on early extinguishment of debt - 3,103,426 -
Provision for losses on accounts receivable 19,828 25,154 6,341
(Gain) loss on disposal of assets (3,000) 45,352 (3,134)
Deferred income taxes 65,000 (2,931,000) (354,000)
Change in assets and liabilities
(Increase) decrease in trade and interest receivables 7,200 67,770 (394,166)
(Increase) decrease in prepaid expenses (109,962) 524,901 89,057
Increase in accounts payable and accrued
expenses 100,923 39,047 207,521
Increase (decrease) in rents received in advance (178,514) 6,262,396 (110,737)
Increase (decrease) in income taxes payable (641,652) 1,949,956 -
Increase in supplemental retirement benefits 601,252 179,200 240,796
---------------- ---------------- --------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 15,088,227 21,990,789 14,914,360
---------------- ---------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase and construction of property and equipment (1,131,994) (6,690,764) (8,764,159)
Proceeds from sale of property and equipment 3,000 - 4,000
Purchase of short-term investments (5,423) (4,081) (3,711)
(Increase) decrease in restricted cash 5,523,143 (22,203,853) -
---------------- ---------------- --------------
NET CASH PROVIDED (USED)
BY INVESTING ACTIVITIES 4,388,726 (28,898,698) (8,763,870)
---------------- ---------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt - 135,000,000 -
Principal payments on long-term debt (2,627,188) (57,472,061) (9,295,564)
Cost incurred to extinguish debt early - (2,720,580) -
Purchase of interest rate cap (833,000) (312,500) -
Proceeds from sale of interest rate floor 833,000 - -
Dividends paid (12,000,243) (60,678,370) -
Retirement of common stock (9,000,167) - -
Financing costs paid (60,380) (2,919,855) -
---------------- ---------------- --------------
NET CASH PROVIDED (USED)
BY FINANCING ACTIVITIES (23,687,978) 10,896,634 (9,295,564)
---------------- ---------------- --------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (4,211,025) 3,988,725 (3,145,074)
CASH AND CASH EQUIVALENTS, BEGINNING 8,848,172 4,859,447 8,004,521
---------------- ---------------- --------------
CASH AND CASH EQUIVALENTS, ENDING $ 4,637,147 $ 8,848,172 $ 4,859,447
================ ================ ==============
PAGE 5
F-6
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION Cash paid during the year for:
Income taxes $ 8,575,614 $ 6,302,511 $ 8,357,298
Interest, net of amount capitalized 5,708,508 7,699,674 4,166,000
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING
AND INVESTING ACTIVITIES
Accounts payable incurred for acquisition of property and
equipment $ 92,096 $ 201,715 $ 2,924,796
================ ================ ==============
Increase in fair value of interest rate floor agreement,
net of deferred income taxes of $1,183,682 $ 1,851,400 $ - $ -
================ ================ ==============
PAGE 6
F-7
INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
NOTE A - DESCRIPTION OF BUSINESS
The Company is the lessor of permanent exhibition space to furniture and
accessory manufacturers which are headquartered throughout the United States and
in many foreign countries. This exhibition space, located in High Point, North
Carolina, is used by the Home Furnishings Industry to showcase its products at
the International Home Furnishings Market held each April and October. The
details of the operating leases with the Company's tenants are described in Note
I.
The Company has been in business since June 27, 1919, and operates under the
trade name of "International Home Furnishings Center."
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
The accounting policies relative to the carrying values of property and
equipment, theater complex and interest rate cap and floor agreements are
indicated in the captions on the consolidated balance sheets. Other significant
accounting policies are as follows:
Principles of Consolidation
The consolidated financial statements include the accounts of International Home
Furnishings Center, Inc. and its wholly-owned subsidiary, IHFC Properties,
L.L.C., a company organized on December 21, 2000. All material intercompany
transactions have been eliminated. The Company and its subsidiary are referred
to collectively herein as "the Company." Notwithstanding the consolidation of
the Company and IHFC Properties, L.L.C. in these financial statements, IHFC
Properties, L.L.C. is a separate entity, with separate assets and liabilities
and has its own separate financial statements.
Rental Income
Income from rental of exhibition space is recognized under the operating method.
Aggregate rentals are reported as income on the straight-line basis over the
lives of the leases, and expenses are charged as incurred against such income.
Future rentals under existing leases are not recorded as assets in the
accompanying consolidated balance sheets.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Investment Securities
The Company has investments in debt and marketable equity securities. Debt
securities consist of obligations of state and local governments and U. S.
corporations. Marketable equity securities consist primarily of investments in
mutual funds.
Page 7
F-8
INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investment Securities (Continued)
Management determines the appropriate classification of securities at the date
individual investment securities are acquired, and the appropriateness of such
classification is reassessed at each balance sheet date. Since the Company
neither buys investment securities in anticipation of short-term fluctuations in
market prices nor commits to holding debt securities to their maturities,
investments in debt and marketable equity securities have been classified as
available-for-sale. Available-for-sale securities are stated at fair value, and
unrealized holding gains and losses, if significant, net of the related deferred
tax effect, are reported as a separate component of accumulated other
comprehensive income in stockholders' equity. Premiums and discounts on
investments in debt securities are amortized over their contractual lives.
Interest on debt securities is recognized in income as accrued, and dividends on
marketable equity securities are recognized in income when declared. Realized
gains and losses are included in income and are determined on the basis of the
specific securities sold.
Property, Equipment and Depreciation
Expenditures for maintenance, repairs, and minor renewals are charged to expense
as incurred. Major renewals and betterments are capitalized. Depreciation is
provided primarily on the straight-line method over the following estimated
useful lives:
Land improvements 10 years
Building structures 20 to 50 years
Building components 5 to 20 years
Furniture and equipment 3 to 10 years
In accordance with the provisions of Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," the Company periodically reviews long-lived assets
when indications of impairment exist, and if the value of the assets is
impaired, an impairment loss would be recognized.
Deferred Financing Costs
Costs associated with obtaining long-term financing have been deferred and are
being amortized on the interest method over the term of the related debt.
Amortization expense charged to operations during the years ended October 31,
2002, 2001 and 2000 was $613,042, $522,725 and $83,530, respectively.
Reporting Comprehensive Income
Comprehensive income is the total of net income and other comprehensive income.
Other comprehensive income represents changes in equity, other than net income,
from transactions and other events and circumstances from non-owner sources.
Accordingly, comprehensive income includes all changes in equity during a period
except those resulting from investments by stockholders and distributions to
stockholders.
Page 8
F-9
INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Derivative Instruments
The Company holds and issues derivative instruments for the purpose of hedging
the risks related to the variability of cash flows caused by changes in interest
rates. The Company's objectives are to decrease the volatility of earnings and
cash flows associated with changing interest rates by entering into interest
rate floor and cap agreements that effectively limit the range of interest rate
exposure on its debt (see Note E).
The Company designates its derivatives based upon criteria established by
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). For a derivative
designated as a cash flow hedge, the effective portion of the derivative's gain
or loss is initially reported as a component of other comprehensive income and
subsequently reclassified into earnings when the hedged exposure affects
earnings. The ineffective portion of the gain or loss is reported in earnings
immediately.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in the
consolidated financial statements and consist of taxes currently due plus
deferred taxes related to temporary differences between the reported amounts of
assets and liabilities and their tax bases. The deferred tax assets and
liabilities represent the future tax return consequences of those differences,
which will either be taxable or deductible when the assets and liabilities are
recovered or settled. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
Earnings Per Common Share
The Company follows the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," which specifies the computation,
presentation and disclosure requirements for earnings per share ("EPS"). Basic
EPS excludes all dilution and has been computed using the weighted average
number of common shares outstanding during the year. Diluted EPS reflects the
potential dilution that would occur if securities or other contracts to issue
common stock were exercised or converted into common stock. The Company has no
dilutive potential common shares.
Retirement Plans
The Company maintains a 401(k) qualified retirement plan covering eligible
employees under which participants may contribute up to 25% of their
compensation subject to maximum allowable contributions. The Company is
obligated to contribute, on a matching basis, 50% of the first 6% of
compensation voluntarily contributed by participants. The Company may also make
additional contributions to the plan if it so elects.
Page 9
F-10
INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Retirement Plans (Continued)
In 1991, the Company adopted a nonqualified supplemental retirement benefits
plan for key management employees. Benefits payable under the plan are based
upon the participant's average compensation during his last five years of
employment and are reduced by benefits payable under the Company's qualified
retirement plan and by one-half of the participant's social security benefits.
Benefits under the plan do not vest until the attainment of normal retirement
age; however, a reduced benefit is payable if employment terminates prior to
normal retirement age because of death or disability. The vested portion of the
benefits under this plan amounted to approximately $1,406,000 and $1,345,000 at
October 31, 2002 and 2001, respectively. The Company has no obligation to fund
this supplemental plan.
Fair Value of Financial Instruments
The carrying amounts of the Company's significant financial instruments, none of
which are held for trading purposes, approximate fair value at October 31, 2002
and 2001. Cash, cash equivalents and restricted cash approximate fair value
because of the short maturities of these instruments. Long-term debt
approximates fair value because of its floating interest rate terms. Derivative
financial instruments are carried at fair value.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the 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. Actual results could differ from those
estimates.
NOTE C - RESTRICTED CASH
The Company has restricted, interest-bearing cash accounts held by the lender
under the escrow provisions of the term loan agreement described in Note E. The
restricted cash balances are held for the following purposes at October 31, 2002
and 2001:
2002 2001
------------- -------------
Taxes and insurance $ 1,170,665 $ 767,025
Required repairs 1,131,629 1,120,729
Replacements 235,806 142,251
Environmental 240,057 802,882
Debt service 1,332,213 7,438,700
Operating expenses 1,054,868 677,394
Ground rent 51,382 48,360
Cash management 13,740,064 13,482,486
------------- -------------
$ 18,956,684 $ 24,479,827
============= =============
Page 10
F-11
INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
NOTE C - RESTRICTED CASH (CONTINUED)
All rents and other income from operation of the Company's property are
deposited directly into a lockbox account controlled by the lender under the
Company's cash management agreement. In May and November of each year during the
term of the loan, the lender will disburse to the Company amounts in the cash
management account in excess of the amounts needed to replenish the various
escrow accounts.
The Company has granted the lender a security interest in each of the restricted
cash accounts as additional security for the outstanding term loan.
NOTE D - INVESTMENT IN DEBT AND MARKETABLE EQUITY SECURITIES
The following is a summary of the Company's investment in available-for-sale
securities as of October 31, 2002 and 2001:
2002
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ----------- ------------
Debt securities
State and local governments $ 2,976,644 $ - $ - $ 2,976,644
Equity securities 103,993 - - 103,993
------------ ------------ ----------- ------------
$ 3,080,637 $ - $ - $ 3,080,637
============ ============ =========== ============
2001
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ----------- ------------
Debt securities
State and local governments $ 3,015,466 $ - $ - $ 3,015,466
Corporate 3,000,000 - - 3,000,000
Equity securities 98,570 - - 98,570
------------ ------------ ----------- ------------
$ 6,114,036 $ - $ - $ 6,114,036
============ ============ =========== ============
Available-for-sale securities are classified in the following balance sheet
captions as of October 31, 2002 and 2001:
2002 2001
--------------- ---------------
Cash and cash equivalents $ 2,976,644 $ 6,015,466
Short-term investments 103,993 98,570
--------------- ---------------
$ 3,080,637 $ 6,114,036
=============== ===============
All the Company's debt securities mature within three months.
Page 11
F-12
INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
NOTE E - LONG-TERM DEBT
Long-term debt consists of the following at October 31, 2002 and 2001:
2002 2001
--------------- ---------------
Term note payable, Bank of America, N.A. Principal
payments are due monthly based on an amortization
schedule provided by the lender. Interest is
payable monthly at the LIBOR rate plus 2.1%. At
October 31, 2002, the interest rate was 3.9%. The
note matures in December 2003 and has two
one-year extension periods available, which the
Company intends to exercise. The loan is
collateralized by land and buildings, restricted
cash (Note C), rents and assignment of leases
with tenants. $ 130,555,335 $ 133,182,523
Less current maturities 2,880,770 2,627,187
--------------- ---------------
$ 127,674,565 $ 130,555,336
=============== ===============
The aggregate maturities of long-term debt are due as follows:
Year Ending October 31,
2003 $ 2,880,770
2004 3,158,836
2005 3,463,739
2006 121,051,990
---------------
$ 130,555,335
===============
During the year ended October 31, 2001, the Company entered into an interest
rate cap agreement that had a notional amount of $133,182,523 at October 31,
2001. The notional amount decreased as principal payments were made on the
Company's term debt and was to be equal to the term debt until the agreement's
expiration in January 2004. Under the agreement, the Company was to receive an
amount equal to the interest it incurred on its term debt in excess of 8%, if
any. The $265,887 decrease in the fair value of the interest rate cap agreement
was charged to earnings as financing expense during the year ended October 31,
2001. In 2002, the Company paid $26,613 to terminate this agreement. The $26,613
was charged to earnings as financing expense for the year ended October 31,
2002.
Page 12
F-13
INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
NOTE E - LONG-TERM DEBT (CONTINUED)
During the year ended October 31, 2002, the Company paid $833,000 to execute an
interest rate cap agreement that has a notional amount of $130,555,335 at
October 31, 2002. The notional amount will decrease as principal payments are
made on the Company's term debt and will be equal to the term debt until the
agreement expires December 6, 2005. Under the agreement, the Company will
receive an amount equal to the LIBOR rate in excess of 8%, if any. The Company
has designated this interest rate cap agreement as a cash flow hedge of interest
payments once the LIBOR rate exceeds 8%. Since the LIBOR rate remained below 8%
during the year ended October 31, 2002, the cap agreement was not yet in effect;
therefore, the $683,364 decrease in the fair value of the interest rate cap
agreement was charged to earnings during the year ended October 31, 2002 as a
part of financing expense.
The Company also entered into an interest rate floor agreement during the year
ended October 31, 2002. In connection with the execution of the floor agreement,
the Company received $833,000. The notional amount of the floor was $130,555,335
at October 31, 2002. The notional amount will decrease as principal payments are
made on the Company's term debt and will be equal to the term debt until the
agreement expires January 6, 2006. Under the agreement, the Company will pay an
amount equal to the excess of 2.63% over the LIBOR rate, if any. Since the LIBOR
rate decreased below the floor of 2.63% during the year ended October 31, 2002,
the initial $833,000 has been reflected in earnings as a part of financing
expense, and the change in fair value of the interest rate floor agreement has
been recorded in accumulated other comprehensive income, net of tax, for the
year ended October 31, 2002.
Total interest cost incurred for the years ended October 31, 2002, 2001 and 2000
was $6,134,336, $8,241,933 and $4,303,766, respectively. Of the interest cost
for the years ended October 31, 2002, 2001 and 2000, $4,293, $371,546 and
$194,277, respectively, was capitalized as part of the building construction
costs.
During the year ended October 31, 2001, the Company recorded an extraordinary
loss of $1,886,426 after income taxes as a result of the early extinguishment of
term debt in the amount of $54,039,689. The loss consisted primarily of costs
associated with the early extinguishment and the write-off of unamortized
financing costs of $382,846. The extinguishment of the debt was financed with a
portion of the proceeds from the $135,000,000 term loan.
Page 13
F-14
INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
NOTE F - INCOME TAXES
The provision for income taxes consists of the following for the years ended
October 31, 2002, 2001 and 2000:
2002 2001 2000
------------- ------------- -------------
Federal:
Current $ 6,560,000 $ 7,365,000 $ 6,975,000
Deferred 53,000 (2,415,000) (287,000)
------------- ------------- -------------
6,613,000 4,950,000 6,688,000
------------- ------------- -------------
State:
Current 1,375,000 1,515,000 1,480,000
Deferred 12,000 (516,000) (67,000)
------------- ------------- -------------
1,387,000 999,000 1,413,000
------------- ------------- -------------
TOTAL $ 8,000,000 $ 5,949,000 $ 8,101,000
============= ============= =============
Deferred tax allocated directly to
stockholders' deficit $ 1,183,682 $ - $ -
============= ============= =============
A reconciliation of the income tax provision at the federal statutory rate to
the income tax provision at the effective tax rate is as follows:
2002 2001 2000
------------- ------------- -------------
Income taxes computed at the federal
statutory rate $ 7,100,000 $ 5,319,000 $ 7,360,000
State taxes, net of federal benefit 902,000 649,000 918,000
Nontaxable investment income (24,000) (48,000) (112,000)
Other, net 22,000 29,000 (65,000)
------------- ------------- -------------
$ 8,000,000 $ 5,949,000 $ 8,101,000
============= ============= =============
Page 14
F-15
INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
NOTE F - INCOME TAXES (CONTINUED)
The components of deferred income taxes consist of the following:
2002 2001
------------ ------------
Deferred income tax assets:
Rents received in advance $ 2,959,000 $ 3,028,000
Supplemental retirement benefits 985,000 750,000
Interest rate floor agreement 1,183,680 70,000
Deferred financing costs 16,000 9,000
------------ ------------
TOTAL DEFERRED TAX ASSETS 5,143,680 3,857,000
------------ ------------
Deferred income tax liabilities:
Depreciation (1,526,000) -
Interest rate cap agreement (58,000) (1,416,000)
------------ ------------
TOTAL DEFERRED TAX LIABILITIES (1,584,000) (1,416,000)
------------ ------------
TOTAL NET DEFERRED
TAX ASSETS $ 3,559,680 $ 2,441,000
============ ============
NOTE G - LAND LEASE COMMITMENT
During 1975, the Company completed construction of an eleven-story exhibition
building. The building is constructed on land leased from the City of High
Point, North Carolina under a noncancelable lease. The lease is for an initial
term of fifty years with three options to renew for periods of ten years each
and a final renewal option for nineteen years. Annual rental under the lease is
$152,234 as of October 31, 2002 and is subject to adjustment at the end of each
five-year period, such adjustment being computed as defined in the lease
agreement. As part of the lease agreement, the Company constructed a theater
complex for public use and office space for use by the City of High Point on the
lower levels of the building. Annual rental cash payments over the initial
fifty-year lease term are being reduced by $39,121 which represents amortization
of the cost of the theater and office complex constructed for the City of High
Point. At the termination of the lease, the building becomes the property of the
City of High Point. Under the terms of the lease, the Company is responsible for
all expenses applicable to the exhibition portion of the building. The City of
High Point is responsible for all expenses applicable to the theater complex and
office space constructed for use by the City.
NOTE H - RETIREMENT EXPENSE
Amounts expensed under the Company's retirement plans amounted to $790,130,
$350,669 and $394,166 for the years ended October 31, 2002, 2001 and 2000,
respectively, including $601,252, $179,200 and $240,796 under the supplemental
retirement benefits plan for the years ended October 31, 2002, 2001 and 2000,
respectively.
Page 15
F-16
INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
NOTE H - RETIREMENT EXPENSE (CONTINUED)
During 2002, the Company accelerated the normal retirement date for one of its
key employees covered under the nonqualified supplemental retirement plan
resulting in a substantial increase in expense for the year.
NOTE I - RENTALS UNDER OPERATING LEASES
The Company's leasing operations consist principally of leasing exhibition
space. Property on operating leases consists of substantially all of the asset
"buildings, exclusive of theater complex" included on the consolidated balance
sheets. Accumulated depreciation on this property amounted to $45,154,925 at
October 31, 2002 and $42,925,163 at October 31, 2001. Leases are typically for
five-year periods and contain provisions to escalate rentals based upon either
the increase in the consumer price index or increases in ad valorem taxes,
utility rates and charges, minimum wage imposed by federal and state
governments, maintenance contracts for elevators and air conditioning,
maintenance of common areas, social security payments, increases resulting from
collective bargaining contracts, if any, and such other similar charges and
rates required in operating the Company. Tenants normally renew their leases.
The following is a schedule of minimum future rentals under noncancelable
operating leases as of October 31, 2002, exclusive of amounts due under
escalation provisions of lease agreements:
Year Ending October 31,
2003 $ 28,907,366
2004 25,351,016
2005 17,061,970
2006 6,587,870
2007 1,549,702
-------------
Total minimum future rentals $ 79,457,924
=============
Rental income includes contingent rentals under escalation provisions of leases
of $1,380,026, $1,164,693 and $823,536 for the years ended October 31, 2002,
2001 and 2000, respectively. Rental income from related parties amounted to
$647,926, $2,682,719 and $2,374,813 for the years ended October 31, 2002, 2001
and 2000, respectively.
NOTE J - CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash deposits in excess of federally insured
limits and trade accounts receivable from customers predominantly in the Home
Furnishings Industry. As of October 31, 2002, the Company's bank balances
exceeded federally insured limits by $15,861,894. The Company's trade accounts
receivable are generally collateralized by merchandise in leased exhibition
spaces which is in the Company's possession.
Page 16
F-17
INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
NOTE K - STOCKHOLDERS' DEFICIT
The stockholders' deficit resulted from the payment of dividends substantially
in excess of accumulated earnings. The dividends in excess of accumulated
earnings were financed, in part, with the proceeds of long-term debt. Although
interest on this debt will negatively impact future earnings, management
believes, based on projections of future operations and cash flows, that future
earnings will provide adequate equity capital for the Company and that operating
cash flows will be sufficient to provide for debt service and for the Company's
other financing and investing needs.
NOTE L - CONSTRUCTION COMMITMENTS
At October 31, 2002, the Company had outstanding commitments for building
improvements of approximately $419,000.
Page 17
FINANCIAL STATEMENTS
LRG Furniture, LLC
Years ended November 30, 2002 and 2001 with
Report of Independent Auditors
LRG Furniture, LLC
Financial Statements
CONTENTS
Report of Independent Auditors...........................................................1
Financial Statements
Balance Sheets...........................................................................3
Statements of Operations.................................................................4
Statements of Changes in Members' Deficit................................................5
Statements of Cash Flows.................................................................6
Notes to Financial Statements............................................................7
F-18
Report of Independent Auditors
Board of Directors and Members
LRG Furniture, LLC
We have audited the accompanying balance sheet of LRG Furniture, LLC (a Virginia
limited liability company) as of November 30, 2002, and the related statement of
operations, changes in members' deficit, and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit. The financial statements of LRG Furniture, LLC as of and for the
year ended November 30, 2001 were audited by other auditors who have ceased
operations and whose report dated December 21, 2001, expressed an unqualified
opinion on those financial statements before the revision described in Note 3.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of LRG Furniture, LLC as of
November 30, 2002, and the results of its operations and its cash flows for the
year then ended, in conformity with accounting principles generally accepted in
the United States.
As discussed in Note 3 to the financial statements, effective December 1, 2001,
the Company adopted Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets ("FAS 142").
As discussed above, the financial statements of LRG Furniture, LLC as of
November 30, 2001 and for the year then ended were audited by other auditors who
have ceased operations. As described in Note 3, these financial statements have
been revised to include the transitional disclosures of FAS 142. We applied
procedures with respect to the disclosures in Note 3 pertaining to 2001
financial statement revisions. In our opinion, the FAS 142 disclosures for 2001
in Note 3 are appropriate. However, we were not engaged to audit, review, or
apply any procedures to the 2001 financial statements of the Company other than
with respect to such disclosures and, accordingly, we do not express an opinion
or any other form of assurance on the 2001 financial statements taken as a
whole.
/s/ Ernst & Young LLP
December 20, 2002
1
F-19
The following report is a copy of a report previously issued by Arthur Andersen
LLP and has not been reissued by Arthur Andersen LLP. As discussed in the
Goodwill and Intangible Assets note, the corporation has presented the
transitional disclosures for 2001 required by SFAS No. 142. The Arthur Andersen
LLP report does not extend to these changes to the 2001 consolidated financial
statements. The adjustments to the 2001 consolidated financial statements were
reported on by Ernst & Young LLP as stated in their report appearing herein.
To the Members of LRG Furniture, LLC:
We have audited the accompanying balance sheets of LRG FURNITURE, LLC (a
Virginia limited liability company) as of November 30, 2001 and 2000, and the
related statements of operations and changes in members' deficit and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of LRG Furniture, LLC as of
November 30, 2001 and 2000, and the results of its operations and its cash flows
for the years then ended, in conformity with accounting principles generally
accepted in the United States.
/s/ Arthur Andersen LLP
Houston, Texas
December 21, 2001
F-20
LRG Furniture, LLC
Balance Sheets
NOVEMBER 30
ASSETS 2002 2001
----------------------------------
Current assets:
Cash and cash equivalents $ 1,520,991 $ 2,456,466
Accounts receivable, net of allowances of $74,259 and
$60,910 in 2002 and 2001, respectively 361,785 644,338
Merchandise inventories, net 5,864,637 10,119,254
Prepaid expenses 70,421 72,053
----------------------------------
Total current assets 7,817,834 13,292,111
Property and equipment:
Computer equipment 338,987 374,909
Equipment 210,181 355,885
Furniture and fixtures 532,686 1,027,155
Leasehold improvements 1,084,914 1,369,775
Vehicles 159,692 174,798
----------------------------------
2,326,460 3,302,522
Less - accumulated depreciation (679,031) (661,893)
----------------------------------
1,647,429 2,640,629
Other assets, net 74,149 776,379
----------------------------------
$9,539,412 $ 16,709,119
==================================
LIABILITIES AND MEMBERS' DEFICIT
Current Liabilities:
Current portion of long-term debt $ 2,591,592 $ 2,466,836
Accounts payable, primarily to Members 4,906,749 9,882,446
Customer deposits 1,545,986 2,390,342
Accrued liabilities 1,146,440 1,026,186
----------------------------------
Total current liabilities 10,190,767 15,765,810
Long-term debt 100,000 1,306,344
Notes payable to members and deferred interest payable 12,109,666 13,291,482
Commitments and contingencies - -
Members' deficit (12,861,021) (13,654,517)
----------------------------------
$ 9,539,412 $16,709,119
==================================
The accompanying notes to the financial statements are an integral part of these
balance sheets.
2
F-21
LRG Furniture, LLC
Statements of Operations
YEARS ENDED NOVEMBER 30
2002 2001
----------------------------------
Sales $ 45,735,769 $ 62,577,684
Cost of goods sold 24,181,141 34,638,022
----------------------------------
Gross profit 21,554,628 27,939,662
Operating and general expenses 22,718,156 33,553,602
----------------------------------
Loss from operations (1,163,528) (5,613,940)
Interest expense 816,764 1,134,030
----------------------------------
Net loss $ (1,980,292) $ (6,747,970)
==================================
The accompanying notes to the financial statements are an integral part of these
statements.
3
F-22
LRG Furniture, LLC
Statements of Changes in Members' Deficit
For the years ended November 30, 2002 and 2001
Members' deficit, November 30, 2000 $ (6,906,547)
Net loss-fiscal 2001 (6,747,970)
----------------
Members' deficit, November 30, 2001 (13,654,517)
Net loss-fiscal 2002 (1,980,292)
Members' contributions 2,773,788
----------------
Members' deficit, November 30, 2002 $ (12,861,021)
================
The accompanying notes to the financial statements are an integral part of these
statements.
4
F-23
LRG Furniture, LLC
Statements of Cash Flows
YEARS ENDED NOVEMBER 30
2002 2001
-----------------------------------
Cash flows from operating activities:
Net loss $ (1,980,292) $ (6,747,970)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 306,786 828,786
Loss on sale of property and equipment - 235,312
Changes in operating assets and liabilities, net of
effects from acquisitions and divestitures:
Accounts receivable (60,947) 36,829
Merchandise inventories 411,343 2,173,743
Prepaid expenses (24,165) 39,757
Accounts payable and accrued liabilities (1,372,701) (970,878)
Customer deposits 87,563 (739,389)
Other 17,414 (5,049)
-----------------------------------
Net cash used in operating activities (2,614,999) (5,148,859)
-----------------------------------
Cash flows from investing activities:
Purchases of property and equipment (214,728) (206,232)
Proceeds from sale of certain assets, net 228,263 204,389
-----------------------------------
Net cash used in investing activities 13,535 (1,843)
-----------------------------------
Cash flows from financing activities:
Proceeds from long-term debt - 500,000
Repayment of long-term debt - (1,827,320)
Proceeds from notes payable to Members 1,322,990 4,100,000
Increase in deferred interest payable 342,999 643,334
-----------------------------------
Net cash provided by financing activities 1,665,989 3,416,014
-----------------------------------
Net decrease in cash (935,475) (1,734,688)
Cash and cash equivalents, beginning of year 2,456,466 4,191,154
-----------------------------------
Cash and cash equivalents, end of year $ 1,520,991 $ 2,456,466
===================================
Supplemental disclosure of cash flow information - cash
paid during the year for interest $ 297,545 $ 479,430
===================================
The accompanying notes to the financial statements are an integral part of these
statements.
5
F-24
LRG Furniture, LLC
Notes to Financial Statements
November 30, 2002 and 2001
1. ORGANIZATION AND OPERATIONS
LRG Furniture, LLC (the "Company") was formed as a limited liability company
under the laws of Virginia on November 29, 1999. The Company was formed as a
joint venture between Bassett Furniture Industries, Inc. ("Bassett") and Bassett
Direct Plus Texas, LLC ("BDPT") (collectively referred to herein as the
"Members"). Bassett and BDPT were credited with 51% and 49%, respectively, of
the combined members' equity of $2,677,489 at the date of formation.
The Company currently operates eight retail furniture stores in Texas and
Nevada. These stores operate under the "Bassett Furniture Direct" name and
substantially all of their purchases are contractually obligated from Bassett
and its affiliates.
2. CONTINUING OPERATIONS
The Company has experienced significant losses from operations since inception.
The Company incurred a net loss of $1,980,000 and $6,748,000 in the years 2002
and 2001, respectively, and has Members' deficit of $12,861,000 and $13,655,000
as of November 30, 2002 and 2001, respectively. Management has implemented a
profit improvement program that includes evaluation and realignment of the
Company's business to improve profitability. This program has resulted in
significant operational changes, overall downsizing of the Company's
administrative and operating overhead and disposals of selected stores (see Note
10). These store disposals have left the Company with eight stores in the Texas
and Nevada markets. As a result of these actions, the Company expects to
substantially reduce losses from operations, however, there can be no assurances
that management's program will be successful.
The Members have historically provided, and are currently providing, sufficient
financial support to the Company to fund the Company's obligations and working
capital requirements as those obligations become due. The Members loaned a total
of $4,100,000 to the Company in 2001. Management of Bassett has committed to
provide the necessary level of financial support to the Company to enable it to
pay its obligations as they become due through November 30, 2003. In addition,
Bassett has guaranteed repayment of all of the Company's third-party long-term
debt.
6
F-25
LRG Furniture, LLC
Notes to Financial Statements (continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
For comparative purposes, certain amounts in the 2001 financial statements have
been reclassified to conform with the 2002 presentation.
CASH AND CASH EQUIVALENTS
Cash includes cash on hand, cash in banks and deposits in-transit from credit
card companies.
REVENUE RECOGNITION AND CONCENTRATION OF CREDIT RISK
The Company recognizes revenue upon the delivery of products to its customers.
There is no concentration of credit risk to any one customer. Allowances are
provided for estimated losses associated with anticipated future returns of
products sold by the Company and inability of customers to pay balances due.
Actual product returns and cash collections could differ from management's
estimates making it reasonably possible that a change in these estimates could
occur in the near term.
MERCHANDISE INVENTORIES
Merchandise inventories are stated at the lower of first-in, first-out (FIFO)
cost or market. Allowances are established to reduce the cost of excess and
obsolete inventories to their estimated net realizable value. Shipping and
handling costs associated with inbound freight are included in cost of sales and
amounts related to merchandise inventory on hand at year-end are capitalized in
merchandise inventories.
7
F-26
LRG Furniture, LLC
Notes to Financial Statements (continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is provided using the
straight-line method over the following estimated useful lives:
Computer equipment 3-5 years
Store fixtures 7 years
Office furniture, fixtures and equipment 7 years
Leasehold improvements Life of lease
Vehicles 5 years
When property is sold or retired, the cost and accumulated depreciation are
removed from the accounts and the resulting gain or loss is recognized in the
statement of operations and changes in members' equity. Expenditures for
maintenance and repairs are charged to operations as incurred.
OTHER ASSETS
Other assets were comprised primarily of an assumed lease contract with an
independent third party with terms that were favorable to its local market value
and refundable deposits with various utilities and property lessors. The
favorable lease contract had a gross balance of $758,867 amortized over the
lease term, which was 15 years. Accumulated amortization related to this
favorable lease contract was $107,136 in 2001. These deposits were refundable at
the discretion of the utility or lessor as applicable. This lease contract was
sold during 2002 as part of the stores that were sold to Bassett (see Note 10).
LONG-LIVED ASSETS
The Company applies Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," which requires that long-lived assets and certain identifiable
intangible assets to be held and used or disposed of by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In the event assets are
impaired, losses are recognized based on the excess carrying amounts over the
estimated discounted future cash flows or fair market value of the asset. SFAS
No. 121 also requires that assets to be disposed of be reported at the lower of
the carrying amount or the fair market value less selling costs. Management does
not believe there are any impairments of long-lived assets at November 30, 2002.
8
F-27
LRG Furniture, LLC
Notes to Financial Statements (continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PREOPENING EXPENSES
Preopening expenses, which consist primarily of payroll and occupancy costs, are
expensed as incurred. Preopening expenses were $193,000 and $177,000 in 2002 and
2001, respectively.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising expense was
$3,152,000 and $4,355,000 in 2002 and 2001, respectively.
SHIPPING AND HANDLING FEES AND COSTS
The Company includes shipping and handling fees billed to customers in net
sales. Shipping and handling costs associated with outbound freight are included
in operating and general expenses and totaled $4,207,000 and $6,442,000 in
fiscal 2002 and 2001, respectively.
CUSTOMER DEPOSITS
Customer deposits relate to amounts paid by customers to the Company at the time
they order goods. These deposits are applied to the ultimate sales price once
goods are delivered to the customer, and are recognized as revenue at that time.
INCOME TAXES
The Company is treated as a pass-through entity for federal income tax purposes.
As a result, the Company is not subject to income tax, but rather the liability
for income taxes from the taxable income generated by the Company is the
obligation of the Members. The Company is treated similarly for state income tax
purposes and, under current law in the states in which the Company is conducting
business, the Company is not subject to state income taxes. Accordingly, no
provision or benefit for federal and state income taxes has been recorded in the
accompanying financial statements.
9
F-28
LRG Furniture, LLC
Notes to Financial Statements (continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash, accounts receivable, accounts
payable and long-term debt. Because of their short maturity, the carrying
amounts of cash, accounts receivable and accounts payable approximate fair
value. The carrying amounts of long-term debt approximate fair value due to the
variable rate nature of bank debt and the Company's belief that its interest
rates on fixed interest rate debt due to its Members approximate fair value
rates for the Company.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2001, the Company adopted Statements of Financial Accounting Standards
("SFAS") No. 140, Accounting for Transfers and Servicing Financial Assets and
Extinguishment of Liabilities. This statement replaces SFAS No. 125, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, but carries over most of the provisions of SFAS No. 125 without
reconsideration. The impact of adopting this pronouncement was not material to
the Company's financial statements.
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, Business Combinations. This statement requires that all business
combinations initiated after June 30, 2001, be accounted for by the purchase
method, eliminating the availability of the pooling-of-interests method. In
addition SFAS No. 141 requires recognition of intangible assets apart from
goodwill if they meet certain criteria. Any acquisition activity performed by
the Company subsequent to the effective date of this statement will be accounted
for under the purchase method. The impact of adopting this pronouncement was not
material to the Company's financial statements.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. This statement supercedes Accounting Principles Board ("APB") Opinion
No. 17, Intangible Assets. SFAS No. 142 establishes new standards for measuring
the carrying value of goodwill related to acquired companies. Instead of
amortizing goodwill over a fixed period of time, the Company will instead
measure the fair value of acquiring businesses annually to determine if goodwill
has been impaired. The Company adopted this statement in fiscal 2002. The
Company did not hold any intangible assets during fiscal 2002, thus, the impact
of adopting this pronouncement was not material to the Company's financial
statements.
10
F-29
LRG Furniture, LLC
Notes to Financial Statements (continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
The following table adjusts the reported net income for the year ended November
30, 2001 to exclude amortization of goodwill:
Reported net loss $(6,748,000)
Amortization of goodwill 368,000
-------------------
Adjusted net loss $(6,380,000)
===================
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This statement supercedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of. In addition, this statement addresses the accounting for the
segment of a business accounted for as a discontinued operation under APB
Opinion 30, Reporting the Results of Operations--Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions. This statement would impact the Company's
reporting if the Company chose to discontinue an operation, and becomes
effective for the Company in fiscal 2003. Management does not expect the impact
of adopting SFAS No. 144 to be material to the Company's financial statements.
In July 2002, the FASB issued SFAS No. 146, Obligations Associated with Disposal
Activities, which is effective for disposal activities initiated after December
31, 2002. SFAS 146 requires that a liability for a disposal obligation should be
recognized and measured at its fair value when it is incurred. Adoption of the
pronouncement is not expected to have a material effect on the Company's
financial statements.
11
F-30
LRG Furniture, LLC
Notes to Financial Statements (continued)
4. LONG-TERM DEBT AND NOTES PAYABLE TO MEMBERS
Long-term debt and notes payable to Members at November 30, 2002 and 2001,
consisted of the following:
2002 2001
-----------------------------
Long-term debt:
Unsecured notes with a bank, payable in monthly
installments as discussed below from January 2001 to
June 2004, plus interest payable monthly ranging from
prime plus 0.5% to 1.0%, as defined in the agreement
(prime was 4.25% at November 30, 2002) $ 883,592 $ 3,773,180
Notes payable to Members:
Unsecured notes and deferred interest payable to Bassett,
accrues interest at 5.5% per year, principle and
interest due November 30, 2007 11,509,666 -
Unsecured notes and deferred interest payable to Bassett,
accrues interest at 8% per year, principle and interest
due November 1, 2004 - 10,316,667
Unsecured demand note payable to Bassett, does not bear
interest - 566,815
Unsecured note payable to BDPT, interest payable
quarterly at 8% per year, $1,808,000 due November 30,
2003, $600,000 due November 30, 2004 2,408,000 2,408,000
-----------------------------
Total notes payable to Members and deferred interest payable 13,917,666 13,291,482
-----------------------------
Total long-term debt and notes payable to Members 14,801,258 17,064,662
Less - Current maturities of long-term debt (2,591,592) (2,466,836)
-----------------------------
$12,209,666 $14,597,826
=============================
12
F-31
LRG Furniture, LLC
Notes to Financial Statements (continued)
4. LONG-TERM DEBT AND NOTES PAYABLE TO MEMBERS (CONTINUED)
The aggregate future annual maturities of long-term debt and deferred interest
payable at November 30, 2002 were as follows:
2003 $ 2,591,592
2004 700,000
2005 -
2006 -
2007 11,509,666
Thereafter -
--------------
$14,801,258
==============
At various dates from March 16, 2000, to August 15, 2000, the Company entered
into a total of eight unsecured notes with a bank for $606,000 each for a total
of $4,848,000. Each note has deferred principal payments of $22,444 beginning 9
months from the close of each note and continuing for 27 months thereafter. The
proceeds of these notes were used primarily to pay for new store opening
inventory. Bassett took over four of these notes during fiscal 2002 in
connection with the sale to Bassett of the associated North Carolina and
Virginia stores. The balance due on the remaining four notes at November 30,
2002 is $583,592. The balance that was due on the eight notes at November 30,
2001 was $3,142,256. Repayment of these loans is guaranteed by Bassett.
On June 4, 2001, the Company entered into an unsecured note with a different
bank for $500,000. The note has deferred principal payments of $16,667 beginning
6 months from the close of the note and continuing for 29 months thereafter. The
proceeds of this note were used primarily to pay for new store opening
inventory. The balance due on this note at November 30, 2002 and 2001 was
$300,000 and $500,000, respectively. Repayment of this loan is guaranteed by
Bassett.
In connection with the acquisition of a Louisville store in 2000 (which was
subsequently sold in 2001, as further discussed in Note 10), the Company assumed
a $252,500 unsecured note payable. The note required monthly principal payments
of $18,704 through June 30, 2002. The balance due on this note at November 30,
2001, was $130,924. Repayment of this note was guaranteed by Bassett. During the
acquisition of this store, the Company had also assumed an unsecured demand note
due to Bassett of $566,815, which was outstanding at November 30, 2001. The
store was sold in December 2001 and both of these notes were settled in
connection with the sale.
13
F-32
LRG Furniture, LLC
Notes to Financial Statements (continued)
4. LONG-TERM DEBT AND NOTES PAYABLE TO MEMBERS (CONTINUED)
On June 1, 2000, August 1, 2000, and May 1, 2001, the Company entered into three
unsecured notes with Bassett for $1,000,000, $5,000,000 and $3,500,000,
respectively. All of these notes had the same terms with deferred principal and
interest payments, all payable November 1, 2004. These Notes were refinanced
with Bassett in March 2002 to three unsecured notes for $3,100,000, $3,000,000,
and $4,250,000 with the same terms and deferred principal and interest
payments, all payable November 30, 2007 (see Note 10).
On November 30, 2001 and 2000, the Company entered into unsecured notes with
BDPT for $600,000 and $1,808,000, respectively. These unsecured notes contain
various restrictive covenants which include, among others, limitations on loans
and contingent liabilities except in the normal course of business. As of
November 30, 2002, the Company was in compliance with all of these covenants.
5. LEASE COMMITMENTS
The Company's administrative offices and retail locations are leased under
noncancelable operating lease agreements that expire from 2003 to 2016. Most of
these leases contain renewal options of 3 to 35 years. Certain of the lease
agreements for retail locations require the payment of contingent rentals based
on a percentage of sales above stipulated levels. No contingent rental expense
was incurred during 2002 or 2001. Certain of the lease agreements contain rent
escalation clauses that are not significant. Total rent expense for 2002 and
2001 was $4,243,000 and $6,242,000, respectively. Rent expense related to
locations owned or leased from the Members was $2,915,000 in 2002 and $3,952,000
in 2001.
14
F-33
LRG Furniture, LLC
Notes to Financial Statements (continued)
5. LEASE COMMITMENTS (CONTINUED)
Future minimum lease commitments for the office and retail locations under
operating leases as of November 30, 2002 are as follows:
BASSETT BDPT OTHER TOTAL
---------------------------------------------------------------
2003 $ 472,800 $ 2,699,136 $ 1,054,380 $ 4,226,316
2004 472,800 2,699,136 981,577 4,153,513
2005 472,800 2,699,136 806,088 3,978,024
2006 472,800 2,699,136 806,088 3,978,024
2007 472,800 2,699,136 599,824 3,771,760
Thereafter 4,609,800 20,826,662 455,301 25,891,763
---------------------------------------------------------------
$ 6,973,800 $ 34,322,342 $ 4,703,258 $ 45,999,400
===============================================================
6. OTHER RELATED-PARTY TRANSACTIONS
Substantially all purchases of merchandise inventories are made from Bassett and
its affiliates. These related entities sell products to the Company at prices
and terms equal to their normal selling prices and terms to unrelated entities.
Accounts payable due to these related parties was $3,895,118 and $9,230,000 in
2002 and 2001, respectively.
Interest expense on borrowings from related parties as described in Note 4 was
$723,132 in 2002 and $789,000 in 2001. Portions of these amounts are included in
notes payable to Members and deferred interest payable in the accompanying
balance sheets at November 30, 2002 and 2001, respectively.
The Company paid salaries to principals of the Members for administrative and
executive services in the amount of $300,000 in both 2002 and 2001.
7. BENEFIT PLAN
EMPLOYEE SAVINGS PLAN
The Company maintains a qualified 401(k) employee savings plan covering
substantially all full-time employees. Under the plan, employees may elect to
contribute up to 15% of their compensation annually. Under the plan, the Company
is not required to make contributions to the plan and no contributions were made
in 2002 or 2001.
15
F-34
LRG Furniture, LLC
Notes to Financial Statements (continued)
8. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS
The Company has certain obligations under various employment agreements through
November 30, 2004, that stipulate, among other things, certain levels of
compensation, bonus potential, other miscellaneous benefits and severance
arrangements. Potential contingent liabilities under these arrangements
approximate $450,000.
LITIGATION
The Company is involved in various legal proceedings encountered in the normal
course of business. In the opinion of management, based on the factors presently
known, the resolution of these matters will not have a material adverse effect
on the Company's financial position or future results of operations.
9. MEMBERS' DEFICIT
The Members' deficit account in the accompanying balance sheets reflects the
initial capital contributed by the Members of $2,677,489 and all losses of the
Company since inception. No distributions have been made to the Members since
inception. During 2002, Bassett contributed $2,774,000 to Members' deficit
consisting of $2,589,000 of debt and related interest of $185,000. The benefits
of this contribution were allocated proportionately to the Members based on the
Members' relative ownership interests in the Company. Under the terms of the
Limited Liability Company Agreement (the LLC Agreement), profits and losses and
any distributions of the Company are allocated to its members based upon the
Members' relative ownership interests in the Company and are made at the sole
discretion of the Board of Managers. Members may not assign or transfer their
rights without consent of the other Member. Both Members have two positions each
in the Board of Directors. There is a single class of Members with the same
rights, powers, duties, obligations, preferences and privileges. Each Member's
liability is limited to the sum of its capital contributions, its share of any
undistributed assets of the Company and any amounts previously distributed to it
from the Company.
The Company's operating agreement provides an option for BDPT to put its
ownership interest to Bassett at a specified formula during fiscal year 2007 and
2010, and conversely, providing a call option for Bassett to purchase BDPT's
interest in the Company at a separate formula during fiscal years 2008 through
2010.
As stated in the Articles of Organization, the latest date on which the Company
is to dissolve is November 30, 2019.
16
F-35
LRG Furniture, LLC
Notes to Financial Statements (continued)
10. SALES AND CLOSURE OF RETAIL STORES
The Company sold its retail furniture store in Knoxville, Tennessee, in January
2001 to an unrelated third party. Substantially all of the inventory in that
location had been sold through a liquidation sale that began in September 2000.
The lease for this location has been assumed by an unrelated third party, who
will utilize the store as a "Bassett Furniture Direct" store going forward.
Losses due to this transaction were insignificant.
The Company closed its retail furniture store in Fredericksburg, Virginia, in
March 2001. Substantially all of the inventory in that location was liquidated
by May 2001. The lease for this location was terminated by Bassett, the owner of
the property, concurrent with the closure of the store. Losses due to the
closure of this store were insignificant.
The Company sold its retail furniture store in Hickory, North Carolina, to
Bassett in July 2001. The principal terms of the agreement called for inventory
and property to be sold at net book value to Bassett. Additionally, Bassett
assumed the customer deposit liability and the lease of the retail facility in
Hickory. There was no gain or loss associated with this transaction.
The Company sold its retail furniture store in Greenville, South Carolina, to an
unrelated third party, in August 2001. The transaction involved the sale of
inventory, property, equipment and leasehold improvements. The buyer also
assumed the customer deposit liability and the future lease commitments for the
store. The Company incurred a loss of approximately $140,000 primarily related
to the disposal of property and equipment.
On December 15, 2000, the Company acquired the assets and assumed the
liabilities of a third-party Bassett Furniture Direct licensee in Louisville,
Kentucky, in a noncash transaction. The fair value of liabilities assumed
exceeded the fair value of assets acquired by $367,569, which was recorded as an
intangible asset. The intangible asset, which related primarily to acquired
order book and customer lists, was amortized as operating and general expenses
during 2001. As part of the transaction, Bassett purchased the related building
and was leasing it to the Company on a month-to-month basis. This store was sold
in December 2001 to an unrelated local furniture retailer. The purchaser bought
substantially all assets and assumed all liabilities of the store. Related
losses on this transaction were not significant.
17
F-36
LRG Furniture, LLC
Notes to Financial Statements (continued)
10. SALES AND CLOSURE OF RETAIL STORES (CONTINUED)
In March 2002, the Company and Bassett entered into an agreement to streamline
the operations of the Company. The agreement called for Bassett to refinance
debt due by the Company to Bassett. Also, as part of the agreement, the Company
sold five stores in North Carolina and Virginia to Bassett for the net book
value as of the effective date of the agreement of approximately $188,000
($5,405,000 of assets and $5,217,000 of liabilities) including bank debt of
approximately $1,481,000.
Sales related to all stores sold, closed or planned to be sold included in the
statement of operations and changes in Members' deficit for the years ended
November 30, 2002 and 2001, were $5,162,883 and $27,944,000, respectively and
related loss from operations for the years ended November 30, 2002 and 2001 were
$533,908 and $4,892,000, respectively.
During September 2002, the Company opened a new store in southwest Houston.
Subsequent to year-end, in December 2002, the Company opened a new store in
southeast Houston.
18
INDEX TO FORM 10-K SCHEDULE
Exhibit No. Report of Independent Public Accountants is included in the
Consent filed as Exhibit 23A to this Annual Report and is
incorporated herein by reference.
F - 37 Report of Previous Independent Public Accountants
F - 38 Bassett Furniture Industries, Inc. Schedule II - Analysis of
Valuation and Qualifying Accounts for the years ended
November 30, 2002, November 24, 2001 and November 25, 2000.
F-37
The following report is a copy of a report previously issued by Arthur Andersen
LLP and has not been reissued by Arthur Andersen LLP.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Bassett Furniture Industries,
Incorporated:
We have audited in accordance with auditing standards generally accepted in the
United States, the financial statements included in the Bassett Furniture
Industries, Incorporated Annual Report to Stockholders incorporated by reference
in the Form 10-K, and have issued our report thereon dated January 15, 2002. Our
audits were made for the purpose of forming an opinion on those statements taken
as a whole. The schedule on page F- is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Greensboro, North Carolina,
January 15, 2002
F-38
BASSETT FURNITURE INDUSTRIES, INC.
Schedule II
Analysis of Valuation and Qualifying Accounts
For the Years Ended November 30, 2002, November 24, 2001 and
November 25, 2000
(in thousands)
Additions
Balance Charged to Balance
Beginning Cost and End
Of Period Expenses Deductions Other Of Period
--------------- ------------- ------------ ------------------- ------------------
(1)
For the Year Ended November 25, 2000:
Reserve deducted from
assets to which it applies-
Allowance for doubtful accounts $2,558 $4,150 $(58) --- $6,650
=============== ============= ============ =================== ==================
Restructuring reserve $1,316 $880 $(853) --- $1,343
=============== ============= ============ =================== ==================
For the Year Ended November 24, 2001:
Reserve deducted from
assets to which it applies-
Allowance for doubtful accounts $6,650 $481 $(4,631) --- $2,500
=============== ============= ============ =================== ==================
Restructuring reserve $1,343 $2,402 $(3,163) --- $582
=============== ============= ============ =================== ==================
For the Year Ended November 30, 2002:
Reserve deducted from
assets to which it applies-
Allowance for doubtful accounts $2,500 $753 $(651) --- $2,602
=============== ============= ============ =================== ==================
Restructuring reserve $582 $1,251 $(1,684) --- $149
=============== ============= ============ =================== ==================
(1) Deductions are for the purpose for which the reserve was created.
INDEX TO EXHIBITS
Exhibit No.
13 Portions of the Bassett Furniture Industries, Incorporated
Annual Report to Stockholders for the year ended November 30,
2002
21 List of subsidiaries of registrant
23A Consent of Independent Auditors
23B Consent of Independent Auditors
23C Notice Regarding Lack of Consent of Arthur Andersen
99A Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99B Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
CONSOLIDATED BALANCE SHEETS
Bassett Furniture Industries, Incorporated and Subsidiaries
November 30, 2002, and November 24, 2001
(In thousands, except share and per share data)
ASSETS 2002 2001
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 1,371 $ 5,347
Accounts receivable, net 44,806 51,487
Inventories 43,449 32,244
Refundable income taxes 2,924 2,728
Deferred income taxes 3,600 3,841
Other current assets 6,816 10,609
--------- ---------
Total current assets 102,966 106,256
--------- ---------
PROPERTY AND EQUIPMENT, NET 90,542 90,407
--------- ---------
OTHER ASSETS
Investments 63,248 67,768
Investments in unconsolidated affiliated companies 4,383 3,984
Deferred income taxes 3,454 6,528
Notes receivable, net 18,761 14,551
Other, net 7,526 11,909
--------- ---------
97,372 104,740
--------- ---------
TOTAL ASSETS $ 290,880 $ 301,403
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 17,738 $ 15,010
Accrued liabilities 16,406 18,250
--------- ---------
Total current liabilities 34,144 33,260
--------- ---------
LONG-TERM LIABILITIES
Employee benefits 10,152 10,596
Long-term debt 3,000 7,482
Deferred revenue from unconsolidated affiliate 13,941 15,593
--------- ---------
27,093 33,671
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, par value $5 a share, 50,000,000 shares authorized,
issued and outstanding - 11,660,587 in 2002 and 11,727,192 in 2001 58,303 58,636
Retained earnings 169,789 173,011
Accumulated other comprehensive income -
unrealized holding gains, net of income tax 1,551 3,047
Unamortized stock compensation -- (222)
--------- ---------
Total stockholders' equity 229,643 234,472
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 290,880 $ 301,403
========= =========
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
6
CONSOLIDATED STATEMENTS OF INCOME
Bassett Furniture Industries, Incorporated and Subsidiaries For the years ended
November 30, 2002, November 24, 2001, and November 25, 2000 (In thousands,
except share and per share data)
2002 2001 2000
-------------------------------------------------
Net sales $ 323,487 $ 305,676 $ 367,444
Cost of sales 254,993 254,456 302,281
--------- --------- ---------
Gross profit 68,494 51,220 65,163
Selling, general and administrative expenses 60,987 54,477 61,854
Gains on sales of property and equipment, net -- (5,297) (175)
Restructuring and impaired asset charges 1,251 6,952 6,680
--------- --------- ---------
Income (loss) from operations 6,256 (4,912) (3,196)
Income from investments, net 2,342 7,497 14,011
Income (loss) from unconsolidated affiliated companies, net 4,715 (3,030) (809)
Interest expense (1,438) (2,819) (4,508)
Other income (expense), net (2,765) (420) 9,569
--------- --------- ---------
Income (loss) before income tax benefit (provision)
and cumulative effect of accounting change 9,110 (3,684) 15,067
Income tax (provision) benefit (2,369) 1,042 (4,671)
--------- --------- ---------
Income (loss) before cumulative effect of accounting change 6,741 (2,642) 10,396
Cumulative effect of accounting change, net of income tax -- -- (364)
--------- --------- ---------
Net income (loss) $ 6,741 $ (2,642) $ 10,032
========= ========= =========
Net income (loss) per share
Basic earnings (loss) per share:
Income (loss) before cumulative effect of accounting change $ 0.58 $ (0.23) $ 0.88
Cumulative effect of accounting change -- -- (0.03)
--------- --------- ---------
Net income (loss) per share $ 0.58 $ (0.23) $ 0.85
========= ========= =========
Diluted earnings (loss) per share:
Income (loss) before cumulative effect of accounting change $ 0.57 $ (0.23) $ 0.88
Cumulative effect of accounting change -- -- (0.03)
--------- --------- ---------
Net income (loss) per share $ 0.57 $ (0.23) $ 0.85
========= ========= =========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
7
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Bassett Furniture Industries, Incorporated and Subsidiaries
For the years ended November 30, 2002, November 24, 2001, and November 25, 2000
(In thousands, except share and per share data)
Additional
Common Stock paid-in Retained
Shares Amount Capital earnings
----------------- --------------- -------------- ---------------
BALANCE, NOVEMBER 27, 1999 12,094,769 $ 60,474 $ -- $ 187,973
Net Income -- -- -- 10,032
Net change in unrealized holding gains -- -- -- --
Comprehensive Income --
Dividends ($.80 per share) -- -- -- (9,497)
Issuance of common stock 9,288 46 82 --
Purchase and retirement of common stock (332,083) (1,660) (133) (2,923)
Issuance of restricted stock 4,724 24 51 --
Forfeitures of restricted stock (11,938) (60) -- (292)
Amortization of stock compensation -- -- -- --
----------- ----------- ----------- -----------
BALANCE, NOVEMBER 25, 2000 11,764,760 58,824 -- 185,293
Net Loss -- -- -- (2,642)
Net change in unrealized holding gains -- -- -- --
Comprehensive loss --
Dividends ($.80 per share) -- -- -- (9,378)
Issuance of common stock 25,932 130 150 --
Purchase and retirement of common stock (63,500) (318) (150) (262)
Amortization of stock compensation -- -- -- --
----------- ----------- ----------- -----------
BALANCE, NOVEMBER 24, 2001 11,727,192 58,636 -- 173,011
Net Income -- -- -- 6,741
Net change in unrealized holding gains -- -- -- --
Comprehensive Income --
Dividends ($.80 per share) -- -- -- (9,358)
Issuance of common stock 41,417 208 375 --
Purchase and retirement of common stock (89,519) (448) (375) (430)
Forfeitures of restricted stock (18,503) (93) -- (175)
Amortization of stock compensation -- -- -- --
----------- ----------- ----------- -----------
BALANCE, NOVEMBER 30, 2002 11,660,587 $ 58,303 $ -- $ 169,789
=========== =========== =========== ===========
Accumulated
Other Unamoritized
comprehensive stock
income compensation Total
-------------------- ------------------- ----------------
BALANCE, NOVEMBER 27, 1999 $ 7,993 $ (689) $ 255,751
Net Income -- -- 10,032
Net change in unrealized holding gains (2,575) -- (2,575)
-----------
Comprehensive Income 7,457
Dividends ($.80 per share) -- -- (9,497)
Issuance of common stock -- -- 128
Purchase and retirement of common stock -- -- (4,716)
Issuance of restricted stock -- (75) --
Forfeitures of restricted stock -- 352 --
Amortization of stock compensation -- 17 17
----------- ----------- -----------
BALANCE, NOVEMBER 25, 2000 5,418 (395) 249,140
Net Loss -- -- (2,642)
Net change in unrealized holding gains (2,371) -- (2,371)
-----------
Comprehensive loss (5,013)
Dividends ($.80 per share) -- -- (9,378)
Issuance of common stock -- -- 280
Purchase and retirement of common stock -- -- (730)
Amortization of stock compensation -- 173 173
----------- ----------- -----------
BALANCE, NOVEMBER 24, 2001 3,047 (222) 234,472
Net Income -- -- 6,741
Net change in unrealized holding gains (1,496) -- (1,496)
-----------
Comprehensive Income 5,245
Dividends ($.80 per share) -- -- (9,358)
Issuance of common stock -- -- 583
Purchase and retirement of common stock -- -- (1,253)
Forfeitures of restricted stock -- -- (268)
Amortization of stock compensation -- 222 222
----------- ----------- -----------
BALANCE, NOVEMBER 30, 2002 $ 1,551 $ -- $ 229,643
=========== =========== ===========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
8
CONSOLIDATED STATEMENTS OF CASH FLOWS
Bassett Furniture Industries, Incorporated and Subsidiaries
For the years ended November 30, 2002, November 24, 2001, and November 25, 2000
(In thousands)
2002 2001 2000
----------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ 6,741 $ (2,642) $ 10,032
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 10,804 11,316 10,032
Equity in undistributed income of investments (6,231) (3,784) (10,172)
Provision for write-down of property and equipment -- 4,550 5,800
Provision for write-down of affiliate investment -- 1,359 --
Provision for write-down of other receivable -- 1,200 --
Provision (income) for corporate owned life insurance 705 994 (1,687)
Provision for losses on trade accounts receivable 237 1,004 3,150
Net gain from sales of investment securities (707) (2,218) (2,356)
Net gain from sales of property and equipment -- (5,297) (175)
Compensation earned under restricted stock and stock option plans 222 173 17
Deferred income taxes 2,215 (824) 1,708
Changes in employee benefit liabilities (444) -- (351)
Changes in operating assets and liabilities, exclusive of assets and
liabilities acquired in a business combination:
Trade accounts receivable 5,874 10,178 (14,957)
Inventories (7,695) 17,957 (6,364)
Refundable income taxes 1,757 (2,148) 426
Other current assets 3,835 (739) (1,005)
Accounts payable and accrued liabilities (5,437) (8,796) (6,114)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 11,876 22,283 (12,016)
-------- -------- --------
INVESTING ACTIVITIES
Purchases of property and equipment (9,659) (12,332) (18,319)
Proceeds from sales of property and equipment -- 7,042 1,338
Proceeds from sales of affiliate companies -- -- 1,748
Proceeds from sales of investment securities 1,406 4,441 5,785
Dividends from investments 8,623 28,559 12,000
Investments in unconsolidated affiliated companies (2,419) -- (4,200)
Other, net 2,164 (559) (1,732)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 115 27,151 (3,380)
-------- -------- --------
FINANCING ACTIVITIES
Borrowings (repayments) under revolving credit arrangement, net (3,000) (39,000) 27,000
Repayment of note payable to bank (1,189) -- --
Borrowings (repayments) for real estate (1,482) 1,482 --
Issuance of common stock, net 315 280 128
Repurchases of common stock (1,253) (730) (4,716)
Cash dividends (9,358) (9,378) (9,497)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (15,967) (47,346) 12,915
-------- -------- --------
CHANGE IN CASH AND CASH EQUIVALENTS (3,976) 2,088 (2,481)
CASH AND CASH EQUIVALENTS -- BEGINNING OF YEAR 5,347 3,259 5,740
-------- -------- --------
CASH AND CASH EQUIVALENTS -- END OF YEAR $ 1,371 $ 5,347 $ 3,259
======== ======== ========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bassett Furniture Industries, Incorporated and Subsidiaries
(In thousands, except share and per share data)
A. Nature of Operations and Summary of Significant Accounting Policies
Bassett Furniture Industries, Incorporated (together with its consolidated
subsidiaries, "Bassett" or the "Company") is a manufacturer, retailer and
importer of quality home furnishings. Bassett's full range of furniture products
and accessories are sold through an exclusive network of 79 independently owned
and six company-owned retail stores known as Bassett Furniture Direct ("BFD")
and over 2,000 furniture and department stores located throughout the United
States. The Company has nine domestic manufacturing facilities.
PRINCIPLES OF CONSOLIDATION AND FISCAL YEAR
The consolidated financial statements include the accounts of Bassett Furniture
Industries, Incorporated and its wholly-owned subsidiaries. All significant
intercompany balances and transactions are eliminated in consolidation. The
Company's fiscal year ends on the Saturday nearest November 30. There were 53
weeks included in fiscal 2002 and 52 weeks each in fiscal 2001 and 2000.
CASH EQUIVALENTS
All temporary, highly liquid investments with original maturities of three
months or less are considered to be cash equivalents. The carrying amount of
these investments approximates fair value.
ACCOUNTS RECEIVABLE AND NOTES RECEIVABLE
Substantially all of the Company's trade accounts receivable and notes
receivable are due from customers located within the United States. The Company
maintains an allowance for doubtful accounts for estimated losses resulting from
the inability of its 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. Allowances for
doubtful accounts were $2,602 and $2,500 at November 30, 2002 and November 24,
2001, respectively. Accounts and notes receivable are generally secured by liens
on merchandise sold to licensees.
CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments that subject the Company to credit risk consist primarily
of cash and cash equivalents, investments, and accounts and notes receivable.
All cash equivalents and investments are managed within established guidelines.
Accounts and notes receivable subject the Company to credit risk partially due
to the concentration of amounts due from two customers. These customers
accounted for 14% and 25% of total accounts receivable at November 30, 2002, and
November 24, 2001, respectively. Sales to one of these customers (J.C. Penney
Corporation, Inc.) were 9%, 15% and 16% of the Company's total net sales in
2002, 2001 and 2000, respectively. Sales to the other major customer (LRG
Furniture, LLC, an affiliate of the Company) were 7%, 10% and 7% of net sales
for 2002, 2001 and 2000, respectively.
INVENTORIES
Inventories (finished goods, work in process and raw materials) are stated at
the lower of cost or market. Cost is determined for wholesale domestic furniture
inventories using the last-in, first-out ("LIFO") method. The cost of imported
and retail inventories is determined on a first-in, first-out ("FIFO") basis.
Inventories recorded under the LIFO method represented 73% and 87% of total
inventory at November 30, 2002 and November 24, 2001, respectively. The Company
estimates an inventory reserve for excess quantities and obsolete items based on
specific identification and historical write-offs, 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.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed over the
estimated useful lives of the respective assets utilizing straight-line and
accelerated methods. Buildings and improvements are generally depreciated over a
period of 10 to 39 years. Machinery and equipment are generally depreciated over
a period of 5 to 10 years. The Company periodically evaluates whether events or
circumstances have occurred that indicate long-lived assets may not be
recoverable or that the remaining useful life may warrant revision. When such
events or circumstances are present, the Company assesses 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 asset's carrying value over its fair value is recorded. The
long-term nature of these assets requires the estimation of its cash inflows and
outflows several years into the future and only takes into consideration
technological advances known at the time of the impairment test.
INVESTMENTS AND FINANCIAL INSTRUMENTS
The Company classifies its marketable equity securities as available-for-sale,
which are reported at fair value. Unrealized holding gains and losses, net of
the related income tax effect, on available-for-sale securities are excluded
from income and are reported as other comprehensive income in stockholders'
equity. Realized gains and losses from securities classified
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(In thousands, except share and per share data)
as available-for-sale are included in income and are determined using the
specific identification method for ascertaining the cost of securities sold. All
financial instru-ments are marked to market and recorded at their fair value.
Gains and losses on financial instruments that do not qualify as accounting
hedges are recorded as other income or expense. Alternative asset fund
investments are valued on the basis of net asset value, with the resultant
difference from the prior valuation included in the accompanying statements of
income. The net asset value is determined by the investee fund based on its
underlying financial instruments.
The Company accounts for derivative instruments in accordance with SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. The statement
requires that all derivative instruments (such as an interest rate swap
contract), be recorded as either assets or liabilities measured at fair value.
Changes in the derivative's fair value are to be recognized currently in
earnings unless specific hedge accounting criteria are met. The criteria for
cash flow and fair value hedges require that hedging relationships must be
designated and documented upon inception. The documentation must include the
consideration of the hedged item, the specific risk being hedged, identification
of the hedging instrument, the Company's risk management strategy, and how
effectiveness will be assessed. The effectiveness assessment must have a
historical basis that supports the assertion that the hedge will be effective
prospectively.
UNCONSOLIDATED INVESTMENTS IN AFFILIATED COMPANIES
The equity method of accounting is used for the Company's investments in
affiliated companies in which the Company exercises significant influence but
does not maintain operating control. For equity investments that have been
reduced to $0 through equity method losses, additional equity losses incurred
have reduced notes receivable from the investee.
INVESTMENT IN CORPORATE OWNED LIFE INSURANCE ("COLI")
The Company was the beneficiary of life insurance policies with a face value of
$1,918,269 at November 24, 2001, which were maintained to fund various employee
and director benefit plans. Policy loans outstanding of $23,821 at November 24,
2001, were recorded as a reduction in the policies' cash surrender value.
Effective July 31, 2002, the Company surrendered these policies. Net cash
surrender value of the policies included in other assets in the accompanying
consolidated balance sheets was $840 and $4,381 at November 30, 2002 and
November 24, 2001, respectively. Life insurance proceeds receivable included in
other current assets was $3,784 and $7,654 at November 30, 2002 and November 24,
2001, respectively. Net COLI income (expense), which includes premiums and
interest on policy loans, changes in cash surrender values, and life insurance
proceeds, is included in other income (expense) in the accompanying consolidated
statements of income.
REVENUE RECOGNITION
Revenue is recognized when the risks and rewards of ownership and title to the
product have transferred to the buyer. This generally occurs upon the shipment
of goods to independent dealers or, in the case of Bassett-owned retail stores,
upon delivery to the customer. Terms offered by the Company vary from 30 to 60
days. An estimate for returns and allowances has been provided on recorded
sales. Other incentives offered to customers include cash discounts and special
advertising arrangements. Advertising arrangements, which give customers
advertising allowances based on revenues, are recorded as a reduction to revenue
when the revenue is recognized.
INCOME TAXES
Deferred income taxes are provided based on the differences in timing of expense
and income recognition between income tax and financial reporting in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes." Income taxes are provided on undistributed earnings from
investments in affiliated companies. Refundable income taxes includes reserves
for estimated tax exposures.
EARNINGS PER SHARE
Basic earnings (loss) per share is determined by dividing net income (loss)
available to common shareholders by the weighted average number of shares of
common stock outstanding. Diluted earnings (loss) per share also considers the
dilutive effect for stock options and restricted stock.
STOCK-BASED COMPENSATION
As permitted by SFAS No. 123, "Stock-Based Compensation," the Company has
continued to measure compensation expense for its stock-based employee/director
compensation plans using the intrinsic value method prescribed by Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." Pro forma disclosures of net income and earnings per share are
presented as if the fair value-based method prescribed by SFAS No. 123 had been
applied in measuring compensation expense for the periods required by the
statement. The Company measures expense for stock options granted to
non-employees based on the fair value of the goods or services received.
SHIPPING AND HANDLING COSTS
Costs incurred to deliver retail merchandise to customers are expensed and
recorded in selling, general and administrative expense and totaled $281 for
2002. There were no such costs in 2001 and 2000.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(In thousands, except share and per share data)
ADVERTISING
Costs incurred for producing and communicating advertising are expensed when
incurred. Advertising costs totaled $5,350, $3,827 and $6,429 and are included
in selling, general and administrative expenses in 2002, 2001 and 2000,
respectively.
ACCOUNTING CHANGE FOR START-UP COSTS
In the first quarter of fiscal year 2000, the Company recognized a cumulative
effect of an accounting change, related to SOP 98-5, "Reporting on the Cost of
Start-up Activities," which amounted to $364 (net of income taxes of $171) or
$.03 per diluted share. Accordingly, the Company wrote-off the unamortized
balance of the previously capitalized store opening related start-up costs.
SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" in 1999. This statement establishes standards for the
reporting of information about operating segments in annual and interim
financial statements and requires restatement of prior year information.
Operating segments are defined as components of an enterprise for which separate
financial information is available that is evaluated regularly by the chief
operating decision maker(s) in deciding how to allocate resources and in
assessing performance.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and cash equivalents, accounts
receivable, notes receivable, investment securities, cost and equity method
investments, accounts payable and long-term debt. Because of their short
maturity, the carrying amounts of cash and cash equivalents, accounts
receivable, and accounts payable approximate fair value. The Company's cost and
equity method investments generally involve entities for which it is not
practical to determine fair values. The carrying amounts of notes receivable
approximate fair value as the effective rates for these instruments are
comparable to market rates at year-end. The carrying amounts of long-term debt
approximate fair value due to the variable rate nature of debt.
BUSINESS INSURANCE RESERVES
The Company has insurance programs in place to cover workers' compensation and
health insurance claims. The insurance programs, which are funded through
self-insured retention, are subject to various stop-loss limitations and
re-insured through a captive insurance program. The Company accrues estimated
losses using historical loss experience. Although management believes that the
insurance reserves are adequate, the reserve estimates are based on historical
experience, which may not be indicative of current and future losses. The
Company adjusts insurance reserves, as needed, in the event that future loss
experience differs from historical loss patterns.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, Business Combinations ("SFAS No. 141"). SFAS No. 141 establishes new
standards for accounting and reporting requirements for business combinations
and requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. SFAS No. 141 also requires that
acquired intangible assets be recognized as assets apart from goodwill if they
meet one of two specified criteria. Additionally, the statement adds certain
disclosure requirements to those required by Accounting Principles Board ("APB")
16, including disclosure of the primary reasons for the business combination and
the allocation of the purchase price paid to the assets acquired and liabilities
assumed by major balance sheet caption. This statement is required to be applied
to all business combinations initiated after June 30, 2001 and to all business
combinations accounted for using the purchase method for which the date of
acquisition is July 1, 2001 or later. Use of the pooling-of-interests method is
prohibited. The adoption of SFAS No. 141 did not have an impact on the Company's
consolidated results of operations or financial condition.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets
("SFAS No. 142"). SFAS No. 142, which must be applied to fiscal years beginning
after December 15, 2001, modifies the accounting and reporting of goodwill and
intangible assets. The pronouncement requires entities to discontinue the
amortization of goodwill, reallocate all existing goodwill among its reporting
segments based on criteria set by SFAS No. 142 and perform initial impairment
tests by applying a fair-value-based analysis on the goodwill in each reporting
segment. Any impairment at the initial adoption date shall be recognized as the
effect of a change in accounting principle. Subsequent to the initial adoption,
goodwill shall be tested for impairment annually or more frequently if
circumstances indicate a possible impairment.
Under SFAS No. 142, entities are required to determine the useful life of other
intangible assets and amortize the value over the useful life. If the useful
life is determined to be indefinite, no amortization will be recorded. For
intangible assets recognized prior to the adoption of SFAS No. 142, the useful
life should be reassessed. Other intangible assets are required to be tested for
impairment in a manner similar to goodwill. At November 24, 2001 and November
30, 2002, the Company had goodwill related to equity method investments in
affiliates of approximately $12,700, net of accumulated amortization. The
Company adopted SFAS No. 142 in the first fiscal quarter of 2002 and ceased the
amortization of goodwill.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(In thousands, except share and per share data)
The audited results of operations presented below for the year ended November
30, 2002 and adjusted results of operations for the years ended November 24,
2001 and November 25, 2000 reflect the operations of the Company had the Company
adopted the non-amortization provisions of SFAS No. 142 effective November 28,
1999:
2002 2001 2000
----------- ---------- ----------
Reported net income (loss) $ 6,741 $ (2,642) $ 10,032
Add: Goodwill amortization, net of tax -- 234 393
---------- ---------- ----------
Adjusted net income (loss) $ 6,741 $ (2,408) $ 10,425
========== ========== ==========
Basic earnings (loss) per share:
Reported net income (loss) $ 0.58 $ (0.23) $ 0.85
Add: Goodwill amortization, net of tax -- 0.02 0.03
---------- ---------- ----------
Adjusted net income $ 0.58 $ (0.21) $ 0.88
========== ========== ==========
Diluted earnings (loss) per share:
Reported net income (loss) $ 0.57 $ (0.23) $ 0.85
Add: Goodwill amortization, net of tax -- 0.02 0.03
---------- ---------- ----------
Adjusted net income $ 0.57 $ (0.21) $ 0.88
========== ========== ==========
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations ("SFAS No. 143"). SFAS No. 143 requires entities to record the fair
value of a liability for an asset retirement obligation in the period in which
it is incurred. SFAS No. 143 is effective for fiscal years beginning after June
15, 2002. The Company does not currently expect the adoption of SFAS No. 143 to
have a material impact on its consolidated results of operations or financial
position.
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets ("SFAS No. 144"). This Statement establishes a
single accounting model for the impairment or disposal of long-lived assets. As
required by SFAS No. 144, the Company adopted this new accounting standard in
fiscal year 2002. The adoption of SFAS No. 144 did not have a material impact on
the Company's consolidated results of operations or financial position.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections
("SFAS No. 145"). This statement eliminates an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions and establishes that gains and losses from
extinguishment of debt should be classified as extraordinary items only if they
meet the criteria of extraordinary. The Company does not currently expect the
adoption of SFAS No. 145 to have a material impact on its consolidated results
of operations or financial position.
In June 2002, the FASB issued SFAS No.146, Accounting for Costs Associated with
Exit or Disposal Activities ("SFAS No. 146"). This Statement requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. SFAS No. 146 also establishes that fair value is
the objective for initial measurement of the liability. The Company adopted this
standard by the required December 2002 deadline. The adoption of SFAS No. 146
did not have a material impact on the Company's consolidated results of
operations or financial position.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others ("FIN No. 45"). FIN No. 45 requires certain guarantees to
be recorded at fair value, which is different from current practice to record a
liability only when a loss is probable and reasonably estimable, as those terms
are defined in FASB Statement No. 5, Accounting for Contingencies. FIN No. 45
also requires the Company to make significant new disclosures about guarantees.
The disclosure requirements of FIN No. 45 are effective for the Company in the
first quarter of fiscal year 2003. FIN No. 45's initial recognition and initial
measurement provisions are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. The Company's previous accounting
for guarantees issued prior to the date of the initial application of FIN No. 45
will not be revised or restated to reflect the provisions of FIN No. 45. As part
of the Company's expansion strategy for its retail stores, Bassett guarantees
certain lease obligations and construction loan obligations of licensee
operators of the Bassett Furniture Direct program. The Company has not completed
the complex analysis required by FIN No. 45 and is unable to determine the
impact on its consolidated results of operations or financial position. See Note
O.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN No. 46"). FIN No. 46 clarifies the application
of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to
certain entities in which equity method investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN No. 46 may require
consolidation of variable interest entities, which were previously not
consolidated. FIN No. 46 is effective for the Company in the third quarter of
fiscal 2003 for entities created prior to February 1, 2003 and is effective in
the first quarter of fiscal 2003 for entities created after January 31, 2003.
The Company has not completed the complex analysis required by FIN No. 46 and
therefore has not determined whether LRG Furniture, LLC or any other affiliated
entity will need to be consolidated based on this Interpretation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(In thousands, except share and per share data)
For comparative purposes, certain amounts in 2001 and 2000 financial statements
have been reclassified to conform to the 2002 presentation.
B. Sale of Bedding Division
During 1999, the Company sold substantially all of the assets of its Bedding
Division to Premier Bedding Group LLC ("PBG"). The sale was effective April 30,
1999. The net assets sold, which totaled $8,400 were exchanged for $6,500 in
cash and a $1,900 convertible note receivable. During fiscal year 2000, PBG sold
the Bassett license to another third party and as part of the agreement, the
Company agreed to allow this third party to manufacture and market mattresses
utilizing the Company's Bassett brand name. Additionally, the $1,900 note
receivable was reduced to $800 and the related loss is recorded in other income
in the 2000 consolidated statement of income
C. Inventories
Inventories consist of the following:
November 30, November 24,
2002 2001
----------- ----------
Finished goods $ 39,863 $ 29,289
Work in process 3,424 4,084
Raw materials and supplies 14,991 16,046
Retail merchandise 3,271 441
-------- --------
Total inventories on first-in,
first-out cost method 61,549 49,860
LIFO adjustment (18,100) (17,616)
-------- --------
$ 43,449 $ 32,244
======== ========
The Company recorded a LIFO increment of $484 in fiscal 2002 associated within
the general increase in the FIFO cost of inventories. During 2001, the Company
liquidated certain LIFO inventories, which decreased cost of sales by
approximately $7,900 and partially offset losses associated with liquidating
certain finished goods inventories. The Company also liquidated certain LIFO
inventories in 2000, which decreased cost of sales by approximately $330.
D. Property and Equipment
November 30, November 24,
2002 2001
-------------- -------------
Land $ 2,391 $ 2,391
Buildings 49,987 50,725
Machinery and equipment 142,191 143,861
Retail real estate 32,817 28,655
--------- ---------
227,386 225,632
Less
Accumulated depreciation (136,844) (135,225)
--------- ---------
$ 90,542 $ 90,407
========= =========
Depreciation expense was $10,804, $10,602 and $9,916 in 2002, 2001 and 2000,
respectively. Retail real estate is under lease to licensee operators of the
Company's Bassett Furniture Direct stores as well as used in the operation of
the Company's corporately owned stores. Retail real estate is comprised of land
and buildings and had accumulated depreciation of $1,807 and $1,170 at November
30, 2002 and November 24, 2001, respectively.
E. Investments
The Company's investments consist of marketable equity securities and a 99.8%
interest in the Bassett Industries Alternative Asset Fund, L.P. ("Alternative
Asset Fund").
Investments in marketable equity securities are held as "available for sale".
Cost and unrealized holding gains of marketable equity securities are as
follows:
November 30, November 24,
2002 2001
----------- -----------
Cost $3,656 $4,355
Unrealized holding gains 2,424 4,761
------ ------
Fair value $6,080 $9,116
====== ======
The net change in unrealized holding gains is recorded in
accumulated other comprehensive income, net of taxes of $842 for 2002, $1,334
for 2001 and $1,448 for 2000.
The Alternative Asset Fund is a fund of funds investment that invests in a
variety of other private funds and partnerships, which employ a combination of
investment strategies including merger arbitrages, convertible arbitrages and
other market neutral investments. Risks to these funds arise from the possible
adverse changes in the market value of such interests and the potential
inability of counterparties to perform under the terms of the contracts. The
recorded investment in the Alternative Asset Fund was $57,168 and $58,652 at
November 30, 2002 and November 24, 2001, respectively. Earnings and dividends
were $1,516 and $3,000, respectively, for 2002, $5,062 and $3,500, respectively,
for 2001 and $10,981 and $12,000 for 2000.
F. Investments in Unconsolidated Affiliated Companies
INTERNATIONAL HOME FURNISHINGS CENTER:
The International Home Furnishings Center ("IHFC") owns and leases showroom
floor space in High Point, North Carolina. During 2001, IHFC refinanced its real
estate based on the market value of its properties which resulted in an
unusually large dividend paid to owners. The Company's share of this dividend
was $25,059. The dividend had no impact on the Company's earnings, as the
investment is accounted for under
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(In thousands, except share and per share data)
the equity method. The Company's investment reflects a credit balance of $13,941
and $15,593 at November 30, 2002 and November 24, 2001, respectively, and is
reflected in the liabilities section in the accompanying consolidated balance
sheets as deferred revenue from unconsolidated affiliate. The Company purchased
an additional interest in IHFC in December 2001 for $1,519 bringing its total
ownership interest to 46.9%. The Company's share of earnings and dividends from
this investment were $5,756 and $5,623, respectively, in 2002, $3,542 and
$25,059, respectively, in 2001 and $4,882 and $0, respectively, in 2000. The
Company leases 85,000 square feet of showroom space from IHFC, 2.5% of the total
space available for lease, at competitive market rates. The complete financial
statements of IHFC may be seen in an attachment to the Company's annual 10-K
filing.
Summarized combined financial information for IHFC is as follows:
2002 2001 2000
--------- ---------- ---------
Current assets $ 30,179 $ 39,210 $ 11,203
Non-current assets 50,722 52,578 49,281
Current liabilities 15,559 16,049 17,890
Long-term liabilities 133,236 133,066 48,494
Revenues 42,764 41,656 38,540
Net income 12,287 9,249 12,931
LRG FURNITURE, LLC:
Effective November 28, 1999, the Company combined its eight retail stores with
five stores owned and managed by a licensee and formed LRG Furniture, LLC
("LRG"). The Company retains a 51% ownership of the joint venture and accounts
for the investment using the equity method since the Company does not maintain
operating control of the joint venture. To capitalize the joint venture, the
Company contributed cash of $4,200 and net assets of $1,500. LRG incurred
start-up related losses in fiscal 2000. As a result of continuing losses in
2001, LRG sold three poor performing stores, closed one store and reduced
headcount at its corporate headquarters. Losses were reduced during 2001.
Effective March 4, 2002, the Company finalized an agreement (negotiated in late
2001) with LRG to restructure the balance sheet and streamline the operations of
LRG. As a result, Bassett recorded a loss of $1,359 in 2001 associated with this
restructuring. The note balance at November 24, 2001 reflects this transaction.
Also, as part of the agreement, the Company agreed to purchase five stores in
North Carolina and Virginia for net book value (which approximated $0). Included
in this transaction were inventories of $3,439, payables of $4,213 and notes
payable to bank of $1,189. The Company also converted $3,000 in accounts
receivable from LRG to a note receivable at the time the stores were acquired.
These transactions have been excluded from the consolidated statement of cash
flows for the year ended November 30, 2002. For the remainder of 2002, LRG
focused its efforts on opening its fourth and fifth stores in the Houston, Texas
market. The fourth Houston store opened in August 2002 and the fifth Houston
store opened subsequent to year-end, in December 2002. LRG had eight stores in
operation in Texas and Nevada at November 30, 2002. As a result of the balance
sheet restructuring, store sales and closures, new store openings in highly
profitable markets, and other cost reductions, LRG further reduced losses in
2002. The Company's share of losses from LRG was ($1,007) in 2002, ($3,855) in
2001 and ($5,062) in 2000. The Company's investment balance of ($2,828) and
($1,820) at November 30, 2002 and November 24, 2001 has been reclassified to
reduce the balance of the notes receivable from LRG at the end of each year.
Bassett is committed to providing financial support to LRG, as appropriate, over
the next twelve months. The complete financial statements of LRG may be seen in
an attachment to the Company's annual 10-K filing.
The Company had outstanding trade accounts receivable due from LRG of $4,257 and
$9,072 as of November 30, 2002 and November 24, 2001, respectively. In addition
the Company had notes receivable from LRG of $10,350 and $7,350 at the end of
2002 and 2001, respectively. These notes are included in notes receivable in the
accompanying consolidated balance sheets and have maturities of between three
and nine years and bear interest at various rates at or above market. Sales to
LRG were $21,697 in 2002, $31,259 in 2001 and $24,622 in 2000. These sales are
at prices equal to normal selling prices to unrelated entities. In addition to
accounts and notes receivable, the Company has lease and loan guarantees with
LRG in the amount of $9,222 and $13,969 at November 30, 2002 and November 24,
2001, respectively. The LRG operating agreement has certain put and call options
beginning in fiscal 2007.
Summarized financial information for LRG is as follows:
2002 2001 2000
------------ ----------- ------------
Current assets $ 7,818 $ 13,292 $ 16,765
Non-current assets 1,721 3,417 4,021
Current liabilities 10,191 15,766 16,412
Long-term liabilities 12,210 14,598 11,280
Revenues 45,736 62,578 63,059
Net loss (1,980) (6,748) (9,584)
OTHER AFFILIATES:
The Company owns 49% of Zenith Freight Lines, LLC, ("Zenith") which hauls
freight for many of the Company's customers. The Company's investment balance
was $4,084 at November 30, 2002 and $3,984 at November 24, 2001. The Company had
no significant transactions with this Company. The Company's share of earnings
(losses) from the investment in Zenith were $100, $0, and ($222) for 2002, 2001
and 2000, respectively.
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(In thousands, except share and per share data)
As part of the Company's retail expansion strategy, the Company made two equity
investments in licensee operators of the Company's BFD store program. The
Company purchased a 30% ownership interest in BFD Northeast, LLC ("BFDNE") for
$600. BFDNE is developing BFD retail stores in New England. As of November 30,
2002, BFDNE operates five BFD stores. Sales to BFDNE were $2,525 for 2002 and
the Company had notes and accounts receivables of $1,422 due from BFDNE at
November 30, 2002. The Company's share of start up losses amounted to $133 for
2002. The Company also purchased a 28% ownership interest in BFD Atlanta, LLC
("BFDA") for $300. BFDA is developing Bassett Furniture Direct retail stores in
metropolitan Atlanta, Georgia. BFDA's first store opened subsequent to November
30, 2002. The Company had no income or loss from this investment in fiscal 2002.
There are put and call options associated with each of these investments
beginning in 2007 through 2010.
Summarized combined financial information for Zenith, BFDNE, and BFDA, is as
follows:
2002 2001 2000
---------- ---------- ----------
Current assets $ 4,036 $ 2,441 $ 2,301
Non-current assets 6,975 6,708 8,000
Current liabilities 2,641 1,835 1,675
Long-term liabilities 4,881 5,231 6,453
Revenues 12,988 14,702 15,783
Net loss (239) (96) (653)
Prior to 2002, the Company owned 90% of the Accessory Group, LP, which provides
accessory-buying services principally to the Company's Bassett Furniture Direct
licensee stores. Since the Company did not exercise operational control, the
investment was accounted for using the equity method. During 2002, the Accessory
Group was reorganized and Bassett effectively took operational control of the
Accessory Group. As such, the Company now consolidates the results of operations
and balance sheet of the Accessory Group.
G. Accrued Liabilities
Accrued liabilities consist of the following:
November 30, November 24,
2002 2001
----------- -----------
Compensation and related
benefits $10,101 $10,048
Severance and employee
benefits 197 582
Legal and environmental 1,352 3,073
Dividends payable 2,328 2,343
Other 2,428 2,204
------- -------
$16,406 $18,250
======= =======
H. Income Taxes
A reconciliation of the statutory federal income tax rate and the effective
income tax rate, as a percentage of income before income taxes, is as follows:
2002 2001 2000
----------- --------- ----------
Statutory federal income
tax rate 35.0% (35.0)% 35.0%
Dividends received
exclusion (18.8) (31.9) (10.7)
Corporate owned life
insurance 2.7 30.6 3.2
State income tax,
net of federal benefit 2.8 8.1 3.2
Other 4.3 (0.1) 0.3
---- ---- ----
Effective income tax rate 26.0% (28.3)% 31.0%
==== ==== ====
The components of the income tax provision (benefit) are as follows:
Current: 2002 2001 2000
-------- -------- --------
Federal $ -- $ -- $ 2,636
State 154 (218) 327
Deferred:
Federal 1,986 (739) 1,533
State 229 (85) 175
------- ------- -------
Total $ 2,369 $(1,042) $ 4,671
======= ======= =======
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(In thousands, except share and per share data)
The income tax effects of temporary differences and carryforwards, which give
rise to significant portions of the deferred income tax assets and deferred
income tax liabilities are as follows:
November 30, November 24,
2002 2001
----------- ------------
Deferred income tax assets:
Trade accounts receivable $ 1,015 $ 1,287
Inventories 599 632
Property and equipment
writedowns 3,764 4,517
Retirement benefits 4,703 5,027
Net operating loss
carryforwards 3,328 4,158
Distribution from affiliates
in excess of income 6,304 3,291
Contribution and other
carryforwards 443 385
Alternative minimum tax credit
carryforward (no expiration) 1,869 3,458
Other 119 1,816
------- -------
Total gross deferred
income tax assets 22,144 24,571
------- -------
Deferred income tax liabilities:
Property and equipment 12,193 10,345
Undistributed affiliate
income 1,809 1,889
Prepaid expenses
and other 215 254
Unrealized holding gains 873 1,714
------- -------
Total gross deferred
income tax liabilities 15,090 14,202
------- -------
Net deferred income
tax assets $ 7,054 $10,369
======= =======
The Company has recorded a deferred income tax asset of $3,328 as of November
30, 2002, for the benefit of approximately $7,900 in federal and state income
tax loss carryforwards, which expire in varying amounts between 2014 and 2022.
Realization is dependent on generating sufficient taxable income prior to
expiration of the loss carryforwards. Although realization is not assured,
management believes it is more likely than not that all of the deferred income
tax assets will be realized. The amount of the deferred income tax assets
considered realizable, however, could be reduced if estimates of future taxable
income during the carryforward period are reduced.
Subsequent to November 30, 2002, the Company reached a final settlement with the
IRS regarding the non-deductibility of interest expense on loans associated with
the Company's corporate owned life insurance plan ("COLI" plan). The Company
had sufficient reserves on hand at November 30, 2002 to cover the negotiated
settlement amount and, as such, there will be no further tax related charges
associated with the COLI. Income taxes paid, net of refunds, during 2002, 2001
and 2000 were $350, $1,485 and $1,994, respectively.
I. Long-Term Liabilities and Retirement Plans
The Company has a qualified defined contribution plan (Employee
Savings/Retirement Plan) that covers all employees who elect to participate and
have fulfilled the necessary service requirements. Employee contributions to the
Plan are matched by the Company at the rate of 115% of the first 2% through 5%
of the employee's contribution, based on seniority. The Plan incorporates
provisions of Section 401(k) of the Internal Revenue Code. Employer matching
contributions to the Plan for 2002, 2001 and 2000 were approximately $1,462,
$1,445 and $1,853, respectively.
The Company has a supplemental retirement Income Plan that covers certain senior
executives and provides additional retirement and death benefits. Also, the
Company has a Deferred Compensation Plan for certain senior executives that
provides for voluntary deferral of compensation otherwise payable. The unfunded
future liability of the Company under these Plans is included as employee
benefits in long-term liabilities. The expenses for these plans for 2002, 2001,
and 2000 were $986, $1,168 and $1,184, respectively.
J. Long-term Debt
In October 2000, the Company entered into a three-year $70,000 revolving credit
facility with a new lender and three other participants. The facility is secured
by certain receivables and inventories of the Company with borrowing rates
ranging from LIBOR plus .625% to LIBOR plus 1.375%, based on various debt to
earnings ratios. The LIBOR rate was 1.94% at November 30, 2002. The Company
amended the facility in 2001 to address restrictive covenants and to reduce the
total facility to $60,000. Borrowings under the facility, which matures November
30, 2003, totaled $3,000 and $6,000 at November 30, 2002 and November 24, 2001,
respectively. After coverage for letters of credit, the Company had $33,955
available for borrowing under the facility at November 30, 2002. The average
interest rate was 3.49% for the year ended November 30, 2002.
The new facility contains, among other provisions, certain defined financial
requirements regarding leverage and fixed charge ratios and certain restrictions
involving future indebtedness and contingent liabilities.
The Company also had a mortgage liability of $1,482 outstanding at November 24,
2001. The interest rate on this mortgage was 8.75%. The mortgage was paid off
during 2002.
Interest paid during 2002, 2001 and 2000 was $465, $1,945 and $3,020,
respectively.
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(In thousands, except share and per share data)
K. Capital Stock and Stock Compensation
The Company has a Long Term Incentive Stock Option Plan that was adopted in 1993
(the 1993 Plan). Under the 1993 Plan, the Company has reserved for issuance
450,000 shares of common stock of which 2,279 were available for grant at
November 30, 1997. Options outstanding under the 1993 Plan expire at various
dates through 2007. The Company adopted a second Employee Stock Plan in 1998
(the 1998 Plan). Under the 1998 Plan, the Company has reserved for issuance
950,000 shares of common stock. The terms of the 1998 Plan also allow for the
issuance of the 2,279 shares, which remained as of December 1, 1997 from the
1993 Plan. In addition, the terms of the 1998 Plan allow for the re-issuance of
any stock options which have been forfeited before being exercised. An
additional 500,000 shares of common stock were authorized for issuance by the
Stockholders at the 1999 Annual Shareholders Meeting. Options granted under the
1998 Plan may be for such terms and exercised at such times as determined by the
Organization, Compensation, and Nominating Committee of the Board of Directors.
Shares available for grant under the 1998 Plan were 275,675 at November 30,
2002.
The Company has a Stock Plan for Non-Employee Directors, adopted in 1993 and
amended in 2000. Under this stock option plan, the Company has reserved for
issuance 125,000 shares of common stock, including an additional 50,000 shares
of common stock that were authorized for issuance by the Stockholders at the
2000 Annual Shareholders Meeting. Shares available for grant under the plan were
10,644 at November 30, 2002. Under the terms of this plan, each non-employee
director will automatically be granted an option to purchase 1,000 shares of
common stock on April 1 of each year. These options are exercisable for 10 years
commencing six months after the date of grant. Option activity under these plans
is as follows:
Weighted
Number average
of price
shares per share
------------------ ------------------
Outstanding at November 27, 1999 1,370,789 $ 27.46
Granted 526,672 14.87
Exercised -- --
Forfeited (173,210) 26.89
----------
Outstanding at November 25, 2000 1,724,251 23.67
Granted 55,500 12.84
Exercised -- --
Forfeited (115,259) 28.59
----------
Outstanding at November 24, 2001 1,664,492 23.11
Granted 358,500 14.93
Exercised (1,000) (11.91)
Forfeited (162,547) 28.50
----------
Outstanding at November 30, 2002 1,859,445 $ 21.07
==========
Exercisable at November 30, 2002 1,319,121 $ 23.66
Exercisable at November 24, 2001 1,167,471 $ 25.99
Exercisable at November 25, 2000 504,858 $ 24.62
For various price ranges, weighted-average characteristics of outstanding stock
options at November 30, 2002 were as follows:
Options Outstanding Options Exercisable
---------------------------------------- -----------------------------
Weighted
average
remaining Weighted Weighted
Range of contractual average average
exercise Number life exercisable Number exercisable
prices outstanding (years) price exercisable price
- ---------------------- ---------------------------------------- -----------------------------
$11.34 - $16.00 868,938 8.3 $14.69 340,614 $ 14.70
16.01 - 27.74 547,474 5.9 22.39 535,474 22.48
27.75 - 37.40 443,033 5.5 31.96 443,033 31.96
---------- ----------
1,859,445 6.1 1,319,121
========== ==========
The Company has elected to continue to account for stock options granted to
employees and directors under APB Opinion No. 25 and is required to provide pro
forma disclosures of what net income and earnings per share would have been had
the Company adopted the new fair value method for recognition purposes under
SFAS No. 123. The following information is presented as if the Company had
adopted SFAS No. 123 and restated its results:
2002 2001 2000
------------ ------------ ------------
Net income (loss)
As reported $ 6,741 $ (2,642) $ 10,032
Pro forma $ 6,118 $ (3,350) $ 9,082
Basic earnings per share:
As reported $ 0.58 $ (0.23) $ 0.85
Pro forma $ 0.52 $ (0.29) $ 0.77
Diluted earnings per share
As reported $ 0.57 $ (0.23) $ 0.85
Pro forma $ 0.52 $ (0.29) $ 0.77
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model and the following weighted average
assumptions:
2002 2001 2000
---------------- ---------------- ----------------
Expected lives 5 years 5 years 5 years
Risk-free interest rate 4.5% 4.4% 6.8%
Expected volatility 40.4% 39.0% 36.0%
Dividend yield 5.3% 6.2% 5.8%
The weighted average fair values of options granted during 2002, 2001 and 2000
were $3.77, $2.89 and $3.71, respectively.
During 2000 and 1998, the Company issued 4,724 and 16,836 shares respectively,
of restricted common stock under the 1998 Long Term Incentive Plan as
compensation for certain key salaried employees. These shares carry dividend and
voting rights. Sale of these shares is restricted prior to the date
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(In thousands, except share and per share data)
of vesting. Shares issued under this plan were recorded at their fair market
value on the date of the grant with a corresponding charge to stockholders'
equity. The unearned portion is being amortized as compensation expense on a
straight-line basis over the related vesting period. Compensation expense
related to these grants was $222 in 2002, $173 in 2001 and $17 in 2000.
The Company's Board of Directors adopted a Shareholders Rights Plan in 1998. If
a person or group acquires beneficial ownership of 20% or more of the common
stock outstanding, each right distributed under the plan will entitle its holder
(other than such person or group) to purchase, at the rights exercise price, a
certain number of shares of the Company's Common Stock or other securities.
The Company implemented an Employee Stock Purchase Plan (ESPP) in the fourth
quarter of fiscal year 2000. This plan allows eligible employees to purchase a
limited number of shares of the Company's stock at 85% of market value. Under
the plan the Company sold 20,635 and 18,837 shares to employees in 2002 and
2001, respectively. Under SFAS No. 123, no compensation expense is recognized
for shares purchased under the ESPP.
L. Other Income (Expense), Net
2002 2001 2000
----------- ----------- -----------
COLI $ (919) $ (994) $ 1,687
Captive insurance
dividend
-- 117 4,500
Real estate, net (741) (253) 1,053
Net gain
on financial instrument
-- 448 1,641
Other, net (1,105) 262 688
------- ------- -------
$(2,765) $ (420) $ 9,569
======= ======= =======
M. Restructuring, Impaired Asset and Other Unusual Charges
During fiscal year 2000, a decision was made to consolidate wood manufacturing
operations at two of the Company's facilities in Bassett, Virginia. This and
other reorganization actions resulted in the elimination of approximately 300
positions, including the severance of approximately 80 salaried employees. In
addition to the restructuring charges recognized in 2000, the Company recorded
unusual and nonrecurring charges of $600 for inventory losses and $3,150 for bad
debt expense. Inventory charges are related to the restructuring. The bad debt
charges were to increase reserves related to expected losses on the Company's
accounts receivable due to the pending bankruptcies of two national retailers.
Of the total restructuring, impaired asset and other unusual charges, $600 is
included in cost of sales, $3,150 is included in selling, general and
administrative expenses and $6,680 is included in restructuring and impaired
asset charges in the accompanying 2000 consolidated statement of income.
Restructuring activities continued in 2001. During the first quarter, production
was moved from one facility to another and a wood manufacturing facility was
identified for closure and was subsequently closed in the second quarter.
Additionally, 60 corporate office positions were eliminated in the first and
second quarters of 2001. Ongoing efforts to match production with demand, offer
more competitively priced products and operate more efficient manufacturing
facilities resulted in the announcement and subsequent closure of two additional
facilities in Bassett, Virginia during the third quarter of 2001. Production has
been moved to other manufacturing facilities in Virginia or has been outsourced.
Approximately 800 positions were eliminated as a result of this restructuring
activity. In addition to the restructuring charges recognized in 2001, the
Company recorded unusual and non-recurring charges of $1,051 for inventory
losses related to discontinued product. This amount is included in 2001 cost of
sales.
During the fourth quarter of 2002, the Company closed its California upholstery
plant and consolidated production in its two remaining upholstery manufacturing
facilities in North Carolina. The Company incurred restructuring charges of
$1,251, which relate entirely to severance and employee benefit costs for
approximately 200 employees. Based on estimated market values of the real estate
with a net book value of approximately $1,100, the company expects to realize a
gain upon disposition of the assets. The following summarizes the restructuring
and impaired asset charges:
2002 2001 2000
---------- --------- ---------
Non-cash writedown
of property and
equipment to
net realizable value $ -- $4,550 $5,800
Severance and related
employee benefit
costs 1,251 2,402 880
------ ------ ------
$1,251 $6,952 $6,680
====== ====== ======
The property and equipment write-downs were entirely related to closing three
facilities in Bassett, Virginia and were determined based on estimated
liquidation value of the associated machinery, equipment and buildings. Certain
production and some employees have been transferred to other production
facilities within the Company. Of the $880 in severance and employee benefit
costs expensed during fiscal 2000, $388 was paid during 2000 and the remaining
$492 was paid out in fiscal 2001. In 2001, $2,402 of severance and employee
benefit costs was expensed. Of the $2,402, $1,820
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(In thousands, except share and per share data)
was paid during fiscal 2001 and the remaining $582 was paid in fiscal 2002.
Fiscal 2002 restructuring costs of $1,251 were expensed during 2002 and $149 was
unpaid at November 30, 2002.
N. Contingencies
The Company is involved in various claims and actions, including environmental
matters, which arise in the normal course of business. Although the final
outcome of these matters cannot be determined, based on the facts presently
known, it is management's opinion that the final resolution of these matters
will not have a material adverse effect on the Company's financial position or
future results of operations.
O. Leases and Loan Guarantees
The Company leases land and buildings that are used in the operation of its
Company-owned retail stores as well as in the operation of independent licensee
BFD stores. Additionally, the Company leases showroom space from IHFC, which is
priced at the market rate. Lease terms range from three to 15 years and
generally have renewal options of between five and 15 years. The Company's
decision to exercise renewal options is primarily dependent on the level of
business conducted at the location and the profitability thereof. Some store
leases contain contingent rental provisions based upon sales volume. The
following schedule shows future minimum lease payments under non-cancelable
leases having remaining terms in excess of one year as of November 30, 2002:
2003 $ 3,521
2004 3,415
2005 3,124
2006 2,605
2007 2,405
Thereafter 15,357
---------------
$ 30,427
===============
In addition to subleasing certain of these properties, the Company owns retail
real estate, which it in turn leases to licensee operators of the Company's
Bassett Furniture Direct stores. The following schedule shows minimum future
rental income related to pass-through rental expense on subleased property as
well as rental income on real estate owned by Bassett.
2003 $ 1,896
2004 1,936
2005 1,875
2006 1,712
2007 1,551
Thereafter 10,064
---------------
$ 19,034
===============
Real estate expense (including associated real estate costs), net of real estate
income, was $741 in 2002 and $253 in 2001. Real estate income, net of real
estate expense, related to these leases was $1,053 in 2000.
As part of the Company's expansion strategy for its retail stores, Bassett has
guaranteed certain lease obligations and construction loan obligations of
licensee operators of the Bassett Furniture Direct program. Lease guarantees
range from one to ten years. The Company was contingently liable under licensee
lease obligation guarantees in the amount of $27,928 and $25,708 at November 30,
2002 and November 24, 2001, respectively.
The Company has also guaranteed loans from two banks to certain of its BFD
dealers to finance initial inventory packages for those stores. The total
contingent liability with respect to these loan guarantees as of November 30,
2002 and November 24, 2001, was $8,568 and $8,990, respectively.
P. Earnings Per Share
The following table reconciles basic and diluted earnings per share:
Earnings
Shares Net Income Per Share
------------ ------------ -----------
2002:
Basic EPS 11,697,519 $ 6,741 $ 0.58
Add effect of
dilutive securities:
Options and
restricted stock 57,742 - (0.01)
---------- ---------- ------
Diluted EPS 11,755,261 $ 6,741 $ 0.57
========== ========== ======
2001:
Basic EPS 11,701,842 $ (2,642) $(0.23)
Add effect of
dilutive securities:
Options and
restricted stock 9,644 - -
---------- ---------- ------
Diluted EPS 11,711,486 $ (2,642) $(0.23)
========== ========== ======
2000:
Basic EPS 11,812,962 $ 10,032 $ 0.85
Add effect of
dilutive securities:
Options and
restricted stock 9,070 - -
---------- ---------- -----=
Diluted EPS 11,822,032 $ 10,032 $ 0.85
========== ========== ======
Options to purchase 1,859,445 shares of common stock in 2002, 1,654,848 shares
in 2001, and 1,715,181 shares in 2000, were outstanding at the end of each
fiscal year that could potentially dilute basic EPS in the future.
Q. Subsequent Event
Subsequent to November 30, 2002, the Company announced that it would close its
wood manufacturing plant in Dublin, Georgia, in order to better match production
capacity to
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(In thousands, except share and per share data)
current demand levels. The Company anticipates recording a charge of
approximately $3,200 in the first quarter of 2003 representing a $1,500
write-down of property and equipment and $1,700 of severance and related
employee benefit costs for 320 employees associated with the closure.
R. Segment Information
The Company's primary business is wholesale home furnishings. The wholesale home
furnishings business is involved principally in the design, manufacture, sale
and distribution of furniture products to a network of independently-owned
stores and stores owned by the Company and by affiliates of the Company.
The wood segment is engaged in the manufacture and sale of wood furniture to
independent and affiliated retailers. The upholstery segment is involved in the
manufacture and sale of upholstered frames and cut upholstery items having a
variety of frame and fabric options. The import segment sources product
principally from Asia and sells these products to independent and affiliated
retailers.
The Company's "other" business segment consists of a contemporary furniture
business and corporate operations, including certain selling, general and
administrative expenses, are all included to reconcile segment information to
the consolidated financial statements.
The retail segment consists of the six corporately owned retail stores in
Virginia and North Carolina. Five of these stores were acquired from LRG
Furniture, LLC on March 4, 2002. The sixth store was acquired from LRG in the
previous year. Data related to this store was included in "other" for 2001.
Inventory profit elimination reflects the embedded wholesale profit in the
Company-owned store inventory that has not been realized. These profits will be
recorded when merchandise is shipped to the retail customer.
Restructuring, impaired fixed assets and other unusual charges are included for
2002, 2001 and 2000 as discussed in Note M to the consolidated financial
statements and are included below in the "other" segment.
Operating income by business segment is defined as sales less direct operating
costs and expenses. Identifiable assets are those assets used exclusively in the
operations of each business segment. Identifiable assets for the wood,
upholstery, import and retail segments consist of inventories and property,
plant and equipment.
2002
Wood Upholstery Import Other Wholesale
---------- ---------- --------- --------- ----------
Net sales $ 160,591 $ 105,562 $ 40,566 $ 8,523 $ 315,242
Operating income (loss) 15,713 14,373 9,129 (31,730) 7,485
Identifiable assets 63,256 14,369 13,720 195,572 286,917
Depreciation and amortization 2,997 954 -- 6,763 10,714
Capital expenditures 2,331 674 -- 6,654 9,659
Retail
Wholesale Retail Elimination Consolidated
----------- ---------- ----------- -------------
Net sales $315,242 $ 15,816 $ (7,571) $323,487
Operating income (loss) 7,485 (1,044) (185) 6,256
Identifiable assets 286,917 3,963 -- 290,880
Depreciation and amortization 10,714 90 -- 10,804
Capital expenditures 9,659 -- -- 9,659
2001
Wood Upholstery Import Other Consolidated
----------- ----------- ----------- ---------- ------------
Net sales $ 173,106 $ 90,117 $ 32,136 $ 10,317 $ 305,676
Operating income (loss) 10,194 9,209 6,941 (31,256) (4,912)
Identifiable assets 67,166 15,633 6,566 212,038 301,403
Depreciation and amortization 3,937 994 -- 6,385 11,316
Capital expenditures 2,112 334 -- 9,886 12,332
2000
Wood Upholstery Import Other Consolidated
----------- ------------ ------------ ----------- ------------
Net sales $ 226,013 $ 97,773 $ 30,985 $ 12,673 367,444
Operating income (loss) 26,143 8,024 7,504 (44,867) (3,196)
Identifiable assets 102,046 17,997 9,976 216,661 346,680
Depreciation and amortization 4,796 961 -- 4,275 10,032
Capital expenditures 5,772 2,111 -- 10,436 18,319
21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Bassett Furniture Industries,
Incorporated:
We have audited the accompanying consolidated balance sheet of Bassett Furniture
Industries, Incorporated and subsidiaries as of November 30, 2002, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The financial statements of
International Home Furnishings Center, Inc. (a corporation in which the Company
has a 47% interest), have been audited by other auditors whose report has been
furnished to us; insofar as our opinion on the consolidated financial statements
relates to the amounts included for International Home Furnishings Center, Inc.,
it is based solely on their report. The consolidated financial statements of
Bassett Furniture Industries, Incorporated and subsidiaries as of November 24,
2001, and for the two years in the period then ended were audited by other
auditors who have ceased operations and whose report dated January 15, 2002
expressed an unqualified opinion on those financial statements before the
revisions described in Note A.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit and the report of other auditors provide
a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Bassett Furniture Industries,
Incorporated and subsidiaries as of November 30, 2002, and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States.
As discussed in Note A to the consolidated financial statements, effective
November 25, 2001, the Company adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets ("FAS 142").
As discussed above, the consolidated financial statements of Bassett Furniture
Industries, Incorporated as of November 24, 2001 and for the two years in the
periods then ended were audited by other auditors who have ceased operations. As
described in Note A, these financial statements have been revised to include the
transitional disclosures of FAS 142. We applied procedures with respect to the
disclosures in Note A pertaining to 2001 and 2000 consolidated financial
statement revisions. In our opinion, the FAS 142 disclosures for 2001 and 2000
in Note A are appropriate. However, we were not engaged to audit, review, or
apply any procedures to the 2001 and 2000 financial statements of the Company
other than with respect to such disclosures and, accordingly, we do not express
an opinion or any other form of assurance on the 2001 and 2000 financial
statements taken as a whole.
/s/ Ernst & Young LLP
Greensboro, North Carolina,
January 7, 2003,
except for Note Q as to which the date is February 3, 2003
22
The following report is a copy of a report previously issued by Arthur Andersen
LLP and has not been reissued by Arthur Andersen LLP. As discussed in the
Goodwill and Intangible Assets note, the corporation has presented the
transitional disclosures for 2001 and 2000 required by SFAS No. 142. The Arthur
Andersen LLP report does not extend to these changes to the 2001 and 2000
consolidated financial statements. The adjustments to the 2001 and 2000
consolidated financial statements were reported on by Ernst & Young LLP as
stated in their report appearing herein.
To the Stockholders and Board of Directors of Bassett Furniture Industries,
Incorporated:
We have audited the accompanying consolidated balance sheets of Bassett
Furniture Industries, Incorporated (a Virginia corporation) and subsidiaries as
of November 24, 2001 and November 25, 2000, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended November 24, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Bassett Furniture Industries,
Incorporated and subsidiaries as of November 24, 2001 and November 25, 2000, and
the results of their operations and their cash flows for each of the three years
in the period ended November 24, 2001, in conformity with accounting principles
generally accepted in the United States.
/s/ ARTHUR ANDERSON, LLP
Greensboro, North Carolina,
January 15, 2002
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(In thousands, except share and per share data)
OTHER BUSINESS DATA
Bassett Furniture Industries, Incorporated and Subsidiaries
(dollars in thousands except per share data)
Selected Financial Data
2002 2001 2000 1999 1998
------------- ------------- ------------- ------------ ------------
Net sales $ 323,487 (2) $ 305,676 $ 367,444 $ 394,412(2)(3) $ 397,557
Cost of sales $ 254,993 $ 254,456 (1) $ 302,281 (1) $ 309,316 $ 323,904
Operating profit (loss) $ 6,256 (1) $ (4,912)(1) $ (3,196)(1) $ 12,474 $ 9,651
Other income, net $ 2,854 $ 1,228 $ 18,263 $ 13,744 $ 11,445
Income (loss) before income taxes $ 9,110 (1) $ (3,684)(1) $ 15,067 (1) $ 26,218 $ 21,096
Income taxes (benefit) $ 2,369 (1) $ (1,042)(1) $ 4,671 (1) $ 8,264 $ 5,379
Net income (loss) $ 6,741 (1) $ (2,642)(1) $ 10,032 (1) $ 17,954 $ 15,717
Diluted earnings (loss) per share $ 0.57 (1) $ (0.23)(1) $ 0.85 (1) $ 1.44 $ 1.20
Cash dividends declared $ 9,358 $ 9,378 $ 9,497 $ 9,983 $ 10,393
Cash dividends per share $ 0.80 $ 0.80 $ 0.80 $ 0.80 $ 0.80
Total assets $ 290,880 $ 301,403 $ 346,680 $ 342,829 $ 321,514
Long-term debt $ 3,000 $ 7,482 $ 45,000 $ 18,000 --
Current ratio 3.02 to 1 3.19 to 1 3.19 to 1 2.39 to 1 3.21 to 1
Book value per share $ 19.63 $ 20.04 $ 21.09 $ 20.46 $ 20.40
Weighted average number of shares 11,697,519 11,701,842 11,812,962 12,499,481 12,984,639
Quarterly Results of Operations
2002
----------------------------------------------------
FIRST SECOND THIRD FOURTH
----------------------------------------------------
Net sales $ 84,788 $ 80,904 $ 78,367 $ 79,428
Gross profit 16,728 18,449 16,584 16,733
Net income (loss) 2,912 2,880 (718) 1,667
Basic earnings (loss) per share 0.25 0.25 (0.06) 0.14
Diluted earnings (loss) per share 0.25 0.24 (0.06) 0.14
2001
----------------------------------------------------
FIRST SECOND THIRD FOURTH
----------------------------------------------------
Net sales $ 82,553 $ 73,765 $ 71,290 $ 78,068
Gross profit 14,559 11,093 10,157 15,411
Net income (loss) 2,252 (538) (2,834) (1,522)
Basic earnings (loss) per share 0.19 (0.05) (0.24) (0.13)
Diluted earnings (loss) per share 0.19 (0.05) (0.24) (0.13)
(1) See Note M to the Consolidated Financial Statements for a discussion of
restructuring, impaired fixed assets and unusual charges.
(2) Includes sales from corporately owned retail stores. See Note F to the
Consolidated Financial Statements.
(3) Includes sale of bedding, see Note B to the Consolidated Financial
Statements.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Bassett Furniture Industries, Incorporated and Subsidiaries
(dollar amounts in thousands)
OVERVIEW
Bassett Furniture Industries Inc., based in Bassett, Va., is a leading
manufacturer and marketer of branded home furnishings. Bassett's products,
designed to provide quality, style and value, are sold through Bassett Furniture
Direct(TM) stores, @t Home with Bassett(R) galleries, and other furniture and
department stores.
The Bassett Furniture Direct store program, which began in 1997, entailed not
only the creation of a new prototype store, but also includes an internal,
cultural transformation aimed at re-focusing company practices and strategies to
the ultimate end user, the consumer. The strategy also focused on re-styling the
Bassett lines and suites with accessories. Bassett Furniture Direct acts as both
a furniture design center and a moderate price point leader - two
characteristics that combined with custom product and quick delivery offer the
Company a unique selling proposition in the furniture industry.
FISCAL 2002 COMPARED TO FISCAL 2001
2002 marked a year of good progress in the Company's continuing transition from
solely a furniture manufacturer to a manufacturer/sourcer/retailer of home
furnishings. Progress was made in several key areas most notably the Bassett
Furniture Direct retail store program and the profitability of the Upholstery
and Import segments. Challenges were presented by sales declines with JCPenney
and capacity issues within the Wood division. These issues are further discussed
in the narrative below.
Subsequent to November 30, 2002, the Company announced that it would close its
Dublin, Georgia wood manufacturing facility. Manufacture of certain products
formerly produced at this facility will be transferred to a facility in Virginia
or will be sourced from foreign manufacturers. The Company will record a charge
of approximately $3,200 in the first quarter of 2003 related to severance and a
write-down of property and equipment to net realizable value.
Bassett reported net sales for 2002 of $323,487, an increase of $17,811 or 5.8%
from sales levels attained in fiscal 2001. The increase reflects a 28% increase
in sales through the Bassett Furniture Direct (BFD) store channel, partially
offset by a $16,994 or 38% decrease in sales to the Company's largest customer,
JCPenney. The majority of the sales decline with JCPenney was expected and
further attrition is planned for 2003. Sales to JCPenney were 9% and 15% of
sales for fiscal 2002 and 2001, respectively. Also included in 2002 results is
$8,245 (net of sales elimination of $7,571) of retail sales from the Company's
corporately owned BFD stores. The Company was able to end attrition in sales to
general furniture stores by successfully implementing its Five Star quick ship
delivery program. This innovative program allows for shipment of eligible
product to qualified dealers within 14 days and billings inclusive of freight.
Also, sales through exchanges located on military bases increased by $4,772 or
61% over 2001 sales levels reflecting the conversion of many of these locations
to @t Home galleries (the Company's gallery program). The Company plans to
continue to develop products and programs specifically targeted to @t Home
galleries and participating Five Star dealers as well as to the BFD stores.
The BFD store channel continues to be the most significant growth vehicle for
the Company. During 2002, licensees opened 22 new licensee BFD stores and closed
four licensee BFD stores for a net increase of 18 stores. There were 85 stores
in operation at November 30, 2002, six of which were corporately owned. The
Company is committed to the financial success of its BFD licensee stores. In
that regard, during 2002, the Company continued efforts to strengthen its retail
organization and to address issues related to the profitability of its retail
licensee network. New licensee candidates are required to meet rigorous
financial and operational requirements before being approved as licensees. In an
effort to further enhance the economics of BFD store operators, the Company
began implementation of a "ship complete" program in the latter half of 2002.
Under this program, orders for a single customer will be consolidated at the
Company's Martinsville Distribution Center and shipped to the dealer when all
items on that order are ready to ship. This will also allow BFD operators to
reduce their inventory holding costs. The Company's service levels improved
dramatically in 2002 as evidenced by a full percentage point reduction in the
returns allowance, from 4% of sales to 3% of sales.
Gross margin, selling, general and administrative (SG&A) expenses; and operating
income (loss) were as follows for the years ended November 30, 2002 and November
24, 2001:
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Continued
(dollar amounts in thousands)
2002 2001
------------------- -------------------
Net sales $ 323,487 100.0% $ 305,676 100.0%
--------- ----- --------- -----
Gross profit 68,494 21.2% 51,220 16.8%
SG&A 60,987 18.9% 54,477 17.8%
Gains on sales of
property and equipment
-- 0.0% (5,297) -1.7%
Restructuring and
impaired asset charges 1,251 0.4% 6,952 2.3%
--------- ----- --------- -----
Operating profit (loss) $ 6,256 1.9% $ (4,912) -1.6%
========= ===== ========= =====
The Company improved gross margin percentage by 4.4 points over 2001 levels.
This improvement is reflective of the restructuring and cost cutting efforts
completed in 2001, improvements in upholstery and import margins, as well as the
inclusion of corporately owned retail store results beginning March 1, 2002.
Inclusion of the retail results represented 1.2 points of the 4.4 point
improvement, while manufacturing efficiencies and the mix of imported products
contributed the remaining 3.2 points.
Manufacturing efficiency gains in the Company's upholstery division brought
about by the implementation of cellular manufacturing over the past several
years led to management's decision to close its California upholstery plant in
October of 2002. Upholstery production has been consolidated in its two
remaining North Carolina facilities. The Company recorded $1,251 in
restructuring charges for the third quarter of 2002 entirely related to
severance and employee benefits associated with the cessation of operations in
California. Nearly the entire volume formerly produced at the California plant
has been absorbed into the production capacity of the North Carolina upholstery
facilities without the need for additional staffing, thereby dramatically
improving the manufacturing efficiencies of the remaining facilities. The
Company is holding the related property for sale and expects to realize a gain
on the disposition of California assets in the next twelve months.
During 2001, the Company continued its efforts to eliminate excessive costs, to
more efficiently structure manufacturing capacities to match current business
levels and to stay competitive with product sourced overseas. The table plant
was closed and production of occasional tables was moved to another facility or
outsourced. The chair plant and a rough-end facility were permanently closed and
production was either transferred to other facilities or sourced to foreign
manufacturers. Approximately 800 salaried and hourly positions were eliminated
in fiscal 2001. Restructuring activities in 2001 resulted in a charge to
earnings of $6,952, of which $4,550 was related to the non-cash write-down of
property, plant and equipment to net realizable value and $2,402 was associated
with severance and employee benefits.
SG&A expenses increased by $6,510 to $60,987 over the 2001 level. As a
percentage of sales, SG&A climbed 1.1 points from 17.8% in 2001 to 18.9% in
2002. The increase in SG&A expense is entirely the result of the inclusion of
corporate store retail operations for nine months in 2002. SG&A expense related
to the Company's corporate retail store operation totaled $8,148. Manufacturing
SG&A expenses actually declined by $1,638, primarily as a result of
restructuring efforts completed in 2001 which resulted in reduced headcount and
better spending control in all areas of the business. Manufacturing SG&A as a
percentage of manufacturing sales declined from 17.8% in 2001 to 16.8% in 2002.
Gains on sales of property and equipment in 2001 relate to the sale of the
Thomasville, North Carolina showroom, a warehouse in Los Angeles, California and
two former manufacturing facilities in the Hickory, North Carolina area.
Income from investments consists of dividends and realized gains associated with
the Company's portfolio of marketable equity securities as well as earnings from
the Company's investment in the Bassett Industries Alternative Asset Fund
(Alternative Asset Fund). Income from investments decreased by $5,155 in 2002
from 2001 levels due to a decrease in returns from the Alternative Asset Fund
and reduced realized gains from sales of marketable equity securities. Income
(loss) from unconsolidated affiliated companies include the Company's share of
earnings or loss from investments in LRG Furniture, LLC (LRG) and the
International Home Furnishings Center (IHFC) among other investments.
Performance improved from a loss of ($3,030) in 2001 to income of $4,715 in
2002. The Company's share of the loss from LRG improved by $2,848 over that
recorded in 2001. Also, the restructuring of LRG debt forced the Company to take
an additional charge of $1,359 in 2001. Results from the Company's investment in
IHFC improved to $5,756 in 2002, $2,214 better than 2001 results. A detail of
other income (expense) may be seen in Note L to the Consolidated Financial
statements.
The effective income tax provision (benefit) rate was 26% in 2002 and (28%) in
2001. The income tax provision (benefit) rates were lower than statutory rates
primarily due to exclusions for tax exempt income and dividends received.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Continued
(dollar amounts in thousands)
For the year ended November 30, 2002, net income was $6,741 or $0.57 per diluted
share. Net loss for the year ended November 24, 2001 was $2,642 or $(0.23) per
diluted share.
The Company enters fiscal 2003 with two key areas of focus: one, continuing to
improve and expand a profitable store network, and two, to improve the financial
performance of its wood division through both the introduction of new products
and the continuing rationalization of the labor and overhead structure
supporting the Wood Division.
FISCAL 2001 COMPARED TO FISCAL 2000
Bassett reported sales for 2001 of $305,676, a decrease of $61,768 or 17% from
fiscal 2000 sales. The decline reflects the loss of two major customers to
bankruptcy in the first quarter of 2001 and an extremely weak retail furniture
climate in 2001. The Company continued with its plan for vertical integration
during 2001 by transitioning from sales to traditional customers to sales to its
dedicated Bassett Furniture Direct (BFD) licensee store network. Though sales to
the independently owned BFD licensees increased in 2001, sales did not increase
to the extent expected due to the weakening economy and the timing of new store
openings. During 2000, the Company implemented a new enterprise-wide software
system, which included sales order processing, logistics, upholstery
manufacturing and some wood manufacturing. The utilization of the system greatly
enhanced the Company's shipping performance and overall customer service in
2001.
Although overall sales have declined, sales to the Bassett Furniture Direct
(BFD) and @t Home with Bassett (@t Home) channels increased by 5% in 2001 and
33% in 2000. The 2001 increase of 5% was impacted by the timing of store
openings, as many stores opened in the last quarter. Sales to national accounts,
major furniture stores and smaller furniture stores declined in 2001. The
increase in sales in the BFD and @t Home channels was driven by the opening of
additional BFD stores and signing additional @t Home retailers. The Company saw
openings of fifteen new independently owned BFD stores and closures of four
stores in 2001, for a net gain of eleven stores. The Company ended 2001 with 68
BFD stores. In an effort to address declining sales to smaller furniture stores,
the Company implemented a new in-stock, rapid delivery program in 2001 for its
@t Home and small furniture retail customers. The innovative program, known as
Five Star, features prepaid freight and 14 day delivery and provides the Company
with a competitive advantage with these customers. During 2001 the Company
completed its move from its Thomasville, North Carolina showroom to a newly
completed space at the International Home Furnishings Center in High Point. As
expected, the Company experienced a significant increase in customer traffic,
which enabled salesmen to re-establish contacts with old customers and introduce
Bassett to many potential new customers who had never shopped the line. The
Company experienced a substantial increase in new accounts opened for dealers in
this category.
Gross margin; selling, general and administrative (SG&A) expenses; and operating
income (loss) were as follows for the years ending November 24, 2001 and
November 25, 2000:
2001 2000
---------------------- ----------------------
Net sales $ 305,676 100.0% $ 367,444 100.0%
--------- ----- --------- -----
Gross profit 51,220 16.8% 65,163 17.7%
SG&A 54,477 17.8% 61,854 16.8%
Gains on sales of
property and equipment
(5,297) -1.7% (175) 0.0%
Restructuring and
6,952 2.3% 6,680 1.8%
--------- ----- --------- -----
impaired asset charges
Operating profit (loss) $ (4,912) -1.6% $ (3,196) -0.9%
========= ===== ========= =====
The decrease in the gross margin from 2000 to 2001 was due to sharply reduced
production levels and related overhead absorption impact, costs incurred to
transition production from one plant to another and lower margins resulting from
liquidating certain discontinued finished goods inventories. This was partially
offset by a reduction in cost of sales that resulted from liquidating LIFO
inventories in 2001. In fiscal 2000, margins were negatively impacted by
restructuring activities, lumber price fluctuations and reduced production
levels.
Bassett has aggressively strived to eliminate excessive costs and to more
efficiently structure manufacturing capacities to match current business levels.
In that regard, the Company made the decision in late 2000 to consolidate
production in the Wood Division. Restructuring charges of $6,680, of which
$5,800 related to the write-down of property and equipment and $880 related to
severance and employee benefit costs were incurred. Restructuring continued in
2001 as the Company reduced manufacturing capacities to meet demand and stay
competitive with product sourced overseas. The table plant was closed and
production of occasional tables was moved to another facility or outsourced. The
chair plant and a rough-end facility were permanently closed and production
either transferred to other facilities or sourced to foreign manufacturers.
Approximately 800 salaried and hourly positions were
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Continued
(dollar amounts in thousands)
eliminated in fiscal 2001. All restructuring activities in 2001 resulted in
restructuring charges of $6,952, of which $4,550 was related to the non-cash
write-down of property and equipment to net realizable value and $2,402 was
associated with severance and employee benefits. Also associated with the
restructuring acti-vities was a $1,051 write-down of discontinued inventories to
net realizable value. This charge is reflected in cost of sales.
Income from investments consists of dividends and realized gains associated with
the Company's portfolio of marketable equity securities as well as earnings from
the Company's investment in the Bassett Industries Alternative Asset Fund
(Alternative Asset Fund). Income from investments decreased by $6,517 in 2001
from 2000 levels due principally to a $5,919 decrease in returns from the
Alternative Asset Fund. Income (loss) from unconsolidated affiliated companies
include the Company's share of earnings or loss from investments in LRG
Furniture, LLC (LRG) and the International Home Furnishings Center (IHFC) among
other investments. Performance worsened from a loss of ($809) in 2000 to a loss
of ($3,030) in 2001. The Company's share of the loss from LRG improved by $1,207
over that recorded in 2000. The restructuring of LRG debt forced the Company to
take an additional charge of $1,359 in 2001. Results from the Company's
investment in IHFC declined to $3,542 in 2001, $1,340 less than 2000 results.
Also for 2001, the Company incurred losses related to the restructuring of its
affiliate, the Accessory Group, LP of $1,358. A detail of other income (expense)
may be seen at Note L to the Consolidated Financial statements.
SEGMENT INFORMATION:
The following is a discussion of operating results for each of Bassett's
business segments. A full description of each operating segment along with
financial data for each segment can be found in Note R to the Notes to
Consolidated Financial Statements.
WOOD DIVISION
2002 2001 2000
------------------- ------------------- -------------------
Net sales $160,591 100.0% $173,106 100.0% $226,013 100.0%
-------- ----- -------- ----- -------- -----
Gross profit 25,785 16.1% 20,934 12.1% 41,958 18.6%
-------- ----- -------- ----- -------- -----
Contribution to profit
and overhead 15,713 9.8% 10,194 5.9% 26,143 11.6%
-------- ----- -------- ----- -------- -----
Wood Division net sales decreased by 7.2% in 2002, due principally to the sharp
decline in sales to JCPenney as well as the shifting of sales to the Company's
Import Division. Sales to JCPenney were down by 37% from sales levels attained
in 2001. Sales increases through the BFD sales channel partially offset this
decline. Sales declined by 23% during 2001 from the fiscal 2000 level of
$226,013. The decline is the result of the loss of two major customers in early
2001, the continued soft retail furniture environment and continuing transition
to imported products. Imported wood furniture continues to pressure top line
sales growth in this division. In order to improve sales and margins in this
segment, the Company is introducing new products, opening more BFD stores, and
refocusing sales efforts on its furniture store channel through implementation
of its Five Star program. Production levels have been substantially reduced to
meet current demand and to reduce expense levels. The Division closed three
plants over the last two years and at the end of 2002, had six plants in
operation; three in Virginia, one in North Carolina and two in Georgia. Each
plant produces a different range of product, categorized as "good", "better" or
"best".
Gross margin improved by four points from 2001 to 2002 principally as a result
of restructuring efforts completed during fiscal 2001. Sales of discontinued
product at lower margins also negatively impacted margins in 2001. The
restructuring efforts resulted in the elimination of excess capacity and enabled
the Company to more closely match production of wood furniture to demand. Gross
margin declined by 6.5 points from fiscal 2000 to fiscal 2001 due principally to
the rapid decline in volume experienced by the Wood Division. The Company
reacted quickly to cut costs and reduce unneeded capacity during 2001 such that
the Division was able to rebound in 2002.
Contribution to profit and overhead is defined by the Company as gross profit
less direct divisional operating expenses but excluding any allocation of
corporate overhead expenses, interest expense or income taxes. Wood Division
contribution to profit and overhead improved to 9.8% of sales in 2002 from 5.9%
of sales in 2001. The improvement is the result of significant restructuring
efforts undertaken over the last two years to better match production capacity
with anticipated demand. These efforts have substantially reduced the Wood
Division's breakeven level. Contribution to profit and overhead declined from
11.6% in 2000 to 5.9% in 2001 due entirely to the rapid sales decline
experienced during fiscal 2001.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Continued
(dollar amounts in thousands)
The combination of soft business conditions and the changing mix of products
sold by the BFD stores generated erratic plant schedules during the second half
of 2002. Furthermore, the aforementioned loss of volume from our single largest
customer put added pressure on the Company's ability to run the domestic wood
plants at full capacity. As a result, domestic wood shipments fell by 7% in
2002. There are a number of productivity enhancement initiatives currently under
way that are designed to improve the competitiveness and profitability of the
domestic wood business. These include the introduction of new products such as
the Bassett Kids program, semi-customization of product offerings, short
production runs and superior service initiatives.
UPHOLSTERY DIVISION
2002 2001 2000
------------------- ------------------- -------------------
Net sales $105,562 100.0% $ 90,117 100.0% $ 97,773 100.0%
-------- ----- -------- ----- -------- -----
Gross profit 22,893 21.7% 16,807 18.7% 15,987 16.4%
-------- ----- -------- ----- -------- -----
Contribution to profit
and overhead 13,122 12.4% 9,209 10.2% 8,024 8.2%
-------- ----- -------- ----- -------- -----
Net sales for the Upholstery Division climbed by 17% during 2002. The sales
increase was the result of strong product offerings sold principally through the
Company's BFD stores. The Company has successfully completed its
re-merchandising of the upholstery product line. The growth of the BFD store
network has a more dramatic effect on the Upholstery Division as the BFD stores
are now the Division's primary sales channel. The sales decline of $7,656 from
2000 to 2001 was the result of losing two major upholstery accounts to
bankruptcy in early 2001. The Company has decided to focus this segment on its
BFD stores, its @t Home galleries and its Five Star customers.
Gross margin has improved in each of the last two years as a result of several
initiatives completed by the Company over the same time span. The Company
successfully repositioned the segment away from lower margin accounts and
products and into higher quality, more stylish goods. Additionally, the Division
has introduced a cellular manufacturing environment to its North Carolina
upholstery manufacturing facilities. Under this concept, upholstery products are
made one at a time, allowing for "just in time" inventory concepts to be used. A
large portion of direct labor employee pay is now paid through a skill based
team incentive pay plan. This plan provides financial incentives to meet or
exceed production goals and to maximize production of goods with superior
quality. These manufacturing initiatives have led to increases in productivity
at the North Carolina facilities.
During the fourth quarter of 2002, the Company closed its California upholstery
plant and consolidated production in its two remaining manufacturing facilities
in North Carolina. The manufacturing efficiencies gained through implementation
of a cellular manufacturing environment has allowed the North Carolina
facilities to absorb nearly all of the production from the California plant
without hiring additional personnel. The Company expects continued improvement
in manufacturing performance in the Upholstery Division as a result of this
consolidation. The Company incurred restructuring charges of $1,251, which
related to severance and employee benefit costs, associated with the closure of
this plant. Management expects to recognize a gain in 2003 related to the
disposition of California real estate.
Contribution to profit and overhead also improved over each of the past two
years as a result of the manufacturing improvements implemented as well as other
cost cutting initiatives. For 2002, contribution to profit and overhead improved
to $13,122 or 12.4% compared to $9,209 or 10.2% in 2001 and $8,024 or 8.2% in
2000.
IMPORT DIVISION
2002 2001 2000
------------------- ------------------ -------------------
Net sales $40,566 100.0% $32,136 100.0% $30,985 100.0%
------- ------ ------- ------ ------- ------
Gross profit 12,345 30.4% 9,516 29.6% 9,202 29.7%
------- ------ ------- ------ ------- ------
Contribution to profit
and overhead 9,129 22.5% 6,941 21.6% 7,504 24.2%
------- ------ ------- ------ ------- ------
Net sales of the Company's Import Division reached $40,566 for 2002, an increase
of 26% over the 2001 level. The increased sales levels reflect the Company's
ongoing strategy of outsourcing certain key products where foreign manufacturers
hold a significant competitive advantage. The vast majority of the Company's
occasional table business and all of its crib business have successfully been
sourced to overseas suppliers. During 2002, the Company began importing entire
suites of furniture, which also contributed to the significantly higher sales
levels.
The products of the Import Division will continue to supplement the product
offerings of the other divisions, as well as include complete suites of
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Continued
(dollar amounts in thousands)
bedroom and dining room furniture. This should continue to have a positive
impact on the Company's overall gross profit margin as the products sold by the
Import Division typically have a higher gross profit margin. Contribution to
profit and overhead increased to 22.5% of sales in 2002 from 21.6% of sales in
2001. The decline in contribution to profit and overhead percentage experienced
in 2001 from the 24.2% of sales achieved in 2000 was primarily the result of
allocating certain support costs to this division. The expected sales growth of
this segment requires the Company to focus more attention on forecasting and
purchasing practices, inventory management, logistics and quality.
RETAIL DIVISION
2002
--------------------
Net sales $ 15,816 100.0%
-------- -----
Gross profit 7,104 44.9%
-------- -----
Contribution to profit
and overhead (1,044) -6.6%
-------- -----
The Company purchased five southeastern BFD stores from its joint venture
partner LRG Furniture, LLC (LRG) for net book value (which approximated $0) on
March 4, 2002. The Company's Retail Division consists of six stores in North
Carolina and Virginia as of November 30, 2002. This purchase returns to Bassett
a corporate store program essential to the Company's retail strategy, and allows
LRG to focus on its core markets in Texas and Nevada.
There are three major components of the Company's corporate store improvement
program. First, increase top-line sales, second, increase gross profit margins
and third, decrease SG&A expenses. Management has had modest success in
increasing top-line sales during 2002, though economic conditions have worsened
late in the year making additional progress difficult. Gross margins have shown
marked improvement, especially late in the year after clearance inventory was
liquidated. Administrative expenses have been reduced, rent has been
restructured in four of the six stores and warehouse and delivery expenses have
been significantly reduced during 2002. The Company believes that results from
the Retail Division will continue to improve in 2003.
LRG FURNITURE, LLC
At the beginning of fiscal year 2000, the Company formed LRG Furniture, LLC,
which is a joint venture between the Company and its licensee partner in
Houston, Texas (BDP Texas, LLC). LRG was formed to capitalize on the retail
expertise of BDP Texas and the economies of scale that a combined company
offered. The Company's eight BFD stores in 1999 were combined with the five BDP
Texas stores in Texas to form LRG. Bassett retains a 51% ownership of the joint
venture and accounts for the investment using the equity method since the
Company does not maintain operating control of the joint venture.
LRG experienced significant difficulties in the initial integration and start-up
activities of operating southeastern stores with stores in Texas and Nevada. The
stores were initially managed centrally from Houston, Texas. This method of
management proved to be costly and ineffective. Additionally, LRG's revenues
were temporarily impacted by the implementation of the Company's enterprise
software system. LRG adopted a decentralized (regional) method of management
midway through fiscal 2000 to attack cost issues on a store by store basis.
Substantial costs were subsequently eliminated from the LRG corporate overhead.
Regional managers have begun to see improved top-line sales growth. Store
expenses, including start-up costs, were subsequently reduced or eliminated.
Bassett's shipments to LRG are also improved due to the complete implementation
of the enterprise system. During 2001, LRG sold three stores located in small to
mid-size markets to local operators and sold the Hickory, North Carolina store
back to Bassett. A significant portion of LRG's losses were attributable to
these stores. These stores are in single store markets where a local licensee
would be better positioned to operate a cost effective store operation. Cost
cutting efforts continued in 2001, both at the corporate overhead level and at
the store level. All of these efforts combined to reduce LRG's net loss in
fiscal 2001.
The Company purchased the five remaining southeastern stores from LRG for net
book value on March 4, 2002. Bassett operates the North Carolina and Virginia
stores as corporate stores. The operating results of these stores are
consolidated into the Company's financial statements, affecting net sales, gross
profit and selling, general and administrative expense. This move allows LRG to
focus on the larger markets in Texas and Nevada. This leaves nine stores
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Continued
(dollar amounts in thousands)
in Texas and Nevada as LRG's core business. Additionally, as part of the
agreement, the Company agreed to restructure a portion of notes receivable due
to the Company from LRG. As a result, Bassett took a charge of $1,359 related to
the debt restructuring in 2001. During 2002, LRG reduced losses by $4,765 to
($1,980) for the year. Included in the 2002 loss were three months of operating
the five southeastern stores purchased by Bassett on March 4, 2002. LRG opened a
fourth Houston store in August 2002 and a fifth Houston store subsequent to year
end in December 2002. These stores complete the Houston market and are expected
to increase the profitability of the entire market by allowing LRG to leverage
advertising and warehouse and delivery costs over a much greater sales volume.
Management believes that LRG will return to profitability in subsequent years
due to overhead cost reductions, the sale of unprofitable stores in single store
markets and the re-focusing of efforts on core markets in Texas and Nevada. The
Company is committed to the success of LRG and will provide financial support to
LRG, as appropriate, over the next twelve months.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of funds have been cash flow from operations, a bank line of
credit, and our investment portfolio. The primary sources of cash for fiscal
2002 were cash provided by operating earnings and dividends received from our
investments. Cash was used in fiscal 2002 to fund capital expenditures including
retail real estate, increases in import division inventories, pay dividends, and
to reduce long-term debt. The primary sources of cash in fiscal 2001 were
reductions in inventories and the receipt of a large dividend from IHFC. Cash
was used in fiscal 2001 to repay long-term debt, fund capital spending, and pay
dividends. The primary sources of cash in fiscal 2000 were borrowings under a
bank line of credit and dividends from investments. Cash was used in fiscal 2000
to fund working capital, fund capital expenditures, and pay dividends.
Net cash generated by operating activities was $11,876 and $22,283 in fiscal
2002 and 2001, respectively, and cash used in operating activities was $12,016
in fiscal 2000. The increase in cash from operations from fiscal 2000 to fiscal
2001 was related to both better management of receivables and inventories, and
the reduction in sales from fiscal 2000 to fiscal 2001. The reduction in
operating cash from 2001 to 2002 was entirely related to increases in
inventories of imported finished goods and imported component parts which more
than offset improved operating earnings in fiscal 2002.
Net cash provided by investing activities was $115 and $27,151 in fiscal 2002
and 2001, respectively. Cash used in investing activities was $3,380 in fiscal
2000. Both the increase in fiscal 2001 from 2000 and the reduction in fiscal
2002 from 2001 were related to an unusually large $25,059 dividend received from
IHFC in fiscal 2001 and the proceeds from the sales of two properties in fiscal
2001.
Net cash used in financing activities were $15,967 and $47,346 in fiscal 2002
and 2001, respectively. Cash provided by financing activities was $12,915 in
fiscal 2000. The Company borrowed $27,000 in fiscal 2000 to fund working capital
and retail expansion. In the last two years the Company has repaid $42,000
through both reductions in working capital and the proceeds of dividends from
investments. Cash dividends to shareholders and a share repurchase plan have
also used cash in each year.
Dividends from investments primarily represent cash distributions from the
Company's investment in IHFC and the Bassett Industries Alternative Asset Fund,
LP. The Company received dividends from these investments as follows; $8,623 in
2002, $28,559 in 2001 and $12,000 in 2000. The unusually large dividend in 2001
of $25,059 from IHFC was a result of the refinancing of its High Point, North
Carolina building. The Company's investment in IHFC reflects a credit balance
and is shown in the liabilities section of the Company's balance sheet as
"Deferred Revenue from Unconsolidated Affiliate". Based on current and expected
future earnings of IHFC, management believes that the market value of this
investment is substantially greater than its current book value. The financial
statements of IHFC are attached to the Company's 10-K filing. During 2002 the
Company purchased an additional investment interest in IHFC for $1,519.
During 2000, the Company replaced borrowings under its $50,000 credit facility
by entering into a three-year $70,000 revolving credit facility with a new
lender and three other participants. At the end of fiscal 2000, the Company had
borrowed $45,000 against its credit line. The Company amended the facility in
2001 to address restrictive covenants and to reduce the total facility to
$60,000. At November 30, 2002, the Company had reduced borrowings under this
facility to $3,000. Also during the year, the Company assumed bank debt
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Continued
(dollar amounts in thousands)
obligations of the five southeastern BFD stores acquired from LRG Furniture, LLC
on March 4, 2002. These debt obligations totaling $1,189 were paid off
subsequent to acquisition. The Company also satisfied a mortgage obligation of
$1,482 during 2002.
The Company purchased and retired 332,000 shares of its Common Stock during
2000. These purchases were part of the Company's stock repurchase program,
approved in 1998, which allows the Company to repurchase its shares for an
aggregate purchase price not to exceed $40,000. The average cost of the shares
purchased in 2000 was $14.20, resulting in a total expenditure of $4,716.
Repurchases of stock were substantially reduced in 2001 as the Company
repurchased 63,500 shares for a total of $730 (average price of $11.50 per
share). The Company repurchased 89,519 shares of common stock for $1,253 during
fiscal 2002. The Company plans to continue its share repurchase program in
fiscal 2003. The Company paid dividends of $9,358, $9,378 and $9,497 in fiscal
2002, 2001 and 2000, respectively. The current ratio for the past two years was
3.02 to 1 and 3.19 to 1, respectively. Working capital was $68,822 at November
30, 2002, and $72,996 at November 24, 2001.
The Company's consolidated financial statements are prepared on the basis of
historical dollars and are not intended to show the impact of inflation or
changing prices. Neither inflation nor changing prices has had a material effect
on the Company's consolidated financial position and results of operations in
prior years.
The following table summarizes our contractual payment obligations and other
commercial commitments.
Contractual commitments by fiscal year ended November
2003 2004 2005 2006 Thereafter Total
------- ------- ------- ------- ---------- -------
Bank line of credit $ -- $ 3,000 $ -- $ -- $ -- $ 3,000
Letters of credit 3,090 -- -- -- -- 3,090
Operating leases 3,521 3,415 3,124 2,605 17,762 30,427
Lease guarantees 8,516 6,582 3,847 2,437 6,546 27,928
Loan gurantees 4,448 3,050 1,070 -- -- 8,568
------- ------- ------- ------- ------- -------
Total $19,575 $16,047 $ 8,041 $ 5,042 $24,308 $73,013
======= ======= ======= ======= ======= =======
We currently anticipate that our capital expenditures for fiscal 2003 will be
approximately $11,000 and will relate primarily to machinery and equipment,
technology, and retail real estate. Our capital expenditure and working capital
requirements in the foreseeable future will change depending on many factors
including, but not limited to, our rate of growth, our operating results and any
other adjustments in our operating plan needed in response to competition,
acquisition opportunities or unexpected events. We believe that our existing
borrowing capacity under the credit facility, together with cash provided by
operations, will be sufficient to meet our capital expenditure and working
capital requirements through fiscal 2003.
CONTINGENCIES:
The Company is involved in various claims and litigation as well as
environmental matters, which arise in the normal course of business. Although
the final outcome of these legal and environmental matters cannot be determined,
based on the facts presently known, it is management's opinion that the final
resolution of these matters will not have a material adverse effect on the
Company's financial position or future results of operations.
CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America
which requires that certain estimates and assumptions be made that affect the
amounts and disclosures reported in those financial statements and the related
accompanying notes. Actual results could differ from these estimates and
assumptions. Management uses its best judgment in valuing these estimates and
may, as warranted, solicit external advice. Estimates are based on current facts
and circumstances, prior experience and other assumptions believed to be
reasonable. The following critical accounting policies, some of which are
impacted significantly by judgments, assumptions and estimates, affect the
Company's consolidated financial statements.
Impairment of Long-Lived Assets - The Company periodically evaluates whether
events or circumstances have occurred that indicate long-lived assets may not be
recoverable or that the remaining useful life may warrant revision. When such
events or circumstances are present, the Company assesses 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 asset's carrying value over its fair value is recorded. The
long-term nature of these assets requires the estimation of its cash inflows
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Continued
(dollar amounts in thousands)
and outflows several years into the future and only takes into consideration
technological advances known at the time of the impairment test.
Allowance for Accounts and Notes Receivable - The Company maintains an allowance
for doubtful accounts for estimated losses resulting from the inability of its
customers to make required payments. The allowance for doubtful accounts is
based on a review of specifically identified accounts and notes receivable 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.
Inventories - Inventories (finished goods, work in process and raw materials)
are stated at the lower of cost or market. Cost is determined for wholesale
domestic furniture inventories using the last-in, first-out method. The cost of
imported and retail inventories is determined on a first-in, first-out basis.
The Company estimates an inventory reserve for excess quantities and obsolete
items based on specific identification and historical write-offs, 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 the risks and rewards of
ownership and title to the product have transferred to the buyer. This generally
occurs upon the shipment of goods to independent dealers or, in the case of
Bassett-owned retail stores, upon delivery to the customer. Terms offered by the
Company vary from 30 to 60 days. An estimate for returns and allowances has been
provided in recorded sales.
Business Insurance Reserves - The Company has insurance programs in place to
cover workers' compensation and health insurance claims. The insurance programs,
which are funded through self-insured retention, are subject to various
stop-loss limitations and re-insured through a captive insurance program. The
Company accrues estimated losses using historical loss experience. Although
management believes that the insurance reserves are adequate, the reserve
estimates are based on historical experience, which may not be indicative of
current and future losses. The Company adjusts insurance reserves, as needed, in
the event that future loss experience differs from historical loss patterns.
Other Loss Reserves - The Company has a number of other potential loss exposures
incurred in the ordinary course of business such as environmental claims,
product liability, litigation, restructuring charges, and the recoverability of
deferred income tax benefits. Establishing loss reserves for these matters
requires management's estimate and judgment with regard to maximum risk exposure
and ultimate liability or realization. As a result, these estimates are often
developed with the Company's counsel, or other appropriate advisors, and are
based on management's 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.
MARKET RISK:
The Company is exposed to market risk for changes in market prices of its
various types of investments. The Company's investments include equity
securities and an investment partnership included in its investments in
affiliated companies. The Company does not use these securities for trading
purposes and is not party to any leveraged derivatives.
The Company's marketable equity securities portfolio, which totaled $6,080 at
November 30, 2002, is diversified among over twenty different medium to large
capitalization interests. Although there are no maturity dates for the Company's
equity investments, management has plans to liquidate its current marketable
equity securities portfolio on a scheduled basis over the next two years.
The Company's Bassett Industries Alternative Asset Fund investment, which
totaled $57,168 at November 30, 2002 and $58,652 at November 24, 2001, invests
in various private limited partnerships, which contain contractual commitments
with elements of market risk. These contractual commitments, which include
fixed-income securities and derivatives, may involve future settlements, which
give rise to both market and credit risk. The investment partnership's exposure
to market risk is determined by a number of factors, including the size,
composition, and diversification of positions held, volatility of interest,
market currency rates, and liquidity. Risks to these funds arise from the
possible adverse changes in the market value of such interests and the potential
inability of counterparties to perform under the terms of the contracts.
However, the risk to the Alternative Asset Fund is limited to the amount of the
Alternative Asset Fund's investment in each of these funds.
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Continued
(dollar amounts in thousands)
SAFE-HARBOR, FORWARD-LOOKING STATEMENTS:
This discussion contains certain forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995 with respect to the
financial condition, results of operations and business of Bassett Furniture
Industries, Incorporated and Subsidiaries. These forward-looking statements
involve certain risks and uncertainties. No assurance can be given that any such
matters will be realized. Important factors that could cause actual results to
differ materially from those contemplated by such forward-looking statements
include:
- - competitive conditions in the home furnishings industry
- - general economic conditions that are less favorable than expected
- - overall consumer demand for home furnishings
- - new BFD openings
- - BFD closings
- - the profitability of BFD licensees and corporately-owned stores
- - not fully realizing cost reductions through restructurings
- - cost and availability of raw materials and labor
- - information and technology advances
- - success of marketing and advertising campaigns, future tax legislation, or
regulatory or judicial positions related to COLI
- - ability to execute new global sourcing strategies
- - performance of the Company's investment portfolios
34
INVESTOR INFORMATION
CORPORATE INFORMATION AND INVESTOR INQUIRIES:
The Company's annual report and proxy statement together contain much of the
information presented in the Form 10-K report filed with the Securities and
Exchange Commission. Individuals who wish to receive the Form 10-K or other
corporate literature should contact Barry C. Safrit, Vice President, Chief
Financial Officer at 276-629-6000.
TRANSFER AGENT/STOCKHOLDER INQUIRIES:
Stockholders with inquiries relating to stockholder records, stock transfers,
change of ownership, change of address or dividend payments should write to:
Wachovia Bank
Shareholder Services/Customer Service
1525 W. WT Harris Blvd.; 3C3
Charlotte, NC 28288-1153
800-829-8432
ANNUAL MEETING:
The Bassett Annual Meeting of Shareholders will be held Tuesday, March 25, 2003,
at 11:00 a.m. EST at the Company's headquarters in Bassett, Virginia.
MARKET AND DIVIDEND INFORMATION:
Bassett's common stock trades on the NASDAQ national market system under the
symbol "BSET." The Company had approximately 1,512 registered stockholders at
November 30, 2002. The range of per share amounts for the closing high and low
market prices and dividends declared for the last two fiscal years are listed
below:
Market Prices of Common Stock Dividends Declared
---------------------------------------------------- --------------------------
Quarter 2002 2001 2002 2001
- -------- ----------------------- ------------------------ --------------------------
High Low High Low
First 17.69 13.99 15.00 9.81 .20 .20
Second 21.74 17.15 14.90 11.50 .20 .20
Third 19.74 13.86 15.50 12.58 .20 .20
Fourth 14.99 12.50 15.47 12.60 .20 .20
FORWARD-LOOKING STATEMENTS:
This Annual Report contains forward-looking statements as defined in the Private
Securities Litigation and Reform Act of 1995 and within the meaning of Sections
27A of the Securities Exchange Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. When used in this Annual Report the
words "hope," "believe," "expect," "plan" or "planned," "intend," "anticipate,"
"potential" and similar expressions are intended to identify forward-looking
statements. Readers are cautioned against placing undue reliance on these
statements. Such statements, including but not limited to those regarding
increases in sales, growth in the number of @t Home with Bassett and Bassett
Furniture Direct stores, maintaining and expanding traditional channels of
distribution, improving gross margins, growth in earnings per share, changes in
capital structure, and the expansion of LRG, are based upon management's
beliefs, as well as assumptions made by and information currently available to
management, and involve various risks and uncertainties, certain of which are
beyond the Company's control. The Company's actual results could differ
materially from those expressed in any forward-looking statement made by or on
behalf of the Company.
If the Company does not attain its goals, its business and results of operations
might be adversely affected. For a discussion of factors that may impair the
Company's ability to achieve its goals, please see the cautionary statements in
the Management's Discussion and Analysis section of this Annual Report.
WEB SITE:
Our Web site on the Internet is filled with information about Bassett Furniture,
including this annual report, detailed financial information and updates,
information about our fine home furnishings products, and a directory of Bassett
Furniture Direct stores and other stores that feature Bassett products. Visit us
at www.bassettfurniture.com.
35
EXHIBIT 21 - LIST OF SUBSIDIARIES
(a) Bassett Furniture Industries of North Carolina, Inc. (North Carolina
Corporation)
(b) The E.B. Malone Corporation (Delaware Corporation)
(c) Bassett Direct Stores, Inc. (Virginia Corporation)
(d) Bassett Direct NC, LLC (Virginia limited liability company)
(e) Bassett Direct SC, LLC (Virginia limited liability company)
(f) The Accessories Group, Inc. (Virginia Corporation)
Exhibit 23A
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Bassett Furniture Industries, Incorporated of our report dated January 7,
2003 (except for Note Q, as to which the date is February 3, 2003), included in
the 2002 Annual Report to Shareholders of Bassett Furniture Industries,
Incorporated.
Our audit also included the financial statement schedule of Bassett Furniture
Industries, Incorporated listed in Item 15(a) for the year ended November 30,
2002. This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audit. In our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-52405, Form S-8 No. 33-52407, Form S-8 No. 333-60327, and Form
S-8 No. 333-43188) of our report dated January 7, 2003 (except for Note Q, as to
which the date is February 3, 2003), with respect to the consolidated financial
statements incorporated herein by reference, and our report included in the
preceding paragraph with respect to the financial statement schedule included in
this Annual Report (Form 10-K) of Bassett Furniture Industries, Incorporated.
We also consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-52405, Form S-8 No. 33-52407, Form S-8 No. 333-60327, Form S-8
No. 333-43188) of our report dated December 20, 2002, with respect to the
financial statements of LRG Furniture, LLC included in this Annual Report (Form
10-K) of Bassett Furniture Industries, Incorporated.
/s/ Ernst & Young LLP
Greensboro, North Carolina
February 19, 2003
EXHIBIT 23B
CONSENT OF INDEPENDENT AUDITORS
Board of Directors
Bassett Furniture Industries, Incorporated
Bassett, Virginia
We consent to incorporation by reference in the Registration Statements (Nos.
33-52405, 33-52407, 333-60327 and 333-43188) on Form S-8 of Bassett Furniture
Industries, Incorporated and subsidiaries of our report dated November 25, 2002,
relating to the balance sheets of International Home Furnishings Center, Inc. as
of October 31, 2002 and 2001, and the related statements of income,
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended October 31, 2002, which report is incorporated by reference in the
November 30, 2002 annual report on Form 10-K of Bassett Furniture Industries,
Incorporated and subsidiaries.
/s/ Dixon Odom PLLC
High Point, North Carolina
February 18, 2003
EXHIBIT 23C
NOTICE REGARDING LACK OF CONSENT OF ARTHUR ANDERSEN
On May 13, 2002, Bassett Furniture Industries, Incorporated (the "Company")
dismissed Arthur Andersen LLP as its independent auditors and retained Ernst &
Young LLP as its new auditors. Ernst & Young audited the financial statements of
the Company as of and for the fiscal year ended November 30, 2002 (and the
related financial statement schedule for such year) and the financial statements
of LRG Furniture, LLC ("LRG") as of and for the fiscal year ended November 30,
2002 and issued their reports with respect thereto. However, after reasonable
efforts, the Company has been unable to obtain from Arthur Andersen reissued
audit reports with respect to the financial statements of the Company as of and
for the fiscal years ended November 25, 2000 and November 24, 2001 (and the
related financial statement schedules for such years) or the financial
statements of LRG as of and for the fiscal years ended November 30, 2001 and
2000 (collectively, the fiscal 2000 and 2001 financials). In accordance with
regulations of the Securities and Exchange Commission, the Company has filed
with this Annual Report on Form 10-K copies of the previously-issued audit
reports dated December 21, 2001 and January 15, 2002 of Arthur Andersen with
respect to the fiscal 2000 and 2001 financials. Because this Annual Report on
Form 10-K is incorporated by reference into the Company's registration
statements on Form S-8 (Nos. 33-52405, 33-52407, 333-60327 and 333-43188), it is
deemed to be a new registration statement relating to the securities offered
therein. After reasonable efforts, the Company has been unable to obtain Arthur
Andersen's written consent to the incorporation by reference of its
previously-issued audit reports into those registration statements. As a result,
Arthur Andersen may not have any liability under Section 11(a) of the Securities
Act of 1933 (the "Securities Act")(1) for any untrue statements of a material
fact contained in the fiscal 2000 and 2001 financials or any omissions of a
material fact required to be stated therein. Accordingly, persons acquiring
securities under those registration statements may be unable to assert a claim
against Arthur Andersen under Section 11(a) of the Securities Act.
- --------------------------
(1) Section 11(a) of the Securities Act provides that if part of a registration
statement at the time it becomes effective contains an untrue statement of a
material fact, or omits a material fact required to be stated therein or
necessary to make the statements therein not misleading, any person acquiring a
security pursuant to such registration statement (unless it is proved that at
the time of such acquisition such person knew of such untruth or omission) may
assert a claim against, among others, an accountant who has consented to be
named as having certified any part of the registration statement or as having
prepared any report for use in connection with the registration statement.
EXHIBIT 99A
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Bassett Furniture Industries, Inc. (the
"Company") on Form 10-K for the period ending November 30, 2002, as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Robert H. Spilman, Jr., Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the
Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Sections 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
/s/ Robert H. Spilman, Jr.
--------------------------------------
Robert H. Spilman, Jr.
President and Chief Executive Officer
February 20, 2003
EXHIBIT 99B
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Bassett Furniture Industries, Inc. (the
"Company") on Form 10-K for the period ending November 30, 2002, as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Barry C. Safrit, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002,
that:
1. The Report fully complies with the requirements of Sections 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
/s/ Barry C. Safrit
----------------------------------------
Barry C. Safrit
Vice President, Chief Financial Officer
February 20, 2003
