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EXHIBIT 13
CONSOLIDATED BALANCE SHEETS
Bassett Furniture Industries, Incorporated and Subsidiaries
November 27, 1999, and November 28, 1998
(dollars in thousands except per share data)
ASSETS
Current Assets 1999 1998
Cash and cash equivalents $ 5,740 $ 5,499
Short-term investments -- 8,923
Trade accounts receivable, net 64,731 59,203
Inventories 50,206 47,285
Refundable income taxes 1,006 8,018
Deferred income taxes 9,314 12,682
Other current assets 5,260 2,038
136,257 143,648
Property and Equipment, net 93,155 56,387
Other Assets
Investment securities 23,057 50,739
Investments in affiliated companies 67,558 52,769
Other 22,802 17,971
113,417 121,479
$ 342,829 $ 321,514
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 30,122 $ 20,221
Accrued liabilities 26,806 24,514
56,928 44,735
Long-Term Liabilities
Employee benefits 10,998 11,272
Notes payable 18,000 --
Deferred income taxes 1,152 595
30,150 11,867
Commitments and Contingencies (Notes N and O)
Stockholders' Equity
Common stock, par value $5 a share, 50,000,000
shares authorized 60,474 64,425
Additional paid-in capital -- --
Retained earnings 187,973 193,130
Accumulated other comprehensive income -
unrealized holding gains, net of income tax effect 7,993 8,286
Unamortized stock compensation (689) (929)
255,751 264,912
$ 342,829 $ 321,514
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
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CONSOLIDATED STATEMENTS OF OPERATIONS
Bassett Furniture Industries, Incorporated and Subsidiaries
For the years ended November 27, 1999, November 28, 1998 and November 30, 1997
(dollars in thousands except per share data)
1999 1998 1997
Net sales $394,412 $397,557 $446,893
Costs and expenses
Cost of sales 309,316 323,904 396,875
Selling, general and administrative 72,622 64,002 84,694
Restructuring and impaired fixed asset charges --- --- 20,646
381,938 387,906 502,215
Income (loss) from operations 12,474 9,651 (55,322)
Other income, net 13,744 11,445 13,367
Income (loss) before income taxes 26,218 21,096 (41,955)
Income taxes 8,264 5,379 (22,346)
Net income (loss) $ 17,954 $ 15,717 $(19,609)
Net income (loss) per share
Basic $ 1.44 $ 1.21 $ (1.50)
Diluted $ 1.44 $ 1.20 $ (1.50)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Bassett Furniture Industries, Incorporated and Subsidiaries
For the years ended November 27, 1999, November 28, 1998, and November 30, 1997
(dollars in thousands)
1999 1998 1997
Net income (loss) $17,954 $15,717 $(19,609)
Other comprehensive income, net of tax:
Unrealized holding gains (losses) arising during
the period, net of tax (76) 2,852 1,713
Less: reclassification adjustments for net gains
included in net income, net of tax (217) (141) 176
Total other comprehensive income (loss) (293) 2,711 1,889
Comprehensive income (loss) $17,661 $18,428 $(17,720)
The accompanying notes to consolidated financial statements are an integral part
of these statements.
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Bassett Furniture Industries, Incorporated and Subsidiaries
For the years ended November 27, 1999, November 28, 1998, and November 30, 1997
(dollars in thousands except share data)
Accumulated
Additional other Unamoritized
Common Stock Paid-in Retained Comprehensive stock
Shares Amount Capital earnings income compensation
BALANCE, DECEMBER 1, 1996 13,075,595 $65,378 $---- $222,417 $3,686 $----
Net Loss ---- ---- ---- (19,609) ---- ----
Dividends ($1.00 per share) ---- ---- ---- (13,041) ---- ----
Issuance of common stock 4,288 21 86 ---- ---- ----
Purchase and retirement of common stock (60,000) (300) (44) (1,006) ---- ----
Issuance of restricted common stock 31,396 157 714 ---- ---- (871)
Amortization of stock compensation ---- ---- ---- ---- ---- 11
Stock option grants ---- ---- 1,682 ---- ---- ----
Net change in unrealized holding gains ---- ---- ---- ---- 1,889 ----
BALANCE, NOVEMBER 30, 1997 13,051,279 65,256 2,438 188,761 5,575 (860)
Net Income ---- ---- ---- 15,717 ---- ----
Dividends ($.80 per share) ---- ---- ---- (10,393) ---- ----
Issuance of common 573 3 12 --- --- ---
Purchase and retirement of common stock (185,300) (927) (2,896) (955) ---- ----
Issuance of restricted common stock 16,836 85 459 ---- ---- (544)
Forfeitures of restricted stock (9,435) (47) (224) ---- ---- 271
Net change in unrealized holding gains ---- ---- ---- ---- 2,711 ----
Amortization of stock compensation ---- ---- ---- ---- ---- 204
Exercise of stock options 11,000 55 211 ---- ---- ----
BALANCE, NOVEMBER 28,1998 12,884,953 64,425 ---- 193,130 8,286 (929)
Net Income ---- ---- ---- 17,954 ---- ----
Dividends ($.80 per share) ---- ---- ---- (9,983) ---- ----
Issuance of common stock 2,806 14 45 --- ---- ----
Purchase and retirement of common stock (792,990) (3,965) (45) (13,128) ---- ----
Net change in unrealized holding gains ---- ---- ---- ---- (293) ----
Amortization of stock compensation ---- ---- ---- ---- ---- 240
BALANCE, NOVEMBER 27, 1999 12,094,769 $60,474 $---- $187,973 $7,993 $(689)
The accompanying notes to consolidated financial statements are an integral part
of these statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Bassett Furniture Industries, Incorporated and Subsidiaries
For the years ended November 27, 1999, November 28, 1998, and November 30, 1997
(dollars in thousands)
OPERATING ACTIVITIES 1999 1998 1997
Net income (loss) $17,954 $15,717 $(19,609)
Adjustments to reconcile net income (loss) to net cash
Provided by operating activities:
Unused reserves for impairment of assets --- 2,000 11,181
Depreciation and amortization 8,386 6,870 6,192
Equity in undistributed income of affiliated companies (12,587) (5,784) (5,926)
Provision for losses on trade accounts receivable 358 216 7,706
Net (gain) loss from sales of investment securities (1,795) (1,446) (1,804)
Net (gain) loss from sales of property and equipment (89) (2,402) 970
Compensation earned under restricted stock and stock option plans 240 204 1,693
Deferred income taxes 4,112 3,516 (18,549)
Changes in long-term liabilities (274) 24 413
Changes in operating assets and liabilities:
Trade accounts receivable (8,617) (2,092) 384
Inventories (7,636) (5,571) 25,368
Other current assets (3,661) (633) (80)
Accounts payable and accrued liabilities 13,325 (3,172) 17,561
Refundable Income taxes 7,012 (2,993) (4,180)
Net Cash Provided By Operating Activities 16,728 4,454 21,320
INVESTING ACTIVITIES
Purchases of property and equipment (47,696) (22,610) (10,824)
Proceeds from sales of property and equipment 1,370 7,717 1,875
Purchases of investment securities --- (16,176) (65,385)
Proceeds from sales of investment securities 37,814 57,510 4,903
Dividends from affiliated company 5,448 31,517 21,245
Investments in affiliated companies (5,700) (50,000) ---
Change in investment in corporate owned life insurance (3,841) (3,900) (1,153)
Proceeds from sale of bedding division 6,500 --- ---
Issuance of notes receivable --- (3,383) ---
Other (1,320) 901 (623)
Net Cash Provided By (Used In) Investing Activities (7,425) 1,576 (49,962)
FINANCING ACTIVITIES
Borrowings under notes payable 18,000 --- ---
Issuances of common stock 59 281 107
Repurchases of common stock (17,138) (4,778) (1,350)
Dividends (9,983) (10,393) (13,041)
Net Cash Used In Financing Activities (9,062) (14,890) (14,284)
CHANGE IN CASH AND CASH EQUIVALENTS 241 (8,860) (42,926)
CASH AND CASH EQUIVALENTS -- beginning of year 5,499 14,359 57,285
CASH AND CASH EQUIVALENTS -- end of year $5,740 $5,499 $14,359
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest payments $1,988 $7,240 $8,205
Income tax payments (refunds) $(3,022) $4,656 $1,402
The accompanying notes to consolidated financial statements are an integral part
of these statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bassett Furniture Industries, Incorporated and Subsidiaries
(dollars in thousands except share data)
A. Summary of Significant Accounting Policies
Nature of Operations
The Company is a manufacturer and retailer of quality home furnishings and sells
a full range of furniture products and accessories through department and
furniture stores and an exclusive network of retail stores, some of which are
company-owned and others are independently owned. Retail stores are located
throughout the United States. The Company has 14 manufacturing facilities
throughout the United States.
PRINCIPLES OF CONSOLIDATION AND FISCAL YEAR
The consolidated financial statements include the accounts of Bassett Furniture
Industries, Incorporated (the "Company") and its subsidiaries, all of which are
wholly-owned. All significant intercompany balances and transactions are
eliminated in consolidation. The Company changed its fiscal year effective 1998
to end on the Saturday nearest November 30. Prior to 1998, the fiscal year ended
on November 30.
USE OF ESTIMATES
The preparation of 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 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.
CASH EQUIVALENTS
All temporary, highly liquid investments with original maturities of three
months or less are considered to be cash equivalents. The carrying amount
approximates fair value.
SHORT-TERM INVESTMENTS
Investments in municipal bonds with original maturities of more than three
months and a remaining maturity of one year or less are considered to be
short-term investments. The carrying amount approximates fair value.
TRADE ACCOUNTS RECEIVABLE
Substantially all of the Company's trade accounts receivable are due from
retailers throughout the United States. The Company performs on-going
evaluations of its customers' credit worthiness and generally requires no
collateral. There is no disproportionate concentration of credit risk. The
Company maintains allowances for doubtful accounts which include reserves for
certain risk accounts and also reserves for sales returns and allowances and
customer chargebacks. Allowances for doubtful accounts were $2,558 and $2,200 at
November 27, 1999 and November 28, 1998, respectively.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined for
wholesale furniture inventories, which approximate 92% of inventories in 1999
and 100% in 1998, using the last-in first-out (LIFO) method. Cost is determined
for retail inventories, which approximate 8%, using the first-in, first-out
(FIFO) method.
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. The Company reviews the carrying value of property and
equipment whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. Measurement of any impairment would include a
comparison of estimated future operating cash flows anticipated to be generated
during the remaining life to the net carrying value of the asset.
INVESTMENT SECURITIES AND FINANCIAL INSTRUMENTS
The Company classifies its investment 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 as available-for-sale are
included in income and are determined using the specific identification method
for ascertaining the cost of securities sold. Periodically, the Company enters
into Financial Instruments in order to reduce its exposure to fluctuations in
the market value of its investment portfolio. All financial instruments are
marked to market and recorded at their fair value. Gains and losses on financial
instruments that qualify
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as accounting hedges are deferred as unrealized gains and losses. Gains and
losses on financial instruments that do not qualify as accounting hedges are
recorded as other income or expense.
INVESTMENT IN AFFILIATED COMPANIES
The equity method of accounting is used for the Company's investment in
affiliated companies in which the Company exercises significant influence but
does not maintain control.
INVESTMENT IN CORPORATE OWNED LIFE INSURANCE (COLI)
The Company is the beneficiary of life insurance policies with a face value of
$2,188,876, which are maintained to fund various employee and director benefit
plans. Policy loans outstanding of $55,398 and $57,496 at November 27,1999, and
November 28, 1998, respectively, are recorded as a reduction in the policies
cash surrender value, which is included in other assets in the accompanying
consolidated balance sheets. Net life insurance income (expense), which includes
premiums and interest on policy loans, changes in cash surrender values, and
death benefits, is included in other income in the accompanying consolidated
statements of operations.
During 1998, the Company elected to discontinue premium payments on a large
number of COLI policies and invoke a non-forfeiture provision provided for by
the policies. The effect of this election was to increase the face value on the
policies to three times the original amount. The Company has elected to pay for
the additional insurance through reductions in the policies cash value.
REVENUE RECOGNITION
Revenue is recognized when furniture is shipped to the customer. Sales to one
customer were 16%, 15% and 15% of the Company's total net sales in 1999, 1998
and 1997.
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."
EARNINGS PER SHARE
The Company adopted SFAS No. 128, "Earnings Per Share" in 1998 and has restated
prior period earnings per share to conform to this Statement. Basic earnings per
share is determined by dividing net income available to common shareholders by
the weighted average number of shares of Common Stock outstanding. Diluted
earnings 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/directors based on the fair value of the goods or services
received.
ADVERTISING COSTS
Costs incurred for producing and communicating advertising are expensed when
incurred, including costs incurred under the Company's cooperative advertising
program with dealers and licensees. Advertising costs totaled $9,200, $6,100,
and $4,500 in 1999, 1998 and 1997, respectively.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities-deferral of the
effective date of SFAS Statement No. 133 - an Amendment of FASB Statement No.
133." This statement delays the effective date of SFAS No. 133 one year, from
years beginning after June 15, 1999, to years beginning after June 15, 2000.
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The
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Company plans to adopt the provisions of this Statement in the first quarter
of fiscal year 2001. Management is currently analyzing the impact of adopting
this Statement on the Company's financial position and results of operations.
In 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) No. 98-5, "Reporting on the Costs of Start-Up
Activities." This SOP provides guidance on the financial reporting of start-up
costs and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred including pre-opening and
pre-operating activities. The SOP is effective for fiscal years beginning after
December 15, 1998. In the year of adoption, all previously capitalized start up
costs should be written off and presented as a cumulative change in accounting
principle. The Company plans to adopt this SOP in the first quarter of 2000 and
does not believe that the impact will materially effect the Company's financial
position or results of operations.
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 $8.4 million, were exchanged for $6.5
million in cash and a $1.9 million convertible note receivable. The reductions
in these operating assets are excluded from the changes in operating assets and
liabilities on the accompanying statement of cash flows for the year ended
November 27, 1999. Net sales and operating income (losses) for the bedding
division were $12 million and $(.1 million), respectively for 1999, $39 million
and $1.0 million in 1998, and $54 million and $1.4 million in 1997.
C. Inventories
Inventories consist of the following:
November 27, 1999 November 28, 1998
Finished goods $41,823 $37,430
Work in process 9,880 9,169
Raw materials and supplies 17,881 26,506
Retail merchandise 6,076 ---
Total inventories on first-in,
first-out cost method 75,660 73,105
LIFO adjustment (25,454) (25,820)
$50,206 $47,285
During 1999 and 1998, the Company liquidated certain LIFO inventories which
decreased cost of sales by approximately $1,600 and $800, respectively.
D. Property and Equipment
November 27, 1999 November 28, 1998
Land $ 7,920 $3,289
Buildings 67,691 48,956
Machinery and Equipment 151,828 133,147
227,439 185,392
Less: Accumulated Depreciation (134,284) (129,005)
$ 93,155 $ 56,387
Depreciation expense was $7,725, $6,870 and $6,192 in 1999, 1998 and 1997,
respectively.
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E. Investment Securities and Financial Instruments
Investment securities by major security type are as follows:
November 27, 1999
Unrealized
holding Fair
Cost gains value
Equity securities $ 9,953 $13,104 $23,057
November 28, 1998
Unrealized
holding Fair
Cost gains value
Equity securities $11,272 $13,146 $24,418
Mutual funds 2,277 408 2,685
Municipal securities 23,606 30 23,636
$37,155 $13,584 $50,739
During 1999, the Company entered into an equity collar arrangement in order to
reduce its exposure to fluctuations in its investment portfolio. The equity
collar is a series of puts and calls on a market index covering a national
amount of $19,700, which expire quarterly in varying amounts over a three year
period. The fair market value of this financial instrument at November 27, 1999
was $3,423 and is included in accrued liabilities on the accompanying balance
sheet. The related loss has been reflected in other income in the accompanying
statement of operations for the year ended November 27, 1999. Subsequent to
yearend, the Company terminated this particular financial instrument, at a cost
of $2.1 million, and entered into a new financial instrument which more directly
correlates to the Company's investment portfolio.
F. Investment in Affiliated Companies
The Company has equity interests in the following entities which are accounted
for using the equity method:
Affiliate % Ownership Description of Business
International Home Furnishings Center, Inc. (IHFC) 41.3% Home Furnishings Showrooms
The Bassett Industries Alternative Asset Fund, LP 99.8% Investment Partnership
Triwood, Inc. 50.0% Real Estate Joint Venture
Zenith Freight Lines, LLC 49.0% Transportation
The Accessory Group, LP 90.0% Home Furnishings Accessories
The Alternative Asset Fund invests in a variety of other private partnerships,
which employ a combination of investment strategies including merger arbitrages,
convertible arbitrages and other market neutral investments. Summarized combined
financial information for all of the affiliated companies are as follows:
1999 1998 1997
Total assets $136,434 $119,276 $ 56,794
Total liabilities 87,503 84,607 10,212
Revenues 56,628 42,203 41,730
Income from operations 31,345 24,021 23,027
Net income 18,455 14,503 15,104
Dividends received 5,448 31,517 21,245
The recorded investment in IHFC at November 27, 1999, and November 28, 1998,
exceeded the Company's interest in the underlying net assets of these entities
by $8,818 and $9,276, respectively. This difference is being amortized and the
related investment balance reduced utilizing the straight-line method over 35
years.
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The Company had earnings in excess of distributions from these investments of
$3,742 at November 27, 1999, and net distributions in excess of earnings of
$3,854 at November 28, 1998. Deferred income taxes related to these items have
been provided in the accompanying consolidated financial statements.
G. Accrued Liabilities
Accrued liabilities consist of the following:
November November
27, 28,
1999 1998
Compensation and related benefits $11,000 $ 9,335
Severance and employee benefits 2,854 1,859
Advertising and rebates 3,214 4,132
Legal and environmental 3,316 4,615
Financial instrument liability 3,423 ---
Other 2,999 4,573
$26,806 $24,514
H. Income Taxes
A reconciliation of the statutory federal income tax rate and the effective
income tax rate, as a percentage of income (loss) before income taxes, is as
follows:
1999 1998 1997
Statutory federal income tax rate 35.0% 35.0% (35.0%)
Dividends received exclusion (.6) (1.0) (.7)
Tax exempt interest (.8) (2.0) (1.0)
Undistributed affiliate income (5.4) (7.7) (4.2)
Corporate owned life insurance (.5) (3.2) (4.3)
State income tax, net of federal benefit 3.6 3.1 (6.0)
Property donation --- --- (3.2)
Other .2 1.3 1.1
Effective income tax rate 31.5% 25.5% (53.3%)
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The components of the income tax provision (benefit) are as follows:
Current: 1999 1998 1997
Federal $ 3,928 $ 1,762 $ (3,968)
State 224 101 171
Deferred:
Federal 3,906 3,340 (17,622)
State 206 176 (927)
Total $ 8,264 $ 5,379 $(22,346)
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 27, November 28,
1999 1998
Deferred income tax assets:
Trade accounts receivable $ 1,648 $ 1,514
Inventories 1,825 1,601
Impaired asset reserves 1,862 2,084
Retirement benefits 5,121 5,135
Severance and employee benefits 964 725
Legal and environmental 1,293 1,800
Net operating loss carry forwards 24 441
Distribution from affiliates in excess of income 2,465 2,258
Contribution carryforward (expires 2002) 989 820
Alternative minimum tax credit carryforward (no expiration) 1,756 ---
Loss on financial instrument 1,335 ---
Other accrued liabilities 3,726 5,141
Total gross deferred income tax assets 23,008 21,519
Deferred income tax liabilities:
Property and equipment 5,689 3,343
Undistributed affiliate income 3,497 541
Prepaid expenses and other 549 250
Unrealized holding gains 5,111 5,298
Total gross deferred income tax liabilities 14,846 9,432
Net deferred income tax assets $ 8,162 $12,087
I. Long-Term Liabilities and Retirement Plans
The Company has a qualified defined contribution plan (Employee
Savings/Retirement Plan) that covers all employees with over one year of service
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. The expenses for the Plan for 1999, 1998, and 1997 were
approximately $2,475, $2,273 and $2,453 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 in long-term
liabilities.
J. Notes Payable
In 1999 the Company entered into a $50 million unsecured revolving credit
facility with a bank which matures October 2002. Borrowings under the facility
totaled $18 million at November 27, 1999. After coverage for letters of credit,
the Company had $26 million available for borrowing under the facility at
November 27, 1999. The average interest rate was 6.9% at November 27, 1999.
The facility contains, among other provisions, certain defined financial
requirements regarding working capital and leverage ratios. The Company was in
compliance with all of these provisions at November 27, 1999.
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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 granted under the 1993 Plan may be for such terms and
exercised at such times as determined at the time of grant by the Organization,
Compensation and Nominating Committee of the Board of Directors. Options to
purchase 360,750 shares of Common Stock were granted during 1997 to officers and
key employees. The exercise price of these options is $22.62, which equaled the
fair market value of the Company's Common Stock at the date of the grant.
However, this exercise price was less than the fair market value at the
measurement date for 330,000 of the options granted. All of these options became
exercisable in 1997. Compensation expense related to these options of $1,682 is
included in selling, general and administrative expenses in the accompanying
1997 consolidated statement of operations. These options 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 reissuance 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 769,902 at November 27, 1999.
The Company has a Stock Plan for Non-Employee Directors which was adopted in
1993. Under this stock option plan, the Company has reserved for issuance 75,000
shares of Common Stock, 7,719 of which are available for grant at November 27,
1999. 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
Average
Number of price per
shares share
Outstanding at November 30, 1996 321,625 $32.02
Granted in 1997 382,750 $22.87
Exercised in 1997 (2,000) $25.97
Cancelled in 1997 (49,577) $31.50
Outstanding at November 30, 1997 652,798 $26,80
Granted in 1998 875,759 $30.25
Exercised in 1998 (11,000) $24.18
Cancelled in 1998 (126,142) $31.67
Outstanding at November 28, 1998 1,391,415 $28.51
Granted in 1999 320,406 $22.58
Exercised in 1999 --- ---
Cancelled in 1999 (341,032) $27.19
Outstanding at November 27, 1999 1,370,789 $27.46
Exercisable at November 27, 1999 508,877 $24.48
Exercisable at November 28, 1998 614,386 $26.17
Exercisable at November 30, 1997 602,726 $26.22
The following table summarizes information about stock options outstanding
at November 27, 1999:
Options Outstanding
Weighted average Options Exercisable
remaining
Range of exercise Number outstanding contractual life Weighted average Number exercisable Weighted average
prices at Nov. 27, 1999 (years) exercise price at Nov. 27, 1999 exercisable price
$16.25 - 22.49 88,500 9.4 $19.59 --- $---
22.50 - 27.75 566,464 7.6 23.24 445,464 23.43
27.76 - 37.40 715,825 8.0 31.79 63,413 31.89
16.25 - 37.40 1,370,789 7.9 27.46 508,877 24.48
12
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:
1999 1998 1997
Net income (loss):
As reported $17,954 $15,717 $(19,609)
Pro Forma $16,879 $14,863 $(19,945)
Basic earnings (loss) per share
As reported $1.44 $1.21 $(1.50)
Pro Forma $1.35 $1.14 $(1.53)
Diluted earnings (loss) per share:
As reported $1.44 $1.20 $(1.50)
Pro Forma $1.35 $1.14 $(1.53)
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:
1999 1998 1997
Expected lives 5 years 5 years 5 years
Risk-free interest rate 4.5% 5.3% 6.6%
Expected volatility 34.5% 34.2% 29.5%
Dividend yield 3.3% 3.0% 3.3%
The weighted average fair values of options granted during 1999, 1998 and 1997
were $5.64, $9.45 and $6.15 respectively.
During 1998 and 1997, the Company issued 16,836 and 31,396 shares respectively,
of restricted Common Stock under the 1993 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 of vesting,
which is five years from the date of grant. 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 $240 in 1999,
$204 in 1998 and $11 in 1997.
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 right's exercise price, a
number of shares of the Company's Common Stock having a market value of twice
such price.
L. Other Income, Net
1999 1998 1997
Equity in undistributed income
of affiliated companies $12,587 $ 5,784 $ 5,926
Corporate owned life insurance,
net of interest expense 3,109 (91) (1,148)
Net gain from sales of investment
securities 1,795 1,446 1,804
Dividends 835 825 1,141
Interest Income (principally
tax exempt) 571 3,195 3,328
Interest expense (256) --- ---
Net loss on financial instrument (3,423) --- ---
Other, net (1,474) 286 2,316
$13,744 $11,445 $13,367
Interest expense on corporate owned life insurance policy loans was $1,769 in
1999, $5,450 in 1998, and $7,295 in 1997.
13
M. Restructuring, Impaired Fixed Asset and Other Unusual and Nonrecurring
Charges
During 1999, the Company reorganized its retail operations and subsequently
formed a new joint venture to operate its stores. See Note R for more discussion
of this transaction. The Company recorded $1,156 of nonrecurring charges related
to this transaction and the closing of one upholstery plant. The charges were
primarily severance and related employee benefit costs. Of these costs, $676 are
included in cost of sales and $480 are included in selling, general and
administrative expenses in the accompanying 1999 consolidated statement of
operations.
During 1997, the Company restructured certain of its operations and recorded
restructuring and impaired fixed asset charges of $20,646. The restructuring
plan was the result of management's decision to focus on its core Bassett
product line and efforts to improve operating efficiencies. The principal
actions of the plan included the closure or sale of 14 manufacturing facilities,
elimination of three product lines (National/Mt. Airy, Impact and Veneer
Production) and the severance of approximately 1,000 employees. The major
components of the restructuring and impairment of fixed assets charges and the
remaining reserves as of November 27, 1999, and November 28, 1998, are as
follows:
1998 1999
Original 1997 1998 Reserve 1999 Reserve
charges Activity Activity Balance Activity Balance
Non-cash write-downs of
property and equipment to
net realizable value $13,362 $13,362 --- --- --- ---
Severance and related employee
benefits 5,684 774 3,507 1,403 289 1,114
Lease exit costs 614 --- 190 424 222 202
Other 986 261 63 662 662 ---
Total $20,646 $14,397 $ 3,760 $ 2,489 $ 1,173 $ 1,316
The Company completed the closure of five of the 14 manufacturing facilities,
disposed of one of the facilities and severed approximately 600 employees during
1997. Substantially all remaining restructuring activities were completed in
1998. Net sales and operating income from activities that were discontinued were
$2,180 and $0, respectively, in 1998, and $46,221 and $(31,602) in 1997.
As a result of the plan, additional nonrecurring charges including moving costs,
plant consolidation inefficiencies and inventory write-downs totaling $4,669
were recorded in 1998. Of these costs, $3,887 are included in cost of goods sold
and $782 are included in selling, general and administrative expenses in the
accompanying 1998 consolidated statement of operations. After an income tax
benefit of $1,821, the additional nonrecurring charges of $4,669 reduced fiscal
year 1998 net income by $2,848 or $0.22 per share. Additional nonrecurring
charges recorded in 1997 totaled $31,654. Of these costs, $28,325 are included
in cost of goods sold and $3,329 are included in selling, general, and
administrative expenses in the accompanying 1997 consolidated statement of
operations. After an income tax benefit of $22,027, the restructuring and
impaired fixed asset charges of $20,646 and additional nonrecurring charges of
$31,654 reduced fiscal year 1997 net income by $30,273 or $2.32 per share.
In addition, the Company incurred other unusual and nonrecurring charges during
1997 of $12,500 related to customer bankruptcies, environmental matters and
issues related to the Bedding Division (Note N). Of these charges, $1,000 are
included in cost of goods sold and $11,500 are included in selling, general and
administrative expenses in the accompanying 1997 consolidated statement of
operations. After an income tax benefit of $4,875, these other unusual and
nonrecurring charges reduced fiscal year 1997 net income by $7,625 or $.58 per
share.
N. Contingencies
A suit was filed in June 1997 in the Superior Court of the State of California
for the County of Los Angeles (the "Superior Court") against the Company, two
major retailers and certain current and former employees of the Company. The
suit sought certification of a class consisting of all consumers who purchased
certain mattresses and box springs from the major retailers that were
manufactured by a subsidiary of the Company, E.B. Malone Corporation, with
allegedly different specifications than those originally manufactured for sale
by these retailers. The suit alleged various causes of action, including
negligent misrepresentation, breach of warranty, violations of deceptive
practices laws and fraud. Plaintiffs sought compensatory damages of $100 million
and punitive damages. In 1998, the Superior Court dismissed the class action
allegations in plaintiffs' complaint and transferred the entire action out of
the class action department. The court also dismissed many of the individual
claims. Plaintiffs then filed a notice of appeal from the class action ruling.
Plaintiffs also filed a petition for a writ of mandamus or other extraordinary
relief, which was denied. The suit was subsequently transferred from the
Superior Court for the County of Los Angeles to the Superior Court for Orange
County. After the case was transferred to Orange County, the plaintiffs
stipulated to a dismissal with prejudice of all individual defendants.
Additionally, all remaining claims against the Company were stayed by the Orange
County Court pending Plaintiffs' appeal of the dismissal of their
14
class action allegations. The parties have recently briefed the issues on
appeal, but no hearing date has been set by the appellate court. Although it is
impossible to predict the ultimate outcome of this litigation, the Company
intends to vigorously defend this suit, because it believes that the damages
sought are unjustified and because this case is inappropriate for class action
treatment. Because the Company believes that the two major retailers were
unaware of any alleged changes in specifications, the Company has agreed to
indemnify the two major retailers with respect to the above.
Legislation has phased out interest deductions on certain policy loans related
to Company owned life insurance (COLI) as of January 1, 1999. The Company has
recorded cumulative reductions to income tax expense of approximately $8 million
as the result of COLI interest deductions through 1998. The Internal Revenue
Service (IRS), on a national level, has pursued an adverse position regarding
the deductibility of COLI policy loan interest for years prior to January 1,
1999. In 1999, the IRS received a favorable Tax Court ruling on one taxpayer
regarding the non-deductibility of COLI loan interest. Management understands
that this ruling and the adverse position taken by the IRS will be subjected to
extensive challenges in court. In the event that the IRS prevails, the outcome
could result in a potential income tax and interest payments which could be
material to the Company's future results of operations.
The Company is also involved in various other claims and actions, including
environmental matters at certain of its plant facilities, 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.
O. Leases
The Company leases land and buildings principally for the operation of its
Company-owned retail outlets and related distribution facilities. Lease terms
range from three to 15 years and generally have renewal options of between five
and 15 years. The following schedule shows future minimum lease payments under
non-cancelable leases having remaining terms in excess of one year as of
November 27, 1999:
2000 $ 2,217
2001 2,131
2002 1,913
2003 1,922
2004 1,837
Thereafter 16,197
$26,217
Rental expense related to these leases was $1,330 in 1999, and $0 in 1998 and
1997, respectively.
As part of Bassett'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
generally do not exceed five years. The Company was contingently liable under
licensee lease obligation guarantees in the amount of $12,147 at November 27,
1999. Additionally, the Company was contingently liable under licensee
construction loan guarantees in the amount of $15,180 at November 27, 1999.
15
P. Earnings Per Share
The following table reconciles basic and diluted earnings per share:
Shares Net Income (loss) Earnings Per Share
1999:
Basic EPS 12,499,481 $17,954 $1.44
Add effect of dilutive securities:
Options and restricted stock 6,992 --- ---
Diluted EPS 12,506,473 $17,954 $1.44
1998:
Basic EPS 12,984,639 $15,717 $1.21
Add effect of dilutive securities:
Options and restricted stock 80,449 --- (.01)
Diluted EPS 13,065,088 $15,717 $1.20
1997:
Basic EPS 13,045,789 $(19,609) $(1.50)
Add effect of dilutive securities:
Options and restricted stock 5,377 --- ---
Diluted EPS 13,051,166 $(19,609) $(1.50)
Q. Segment Information
The Company's operations are classified into two primary businesses: wholesale
and retail 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 and Company-owned stores. The wholesale business
consists primarily of two operating segments, wood and upholstery. The retail
home furnishings segment sells home furnishings products through a network of
Company-owned retail stores known as Bassett Furniture Direct (BFD).
The wood segment is engaged in the manufacture and sale of wood furniture to
independent and Company-owned retailers. The upholstery segment involved in the
manufacture and sale of upholstered frames and cut upholstery items having a
variety of frame and fabric options.
The Company's other businesses consist of the Bedding Division, a contemporary
furniture business (Wieman) and corporate operations, all included to reconcile
segment information to the Consolidated Financial Statements. The Bedding
Division activity is included for five months in 1999 and 12 months in 1998 and
1997. Restructuring and other nonrecurring charges are included for 1998 and
1997 as discussed in Note M to the Consolidated Financial Statements.
Wholesale profitability includes the wholesale gross margin, which is earned on
wholesale sales to all retail stores, including Company-owned stores. The retail
profitability includes the retail gross margin, which is earned based on final
delivery to consumers. Inter-segment eliminations comprise primarily the
wholesale sales and profit on the transfer of inventory between segments.
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 and
upholstery segments consist of inventories and property, plant and equipment.
16
Inter-segment
1999 Wood Upholstery Other Wholesale Retail Eliminations Consolidated
Net sales 259,825 103,520 26,156 389,501 11,319 (6,408) 394,412
Operating Income (Loss) 44,363 9,398 (38,267) 15,494 (2,570) (450) 12,474
Identifiable assets 81,067 14,195 236,708 331,970 10,859 --- 342,829
Depreciation and
amortization 3,846 753 3,303 7,902 484 --- 8,386
Capital expenditures 16,075 2,825 10,106 29,006 18,690 --- 47,696
Inter-segment
1998 Wood Upholstery Other Wholesale Retail Eliminations Consolidated
Net sales 233,626 110,223 53,708 397,557 --- --- 397,557
Operating Income (Loss) 36,730 8,260 (35,339) 9,651 --- --- 9,651
Identifiable assets 80.340 15,134 226,040 321,514 --- --- 321,514
Depreciation and
amortization 3,287 568 3,015 6,870 --- --- 6,870
Capital expenditures 6,363 1,358 14,889 22,610 --- --- 22,610
Inter-segment
1997 Wood Upholstery Other Wholesale Retail Eliminations Consolidated
Net sales 195,743 131,690 119,460 446,893 --- --- 446,893
Operating Income (Loss) 26,943 4,820 (87,085) (55,322) --- --- (55,322)
Identifiable assets 65,632 12,606 242,087 320,325 --- --- 320,325
Depreciation and
amortization 3,014 590 2,588 6,192 --- --- 6,192
Capital expenditures 7,590 425 2,809 10,824 --- --- 10,824
R. Subsequent Event:
Subsequent to yearend, the Company merged all of its eight company owned Bassett
Furniture Direct (BFD) stores with a licensee's five BFD stores, and formed a
new joint venture know as the Ladin Retail Group (LRG). Bassett contributed the
net assets from its retail operations along with $4.2 million in cash and the
Ladins contributed their net assets along with $.5 million in cash. Bassett owns
51% of the new entity.
17
[ARTHUR ANDERSEN LOGO]
To the Stockholders and Board of Directors of Bassett Furniture Industries,
Incorporated:
We have audited the accompanying consolidating balcnace sheets of Bassett
Furnityre Industries, Incorporated (a Virginia corporation) and subsidiaries as
of November 27, 1999 and November 28, 1998, and the related consolidated
statement of operation, comprehensive income, stockholders' equity, and cash
flows for each of the three years in the period ended November 27, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on thesse financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit ot obtain
reasonable assurance about whether the financial statements are free of
material messtatement. An audit includes examining, on a test basis, evidence
supporting the amount 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 finacnial
statment presentation. We believe that our audits provide a reasonabe basis of
our opinion.
In our opinion, financial statements referred to above present fairly, in all
material respects, the financial position of Bassett Furniture Industries,
Incorporated and subsidiaries os of November 27, 1999 and Novenber 28, 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended November 27, 1998, in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen
Greensboro, North Carolina,
January 17, 2000.
18
OTHER BUSINESS DATA
Bassett Furniture Industries, Incorporated and Subsidiaries
(dollars in thousands except share and share data)
SELECTED FINANCIAL DATA
1999 1998 1997 1996 1995
Net sales $394,412 $397,557 $446,893 $450,717 $490,817
Cost of sales 309,316 323,904 396,875 379,259 407,750
Operating profit (loss) 12,474 9,651 (55,322) (1) 7,306 17,129
Other income 13,744 11,445 13,367 14,982 13,000
Income (loss) before income taxes 26,218 21,096 (41,955) (1) 22,288 30,129
Income taxes 8,264 5,379 (22,346) (1) 3,787 7,226
Net income (loss) 17,954 15,717 (19,609) (1) 18,501 22,903
Diluted earnings (loss) per share 1.44 1.20 (1.50) (1) 1.39 1.63
Cash dividends declared 9,983 10,393 13,041 10,626 11,197
Cash dividends per share .80 .80 1.00 .80 .80
Total assets 342,829 321,514 320,325 335,166 346,720
Current ratio 2.39 to 1 3.21 to 1 4.12 to 1 6.42 to 1 5.79 to 1
Book value per share 20.46 20.40 20.01 22.29 21.88
Weighted average number of shares 12,499,481 12,984,639 13,045,789 13,351,585 14,052,794
QUARTERLY RESULTS OF OPERATIONS
1999
First Second Third Fourth
Net sales $ 99,809 $103,659 $ 88,803 $102,141
Gross profit 19,576 22,464 20,224 22,832
Net income 4,415 5,060 4,405 4,074
Basic earnings per share .34 .40 .36 .34
Diluted earnings per share .34 .40 .36 .34
1998
First Second Third Fourth
Net sales $ 98,333 $ 98,335 $ 98,093 $102,796
Gross profit 17,582 18,527 17,690 19,854
Net income 3,435 3,959 3,127 5,196
Basic earnings per share .26 .30 .24 .40
Diluted earnings per share .26 .30 .24 .40
(1) See Note M to the Consolidated Financial Statements for a discussion of
restructuring and fixed asset impairment charges
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Bassett Furniture Industries, Incorporated and Subsidiaries
(dollar amounts in thousands)
RESULTS OF OPERATIONS:
In 1999, Bassett reported a net sales decline of 1% following an 11% decline in
1998. The decline in sales reflects the elimination and disposition of divisions
and products that did not adequately contribute to earnings. In April of 1999,
the Company sold its Bedding Division, which had revenues of $12 million in 1999
(prior to the sale), $39 million in 1998, and $54 million in 1997. The decline
from 1997 to 1998 also resulted from eliminating three divisions (Impact,
National/Mt. Airy and Veneer) which had net sales of $46 million in 1997.
Offsetting these declines were increases in core Bassett branded wholesale
furniture sales in both 1998 and 1999. Core wholesale furniture sales have
increased 6% each of the past two years driven by the opening of additional
Bassett Furniture Direct (BFD) stores. A net 15 BFD stores were opened in 1999
following the opening of 17 stores in 1998, bringing the total BFD stores open
at the end of fiscal 1999 to 51. The Company has targeted opening approximately
20 new BFD stores in each of the next five years. Within our core wholesale
furniture segment, sales of our products have significantly increased over the
past two years, 11% and 19% for 1999 and 1998, respectively, while upholstery
product sales have declined 6% and 16% for 1999 and 1998, respectively. We
continue to reposition our product offerings and account structure in order to
improve both service and profitability.
Gross margin; selling, general, and administrative (S,G&A) expenses; and
operating income as a percentage of net sales were as follows for the years
ended November 27, 1999, November 28, 1998, and November 30, 1997:
1999 1998 1997
Gross Margin 21.6% 18.5% 11.2%
S,G&A Expenses 18.4% 16.1% 18.9%
Operating Income 3.2% 2.4% (12.4%)
The improvement in gross margin from 11.2% in 1997 to 18.5% in 1998 to 21.6% in
1999 reflects both the elimination and disposition of unprofitable divisions and
the operational changes made by the Company over the past two years. Results in
1997 and 1998 were negatively impacted by restructuring and nonrecurring
charges, substantially all of which were completed in 1998. On a continuing
operations basis, margins improved from 17.8% in 1997 to 19.5% in 1998 to 21.7%
in 1999 due to consolidation and absorption efficiencies, new investments in
technology and equipment, manufacturing process improvements, and product
enhancements. The Company is committed to continuing its gross margin
improvement initiatives. These initiatives include the consolidation of the J.D.
Bassett plant in the Wood Division and the closing of the Dumas plant in the
Upholstery Division, additional investments in equipment and technology, and
additional engineering efforts to streamline plant production processes.
S,G&A expenses increased from 16.1% of sales in 1998 to 18.4% of sales in 1999
following a decrease in 1998 from 18.9% in 1997. The increase in 1999 is
attributable primarily to the Company's entry into the retail furniture business
and the related support structure required for this segment ($10 million). In
addition, the Company increased spending on brand building and marketing
programs. Spending related to information technology and systems has also
increased in each of the last two years. The Company plans to continue to focus
its spending on marketing and advertising in order to drive its sales growth.
Management expects S,G&A spending in the wholesale furniture segment to
approximate 16.5% of wholesale furniture sales over the next five years. Total
S,G&A spending will continue to increase as a percentage of sales due to the
consolidation of an ever growing retail business.
Other income increased from $11.4 million in 1998 to $13.7 million in 1999,
following a decrease in 1998 from $13.4 million in 1997. The increase in 1999
was due principally to better returns on the Company's investment portfolio.
Also included in the increase was income from the Company's COLI plan. COLI
income is realized as proceeds from policy claims exceed interest on policy
loans and changes in the cash surrender value of the policies. The decrease from
1997 to 1998 was due to fewer sales of investment securities and the related
gains from these sales. Other income will continue to be an integral component
of the Company's future earnings. Management plans to continue to make
investments in companies which are strategically aligned with Bassett and the
home furnishings industry.
The effective tax rate was 31.5% in 1999 compared to 25.5% in 1998 and (53.3%)
in 1997. The unusual rate in 1997 was a result of the restructuring, impaired
fixed asset and other non-recurring charges incurred in 1997. The 1999 and 1998
tax rates were lower than the statutory federal income tax rate due to
exclusions for tax exempt and undistributed affiliate income and the Company's
COLI Plan (1998 only). Note H in the "Notes to Consolidated Financial
Statements" contains complete disclosure of the Company's income tax status. The
increase in the effective rate for 1999 is due to the final phase-out of the
COLI loan interest deduction and the reduction in tax exempt bond income.
For the year ended November 27, 1999, net income was $18.0 million, or $1.44 per
diluted share, compared to net income of $15.7 million or $1.20 per diluted
share in fiscal 1998, and a net loss of $19.6 million or ($1.50) per diluted
share in fiscal 1997.
20
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 Q to the Notes of the
Consolidated Financial Statements.
Wood Division
1999 1998 1997
Net Sales $259,825 $233,626 $195,743
Contribution to Profit and Overhead 44,363 36,730 26,943
Wood Division net sales grew 11% in 1999 and 19% in 1998 due to the expansion of
the BFD store program, successful new product introductions, and improvements in
product styling, quality, and service.
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. For the Wood
division, contribution to profit and overhead has increased dramatically over
the past two years from 13.8 as a percentage of net sales in 1997 to 15.7% in
1998 and 17.1% in 1999. This improvement results from the combination of
consolidation and absorption efficiencies and several Company initiatives. The
initiatives include investments in equipment and technology, manufacturing
process improvements, and targeted price increases.
Two of the Company's wood manufacturing facilities posted notable improvement in
their contribution to profit and overhead from 1998 to 1999. The two plants
located in Dublin, Georgia, and Mt. Airy, North Carolina, achieved these results
for the reasons noted above but also as a result of better plant scheduling
practices, a narrower more focused product line, and standardized production
processes. In addition, sales of the Company's import products have increased in
each of the last two years, improving sales and profitability for the Wood
Division.
Upholstery Division
1999 1998 1997
Net Sales $103,520 $110,223 $131,690
Contribution to Profit and Overhead 9,398 8,260 4,820
Net sales for the Upholstery Division have declined in each of the past two
years, as the Company continues its overall repositioning of this product
segment. Management decided to exit certain distribution channels, which it
concluded, were incompatible with the Bassett brand image and its current
primary channels of distribution. The Company has decided to focus this segment
on its BFD stores, its At Home with Bassett galleries, and several of its major
customers.
Contribution to profit and overhead has improved despite the sales decline. For
the Upholstery Division, contribution to profit and overhead has increased over
the past two years from 3.6% of sales in 1997 to 7.5% in 1998 to 9.1% in 1999.
Repositioning the segment away from lower margin accounts and products and into
higher quality, more stylish goods combined with operational initiatives have
propelled the profit improvement. The operational initiatives include the entry
into cellular manufacturing and investments in new cutting and sewing equipment.
Retail Segment
1999 1998 1997
Net Sales $11,319 --- ---
Operating Loss (2,570) --- ---
The Company owned and operated eight BFD stores in 1999. Delivered sales from
these stores, which opened or were purchased at various months during the year,
were $11.3 million. The pretax operating loss (which includes a corporate
management allocation) of $2.6 million resulted from acquiring two
underperforming licensed stores during the year, start-up related losses
associated with opening the other six stores, and operational inefficiencies
incurred during the first year of this new segment.
Note that subsequent to year-end, the Company merged its eight BFD stores with a
licensee's five BFD stores, and formed a new joint venture known as the Ladin
Retail Group (LRG). Bassett retains a 51% ownership of the joint venture and
will be consolidating the results of LRG's operations into future consolidated
financial statements.
The change in "Other" operations from 1997 to 1998 to 1999 detailed in Note Q to
the Consolidated Financial Statements reflect the elimination of discontinued
operations previously discussed, the sale of the bedding division, and the
increase in corporate related marketing and support structure spending.
21
LIQUIDITY AND CAPITAL RESOURCES:
Cash provided by operating activities was $16.3 million in 1999 compared with
$4.5 million in 1998 and $21.3 million in 1997. The increase in 1999 was
attributable to better earnings, the timing of certain accounts payable
expenditures, and the refund of certain income taxes paid in 1998. In 1998,
increases in inventories and receivables negatively impacted operating cash
flow.
The Company invested $47.7 million in property and equipment in 1999. This
significant increase in capital spending included amounts for the BFD store real
estate, the Company's new enterprise-wide information systems, new manufacturing
equipment and a new dining table top manufacturing facility. The Company plans
to invest approximately $30 to $40 million per year over the next few years to
aggressively execute its BFD expansion. The Company's solid financial position
with significant liquidity and minimal debt affords it many options. Management
intends to examine opportunities to strengthen its balance sheet and increase
shareholder value, which could require additional debt financing.
In 1999, the Company liquidated a significant portion of its investment
portfolio, primarily tax exempt municipal bonds, and generated $37.8 million in
cash proceeds. These proceeds were utilized to fund capital expenditures and BFD
expansion. This follows the decision made by management in 1998 to reinvest a
large portion ($50 million) of its investment portfolio into an investment
partnership which has enabled the Company to generate improved investment
returns in 1999 compared to 1998.
The Company made two strategic investments in 1999 totaling $5.7 million for
equity interests in Zenith Freight Lines LLC and The Accessory Group LP, two
companies which service and support the home furnishings industry.
The Company entered into a $50 million revolving credit facility in 1999.
Management decided to borrow money at competitive rates rather than further
liquidate its investment portfolio, which has been generating favorable returns.
At the end of fiscal 1999, the Company had borrowed $18 million against its
credit line and expects to continue to borrow against this line in fiscal 2000.
The Company also plans to liquidate a portion of its investment portfolio over
the next six years.
The Company purchased and retired 793,000 shares of its Common Stock during
1999. These purchases were part of the Company's stock repurchase program,
approved in 1998, which allows the Company to repurchase up to 1.3 million
shares for an aggregate purchase price not to exceed $40 million. The average
cost of the shares purchased in 1999 was $21.73, resulting in a total
expenditure of $17.0 million. In 1998, the Company purchased and retired 185,300
shares for $4.8 million, while in 1997, 60,000 shares were purchased and retired
for $1.4 million. The Company plans to actively continue its share repurchase
program in fiscal 2000.
The current ratio for the past two years was 2.39 to 1 and 3.21 to 1,
respectively. Working capital was $79.3 million at November 27, 1999 and $98.9
million at November 28, 1998. This decrease is due primarily to the Company's
change in investment strategies, and the sale of its bedding division in April
1999.
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.
CONTINGENCIES:
The Company is involved in various claims and litigation, including a lawsuit
concerning a subsidiary, E. B. Malone Corporation, as well as environmental
matters at certain plant facilities, which arise in the normal course of
business. The details of these matters are described in Note N in the Notes to
Consolidated Financial Statements. 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.
Legislation has phased out interest deductions on certain policy loans related
to Company owned life insurance (COLI) as of January 1, 1999. The Company has
recorded cumulative reductions to income tax expense of approximately $8 million
as the result of COLI interest deductions through 1998. The Internal Revenue
Service (IRS), on a national level, has pursued an adverse position regarding
the deductibility of COLI policy loan interest for years prior to January 1,
1999. In 1999, the IRS received a favorable Tax Court ruling on one taxpayer
regarding the non-deductibility of COLI loan interest. Management understands
that this ruling and the adverse position taken by the IRS will be subjected to
extensive challenges in court. In the event that the IRS prevails, the outcome
could result in a potential income tax and interest payments which could be
material to the Company's future results of operations.
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YEAR 2000:
JANUARY 2000 UPDATE:
Through the first month of the year 2000, Bassett's operations throughout the
United States are fully functioning and have not experienced any significant
problems associated with the Y2K issue. We are pleased by the results of our
Year 2000 efforts, and that of our customers, suppliers, and third party service
providers thus far, however the Company remains vigilant in its testing and
preparations for any follow-on Year 2000 issues that may arise.
YEAR 2000 READINESS OVERVIEW:
The Year 2000 issue results from the inability of many computer systems and
applications to recognize and process data after the year 1999. This could cause
systems to process critical information incorrectly. Over the past few years,
the Company has been steadily reengineering its business processes and
information systems to prepare for the conversion to year 2000. Based on our
analysis of significant Year 2000 issues, management believes that the Company
has taken and is taking appropriate and timely actions. The Company's Year 2000
compliance plan includes three phases discussed in greater detail below. Each
significant internal and external information technology and non-information
technology system that may possibly be affected by a Year 2000 problem,
(hereinafter collectively, the "System[s]") had to be confirmed as Year 2000
compliant in Phase One or be successfully tested through phases Two and Three to
be considered Year 2000 ready.
Phase One of the Compliance Plan involved a comprehensive audit to identify all
internal and external Systems. Once identified, each System was reviewed and
categorized as compliant or non-compliant. In addition, initial contingency
plans were developed based on the importance of any non-compliant system. Phase
Two involved correcting those Systems identified in Phase One as non-compliant,
initial testing (as well as additional testing if needed) of individual internal
Systems, a Year 2000 readiness audit of all existing software by an external
consultant, and formalization of contingency plans. Phase Three involved
comprehensive simultaneous Company wide testing of internal locations and
Systems, final confirmation of the readiness of external Systems, and
finalization of contingency plans. Testing in Phase Two and Phase Three included
setting internal System clocks ahead to simulate the change from 1999 into 2000
and monitoring System performance before, during, and after the simulated date
change.
A significant step in moving towards Year 2000 readiness was taken in the second
quarter of 1998 when a comprehensive enterprise wide system (which had been
installed in over 4,400 companies and is Year 2000 compliant) was purchased.
Implementation of the enterprise wide system began immediately thereafter. In
1998, the Company also engaged a consultant, knowledgeable in the enterprise
wide system being installed, to advise and assist in the installation and
implementation of the system. To further assure readiness, the Company converted
all PC's to Year 2000 compliant Pentium chip PC's by December 1999.
As part of Phases One, Two, and Three the Company developed and updated
contingency plans and will continue to refine them as test data and other
information regarding possible Year 2000 issues develop. Current contingency
plans include identifying alternate means of supply, determining appropriate
levels of safety stock, contacting customers to coordinate orders, arranging
alternate means of placing orders, and printing hard copies of reports that may
otherwise be available only on computer. In addition, combined action teams are
prepared and trained to assure rapid response if needed. The reasonable worst
case scenario is an interruption of normal business operations. If Year 2000
issues present themselves, the amount of lost revenue would depend on the
duration of the problem and the amount of deliverable goods in inventory.
The Company also worked with its customers, suppliers and third-party service
providers to identify external weaknesses and provide solutions which will
prevent the disruption of business activities; it does not believe that it will
be significantly affected by direct suppliers of raw materials or supplies that
might be non-compliant. The Company's actions included surveying vendors and
customers with which it has a material relationship. To date, the Company has
not received any responses that indicate the possibility of significant
problems. However, the Company cannot guarantee that Year 2000 related systems
or hardware issues of its business partners will be corrected in a timely manner
or that the failure of its business partners to correct these issues would not
have a material adverse effect on its future results of operations or financial
condition. The Company does not believe that it will be significantly affected
by non-compliance by companies outside the United States.
The Company does not expect the cost of implementation to have a material
adverse effect on its future results of operations, liquidity or capital
resources. The total cost of the new enterprise system is estimated at $10
million. This total includes the Year 2000 Project. The new system was not
purchased to solely achieve Year 2000 compliance in the Company's information
systems. Instead it was purchased to provide management with the information and
tools that it needs to better manage the Company. The Year 2000 issue slightly
accelerated the timetable for implementation, however. Of the total project
cost, $9 million represents the purchase of new software, new hardware, and
related implementation costs, which have been or will be capitalized. As of the
end of the fiscal 1999, the Company has spent approximately $8 million on the
project.
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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, a financial instrument entered into in order to hedge its 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 equity securities portfolio, which totaled $23,057 at November 27,
1999, is diversified among over twenty different medium to large capitalization
interests. The Company entered into an equity collar in 1999 to reduce its
exposure to fluctuations in the market value of these securities. Subsequent to
yearend, management decided to liquidate this financial instrument and enter
into a new financial instrument which more clearly correlates to its equity
portfolio. Although there are no maturity dates for the Company's equity
investments, management has plans to liquidate both its current equity portfolio
and the related financial instrument on a scheduled basis over the next five
years. See Note E to the Consolidated Financial statements for more information
on these investment securities.
The Company's investment in a limited partnership, which totaled $58,000 at
November 27, 1999, invests in various other 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.
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. 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
- - cost and availability of raw materials and labor
- - information and technology advances, including Year 2000 issues
- - success of marketing and advertising campaigns
- - future tax legislation, or regulatory or judicial positions related to
COLI
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INVESTOR INFORMATION
CORPORATE INFORMATION:
The Company's annual report and proxy statement together contain substantially
all 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 Grover S. Elliott, Vice President, Finance
and Investor Relations at 336-725-7996.
INVESTOR INQUIRIES:
Securities analysts, portfolio managers and other representatives of financial
institutions seeking information about the corporation should contact Grover S.
Elliott, Vice President, Finance and Investor Relations at 336-725-7996.
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 Jane
Wilson at the corporate headquarters.
ANNUAL MEETING:
The Bassett Annual Meeting of Shareholders will be held Tuesday, March 28, 2000,
at 11:30 a.m. at the Company's showroom building in Thomasville, North Carolina.
MARKET AND DIVIDEND INFORMATION:
Bassett's common stock trades on the NASDAQ national market system under the
symbol "BSET." The Company had approximately 1,700 registered stockholders at
November 27, 1999. The range of per share amounts for 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 1999 1998 1999 1998
High Low High Low
First $27.00 $19.87 $31.25 $25.63 .20 .20
Second $24.31 $19.50 33.50 29.34 .20 .20
Third $24.91 $20.37 31.88 24.13 .20 .20
Fourth $20.25 $15.87 29.69 19.94 .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 increases in sales,
growth in the number of At Home with Bassett & Bassett Furniture Direct stores,
maintaining and expanding traditional channels of distribution, improving gross
margins, growth in earnings per share, changes in capital structure, royalties,
and the expansion of LRG 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 sections of this Annual Report.
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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.