SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________________ to ____________________
Commission File No. 0-209
BASSETT FURNITURE INDUSTRIES, INCORPORATED
(Exact name of Registrant as specified in its charter)
Virginia 54-0135270
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3525 Fairystone Park Highway
Bassett, Virginia 24055
(Address of principal executive offices)
(Zip Code)
(276) 629-6000
(Registrant's telephone number, including area code)
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 the past 90 days. Yes X No
--- ---
At September 26, 2002, 11,720,617 shares of common stock of the Registrant were
outstanding.
1 of 21
PART I - FINANCIAL INFORMATION
BASSETT FURNITURE INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE PERIODS ENDED AUGUST 31, 2002, AND AUGUST 25, 2001 - UNAUDITED
(In thousands except per share data)
Item 1. Financial Statements
Nine Months Ended Quarter Ended
--------------------------------------- -------------------------------------
40 Weeks 39 Weeks 13 Weeks 13 Weeks
-------------------- ------------------ ------------------ ------------------
August 31, 2002 August 25, 2001 August 31, 2002 August 25, 2001
-------------------- ------------------ ------------------ ------------------
Net sales $ 244,059 $ 227,608 $ 78,367 $ 71,290
Cost of sales 192,298 191,799 61,783 61,133
--------- --------- --------- ---------
Gross profit 51,761 35,809 16,584 10,157
Selling, general and administrative 45,020 39,728 15,472 12,805
Gain on sales of property and equipment
-- (4,013) -- (985)
Restructuring and impaired fixed asset charges 1,251 6,639 1,251 3,973
--------- --------- --------- ---------
Operating income (loss) 5,490 (6,545) (139) (5,636)
Other income (loss), net 1,817 4,678 (948) 1,323
--------- --------- --------- ---------
Income (loss) before income taxes 7,307 (1,867) (1,087) (4,313)
Income taxes (2,233) 747 369 1,479
--------- --------- --------- ---------
Net income (loss) $ 5,074 $ (1,120) $ (718) $ (2,834)
Retained earnings-beginning of period 173,011 185,293 174,274 182,112
Cash dividends (7,030) (7,035) (2,341) (2,345)
Share repurchases, net (74) (182) (234) 23
--------- --------- --------- ---------
Retained earnings-end of period $ 170,981 $ 176,956 $ 170,981 $ 176,956
========= ========= ========= =========
Basic earnings (loss) per share $ 0.43 $ (0.10) $ (0.06) $ (0.24)
========= ========= ========= =========
Diluted earnings (loss) per share $ 0.43 $ (0.10) $ (0.06) $ (0.24)
========= ========= ========= =========
Dividends per share $ 0.60 $ 0.60 $ 0.20 $ 0.20
========= ========= ========= =========
The accompanying notes to condensed consolidated financial statements are an
integral part of the condensed consolidated financial statements.
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PART I - FINANCIAL INFORMATION - CONTINUED
BASSETT FURNITURE INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AUGUST 31, 2002 AND NOVEMBER 24, 2001
(In thousands)
ASSETS (Unaudited)
- ------ August 31, 2002 November 24, 2001
----------------- -------------------
Current assets
Cash and cash equivalents $ 4,212 $ 5,347
Accounts receivable, net 47,582 51,487
Inventories, net 38,139 32,244
Other current assets 6,584 10,609
Refundable income taxes 4,276 2,728
Deferred income taxes 5,553 3,841
--------- ---------
Total current assets 106,346 106,256
--------- ---------
Property and equipment
Cost 229,579 225,632
Less accumulated depreciation 138,543 135,225
--------- ---------
Total property and equipment 91,036 90,407
--------- ---------
Other long-term assets
Investment securities 5,687 9,116
Investments in affiliated companies 60,820 62,636
Deferred income taxes 2,134 6,528
Notes receivable, net 18,813 14,551
Other 6,979 11,909
--------- ---------
Total other long-term assets 94,433 104,740
--------- ---------
Total assets $ 291,815 $ 301,403
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 17,464 $ 15,010
Accrued liabilities 17,426 18,250
--------- ---------
Total current liabilities 34,890 33,260
--------- ---------
Long-term liabilities
Employee benefits 10,424 10,596
Long-term debt -- 7,482
Deferred revenue from affiliate 15,693 15,593
--------- ---------
Total long-term liabilities 26,117 33,671
--------- ---------
Stockholders' Equity
Common stock 58,603 58,636
Retained earnings 170,981 173,011
Accumulated other comprehensive income -
unrealized holding gains, net of income tax effect 1,300 3,047
Unamortized stock compensation (76) (222)
--------- ---------
Total stockholders' equity 230,808 234,472
--------- ---------
Total liabilities and stockholders' equity $ 291,815 $ 301,403
========= =========
The accompanying notes to condensed consolidated financial statements are an
integral part of the condensed consolidated financial statements.
3 of 21
PART I - FINANCIAL INFORMATION - CONTINUED
BASSETT FURNITURE INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED AUGUST 31, 2002 AND AUGUST 25, 2001 - UNAUDITED
(in thousands)
2002 2001
40 Weeks 39 Weeks
---------- ----------
Net income (loss) $ 5,074 $ (1,120)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization 7,686 8,357
Equity in undistributed income of affiliated companies (3,823) (4,367)
Provision for deferred income taxes 2,117 (2,736)
Provision for writedown of property and equipment -- 4,550
Net gain from sales of property and equipment -- (4,013)
Net gain on financial instrument -- (448)
Net gain from sales of investment securtities (707) (1,502)
Compensation earned under restricted stock plan 146 130
Changes in long-term liabilities (172) (160)
Changes in operating assets and liabilities:
Accounts receivable 3,335 8,717
Inventories (2,020) 18,386
Other current assets 4,067 (763)
Accounts payable and accrued liabilities (3,291) (9,316)
-------- --------
Net cash provided by operating activities 12,412 15,715
-------- --------
Investing activities:
Purchases of property and equipment (7,088) (11,953)
Proceeds from sales of property and equipment -- 5,114
Dividends from affiliated companies 8,623 28,782
Proceeds from sales of investment securities 1,393 2,590
Investments in affiliated companies (2,118) --
Other, net 1,451 (116)
-------- --------
Net cash provided by investing activities 2,261 24,417
-------- --------
Financing activities:
Repayments of long-term debt (8,671) (32,000)
Issuance of common stock 321 219
Repurchase of common stock (428) (550)
Cash dividends (7,030) (7,035)
-------- --------
Net cash used in financing activities (15,808) (39,366)
-------- --------
Net change in cash and cash equivalents (1,135) 766
Cash and cash equivalents, beginning of period 5,347 3,259
-------- --------
Cash and cash equivalents, end of period $ 4,212 $ 4,025
======== ========
Supplemental disclosure of non-cash investing and financing activities: During
the second quarter of 2002, the Company acquired the net assets of five stores
formerly operated by its affiliate LRG Furniture, LLC (LRG) 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. Also, during the
second quarter of 2002, the Company converted $3,000 in accounts receivable to a
note receivable. These transactions have appropriately been excluded from the
cash flow statement.
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BASSETT FURNITURE INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
AUGUST 31, 2002
(Dollars in thousands except share and per share data)
Note A. Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
The condensed consolidated financial statements include the accounts of Bassett
Furniture Industries, Incorporated (the "Company") and its wholly owned
subsidiaries. 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 control.
Certain amounts in the 2001 financial statements have been reclassified to more
closely conform with the 2002 presentation. The Company's 2002 fiscal year
contains 53 weeks. As a consequence, the first quarter of 2002 contained 14
weeks.
Note B. Inventories:
Inventories are valued at the lower of cost or market. Cost is determined for
wholesale domestic furniture inventories using the last-in, first-out (LIFO)
method. The costs for imported inventories and retail inventories are determined
using the first-in, first-out (FIFO) method.
August 31, November 24,
2002 2001
------------ --------------
Finished goods $ 30,666 $ 29,289
Work in process 3,320 4,084
Raw materials and supplies 18,179 16,046
Retail merchandise 3,299 441
-------- --------
Total inventories on FIFO method 55,464 49,860
LIFO adjustment (17,325) (17,616)
-------- --------
Total inventories, net $ 38,139 $ 32,244
======== ========
Note C. Investments in Affiliated Companies:
The Company's investments in affiliated companies are summarized in the table
below:
Description
Affiliate % Ownership of business
- --------------------------------------- ----------------- -----------------
The Bassett Industries Investment
Alternative Asset Fund, LP 99.8% Partnership
International Home Home
Furnishings Furnishings
Center, Inc. (IHFC) 46.9% Showrooms
Zenith Freight Lines, LLC 49.0% Transportation
Furniture
LRG Furniture, LLC (LRG) 51.0% Retailer
Furniture
BFD Northeast, LLC (BFD NE) 30.0% Retailer
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BASSETT FURNITURE INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
AUGUST 31, 2002
(Dollars in thousands except share and per share data)
Summarized combined income statement information for the Company's equity method
investments, excluding LRG Furniture, LLC (LRG), for the nine months ended
August 31, 2002 and August 25, 2001 are as follows:
2002 2001
------ ------
Revenues $40,330 $43,858
Income from operations 19,146 20,377
Net income 8,928 9,813
The recorded investment in the Bassett Industries Alternative Asset Fund, LP
(BIAAF) was $56,370 and $58,652 at August 31, 2002 and November 24, 2001,
respectively. The Company received distributions of $3,000 during the first nine
months of 2002 related to this investment.
The Company paid $1,519 for an additional ownership interest in IHFC during the
first quarter of 2002, bringing its total ownership interest to 46.85%.
Dividends received during the first nine months of 2002 totaled $5,623. During
the same period in 2001, IHFC refinanced its real estate, which allowed for an
unusually large dividend of $25,059 to be paid to the Company. The large
dividend essentially reflected an advance on the Company's earnings and as such,
the investment in IHFC is shown as a credit balance in the liabilities section
of the accompanying balance sheets. The recorded investment in IHFC was
($15,693) and ($15,593) at August 31, 2002 and November 24, 2001, respectively.
The Company's investment in Zenith was recorded at $3,984 at August 31, 2002 and
November 24, 2001. Zenith continued to operate at a break-even level during the
first nine months of 2002.
The Company had outstanding accounts and notes receivable from LRG, an
affiliated company, totaling $14,236 at the end of the third quarter of 2002.
Additionally, the Company has lease and loan guarantees with LRG. During the
second quarter of 2002, the Company completed its previously announced
acquisition of five stores from LRG for net book value. The Company has
committed to provide financial support to LRG, as needed, over the next two
years. Summarized combined financial statement information for LRG for the nine
months ended August 31, 2002 and nine months ended August 25, 2001 is presented
below. The 2002 results are impacted by the sale of five stores to Bassett at
the beginning of the second quarter of 2002.
2002 2001
--------- ---------
Total assets $ 8,135 $ 17,177
Total liabilities 20,457 29,390
Revenues 35,135 44,532
Net loss (1,442) (5,306)
In the first quarter of 2002, the Company paid $600 for a 30% ownership interest
in a joint venture developing Bassett Furniture Direct (BFD) stores in New
England.
6 of 21
BASSETT FURNITURE INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
AUGUST 31, 2002
(Dollars in thousands except share and per share data)
Note D. Comprehensive income:
For the quarters ended August 31, 2002, and August 25, 2001, total comprehensive
loss was $1,637 and $3,809, respectively. Included in total comprehensive income
are net losses of $718 and $2,834 and unrealized holding losses, net of tax of
$919 and $975. Comprehensive income (loss) was $3,327 and ($3,134), consisting
of net income (loss) of $5,074 and ($1,120) and unrealized holding losses, net
of tax of $1,747 and $2,014 for the nine months ended August 31, 2002 and August
25, 2001, respectively.
Note E. Restructuring, Impaired Fixed Assets and Other Unusual and Nonrecurring
Charges:
During the third quarter of 2002, the Company announced that it would close its
California upholstery plant and consolidate upholstery production into its two
North Carolina facilities. Restructuring charges of $1,251, which entirely
relate to severance and employee benefit costs for approximately 200 employees,
were accrued at the end of the quarter. During the first nine months of 2001,
$5,039 of severance and related employee benefit costs were expensed, $3,973 of
this amount in the third quarter of 2001, associated with fiscal 2001
restructuring. Additionally, the Company recorded an impaired asset charge of
$1,600 in the first quarter of 2001, related to the same restructuring. There
was $56 remaining in the 2001 restructuring reserve as of August 31, 2002 that
relates to severance and employee benefits that will be paid out over the
remainder of 2002. The Company is holding the related property for sale and
expects to realize a gain on the disposition of assets in the next nine months.
Note F. Contingencies:
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 $8,000 as
the result of COLI interest deductions through 1998. The Internal Revenue
Service, on a national level, has pursued an adverse position regarding the
deductibility of COLI policy loan interest for years prior to January 1, 1999.
The IRS has received favorable rulings on the non-deductibility of COLI loan
interest. The Company has entered into a settlement process with the IRS
regarding the non-deductibility of interest expense for certain fiscal years.
Management believes that the Company has adequate reserves to address the
estimated settlement amount.
The Company has also surrendered the policies under the COLI plan effective July
31, 2002. Discussions are currently underway with the Company's insurance
carrier relating to the final settlement of these policies.
The Company is involved in various other legal and 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.
As part of the Company's expansion strategy for its retail stores, Bassett has
guaranteed certain lease and loan obligations of licensee operators of the
Bassett Furniture Direct program. Lease guarantees range from three to ten
years. Loan guarantees are for a maximum of 36 months and are limited to $400
per location. The loan guarantees are used to finance initial floor inventories
for the BFD stores. The Company was contingently liable under licensee lease
obligation guarantees in the amount of $29,496 and $25,708 at August 31, 2002
and November 24, 2001, respectively. The Company was contingently liable under
BFD loan guarantees in the amount of $7,912 and $8,990 at August 31, 2002 and
November 24, 2001.
Note G. Recent Accounting Pronouncements
The Company adopted SFAS No. 142 "Goodwill and Other Intangible Assets" in the
first quarter of fiscal 2002. Instead of amortizing goodwill over a fixed period
of time, the Company will instead measure the fair value of acquired businesses
annually to determine if goodwill has been impaired. Goodwill amortization,
related to investments in affiliates, which was recorded during the first nine
months and third quarter of 2001 and that will no longer be recorded, was $168
and $56, respectively. There would have been no change to basic or diluted
earnings per share should the Company have adopted SFAS No. 142 in 2001.
7 of 21
BASSETT FURNITURE INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
AUGUST 31, 2002
(Dollars in thousands except share and per share data)
Note H. Earnings per share:
The following reconciles basic and diluted earnings per share after cumulative
effect of accounting change:
Weighted
Average Earnings per
Net Income Shares share
------------------------------------------------
For the nine months ended August 31, 2002
- --------------------------------------------
Net income available to common stockholders $ 5,074 11,704,996 $0.43
Add effect of dilutive securities:
Options and restricted stock -- 117,441 --
------------------------------------------
Diluted earnings per share $ 5,074 11,822,437 $0.43
==========================================
For the quarter ended August 31, 2002
- --------------------------------------------
Net loss available to common stockholders $ (718) 11,708,324 $(0.06)
Add effect of dilutive securities:
Options and restricted stock -- -- --
-------------------------------------------
Diluted earnings per share $ (718) 11,708,324 $(0.06)
===========================================
For the nine months ended August 25, 2001
- --------------------------------------------
Net loss available to common stockholders $ (1,120) 11,703,349 $(0.10)
Add effect of dilutive securities:
Options and restricted stock -- -- --
-------------------------------------------
Diluted earnings per share $ (1,120) 11,703,349 $(0.10)
===========================================
For the quarter ended August 25, 2001
- --------------------------------------------
Net loss available to common stockholders $ (2,834) 11,702,001 $(0.24)
Add effect of dilutive securities:
Options and restricted stock -- -- --
-------------------------------------------
Diluted earnings (loss) per share $ (2,834) 11,702,001 $(0.24)
===========================================
Options to purchase 1.9 million and 1.8 million shares of common stock were
outstanding during the third quarters of 2002 and 2001, respectively, that could
potentially dilute basic EPS in the future.
Common stock equivalent shares are excluded from the computations if their
effect is anti-dilutive. The effect of stock options is not included in the
diluted computation for periods in which a loss occurs because to do so would
have been anti-dilutive.
8 of 21
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES INC. AND SUBSIDIARIES
AUGUST 31, 2002
(Dollars in thousands except share and per share data)
Note I. Segment Information:
Segment information for the periods ended August 31, 2002 and August 25, 2001
was as follows:
For the nine months ended August 31, 2002
Wood Imports Upholstery Retail Other Consolidated
--------------------------------------------------------------------------------------------
Net sales $123,220 $ 29,299 $ 79,602 $ 10,694 $ 1,244 $244,059
Operating income (loss) 12,777 6,784 10,512 (809) (23,774) 5,490
Depreciation and amortization 2,783 -- 715 61 4,127 7,686
Capital expenditures 1,823 -- 492 44 4,729 7,088
For the quarter ended August 31, 2002
Wood Imports Upholstery Retail Other Consolidated
--------------------------------------------------------------------------------------------
Net sales $ 38,519 $ 9,757 $ 25,432 $ 5,088 $ (429) $ 78,367
Operating income (loss) 2,941 2,292 3,337 (263) (8,446) (139)
Depreciation and amortization 970 -- 250 30 1,351 2,601
Capital expenditures 741 -- 96 22 1,883 2,742
For the nine months ended August 25, 2001
Wood Imports Upholstery Other Consolidated
--------------------------------------------------------------------------------------------
Net sales $ 130,630 $ 23,061 $ 66,425 $ 7,492 $ 227,608
Operating income (loss) 9,259 4,937 6,415 (27,156) (6,545)
Depreciation and amortization 3,201 -- 734 4,422 8,357
Capital expenditures 1,756 -- 292 9,905 11,953
For the quarter ended August 25, 2001
Wood Imports Upholstery Other Consolidated
--------------------------------------------------------------------------------------------
Net sales $ 39,807 $ 7,071 $ 22,155 $ 2,257 $ 71,290
Operating income (loss) 1,334 1,541 2,330 (10,841) (5,636)
Depreciation and amortization 970 -- 234 1,609 2,813
Capital expenditures 707 -- 111 608 1,426
The Company's other business segment consists of a contemporary furniture
business, restructuring costs, elimination of intercompany sales ($2,629 and
$5,166 for the quarter and nine months, respectively), any change in reserves
for profits on inventory held by the Company's corporate stores and LRG, and
other corporate support functions, including certain selling, general and
administrative expenses, all included to reconcile segment information to the
consolidated financial statements. Operating income by business segment is
defined as sales less direct operating costs and expenses. For 2001, activity in
the retail segment was negligible. The sales elimination relates to wholesale
furniture shipments to the corporately owned retail stores.
9 of 21
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES INC. AND SUBSIDIARIES
AUGUST 31, 2002
(Dollars in thousands except share and per share data)
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations - Periods ended August 31, 2002 compared with periods
ended August 25, 2001
The Company reported net sales of $244,059 for the nine months ended August 31,
2002, an increase of 7% from $227,608 reported for the first nine months of
2001. Sales for the third quarter of 2002 increased by $7,077 or 10% over sales
for the third quarter of 2001. The increases are due to strong performances in
the Bassett Furniture Direct (BFD) retail stores. Additionally, there is $2,459
and $5,528 of net retail sales (after eliminations) included for the third
quarter and nine months of 2002, respectively, related to the six corporately
owned BFD stores acquired in March 2002.
Sales to the BFD and @Home channels increased by 23% in the third quarter of
2002 and by 25% for the first nine months of 2002 compared to the same periods
in 2001. During the first nine months of 2002, eighteen new BFD stores were
opened, nine of which were opened in the third quarter. There were 83 BFD stores
open at the end of the third quarter of 2002. There were a total of 175 @tHome
galleries at the end of the third quarter of 2002. Sales through the BFD channel
more than offset the continued attrition of business from large department
stores.
Gross margin; selling, general and administrative (S,G&A) expenses; and
operating income as a percentage of net sales were as follows for the nine
months and quarters ended August 31, 2002, and August 25, 2001:
For the Nine Months Ended For the Quarter Ended
August 31, 2002 August 25, 2001 August 31, 2002 August 25, 2001
---------------------------------------- --------------------------------------
Gross margin 21.2% 15.7% 21.2% 14.2%
Gain on sale of property and equipment 0.0% 1.8% 0.0% 1.4%
Restructuring and impaired fixed asset charges 0.5% 2.9% 1.6% 5.5%
S,G&A 18.4% 17.5% 19.7% 18.0%
Operating income (loss) 2.3% (2.9%) (.1%) (7.9%)
The increase in gross margin for the first nine months and third quarter of 2002
compared to the prior year periods was a result of improved earnings from the
Upholstery Division, restructuring activities in the Wood Division started in
fiscal 2001, increased volume through the higher margin Import Division and, to
a lesser degree, inclusion of retail sales. The overall improvement in the
Company's operating margins was due in part to the 2001 reductions in the
Company's fixed cost structure and the related completion of restructuring
activities.
The Company recognized a one-time gain of $3,028 on the sale of its former
showroom in Thomasville, North Carolina, during the first quarter of 2001 which
was included in operating income in 2001.
During the third quarter of 2002, the Company announced plans to close its Los
Angeles, California upholstery manufacturing facility and consolidate upholstery
production in its two remaining North Carolina facilities. The Company recorded
$1,251 in restructuring charges for the third quarter, entirely related to
severance and employee benefits associated with the cessation of operations in
California. The Company is holding the related property for sale and expects to
realize a gain on the disposition of assets in the next nine months. Management
believes that resulting savings over the next twelve months will more than
offset the charge incurred during the third quarter.
In late 2000, the Company made a decision to consolidate production in the Wood
Division. As a result of this decision, the Company incurred $5,039 in related
restructuring expenses during the first nine months of 2001. Also during the
first quarter of 2001, additional restructuring activities, which include
further consolidation within the Wood Division, resulted in a charge of $1,600
related to the writedown of property and equipment. This writedown was entirely
related to closing one facility in Bassett, Virginia. Production and many of the
employees from this facility have been transferred to other manufacturing
facilities.
10 of 21
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES INC. AND SUBSIDIARIES
AUGUST 31, 2002
(Dollars in thousands except share and per share data)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
S,G&A expenses were 18.4% of sales for the first nine months of 2002 and 19.7%
of sales for the third quarter of 2002 compared to 17.5% and 18% of sales for
the period and quarter ended in 2001. The inclusion of retail results for the
six Company owned BFD stores resulted in increases of 1.9% and 2.6% for the nine
months and third quarter, respectively, over what was incurred on a
manufacturing basis. The Company's total S,G&A spending increased from $12,805
in the third quarter 2001 to $15,472 for the third quarter of 2002 due in large
part to the addition of corporate retail stores in the second quarter of 2002.
If the impact of corporate retail stores is removed, SG&A costs for the third
quarter of 2002 would have been $12,949. SG&A expenses for the first nine months
of 2002 compared to the first nine months of 2001 also reflect the addition of
retail in the second quarter. The Company continues to closely monitor
discretionary spending and adjust such expenses to match current sales demands.
Management is committed to the further reduction of SG&A costs as a percentage
of net sales.
Other income(loss) for the first nine months and for the quarter ended August
31, 2002, was $1,817 and ($948). The decreases from prior year periods were
largely attributable to lower earnings from the Company's investment in the
Bassett Industries Alternative Asset Fund, LP (BIAAF), partially offset by
improved results from the LRG investment as well as better earnings from the
Company's IHFC investment. The fund has an average annual return of 11% since
its inception in 1998 and has had a positive return for the first nine months of
2002. Included in other income are the Company's regular investment earnings,
earnings from its equity in undistributed income of affiliated companies, and
interest expense. Other income is expected to continue to be an integral
component of the Company's future earnings.
The effective tax rate was 34% in the third quarter of 2002 and 2001. The
effective tax rates are lower than the statutory federal income tax rate due
principally to exclusions for tax exempt income.
For the quarter ended August 31, 2002, net loss was ($718) or ($.06) per diluted
share, compared to a loss of ($2,834) or ($.24) per diluted share for the third
quarter ended August 25, 2001.
Year-to-date income for the first nine months of 2002 was $5,074 or $.43 per
diluted share compared to a loss of ($1,120) or ($.10) per diluted share for the
same period in 2001.
Segment Information
The following is a discussion of operating results for each of Bassett's
business segments.
For the Nine Months Ended Quarter Ended
Wood Division August 31, 2002 August 25, 2001 August 31, 2002 August 25, 2001
---------------------------------------------- ----------------------------------------------
Net sales $ 123,220 $ 130,630 $ 38,519 $39,807
Contribution to profit
and overhead $ 12,777 $ 9,259 $ 2,941 $ 1,334
Wood Division net sales decreased for the first nine months and for the third
quarter of 2002 from levels attained in the 2001 periods due to continued
erosion of department store sales, the bankruptcies of two major customers and a
strategic decision by management to import certain product offerings based on
competitive pressures. The decline in shipments to the department store channel
was partially offset by an increase in shipments to the BFD stores. In an effort
to improve sales and margins in this segment, the Company is introducing new
products, opening more BFD and @tHome stores, repositioning the division through
cost reduction initiatives, as well as improving product
11 of 21
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES INC. AND SUBSIDIARIES
AUGUST 31, 2002
(Dollars in thousands except share and per share data)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
styling, quality and service. The decline in sales was largely stemmed in the
third quarter as sales through the BFD and @tHome retail channels came close to
offsetting the attrition of business from the department store segment.
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 between periods (10.4% of sales for
2002 as compared to 7% of sales for 2001) despite the 5.7% decline in sales. The
Company was able to achieve these results due to restructuring efforts completed
in 2001. Sales improvement, if realized, and complete implementation of cost
cutting initiatives should improve operating results for this division in
subsequent quarters.
For the Nine Months Ended Quarter Ended
Import Division August 31, 2002 August 25, 2001 August 31, 2002 August 25, 2001
----------------------------------------- -----------------------------------------
Net sales $29,299 $23,061 $ 9,757 $ 7,071
Contribution to profit
and overhead $ 6,784 $ 4,937 $ 2,292 $ 1,541
Net sales for the Import Division increased 38% in the third quarter of 2002
compared to the third quarter of 2001 and 27% in a year over year comparison.
The Company expects the sales of this segment to continue to increase, which
should, in turn, increase the Company's overall margin position. The division
has benefited from the Company's decision to outsource certain wood furniture
previously manufactured domestically. Notable among the wood furniture now
imported are occasional tables and cribs. The products of the Import Division
will continue to supplement the product offerings of the other divisions, as
well as include complete suites of bedroom and dining room furniture.
Import Division contribution to profit and overhead increased from 21.8% of net
sales in the third quarter of 2001 to 23.5% of net sales in 2002. For the first
nine months of 2002, Import Division contribution to profit and overhead was
23.2% of sales compared to 21.4% of sales for prior year period. The expected
sales growth of this segment requires the Company to focus more attention on
forecasting and purchasing practices, inventory management, logistics and
quality.
For the Nine Months Ended Quarter Ended
Upholstery Division August 31, 2002 August 25, 2001 August 31, 2002 August 25, 2001
---------------------------------------------- -----------------------------------------------
Net sales $79,602 $66,425 $25,432 $22,155
Contribution to profit and
overhead $10,512 $ 6,415 $ 3,337 $ 2,330
Net sales for the Upholstery Division have increased by 14.8% for the third
quarter 2002 compared to the third quarter 2001, and by 19.8% on a year-to-date
comparison, due primarily to sales increases through the BFD channel. The
Division's product offerings have been bolstered by products with more
contemporary styling at better price points than those that were offered in the
first nine months of 2001. Additionally, the Company has implemented a quick
ship delivery program for certain dealers that guarantees delivery of furniture
to the customer within thirty days. Management also decided, during 2001, to
exit certain distribution channels, which were incompatible with the Bassett
brand image and the Company's current primary channels of distribution. The
Company is focusing upholstery distribution on its BFD stores, its @tHome with
Bassett galleries, and several of its major customers.
12 of 21
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES INC. AND SUBSIDIARIES
AUGUST 31, 2002
(Dollars in thousands except share and per share data)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Contribution to profit and overhead increased from 10.5% of net sales for the
third quarter of 2001 to 13.1% of net sales for the third quarter of 2002. The
improvement was nearly identical for the first nine months of 2002 compared to
the first nine months of 2001. Increases were due to increased volume, a
continuation of efforts to control labor and overhead spending, the decision to
exit certain distribution channels, introduction of new products and the
implementation of several operational initiatives. These include cellular
manufacturing and investments in new cutting and sewing equipment.
During the third quarter of 2002, the Company announced that it would close its
Los Angeles, California upholstery plant. The Company recorded restructuring
charges of $1,251 related to severance and employee benefits associated with the
plant closure. Production from the California facility will be consolidated in
the Company's two remaining upholstery facilities in North Carolina. The Company
expects additional profit improvements for the Upholstery Division through the
consolidation of upholstery manufacturing to North Carolina, sales growth of new
products at higher margins and the related absorption efficiencies resulting
from increased sales and production levels.
Nine Months Ended Quarter Ended
Retail Division August 31, 2002 August 31, 2002
------------------- -----------------
Net sales $ 10,694 $ 5,088
Contribution to profit and
overhead $ (809) $ (263)
The Company acquired five BFD stores in North Carolina and Virginia from its
affiliate LRG in March of 2002. The Company purchased the stores for net book
value, which approximated $0 at the time of acquisition. Sales have increased
over prior year periods and losses have been substantially reduced. Management
expects the stores to continue to improve profitability in 2003.
Liquidity and Capital Resources
Cash provided by operating activities was $12,412 for the nine months ended
August 31, 2002, compared to $15,715 for the nine months ended August 25, 2001.
The Company continued to reduce accounts receivable levels through better
collection efforts during 2002, though not at the same pace established in 2001.
Inventories increased by $2,020 during the first nine months of 2002 after a
large reduction for the same period in 2001. The Company continues its efforts
to efficiently manage working capital. Some of these initiatives include better
planning and forecasting, improved purchasing practices, discounting of
slow-moving inventories, and more effective collection efforts.
The Company invested $7,088 in property and equipment in the first nine months
of 2002 for retail real estate, computer-related equipment for information
systems, and various manufacturing equipment. The Company invested $11,953
during the first nine months of 2001 for retail real estate, the build out of
its leased showroom and computer related equipment for information systems.
During 2001, the Company realized proceeds of $5,114 on the sale of its former
showroom in Thomasville, North Carolina and two former manufacturing facilities
also in North Carolina. Also during 2001, the Company received a special
dividend from an affiliated company of $25,059, which was utilized to reduce the
Company's overall debt position. Dividends from the Company's equity investments
have totaled $8,623 for the first nine months of fiscal 2002. During 2002 the
Company expended $1,519 to increase its ownership interest in the International
Home Furnishings Center (IHFC) and $600 to take an equity interest in a licensee
operator developing BFD stores in New England.
During 2000, the Company entered into a three-year $70,000 revolving credit
facility with a new lender and three other participants. The facility was
amended in 2001 to address restrictive covenants and to reduce the total
facility to $60,000. During the first nine months of 2001, the Company repaid
$32,000 of this facility, principally by applying the special dividend from an
affiliate. During the first nine months of 2002 the Company repaid the
13 of 21
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES INC. AND SUBSIDIARIES
AUGUST 31, 2002
(Dollars in thousands except share and per share data)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
remaining amount outstanding on this facility, to bring the balance of long-term
debt outstanding at the end of the third quarter to $0. The Company does not
expect to to make substantial borrowings in the remainder of fiscal year 2002.
The Company purchased and retired 50,500 shares of its Common Stock for $550
during the first nine months of 2001. The Company purchased and retired 29,000
shares of its Common Stock during 2002. These purchases were part of the
Company's stock repurchase program, approved in fiscal 1998, which allows the
Company to repurchase up to $40,000 in Company stock. There was $12,000
remaining under the stock repurchase program at August 31, 2002. Issuance of
shares of Common Stock in 2001 and 2002 related principally to the Company's
Employee Stock Purchase Program. Dividends in the amount of $.60 per share were
paid in the first nine months of 2002 and 2001.
The current ratio as of August 31, 2002, and November 24, 2001, respectively,
was 3.05 to 1 and 3.19 to 1. Working capital at August 31, 2002, was $71,456
compared to $72,996 at November 24, 2001. The Company's consolidated financial
statements are prepared on the basis of historical cost and are not intended to
show the impact of inflation or changing prices. Neither inflation nor changing
prices have had a material effect on the Company's consolidated financial
position and results of operations in recent years.
As part of the Company's expansion strategy for its retail stores, Bassett has
guaranteed certain lease and loan obligations of licensee operators of the
Bassett Furniture Direct program. Lease guarantees range from three to ten
years. Loan guarantees are for a maximum of 36 months and are limited to $400
per location. The loan guarantees are used to finance initial floor inventories
for the BFD stores. The Company was contingently liable under licensee lease
obligation guarantees in the amount of $29,496 and $25,708 at August 31, 2002
and November 24, 2001, respectively. The Company was contingently liable under
BFD loan guarantees in the amount of $7,912 and $8,990 at August 31, 2002 and
November 24, 2001.
General
The furniture industry is currently undergoing rapid change. The change has been
precipitated by both the growth of imported furniture (which has included
downward pressure on retail prices) and the consolidation and elimination of
traditional channels of distribution. Bassett Furniture Industries has embraced
these changes by reducing its domestic production of product that can be more
efficiently sourced overseas. The Company strives to provide its customers with
home furnishings at competitive prices and, with that goal in mind, will
continue to evaluate the cost effectiveness of domestic production on a product
by product basis. The Company also is continuing its focus on the Bassett
Furniture Direct distribution channel. Continual improvements to the retail
program are being made through improved product and better delivery, service and
training. The Company expects to open between 15 and 20 new stores per year over
the next several years. The Company believes that manufacturing operating
margins will continue to improve through its efforts to source more product
overseas and reengineer manufacturing processes.
Management intends to execute these strategies in such a way as to preserve the
Company's investments, minimize the need for borrowed funds and maintain a
strong balance sheet. These new strategies entail key business risks, namely the
realization of inventories and receivables and the coverage of potential
contingent liabilities, for which management believes adequate reserves have
been established.
Item 3. 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 equity securities portfolio, which totaled $5,687 at August 31,
2002, is diversified among over twenty different medium to large capitalization
interests. Although there are no maturity dates for the Company's
14 of 21
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES INC. AND SUBSIDIARIES
AUGUST 31, 2002
(Dollars in thousands except share and per share data)
equity investments, management has plans to liquidate its current equity
portfolio on a scheduled basis over the next three years.
The Company's investment in a limited partnership, which totaled $56,370 at
August 31, 2002, 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.
Item 4. Controls and Procedures:
a. Evaluation of disclosure controls and procedures. The Company's chief
executive officer and chief financial officer have concluded that the
Company's disclosure controls and procedures (as defined in Exchange Act
Rule 13a-14 (c)) are sufficiently effective to ensure that the information
required to be disclosed by the Company in the reports it files under the
Exchange Act is gathered, analyzed and disclosed with adequate timeliness,
accuracy and completeness, based on an evaluation of such controls and
procedures conducted within 90 days prior to the date hereof.
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
evaluation referred to above.
Safe-harbor, forward-looking statements:
The discussion in items 2 and 3 above 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
- - timing and number of new BFD openings and closings
- - not fully realizing cost reductions through restructurings
- - the profitability of BFD licensees and Company owned BFD's
- - cost and availability of raw materials and labor
- - effectiveness of marketing and advertising campaigns
- - future tax legislation, or regulatory or judicial positions related to COLI
- - information and technology advances
- - ability to execute new global sourcing strategies
- - performance of the Company's investment portfolios
15 of 21
PART II - OTHER INFORMATION
BASSETT FURNITURE INDUSTRIES INC. AND SUBSIDIARIES
AUGUST 31, 2002
Item 4. Submission of matters to a vote of security holders:
None
Item 5. Other Information:
The Company's audit committee approved the provision by the Company's external
auditor, Ernst & Young, of the non-audit service of rendering tax advice. This
disclosure is made pursuant to Section 10A(i)(2) of the Exchange Act, as added
by Section 202 of the Sarbanes-Oxley Act of 2002.
Item 6.
a. Exhibits:
Exhibit 99a - Chief Executive Officer's certification pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
Exhibit 99b - Chief Financial Officer's certification pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
b. Reports on Form 8-K: None
16 of 21
SIGNATURES
Pursuant to the requirements 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
/s/ ROBERT H. SPILMAN JR.
----------------------------------------------------------------
Robert H. Spilman Jr., President and Chief Executive Officer
October 9, 2002
/s/ BARRY C. SAFRIT
-----------------------------------------------------------------
Barry C. Safrit, Vice President and Chief Financial Officer
October 9, 2002
17 of 21
CERTIFICATIONS
I, Robert H. Spilman, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Bassett Furniture
Industries, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;
4. The registrant's other certifying officers 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 we 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 quarterly
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 quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly 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 officers 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 officers and I have indicated in this
quarterly 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.
October 9, 2002
/s/ ROBERT H. SPILMAN, JR.
-------------------------------------
Robert H. Spilman, Jr.
President, Chief Executive Officer
18 of 21
CERTIFICATIONS
I, Barry C. Safrit, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Bassett Furniture
Industries, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;
4. The registrant's other certifying officers 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 we 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 quarterly
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 quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly 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 officers 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 officers and I have indicated in this
quarterly 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.
October 9, 2002
/s/ BARRY C. SAFRIT
-------------------------------------
Barry C. Safrit
Vice President, Chief Financial Officer
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