CONSOLIDATED BALANCE SHEETS
Bassett Furniture Industries, Incorporated and Subsidiaries
November 30, 2002, and November 24, 2001
(In thousands, except share and per share data)
ASSETS 2002 2001
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 1,371 $ 5,347
Accounts receivable, net 44,806 51,487
Inventories 43,449 32,244
Refundable income taxes 2,924 2,728
Deferred income taxes 3,600 3,841
Other current assets 6,816 10,609
--------- ---------
Total current assets 102,966 106,256
--------- ---------
PROPERTY AND EQUIPMENT, NET 90,542 90,407
--------- ---------
OTHER ASSETS
Investments 63,248 67,768
Investments in unconsolidated affiliated companies 4,383 3,984
Deferred income taxes 3,454 6,528
Notes receivable, net 18,761 14,551
Other, net 7,526 11,909
--------- ---------
97,372 104,740
--------- ---------
TOTAL ASSETS $ 290,880 $ 301,403
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 17,738 $ 15,010
Accrued liabilities 16,406 18,250
--------- ---------
Total current liabilities 34,144 33,260
--------- ---------
LONG-TERM LIABILITIES
Employee benefits 10,152 10,596
Long-term debt 3,000 7,482
Deferred revenue from unconsolidated affiliate 13,941 15,593
--------- ---------
27,093 33,671
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, par value $5 a share, 50,000,000 shares authorized,
issued and outstanding - 11,660,587 in 2002 and 11,727,192 in 2001 58,303 58,636
Retained earnings 169,789 173,011
Accumulated other comprehensive income -
unrealized holding gains, net of income tax 1,551 3,047
Unamortized stock compensation -- (222)
--------- ---------
Total stockholders' equity 229,643 234,472
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 290,880 $ 301,403
========= =========
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
6
CONSOLIDATED STATEMENTS OF INCOME
Bassett Furniture Industries, Incorporated and Subsidiaries For the years ended
November 30, 2002, November 24, 2001, and November 25, 2000 (In thousands,
except share and per share data)
2002 2001 2000
-------------------------------------------------
Net sales $ 323,487 $ 305,676 $ 367,444
Cost of sales 254,993 254,456 302,281
--------- --------- ---------
Gross profit 68,494 51,220 65,163
Selling, general and administrative expenses 60,987 54,477 61,854
Gains on sales of property and equipment, net -- (5,297) (175)
Restructuring and impaired asset charges 1,251 6,952 6,680
--------- --------- ---------
Income (loss) from operations 6,256 (4,912) (3,196)
Income from investments, net 2,342 7,497 14,011
Income (loss) from unconsolidated affiliated companies, net 4,715 (3,030) (809)
Interest expense (1,438) (2,819) (4,508)
Other income (expense), net (2,765) (420) 9,569
--------- --------- ---------
Income (loss) before income tax benefit (provision)
and cumulative effect of accounting change 9,110 (3,684) 15,067
Income tax (provision) benefit (2,369) 1,042 (4,671)
--------- --------- ---------
Income (loss) before cumulative effect of accounting change 6,741 (2,642) 10,396
Cumulative effect of accounting change, net of income tax -- -- (364)
--------- --------- ---------
Net income (loss) $ 6,741 $ (2,642) $ 10,032
========= ========= =========
Net income (loss) per share
Basic earnings (loss) per share:
Income (loss) before cumulative effect of accounting change $ 0.58 $ (0.23) $ 0.88
Cumulative effect of accounting change -- -- (0.03)
--------- --------- ---------
Net income (loss) per share $ 0.58 $ (0.23) $ 0.85
========= ========= =========
Diluted earnings (loss) per share:
Income (loss) before cumulative effect of accounting change $ 0.57 $ (0.23) $ 0.88
Cumulative effect of accounting change -- -- (0.03)
--------- --------- ---------
Net income (loss) per share $ 0.57 $ (0.23) $ 0.85
========= ========= =========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
7
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Bassett Furniture Industries, Incorporated and Subsidiaries
For the years ended November 30, 2002, November 24, 2001, and November 25, 2000
(In thousands, except share and per share data)
Additional
Common Stock paid-in Retained
Shares Amount Capital earnings
----------------- --------------- -------------- ---------------
BALANCE, NOVEMBER 27, 1999 12,094,769 $ 60,474 $ -- $ 187,973
Net Income -- -- -- 10,032
Net change in unrealized holding gains -- -- -- --
Comprehensive Income --
Dividends ($.80 per share) -- -- -- (9,497)
Issuance of common stock 9,288 46 82 --
Purchase and retirement of common stock (332,083) (1,660) (133) (2,923)
Issuance of restricted stock 4,724 24 51 --
Forfeitures of restricted stock (11,938) (60) -- (292)
Amortization of stock compensation -- -- -- --
----------- ----------- ----------- -----------
BALANCE, NOVEMBER 25, 2000 11,764,760 58,824 -- 185,293
Net Loss -- -- -- (2,642)
Net change in unrealized holding gains -- -- -- --
Comprehensive loss --
Dividends ($.80 per share) -- -- -- (9,378)
Issuance of common stock 25,932 130 150 --
Purchase and retirement of common stock (63,500) (318) (150) (262)
Amortization of stock compensation -- -- -- --
----------- ----------- ----------- -----------
BALANCE, NOVEMBER 24, 2001 11,727,192 58,636 -- 173,011
Net Income -- -- -- 6,741
Net change in unrealized holding gains -- -- -- --
Comprehensive Income --
Dividends ($.80 per share) -- -- -- (9,358)
Issuance of common stock 41,417 208 375 --
Purchase and retirement of common stock (89,519) (448) (375) (430)
Forfeitures of restricted stock (18,503) (93) -- (175)
Amortization of stock compensation -- -- -- --
----------- ----------- ----------- -----------
BALANCE, NOVEMBER 30, 2002 11,660,587 $ 58,303 $ -- $ 169,789
=========== =========== =========== ===========
Accumulated
Other Unamoritized
comprehensive stock
income compensation Total
-------------------- ------------------- ----------------
BALANCE, NOVEMBER 27, 1999 $ 7,993 $ (689) $ 255,751
Net Income -- -- 10,032
Net change in unrealized holding gains (2,575) -- (2,575)
-----------
Comprehensive Income 7,457
Dividends ($.80 per share) -- -- (9,497)
Issuance of common stock -- -- 128
Purchase and retirement of common stock -- -- (4,716)
Issuance of restricted stock -- (75) --
Forfeitures of restricted stock -- 352 --
Amortization of stock compensation -- 17 17
----------- ----------- -----------
BALANCE, NOVEMBER 25, 2000 5,418 (395) 249,140
Net Loss -- -- (2,642)
Net change in unrealized holding gains (2,371) -- (2,371)
-----------
Comprehensive loss (5,013)
Dividends ($.80 per share) -- -- (9,378)
Issuance of common stock -- -- 280
Purchase and retirement of common stock -- -- (730)
Amortization of stock compensation -- 173 173
----------- ----------- -----------
BALANCE, NOVEMBER 24, 2001 3,047 (222) 234,472
Net Income -- -- 6,741
Net change in unrealized holding gains (1,496) -- (1,496)
-----------
Comprehensive Income 5,245
Dividends ($.80 per share) -- -- (9,358)
Issuance of common stock -- -- 583
Purchase and retirement of common stock -- -- (1,253)
Forfeitures of restricted stock -- -- (268)
Amortization of stock compensation -- 222 222
----------- ----------- -----------
BALANCE, NOVEMBER 30, 2002 $ 1,551 $ -- $ 229,643
=========== =========== ===========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
8
CONSOLIDATED STATEMENTS OF CASH FLOWS
Bassett Furniture Industries, Incorporated and Subsidiaries
For the years ended November 30, 2002, November 24, 2001, and November 25, 2000
(In thousands)
2002 2001 2000
----------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ 6,741 $ (2,642) $ 10,032
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 10,804 11,316 10,032
Equity in undistributed income of investments (6,231) (3,784) (10,172)
Provision for write-down of property and equipment -- 4,550 5,800
Provision for write-down of affiliate investment -- 1,359 --
Provision for write-down of other receivable -- 1,200 --
Provision (income) for corporate owned life insurance 705 994 (1,687)
Provision for losses on trade accounts receivable 237 1,004 3,150
Net gain from sales of investment securities (707) (2,218) (2,356)
Net gain from sales of property and equipment -- (5,297) (175)
Compensation earned under restricted stock and stock option plans 222 173 17
Deferred income taxes 2,215 (824) 1,708
Changes in employee benefit liabilities (444) -- (351)
Changes in operating assets and liabilities, exclusive of assets and
liabilities acquired in a business combination:
Trade accounts receivable 5,874 10,178 (14,957)
Inventories (7,695) 17,957 (6,364)
Refundable income taxes 1,757 (2,148) 426
Other current assets 3,835 (739) (1,005)
Accounts payable and accrued liabilities (5,437) (8,796) (6,114)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 11,876 22,283 (12,016)
-------- -------- --------
INVESTING ACTIVITIES
Purchases of property and equipment (9,659) (12,332) (18,319)
Proceeds from sales of property and equipment -- 7,042 1,338
Proceeds from sales of affiliate companies -- -- 1,748
Proceeds from sales of investment securities 1,406 4,441 5,785
Dividends from investments 8,623 28,559 12,000
Investments in unconsolidated affiliated companies (2,419) -- (4,200)
Other, net 2,164 (559) (1,732)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 115 27,151 (3,380)
-------- -------- --------
FINANCING ACTIVITIES
Borrowings (repayments) under revolving credit arrangement, net (3,000) (39,000) 27,000
Repayment of note payable to bank (1,189) -- --
Borrowings (repayments) for real estate (1,482) 1,482 --
Issuance of common stock, net 315 280 128
Repurchases of common stock (1,253) (730) (4,716)
Cash dividends (9,358) (9,378) (9,497)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (15,967) (47,346) 12,915
-------- -------- --------
CHANGE IN CASH AND CASH EQUIVALENTS (3,976) 2,088 (2,481)
CASH AND CASH EQUIVALENTS -- BEGINNING OF YEAR 5,347 3,259 5,740
-------- -------- --------
CASH AND CASH EQUIVALENTS -- END OF YEAR $ 1,371 $ 5,347 $ 3,259
======== ======== ========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bassett Furniture Industries, Incorporated and Subsidiaries
(In thousands, except share and per share data)
A. Nature of Operations and Summary of Significant Accounting Policies
Bassett Furniture Industries, Incorporated (together with its consolidated
subsidiaries, "Bassett" or the "Company") is a manufacturer, retailer and
importer of quality home furnishings. Bassett's full range of furniture products
and accessories are sold through an exclusive network of 79 independently owned
and six company-owned retail stores known as Bassett Furniture Direct ("BFD")
and over 2,000 furniture and department stores located throughout the United
States. The Company has nine domestic manufacturing facilities.
PRINCIPLES OF CONSOLIDATION AND FISCAL YEAR
The consolidated financial statements include the accounts of Bassett Furniture
Industries, Incorporated and its wholly-owned subsidiaries. All significant
intercompany balances and transactions are eliminated in consolidation. The
Company's fiscal year ends on the Saturday nearest November 30. There were 53
weeks included in fiscal 2002 and 52 weeks each in fiscal 2001 and 2000.
CASH EQUIVALENTS
All temporary, highly liquid investments with original maturities of three
months or less are considered to be cash equivalents. The carrying amount of
these investments approximates fair value.
ACCOUNTS RECEIVABLE AND NOTES RECEIVABLE
Substantially all of the Company's trade accounts receivable and notes
receivable are due from customers located within the United States. The Company
maintains an allowance for doubtful accounts for estimated losses resulting from
the inability of its customers to make required payments. The allowance for
doubtful accounts is based on a review of specifically identified accounts in
addition to an overall aging analysis. Judgments are made with respect to the
collectibility of accounts receivable based on historical experience and current
economic trends. Actual losses could differ from those estimates. Allowances for
doubtful accounts were $2,602 and $2,500 at November 30, 2002 and November 24,
2001, respectively. Accounts and notes receivable are generally secured by liens
on merchandise sold to licensees.
CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments that subject the Company to credit risk consist primarily
of cash and cash equivalents, investments, and accounts and notes receivable.
All cash equivalents and investments are managed within established guidelines.
Accounts and notes receivable subject the Company to credit risk partially due
to the concentration of amounts due from two customers. These customers
accounted for 14% and 25% of total accounts receivable at November 30, 2002, and
November 24, 2001, respectively. Sales to one of these customers (J.C. Penney
Corporation, Inc.) were 9%, 15% and 16% of the Company's total net sales in
2002, 2001 and 2000, respectively. Sales to the other major customer (LRG
Furniture, LLC, an affiliate of the Company) were 7%, 10% and 7% of net sales
for 2002, 2001 and 2000, respectively.
INVENTORIES
Inventories (finished goods, work in process and raw materials) are stated at
the lower of cost or market. Cost is determined for wholesale domestic furniture
inventories using the last-in, first-out ("LIFO") method. The cost of imported
and retail inventories is determined on a first-in, first-out ("FIFO") basis.
Inventories recorded under the LIFO method represented 73% and 87% of total
inventory at November 30, 2002 and November 24, 2001, respectively. The Company
estimates an inventory reserve for excess quantities and obsolete items based on
specific identification and historical write-offs, taking into account future
demand and market conditions. If actual demand or market conditions in the
future are less favorable than those estimated, additional inventory write-downs
may be required.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed over the
estimated useful lives of the respective assets utilizing straight-line and
accelerated methods. Buildings and improvements are generally depreciated over a
period of 10 to 39 years. Machinery and equipment are generally depreciated over
a period of 5 to 10 years. The Company periodically evaluates whether events or
circumstances have occurred that indicate long-lived assets may not be
recoverable or that the remaining useful life may warrant revision. When such
events or circumstances are present, the Company assesses the recoverability of
long-lived assets by determining whether the carrying value will be recovered
through the expected undiscounted future cash flows resulting from the use of
the asset. In the event the sum of the expected undiscounted future cash flows
is less than the carrying value of the asset, an impairment loss equal to the
excess of the asset's carrying value over its fair value is recorded. The
long-term nature of these assets requires the estimation of its cash inflows and
outflows several years into the future and only takes into consideration
technological advances known at the time of the impairment test.
INVESTMENTS AND FINANCIAL INSTRUMENTS
The Company classifies its marketable equity securities as available-for-sale,
which are reported at fair value. Unrealized holding gains and losses, net of
the related income tax effect, on available-for-sale securities are excluded
from income and are reported as other comprehensive income in stockholders'
equity. Realized gains and losses from securities classified
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(In thousands, except share and per share data)
as available-for-sale are included in income and are determined using the
specific identification method for ascertaining the cost of securities sold. All
financial instru-ments are marked to market and recorded at their fair value.
Gains and losses on financial instruments that do not qualify as accounting
hedges are recorded as other income or expense. Alternative asset fund
investments are valued on the basis of net asset value, with the resultant
difference from the prior valuation included in the accompanying statements of
income. The net asset value is determined by the investee fund based on its
underlying financial instruments.
The Company accounts for derivative instruments in accordance with SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. The statement
requires that all derivative instruments (such as an interest rate swap
contract), be recorded as either assets or liabilities measured at fair value.
Changes in the derivative's fair value are to be recognized currently in
earnings unless specific hedge accounting criteria are met. The criteria for
cash flow and fair value hedges require that hedging relationships must be
designated and documented upon inception. The documentation must include the
consideration of the hedged item, the specific risk being hedged, identification
of the hedging instrument, the Company's risk management strategy, and how
effectiveness will be assessed. The effectiveness assessment must have a
historical basis that supports the assertion that the hedge will be effective
prospectively.
UNCONSOLIDATED INVESTMENTS IN AFFILIATED COMPANIES
The equity method of accounting is used for the Company's investments in
affiliated companies in which the Company exercises significant influence but
does not maintain operating control. For equity investments that have been
reduced to $0 through equity method losses, additional equity losses incurred
have reduced notes receivable from the investee.
INVESTMENT IN CORPORATE OWNED LIFE INSURANCE ("COLI")
The Company was the beneficiary of life insurance policies with a face value of
$1,918,269 at November 24, 2001, which were maintained to fund various employee
and director benefit plans. Policy loans outstanding of $23,821 at November 24,
2001, were recorded as a reduction in the policies' cash surrender value.
Effective July 31, 2002, the Company surrendered these policies. Net cash
surrender value of the policies included in other assets in the accompanying
consolidated balance sheets was $840 and $4,381 at November 30, 2002 and
November 24, 2001, respectively. Life insurance proceeds receivable included in
other current assets was $3,784 and $7,654 at November 30, 2002 and November 24,
2001, respectively. Net COLI income (expense), which includes premiums and
interest on policy loans, changes in cash surrender values, and life insurance
proceeds, is included in other income (expense) in the accompanying consolidated
statements of income.
REVENUE RECOGNITION
Revenue is recognized when the risks and rewards of ownership and title to the
product have transferred to the buyer. This generally occurs upon the shipment
of goods to independent dealers or, in the case of Bassett-owned retail stores,
upon delivery to the customer. Terms offered by the Company vary from 30 to 60
days. An estimate for returns and allowances has been provided on recorded
sales. Other incentives offered to customers include cash discounts and special
advertising arrangements. Advertising arrangements, which give customers
advertising allowances based on revenues, are recorded as a reduction to revenue
when the revenue is recognized.
INCOME TAXES
Deferred income taxes are provided based on the differences in timing of expense
and income recognition between income tax and financial reporting in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes." Income taxes are provided on undistributed earnings from
investments in affiliated companies. Refundable income taxes includes reserves
for estimated tax exposures.
EARNINGS PER SHARE
Basic earnings (loss) per share is determined by dividing net income (loss)
available to common shareholders by the weighted average number of shares of
common stock outstanding. Diluted earnings (loss) per share also considers the
dilutive effect for stock options and restricted stock.
STOCK-BASED COMPENSATION
As permitted by SFAS No. 123, "Stock-Based Compensation," the Company has
continued to measure compensation expense for its stock-based employee/director
compensation plans using the intrinsic value method prescribed by Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." Pro forma disclosures of net income and earnings per share are
presented as if the fair value-based method prescribed by SFAS No. 123 had been
applied in measuring compensation expense for the periods required by the
statement. The Company measures expense for stock options granted to
non-employees based on the fair value of the goods or services received.
SHIPPING AND HANDLING COSTS
Costs incurred to deliver retail merchandise to customers are expensed and
recorded in selling, general and administrative expense and totaled $281 for
2002. There were no such costs in 2001 and 2000.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(In thousands, except share and per share data)
ADVERTISING
Costs incurred for producing and communicating advertising are expensed when
incurred. Advertising costs totaled $5,350, $3,827 and $6,429 and are included
in selling, general and administrative expenses in 2002, 2001 and 2000,
respectively.
ACCOUNTING CHANGE FOR START-UP COSTS
In the first quarter of fiscal year 2000, the Company recognized a cumulative
effect of an accounting change, related to SOP 98-5, "Reporting on the Cost of
Start-up Activities," which amounted to $364 (net of income taxes of $171) or
$.03 per diluted share. Accordingly, the Company wrote-off the unamortized
balance of the previously capitalized store opening related start-up costs.
SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" in 1999. This statement establishes standards for the
reporting of information about operating segments in annual and interim
financial statements and requires restatement of prior year information.
Operating segments are defined as components of an enterprise for which separate
financial information is available that is evaluated regularly by the chief
operating decision maker(s) in deciding how to allocate resources and in
assessing performance.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and cash equivalents, accounts
receivable, notes receivable, investment securities, cost and equity method
investments, accounts payable and long-term debt. Because of their short
maturity, the carrying amounts of cash and cash equivalents, accounts
receivable, and accounts payable approximate fair value. The Company's cost and
equity method investments generally involve entities for which it is not
practical to determine fair values. The carrying amounts of notes receivable
approximate fair value as the effective rates for these instruments are
comparable to market rates at year-end. The carrying amounts of long-term debt
approximate fair value due to the variable rate nature of debt.
BUSINESS INSURANCE RESERVES
The Company has insurance programs in place to cover workers' compensation and
health insurance claims. The insurance programs, which are funded through
self-insured retention, are subject to various stop-loss limitations and
re-insured through a captive insurance program. The Company accrues estimated
losses using historical loss experience. Although management believes that the
insurance reserves are adequate, the reserve estimates are based on historical
experience, which may not be indicative of current and future losses. The
Company adjusts insurance reserves, as needed, in the event that future loss
experience differs from historical loss patterns.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, Business Combinations ("SFAS No. 141"). SFAS No. 141 establishes new
standards for accounting and reporting requirements for business combinations
and requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. SFAS No. 141 also requires that
acquired intangible assets be recognized as assets apart from goodwill if they
meet one of two specified criteria. Additionally, the statement adds certain
disclosure requirements to those required by Accounting Principles Board ("APB")
16, including disclosure of the primary reasons for the business combination and
the allocation of the purchase price paid to the assets acquired and liabilities
assumed by major balance sheet caption. This statement is required to be applied
to all business combinations initiated after June 30, 2001 and to all business
combinations accounted for using the purchase method for which the date of
acquisition is July 1, 2001 or later. Use of the pooling-of-interests method is
prohibited. The adoption of SFAS No. 141 did not have an impact on the Company's
consolidated results of operations or financial condition.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets
("SFAS No. 142"). SFAS No. 142, which must be applied to fiscal years beginning
after December 15, 2001, modifies the accounting and reporting of goodwill and
intangible assets. The pronouncement requires entities to discontinue the
amortization of goodwill, reallocate all existing goodwill among its reporting
segments based on criteria set by SFAS No. 142 and perform initial impairment
tests by applying a fair-value-based analysis on the goodwill in each reporting
segment. Any impairment at the initial adoption date shall be recognized as the
effect of a change in accounting principle. Subsequent to the initial adoption,
goodwill shall be tested for impairment annually or more frequently if
circumstances indicate a possible impairment.
Under SFAS No. 142, entities are required to determine the useful life of other
intangible assets and amortize the value over the useful life. If the useful
life is determined to be indefinite, no amortization will be recorded. For
intangible assets recognized prior to the adoption of SFAS No. 142, the useful
life should be reassessed. Other intangible assets are required to be tested for
impairment in a manner similar to goodwill. At November 24, 2001 and November
30, 2002, the Company had goodwill related to equity method investments in
affiliates of approximately $12,700, net of accumulated amortization. The
Company adopted SFAS No. 142 in the first fiscal quarter of 2002 and ceased the
amortization of goodwill.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(In thousands, except share and per share data)
The audited results of operations presented below for the year ended November
30, 2002 and adjusted results of operations for the years ended November 24,
2001 and November 25, 2000 reflect the operations of the Company had the Company
adopted the non-amortization provisions of SFAS No. 142 effective November 28,
1999:
2002 2001 2000
----------- ---------- ----------
Reported net income (loss) $ 6,741 $ (2,642) $ 10,032
Add: Goodwill amortization, net of tax -- 234 393
---------- ---------- ----------
Adjusted net income (loss) $ 6,741 $ (2,408) $ 10,425
========== ========== ==========
Basic earnings (loss) per share:
Reported net income (loss) $ 0.58 $ (0.23) $ 0.85
Add: Goodwill amortization, net of tax -- 0.02 0.03
---------- ---------- ----------
Adjusted net income $ 0.58 $ (0.21) $ 0.88
========== ========== ==========
Diluted earnings (loss) per share:
Reported net income (loss) $ 0.57 $ (0.23) $ 0.85
Add: Goodwill amortization, net of tax -- 0.02 0.03
---------- ---------- ----------
Adjusted net income $ 0.57 $ (0.21) $ 0.88
========== ========== ==========
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations ("SFAS No. 143"). SFAS No. 143 requires entities to record the fair
value of a liability for an asset retirement obligation in the period in which
it is incurred. SFAS No. 143 is effective for fiscal years beginning after June
15, 2002. The Company does not currently expect the adoption of SFAS No. 143 to
have a material impact on its consolidated results of operations or financial
position.
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets ("SFAS No. 144"). This Statement establishes a
single accounting model for the impairment or disposal of long-lived assets. As
required by SFAS No. 144, the Company adopted this new accounting standard in
fiscal year 2002. The adoption of SFAS No. 144 did not have a material impact on
the Company's consolidated results of operations or financial position.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections
("SFAS No. 145"). This statement eliminates an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions and establishes that gains and losses from
extinguishment of debt should be classified as extraordinary items only if they
meet the criteria of extraordinary. The Company does not currently expect the
adoption of SFAS No. 145 to have a material impact on its consolidated results
of operations or financial position.
In June 2002, the FASB issued SFAS No.146, Accounting for Costs Associated with
Exit or Disposal Activities ("SFAS No. 146"). This Statement requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. SFAS No. 146 also establishes that fair value is
the objective for initial measurement of the liability. The Company adopted this
standard by the required December 2002 deadline. The adoption of SFAS No. 146
did not have a material impact on the Company's consolidated results of
operations or financial position.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others ("FIN No. 45"). FIN No. 45 requires certain guarantees to
be recorded at fair value, which is different from current practice to record a
liability only when a loss is probable and reasonably estimable, as those terms
are defined in FASB Statement No. 5, Accounting for Contingencies. FIN No. 45
also requires the Company to make significant new disclosures about guarantees.
The disclosure requirements of FIN No. 45 are effective for the Company in the
first quarter of fiscal year 2003. FIN No. 45's initial recognition and initial
measurement provisions are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. The Company's previous accounting
for guarantees issued prior to the date of the initial application of FIN No. 45
will not be revised or restated to reflect the provisions of FIN No. 45. As part
of the Company's expansion strategy for its retail stores, Bassett guarantees
certain lease obligations and construction loan obligations of licensee
operators of the Bassett Furniture Direct program. The Company has not completed
the complex analysis required by FIN No. 45 and is unable to determine the
impact on its consolidated results of operations or financial position. See Note
O.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN No. 46"). FIN No. 46 clarifies the application
of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to
certain entities in which equity method investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN No. 46 may require
consolidation of variable interest entities, which were previously not
consolidated. FIN No. 46 is effective for the Company in the third quarter of
fiscal 2003 for entities created prior to February 1, 2003 and is effective in
the first quarter of fiscal 2003 for entities created after January 31, 2003.
The Company has not completed the complex analysis required by FIN No. 46 and
therefore has not determined whether LRG Furniture, LLC or any other affiliated
entity will need to be consolidated based on this Interpretation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(In thousands, except share and per share data)
For comparative purposes, certain amounts in 2001 and 2000 financial statements
have been reclassified to conform to the 2002 presentation.
B. Sale of Bedding Division
During 1999, the Company sold substantially all of the assets of its Bedding
Division to Premier Bedding Group LLC ("PBG"). The sale was effective April 30,
1999. The net assets sold, which totaled $8,400 were exchanged for $6,500 in
cash and a $1,900 convertible note receivable. During fiscal year 2000, PBG sold
the Bassett license to another third party and as part of the agreement, the
Company agreed to allow this third party to manufacture and market mattresses
utilizing the Company's Bassett brand name. Additionally, the $1,900 note
receivable was reduced to $800 and the related loss is recorded in other income
in the 2000 consolidated statement of income
C. Inventories
Inventories consist of the following:
November 30, November 24,
2002 2001
----------- ----------
Finished goods $ 39,863 $ 29,289
Work in process 3,424 4,084
Raw materials and supplies 14,991 16,046
Retail merchandise 3,271 441
-------- --------
Total inventories on first-in,
first-out cost method 61,549 49,860
LIFO adjustment (18,100) (17,616)
-------- --------
$ 43,449 $ 32,244
======== ========
The Company recorded a LIFO increment of $484 in fiscal 2002 associated within
the general increase in the FIFO cost of inventories. During 2001, the Company
liquidated certain LIFO inventories, which decreased cost of sales by
approximately $7,900 and partially offset losses associated with liquidating
certain finished goods inventories. The Company also liquidated certain LIFO
inventories in 2000, which decreased cost of sales by approximately $330.
D. Property and Equipment
November 30, November 24,
2002 2001
-------------- -------------
Land $ 2,391 $ 2,391
Buildings 49,987 50,725
Machinery and equipment 142,191 143,861
Retail real estate 32,817 28,655
--------- ---------
227,386 225,632
Less
Accumulated depreciation (136,844) (135,225)
--------- ---------
$ 90,542 $ 90,407
========= =========
Depreciation expense was $10,804, $10,602 and $9,916 in 2002, 2001 and 2000,
respectively. Retail real estate is under lease to licensee operators of the
Company's Bassett Furniture Direct stores as well as used in the operation of
the Company's corporately owned stores. Retail real estate is comprised of land
and buildings and had accumulated depreciation of $1,807 and $1,170 at November
30, 2002 and November 24, 2001, respectively.
E. Investments
The Company's investments consist of marketable equity securities and a 99.8%
interest in the Bassett Industries Alternative Asset Fund, L.P. ("Alternative
Asset Fund").
Investments in marketable equity securities are held as "available for sale".
Cost and unrealized holding gains of marketable equity securities are as
follows:
November 30, November 24,
2002 2001
----------- -----------
Cost $3,656 $4,355
Unrealized holding gains 2,424 4,761
------ ------
Fair value $6,080 $9,116
====== ======
The net change in unrealized holding gains is recorded in
accumulated other comprehensive income, net of taxes of $842 for 2002, $1,334
for 2001 and $1,448 for 2000.
The Alternative Asset Fund is a fund of funds investment that invests in a
variety of other private funds and partnerships, which employ a combination of
investment strategies including merger arbitrages, convertible arbitrages and
other market neutral investments. Risks to these funds arise from the possible
adverse changes in the market value of such interests and the potential
inability of counterparties to perform under the terms of the contracts. The
recorded investment in the Alternative Asset Fund was $57,168 and $58,652 at
November 30, 2002 and November 24, 2001, respectively. Earnings and dividends
were $1,516 and $3,000, respectively, for 2002, $5,062 and $3,500, respectively,
for 2001 and $10,981 and $12,000 for 2000.
F. Investments in Unconsolidated Affiliated Companies
INTERNATIONAL HOME FURNISHINGS CENTER:
The International Home Furnishings Center ("IHFC") owns and leases showroom
floor space in High Point, North Carolina. During 2001, IHFC refinanced its real
estate based on the market value of its properties which resulted in an
unusually large dividend paid to owners. The Company's share of this dividend
was $25,059. The dividend had no impact on the Company's earnings, as the
investment is accounted for under
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(In thousands, except share and per share data)
the equity method. The Company's investment reflects a credit balance of $13,941
and $15,593 at November 30, 2002 and November 24, 2001, respectively, and is
reflected in the liabilities section in the accompanying consolidated balance
sheets as deferred revenue from unconsolidated affiliate. The Company purchased
an additional interest in IHFC in December 2001 for $1,519 bringing its total
ownership interest to 46.9%. The Company's share of earnings and dividends from
this investment were $5,756 and $5,623, respectively, in 2002, $3,542 and
$25,059, respectively, in 2001 and $4,882 and $0, respectively, in 2000. The
Company leases 85,000 square feet of showroom space from IHFC, 2.5% of the total
space available for lease, at competitive market rates. The complete financial
statements of IHFC may be seen in an attachment to the Company's annual 10-K
filing.
Summarized combined financial information for IHFC is as follows:
2002 2001 2000
--------- ---------- ---------
Current assets $ 30,179 $ 39,210 $ 11,203
Non-current assets 50,722 52,578 49,281
Current liabilities 15,559 16,049 17,890
Long-term liabilities 133,236 133,066 48,494
Revenues 42,764 41,656 38,540
Net income 12,287 9,249 12,931
LRG FURNITURE, LLC:
Effective November 28, 1999, the Company combined its eight retail stores with
five stores owned and managed by a licensee and formed LRG Furniture, LLC
("LRG"). The Company retains a 51% ownership of the joint venture and accounts
for the investment using the equity method since the Company does not maintain
operating control of the joint venture. To capitalize the joint venture, the
Company contributed cash of $4,200 and net assets of $1,500. LRG incurred
start-up related losses in fiscal 2000. As a result of continuing losses in
2001, LRG sold three poor performing stores, closed one store and reduced
headcount at its corporate headquarters. Losses were reduced during 2001.
Effective March 4, 2002, the Company finalized an agreement (negotiated in late
2001) with LRG to restructure the balance sheet and streamline the operations of
LRG. As a result, Bassett recorded a loss of $1,359 in 2001 associated with this
restructuring. The note balance at November 24, 2001 reflects this transaction.
Also, as part of the agreement, the Company agreed to purchase five stores in
North Carolina and Virginia for net book value (which approximated $0). Included
in this transaction were inventories of $3,439, payables of $4,213 and notes
payable to bank of $1,189. The Company also converted $3,000 in accounts
receivable from LRG to a note receivable at the time the stores were acquired.
These transactions have been excluded from the consolidated statement of cash
flows for the year ended November 30, 2002. For the remainder of 2002, LRG
focused its efforts on opening its fourth and fifth stores in the Houston, Texas
market. The fourth Houston store opened in August 2002 and the fifth Houston
store opened subsequent to year-end, in December 2002. LRG had eight stores in
operation in Texas and Nevada at November 30, 2002. As a result of the balance
sheet restructuring, store sales and closures, new store openings in highly
profitable markets, and other cost reductions, LRG further reduced losses in
2002. The Company's share of losses from LRG was ($1,007) in 2002, ($3,855) in
2001 and ($5,062) in 2000. The Company's investment balance of ($2,828) and
($1,820) at November 30, 2002 and November 24, 2001 has been reclassified to
reduce the balance of the notes receivable from LRG at the end of each year.
Bassett is committed to providing financial support to LRG, as appropriate, over
the next twelve months. The complete financial statements of LRG may be seen in
an attachment to the Company's annual 10-K filing.
The Company had outstanding trade accounts receivable due from LRG of $4,257 and
$9,072 as of November 30, 2002 and November 24, 2001, respectively. In addition
the Company had notes receivable from LRG of $10,350 and $7,350 at the end of
2002 and 2001, respectively. These notes are included in notes receivable in the
accompanying consolidated balance sheets and have maturities of between three
and nine years and bear interest at various rates at or above market. Sales to
LRG were $21,697 in 2002, $31,259 in 2001 and $24,622 in 2000. These sales are
at prices equal to normal selling prices to unrelated entities. In addition to
accounts and notes receivable, the Company has lease and loan guarantees with
LRG in the amount of $9,222 and $13,969 at November 30, 2002 and November 24,
2001, respectively. The LRG operating agreement has certain put and call options
beginning in fiscal 2007.
Summarized financial information for LRG is as follows:
2002 2001 2000
------------ ----------- ------------
Current assets $ 7,818 $ 13,292 $ 16,765
Non-current assets 1,721 3,417 4,021
Current liabilities 10,191 15,766 16,412
Long-term liabilities 12,210 14,598 11,280
Revenues 45,736 62,578 63,059
Net loss (1,980) (6,748) (9,584)
OTHER AFFILIATES:
The Company owns 49% of Zenith Freight Lines, LLC, ("Zenith") which hauls
freight for many of the Company's customers. The Company's investment balance
was $4,084 at November 30, 2002 and $3,984 at November 24, 2001. The Company had
no significant transactions with this Company. The Company's share of earnings
(losses) from the investment in Zenith were $100, $0, and ($222) for 2002, 2001
and 2000, respectively.
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(In thousands, except share and per share data)
As part of the Company's retail expansion strategy, the Company made two equity
investments in licensee operators of the Company's BFD store program. The
Company purchased a 30% ownership interest in BFD Northeast, LLC ("BFDNE") for
$600. BFDNE is developing BFD retail stores in New England. As of November 30,
2002, BFDNE operates five BFD stores. Sales to BFDNE were $2,525 for 2002 and
the Company had notes and accounts receivables of $1,422 due from BFDNE at
November 30, 2002. The Company's share of start up losses amounted to $133 for
2002. The Company also purchased a 28% ownership interest in BFD Atlanta, LLC
("BFDA") for $300. BFDA is developing Bassett Furniture Direct retail stores in
metropolitan Atlanta, Georgia. BFDA's first store opened subsequent to November
30, 2002. The Company had no income or loss from this investment in fiscal 2002.
There are put and call options associated with each of these investments
beginning in 2007 through 2010.
Summarized combined financial information for Zenith, BFDNE, and BFDA, is as
follows:
2002 2001 2000
---------- ---------- ----------
Current assets $ 4,036 $ 2,441 $ 2,301
Non-current assets 6,975 6,708 8,000
Current liabilities 2,641 1,835 1,675
Long-term liabilities 4,881 5,231 6,453
Revenues 12,988 14,702 15,783
Net loss (239) (96) (653)
Prior to 2002, the Company owned 90% of the Accessory Group, LP, which provides
accessory-buying services principally to the Company's Bassett Furniture Direct
licensee stores. Since the Company did not exercise operational control, the
investment was accounted for using the equity method. During 2002, the Accessory
Group was reorganized and Bassett effectively took operational control of the
Accessory Group. As such, the Company now consolidates the results of operations
and balance sheet of the Accessory Group.
G. Accrued Liabilities
Accrued liabilities consist of the following:
November 30, November 24,
2002 2001
----------- -----------
Compensation and related
benefits $10,101 $10,048
Severance and employee
benefits 197 582
Legal and environmental 1,352 3,073
Dividends payable 2,328 2,343
Other 2,428 2,204
------- -------
$16,406 $18,250
======= =======
H. Income Taxes
A reconciliation of the statutory federal income tax rate and the effective
income tax rate, as a percentage of income before income taxes, is as follows:
2002 2001 2000
----------- --------- ----------
Statutory federal income
tax rate 35.0% (35.0)% 35.0%
Dividends received
exclusion (18.8) (31.9) (10.7)
Corporate owned life
insurance 2.7 30.6 3.2
State income tax,
net of federal benefit 2.8 8.1 3.2
Other 4.3 (0.1) 0.3
---- ---- ----
Effective income tax rate 26.0% (28.3)% 31.0%
==== ==== ====
The components of the income tax provision (benefit) are as follows:
Current: 2002 2001 2000
-------- -------- --------
Federal $ -- $ -- $ 2,636
State 154 (218) 327
Deferred:
Federal 1,986 (739) 1,533
State 229 (85) 175
------- ------- -------
Total $ 2,369 $(1,042) $ 4,671
======= ======= =======
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(In thousands, except share and per share data)
The income tax effects of temporary differences and carryforwards, which give
rise to significant portions of the deferred income tax assets and deferred
income tax liabilities are as follows:
November 30, November 24,
2002 2001
----------- ------------
Deferred income tax assets:
Trade accounts receivable $ 1,015 $ 1,287
Inventories 599 632
Property and equipment
writedowns 3,764 4,517
Retirement benefits 4,703 5,027
Net operating loss
carryforwards 3,328 4,158
Distribution from affiliates
in excess of income 6,304 3,291
Contribution and other
carryforwards 443 385
Alternative minimum tax credit
carryforward (no expiration) 1,869 3,458
Other 119 1,816
------- -------
Total gross deferred
income tax assets 22,144 24,571
------- -------
Deferred income tax liabilities:
Property and equipment 12,193 10,345
Undistributed affiliate
income 1,809 1,889
Prepaid expenses
and other 215 254
Unrealized holding gains 873 1,714
------- -------
Total gross deferred
income tax liabilities 15,090 14,202
------- -------
Net deferred income
tax assets $ 7,054 $10,369
======= =======
The Company has recorded a deferred income tax asset of $3,328 as of November
30, 2002, for the benefit of approximately $7,900 in federal and state income
tax loss carryforwards, which expire in varying amounts between 2014 and 2022.
Realization is dependent on generating sufficient taxable income prior to
expiration of the loss carryforwards. Although realization is not assured,
management believes it is more likely than not that all of the deferred income
tax assets will be realized. The amount of the deferred income tax assets
considered realizable, however, could be reduced if estimates of future taxable
income during the carryforward period are reduced.
Subsequent to November 30, 2002, the Company reached a final settlement with the
IRS regarding the non-deductibility of interest expense on loans associated with
the Company's corporate owned life insurance plan ("COLI" plan). The Company
had sufficient reserves on hand at November 30, 2002 to cover the negotiated
settlement amount and, as such, there will be no further tax related charges
associated with the COLI. Income taxes paid, net of refunds, during 2002, 2001
and 2000 were $350, $1,485 and $1,994, respectively.
I. Long-Term Liabilities and Retirement Plans
The Company has a qualified defined contribution plan (Employee
Savings/Retirement Plan) that covers all employees who elect to participate and
have fulfilled the necessary service requirements. Employee contributions to the
Plan are matched by the Company at the rate of 115% of the first 2% through 5%
of the employee's contribution, based on seniority. The Plan incorporates
provisions of Section 401(k) of the Internal Revenue Code. Employer matching
contributions to the Plan for 2002, 2001 and 2000 were approximately $1,462,
$1,445 and $1,853, respectively.
The Company has a supplemental retirement Income Plan that covers certain senior
executives and provides additional retirement and death benefits. Also, the
Company has a Deferred Compensation Plan for certain senior executives that
provides for voluntary deferral of compensation otherwise payable. The unfunded
future liability of the Company under these Plans is included as employee
benefits in long-term liabilities. The expenses for these plans for 2002, 2001,
and 2000 were $986, $1,168 and $1,184, respectively.
J. Long-term Debt
In October 2000, the Company entered into a three-year $70,000 revolving credit
facility with a new lender and three other participants. The facility is secured
by certain receivables and inventories of the Company with borrowing rates
ranging from LIBOR plus .625% to LIBOR plus 1.375%, based on various debt to
earnings ratios. The LIBOR rate was 1.94% at November 30, 2002. The Company
amended the facility in 2001 to address restrictive covenants and to reduce the
total facility to $60,000. Borrowings under the facility, which matures November
30, 2003, totaled $3,000 and $6,000 at November 30, 2002 and November 24, 2001,
respectively. After coverage for letters of credit, the Company had $33,955
available for borrowing under the facility at November 30, 2002. The average
interest rate was 3.49% for the year ended November 30, 2002.
The new facility contains, among other provisions, certain defined financial
requirements regarding leverage and fixed charge ratios and certain restrictions
involving future indebtedness and contingent liabilities.
The Company also had a mortgage liability of $1,482 outstanding at November 24,
2001. The interest rate on this mortgage was 8.75%. The mortgage was paid off
during 2002.
Interest paid during 2002, 2001 and 2000 was $465, $1,945 and $3,020,
respectively.
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(In thousands, except share and per share data)
K. Capital Stock and Stock Compensation
The Company has a Long Term Incentive Stock Option Plan that was adopted in 1993
(the 1993 Plan). Under the 1993 Plan, the Company has reserved for issuance
450,000 shares of common stock of which 2,279 were available for grant at
November 30, 1997. Options outstanding under the 1993 Plan expire at various
dates through 2007. The Company adopted a second Employee Stock Plan in 1998
(the 1998 Plan). Under the 1998 Plan, the Company has reserved for issuance
950,000 shares of common stock. The terms of the 1998 Plan also allow for the
issuance of the 2,279 shares, which remained as of December 1, 1997 from the
1993 Plan. In addition, the terms of the 1998 Plan allow for the re-issuance of
any stock options which have been forfeited before being exercised. An
additional 500,000 shares of common stock were authorized for issuance by the
Stockholders at the 1999 Annual Shareholders Meeting. Options granted under the
1998 Plan may be for such terms and exercised at such times as determined by the
Organization, Compensation, and Nominating Committee of the Board of Directors.
Shares available for grant under the 1998 Plan were 275,675 at November 30,
2002.
The Company has a Stock Plan for Non-Employee Directors, adopted in 1993 and
amended in 2000. Under this stock option plan, the Company has reserved for
issuance 125,000 shares of common stock, including an additional 50,000 shares
of common stock that were authorized for issuance by the Stockholders at the
2000 Annual Shareholders Meeting. Shares available for grant under the plan were
10,644 at November 30, 2002. Under the terms of this plan, each non-employee
director will automatically be granted an option to purchase 1,000 shares of
common stock on April 1 of each year. These options are exercisable for 10 years
commencing six months after the date of grant. Option activity under these plans
is as follows:
Weighted
Number average
of price
shares per share
------------------ ------------------
Outstanding at November 27, 1999 1,370,789 $ 27.46
Granted 526,672 14.87
Exercised -- --
Forfeited (173,210) 26.89
----------
Outstanding at November 25, 2000 1,724,251 23.67
Granted 55,500 12.84
Exercised -- --
Forfeited (115,259) 28.59
----------
Outstanding at November 24, 2001 1,664,492 23.11
Granted 358,500 14.93
Exercised (1,000) (11.91)
Forfeited (162,547) 28.50
----------
Outstanding at November 30, 2002 1,859,445 $ 21.07
==========
Exercisable at November 30, 2002 1,319,121 $ 23.66
Exercisable at November 24, 2001 1,167,471 $ 25.99
Exercisable at November 25, 2000 504,858 $ 24.62
For various price ranges, weighted-average characteristics of outstanding stock
options at November 30, 2002 were as follows:
Options Outstanding Options Exercisable
---------------------------------------- -----------------------------
Weighted
average
remaining Weighted Weighted
Range of contractual average average
exercise Number life exercisable Number exercisable
prices outstanding (years) price exercisable price
- ---------------------- ---------------------------------------- -----------------------------
$11.34 - $16.00 868,938 8.3 $14.69 340,614 $ 14.70
16.01 - 27.74 547,474 5.9 22.39 535,474 22.48
27.75 - 37.40 443,033 5.5 31.96 443,033 31.96
---------- ----------
1,859,445 6.1 1,319,121
========== ==========
The Company has elected to continue to account for stock options granted to
employees and directors under APB Opinion No. 25 and is required to provide pro
forma disclosures of what net income and earnings per share would have been had
the Company adopted the new fair value method for recognition purposes under
SFAS No. 123. The following information is presented as if the Company had
adopted SFAS No. 123 and restated its results:
2002 2001 2000
------------ ------------ ------------
Net income (loss)
As reported $ 6,741 $ (2,642) $ 10,032
Pro forma $ 6,118 $ (3,350) $ 9,082
Basic earnings per share:
As reported $ 0.58 $ (0.23) $ 0.85
Pro forma $ 0.52 $ (0.29) $ 0.77
Diluted earnings per share
As reported $ 0.57 $ (0.23) $ 0.85
Pro forma $ 0.52 $ (0.29) $ 0.77
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model and the following weighted average
assumptions:
2002 2001 2000
---------------- ---------------- ----------------
Expected lives 5 years 5 years 5 years
Risk-free interest rate 4.5% 4.4% 6.8%
Expected volatility 40.4% 39.0% 36.0%
Dividend yield 5.3% 6.2% 5.8%
The weighted average fair values of options granted during 2002, 2001 and 2000
were $3.77, $2.89 and $3.71, respectively.
During 2000 and 1998, the Company issued 4,724 and 16,836 shares respectively,
of restricted common stock under the 1998 Long Term Incentive Plan as
compensation for certain key salaried employees. These shares carry dividend and
voting rights. Sale of these shares is restricted prior to the date
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(In thousands, except share and per share data)
of vesting. Shares issued under this plan were recorded at their fair market
value on the date of the grant with a corresponding charge to stockholders'
equity. The unearned portion is being amortized as compensation expense on a
straight-line basis over the related vesting period. Compensation expense
related to these grants was $222 in 2002, $173 in 2001 and $17 in 2000.
The Company's Board of Directors adopted a Shareholders Rights Plan in 1998. If
a person or group acquires beneficial ownership of 20% or more of the common
stock outstanding, each right distributed under the plan will entitle its holder
(other than such person or group) to purchase, at the rights exercise price, a
certain number of shares of the Company's Common Stock or other securities.
The Company implemented an Employee Stock Purchase Plan (ESPP) in the fourth
quarter of fiscal year 2000. This plan allows eligible employees to purchase a
limited number of shares of the Company's stock at 85% of market value. Under
the plan the Company sold 20,635 and 18,837 shares to employees in 2002 and
2001, respectively. Under SFAS No. 123, no compensation expense is recognized
for shares purchased under the ESPP.
L. Other Income (Expense), Net
2002 2001 2000
----------- ----------- -----------
COLI $ (919) $ (994) $ 1,687
Captive insurance
dividend
-- 117 4,500
Real estate, net (741) (253) 1,053
Net gain
on financial instrument
-- 448 1,641
Other, net (1,105) 262 688
------- ------- -------
$(2,765) $ (420) $ 9,569
======= ======= =======
M. Restructuring, Impaired Asset and Other Unusual Charges
During fiscal year 2000, a decision was made to consolidate wood manufacturing
operations at two of the Company's facilities in Bassett, Virginia. This and
other reorganization actions resulted in the elimination of approximately 300
positions, including the severance of approximately 80 salaried employees. In
addition to the restructuring charges recognized in 2000, the Company recorded
unusual and nonrecurring charges of $600 for inventory losses and $3,150 for bad
debt expense. Inventory charges are related to the restructuring. The bad debt
charges were to increase reserves related to expected losses on the Company's
accounts receivable due to the pending bankruptcies of two national retailers.
Of the total restructuring, impaired asset and other unusual charges, $600 is
included in cost of sales, $3,150 is included in selling, general and
administrative expenses and $6,680 is included in restructuring and impaired
asset charges in the accompanying 2000 consolidated statement of income.
Restructuring activities continued in 2001. During the first quarter, production
was moved from one facility to another and a wood manufacturing facility was
identified for closure and was subsequently closed in the second quarter.
Additionally, 60 corporate office positions were eliminated in the first and
second quarters of 2001. Ongoing efforts to match production with demand, offer
more competitively priced products and operate more efficient manufacturing
facilities resulted in the announcement and subsequent closure of two additional
facilities in Bassett, Virginia during the third quarter of 2001. Production has
been moved to other manufacturing facilities in Virginia or has been outsourced.
Approximately 800 positions were eliminated as a result of this restructuring
activity. In addition to the restructuring charges recognized in 2001, the
Company recorded unusual and non-recurring charges of $1,051 for inventory
losses related to discontinued product. This amount is included in 2001 cost of
sales.
During the fourth quarter of 2002, the Company closed its California upholstery
plant and consolidated production in its two remaining upholstery manufacturing
facilities in North Carolina. The Company incurred restructuring charges of
$1,251, which relate entirely to severance and employee benefit costs for
approximately 200 employees. Based on estimated market values of the real estate
with a net book value of approximately $1,100, the company expects to realize a
gain upon disposition of the assets. The following summarizes the restructuring
and impaired asset charges:
2002 2001 2000
---------- --------- ---------
Non-cash writedown
of property and
equipment to
net realizable value $ -- $4,550 $5,800
Severance and related
employee benefit
costs 1,251 2,402 880
------ ------ ------
$1,251 $6,952 $6,680
====== ====== ======
The property and equipment write-downs were entirely related to closing three
facilities in Bassett, Virginia and were determined based on estimated
liquidation value of the associated machinery, equipment and buildings. Certain
production and some employees have been transferred to other production
facilities within the Company. Of the $880 in severance and employee benefit
costs expensed during fiscal 2000, $388 was paid during 2000 and the remaining
$492 was paid out in fiscal 2001. In 2001, $2,402 of severance and employee
benefit costs was expensed. Of the $2,402, $1,820
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(In thousands, except share and per share data)
was paid during fiscal 2001 and the remaining $582 was paid in fiscal 2002.
Fiscal 2002 restructuring costs of $1,251 were expensed during 2002 and $149 was
unpaid at November 30, 2002.
N. Contingencies
The Company is involved in various claims and actions, including environmental
matters, which arise in the normal course of business. Although the final
outcome of these matters cannot be determined, based on the facts presently
known, it is management's opinion that the final resolution of these matters
will not have a material adverse effect on the Company's financial position or
future results of operations.
O. Leases and Loan Guarantees
The Company leases land and buildings that are used in the operation of its
Company-owned retail stores as well as in the operation of independent licensee
BFD stores. Additionally, the Company leases showroom space from IHFC, which is
priced at the market rate. Lease terms range from three to 15 years and
generally have renewal options of between five and 15 years. The Company's
decision to exercise renewal options is primarily dependent on the level of
business conducted at the location and the profitability thereof. Some store
leases contain contingent rental provisions based upon sales volume. The
following schedule shows future minimum lease payments under non-cancelable
leases having remaining terms in excess of one year as of November 30, 2002:
2003 $ 3,521
2004 3,415
2005 3,124
2006 2,605
2007 2,405
Thereafter 15,357
---------------
$ 30,427
===============
In addition to subleasing certain of these properties, the Company owns retail
real estate, which it in turn leases to licensee operators of the Company's
Bassett Furniture Direct stores. The following schedule shows minimum future
rental income related to pass-through rental expense on subleased property as
well as rental income on real estate owned by Bassett.
2003 $ 1,896
2004 1,936
2005 1,875
2006 1,712
2007 1,551
Thereafter 10,064
---------------
$ 19,034
===============
Real estate expense (including associated real estate costs), net of real estate
income, was $741 in 2002 and $253 in 2001. Real estate income, net of real
estate expense, related to these leases was $1,053 in 2000.
As part of the Company's expansion strategy for its retail stores, Bassett has
guaranteed certain lease obligations and construction loan obligations of
licensee operators of the Bassett Furniture Direct program. Lease guarantees
range from one to ten years. The Company was contingently liable under licensee
lease obligation guarantees in the amount of $27,928 and $25,708 at November 30,
2002 and November 24, 2001, respectively.
The Company has also guaranteed loans from two banks to certain of its BFD
dealers to finance initial inventory packages for those stores. The total
contingent liability with respect to these loan guarantees as of November 30,
2002 and November 24, 2001, was $8,568 and $8,990, respectively.
P. Earnings Per Share
The following table reconciles basic and diluted earnings per share:
Earnings
Shares Net Income Per Share
------------ ------------ -----------
2002:
Basic EPS 11,697,519 $ 6,741 $ 0.58
Add effect of
dilutive securities:
Options and
restricted stock 57,742 - (0.01)
---------- ---------- ------
Diluted EPS 11,755,261 $ 6,741 $ 0.57
========== ========== ======
2001:
Basic EPS 11,701,842 $ (2,642) $(0.23)
Add effect of
dilutive securities:
Options and
restricted stock 9,644 - -
---------- ---------- ------
Diluted EPS 11,711,486 $ (2,642) $(0.23)
========== ========== ======
2000:
Basic EPS 11,812,962 $ 10,032 $ 0.85
Add effect of
dilutive securities:
Options and
restricted stock 9,070 - -
---------- ---------- -----=
Diluted EPS 11,822,032 $ 10,032 $ 0.85
========== ========== ======
Options to purchase 1,859,445 shares of common stock in 2002, 1,654,848 shares
in 2001, and 1,715,181 shares in 2000, were outstanding at the end of each
fiscal year that could potentially dilute basic EPS in the future.
Q. Subsequent Event
Subsequent to November 30, 2002, the Company announced that it would close its
wood manufacturing plant in Dublin, Georgia, in order to better match production
capacity to
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(In thousands, except share and per share data)
current demand levels. The Company anticipates recording a charge of
approximately $3,200 in the first quarter of 2003 representing a $1,500
write-down of property and equipment and $1,700 of severance and related
employee benefit costs for 320 employees associated with the closure.
R. Segment Information
The Company's primary business is wholesale home furnishings. The wholesale home
furnishings business is involved principally in the design, manufacture, sale
and distribution of furniture products to a network of independently-owned
stores and stores owned by the Company and by affiliates of the Company.
The wood segment is engaged in the manufacture and sale of wood furniture to
independent and affiliated retailers. The upholstery segment is involved in the
manufacture and sale of upholstered frames and cut upholstery items having a
variety of frame and fabric options. The import segment sources product
principally from Asia and sells these products to independent and affiliated
retailers.
The Company's "other" business segment consists of a contemporary furniture
business and corporate operations, including certain selling, general and
administrative expenses, are all included to reconcile segment information to
the consolidated financial statements.
The retail segment consists of the six corporately owned retail stores in
Virginia and North Carolina. Five of these stores were acquired from LRG
Furniture, LLC on March 4, 2002. The sixth store was acquired from LRG in the
previous year. Data related to this store was included in "other" for 2001.
Inventory profit elimination reflects the embedded wholesale profit in the
Company-owned store inventory that has not been realized. These profits will be
recorded when merchandise is shipped to the retail customer.
Restructuring, impaired fixed assets and other unusual charges are included for
2002, 2001 and 2000 as discussed in Note M to the consolidated financial
statements and are included below in the "other" segment.
Operating income by business segment is defined as sales less direct operating
costs and expenses. Identifiable assets are those assets used exclusively in the
operations of each business segment. Identifiable assets for the wood,
upholstery, import and retail segments consist of inventories and property,
plant and equipment.
2002
Wood Upholstery Import Other Wholesale
---------- ---------- --------- --------- ----------
Net sales $ 160,591 $ 105,562 $ 40,566 $ 8,523 $ 315,242
Operating income (loss) 15,713 14,373 9,129 (31,730) 7,485
Identifiable assets 63,256 14,369 13,720 195,572 286,917
Depreciation and amortization 2,997 954 -- 6,763 10,714
Capital expenditures 2,331 674 -- 6,654 9,659
Retail
Wholesale Retail Elimination Consolidated
----------- ---------- ----------- -------------
Net sales $315,242 $ 15,816 $ (7,571) $323,487
Operating income (loss) 7,485 (1,044) (185) 6,256
Identifiable assets 286,917 3,963 -- 290,880
Depreciation and amortization 10,714 90 -- 10,804
Capital expenditures 9,659 -- -- 9,659
2001
Wood Upholstery Import Other Consolidated
----------- ----------- ----------- ---------- ------------
Net sales $ 173,106 $ 90,117 $ 32,136 $ 10,317 $ 305,676
Operating income (loss) 10,194 9,209 6,941 (31,256) (4,912)
Identifiable assets 67,166 15,633 6,566 212,038 301,403
Depreciation and amortization 3,937 994 -- 6,385 11,316
Capital expenditures 2,112 334 -- 9,886 12,332
2000
Wood Upholstery Import Other Consolidated
----------- ------------ ------------ ----------- ------------
Net sales $ 226,013 $ 97,773 $ 30,985 $ 12,673 367,444
Operating income (loss) 26,143 8,024 7,504 (44,867) (3,196)
Identifiable assets 102,046 17,997 9,976 216,661 346,680
Depreciation and amortization 4,796 961 -- 4,275 10,032
Capital expenditures 5,772 2,111 -- 10,436 18,319
21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Bassett Furniture Industries,
Incorporated:
We have audited the accompanying consolidated balance sheet of Bassett Furniture
Industries, Incorporated and subsidiaries as of November 30, 2002, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The financial statements of
International Home Furnishings Center, Inc. (a corporation in which the Company
has a 47% interest), have been audited by other auditors whose report has been
furnished to us; insofar as our opinion on the consolidated financial statements
relates to the amounts included for International Home Furnishings Center, Inc.,
it is based solely on their report. The consolidated financial statements of
Bassett Furniture Industries, Incorporated and subsidiaries as of November 24,
2001, and for the two years in the period then ended were audited by other
auditors who have ceased operations and whose report dated January 15, 2002
expressed an unqualified opinion on those financial statements before the
revisions described in Note A.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit and the report of other auditors provide
a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Bassett Furniture Industries,
Incorporated and subsidiaries as of November 30, 2002, and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States.
As discussed in Note A to the consolidated financial statements, effective
November 25, 2001, the Company adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets ("FAS 142").
As discussed above, the consolidated financial statements of Bassett Furniture
Industries, Incorporated as of November 24, 2001 and for the two years in the
periods then ended were audited by other auditors who have ceased operations. As
described in Note A, these financial statements have been revised to include the
transitional disclosures of FAS 142. We applied procedures with respect to the
disclosures in Note A pertaining to 2001 and 2000 consolidated financial
statement revisions. In our opinion, the FAS 142 disclosures for 2001 and 2000
in Note A are appropriate. However, we were not engaged to audit, review, or
apply any procedures to the 2001 and 2000 financial statements of the Company
other than with respect to such disclosures and, accordingly, we do not express
an opinion or any other form of assurance on the 2001 and 2000 financial
statements taken as a whole.
/s/ Ernst & Young LLP
Greensboro, North Carolina,
January 7, 2003,
except for Note Q as to which the date is February 3, 2003
22
The following report is a copy of a report previously issued by Arthur Andersen
LLP and has not been reissued by Arthur Andersen LLP. As discussed in the
Goodwill and Intangible Assets note, the corporation has presented the
transitional disclosures for 2001 and 2000 required by SFAS No. 142. The Arthur
Andersen LLP report does not extend to these changes to the 2001 and 2000
consolidated financial statements. The adjustments to the 2001 and 2000
consolidated financial statements were reported on by Ernst & Young LLP as
stated in their report appearing herein.
To the Stockholders and Board of Directors of Bassett Furniture Industries,
Incorporated:
We have audited the accompanying consolidated balance sheets of Bassett
Furniture Industries, Incorporated (a Virginia corporation) and subsidiaries as
of November 24, 2001 and November 25, 2000, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended November 24, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Bassett Furniture Industries,
Incorporated and subsidiaries as of November 24, 2001 and November 25, 2000, and
the results of their operations and their cash flows for each of the three years
in the period ended November 24, 2001, in conformity with accounting principles
generally accepted in the United States.
/s/ ARTHUR ANDERSON, LLP
Greensboro, North Carolina,
January 15, 2002
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(In thousands, except share and per share data)
OTHER BUSINESS DATA
Bassett Furniture Industries, Incorporated and Subsidiaries
(dollars in thousands except per share data)
Selected Financial Data
2002 2001 2000 1999 1998
------------- ------------- ------------- ------------ ------------
Net sales $ 323,487 (2) $ 305,676 $ 367,444 $ 394,412(2)(3) $ 397,557
Cost of sales $ 254,993 $ 254,456 (1) $ 302,281 (1) $ 309,316 $ 323,904
Operating profit (loss) $ 6,256 (1) $ (4,912)(1) $ (3,196)(1) $ 12,474 $ 9,651
Other income, net $ 2,854 $ 1,228 $ 18,263 $ 13,744 $ 11,445
Income (loss) before income taxes $ 9,110 (1) $ (3,684)(1) $ 15,067 (1) $ 26,218 $ 21,096
Income taxes (benefit) $ 2,369 (1) $ (1,042)(1) $ 4,671 (1) $ 8,264 $ 5,379
Net income (loss) $ 6,741 (1) $ (2,642)(1) $ 10,032 (1) $ 17,954 $ 15,717
Diluted earnings (loss) per share $ 0.57 (1) $ (0.23)(1) $ 0.85 (1) $ 1.44 $ 1.20
Cash dividends declared $ 9,358 $ 9,378 $ 9,497 $ 9,983 $ 10,393
Cash dividends per share $ 0.80 $ 0.80 $ 0.80 $ 0.80 $ 0.80
Total assets $ 290,880 $ 301,403 $ 346,680 $ 342,829 $ 321,514
Long-term debt $ 3,000 $ 7,482 $ 45,000 $ 18,000 --
Current ratio 3.02 to 1 3.19 to 1 3.19 to 1 2.39 to 1 3.21 to 1
Book value per share $ 19.63 $ 20.04 $ 21.09 $ 20.46 $ 20.40
Weighted average number of shares 11,697,519 11,701,842 11,812,962 12,499,481 12,984,639
Quarterly Results of Operations
2002
----------------------------------------------------
FIRST SECOND THIRD FOURTH
----------------------------------------------------
Net sales $ 84,788 $ 80,904 $ 78,367 $ 79,428
Gross profit 16,728 18,449 16,584 16,733
Net income (loss) 2,912 2,880 (718) 1,667
Basic earnings (loss) per share 0.25 0.25 (0.06) 0.14
Diluted earnings (loss) per share 0.25 0.24 (0.06) 0.14
2001
----------------------------------------------------
FIRST SECOND THIRD FOURTH
----------------------------------------------------
Net sales $ 82,553 $ 73,765 $ 71,290 $ 78,068
Gross profit 14,559 11,093 10,157 15,411
Net income (loss) 2,252 (538) (2,834) (1,522)
Basic earnings (loss) per share 0.19 (0.05) (0.24) (0.13)
Diluted earnings (loss) per share 0.19 (0.05) (0.24) (0.13)
(1) See Note M to the Consolidated Financial Statements for a discussion of
restructuring, impaired fixed assets and unusual charges.
(2) Includes sales from corporately owned retail stores. See Note F to the
Consolidated Financial Statements.
(3) Includes sale of bedding, see Note B to the Consolidated Financial
Statements.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Bassett Furniture Industries, Incorporated and Subsidiaries
(dollar amounts in thousands)
OVERVIEW
Bassett Furniture Industries Inc., based in Bassett, Va., is a leading
manufacturer and marketer of branded home furnishings. Bassett's products,
designed to provide quality, style and value, are sold through Bassett Furniture
Direct(TM) stores, @t Home with Bassett(R) galleries, and other furniture and
department stores.
The Bassett Furniture Direct store program, which began in 1997, entailed not
only the creation of a new prototype store, but also includes an internal,
cultural transformation aimed at re-focusing company practices and strategies to
the ultimate end user, the consumer. The strategy also focused on re-styling the
Bassett lines and suites with accessories. Bassett Furniture Direct acts as both
a furniture design center and a moderate price point leader - two
characteristics that combined with custom product and quick delivery offer the
Company a unique selling proposition in the furniture industry.
FISCAL 2002 COMPARED TO FISCAL 2001
2002 marked a year of good progress in the Company's continuing transition from
solely a furniture manufacturer to a manufacturer/sourcer/retailer of home
furnishings. Progress was made in several key areas most notably the Bassett
Furniture Direct retail store program and the profitability of the Upholstery
and Import segments. Challenges were presented by sales declines with JCPenney
and capacity issues within the Wood division. These issues are further discussed
in the narrative below.
Subsequent to November 30, 2002, the Company announced that it would close its
Dublin, Georgia wood manufacturing facility. Manufacture of certain products
formerly produced at this facility will be transferred to a facility in Virginia
or will be sourced from foreign manufacturers. The Company will record a charge
of approximately $3,200 in the first quarter of 2003 related to severance and a
write-down of property and equipment to net realizable value.
Bassett reported net sales for 2002 of $323,487, an increase of $17,811 or 5.8%
from sales levels attained in fiscal 2001. The increase reflects a 28% increase
in sales through the Bassett Furniture Direct (BFD) store channel, partially
offset by a $16,994 or 38% decrease in sales to the Company's largest customer,
JCPenney. The majority of the sales decline with JCPenney was expected and
further attrition is planned for 2003. Sales to JCPenney were 9% and 15% of
sales for fiscal 2002 and 2001, respectively. Also included in 2002 results is
$8,245 (net of sales elimination of $7,571) of retail sales from the Company's
corporately owned BFD stores. The Company was able to end attrition in sales to
general furniture stores by successfully implementing its Five Star quick ship
delivery program. This innovative program allows for shipment of eligible
product to qualified dealers within 14 days and billings inclusive of freight.
Also, sales through exchanges located on military bases increased by $4,772 or
61% over 2001 sales levels reflecting the conversion of many of these locations
to @t Home galleries (the Company's gallery program). The Company plans to
continue to develop products and programs specifically targeted to @t Home
galleries and participating Five Star dealers as well as to the BFD stores.
The BFD store channel continues to be the most significant growth vehicle for
the Company. During 2002, licensees opened 22 new licensee BFD stores and closed
four licensee BFD stores for a net increase of 18 stores. There were 85 stores
in operation at November 30, 2002, six of which were corporately owned. The
Company is committed to the financial success of its BFD licensee stores. In
that regard, during 2002, the Company continued efforts to strengthen its retail
organization and to address issues related to the profitability of its retail
licensee network. New licensee candidates are required to meet rigorous
financial and operational requirements before being approved as licensees. In an
effort to further enhance the economics of BFD store operators, the Company
began implementation of a "ship complete" program in the latter half of 2002.
Under this program, orders for a single customer will be consolidated at the
Company's Martinsville Distribution Center and shipped to the dealer when all
items on that order are ready to ship. This will also allow BFD operators to
reduce their inventory holding costs. The Company's service levels improved
dramatically in 2002 as evidenced by a full percentage point reduction in the
returns allowance, from 4% of sales to 3% of sales.
Gross margin, selling, general and administrative (SG&A) expenses; and operating
income (loss) were as follows for the years ended November 30, 2002 and November
24, 2001:
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Continued
(dollar amounts in thousands)
2002 2001
------------------- -------------------
Net sales $ 323,487 100.0% $ 305,676 100.0%
--------- ----- --------- -----
Gross profit 68,494 21.2% 51,220 16.8%
SG&A 60,987 18.9% 54,477 17.8%
Gains on sales of
property and equipment
-- 0.0% (5,297) -1.7%
Restructuring and
impaired asset charges 1,251 0.4% 6,952 2.3%
--------- ----- --------- -----
Operating profit (loss) $ 6,256 1.9% $ (4,912) -1.6%
========= ===== ========= =====
The Company improved gross margin percentage by 4.4 points over 2001 levels.
This improvement is reflective of the restructuring and cost cutting efforts
completed in 2001, improvements in upholstery and import margins, as well as the
inclusion of corporately owned retail store results beginning March 1, 2002.
Inclusion of the retail results represented 1.2 points of the 4.4 point
improvement, while manufacturing efficiencies and the mix of imported products
contributed the remaining 3.2 points.
Manufacturing efficiency gains in the Company's upholstery division brought
about by the implementation of cellular manufacturing over the past several
years led to management's decision to close its California upholstery plant in
October of 2002. Upholstery production has been consolidated in its two
remaining North Carolina facilities. The Company recorded $1,251 in
restructuring charges for the third quarter of 2002 entirely related to
severance and employee benefits associated with the cessation of operations in
California. Nearly the entire volume formerly produced at the California plant
has been absorbed into the production capacity of the North Carolina upholstery
facilities without the need for additional staffing, thereby dramatically
improving the manufacturing efficiencies of the remaining facilities. The
Company is holding the related property for sale and expects to realize a gain
on the disposition of California assets in the next twelve months.
During 2001, the Company continued its efforts to eliminate excessive costs, to
more efficiently structure manufacturing capacities to match current business
levels and to stay competitive with product sourced overseas. The table plant
was closed and production of occasional tables was moved to another facility or
outsourced. The chair plant and a rough-end facility were permanently closed and
production was either transferred to other facilities or sourced to foreign
manufacturers. Approximately 800 salaried and hourly positions were eliminated
in fiscal 2001. Restructuring activities in 2001 resulted in a charge to
earnings of $6,952, of which $4,550 was related to the non-cash write-down of
property, plant and equipment to net realizable value and $2,402 was associated
with severance and employee benefits.
SG&A expenses increased by $6,510 to $60,987 over the 2001 level. As a
percentage of sales, SG&A climbed 1.1 points from 17.8% in 2001 to 18.9% in
2002. The increase in SG&A expense is entirely the result of the inclusion of
corporate store retail operations for nine months in 2002. SG&A expense related
to the Company's corporate retail store operation totaled $8,148. Manufacturing
SG&A expenses actually declined by $1,638, primarily as a result of
restructuring efforts completed in 2001 which resulted in reduced headcount and
better spending control in all areas of the business. Manufacturing SG&A as a
percentage of manufacturing sales declined from 17.8% in 2001 to 16.8% in 2002.
Gains on sales of property and equipment in 2001 relate to the sale of the
Thomasville, North Carolina showroom, a warehouse in Los Angeles, California and
two former manufacturing facilities in the Hickory, North Carolina area.
Income from investments consists of dividends and realized gains associated with
the Company's portfolio of marketable equity securities as well as earnings from
the Company's investment in the Bassett Industries Alternative Asset Fund
(Alternative Asset Fund). Income from investments decreased by $5,155 in 2002
from 2001 levels due to a decrease in returns from the Alternative Asset Fund
and reduced realized gains from sales of marketable equity securities. Income
(loss) from unconsolidated affiliated companies include the Company's share of
earnings or loss from investments in LRG Furniture, LLC (LRG) and the
International Home Furnishings Center (IHFC) among other investments.
Performance improved from a loss of ($3,030) in 2001 to income of $4,715 in
2002. The Company's share of the loss from LRG improved by $2,848 over that
recorded in 2001. Also, the restructuring of LRG debt forced the Company to take
an additional charge of $1,359 in 2001. Results from the Company's investment in
IHFC improved to $5,756 in 2002, $2,214 better than 2001 results. A detail of
other income (expense) may be seen in Note L to the Consolidated Financial
statements.
The effective income tax provision (benefit) rate was 26% in 2002 and (28%) in
2001. The income tax provision (benefit) rates were lower than statutory rates
primarily due to exclusions for tax exempt income and dividends received.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Continued
(dollar amounts in thousands)
For the year ended November 30, 2002, net income was $6,741 or $0.57 per diluted
share. Net loss for the year ended November 24, 2001 was $2,642 or $(0.23) per
diluted share.
The Company enters fiscal 2003 with two key areas of focus: one, continuing to
improve and expand a profitable store network, and two, to improve the financial
performance of its wood division through both the introduction of new products
and the continuing rationalization of the labor and overhead structure
supporting the Wood Division.
FISCAL 2001 COMPARED TO FISCAL 2000
Bassett reported sales for 2001 of $305,676, a decrease of $61,768 or 17% from
fiscal 2000 sales. The decline reflects the loss of two major customers to
bankruptcy in the first quarter of 2001 and an extremely weak retail furniture
climate in 2001. The Company continued with its plan for vertical integration
during 2001 by transitioning from sales to traditional customers to sales to its
dedicated Bassett Furniture Direct (BFD) licensee store network. Though sales to
the independently owned BFD licensees increased in 2001, sales did not increase
to the extent expected due to the weakening economy and the timing of new store
openings. During 2000, the Company implemented a new enterprise-wide software
system, which included sales order processing, logistics, upholstery
manufacturing and some wood manufacturing. The utilization of the system greatly
enhanced the Company's shipping performance and overall customer service in
2001.
Although overall sales have declined, sales to the Bassett Furniture Direct
(BFD) and @t Home with Bassett (@t Home) channels increased by 5% in 2001 and
33% in 2000. The 2001 increase of 5% was impacted by the timing of store
openings, as many stores opened in the last quarter. Sales to national accounts,
major furniture stores and smaller furniture stores declined in 2001. The
increase in sales in the BFD and @t Home channels was driven by the opening of
additional BFD stores and signing additional @t Home retailers. The Company saw
openings of fifteen new independently owned BFD stores and closures of four
stores in 2001, for a net gain of eleven stores. The Company ended 2001 with 68
BFD stores. In an effort to address declining sales to smaller furniture stores,
the Company implemented a new in-stock, rapid delivery program in 2001 for its
@t Home and small furniture retail customers. The innovative program, known as
Five Star, features prepaid freight and 14 day delivery and provides the Company
with a competitive advantage with these customers. During 2001 the Company
completed its move from its Thomasville, North Carolina showroom to a newly
completed space at the International Home Furnishings Center in High Point. As
expected, the Company experienced a significant increase in customer traffic,
which enabled salesmen to re-establish contacts with old customers and introduce
Bassett to many potential new customers who had never shopped the line. The
Company experienced a substantial increase in new accounts opened for dealers in
this category.
Gross margin; selling, general and administrative (SG&A) expenses; and operating
income (loss) were as follows for the years ending November 24, 2001 and
November 25, 2000:
2001 2000
---------------------- ----------------------
Net sales $ 305,676 100.0% $ 367,444 100.0%
--------- ----- --------- -----
Gross profit 51,220 16.8% 65,163 17.7%
SG&A 54,477 17.8% 61,854 16.8%
Gains on sales of
property and equipment
(5,297) -1.7% (175) 0.0%
Restructuring and
6,952 2.3% 6,680 1.8%
--------- ----- --------- -----
impaired asset charges
Operating profit (loss) $ (4,912) -1.6% $ (3,196) -0.9%
========= ===== ========= =====
The decrease in the gross margin from 2000 to 2001 was due to sharply reduced
production levels and related overhead absorption impact, costs incurred to
transition production from one plant to another and lower margins resulting from
liquidating certain discontinued finished goods inventories. This was partially
offset by a reduction in cost of sales that resulted from liquidating LIFO
inventories in 2001. In fiscal 2000, margins were negatively impacted by
restructuring activities, lumber price fluctuations and reduced production
levels.
Bassett has aggressively strived to eliminate excessive costs and to more
efficiently structure manufacturing capacities to match current business levels.
In that regard, the Company made the decision in late 2000 to consolidate
production in the Wood Division. Restructuring charges of $6,680, of which
$5,800 related to the write-down of property and equipment and $880 related to
severance and employee benefit costs were incurred. Restructuring continued in
2001 as the Company reduced manufacturing capacities to meet demand and stay
competitive with product sourced overseas. The table plant was closed and
production of occasional tables was moved to another facility or outsourced. The
chair plant and a rough-end facility were permanently closed and production
either transferred to other facilities or sourced to foreign manufacturers.
Approximately 800 salaried and hourly positions were
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Continued
(dollar amounts in thousands)
eliminated in fiscal 2001. All restructuring activities in 2001 resulted in
restructuring charges of $6,952, of which $4,550 was related to the non-cash
write-down of property and equipment to net realizable value and $2,402 was
associated with severance and employee benefits. Also associated with the
restructuring acti-vities was a $1,051 write-down of discontinued inventories to
net realizable value. This charge is reflected in cost of sales.
Income from investments consists of dividends and realized gains associated with
the Company's portfolio of marketable equity securities as well as earnings from
the Company's investment in the Bassett Industries Alternative Asset Fund
(Alternative Asset Fund). Income from investments decreased by $6,517 in 2001
from 2000 levels due principally to a $5,919 decrease in returns from the
Alternative Asset Fund. Income (loss) from unconsolidated affiliated companies
include the Company's share of earnings or loss from investments in LRG
Furniture, LLC (LRG) and the International Home Furnishings Center (IHFC) among
other investments. Performance worsened from a loss of ($809) in 2000 to a loss
of ($3,030) in 2001. The Company's share of the loss from LRG improved by $1,207
over that recorded in 2000. The restructuring of LRG debt forced the Company to
take an additional charge of $1,359 in 2001. Results from the Company's
investment in IHFC declined to $3,542 in 2001, $1,340 less than 2000 results.
Also for 2001, the Company incurred losses related to the restructuring of its
affiliate, the Accessory Group, LP of $1,358. A detail of other income (expense)
may be seen at Note L to the Consolidated Financial statements.
SEGMENT INFORMATION:
The following is a discussion of operating results for each of Bassett's
business segments. A full description of each operating segment along with
financial data for each segment can be found in Note R to the Notes to
Consolidated Financial Statements.
WOOD DIVISION
2002 2001 2000
------------------- ------------------- -------------------
Net sales $160,591 100.0% $173,106 100.0% $226,013 100.0%
-------- ----- -------- ----- -------- -----
Gross profit 25,785 16.1% 20,934 12.1% 41,958 18.6%
-------- ----- -------- ----- -------- -----
Contribution to profit
and overhead 15,713 9.8% 10,194 5.9% 26,143 11.6%
-------- ----- -------- ----- -------- -----
Wood Division net sales decreased by 7.2% in 2002, due principally to the sharp
decline in sales to JCPenney as well as the shifting of sales to the Company's
Import Division. Sales to JCPenney were down by 37% from sales levels attained
in 2001. Sales increases through the BFD sales channel partially offset this
decline. Sales declined by 23% during 2001 from the fiscal 2000 level of
$226,013. The decline is the result of the loss of two major customers in early
2001, the continued soft retail furniture environment and continuing transition
to imported products. Imported wood furniture continues to pressure top line
sales growth in this division. In order to improve sales and margins in this
segment, the Company is introducing new products, opening more BFD stores, and
refocusing sales efforts on its furniture store channel through implementation
of its Five Star program. Production levels have been substantially reduced to
meet current demand and to reduce expense levels. The Division closed three
plants over the last two years and at the end of 2002, had six plants in
operation; three in Virginia, one in North Carolina and two in Georgia. Each
plant produces a different range of product, categorized as "good", "better" or
"best".
Gross margin improved by four points from 2001 to 2002 principally as a result
of restructuring efforts completed during fiscal 2001. Sales of discontinued
product at lower margins also negatively impacted margins in 2001. The
restructuring efforts resulted in the elimination of excess capacity and enabled
the Company to more closely match production of wood furniture to demand. Gross
margin declined by 6.5 points from fiscal 2000 to fiscal 2001 due principally to
the rapid decline in volume experienced by the Wood Division. The Company
reacted quickly to cut costs and reduce unneeded capacity during 2001 such that
the Division was able to rebound in 2002.
Contribution to profit and overhead is defined by the Company as gross profit
less direct divisional operating expenses but excluding any allocation of
corporate overhead expenses, interest expense or income taxes. Wood Division
contribution to profit and overhead improved to 9.8% of sales in 2002 from 5.9%
of sales in 2001. The improvement is the result of significant restructuring
efforts undertaken over the last two years to better match production capacity
with anticipated demand. These efforts have substantially reduced the Wood
Division's breakeven level. Contribution to profit and overhead declined from
11.6% in 2000 to 5.9% in 2001 due entirely to the rapid sales decline
experienced during fiscal 2001.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Continued
(dollar amounts in thousands)
The combination of soft business conditions and the changing mix of products
sold by the BFD stores generated erratic plant schedules during the second half
of 2002. Furthermore, the aforementioned loss of volume from our single largest
customer put added pressure on the Company's ability to run the domestic wood
plants at full capacity. As a result, domestic wood shipments fell by 7% in
2002. There are a number of productivity enhancement initiatives currently under
way that are designed to improve the competitiveness and profitability of the
domestic wood business. These include the introduction of new products such as
the Bassett Kids program, semi-customization of product offerings, short
production runs and superior service initiatives.
UPHOLSTERY DIVISION
2002 2001 2000
------------------- ------------------- -------------------
Net sales $105,562 100.0% $ 90,117 100.0% $ 97,773 100.0%
-------- ----- -------- ----- -------- -----
Gross profit 22,893 21.7% 16,807 18.7% 15,987 16.4%
-------- ----- -------- ----- -------- -----
Contribution to profit
and overhead 13,122 12.4% 9,209 10.2% 8,024 8.2%
-------- ----- -------- ----- -------- -----
Net sales for the Upholstery Division climbed by 17% during 2002. The sales
increase was the result of strong product offerings sold principally through the
Company's BFD stores. The Company has successfully completed its
re-merchandising of the upholstery product line. The growth of the BFD store
network has a more dramatic effect on the Upholstery Division as the BFD stores
are now the Division's primary sales channel. The sales decline of $7,656 from
2000 to 2001 was the result of losing two major upholstery accounts to
bankruptcy in early 2001. The Company has decided to focus this segment on its
BFD stores, its @t Home galleries and its Five Star customers.
Gross margin has improved in each of the last two years as a result of several
initiatives completed by the Company over the same time span. The Company
successfully repositioned the segment away from lower margin accounts and
products and into higher quality, more stylish goods. Additionally, the Division
has introduced a cellular manufacturing environment to its North Carolina
upholstery manufacturing facilities. Under this concept, upholstery products are
made one at a time, allowing for "just in time" inventory concepts to be used. A
large portion of direct labor employee pay is now paid through a skill based
team incentive pay plan. This plan provides financial incentives to meet or
exceed production goals and to maximize production of goods with superior
quality. These manufacturing initiatives have led to increases in productivity
at the North Carolina facilities.
During the fourth quarter of 2002, the Company closed its California upholstery
plant and consolidated production in its two remaining manufacturing facilities
in North Carolina. The manufacturing efficiencies gained through implementation
of a cellular manufacturing environment has allowed the North Carolina
facilities to absorb nearly all of the production from the California plant
without hiring additional personnel. The Company expects continued improvement
in manufacturing performance in the Upholstery Division as a result of this
consolidation. The Company incurred restructuring charges of $1,251, which
related to severance and employee benefit costs, associated with the closure of
this plant. Management expects to recognize a gain in 2003 related to the
disposition of California real estate.
Contribution to profit and overhead also improved over each of the past two
years as a result of the manufacturing improvements implemented as well as other
cost cutting initiatives. For 2002, contribution to profit and overhead improved
to $13,122 or 12.4% compared to $9,209 or 10.2% in 2001 and $8,024 or 8.2% in
2000.
IMPORT DIVISION
2002 2001 2000
------------------- ------------------ -------------------
Net sales $40,566 100.0% $32,136 100.0% $30,985 100.0%
------- ------ ------- ------ ------- ------
Gross profit 12,345 30.4% 9,516 29.6% 9,202 29.7%
------- ------ ------- ------ ------- ------
Contribution to profit
and overhead 9,129 22.5% 6,941 21.6% 7,504 24.2%
------- ------ ------- ------ ------- ------
Net sales of the Company's Import Division reached $40,566 for 2002, an increase
of 26% over the 2001 level. The increased sales levels reflect the Company's
ongoing strategy of outsourcing certain key products where foreign manufacturers
hold a significant competitive advantage. The vast majority of the Company's
occasional table business and all of its crib business have successfully been
sourced to overseas suppliers. During 2002, the Company began importing entire
suites of furniture, which also contributed to the significantly higher sales
levels.
The products of the Import Division will continue to supplement the product
offerings of the other divisions, as well as include complete suites of
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Continued
(dollar amounts in thousands)
bedroom and dining room furniture. This should continue to have a positive
impact on the Company's overall gross profit margin as the products sold by the
Import Division typically have a higher gross profit margin. Contribution to
profit and overhead increased to 22.5% of sales in 2002 from 21.6% of sales in
2001. The decline in contribution to profit and overhead percentage experienced
in 2001 from the 24.2% of sales achieved in 2000 was primarily the result of
allocating certain support costs to this division. The expected sales growth of
this segment requires the Company to focus more attention on forecasting and
purchasing practices, inventory management, logistics and quality.
RETAIL DIVISION
2002
--------------------
Net sales $ 15,816 100.0%
-------- -----
Gross profit 7,104 44.9%
-------- -----
Contribution to profit
and overhead (1,044) -6.6%
-------- -----
The Company purchased five southeastern BFD stores from its joint venture
partner LRG Furniture, LLC (LRG) for net book value (which approximated $0) on
March 4, 2002. The Company's Retail Division consists of six stores in North
Carolina and Virginia as of November 30, 2002. This purchase returns to Bassett
a corporate store program essential to the Company's retail strategy, and allows
LRG to focus on its core markets in Texas and Nevada.
There are three major components of the Company's corporate store improvement
program. First, increase top-line sales, second, increase gross profit margins
and third, decrease SG&A expenses. Management has had modest success in
increasing top-line sales during 2002, though economic conditions have worsened
late in the year making additional progress difficult. Gross margins have shown
marked improvement, especially late in the year after clearance inventory was
liquidated. Administrative expenses have been reduced, rent has been
restructured in four of the six stores and warehouse and delivery expenses have
been significantly reduced during 2002. The Company believes that results from
the Retail Division will continue to improve in 2003.
LRG FURNITURE, LLC
At the beginning of fiscal year 2000, the Company formed LRG Furniture, LLC,
which is a joint venture between the Company and its licensee partner in
Houston, Texas (BDP Texas, LLC). LRG was formed to capitalize on the retail
expertise of BDP Texas and the economies of scale that a combined company
offered. The Company's eight BFD stores in 1999 were combined with the five BDP
Texas stores in Texas to form LRG. Bassett retains a 51% ownership of the joint
venture and accounts for the investment using the equity method since the
Company does not maintain operating control of the joint venture.
LRG experienced significant difficulties in the initial integration and start-up
activities of operating southeastern stores with stores in Texas and Nevada. The
stores were initially managed centrally from Houston, Texas. This method of
management proved to be costly and ineffective. Additionally, LRG's revenues
were temporarily impacted by the implementation of the Company's enterprise
software system. LRG adopted a decentralized (regional) method of management
midway through fiscal 2000 to attack cost issues on a store by store basis.
Substantial costs were subsequently eliminated from the LRG corporate overhead.
Regional managers have begun to see improved top-line sales growth. Store
expenses, including start-up costs, were subsequently reduced or eliminated.
Bassett's shipments to LRG are also improved due to the complete implementation
of the enterprise system. During 2001, LRG sold three stores located in small to
mid-size markets to local operators and sold the Hickory, North Carolina store
back to Bassett. A significant portion of LRG's losses were attributable to
these stores. These stores are in single store markets where a local licensee
would be better positioned to operate a cost effective store operation. Cost
cutting efforts continued in 2001, both at the corporate overhead level and at
the store level. All of these efforts combined to reduce LRG's net loss in
fiscal 2001.
The Company purchased the five remaining southeastern stores from LRG for net
book value on March 4, 2002. Bassett operates the North Carolina and Virginia
stores as corporate stores. The operating results of these stores are
consolidated into the Company's financial statements, affecting net sales, gross
profit and selling, general and administrative expense. This move allows LRG to
focus on the larger markets in Texas and Nevada. This leaves nine stores
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Continued
(dollar amounts in thousands)
in Texas and Nevada as LRG's core business. Additionally, as part of the
agreement, the Company agreed to restructure a portion of notes receivable due
to the Company from LRG. As a result, Bassett took a charge of $1,359 related to
the debt restructuring in 2001. During 2002, LRG reduced losses by $4,765 to
($1,980) for the year. Included in the 2002 loss were three months of operating
the five southeastern stores purchased by Bassett on March 4, 2002. LRG opened a
fourth Houston store in August 2002 and a fifth Houston store subsequent to year
end in December 2002. These stores complete the Houston market and are expected
to increase the profitability of the entire market by allowing LRG to leverage
advertising and warehouse and delivery costs over a much greater sales volume.
Management believes that LRG will return to profitability in subsequent years
due to overhead cost reductions, the sale of unprofitable stores in single store
markets and the re-focusing of efforts on core markets in Texas and Nevada. The
Company is committed to the success of LRG and will provide financial support to
LRG, as appropriate, over the next twelve months.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of funds have been cash flow from operations, a bank line of
credit, and our investment portfolio. The primary sources of cash for fiscal
2002 were cash provided by operating earnings and dividends received from our
investments. Cash was used in fiscal 2002 to fund capital expenditures including
retail real estate, increases in import division inventories, pay dividends, and
to reduce long-term debt. The primary sources of cash in fiscal 2001 were
reductions in inventories and the receipt of a large dividend from IHFC. Cash
was used in fiscal 2001 to repay long-term debt, fund capital spending, and pay
dividends. The primary sources of cash in fiscal 2000 were borrowings under a
bank line of credit and dividends from investments. Cash was used in fiscal 2000
to fund working capital, fund capital expenditures, and pay dividends.
Net cash generated by operating activities was $11,876 and $22,283 in fiscal
2002 and 2001, respectively, and cash used in operating activities was $12,016
in fiscal 2000. The increase in cash from operations from fiscal 2000 to fiscal
2001 was related to both better management of receivables and inventories, and
the reduction in sales from fiscal 2000 to fiscal 2001. The reduction in
operating cash from 2001 to 2002 was entirely related to increases in
inventories of imported finished goods and imported component parts which more
than offset improved operating earnings in fiscal 2002.
Net cash provided by investing activities was $115 and $27,151 in fiscal 2002
and 2001, respectively. Cash used in investing activities was $3,380 in fiscal
2000. Both the increase in fiscal 2001 from 2000 and the reduction in fiscal
2002 from 2001 were related to an unusually large $25,059 dividend received from
IHFC in fiscal 2001 and the proceeds from the sales of two properties in fiscal
2001.
Net cash used in financing activities were $15,967 and $47,346 in fiscal 2002
and 2001, respectively. Cash provided by financing activities was $12,915 in
fiscal 2000. The Company borrowed $27,000 in fiscal 2000 to fund working capital
and retail expansion. In the last two years the Company has repaid $42,000
through both reductions in working capital and the proceeds of dividends from
investments. Cash dividends to shareholders and a share repurchase plan have
also used cash in each year.
Dividends from investments primarily represent cash distributions from the
Company's investment in IHFC and the Bassett Industries Alternative Asset Fund,
LP. The Company received dividends from these investments as follows; $8,623 in
2002, $28,559 in 2001 and $12,000 in 2000. The unusually large dividend in 2001
of $25,059 from IHFC was a result of the refinancing of its High Point, North
Carolina building. The Company's investment in IHFC reflects a credit balance
and is shown in the liabilities section of the Company's balance sheet as
"Deferred Revenue from Unconsolidated Affiliate". Based on current and expected
future earnings of IHFC, management believes that the market value of this
investment is substantially greater than its current book value. The financial
statements of IHFC are attached to the Company's 10-K filing. During 2002 the
Company purchased an additional investment interest in IHFC for $1,519.
During 2000, the Company replaced borrowings under its $50,000 credit facility
by entering into a three-year $70,000 revolving credit facility with a new
lender and three other participants. At the end of fiscal 2000, the Company had
borrowed $45,000 against its credit line. The Company amended the facility in
2001 to address restrictive covenants and to reduce the total facility to
$60,000. At November 30, 2002, the Company had reduced borrowings under this
facility to $3,000. Also during the year, the Company assumed bank debt
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Continued
(dollar amounts in thousands)
obligations of the five southeastern BFD stores acquired from LRG Furniture, LLC
on March 4, 2002. These debt obligations totaling $1,189 were paid off
subsequent to acquisition. The Company also satisfied a mortgage obligation of
$1,482 during 2002.
The Company purchased and retired 332,000 shares of its Common Stock during
2000. These purchases were part of the Company's stock repurchase program,
approved in 1998, which allows the Company to repurchase its shares for an
aggregate purchase price not to exceed $40,000. The average cost of the shares
purchased in 2000 was $14.20, resulting in a total expenditure of $4,716.
Repurchases of stock were substantially reduced in 2001 as the Company
repurchased 63,500 shares for a total of $730 (average price of $11.50 per
share). The Company repurchased 89,519 shares of common stock for $1,253 during
fiscal 2002. The Company plans to continue its share repurchase program in
fiscal 2003. The Company paid dividends of $9,358, $9,378 and $9,497 in fiscal
2002, 2001 and 2000, respectively. The current ratio for the past two years was
3.02 to 1 and 3.19 to 1, respectively. Working capital was $68,822 at November
30, 2002, and $72,996 at November 24, 2001.
The Company's consolidated financial statements are prepared on the basis of
historical dollars and are not intended to show the impact of inflation or
changing prices. Neither inflation nor changing prices has had a material effect
on the Company's consolidated financial position and results of operations in
prior years.
The following table summarizes our contractual payment obligations and other
commercial commitments.
Contractual commitments by fiscal year ended November
2003 2004 2005 2006 Thereafter Total
------- ------- ------- ------- ---------- -------
Bank line of credit $ -- $ 3,000 $ -- $ -- $ -- $ 3,000
Letters of credit 3,090 -- -- -- -- 3,090
Operating leases 3,521 3,415 3,124 2,605 17,762 30,427
Lease guarantees 8,516 6,582 3,847 2,437 6,546 27,928
Loan gurantees 4,448 3,050 1,070 -- -- 8,568
------- ------- ------- ------- ------- -------
Total $19,575 $16,047 $ 8,041 $ 5,042 $24,308 $73,013
======= ======= ======= ======= ======= =======
We currently anticipate that our capital expenditures for fiscal 2003 will be
approximately $11,000 and will relate primarily to machinery and equipment,
technology, and retail real estate. Our capital expenditure and working capital
requirements in the foreseeable future will change depending on many factors
including, but not limited to, our rate of growth, our operating results and any
other adjustments in our operating plan needed in response to competition,
acquisition opportunities or unexpected events. We believe that our existing
borrowing capacity under the credit facility, together with cash provided by
operations, will be sufficient to meet our capital expenditure and working
capital requirements through fiscal 2003.
CONTINGENCIES:
The Company is involved in various claims and litigation as well as
environmental matters, which arise in the normal course of business. Although
the final outcome of these legal and environmental matters cannot be determined,
based on the facts presently known, it is management's opinion that the final
resolution of these matters will not have a material adverse effect on the
Company's financial position or future results of operations.
CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America
which requires that certain estimates and assumptions be made that affect the
amounts and disclosures reported in those financial statements and the related
accompanying notes. Actual results could differ from these estimates and
assumptions. Management uses its best judgment in valuing these estimates and
may, as warranted, solicit external advice. Estimates are based on current facts
and circumstances, prior experience and other assumptions believed to be
reasonable. The following critical accounting policies, some of which are
impacted significantly by judgments, assumptions and estimates, affect the
Company's consolidated financial statements.
Impairment of Long-Lived Assets - The Company periodically evaluates whether
events or circumstances have occurred that indicate long-lived assets may not be
recoverable or that the remaining useful life may warrant revision. When such
events or circumstances are present, the Company assesses the recoverability of
long-lived assets by determining whether the carrying value will be recovered
through the expected undiscounted future cash flows resulting from the use of
the asset. In the event the sum of the expected undiscounted future cash flows
is less than the carrying value of the asset, an impairment loss equal to the
excess of the asset's carrying value over its fair value is recorded. The
long-term nature of these assets requires the estimation of its cash inflows
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Continued
(dollar amounts in thousands)
and outflows several years into the future and only takes into consideration
technological advances known at the time of the impairment test.
Allowance for Accounts and Notes Receivable - The Company maintains an allowance
for doubtful accounts for estimated losses resulting from the inability of its
customers to make required payments. The allowance for doubtful accounts is
based on a review of specifically identified accounts and notes receivable in
addition to an overall aging analysis. Judgments are made with respect to the
collectibility of accounts receivable based on historical experience and current
economic trends. Actual losses could differ from those estimates.
Inventories - Inventories (finished goods, work in process and raw materials)
are stated at the lower of cost or market. Cost is determined for wholesale
domestic furniture inventories using the last-in, first-out method. The cost of
imported and retail inventories is determined on a first-in, first-out basis.
The Company estimates an inventory reserve for excess quantities and obsolete
items based on specific identification and historical write-offs, taking into
account future demand and market conditions. If actual demand or market
conditions in the future are less favorable than those estimated, additional
inventory write-downs may be required.
Revenue Recognition - Revenue is recognized when the risks and rewards of
ownership and title to the product have transferred to the buyer. This generally
occurs upon the shipment of goods to independent dealers or, in the case of
Bassett-owned retail stores, upon delivery to the customer. Terms offered by the
Company vary from 30 to 60 days. An estimate for returns and allowances has been
provided in recorded sales.
Business Insurance Reserves - The Company has insurance programs in place to
cover workers' compensation and health insurance claims. The insurance programs,
which are funded through self-insured retention, are subject to various
stop-loss limitations and re-insured through a captive insurance program. The
Company accrues estimated losses using historical loss experience. Although
management believes that the insurance reserves are adequate, the reserve
estimates are based on historical experience, which may not be indicative of
current and future losses. The Company adjusts insurance reserves, as needed, in
the event that future loss experience differs from historical loss patterns.
Other Loss Reserves - The Company has a number of other potential loss exposures
incurred in the ordinary course of business such as environmental claims,
product liability, litigation, restructuring charges, and the recoverability of
deferred income tax benefits. Establishing loss reserves for these matters
requires management's estimate and judgment with regard to maximum risk exposure
and ultimate liability or realization. As a result, these estimates are often
developed with the Company's counsel, or other appropriate advisors, and are
based on management's current understanding of the underlying facts and
circumstances. Because of uncertainties related to the ultimate outcome of these
issues or the possibilities of changes in the underlying facts and
circumstances, additional charges related to these issues could be required in
the future.
MARKET RISK:
The Company is exposed to market risk for changes in market prices of its
various types of investments. The Company's investments include equity
securities and an investment partnership included in its investments in
affiliated companies. The Company does not use these securities for trading
purposes and is not party to any leveraged derivatives.
The Company's marketable equity securities portfolio, which totaled $6,080 at
November 30, 2002, is diversified among over twenty different medium to large
capitalization interests. Although there are no maturity dates for the Company's
equity investments, management has plans to liquidate its current marketable
equity securities portfolio on a scheduled basis over the next two years.
The Company's Bassett Industries Alternative Asset Fund investment, which
totaled $57,168 at November 30, 2002 and $58,652 at November 24, 2001, invests
in various private limited partnerships, which contain contractual commitments
with elements of market risk. These contractual commitments, which include
fixed-income securities and derivatives, may involve future settlements, which
give rise to both market and credit risk. The investment partnership's exposure
to market risk is determined by a number of factors, including the size,
composition, and diversification of positions held, volatility of interest,
market currency rates, and liquidity. Risks to these funds arise from the
possible adverse changes in the market value of such interests and the potential
inability of counterparties to perform under the terms of the contracts.
However, the risk to the Alternative Asset Fund is limited to the amount of the
Alternative Asset Fund's investment in each of these funds.
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Continued
(dollar amounts in thousands)
SAFE-HARBOR, FORWARD-LOOKING STATEMENTS:
This discussion contains certain forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995 with respect to the
financial condition, results of operations and business of Bassett Furniture
Industries, Incorporated and Subsidiaries. These forward-looking statements
involve certain risks and uncertainties. No assurance can be given that any such
matters will be realized. Important factors that could cause actual results to
differ materially from those contemplated by such forward-looking statements
include:
- - competitive conditions in the home furnishings industry
- - general economic conditions that are less favorable than expected
- - overall consumer demand for home furnishings
- - new BFD openings
- - BFD closings
- - the profitability of BFD licensees and corporately-owned stores
- - not fully realizing cost reductions through restructurings
- - cost and availability of raw materials and labor
- - information and technology advances
- - success of marketing and advertising campaigns, future tax legislation, or
regulatory or judicial positions related to COLI
- - ability to execute new global sourcing strategies
- - performance of the Company's investment portfolios
34
INVESTOR INFORMATION
CORPORATE INFORMATION AND INVESTOR INQUIRIES:
The Company's annual report and proxy statement together contain much of the
information presented in the Form 10-K report filed with the Securities and
Exchange Commission. Individuals who wish to receive the Form 10-K or other
corporate literature should contact Barry C. Safrit, Vice President, Chief
Financial Officer at 276-629-6000.
TRANSFER AGENT/STOCKHOLDER INQUIRIES:
Stockholders with inquiries relating to stockholder records, stock transfers,
change of ownership, change of address or dividend payments should write to:
Wachovia Bank
Shareholder Services/Customer Service
1525 W. WT Harris Blvd.; 3C3
Charlotte, NC 28288-1153
800-829-8432
ANNUAL MEETING:
The Bassett Annual Meeting of Shareholders will be held Tuesday, March 25, 2003,
at 11:00 a.m. EST at the Company's headquarters in Bassett, Virginia.
MARKET AND DIVIDEND INFORMATION:
Bassett's common stock trades on the NASDAQ national market system under the
symbol "BSET." The Company had approximately 1,512 registered stockholders at
November 30, 2002. The range of per share amounts for the closing high and low
market prices and dividends declared for the last two fiscal years are listed
below:
Market Prices of Common Stock Dividends Declared
---------------------------------------------------- --------------------------
Quarter 2002 2001 2002 2001
- -------- ----------------------- ------------------------ --------------------------
High Low High Low
First 17.69 13.99 15.00 9.81 .20 .20
Second 21.74 17.15 14.90 11.50 .20 .20
Third 19.74 13.86 15.50 12.58 .20 .20
Fourth 14.99 12.50 15.47 12.60 .20 .20
FORWARD-LOOKING STATEMENTS:
This Annual Report contains forward-looking statements as defined in the Private
Securities Litigation and Reform Act of 1995 and within the meaning of Sections
27A of the Securities Exchange Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. When used in this Annual Report the
words "hope," "believe," "expect," "plan" or "planned," "intend," "anticipate,"
"potential" and similar expressions are intended to identify forward-looking
statements. Readers are cautioned against placing undue reliance on these
statements. Such statements, including but not limited to those regarding
increases in sales, growth in the number of @t Home with Bassett and Bassett
Furniture Direct stores, maintaining and expanding traditional channels of
distribution, improving gross margins, growth in earnings per share, changes in
capital structure, and the expansion of LRG, are based upon management's
beliefs, as well as assumptions made by and information currently available to
management, and involve various risks and uncertainties, certain of which are
beyond the Company's control. The Company's actual results could differ
materially from those expressed in any forward-looking statement made by or on
behalf of the Company.
If the Company does not attain its goals, its business and results of operations
might be adversely affected. For a discussion of factors that may impair the
Company's ability to achieve its goals, please see the cautionary statements in
the Management's Discussion and Analysis section of this Annual Report.
WEB SITE:
Our Web site on the Internet is filled with information about Bassett Furniture,
including this annual report, detailed financial information and updates,
information about our fine home furnishings products, and a directory of Bassett
Furniture Direct stores and other stores that feature Bassett products. Visit us
at www.bassettfurniture.com.
35