1
OTHER BUSINESS DATA
Bassett Furniture Industries, Incorporated and Subsidiaries
(dollars in thousands except per share data)
SELECTED FINANCIAL DATA
1997 1996 1995 1994 1993
------------ ----------- ----------- ----------- -----------
Net Sales $ 446,893 $ 450,717 $ 490,817 $ 510,561 $ 503,770
Cost of Sales $ 396,875 $ 379,259 $ 407,750 $ 419,394 $ 413,055
Operating profit (loss) $ (55,322)(1) $ 7,306 $ 17,129 $ 25,123 $ 27,243
Other income $ 13,367 $ 14,982 $ 13,000 $ 9,657 $ 9,270
Income (loss) Before Income Taxes $ (41,955) $ 22,288 $ 30,129 $ 34,780 $ 36,513
Income Taxes $ (22,346) $ 3,787 $ 7,226 $ 9,804 $ 10,644
Net Income (loss) $ (19,609)(1) $ 18,501 $ 22,903 $ 24,466 $ 25,869
Net Income (loss) Per Share $ (1.50)(1) $ 1.39 $ 1.63 $ 1.71 $ 1.79
Cash Dividends Declared $ 13,041 10,626 $ 11,197 $ 11,411 $ 11,358
Cash Dividends Per Share $ 1.00 $ .80 $ .80 $ .80 $ .78
Total Assets $ 320,325 $ 335,166 $ 346,720 $ 340,498 $ 330,678
Current Ratio 4.18 to 1 6.42 to 1 5.79 to 1 5.67 to 1 6.07 to 1
Book Value Per Share $ 20.01 $ 22.29 $ 21.88 $ 20.96 $ 19.99
Weighted Average Number of Shares 13,045,789 13,351,585 14,052,794 14,294,803 14,440,341
(1) Includes $20,646 in restructuring and impaired asset charges; net of income
tax the charges were $12,594 or $(.97) per share.
QUARTERLY RESULTS OF OPERATIONS
1997
------------------------------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
Net Sales............................................... $109,806 $113,198 $110,252 $113,637
Gross Profit............................................ 18,233 11,840 9,651 10,294
Net Income (loss) ...................................... 3,433 (14,025)(2) (5,072)(2) (3,945)(2)
Per Share........................................... .26 (1.07) (.39) (.30)
(2) Includes pre-tax restructuring and impaired asset charges as management
committed to restructuring action plans of $13,929 in the second quarter, $2,360
in the third quarter and $4,357 in the fourth quarter; charges net of income tax
for the respective quarters were $8,496, $1,440 and $2,658; the loss per share
effect of the charges was $(.65), $(.11) and $(.21), respectively.
1996
------------------------------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
Net Sales............................................... $111,951 $111,273 $109,008 $118,485
Gross Profit............................................ 17,768 17,715 17,782 18,193
Net Income.............................................. 4,714 4,992 4,826 3,969
Per Share........................................... .35 .37 .36 .31
MARKET AND DIVIDEND INFORMATION
The Company's Common Stock trades on The Nasdaq Stock Market under the symbol
"BSET."The Company had approximately 1,900 registered stockholders at November
30, 1997. The range of per share amounts for high and low market prices and
dividends declared for the last two fiscal years are listed below:
MARKET PRICES OF COMMON STOCK DIVIDENDS DECLARED
------------------------------------------------------------ -------------------------
QUARTER 1997 1996 1997 1996
------- ------------------ ------------------ ------- -------
HIGH LOW HIGH LOW
First $25.50 $22.25 $25.75 $22.38 $.40 $.20
Second 25.75 22.38 26.38 24.25 .20 .20
Third 30.75 26.00 27.00 22.00 .20 .20
Fourth 29.50 26.63 24.88 22.13 .20 .20
2
OTHER BUSINESS DATA - CONTINUED
Bassett Furniture Industries, Incorporated and Subsidiaries
(dollar amounts in thousands)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS:
NET SALES
Net sales for 1997 compared to prior years are as follows:
1997 1996 1995
-------- -------- ----------
Net sales $446,893 $450,717 $ 490,817
% change from prior year (.9)% (8.2)% (3.9)%
The Company achieved increased sales in the Wood Division where sales were up
6.9% for the year. This improvement was offset by a decline in sales resulting
from the discontinuance of the Impact and National/Mt. Airy product lines and
decreases in sales in both the Upholstery and Mattress Divisions. Sales in the
discontinued divisions were $9,877 less than in 1996. Sales for the Upholstery
Division decreased 2.9% for the year, while Mattress Division sales decreased
3.9% for the year.
Wood Division sales were strong throughout 1997 and sales growth improved as the
year progressed. New management has been appointed in both the Upholstery and
Mattress Divisions and significant changes in the sales force were undertaken to
improve our penetration of selected markets. Both divisions are developing
strategies to restore and solidify a strong base in their respective markets.
For 1996, net sales decreased 8% below the 1995 volume as the Upholstery and
Impact Divisions' sales decreased significantly. All other divisions experienced
slight sales decreases, except the Mattress Division, where volume remained
constant with prior year's level.
COSTS AND EXPENSES
Throughout the second half of 1997, the Company was engaged in implementing
major changes. Three manufacturing divisions (Impact, National/Mt. Airy and
veneer production) ceased production and plans were developed and initiated to
consolidate certain operations in all remaining divisions. As a result, the
Company announced the closing of 14 plants, five of which were consummated
before fiscal year-end. Four of the remaining plants were closed in December
1997, three in January 1998 and one in February 1998. Of the 14, the production
capabilities of 11 will be consolidated into ongoing facilities.
As a result of the execution of these plans, the Company recorded a $20,646
restructuring and asset impairment charge which included asset impairment losses
incurred on closed facilities, severance and related employee benefit costs for
terminated employees and various other charges as detailed in Note J in the
Notes to Consolidated Financial Statements. Also resulting from these plans, the
Company incurred $44,154 in charges related to consolidation inefficiencies,
inventory write-downs, customer bankruptcies, environmental matters and the
Mattress Division issue as described in Note J in the Notes to Consolidated
Financial Statements.These unusual and nonrecurring charges are included in cost
of sales and selling, general and administrative (SG&A) expenses in the 1997
Statement of Operations.
Below is a comparison of cost data for the past three years (as a percent of net
sales):
1997 1996 1995
---- ---- ----
Cost of sales 88.8% 83.6% 83.1%
SG&A expenses 18.9 14.2 13.4
The increase in cost of sales was primarily attributable to the restructuring
and other unusual and nonrecurring charges, with $29,325 of these charges
included in cost of sales. Inventory write-downs and losses resulting from
exiting three sales divisions and several plants during 1997, transition costs
of consolidating operations, losses incurred in closing facilities and carrying
costs of closed facilities were the primary factors driving the cost of sales
percentage increase.While management does expect to incur additional expenses of
$10,540 in 1998 related to plant consolidations and carrying costs of closed
facilities, it believes that efficiencies will be realized in labor and overhead
expenses in the facilities involved in consolidations.
In 1996, cost of sales was up slightly as the Company incurred a one-time
pre-tax charge of $2,675 in recording the costs and expenses related to the
closure of one plant in the Motion Division and the consolidation of that
plant's business into the remaining Motion Division plants. The charge also
included the write-down of certain inventories and adjustments in fixed asset
carrying values. Gross profit margins continued to decline as material costs
increased. Also, overhead as a percent of net sales increased as sales volume
declined.
The current year increase in SG&A expenses as a percentage of sales was
attributable to several factors. The activities related to the restructuring and
unusual and nonrecurring charges resulted in $14,829 of additional SG&A expenses
in 1997. In addition, the Company implemented a co-op advertising program during
1997 and increased its spending for sales promotion. Expenses related to both
the Bassett Furniture Direct (BFD) stores and Gallery stores increased
significantly. For example, a structured training program for the BFD stores was
implemented during the year. Several one-time expenses were incurred during the
fourth quarter, including consultants and various professional services, to
assist the Company and develop strategies for future operating improvements.
Finally, expense associated with the stock options granted during 1997 was
incurred in the third and fourth quarters. We expect SG&A expenses to average
between 15% and 16% of sales in future periods.
During 1996, SG&A expenses as a percent of net sales increased slightly as net
sales declined, resulting from the fixed cost elements of many SG&A expenses.
OTHER INCOME, NET
Other income was down $1,600 from the 1996 level. Gains from the sale of
investment securities declined $4,900 as management decided not to further
liquidate its investment portfolio until its new investment strategy is
formulated and implemented. This decrease in income was offset by increased
income from interest bearing investments, equity in undistributed earnings of
affiliates, gains on sales of properties and decreased net cost related to
corporate
3
OTHER BUSINESS DATA - CONTINUED
Bassett Furniture Industries, Incorporated and Subsidiaries
(dollar amounts in thousands)
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED
owned life insurance. In late 1997, the Company changed its investment strategy
from primarily tax free municipal securities to selected taxable securities to
enhance its overall investment return, which provided some of the above
mentioned increases in investment income. Note I in the Notes to Consolidated
Financial Statements provides the components of other income for the last three
years.
INCOME TAXES
The effective income tax rate for 1997 was (53.3)% compared to 17.0% in 1996 and
24.0% in 1995. The unusual rate for the year was a result of the restructuring,
impaired asset and other unusual and nonrecurring charges incurred, leaving the
Company with a loss for the year. Non-taxable income items had a similar impact
on the effective tax rate for 1997 as they did in 1996. Note F in the Notes to
Consolidated Financial Statements contains complete disclosure of the Company's
income tax status for the past three years.
LIQUIDITY AND CAPITAL RESOURCES:
Cash provided by operating activities was $21,320 in 1997 compared to $25,527 in
1996 and $26,316 in 1995. The decrease was partially attributable to the
expenses related to the plant closings and the transition costs of moving the
production of certain products from the closed plants to continuing plants.
Inventory decreases, as a result of the discontinued divisions and plants,
totaling $25,368 were a significant source of working capital. For the last few
years prior to 1997, working capital generated by operations remained constant.
As in prior years, the Company continued to purchase, rather than lease, its
capital equipment requirements. During 1997, $10,824 was spent for new equipment
and improvement of existing facilities; in 1996, comparable purchases totaled
$9,627. A comparison of property and equipment purchases and depreciation
charges is shown below:
1997 1996 1995
------- ------ ------
Purchases of property and equipment $10,824 $9,627 $7,226
Depreciation charges 6,192 6,312 8,607
The Company plans to expend substantial funds in the upcoming two to three years
to enhance the environmental efficiencies of the facilities. These plans include
replacing certain of our boilers and renovating others for the short-term, while
considering alternate cleaner sources of energy for the long-term future.
The Company purchased and retired 60,000 shares of its Common Stock during 1997.
The average cost of the shares purchased was $22.50, resulting in a total
expenditure of $1,350. In 1996, the Company purchased and retired 584,343 shares
for $14,119, while in 1995, 429,701 shares were purchased and retired for
$10,125.
The current ratio for the past two years was 4.18 to 1 and 6.42 to 1,
respectively. Working capital was $152,577 at November 30, 1997 and $164,373 at
November 30, 1996. Cash provided by operating activities is expected to be
adequate for normal future cash requirements. There were no material commitments
for capital expenditures at November 30, 1997. Capital expenditures made in the
future for normal expansion are anticipated to be made from funds generated by
operating activities. The Company has not typically used the debt or equity
markets as sources of funds or capital.
The Company's consolidated financial statements are prepared on the basis of
historical dollars and are not intended to show the impact of inflation or
changing prices. Neither inflation nor changing prices has had a material effect
on the Company's consolidated financial position and results of operations in
prior years.
CONTINGENCIES:
The Company is involved in various claims and litigation, including a lawsuit
concerning our Mattress Division, as well as environmental matters at certain
plant facilities, which arise in the normal course of business. The details of
these matters are described in Note K in the Notes to Consolidated Financial
Statements. Although the final outcome of these legal and environmental matters
cannot be determined, based on the facts presently known, it is management's
opinion that the final resolution of these matters will not have a material
adverse effect on the Company's financial position or future results of
operations.
YEAR 2000:
Over the past few years, the Company has been steadily reengineering its
business processes and information systems to prepare for the conversion to year
2000. This effort has incorporated an analysis of Year 2000 issues and, as a
result, management believes that appropriate and timely action has been taken to
minimize the negative impact of this event. The Year 2000 issue results from the
inability of many computer systems and applications to recognize the year 2000
as the year following 1999. This could cause systems to process critical
information incorrectly. The Company plans to implement new systems and
technologies in 1998 and 1999 that will provide solutions to these issues. In
addition, the Company plans to purchase an enterprise system in 1998, which will
be implemented prior to year 2000, which will be in compliance with Year 2000
issues. The Company continues to work with it customers, suppliers and third
party service providers to identify external weaknesses and provide solutions
which will prevent the disruption of business activities at that time.
SAFE HARBOR-FORWARD-LOOKING STATEMENTS:
This discussion contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 with respect to
the financial condition, results of operations and business of Bassett Furniture
Industries, Incorporated. These forward-looking statements involve certain risks
and uncertainties. No assurance can be given that any such matters will be
realized. Factors that may cause actual results to differ materially from those
contemplated by such forward-looking statements include, among others, the
following possibilities: (I) competitive conditions in the industry in which
Bassett operates; and (II) general economic conditions that are less favorable
than expected.
4
CONSOLIDATED BALANCE SHEETS
Bassett Furniture Industries, Incorporated and Subsidiaries
(dollars in thousands except per share data)
ASSETS
NOVEMBER 30,
-------------------------
1997 1996
--------- --------
CURRENT ASSETS
Cash and cash equivalents ........................................ $ 29,552 $ 57,285
Marketable securities ............................................ 49,985 --
Trade accounts receivable, less allowances for doubtful
accounts (1997- $1,984; 1996- $1,355) ........................ 57,327 65,417
Inventories ....................................................... 41,714 67,082
Prepaid expenses ................................................. 1,405 1,493
Refundable income taxes .......................................... 5,025 845
Deferred income taxes ............................................ 15,476 2,597
--------- --------
200,484 194,719
--------- --------
PROPERTY AND EQUIPMENT
Buildings ........................................................ 50,021 74,597
Equipment ........................................................ 114,495 139,557
--------- --------
164,516 214,154
Less allowances for depreciation ................................. 124,547 162,150
--------- --------
39,969 52,004
Land ............................................................. 3,510 4,375
--------- --------
43,479 56,379
--------- --------
OTHER ASSETS
Investment securities ............................................ 29,922 29,625
Investment in affiliated companies ............................... 30,502 45,821
Deferred income taxes ............................................ 1,866 --
Assets held for sale ............................................. 3,506 --
Other ............................................................ 10,566 8,622
--------- --------
76,362 84,068
--------- --------
$ 320,325 $335,166
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ................................................. $ 21,694 $ 20,541
Accrued liabilities .............................................. 26,213 9,805
--------- --------
47,907 30,346
--------- --------
LONG-TERM LIABILITIES
Employee benefits ................................................ 11,248 10,835
Deferred income taxes ............................................ -- 2,504
--------- --------
11,248 13,339
--------- --------
COMMITMENTS AND CONTINGENCIES (NOTES A AND J)
STOCKHOLDERS' EQUITY
Common stock, par value $5 a share, 50,000,000 shares authorized.. 65,256 65,378
Additional paid in capital ....................................... 2,438 --
Retained earnings ................................................ 188,761 222,417
Unrealized holding gains, net of income tax effect ............... 5,575 3,686
Unamortized stock compensation ................................... (860) --
--------- --------
261,170 291,481
--------- --------
$ 320,325 $335,166
========= ========
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
5
CONSOLIDATED STATEMENTS OF OPERATIONS
Bassett Furniture Industries, Incorporated and Subsidiaries
(dollars in thousands except per share data)
YEAR ENDED NOVEMBER 30,
----------------------------------------
1997 1996 1995
--------- -------- --------
Net Sales .................................. $ 446,893 $450,717 $490,817
--------- -------- --------
Costs and Expenses
Cost of Sales ............................ 396,875 379,259 407,750
Selling, General and Administrative ...... 84,694 64,152 65,938
Restructuring and Impaired Asset Charges.. 20,646 -- --
--------- -------- --------
502,215 443,411 473,688
--------- -------- --------
Income (loss) from Operations .............. (55,322) 7,306 17,129
Other Income, Net .......................... 13,367 14,982 13,000
--------- -------- --------
Income (loss) Before Income Taxes .......... (41,955) 22,288 30,129
Income Taxes ............................... (22,346) 3,787 7,226
--------- -------- --------
Net Income (loss) .......................... $ (19,609) $ 18,501 $ 22,903
========= ======== ========
Net Income (loss) Per Share ................ $ (1.50) $ 1.39 $ 1.63
========= ======== ========
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Bassett Furniture Industries, Incorporated and Subsidiaries
(dollars in thousands )
COMMON STOCK ADDITIONAL UNAMORTIZED
---------------------- PAID-IN RETAINED UNREALIZED STOCK
SHARES AMOUNT CAPITAL EARNINGS HOLDING GAINS COMPENSATION
---------- -------- ------- --------- ------------- ------------
BALANCE, DECEMBER 1, 1994 ............................ 14,086,815 $ 70,434 $ -- $ 221,950 $ 2,809 $ --
Net income ......................................... -- -- -- 22,903 -- --
Cash dividends ..................................... -- -- -- (11,197) -- --
Issuance of Common Stock to non-employee directors.. 1,839 9 40 -- -- --
Purchase and retirement of Common Stock ............ (429,701) (2,148) (40) (7,937) -- --
Net change in unrealized holding gains ............. -- -- -- -- 2,081 --
---------- -------- ------- --------- ------- -----
BALANCE, NOVEMBER 30, 1995 ........................... 13,658,953 68,295 -- 225,719 4,890 --
Net income ......................................... -- -- -- 18,501 -- --
Cash dividends ..................................... -- -- -- (10,626) -- --
Issuance of Common Stock to non-employee directors.. 985 5 20 -- -- --
Purchase and retirement of Common Stock ............ (584,343) (2,922) (20) (11,177) -- --
Net change in unrealized holding gains ............. -- -- -- -- (1,204) --
---------- -------- ------- --------- ------- -----
BALANCE, NOVEMBER 30, 1996 ........................... 13,075,595 65,378 -- 222,417 3,686 --
Net loss ........................................... -- -- -- (19,609) -- --
Cash dividends ..................................... -- -- -- (13,041) -- --
Issuance of Common Stock to non-employee directors.. 4,288 21 86 -- -- --
Purchase and retirement of Common Stock ............ (60,000) (300) (44) (1,006) -- --
Issuance of Restricted Common Stock to officers .... 31,396 157 714 -- -- (871)
Amortization of stock compensation ................. -- -- -- -- -- 11
Stock option grants ................................ -- -- 1,682 -- -- --
Net change in unrealized holding gains ............. -- -- -- -- $ 1,889 --
---------- -------- ------- --------- ------- -----
BALANCE, NOVEMBER 30, 1997 ........................... 13,051,279 $ 65,256 $ 2,438 $ 188,761 $ 5,575 $(860)
========== ======== ======= ========= ======= =====
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
6
CONSOLIDATED STATEMENTS OF CASH FLOWS
Bassett Furniture Industries, Incorporated and Subsidiaries
(dollars in thousands)
YEAR ENDED NOVEMBER 30,
------------------------------------------
1997 1996 1995
-------- -------- --------
OPERATING ACTIVITIES
Net income (loss) .................................................... $(19,609) $ 18,501 $ 22,903
Adjustments to reconcile net income to net cash
provided by operating activities:
Unused reserves for impairment of assets .......................... 11,181 -- --
Depreciation and amortization ..................................... 6,192 6,312 8,607
Equity in undistributed income of affiliated companies ............ (5,926) (5,422) (4,986)
Provision for losses on trade accounts receivable ................. 7,706 241 607
Net gain from sales of investment securities ...................... (1,804) (6,720) (4,142)
Net (gain) loss from sales of property, and equipment ............. 970 (29) (1)
Compensation earned under restricted stock and stock option plans.. 1,693 -- --
Deferred income taxes ............................................. (18,549) 527 (108)
Changes in deferred liabilities ................................... 413 538 766
Changes in operating assets and liabilities:
Trade accounts receivable ...................................... 384 2,934 2,739
Other receivables .............................................. (168) 127 (31)
Inventories and prepaid expenses ............................... 25,456 14,409 (703)
Accounts payable and accrued liabilities ....................... 17,561 (4,144) (512)
Income taxes ................................................... (4,180) (1,747) 1,177
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 21,320 25,527 26,316
INVESTING ACTIVITIES
Purchases of property, and equipment ................................. (10,824) (9,627) (7,226)
Proceeds from sales of property, and equipment ....................... 1,875 91 49
Purchases of marketable securities ................................... (49,985) -- --
Purchases of investment securities ................................... (207) (6,588) (4,073)
Proceeds from sales of investment securities ......................... 4,903 20,793 16,157
Dividends from affiliated company .................................... 21,245 -- 1,089
Additional investment in affiliated company .......................... -- -- (1,100)
Change in investment in corporate owned life insurance ............... (1,153) 738 (920)
Other ................................................................ (623) (260) (3)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (34,769) 5,147 3,973
FINANCING ACTIVITIES
Issuance of Common Stock ............................................. 107 25 49
Purchase of Common Stock ............................................. (1,350) (14,119) (10,125)
Cash dividends ....................................................... (13,041) (10,626) (11,197)
-------- -------- --------
NET CASH USED IN FINANCING ACTIVITIES (14,284) (24,720) (21,273)
-------- -------- --------
CHANGE IN CASH AND CASH EQUIVALENTS ....................................... (27,733) 5,954 9,016
CASH AND CASH EQUIVALENTS - beginning of year ............................. 57,285 51,331 42,315
-------- -------- --------
CASH AND CASH EQUIVALENTS - end of year ................................... $ 29,552 $ 57,285 $ 51,331
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest payments ......................................................... $ 8,205 $ 5,495 $ 3,136
======== ======== ========
Income tax payments ....................................................... $ 1,402 $ 5,007 $ 6,157
======== ======== ========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bassett Furniture Industries, Incorporated and Subsidiaries
(dollars in thousands except per share data)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly-owned. All significant intercompany
balances and transactions are eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash Equivalents
The Company considers all temporary, highly liquid investments with a maturity
of three months or less to be cash equivalents. The carrying amount approximates
fair value because of the short maturity of these investments.
Marketable Securities
The Company considers investments in government agencies with various
maturities, but with short-term calls, to be marketable securities. The carrying
amount approximates fair value because of the short-term nature of the
investments.
Trade Accounts Receivable
The Company has only one business segment, the manufacture and sale of household
furniture. Substantially all of the Company's trade accounts receivable are due
from retailers in this segment throughout the United States. The Company
performs on-going evaluations of its customers' credit worthiness and,
generally, requires no collateral. There is no disproportionate concentration of
credit risk.
Inventories
All inventories are valued at last-in, first-out (LIFO) cost which is not in
excess of market value.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed over the
estimated useful lives of the respective assets utilizing straight-line and
accelerated methods. The Company reviews the carrying value of property and
equipment whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. Measurement of any impairment would include a
comparison of estimated future operating cash flows anticipated to be generated
during the remaining life to the net carrying value of the asset.
Investment Securities
The Company classifies its investment securities as available-for-sale, which is
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 a separate component of stockholders' equity. Realized gains and
losses from securities classified as available-for-sale are included in income
and are determined using the specific identification method for ascertaining the
cost of securities sold.
Investment in Affiliated Companies
The equity method of accounting for investments in common stock is used for the
Company's investment in affiliated companies in which the Company exercises
significant influence but does not maintain control through majority ownership.
Assets Held For Sale
Several manufacturing facilities, with their related equipment, were closed
during 1997 and are being held for sale. Those facilities were written down to
their estimated fair market value and depreciation of the facilities was
terminated at the time of closure.
Investment in Corporate Owned Life Insurance
The company is the beneficiary of life insurance policies with a face value of
$756,592, which are maintained to fund various employee and director benefit
plans. Policy loans outstanding of $106,775 and $103,966 at November 30, 1997
and 1996, respectively, are recorded as a reduction in the cash surrender value
of these policies that is included in other assets in the accompanying
consolidated balance sheets. The net life insurance expense, which includes
premiums and interest on policy loans, net of increases in cash surrender values
and death benefits received, is included in other income in the accompanying
consolidated statements of operations.
Revenue Recognition
Revenue from sales is recognized when the goods are shipped to the customer.
Sales to one customer, as a percent of gross sales, amounted to 14% in 1997, 15%
in 1996 and 14% in 1995.
Income Taxes
Deferred income taxes are determined based on the difference between the
financial statement and income tax bases of assets and liabilities using enacted
tax rates in effect for the year in which the differences are expected to
reverse.
Earnings Per Share
Earnings per share is computed based on the weighted average number of shares
outstanding during each period. The effect of common stock equivalents on
earnings per share is not material.
In March 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share." This Statement requires the presentation of basic earnings
per share (net income available to common shareholders divided by the weighted
average number of shares of common stock outstanding) and a disclosure
reconciling the numerator and the denominator of the earnings per share
calculations. SFAS No. 128 is effective for interim and annual periods ending
after December 15, 1997, and early application is prohibited.
Accordingly, the accompanying financial statements do not reflect the provisions
of SFAS No. 128. The Company will adopt the provisions of SFAS No. 128 in the
first quarter of fiscal 1998. Management does not expect the impact of the
adoption of this statement on the Company's financial position and results of
operations to be material.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Bassett Furniture Industries, Incorporated and Subsidiaries
(dollars in thousands except per share data)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Stock-Based Compensation
As permitted by Statement of Financial Accounting Standards (SFAS) No. 123,
"Stock-Based Compensation," the Company has continued to measure compensation
expense for its stock-based employee 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.
Comprehensive Income
In June 1997, the Financial Accounting Standards board issued SFAS No. 130,
"Reporting Comprehensive Income." This Statement establishes standards for the
prominent reporting and display of comprehensive income and its components in a
full set of general-purpose financial statements. Comprehensive income is the
total of net income and other changes in equity that are excluded from the
measurement of income. The Statement is effective for fiscal years beginning
after December 15, 1997. The Company plans to adopt the provisions of this
Statement in fiscal 1999. Management does not expect the impact of the adoption
of this Statement on the Company's financial positon and results of operations
to be material.
Segment Reporting
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131
"Disclosures About Segments of an Enterprise and Related Information." This
statement introduces a new model for segment reporting and requires that the
Company report profit and loss, assets and liabilities by segment. The statement
is effective for fiscal years beginning after December 15, 1997. The Company
plans to adopt the provisions of this Statement in fiscal 1999. Management does
not expect the impact of adoption of this Statement on the Company's financial
position and results of operations to be material.
B. INVENTORIES
Inventories consist of the following:
November 30,
----------------------
1997 1996
---- ----
Finished goods $29,485 $42,594
Work in process 9,025 14,008
Raw materials and supplies 28,420 38,276
------- -------
Total inventories on first-in, first-out
cost method 66,930 94,878
LIFO adjustment 25,216 27,796
------- -------
$41,714 $67,082
======= =======
During 1997, the company liquidated certain LIFO inventories which decreased
cost of sales by approximately $3,450.
C. INVESTMENT SECURITIES
Investment securities by major security type are as follows:
November 30, 1997
------------------------
Gross Gross
Unrealized Unrealized
Holding Holding Fair
Cost Gains Losses Value
---- ----- ------ -----
Equity securities $13,051 $8,249 $ 1 $21,299
Mutual funds 2,277 792 -- 3,069
Municipal securities 5,460 94 -- 5,554
------- ------ ------- -------
$20,788 $9,135 $ 1 $29,922
======= ====== ======= =======
November 30, 1996
-------------------------
Gross Gross
Unrealized Unrealized
Holding Holding Fair
Cost Gains Losses Value
---- ----- ------ -----
Equity securities $15,014 $6,007 $ 613 $20,408
Mutual funds 3,145 579 54 3,670
Municipal securities 5,521 26 -- 5,547
------- ------ ------- -------
$23,680 $6,612 $ 667 $29,625
======= ====== ======= =======
Maturities of the municipal securities held are five years or less
D. INVESTMENT IN AFFILIATED COMPANIES
The Company has minority equity interests in two entities that provide services
and raw materials to various furniture and furniture accessory manufacturers.
The recorded investment in these entities at November 30, 1997 and 1996, exceeds
the Company's interest in the underlying net assets of these entities by $9,689
and $10,110, respectively. This difference is being amortized and the related
investment balance reduced utilizing the straight line method over 35 years.
Summarized combined financial information for these affiliated companies is as
follows:
1997 1996 1995
---- ---- ----
Total assets $56,794 $93,187 $86,474
Total liabilities 10,212 10,263 9,905
Revenues 41,730 40,221 39,457
Income from operations 23,027 21,099 20,993
Net income 15,104 13,992 12,778
Dividends received 21,245 -- 1,089
The Company had $20,479 and $35,486 of undistributed earnings from these
investments included in retained earnings at November 30, 1997 and 1996,
respectively. Deferred income taxes related to these undistributed earnings have
been provided in the accompanying consolidated financial statements of the
Company.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Bassett Furniture Industries, Incorporated and Subsidiaries
(dollars in thousands except per share data)
E. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
November 30,
---------------------
1997 1996
---- ----
Compensation and related benefits $10,016 $8,475
Severance and related employee
benefit costs 4,910 --
Advertising and rebates 3,781 321
Other 7,506 1,009
------- ------
$26,213 $9,805
======= ======
F. INCOME TAXES
A reconciliation of the statutory federal income tax rate and the effective
income tax rate, as a percentage of income (loss) before income taxes, is as
follows:
1997 1996 1995
---- ---- ----
Statutory federal income tax rate (35.0%) 35.0% 35.0%
Dividends received exclusion (.7) (1.6) (1.7)
Tax exempt interest (1.0) (3.4) (2.4)
Undistributed affiliate income (4.2) (6.5) (4.5)
Corporate owned life insurance (4.3) (7.0) (2.7)
State income tax, net of
federal benefit (6.0) 0.9 1.9
Tax credits - - (0.2)
Property donation (3.2) - -
Other 1.1 (0.4) (1.4)
----- ---- ----
Effective income tax rate (53.3%) 17.0% 24.0%
===== ==== ====
The income tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets and deferred income tax liabilities
at November 30, are as follows:
1997 1996
---- ----
Deferred income tax assets:
Trade accounts receivable $ 1,554 $ 515
Inventories 3,488 840
Investment securities - 333
Impaired asset reserves 4,634 -
Retirement benefits 5,047 4,105
Severance and related employee benefit cost 1,915 -
Net operating loss carry forwards 900 -
Other liabilities and reserves 8,768 1,769
------- ------
Total gross deferred income tax assets 26,306 7,562
------- ------
Deferred income tax liabilities:
Property and equipment 2,939 2,334
Undistributed affiliate income 1,983 2,697
Prepaid expenses 483 179
Unrealized holding gains 3,559 2,259
------- ------
Total gross deferred income tax liabilities 8,964 7,469
------- ------
Net deferred income tax assets $17,342 $ 93
======= ======
The Company has recorded $900 for the benefit of approximately $13,400 in state
income tax loss carry-forwards which expire in varying amounts between 2003 and
2013. Realization is dependent on generating sufficient taxable income prior to
expiration of the loss carry forwards. Based upon the level of historical
taxable income and projections for future taxable income over the periods which
the deferred income tax assets are deductible, management believes it is more
likely than not the Company will realize the benefits of the deferred income tax
assets.
The components of the income tax provision (benefit) are as follows:
1997 1996 1995
---- ---- ----
Federal $(3,968) $3,140 $6,455
State 171 268 879
Deferred (18,549) 379 (108)
-------- ------ ------
Total $(22,346) $3,787 $7,226
======== ====== ======
G. RETIREMENT PLANS
The Company has a qualified defined contribution plan (Employee Savings/
Retirement Plan) which covers all employees, with over one year service, who
elect to participate and have fulfilled the necessary service requirements.
Employee contributions to the Plan are matched by the Company at the rate of
115% of the first 2% through 5% of the employee's contribution, based on
seniority. The Plan incorporates provisions of Section 401(k) of the Internal
Revenue Code. The expense for the Plan for 1997, 1996 and 1995, amounted to
approximately $2,453, $2,379 and $2,395, 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 which
provides for voluntary deferral of compensation, otherwise payable. The unfunded
future liability of the Company under these Plans is included in long-term
liabilities.
H. CAPITAL STOCK AND STOCK COMPENSATION
The Company has a Long Term Incentive Stock Option Plan which was adopted in
1993. Under the stock option plan, the Company has reserved for issuance,
450,000 shares of Common Stock of which 33,675 are available for grant at
November 30, 1997. Options granted under the plan may be for such terms and
exercised at such times as determined at the time of grant by the Organization,
Compensation and Nominating Committee of the Board of Directors. Options to
purchase 360,750 shares of Common Stock were granted during 1997 to officers and
key employees. The exercise price of these options is $22,625 which equaled the
fair market value of the Company's Common Stock at the date of the grant.
However, this exercise price was less than the fair market value at the
measurement date for 330,000 of the options granted. All of these options became
exercisable in 1997. Compensation expense related to these options of $1,682 is
included in selling, general and administrative expenses in the accompanying
1997 consolidated statement of operations. These options expire at various dates
through 2007.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Bassett Furniture Industries, Incorporated and Subsidiaries
(dollars in thousands except per share data)
H. CAPITAL STOCK AND STOCK COMPENSATION - CONTINUED
The Company has a Stock Plan for Non-Employee Directors which was adopted in
1993. Under this stock option plan, the Company has reserved for issuance,
75,000 shares of Common Stock of which 45,000 are available for grant at
November 30, 1997. Under the terms of this plan, each non-employee director will
automatically be granted an option to purchase 500 shares of Common Stock on
April 1 of each year. These options are exercisable for ten years commencing six
months after the date of the grant. An additional 17,500 options to purchase
common Stock were awarded to non-employee directors during 1997. These options
are exercisable for five years commencing six months after the date of the
grant.
Option activity under these plans is as follows:
Number of Average price
shares per share
------ ---------
Outstanding at November 30, 1994 345,217 $32.10
Granted in 1995 4,500 $26.50
Exercised in 1995 - -
Cancelled in 1995 (17,292) $30.07
-------
Outstanding at November 30, 1995 332,425 $32.13
Granted in 1996 4,500 $25.75
Exercised in 1996 - -
Cancelled in 1996 (15,300) $32.40
------
Outstanding at November 30, 1996 321,625 $32.02
Granted in 1997 382,750 $22.87
Exercised in 1997 (2,000) $25.97
Cancelled in 1997 (49,577) $31.50
------
Outstanding at November 30, 1997 652,798 $26.80
=======
Exercisable at November 30, 1997 602,726 $26.22
Exercisable at November 30, 1996 267,770 $31.88
Exercisable at November 30, 1995 251,923 $31.91
The following table summarizes information about stock options outstanding at
November 30, 1997
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Number average Weighted Number Weighted
Range of outstanding remaining average exercisable at average
exercise at Nov. 30, contractual exercise Nov. 30, exercisable
prices 1997 life (years) price 1997 price
------ ---- ------------ ----- ---- -----
$22.63 - $27.75 442,150 9.0 $23.35 424,650 $23.17
28.00 - 37.40 210,648 5.0 33.79 178,076 33.51
- --------------- ------- --- ------ ------- ------
$22.63 - $37.40 652,798 7.7 $26.72 602,726 $26.22
=============== ======= === ====== ======= ======
The Company has elected to continue to account for stock option grants under ABP
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:
1997 1996
---- ----
Net Income (loss):
As reported $(19,609) $18,501
Pro Forma $(19,945) $18,481
Net Income (loss) per share:
As reported $(1.50) $1.39
Pro Forma $(1.53) $1.38
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:
1997 1996
---- ----
Expected lives 5 years 5 years
Risk-free interest rate 6.6% 6.3%
Expected volatility 29.5% 29.6%
Dividend yield 3.3% 2.8%
The weighted average fair value of options granted during 1997 and 1996 were
$6.15 and $7.23, respectively. Because the SFAS No. 123 method of accounting has
not been applied to options granted prior to December 15, 1995, the above pro
forma amounts may not be representative of the estimated compensation costs to
be expected in future years utilizing this pro forma approach.
During 1997, the company issued 31,396 shares of restricted common stock under
the 1993 Long Term Incentive Stock Option Plan as compensation for certain key
salaried employees. These shares carry dividend and voting rights. Sale of these
shares is restricted prior to the date of vesting which is five years from the
date of grant. Shares issued under this plan were recorded at their fair market
value on the date of the grant with a corresponding charge to stockholders'
equity. The unearned portion is being amortized as compensation expense on a
straight-line basis over the related vesting period. Compensation expense
related to this grant was $11 in 1997.
I. OTHER INCOME, NET
1997 1996 1995
---- ---- ----
Dividends $ 1,141 $ 1,497 $ 2,209
Interest (principally tax exempt) 3,328 2,361 2,360
Equity in undistributed income
of affiliated companies 5,926 5,422 4,986
Net gain from sales of investment
securities 1,804 6,720 4,142
Corporate owned life insurance,
net of interest expense (1,148) (2,125) (1,676)
Other 2,316 1,107 979
-------- -------- --------
$ 13,367 $ 14,982 $ 13,000
======== ======== ========
Interest expense on corporate owned life insurance policy loans was $7,295 in
1997, $6,377 in 1996 and $3,898 in 1995.
J. RESTRUCTURING, IMPAIRED ASSET AND OTHER UNUSUAL AND NONRECURRING CHARGES:
During 1997, the Company commenced the restructuring of certain of its
operations and recorded restructuring and impaired asset charges of $20,646. The
restructuring plan is the result of management's decision to
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Bassett Furniture Industries, Incorporated and Subsidiaries
(dollars in thousands except per share data)
J. RESTRUCTURING, IMPAIRED ASSET AND OTHER UNUSUAL AND
NONRECURRING CHARGES: - CONTINUED
focus on it's core Bassett product line and efforts to improve operating
efficiencies. The principal actions of the plan include the closure or sale of
fourteen manufacturing facilities, elimination of three product lines
(National/Mt. Airy, Impact and veneer production) and the severance of
approximately 1,000 employees. The major components of the restructuring and
impairment of assets charges and the remaining reserves as of November 30, 1997
are as follows:
Writedown of
property and
equipment to
Original net realizable Reserves Reserve
charges value utilized balance
------- ----- -------- -------
Non-cash write-downs of
property and equipment
to net realizable value $13,362 $13,362 - -
Severance and related
employee benefit cost 5,684 - 774 4,910
Lease exit costs 614 - - 614
Other 986 - 261 725
------- ------- ------ ------
Total $20,646 $13,362 $1,035 $6,249
======= ======= ====== ======
The Company completed the closure of five of the fourteen manufacturing
facilities, disposed of one of the facilities and severed approximately 600
employees during 1997. Eight additional facilities were closed subsequent to
year-end and management expects to complete the remaining restructuring actions
during 1998. Net sales and operating income from activities which were
discontinued were $46,221 and $(31,602) respectively in 1997, $60,119 and
$(1,867) respectively in 1996, and $70,149 and $(1,495) respectively in 1995.
As a result of the plan, additional unusual and nonrecurring charges including
moving costs, plant consolidation inefficiencies and inventory write-downs
totaling $31,654 were recorded in 1997. Of these costs, $28,325 are included in
cost of goods sold and $3,329 are included in selling, general and
administrative expenses in the accompanying 1997 consolidated statement of
operations. The Company estimates that additional charges due to plant
inefficiencies and idle facilities of approximately $10,540 will be incurred
during 1998. After an income tax benefit of $20,397, the restructuring and
impaired asset charges of $20,646 and additional nonrecurring charges of $31,654
reduced fiscal year 1997 net income by $31,903 or $2.34 per share.
In addition, the Company incurred other unusual and nonrecurring charges during
1997 of $12,500 related to customer bankruptcies, environmental matters and
issues related to the Mattress Division (Note K). Of these charges, $1,000 are
included in cost of goods sold and $11,500 are included in selling, general and
administrative expenses in the accompanying 1997 consolidated statement of
operations. After an income tax benefit of $4,875, these other unusual and
nonrecurring charges reduced fiscal year 1997 net income by $7,625 or $.56 per
share.
K. CONTINGENCIES
In June 1997, the Company's management learned that certain mattresses and box
springs manufactured by a subsidiary, E. B. Malone Corporation, for sale to two
major retail customers, were made with different specifications than those
originally manufactured for sale by these retailers. To remedy this situation,
the Company implemented a program under which consumers who purchased these
products can obtain a rebate directly from the Company.
On June 18, 1997, a suit was filed in the Superior Court of the State of
California for the County of Los Angeles (the "Superior Court") against the
Company, two major retailers and certain current and former employees of the
Company seeking certification of a class consisting of all consumers who
purchased the above described products from these two major retailers. The suit
alleges various causes of action, including negligent misrepresentation, breach
of warranty, violations of deceptive practices laws, and fraud, and seeks
compensatory damages of $100 million and punitive damages. The Company filed a
demurrer seeking to dismiss several of the causes of action and on September 12,
1997, the Superior Court sustained the demurrer but granted the plaintiffs leave
to amend. Plaintiffs thereafter filed a Second Amended Complaint adding certain
independent retailers as additional plaintiffs. On December 17, 1997, the
Superior Court again sustained the Company's demurrer to plaintiffs' fraud,
negligent misrepresentation and conspiracy counts, and plaintiffs filed a Third
Amended Complaint. On February 10, 1998 the Superior Court sustained the
Company's demurrer, without leave to amend the class action allegations of the
Third Amended Complaint and ordered the case transferred out of the class action
department. The Superior Court also sustained a demurrer, without leave to
amend, to many of the individual claims. As a result of these rulings, the
number and types of claims have been substantially reduced. Although it is
impossible to predict the ultimate outcome of this litigation, the Company
intends to vigorously defend this suit because it believes that the damages
sought are unjustified and because certification of a class of consumers is
unnecessary and inappropriate in this case. Because the Company believes that
the two major retailers were unaware of the changes in product specifications,
the Company has agreed to indemnify the two major retailers with respect to the
above.
The Company is also involved in various other claims and actions, including
environmental matters at certain of its plant facilities, which arise in the
normal course of business. Although the final outcome of these legal and
environmental matters cannot be determined, based on the facts presently known,
it is management's opinion that the final resolution of these matters will not
have a material adverse effect on the Company's financial position or future
results of operations.
12
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Bassett Furniture Industries, Incorporated:
We have audited the accompanying consolidated balance sheet of Bassett
Furniture Industries, Incorporated (a Virginia corporation) and subsidiaries as
of November 30, 1997, and the related consolidated statements of operations,
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 accompanying 1996 and 1995 financial statements of Bassett
Furniture Industries, Incorporated and subsidiaries were audited by other
auditors whose report dated December 17, 1996 expressed an unqualified opinion
on those financial statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1997 financial statements referred to above present
fairly, in all material respects, the financial position of Bassett Furniture
Industries, Incorporated and subsidiaries as of November 30, 1997, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
-----------------------------------
Greensboro, North Carolina,
January 2, 1998
13
BOARD OF DIRECTORS
P. FULTON
Chairman of the Board and W.H. GOODWIN, JR.
Chief Executive Officer Chairman of the Board
CCA Industries, Inc.
P.W. BROWN, M.D.
Partner, Virginia Surgical Associates J.W. MCGLOTHLIN
of Richmond Chairman of the Board and
Chief Executive Officer,
A.W. BRINKLEY The United Company
Executive Vice President and
Marketing Group T.W. MOSS, JR.
Executive, NationsBank Corporation Speaker of the Virginia
House of Delegates
T.E. CAPPS
Chairman of the Board, President M.E. MURPHY
and Chief Executive Officer, Retired Vice Chairman and
Dominion Resources, Inc. Chief Administrative Officer of
Sara Lee Corporation.
W.D. DAVIS
President of All Pro A.F. SLOAN
Broadcasting, Inc. Retired Chairman of the Board,
Lance, Inc.
A.T. DICKSON
Chairman of the Board R.H. SPILMAN, JR.
Ruddick Corporation President and
Chief Operating Officer
H.H. HAWORTH
President, Haworth Group
OFFICERS
P. FULTON R.H. SPILMAN, JR.
Chairman of the Board and President and
Chief Executive Officer Chief Operating Officer
VICE PRESIDENTS
J.F. ALBANESE J.E. HAMLIN
Vice President - Vice President -
Retail Development Marketing
J.E. BASSETT III J.R. HERVEY
Vice President - Vice President and
Wood Manufacturing General Counsel
P.E. BOOKER D.W. MILLER
Vice President and Vice President and
General Manager - Chief Financial Officer
Mattress Manufacturing
R.W. DOWNING J.C. PHILPOTT
Vice President - Executive Vice President -
Sales Wood Manufacturing
G.S. ELLIOTT S.P. RINDSKOPF
Vice President - Vice President -
Strategic Planning Human Resources
M.B. GOSNELL
Vice President -
Upholstery Manufacturing