1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission File No. 0-209
BASSETT FURNITURE INDUSTRIES, INCORPORATED
(Exact name of Registrant as specified in its charter)
Virginia 54-0135270
- ----------------------------------------- ---------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Bassett, Virginia 24055
-------------------------
(Address of principal executive offices)
(Zip Code)
(540) 629-6000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
At March 20, 1998, 13,054,279 shares of common stock of the Registrant were
outstanding.
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PART I - FINANCIAL INFORMATION
BASSETT FURNITURE INDUSTRIES, INCORPORATED
AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS
OF INCOME AND RETAINED EARNINGS - UNAUDITED
FOR THE 13 WEEKS ENDED FEBRUARY 28, 1998 AND THE 3 MONTHS
ENDED FEBRUARY 28, 1997 (NOTE A)
(In thousands except per share data)
1998 1997
------- ------
Net sales $98,333 $109,806
------- ---------
Costs and expenses
Cost of sales 80,751 91,573
Selling, general and administrative 15,779 15,848
------ ---------
96,530 107,421
-------- --------
Income from operations 1,803 2,385
Other income, net 2,747 2,078
----------- ----------
Income before income taxes 4,550 4,463
Income taxes 1,115 1,030
----------- --------
NET INCOME 3,435 3,433
Retained earnings - beginning of period 188,761 222,417
Cash dividends (2,610) (5,230)
------ -------
Retained earnings - end of period $189,586 $220,620
======== ========
BASIC EARNINGS PER SHARE $.26 $.26
==== ====
DILUTED EARNINGS PER SHARE $.26 $.26
==== ====
DIVIDENDS PER SHARE $.20 $.40
==== ====
- -------------------------------
The accompanying notes to condensed consolidated financial statements are an
integral part of the condensed consolidated financial statements.
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PART I - FINANCIAL INFORMATION - CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
February 28, 1998 and November 30, 1997
(in thousands except per share data)
Assets 1998 1997
---- ----
Current assets:
Cash & cash equivalents $31,864 $29,552
Marketable securities 49,115 49,985
Trade accounts receivable, net 53,418 57,327
Inventories 41,137 41,714
Prepaid expenses 1,324 1,405
Refundable income taxes 4,904 5,025
Deferred income taxes 13,971 15,476
------ ------
Total current assets 195,733 200,484
------- -------
Property & equipment:
Cost 169,539 168,026
Allowances for depreciation (126,308) (124,547)
---------- ---------
Net property & equipment 43,231 43,479
------ ------
Other long-term assets:
Investment securities 30,308 29,922
Investment in affiliated companies 31,667 30,502
Deferred income taxes 1,946 1,866
Assets held for sale 3,623 3,506
Other 10,679 10,566
------ ------
Total other long-term assets 78,223 76,362
------ ------
Total assets $317,187 $320,325
======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $17,091 $21,694
Accrued compensation 1,616 4,910
Other accrued liabilities 24,255 21,303
------ ------
Total current liabilities 42,962 47,907
------ ------
Long-term liabilities:
Employee benefits 11,426 11,248
------ ------
Total long-term liabilities 11,426 11,248
------ ------
Stockholders' equity:
Common stock 65,276 65,256
Additional paid in capital 2,508 2,438
Retained earnings 189,586 188,761
Unrealized holding gains, net of income tax effect 6,245 5,575
Unamortized stock compensation (816) (860)
----- -----
Total stockholders' equity 262,799 261,170
------- -------
Total liabilities and stockholders' equity $317,187 $320,325
======== ========
The accompanying notes to condensed consolidated financial statements are an
integral part of the condensed consolidated financial statements.
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PART I - FINANCIAL INFORMATION - CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
FOR THE 13 WEEKS ENDED FEBRUARY 28, 1998 AND THE THREE MONTHS
ENDED FEBRUARY 28, 1997 (NOTE A)
(in thousands except per share data)
1998 1997
--------- ----------
- ----
Net Income $ 3,435 $ 3,433
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,611 1,759
Amortization of stock compensation expense 44 -
Equity in undistributed income of affiliated companies (1,165) (1,136)
Provision for losses on trade accounts receivable 61 14
Net gain from sales of investment securities (35) -
Net gain from sales of property & equipment (178) (216)
Deferred income taxes 1,425 21
Refundable income taxes 121 1,011
Changes in deferred liabilities 178 (67)
Changes in operating assets & liabilities:
Trade accounts receivable 3,848 (281)
Other receivables (113) (1,101)
Inventory 577 (822)
Prepaid expenses 81 115
Accounts payable and accured liabilities (7,555) (845)
------- -------
Net cash provided by operating activities 2,335 1,885
Investing activities:
Purchases of property and equipment (2,416) (4,314)
Proceeds from sales of property & equipment 1,114 333
Purchases of investment securities (414) (21)
Dividend from affiliated company - 272
Proceeds from sales of investment securities 733 -
Proceeds from sales of marketable securities, net 870 -
Other - 12
------- --
Net cash used in investing activities (113) (3,718)
Financing activities:
Issuance of common stock under stock option plan 90 -
------- -------
Net cash provided by financing activities 90 -
------- -------
Net change in cash and cash equivalents 2,312 (1,833)
Cash and cash equivalents, beginning of period 29,552 57,285
------- -------
Cash and cash equivalents, end of period $31,864 $55,452
======= =======
- ---------------------------------
The accompanying notes to condensed consolidated financial statements are an
integral part of the condensed consolidated financial statements.
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PART I - FINANCIAL INFORMATION - CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
February 28, 1998 (in thousands except per share data)
Note A. Change in Accounting Period:
Effective December 1, 1997, the Company changed to a fiscal year end on the
fifty-second Saturday after December 1. For previous years reported, the
Company utilized a fiscal year ending on November 30.
Note B. Inventories:
Inventories are carried at last-in, first-out (LIFO) cost which is not in
excess of market. Inventories at February 28, 1998 and November 30, 1997
consisted of the following:
February 28, November 30,
1998 1997
---- ----
Finished goods $29,337 $29,485
Work in process 9,193 9,025
Raw materials and supplies 28,011 28,420
------ ------
Total inventories valued at first-in,
first-out (FIFO) cost 66,541 66,930
LIFO adjustment 25,404 25,216
------ ------
Total inventories $41,137 $41,714
======= =======
Note C. Investment in affiliated companies:
Summarized combined income statement information for the Company's equity
method investments for the thirteen week period ended February 28, 1998 and the
three month period ended February 28, 1997 is as follows:
1998 1997
---- ----
Revenues $7,841 $7,613
Income from operations 4,660 4,639
Net income 2,870 3,119
Information for each investee is summarized from the available financial
information for each entity.
Note D. Restructuring, Impaired Assets 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.
Of these charges, $14,397 was utilized during 1997, leaving $6,249 in reserves
to be utilized in future periods as the remaining activities related to the
restructuring charges are completed. The restructuring plans included the
closure of 14 manufacturing facilities and the severance of approximately 1,000
employees. As of November 30, 1997, five of the 14 facilities were closed and
approximately 600 employees had been severed. During the first quarter of
fiscal 1998, the remaining nine facilities were closed and approximately 400
employees were severed.
Activity within the restructuring reserves was as follows:
November 30, Reserves February 28,
1997 reserve utilized in 1st 1998 reserve
balance Qtr 1998 balance
--------------------------------------------------
Severance & related employee $4,910 $1,620 $3,290
benefit costs
Lease exit costs 614 32 582
Other 725 0 725
--------------------------------------------------
Total $6,249 $1,652 $4,597
--------------------------------------------------
The Company projected at November 30, 1997, that it would incur an additional
$10,540 of charges during 1998 as a result of (1) operating inefficiencies at
plants involved in consolidations and (2) costs incurred at idle facilities.
The total of these expenses incurred during the 13 week period ended February
28, 1998, was $1,469.
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PART I - FINANCIAL INFORMATION - CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
February 28, 1998 (in thousands of dollars)
Note E. Contingencies:
A suit was filed last June in the Superior Court of the State of California for
the County of Los Angeles (the "Superior Court") against the Company, two major
retailers and certain current and former employees of the Company. The suit
sought certification of a class consisting of all consumers who purchased from
the major retailers certain mattresses and box springs which were manufactured
by a subsidiary of the Company, E. B. Malone Corporation, with different
specifications than those originally manufactured for sale by these retailers.
The suit alleged various causes of action, including negligent
misrepresentation, breach of warranty, violations of deceptive practices laws
and fraud, and sought compensatory damages of $100 million and punitive
damages. In September, 1997, the Superior Court sustained the Company's
demurrer seeking to dismiss several of plaintiffs' causes of action, but gave
plaintiffs leave to amend. Plaintiffs' Second Amended Complaint added certain
independent retailers as additional plaintiffs. In December, 1997, the
Superior Court sustained the Company's second demurrer as to several causes of
action, but again gave plaintiffs leave to amend. The plaintiffs filed a Third
Amended Complaint, and in February, 1998, the Superior Court sustained the
Company's third demurrer as to the class allegations and to many of the
individual claims, this time without giving the plaintiffs leave to amend.
Plaintiffs have filed a notice of appeal from the most recent demurrer rulings.
The suit has been transferred out of the Superior Court's class action
department, and recently was transferred out of the Superior Court for the
County of Los Angeles to the Superior Court for Orange County. 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 class certification 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 it 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.
Note F. Earnings per share:
The Company adopted SFAS No. 128, "Earnings per Share," effective December 1,
1997. As a result, the Company's reported earnings per share for 1997 have
been restated. The effect of this accounting change on previously reported
earnings per share (EPS) data was not material.
For the thirteen weeks ended February 28, 1998
----------------------------------------------
Income Shares Per share amount
------ ------ ----------------
Basic earnings per share $3,435 13,022,883 $.26
Effect of dilutive securities:
Options issued to directors and employees 0 88,988 0
Restricted stock issued to employees 0 1,661 0
- ----- -
Diluted earnings per share $3,435 13,113,532 $.26
====== ========== ====
For the quarter ended February 28, 1997
---------------------------------------
Income Shares Per share amount
------ ------ ----------------
Basic earnings per share $3,433 13,075,595 $.26
Effect of dilutive securities:
Options issued to directors and employees 0 0 0
Restricted stock issued to employees 0 0 0
- - -
Diluted earnings per share $3,433 13,075,595 $.26
====== ========== ====
Options to purchase 149,067 shares of common stock at $37.40 per share were
outstanding during the first quarter of 1998 but were not included in the
computation of diluted EPS because the options' exercise price was greater than
the average market price of the common shares.
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PART I - FINANCIAL INFORMATION - CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
February 28, 1998 (in thousands of dollars)
Note F. Earnings per share: (continued)
Basic earnings per common share was computed by dividing net income by the
weighted average number of shares of common stock outstanding during the year.
Diluted earnings per common share reflect the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock.
Basis of presentation:
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Results of Operations
The major components of net income expressed as a percentage of net sales were
as follows. The proforma data excludes the effect of sales from closed
operations and the effect of nonrecurring charges.
First Quarter Ended February 28,
--------------------------------
1998 Actual 1998 Proforma 1997 1996
----------- ------------- ---- ----
Cost of sales 82.1 % 80.7 % 83.4 % 84.1 %
Gross profit 17.9 19.3 16.6 15.9
SG&A expenses 16.0 16.0 14.4 13.8
Income from operations 1.8 3.4 2.2 2.0
Other income, net 2.8 2.8 1.9 3.6
Income before income taxes 4.6 6.2 4.1 5.7
Income taxes 1.1 1.7 .9 1.4
Net income 3.5 4.4 3.1 4.2
Net Sales
Net sales for the first quarter compared with prior years was as follows:
1998 1997 1996
---- ---- ----
Net sales $98,333 $109,806 $111,951
% change from prior year (10.4)% (1.92)% (9.4)%
Wood Division sales were very strong throughout the quarter, increasing 12%
over prior year levels. However, Upholstery Division and Mattress Division
sales decreased significantly below the 1997 first quarter volume. Certain
recently introduced suites produced by the Wood Division, combined with
improvements in overall quality, account for the significant sales increase.
The sales decline in the Upholstery Division is generally attributable to the
consolidation of motion furniture manufacturing into the Dumas, Arkansas plant.
The consolidation resulted in the elimination of numerous SKU's and related
sales. Mattress Division sales are down due to the loss of Levitz Furniture as
a customer in late 1997. Overall, the net decrease in sales resulted primarily
from the discontinuance of the National/Mt. Airy and Impact product lines,
which accounted for $11,197 of sales in the first quarter of 1997 compared to
$846 in 1998.
Costs and expenses
The Company showed marked improvement in operating efficiencies in the first
quarter as gross profit margin increased to 17.9% of net sales from 16.6% in
1997. However, the 1998 percentage includes $1,270 in operating expenses
related to continuing costs of closed facilities. Excluding these continuing
costs, the gross profit margin was 19.3%. This improvement is a direct result
of the efficiencies gained through the Company's restructuring activities of
1997 and early 1998. Gross profit margins have improved in virtually every
facility compared to a year ago. In addition, production volumes and operating
margins have also improved in virtually every facility, except those involved
in consolidations from closed facilities.
The 1997 cost of sales percentages were down from 1996 as the Company made
improvements in its material cost component, which was more than offset by
increases in the labor component due to an initiative to increase
competitiveness of production employees' compensation rates.
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PART I - FINANCIAL INFORMATION - CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
February 28, 1998 (In thousands of dollars)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
SG&A expenses increased in 1998 compared to 1997 as the Company added key
senior management positions to grow the business, increased expenditures to
promote the Bassett brand name and continued expenditures to grow the Bassett
Furniture Direct ("BFD") stores and Gallery stores. Expenses related to BFD
stores and Gallery stores continues to escalate as the total number of these
stores grows. Although SG&A expenses as a percentage of sales in 1998 was
higher than in prior years, it is in line with the Company's expectations for
the quarter.
SG&A expenses as a percentage of sales for 1997 were up 60 basis points over
1996 due to costs associated with product promotion, BFD and Gallery store
programs and the Company's focus on customer service.
Other income, net
Other income increased 32% from $2,078 in 1997 to $2,747 in 1998. The increase
in cash, cash equivalents and marketable securities by $23,000 over the prior
year allowed the Company to increase its investment income. In addition, the
change in investment strategy announced in the fourth quarter of 1997 accounted
for increased income in the quarter.
In the first quarter of 1997, other income was down $1,964 from the first
quarter of 1996, when the Company generated $2,115 in income from gains on the
sale of investment securities.
Income taxes
The effective income tax rate for the first quarter of 1998 was 24.5 % compared
to 23.1 % in 1997. The rate increase occurred because many of the items in the
current investment portfolio, under the new investment strategy, have higher
tax rates than investments under the previous strategy. The new portfolio
strategy is, however, generating a higher net income.
Liquidity and Capital Resources
Cash provided by operating activities was $ 2,335 in 1998 compared to $ 1,885
in 1997. The current ratio as of February 28, 1998 and 1997, respectively, was
4.55 to 1 and 5.53 to 1. Working capital for 1998 was $ 152,771 compared to
$158,190 in 1997. There are no material commitments for capital expenditures at
February 28, 1998. 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 a subsidiary, E. B. Malone Corporation, as well as environmental
matters at certain plant facilities, which arise in the normal course of
business. The details of these matters are described in Note E in the Notes to
Condensed 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.
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PART I - FINANCIAL INFORMATION - CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
February 28, 1998 (in thousands of dollars)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
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
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. The
most significant step in accomplishing this goal was completed in the first
quarter of 1998 when a comprehensive enterprise system was purchased;
implementation began immediately and should be completed in the third quarter
of 1999. The system has been installed in over 4,400 companies and is Year
2000 compliant. The Company continues to work with its 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. The Company does not expect the cost of implementation to have a
material adverse effect on its future results of operations, liquidity or
capital resources.
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 the Company operates; and (II) general economic conditions that are less
favorable than expected.
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PART II - OTHER INFORMATION
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
February 28, 1998
Item 4. Submission of matters to a vote of security holders
The stockholders were asked to vote on four proposals for the Annual Meeting of
Stockholders: (1 ) nomination of thirteen directors, (2) approval of the
Company's 1997 Employee Stock Plan, (3) ratification of selection of Arthur
Andersen LLP as independent public accountants and (4) a stockholder proposal
regarding an independent chairperson.
The results of the votes by the stockholders was as follows:
(1) Election of directors:
Voted for Withheld vote Abstained
--------- ------------- ---------
Paul Fulton 12,728,034 185,557 137,688
Amy W. Brinkley 12,688,392 225,199 137,688
Peter W. Brown, M.D. 12,728,060 185,531 137,688
Thomas E. Capps 12,727,567 186,024 137,688
Willie D. Davis 12,682,074 231,517 137,688
Alan T. Dickson 12,726,567 187,024 137,688
William H. Goodwin, Jr. 12,729,434 184,157 137,688
Howard H. Haworth 12,691,396 222,195 137,688
James W. McGlothin 12,716,009 197,582 137,688
Thomas W. Moss, Jr. 12,700,905 212,686 137,688
Michael E. Murphy 12,729,633 183,958 137,688
Albert F. Sloan 12,726,467 187,124 137,688
Robert H. Spilman, Jr. 12,874,000 39,591 137,688
(2) Approval of 1997 Employee Stock Plan:
voted for - 11,283,650; withheld vote - 1,146,765; abstained - 620,864
(3) Ratification of Arthur Andersen LLP as independent public accountants:
voted for - 13,027,418; withheld vote - 9,432; abstained - 14,429
(4) Stockholder proposal regarding an independent chairperson:
voted for - 3,282,446; withheld vote - 9,654,967; abstained - 113,866
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
(10) 1997 Employee Stock Plan
(27) Financial Data Schedule
b. Reports on Form 8-K:
Reports on Form 8-K were filed on December 1, 1997, December 10, 1997 and
December 18, 1997 reporting the change in Registrant's public accountants.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BASSETT FURNITURE INDUSTRIES, INCORPORATED
- -------------------------------------------------------------
Douglas W. Miller, Vice President, Chief Financial Officer
DATE:
-------------------------
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
For the quarter ended Commission File Number
February 28, 1998 0-209
BASSETT FURNITURE INDUSTRIES, INCORPORATED
EXHIBIT INDEX
Exhibit No. Exhibit Description Page No.
---------- ------------------- -------
27 Financial Data Schedule page 9
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