1
EXHIBIT 13
CONSOLIDATED BALANCE SHEETS
Bassett Furniture Industries, Incorporated and Subsidiaries
November 28, 1998 and November 30, 1997
(dollars in thousands except per share data)
Assets
1998 1997
--------- --------
CURRENT ASSETS
Cash and cash equivalents .......................................................... $ 5,499 $ 14,359
Short-term investments ............................................................. 8,923 61,904
Trade accounts receivable, less allowances for
doubtful accounts (1998 - $2,200; 1997 - $1,984) ................................. 59,203 57,327
Inventories ........................................................................ 47,285 41,714
Prepaid expenses ................................................................... 2,038 1,405
Refundable income taxes ............................................................ 8,018 5,025
Deferred income taxes .............................................................. 12,682 15,476
--------- --------
143,648 197,210
--------- --------
PROPERTY AND EQUIPMENT
Buildings .......................................................................... 48,956 50,021
Equipment .......................................................................... 133,147 114,495
--------- --------
182,103 164,516
Accumulated depreciation ........................................................... (129,005) (124,547)
--------- --------
53,098 39,969
Land ............................................................................... 3,289 3,510
--------- --------
56,387 43,479
--------- --------
OTHER ASSETS
Investment securities .............................................................. 50,739 33,196
Investment in affiliated companies ................................................. 52,769 30,502
Deferred income taxes .............................................................. -- 1,866
Assets held for sale ............................................................... 1,023 3,506
Other .............................................................................. 16,948 10,566
--------- --------
121,479 79,636
--------- --------
$321,514 $320,325
========= ========
Liabilities and Stockholders' Equity
CURRENT LIABILITIES
Accounts payable ................................................................... $ 20,221 $ 21,694
Accrued liabilities ................................................................ 24,514 26,213
--------- --------
44,735 47,907
--------- --------
LONG-TERM LIABILITIES
Employee benefits .................................................................. 11,272 11,248
Deferred income taxes .............................................................. 595 --
--------- --------
11,867 11,248
--------- --------
COMMITMENTS AND CONTINGENCIES (NOTES H AND K)
STOCKHOLDERS' EQUITY
Common stock, par value $5 a share, 50,000,000 shares authorized.................... 64,425 65,256
Additional paid-in capital ......................................................... -- 2,438
Retained earnings .................................................................. 193,130 188,761
Unrealized holding gains, net of income tax effect ................................. 8,286 5,575
Unamortized stock compensation ..................................................... (929) (860)
--------- --------
264,912 261,170
--------- --------
$321,514 $320,325
========= ========
10 The accompanying notes to consolidated financial statements are
an integral part of these balance sheets.
2
CONSOLIDATED STATEMENTS OF OPERATIONS
Bassett Furniture Industries, Incorporated and Subsidiaries
For the years ended November 28, 1998, November 30, 1997 and November 30, 1996
(dollars in thousands except per share data)
1998 1997 1996
---------- ---------- ----------
NET SALES ............................................ $397,557 $446,893 $450,717
---------- ---------- ----------
COSTS AND EXPENSES
Cost of sales ...................................... 323,904 396,875 379,259
Selling, general and administrative ................ 64,002 84,694 64,152
Restructuring and impaired fixed asset charges...... -- 20,646 --
---------- ---------- ----------
387,906 502,215 443,411
---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS ........................ 9,651 (55,322) 7,306
OTHER INCOME, NET .................................... 11,445 13,367 14,982
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES .................... 21,096 (41,955) 22,288
INCOME TAXES ......................................... 5,379 (22,346) 3,787
---------- ---------- ----------
NET INCOME (LOSS) .................................... $ 15,717 $ (19,609) $ 18,501
========== ========== ==========
NET INCOME (LOSS) PER SHARE
Basic .............................................. $ 1.21 $ (1.50) $ 1.39
Diluted ............................................ $ 1.20 $ (1.50) $ 1.39
========== ========== ==========
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Bassett Furniture Industries, Incorporated and Subsidiaries
For the years ended November 28, 1998, November 30, 1997 and November 30, 1996
(dollars in thousands)
Common Stock Additional Unamortized
-------------------------- paid-in Retained Unrealized stock
Shares Amount capital earnings holding gains compensation
------------ ---------- ---------- --------- ------------- ------------
BALANCE, DECEMBER 1, 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)
Net income ........................................ -- -- -- 15,717 -- --
Cash dividends .................................... -- -- -- (10,393) -- --
Issuance of Common Stock
to non-employee directors ....................... 573 3 12 -- -- --
Purchase and retirement of Common Stock ........... (185,300) (927) (2,896) (955) -- --
Issuance of Restricted Common Stock to officers.... 16,836 85 459 -- -- (544)
Forfeitures of Restricted Stock ................... (9,435) (47) (224) -- -- 271
Amortization of stock compensation ................ -- -- -- -- -- 204
Exercise of stock options ......................... 11,000 55 211 -- -- --
Net change in unrealized holding gains ............ -- -- -- -- 2,711 --
------------ ---------- ------- --------- ------------ -------
BALANCE, NOVEMBER 28, 1998 .......................... 12,884,953 $64,425 -- $193,130 $8,28 $ (929)
============ ========== ======= ========= ============ =======
The accompanying notes to consolidated financial statements are 11
an integral part of these statements.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS
Bassett Furniture Industries, Incorporated and Subsidiaries
For the years ended November 28, 1998, November 30, 1997 and November 30, 1996
(dollars in thousands except per share data)
Operating Activities 1998 1997 1996
-------- -------- --------
Net income (loss) ......................................... $ 15,717 $(19,609) $ 18,501
Adjustments to reconcile net income to net cash
provided by operating activities:
Unused reserves for impairment of assets ................ 2,000 11,181 --
Depreciation and amortization ........................... 6,870 6,192 6,312
Equity in undistributed income of affiliated companies... (5,784) (5,926) (5,422)
Provision for losses on trade accounts receivable ....... 216 7,706 241
Net (gain) loss from sales of investment securities ..... (1,446) (1,804) (6,720)
Net (gain) loss from sales of property and equipment .... (2,402) 970 (29)
Compensation earned under restricted stock and
stock option plans .................................... 204 1,693 --
Deferred income taxes ................................... 3,516 (18,549) 527
Changes in long-term liabilities ........................ 24 413 538
Changes in operating assets and liabilities:
Trade accounts receivable ............................. (2,092) 384 2,934
Other receivables ..................................... -- (168) 127
Inventories ........................................... (5,571) 25,368 14,144
Prepaid expenses ...................................... (633) 88 265
Accounts payable and accrued liabilities .............. (3,172) 17,561 (4,144)
Refundable income taxes ............................... (2,993) (4,180) (1,747)
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ........... 4,454 21,320 25,527
-------- -------- --------
Investing Activities
Purchases of property and equipment ....................... (22,610) (10,824) (9,627)
Proceeds from sales of property and equipment ............. 7,717 1,875 91
Purchases of investment securities ........................ (16,176) (65,385) (6,588)
Proceeds from sales of investment securities .............. 57,510 4,903 20,793
Dividends from affiliated company ......................... 31,517 21,245 --
Investment in affiliated company .......................... (50,000) -- --
Change in investment in corporate owned life insurance .... (3,900) (1,153) 738
Issuance of notes receivable .............................. (3,383) -- --
Other ..................................................... 901 (623) (260)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES.. 1,576 (49,962) 5,147
-------- -------- --------
Financing Activities
Proceeds from issuance of Common Stock .................... 281 107 25
Purchases of Common Stock ................................. (4,778) (1,350) (14,119)
Cash dividends ............................................ (10,393) (13,041) (10,626)
-------- -------- --------
NET CASH USED IN FINANCING ACTIVITIES ............... (14,890) (14,284) (24,720)
-------- -------- --------
Change In Cash And Cash Equivalents ......................... (8,860) (42,926) 5,954
Cash And Cash Equivalents -- beginning of year .............. 14,359 57,285 51,331
-------- -------- --------
Cash And Cash Equivalents -- end of year .................... $ 5,499 $ 14,359 $ 57,285
======== ======== ========
Supplemental Disclosure Of Cash Flow Information:
Interest payments ........................................... $ 7,240 $ 8,205 $ 5,495
======== ======== ========
Income tax payments ......................................... $ 4,656 $ 1,402 $ 5,007
======== ======== ========
12 The accompanying notes to consolidated financial statements are
an integral part of these statements.
4
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 AND FISCAL YEAR
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. The Company changed
its fiscal year effective 1998 to end on the Saturday nearest November 30.
Prior to 1998, the fiscal year ended on November 30.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts in the 1997 and 1996 financial statements have been reclassified
to conform with the 1998 presentation.
CASH EQUIVALENTS
All temporary, highly liquid investments with original maturities of three
months or less are considered to be cash equivalents. The carrying amount
approximates fair value.
SHORT-TERM INVESTMENTS
Investments in municipal bonds with original maturities of more than three
months and a remaining maturity of one year or less are considered to be
short-term investments. The carrying amount approximates fair value.
TRADE ACCOUNTS RECEIVABLE
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 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 the lower of last-in, first-out (LIFO) cost or
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
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 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 is used for the Company's investment in
affiliated companies in which the Company exercises significant influence but
does not maintain control.
ASSETS HELD FOR SALE
Several manufacturing facilities, with their related equipment, were closed
during 1997 and 1998, 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 (COLI)
The Company is the beneficiary of life insurance policies with a face value of
$2,207,334, which are maintained to fund various employee and director benefit
plans. Policy loans outstanding of $57,496 and $106,775 at November 28, 1998 and
November 30, 1997, respectively, are recorded as a reduction in the policies'
cash surrender value, which 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.
During 1998, the Company elected to discontinue premium payments on a large
number of COLI policies and invoke a non-forfeiture provision provided for by
the policies. The effect of this election was to increase the face value on the
policies to three times the original amount. The Company has elected to pay for
the additional insurance through reductions in the policies' cash value.
REVENUE RECOGNITION
Revenue from sales is recognized when furniture is shipped to the customer.
Sales to one customer were 15% of net sales in 1998, 1997 and 1996.
INCOME TAXES
Deferred income taxes are provided based on the differences 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
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share," in 1998 and has restated prior period earnings per share
to conform to this Statement. Basic earnings per share is determined by dividing
net income available to common shareholders by the weighted average number of
shares of Common Stock outstanding. Diluted earnings per share also considers
the dilutive effect for stock options and restricted stock.
13
5
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 SFAS No. 123, "Stock-Based Compensation," the Company has
continued to measure compensation expense for its stock-based employee/director
compensation plans using the intrinsic value method prescribed by Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees." Pro forma disclosures of net income and earnings per share are
presented as if the fair value-based method prescribed by SFAS No. 123 had been
applied in measuring compensation expense for the periods required by the
Statement. The Company measures expense for stock options granted to
non-employees/directors based on the fair value of the goods or services
received.
RECENT ACCOUNTING PRONOUNCEMENTS
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. In June 1997, the Financial Accounting Standards Board
issued SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information." This Statement establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. In February 1998,
the Financial Accounting Standards Board issued SFAS No. 132, "Employers'
Disclosures About Pensions and Other Postretirement Benefits". This Statement
revises employers' disclosures about pension and other postretirement benefit
plans. It does not change the measurement or recognition of those plans. These
Statements are effective for fiscal years beginning after December 15, 1997. The
Company plans to adopt the provisions of these Statements in fiscal 1999.
Management does not expect the impact of adoption of these Statements on the
Company's financial position and results of operations to be material.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". This Statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This Statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. The Company plans to adopt the provisions
of this Statement in fiscal year 2000. 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 28, November 30,
1998 1997
------------ ------------
Finished goods ................ $37,430 $29,485
Work in process................ 9,169 9,025
Raw materials and supplies..... 26,506 28,420
-------- --------
Total inventories on first-in,
first-out cost method..... 73,105 66,930
LIFO adjustment................ (25,820) (25,216)
-------- --------
$47,285 $41,714
======== ========
During 1998 and 1997, the Company liquidated certain LIFO inventories, which
decreased cost of sales by approximately $800 and $3,450, respectively.
C. Investment Securities
Investment securities by major security type are as follows:
November 28, 1998
-------------------------------------------
Gross Gross
Unrealized Unrealized
Holding Holding Fair
Cost Gains Losses Value
------- ------- ------- -------
Equity securities..... $11,272 $13,161 $15 $24,418
Mutual funds.......... 2,277 408 -- 2,685
Municipal securities.. 23,606 30 -- 23,636
------- ------- ------ -------
$37,155 $13,599 $15 $50,739
======= ======= ====== =======
November 30, 1998
-------------------------------------------
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.. 8,734 94 -- 8,828
------- ------ ----- -------
$24,062 $9,135 $1 $33,196
======= ====== ===== =======
Maturities of the majority 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.
During 1998, the Company invested $50,000 in a limited partnership. The
partnership invests in a variety of other private partnerships which employ a
combination of investment strategies including merger arbitrages, convertible
arbitrages and other market neutral investments. The recorded investment in
these entities at November 28, 1998 and November 30, 1997, exceeded the
Company's interest in the underlying net assets of these entities by $9,276 and
$9,689, 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:
14
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
Bassett Furniture Industries, Incorporated and Subsidiaries
(dollars in thousands except per share data)
1998 1997 1996
-------- ------- -------
Total assets .......... $119,276 $56,794 $93,187
Total liabilities...... 84,607 10,212 10,263
Revenues............... 42,203 41,730 40,221
Income from operations. 24,021 23,027 21,099
Net income............. 14,503 15,104 13,992
Dividends received..... 31,517 21,245 --
The Company had net distributions in excess of earnings of $3,854 at November
28, 1998 and $21,467 of undistributed earnings from these investments at
November 30, 1997. Deferred income taxes related to these items have been
provided in the accompanying consolidated financial statements.
E. Accrued Liabilities
Accrued liabilities consist of the following:
November 28, November 30,
1998 1997
------------ ------------
Compensation and related benefits... $ 9,335 $10,016
Severance and related employee
benefit costs..................... 1,859 4,910
Advertising and rebates............. 4,132 3,781
Legal and environmental............. 4,615 4,494
Other............................... 4,573 3,012
------- -------
$24,514 $26,213
======= =======
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:
1998 1997 1996
------ ------- -------
Statutory federal income tax rate......... 35.0% (35.0%) 35.0%
Dividends received exclusion.............. (1.0) (0.7) (1.6)
Tax exempt interest....................... (2.0) (1.0) (3.4)
Undistributed affiliate income............ (7.7) (4.2) (6.5)
Corporate owned life insurance............ (3.2) (4.3) (7.0)
State income tax, net of..................
federal benefit......................... 3.1 (6.0) 0.9
Property donation......................... -- (3.2) --
Other..................................... 1.3 1.1 (0.4)
------ ------- -------
Effective income tax rate............... 25.5% (53.3%) 17.0%
====== ======= =======
The components of the income tax provision (benefit) are as follows:
1998 1997 1996
------ -------- ------
Federal.............. $1,762 $ (3,968) $3,140
State................ 101 171 268
Deferred............. 3,516 (18,549) 379
------ -------- ------
Total................ $5,379 $(22,346) $3,787
====== ======== ======
The income tax effects of temporary differences that give rise to the deferred
income tax assets and deferred income tax liabilities are as follows:
November 28, November 30,
1998 1997
------------ ------------
Deferred income tax assets:
Trade accounts receivable................. $ 1,514 $ 1,554
Inventories............................... 1,601 3,488
Impaired asset reserves................... 2,084 4,634
Retirement benefits....................... 5,135 5,047
Severance and related employee............
benefit cost............................ 725 1,915
Net operating loss carryforwards.......... 441 900
Distribution from affiliates in...........
excess of income........................ 2,258 --
Contribution carryforward.................
(expires 2002)........................... 820 --
Other liabilities and reserves............ 6,941 8,768
-------- --------
Total gross deferred income.............
tax assets........................... 21,519 26,306
-------- --------
Deferred income tax liabilities:............
Property and equipment.................... 3,343 2,939
Undistributed affiliate income............ 541 1,983
Prepaid expenses.......................... 250 483
Unrealized holding gains................ 5,298 3,559
-------- --------
Total gross deferred income...........
tax liabilities..................... 9,432 8,964
-------- --------
Net deferred income tax assets........ $12,087 $17,342
======== ========
The Company has recorded $441 to recognize the deferred income tax benefit
related to approximately $6,200 in state income tax loss carryforwards that
expire in varying amounts between the years 2003 and 2014. Realization is
dependent on generating sufficient taxable income prior to expiration of the
loss carryforwards. Based upon the level of historical taxable income and
projections for future taxable income over the periods in 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.
G. Long-Term Liabilities and Retirement Plans
The Company has a qualified defined contribution plan (Employee
Savings/Retirement Plan) that covers all employees with over one year of service
who elect to participate and have fulfilled the necessary service requirements.
Employee contributions to the Plan are matched by the Company at the rate of
115% of the first 2% through 5% of the employee's contribution, based on
seniority. The Plan incorporates provisions of Section 401(k) of the Internal
Revenue Code. The expenses for the Plan for 1998, 1997 and 1996 were
approximately $2,273, $2,453 and $2,379, respectively.
The Company has a Supplemental Retirement Income Plan that covers certain senior
executives and provides additional retirement and death benefits. Also, the
Company has a Deferred Compensation Plan for certain senior executives that
provides for voluntary deferral of compensation otherwise payable. The unfunded
future liability of the Company under these Plans is included in long-term
liabilities.
15
7
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
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, 2,279 of which were 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.
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 plan also allow for the issuance of the 2,279 options
that remained as of December 1, 1997 from the 1993 Plan. In addition, the terms
of the 1998 Plan allow for the reissuance of any stock options that have been
forfeited before being exercised. Options granted under the 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. Options to
purchase 857,259 shares of common stock were granted under the plan during 1998
primarily to officers and key employees. The exercise prices of these options,
which equaled the fair market value of the Company's Common Stock at the date of
the grant, ranged from $22.50 to $32.25. These options expire at various dates
during 2008. Shares available for grant under the 1998 Plan were 153,088 at
November 28, 1998.
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, 26,500 of which are available for grant at November 28,
1998. 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. The Company awarded 18,500 options in 1998, 22,000 options
in 1997 and 4,500 options in 1996, to purchase Common Stock to non-employee
directors during 1998. These options are exercisable for ten 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 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
Granted in 1998.......................... 875,759 $30.25
Exercised in 1998........................ (11,000) $24.18
Cancelled in 1998........................ (126,142) $31.67
---------
Outstanding at November 28, 1998........... 1,391,415 $28.51
=========
Exercisable at November 28, 1998........... 614,386 $26.17
Exercisable at November 30, 1997........... 602,726 $26.22
Exercisable at November 30, 1996........... 267,770 $31.88
The following table summarizes information about stock options outstanding at
November 28, 1998:
Options Outstanding Options Exercisable
------------------------------------- ------------------------
Weighted
Number average Weighted Number Weighted
Range of outstanding remaining average exercisable average
exercise at Nov. 28, contractual exercise at Nov. 28, exercisable
prices 1998 life (years) price 1998 price
- --------------- ----------- ------------ -------- ----------- -----------
$22.50 - $27.75 585,922 8.4 $23.22 438,922 $23.47
27.76 - 37.40 805,493 8.1 32.36 175,464 32.92
- --------------- --------- ------------ ------ ------- -------
$22.50 - $37.40 1,391,415 8.3 $28.51 614,386 $26.17
=============== ========= ============ ====== ======= =======
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:
1998 1997 1996
-------- -------- --------
Net income (loss):
As reported ............................... $ 15,717 $(19,609) $18,501
Pro Forma ................................. $ 14,863 $(19,945) $18,481
Basic earnings (loss) per share:
As reported ............................... $ 1.21 $ (1.50) $ 1.39
Pro Forma ................................. $ 1.14 $ (1.53) $ 1.38
Diluted earnings (loss) per share:
As reported ............................... $ 1.20 $ (1.50) $ 1.39
Pro Forma ................................. $ 1.14 $ (1.53) $ 1.38
16
8
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 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:
1998 1997 1996
------- ------- -------
Expected lives .................... 5 years 5 years 5 years
Risk-free interest rate ........... 5.3% 6.6% 6.3%
Expected volatility ............... 34.2% 29.5% 29.6%
Dividend yield .................... 3.0% 3.3% 2.8%
The weighted average fair values of options granted during 1998, 1997 and 1996
were $9.45, $6.15 and $7.23, respectively.
During 1998 and 1997, the Company issued 16,836 and 31,396 shares, respectively,
of restricted Common Stock under the Long Term Incentive Stock Option Plans as
compensation for certain key salaried employees. These shares carry dividend and
voting rights. Sale of these shares is restricted prior to the date of vesting,
which is five years from the date of grant. Shares issued under this plan were
recorded at their fair market value on the date of the grant with a
corresponding charge to stockholders' equity. The unearned portion is being
amortized as compensation expense on a straight-line basis over the related
vesting period. Compensation expense related to these grants was $204 in 1998
and $11 in 1997.
The Company's Board of Directors adopted a shareholders rights plan in 1998. If
a person or group acquires beneficial ownership of 20% or more of the Common
Stock outstanding, each right distributed under the plan will entitle its holder
(other than such person or group) to purchase, at the right's exercise price, a
number of shares of the Company's Common Stock having a market value of twice
such price.
I. Other Income, Net
1998 1997 1996
-------- -------- --------
Dividends ......................................... $ 825 $ 1,141 $ 1,497
Interest (principally tax exempt) ................. 3,195 3,328 2,361
Equity in undistributed income
of affiliated companies ......................... 5,784 5,926 5,422
Net gain from sales of investment
securities ...................................... 1,446 1,804 6,720
Corporate owned life insurance,
net of interest expense ......................... (91) (1,148) (2,125)
Other, net ........................................ 286 2,316 1,107
-------- -------- --------
$ 11,445 $ 13,367 $ 14,982
======== ======== ========
Interest expense on corporate owned life insurance policy loans was $5,450 in
1998, $7,295 in 1997, and $6,377 in 1996.
J. Restructuring, Impaired Fixed Asset and
Other Unusual and Nonrecurring Charges
During 1997, the Company restructured certain of its operations and recorded
restructuring and impaired fixed asset charges of $20,646. The restructuring
plan was the result of management's decision to focus on its core Bassett
product line and efforts to improve operating efficiencies. The principal
actions of the plan included the closure or sale of 14 manufacturing facilities,
elimination of three product lines (National/Mt. Airy, Impact and Veneer
Production) and the severance of approximately 1,000 employees. The major
components of the restructuring and impairment of fixed assets charges and the
remaining reserves as of November 28, 1998 and November 30, 1997, are as
follows:
Write-down of
property and
equipment to Reserves 1997 Reserves 1998
Original net realizable utilized Reserve utilized Reserve
charges value in 1997 balance in 1998 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 3,507 1,403
Lease exit costs...... 614 -- -- 614 190 424
Other................. 986 -- 261 725 63 662
------- ------- ------ ------ ------ ------
$20,646 $13,362 $1,035 $6,249 $3,760 $2,489
======= ======= ====== ====== ====== ======
The Company completed the closure of five of the 14 manufacturing facilities,
disposed of one of the facilities and severed approximately 600 employees during
1997. Substantially all remaining restructuring activities were completed in
1998. Net sales and operating income from activities that were discontinued were
$2,180 and $0, respectively, in 1998, $46,221 and $(31,602), respectively, in
1997 and $60,119 and $(1,867), respectively, in 1996.
As a result of the plan, additional unusual and nonrecurring charges including
moving costs, plant consolidation inefficiencies and inventory write-downs
totaling $4,669 were recorded in 1998. Of these costs, $3,887 are included in
cost of goods sold and $782 are included in selling, general and administrative
expenses in the accompanying 1998 consolidated statement of operations. After an
income tax benefit of $1,821, the additional nonrecurring charges of $4,669
reduced fiscal year 1998 net income by $2,848 or $0.22 per share. Additional
unusual and nonrecurring charges recorded in 1997 totaled $31,654. Of these
costs, $28,325 are included in cost of goods sold and $3,329 are included in
selling, general and administrative expenses in the accompanying 1997
consolidated statement of operations. After an income tax benefit of $22,027,
the restructuring and impaired fixed asset charges of $20,646 and additional
nonrecurring charges of $31,654 reduced fiscal year 1997 net income by $30,273
or $2.32 per share.
In addition, the Company incurred other unusual and nonrecurring charges during
1997 of $12,500 related to customer bankruptcies, environmental matters and
issues related to the 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 $.58 per
share.
17
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
Bassett Furniture Industries, Incorporated and Subsidiaries
(dollars in thousands except per share data)
K. Contingencies
A suit was filed in June, 1997, in the Superior Court of the State of California
for the County of Los Angeles (the "Superior Court") against the Company, two
major retailers and certain current and former employees of the Company. The
suit sought certification of a class consisting of all consumers who purchased
certain mattresses and box springs from the major retailers that were
manufactured by a subsidiary of the Company, E.B. Malone Corporation, with
different specifications than those originally manufactured for sale by these
retailers. The suit alleged various causes of action, including negligent
misrepresentation, breach of warranty, violations of deceptive practices laws
and fraud. Plaintiffs sought compensatory damages of $100 million and punitive
damages. In 1997, the Superior Court twice sustained the Company's demurrers to
several of plaintiffs' causes of action, but granted the plaintiffs leave to
amend. In February, 1998, the Superior Court sustained the Company's demurrers
to many of the individual claims, this time without granting plaintiffs leave to
amend. The Superior Court also sustained the Company's demurrer to the class
action allegations in plaintiffs' Third Amended Complaint, without granting
leave to amend, and transferred the entire action out of the class action
department. Plaintiffs have filed a notice of appeal from the class action
ruling. Plaintiffs also filed a petition for a writ of mandamus or other
extraordinary relief seeking immediate review of the other demurrer rulings,
which petition was denied. The suit was subsequently transferred from the
Superior Court for the County of Los Angeles to the Superior Court for Orange
County. After the case was transferred to Orange County, the plaintiffs
stipulated to a dismissal with prejudice of all individual defendants.
Additionally, all remaining claims against the Company were stayed by the Court
pending plaintiffs' appeal of the dismissal of their class action allegations.
Although it is impossible to predict the ultimate outcome of this litigation,
the Company intends to vigorously defend this suit, because it believes that the
damages sought are unjustified and because this case is inappropriate for class
action treatment. Because the Company believes that the two major retailers were
unaware of the changes in specifications, the Company has agreed to indemnify
the two major retailers with respect to the above.
Legislation will phase out interest deductions on certain policy loans related
to Company owned life insurance (COLI) as of January 1, 1999. The Company has
recorded cumulative reductions to income tax expense of approximately $8,000 as
the result of COLI interest deductions through 1998. The Internal Revenue
Service (IRS), on a national level, is evaluating its position regarding the
deductibility of COLI policy loan interest for years prior to January 1, 1999.
In 1998 and 1999, the IRS issued several Technical Advice Memoranda regarding
the deductibility of certain aspects of COLI for taxpayers unrelated to the
Company. Management understands that the adverse position taken by the IRS will
be subjected to extensive challenges in court. In the event that the IRS
prevails, the outcome could result in the reversal of the income tax benefits
recorded to date plus other potential charges assessed by the IRS and state
taxing authorities, which in total could be material to future results of
operations.
The Company is also involved in various other claims and actions, including
environmental matters at certain of its plant facilities, which arise in the
normal course of business. Although the final outcome of these legal and
environmental matters cannot be determined, based on the facts presently known,
it is management's opinion that the final resolution of these matters will not
have a material adverse effect on the Company's financial position or future
results of operations.
L. Earnings Per Share
The following table reconciles basic and diluted earnings per share:
Net Income Earnings (loss)
Shares (loss) Per Share
----------- ------------- --------------
1998:
Basic EPS 12,984,639 $ 15,717 $ 1.21
Add effect of
dilutive securities:
Options and
Restricted Stock 80,449 -- (.01)
----------- ------------ -------------
Diluted EPS 13,065,088 $ 15,717 $ 1.20
=========== ============ =============
1997:
Basic EPS 13,045,789 $ (19,609) $ (1.50)
Add effect of
dilutive securities:
Options and
Restricted Stock 5,377 -- --
----------- ------------ -------------
Diluted EPS 13,051,166 $ (19,609) $ (1.50)
=========== ============ =============
1996:
Basic EPS 13,351,585 $ 18,501 $ 1.39
Add effect of
dilutive securities:
Options and
Restricted Stock -- -- --
----------- ------------ -------------
Diluted EPS 13,351,585 $ 18,501 $ 1.39
=========== ============ =============
M. Subsequent Event
In December 1998, the Company signed a letter of intent to sell substantially
all of the assets and certain liabilities of its Mattress Division to a new
company to be formed by LIS Corporation (NewCo). If the deal is consummated,
NewCo will supply mattresses under the Bassett brand name and the Company will
receive quarterly royalty fees as part of a five-year licensing agreement. Net
sales and operating income for the mattress division were $39,133 and $1,026 in
1998, $53,977 and $1,420 in 1997 and $56,016 and $2,650 in 1996. Net assets for
the division approximated $11,000 as of November 28, 1998, and $12,000 at
November 30, 1997.
18
10
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
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 28, 1998 and November 30, 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
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 audits. The accompanying 1996 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 audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the 1998 and 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 28, 1998 and November
30, 1997, and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Greensboro, North Carolina,
January 12, 1999.
19
11
OTHER BUSINESS DATA
Bassett Furniture Industries, Incorporated and Subsidiaries (dollars in
thousands except per share data) Selected Financial Data
Selected Financial Data
1998 1997 1996 1995 1994
---------- --------- ---------- ---------- ----------
Net sales.......................... $ 397,557 $ 446,893 $ 450,717 $ 490,817 $ 510,561
Cost of sales...................... $ 323,904 $ 396,875 $ 379,259 $ 407,750 $ 419,394
Operating profit (loss)............ $ 9,651 $ (55,322)(1) $ 7,306 $ 17,129 $ 25,123
Other income....................... $ 11,445 $ 13,367 $ 14,982 $ 1 3,000 $ 9,657
Income (loss) before income taxes.. $ 21,096 $ (41,955)(1) $ 22,288 $ 30,129 $ 34,780
Income taxes....................... $ 5,379 $ (22,346) $ 3,787 $ 7,226 $ 9,804
Net income (loss).................. $ 15,717 $ (19,609)(1) $ 18,501 $ 22,903 $ 24,466
Diluted earnings (loss) per share.. $ 1.20 $ (1.50)(1) $ 1.39 $ 1.63 $ 1.71
Cash dividends declared............ $ 10,393 $ 13,041 $ 10,626 $ 11,197 $ 11,411
Cash dividends per share........... $ .80 $ 1.00 $ .80 $ .80 $ .80
Total assets....................... $ 321,514 $ 320,325 $ 335,166 $ 346,720 $ 340,498
Current ratio...................... 3.21 to 1 4.12 to 1 6.42 to 1 5.79 to 1 5.67 to 1
Book value per share............... $ 20.40 $ 20.01 $ 22.29 $ 21.88 $ 20.96
Weighted average number of shares.. 12,984,639 13,045,789 13,351,585 14,052,794 14,294,803
Quarterly Results of Operations
1998
---------------------------------------------------
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
Net sales........................................ $98,333 $98,335 $98,093 $102,796
Gross profit..................................... 17,582 18,527 17,690 19,854
Net income....................................... 3,435 3,959 3,127 5,196
Basic earnings per share....................... .26 .30 .24 .40
Diluted earnings per share..................... .26 .30 .24 .40
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)(1) (5,072) (1) (3,945)(1)
Basic earnings (loss) per share................ .26 (1.07)(1) (.39) (1) (.30)(1)
Diluted earnings (loss) per share.............. .26 (1.07)(1) (.39) (1) (.30)(1)
(1) See Note J to the Consolidated Financial Statements for a discussion of
restructuring and fixed asset impairment charges.
20
12
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Bassett Furniture Industries, Incorporated and Subsidiaries
OPERATING RESULTS - 1998 COMPARED WITH 1997
Net sales decreased 11% to $397.6 million in 1998, from $446.9 million in 1997.
The sales decline reflects the elimination in 1997 of three manufacturing
divisions (Impact, National/Mt. Airy and Veneer Production) that did not
contribute adequately to earnings. Net sales from discontinued activities were
$46.2 million in 1997. Opening 17 Bassett Furniture Direct (BFD) stores
highlighted 1998, bringing the total BFD stores open at the end of the year to
36. On a continuing operations basis, Wood Division sales increased 15% during
1998 due to the expansion of BFD stores and improved product offerings.
Upholstery Division sales decreased 16% as the Company repositioned its account
structure to better serve key customers and improve profitability. Mattress
Division sales declined significantly due to the loss of two major customers in
1997.
The gross profit margin was 18.5% in 1998, compared to 11.2% in 1997. Results in
1997 were negatively impacted by the significant restructuring and other
nonrecurring charges discussed below. On a continuing operations basis, margins
improved from 17.8% in 1997 to 19.5% in 1998 as plant consolidations and better
production practices continue to improve operating efficiencies. Nonrecurring
charges were $4.7 million in 1998, below the $10.5 million management had
estimated, due to a more aggressive schedule of disposing of and selling closed
plants. Substantially all restructuring activities were completed in 1998.
Operating income was $9.7 million in 1998 compared to an operating loss of $55.3
million in 1997. $64.8 million of restructuring and nonrecurring charges were
included in the 1997 results. On a continuing operations basis, operating income
improved 51% and operating income margin increased from 2.1% of sales in 1997 to
3.6% of sales in 1998, due principally to gross margin improvement in wood
operations and elimination of operations which did not contribute adequately to
earnings.
Other income decreased from $13.4 million in 1997 to $11.4 million in 1998.
Gains from the sales of investment securities were lower in 1998 as management
decided against further liquidations of the investment portfolio in 1998. In
addition, the Company recorded a $2 million reserve as an impairment for an
investment in an affiliated company. Note I in the "Notes to Consolidated
Financial Statements" provides the components of other income for the last three
years.
The effective tax rate was 25.5% in 1998 compared to (53.3%) in 1997. The
unusual rate for 1997 was a result of the restructuring, impaired fixed asset
and other nonrecurring charges incurred in 1997. The 1998 effective tax rate was
lower than the statutory federal income tax rate due to exclusions for tax
exempt and undistributed affiliate income and the Company's corporate owned life
insurance plan. Note F in the "Notes to Consolidated Financial Statements"
contains complete disclosure of the Company's income tax status for the past
three years.
OPERATING RESULTS - 1997 COMPARED TO 1996
Net sales decreased 0.9% to $446.9 million in 1997 from $450.7 million in 1996.
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 $9.9 million 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 was appointed in both the Upholstery and
Mattress Divisions and significant changes in the sales force were undertaken to
improve penetration of selected markets.
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, and the remaining which were closed in 1998. Of the 14
closed plants, the production capabilities of 11 were consolidated into ongoing
facilities.
As a result of the execution of these plans, the Company recorded a $20.6
million 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 $44.2 million in charges related to
consolidation inefficiencies, inventory write-downs, customer bankruptcies,
environmental matters and the Mattress Division issue as described in Note K 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.
Gross profit margin decreased from 17.4% in 1996 to 11.2% in 1997. This decrease
was attributable primarily to the restructuring and other unusual and
nonrecurring charges, with $29.3 million 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.
The 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 $14.8 million 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.
21
13
Management's Discussion and Analysis -- Continued
Bassett Furniture Industries, Incorporated and Subsidiaries
Other income was down $1.6 million from the 1996 level. Gains from the sale of
investment securities declined $4.9 million 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 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.
The effective income tax rate for 1997 was (53.3)% compared with 17.0% in 1996.
The unusual rate for 1997 was a result of the restructuring, impaired fixed
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.
LIQUIDITY AND CAPITAL RESOURCES:
Cash provided by operating activities was $4.5 million in 1998 compared with
$21.3 million in 1997 and $25.5 million in 1996. The decrease was primarily
attributable to the increases in receivables and inventories necessary to fund
the BFD expansion discussed above. In addition, expenses related to plant
closings and transition costs were paid in 1998. In 1997, inventory decreases,
as a result of the discontinued divisions and plants, totaling $25.4 million
were a significant source of working capital.
The Company invested $22.6 million in property and equipment in 1998. This
significant increase in capital spending included amounts for the first Company
owned BFD store, the Company's new enterprise-wide information systems, new
manufacturing equipment and replacing certain boilers to enhance the
environmental efficiencies of the facilities. The Company plans to invest
approximately $50 to $60 million per year over the next few years to
aggressively execute its BFD expansion. The Company's solid financial position
with significant liquidity and no debt affords it many options. Management
intends to examine opportunities to strengthen its balance sheet and increase
shareholder value which may require debt financing. The Company has not
typically used the debt or equity markets as sources of funds or capital.
The Company purchased and retired 185,300 shares of its Common Stock during
1998. These purchases were part of the Company's stock repurchase program,
approved in 1998, which allows the Company to repurchase up to 1.3 million
shares for an aggregate purchase price not to exceed $40 million. The average
cost of the shares purchased was $25.78, resulting in a total expenditure of
$4.8 million. In 1997, the Company purchased and retired 60,000 shares for $1.4
million, while in 1996, 584,343 shares were purchased and retired for $14.1
million.
The current ratio for the past two years was 3.21 to 1 and 4.12 to 1,
respectively. Working capital was $98.9 million at November 28, 1998 and $149.3
million at November 30, 1997. This decrease is primarily due to the Company's
change in investment strategies during 1998 partially offset by increases in
inventories and receivables to fund the BFD expansion. Cash provided by
operating activities is expected to be adequate for normal future cash
requirements.
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 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.
As a result of legislation that will phase out interest deductions on certain
policy loans related to Company owned life insurance (COLI), the Company expects
that its effective income tax rates will increase in future years. The Company
has recorded cumulative reductions to income tax expense of approximately $8
million as the result of COLI interest deductions through 1998. The Internal
Revenue Service, on a national level, is evaluating its position regarding the
deductibility of COLI policy loan interest for years prior to January 1, 1999.
In 1998 and 1999, the IRS issued several Technical Advice Memoranda regarding
the deductibility of certain aspects of COLI for taxpayers unrelated to the
Company. Management understands that the adverse position taken by the IRS will
be subjected to extensive challenges in court. In the event that the IRS
prevails, the outcome could result in the reversal of the income tax benefits
recorded to date plus other potential charges assessed by the IRS and state
taxing authorities, which in total could be material to 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
management believes that appropriate and timely actions are being taken. 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 1999 that will provide solutions to
these issues. In addition, the Company purchased an enterprise system in 1998,
which will be implemented prior to year 2000, which will be in compliance with
Year 2000 issues. The most significant step in accomplishing this goal was
completed in the first quarter of 1998 when a comprehensive enterprise system
(which had been installed in over 4,400 companies and is Year 2000 compliant)
was purchased; implementation began immediately and should be completed in the
fourth quarter of 1999. Earlier in 1998, the Company engaged a consultant,
knowledgeable about the enterprise system being installed, to advise and assist
in the installation and implementation of the system. The Company has made a
thorough survey to identify all microcontrollers that are embedded within
22
14
Management's Discussion and Analysis -- Continued
Bassett Furniture Industries, Incorporated and Subsidiaries
equipment to determine compliance in this area. All microcontrollers that were
identified as non-compliant were or will be replaced. The Company now has a
verification program to ensure that all microcontrollers have been properly
identified and replaced.
The Company continues to work with its customers, suppliers and third-party
service providers to identify external weaknesses and provide solutions that
will prevent the disruption of business activities at that time; it does not
believe that it will be significantly affected by direct suppliers of raw
materials or supplies that will be non-compliant. However, the Company cannot
guarantee that Year 2000 related systems or hardware issues of its business
partners will be corrected in a timely manner or that the failure of its
business partners to correct these issues would not have a material adverse
effect on its future results of operations or financial condition.
Management believes that the most likely "worst case scenario" will involve the
failure of service providers to be compliant, thereby potentially causing
business interruptions in the Company's normal channels of supply and
distribution. The Company does not believe that it will be significantly
affected by non-compliance by countries outside the United States.
The Company is developing a contingency plan in the event that a business
interruption caused by Year 2000 problems should occur. Contingency plans are in
place for all information technology systems. The Company is preparing to
upgrade its existing computer systems in order to ensure compliance. Management
is researching key raw materials markets to ensure that the Company is
adequately supplied in the event that a key supplier is not compliant.
The Company does not expect the cost of implementation to have a material
adverse effect on its future results of operations, liquidity or capital
resources. The total cost of the Year 2000 project is estimated at $4.6 million.
This total includes the new enterprise system that was purchased during 1998,
which was not purchased to achieve Year 2000 compliance in the Company's
information systems. Instead it was purchased to provide management with the
information and tools that it needs to better manage the Company. The Year 2000
problem has slightly accelerated the timetable for implementation, however. Of
the total project cost, $3.5 million represents the purchase of new software and
hardware, which will be capitalized. The remaining has been and will be expensed
as incurred during 1998 and 1999, respectively. As of the end of the year, the
Company has spent approximately $2.3 million on the project.
MARKET RISK
The Company has significant investments in both equity securities and municipal
securities. These are summarized in Note C to the Consolidated Financial
Statements. The Company does not use these securities for trading purposes and
is not a party to any leveraged derivatives. For securities held, the Company
utilizes a sensitivity analysis technique to evaluate the effect that
hypothetical changes in market prices will have on the Company's investment
securities. At November 28, 1998, the potential change in fair value of equity
securities, assuming a 10% change in market prices was approximately $5
million. This amount is not significant compared with the overall financial
position of the Company.
In addition, the Company has investments in affiliated companies accounted for
under the equity method of accounting as described in Note D to the
Consolidated Financial Statements.
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.
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INVESTOR INFORMATION
CORPORATE INFORMATION
The company's annual report and proxy statement together contain substantially
all the information presented in the Form 10-K report filed with the Securities
and Exchange Commission. Individuals who wish to receive the Form 10-K or other
corporate literature should contact Grover S. Elliott, Vice President, Finance
and Investor Relations at 336-725-7996.
MARKET AND DIVIDEND INFORMATION
Bassett's common stock trades on the NASDAQ national market system under the
symbol BSET. The company had approximately 1,752 registered stockholders at
November 30, 1998. 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 1998 1997 1998 1997
- ------- ---- ---- ---- ----
HIGH LOW HIGH LOW
First $31.25 $25.63 $25.50 $22.25 $.20 $.40
Second 33.50 29.34 25.75 22.38 .20 .20
Third 31.88 24.13 30.75 26.00 .20 .20
Fourth 29.69 19.94 29.50 26.63 .20 .20
INVESTOR INQUIRIES
Securities analysts, portfolio managers and other representatives of financial
institutions seeking information about the corporation should contact Grover S.
Elliott, Vice President, Finance and Investor Relations at 336-725-7996.
STOCKHOLDER INQUIRIES
Stockholders with inquiries relating to stockholder records, stock transfers,
change of ownership, change of address or dividend payments should write to Jane
Wilson at the corporate headquarters.
ANNUAL MEETING
The Bassett Annual Meeting of Shareholders will be held Tuesday, March
30, 1999, at 11:30 a.m. at the company's showroom building in Thomasville, North
Carolina.
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.
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