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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 2002 Commission File No. 0-209
BASSETT FURNITURE INDUSTRIES, INCORPORATED
(Exact name of registrant as specified in its charter)
VIRGINIA 54-0135270
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3525 FAIRYSTONE PARK HIGHWAY
BASSETT, VIRGINIA 24055
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 276/629-6000
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Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange
Title of each class: on which registered
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Common Stock ($5.00 par value) NASDAQ
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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 at least the past 90 days.
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X]
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant as of February 18, 2003 was
$150,794,189.
The number of shares of the Registrant's common stock outstanding on
February 18, 2003 was 11,599,553.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Bassett Furniture Industries, Incorporated Annual
Report to Stockholders for the year ended November 30, 2002 (the
"Annual Report") are incorporated by reference into Parts I and II of
this Form 10-K.
(2) Portions of the Bassett Furniture Industries, Incorporated definitive
Proxy Statement for its 2003 Annual Meeting of Stockholders to be held
March 25, 2003, filed with the Securities and exchange Commission
pursuant to Regulation 14A under the Securities Exchange Act of 1934
(the "Proxy Statement") are incorporated by reference into Part III of
this Form 10-K.
PAGE 2
PART I
ITEM 1. BUSINESS
(dollar amounts in thousands except per share data)
GENERAL DEVELOPMENT OF BUSINESS
Bassett Furniture Industries Inc., ("Bassett" or the "Company") based
in Bassett, Va., is a leading manufacturer and marketer of branded
home furnishings. Bassett's products, designed to provide quality,
style and value, are sold through Bassett Furniture Direct(TM)
stores, @t Home with Bassett(R) galleries, and other furniture and
department stores. Bassett was founded in 1902 and incorporated under
the laws of Virginia in 1930.
Material Changes in the Development of Business in the last five
years are as follows:
The Bassett Furniture Direct store program, which began in 1997,
entailed not only the creation of a new prototype store, but also
includes an internal, cultural transformation aimed at re-focusing
company practices and strategies to the ultimate end user, the
consumer. The strategy also focused on re-styling the Bassett lines
and suites with accessories. Bassett Furniture Direct acts as both a
furniture design center and a moderate price point leader - two
characteristics that combined with custom product and quick delivery
offer the Company a unique selling proposition in the furniture
industry.
There have been two significant business developments that have
materially affected the Company's operations over the last five
years. First, the Company has created and re-channeled sales through
a vertically integrated retail sales network. This strategy both
builds on the Company's strengths (brand name, balance sheet, product
offerings) and better positions the Company to capitalize on the
changing furniture retail environment. The independently owned
licensee stores, known as Bassett Furniture Direct, accounted for 45%
of the Company's sales in 2002. There were 85 stores operating at
November 30, 2002. Second, the Company has restructured production
capacities and eliminated costs to closely align manufacturing
capabilities with the Company's target markets. These efforts have
resulted in the elimination of approximately 4,200 salaried and
hourly positions over the last five years.
The Company closed its California upholstery plant during the fourth
quarter of 2002 and consolidated production in its two remaining
upholstery manufacturing facilities in North Carolina. The Company
incurred restructuring charges of $1,251, which relate entirely to
severance and employee benefit costs for approximately 200 employees.
Effective March 4, 2002, the Company purchased five stores in North
Carolina and Virginia from LRG Furniture, LLC, an affiliate of the
Company, for net book value (which approximated $0). Included in this
transaction were inventories of $3,439, payables of $4,213 and notes
payable to bank of $1,189.
Subsequent to November 30, 2002, the Company announced that it would
close its wood manufacturing plant in Dublin, Georgia, in order to
better match production capacity to current demand levels. The
Company anticipates recording a charge of approximately $3,200 in the
first quarter of 2003 representing a $1,500 write-down of property
and equipment and $1,700 of severance and related employee benefit
costs for 320 employees associated with the closure.
The Company restructured production capacities for its Wood Division
in 2001. During the first quarter, production was moved from one
facility to another and a wood manufacturing facility was identified
for closure and was subsequently closed in the second quarter.
Additionally, 60 corporate office positions were eliminated in the
first and second quarters of 2001. Ongoing efforts to match
production with demand, offer more competitively priced products and
operate more efficient manufacturing facilities resulted in the
announcement and subsequent closure of
PAGE 3
two additional facilities in Bassett, Virginia during the third
quarter of 2001. Production has been moved to other manufacturing
facilities in Virginia or has been outsourced. Approximately 800
positions were eliminated as a result of this restructuring activity.
Restructuring charges of $6,952 were recognized in 2001. The Company
also recorded unusual and non-recurring charges of $1,051 for
inventory losses related to discontinued product. This amount is
included in 2001 cost of sales.
The Company made a decision in late 2000 to consolidate production in
its Wood Division. This included transferring certain products to
different facilities, reducing one facility to rough-end operations
only, and eliminating approximately 300 salaried and hourly
positions. As a result, the Company recorded a restructuring charge
in 2000 of $6,680, of which, $5,800 related to the write-down of
property and equipment and $880 related to severance and related
employee benefits costs.
Early in fiscal year 2000, the Company merged all of its eight
Company-owned Bassett Furniture Direct (BFD) stores with a licensee's
five BFD stores to form a joint venture known as the LRG Furniture,
LLC ("LRG"). Refer to Note F of the Consolidated Financial Statements
included in the Annual Report for more information about the joint
venture.
During 1999, the Company sold substantially all of the assets of its
Bedding Division to Premier Bedding Group LLC ("PBG"). The net assets
sold, which totaled $8,400, were exchanged for $6,500 in cash and a
$1,900 convertible note receivable. Refer to Note B of the
Consolidated Financial Statements included in the Annual Report for
more information about the bedding sale.
Refer to Note M of the Consolidated Financial Statements included in
the Annual Report for a detail of restructuring activity and refer to
the Management's Discussion and Analysis section of the Annual Report
for additional discussion on these topics.
OPERATING SEGMENTS
The Company's primary business is in wholesale home furnishings. The
wholesale home furnishings business is involved principally in the
manufacture, sale and distribution of furniture products to a network
of independently owned stores and stores owned by the Company and by
affiliates of the Company. The wholesale business consists primarily
of three operating segments: wood, upholstery and import. Stores
operated by the Company are included in the retail segment.
Refer to Note R of the Consolidated Financial Statements included in
the Annual Report for more information about segment information for
2000, 2001 and 2002 and refer to the Management's Discussion and
Analysis section of the Annual Report for additional discussion on
this topic.
DESCRIPTION OF BUSINESS
Bassett Furniture Industries, Incorporated (together with its
consolidated subsidiaries, "Bassett" or the "Company") is a
manufacturer, retailer and importer of quality home furnishings.
Bassett's full range of furniture products and accessories are sold
through an exclusive network of 79 independently owned and six
company-owned retail stores known as Bassett Furniture Direct ("BFD")
and over 2,000 furniture and department stores located throughout the
United States. The Company has nine domestic manufacturing
facilities.
The wood segment is engaged in the manufacture and sale of wood
furniture, including bedroom and dining suites and accent pieces, to
independent and affiliated retailers. The wood segment accounted for
49%, 57% and 62% of total net sales during 2002, 2001 and 2000,
respectively. The Company currently has six wood manufacturing
facilities. The upholstery segment is involved in the manufacture and
sale of upholstered frames and cut upholstery items having a variety
of frame and fabric options, including sofas, chairs, and love seats.
The Company
PAGE 4
currently has two upholstery manufacturing facilities. The upholstery
segment accounted for 32%, 29% and 27% of total net sales during
2002, 2001 and 2000, respectively. The import segment sources
product, principally from Asia, and sells this product to independent
and affiliated retailers. The import segment accounted for 13%, 11%
and 8% of total net sales during 2002, 2001 and 2000, respectively.
The retail segment operates six Bassett Furniture Direct stores in
North Carolina and Virginia acquired in 2001 and 2002. The retail
segment accounted for 5% of total net sales in 2002.
Raw materials used by the Company are generally available from
numerous sources and are obtained from domestic and foreign sources.
The Company sources component parts from overseas markets when it is
economically advantageous. The Company currently assembles and
finishes these imported components in several of its plants in the
United States.
The Company's trademarks, including "Bassett" and the names of its
marketing divisions, products and collections are significant to the
conduct of its business. This importance is due to consumer
recognition of the names and identification with the Company's broad
range of products. Certain of the Company's trademarks are licensed
to independent retailers for use in full store presentations and in
store gallery presentations of the Company's products. The Company
also owns certain patents and licenses that are important in the
conduct of the Company's business.
The furniture industry in which the Company competes is not
considered to be a seasonal industry. However, working capital levels
will fluctuate based on overall business conditions, and desired
service levels.
Sales to one customer (JCPenney Company) amounted to approximately
9%, 15% and 16% of gross sales in 2002, 2001 and 2000, respectively.
Additionally, sales to LRG Furniture, LLC ("LRG"), an affiliate of
the Company, were 7%, 10% and 7% of net sales in 2002, 2001, and
2000, respectively. The Company's backlog of orders believed to be
firm was $18,014 at November 30, 2002 and $19,000 at November 24,
2001. It is expected that the November 30, 2002 backlog will be
filled within the 2003 fiscal year.
The furniture industry is very competitive and there are a large
number of manufacturers both within the United States and offshore
who compete in the market on the basis of product quality, price,
style, delivery and service. Additionally, certain retailers are
increasingly sourcing imported product directly, thus bypassing
domestic furniture manufacturers. Based on annual sales revenue, the
Company is one of the largest furniture manufacturers located in the
United States. The Company has been successful in this competitive
environment because its products represent excellent value combining
attractive prices, quality and styling; prompt delivery; and
courteous service.
The furniture industry is considered to be a "fashion" industry
subject to constant fluctuations to meet changing consumer
preferences and tastes. As such, the Company is continuously involved
in the development of new designs and products. Due to the nature of
these efforts and the close relationship to the manufacturing
operations, these costs are considered normal operating costs and are
not segregated. The Company is not otherwise involved in
"traditional" research and development activities nor does the
Company sponsor research and development activities of any of its
customers.
In management's view, the Company has complied in all material
respects with all federal, state and local standards in the area of
safety, health and pollution and environmental controls. Compliance
with these standards did result in a charge to earnings in 1997 and
capital spending in 1998 and 1999, but otherwise, has not had a
material adverse effect on past earnings or competitive position. The
Company is involved in environmental matters at certain of its plant
facilities, which arise in the normal course of business. Although
the final outcome of these
PAGE 5
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.
The Company had approximately 2,700 employees at November 30, 2002.
The Company has several investments in affiliated companies,
including a minority interest in International Home Furnishings
Center, Inc. (IHFC) which is a lessor of permanent exhibition space
to furniture and accessory manufacturers. The IHFC financial
statements are included on pages F-1 to F-15. The Company owns a
majority interest in LRG Furniture, LLC, (LRG), which is a retailer
of home furnishings. The LRG financial statements are included on
pages F-16 to F-28.
FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
The Company has no foreign operations, and its export sales were
approximately $2.9 million, $3.2 million, and $4.9 million in 2002,
2001, and 2000 respectively.
ITEM 2. PROPERTIES
At November 30, 2002 the Company owned the following manufacturing
facilities, by segment:
Wood Segment:
J. D. Bassett Manufacturing Company *
Bassett, VA
Bassett Superior Lines
Bassett, VA
Bassett Chair Company *
Bassett, VA
Bassett Table Company *
Bassett, VA
Bassett Furniture Industries
Macon, GA
Bassett Dining Table Top
Martinsville, VA
Bassett Furniture Industries
Dublin, GA
Bassett Furniture Industries
Mt. Airy, NC
Bassett Fiberboard
Bassett, VA
Upholstery Segment:
Bassett Upholstery Division
Newton, NC
Bassett Upholstery Division
Hiddenite, NC
Bassett Upholstery **
Los Angeles, CA
PAGE 6
Other:
Weiman Upholstery
Christiansburg, VA
Properties designated by a single asterisk "*" have ceased manufacturing
operations and are currently either held for sale or are idle facilities in
connection with restructuring efforts. "**" Denotes held for sale.
The Company owned the real estate of certain Bassett Furniture Direct retail
stores, approximating 25,000 square feet each, in the following cities:
Real Estate:
Greenville, SC
Concord, NC
Greensboro, NC
Fredericksburg, VA
Knoxville, TN
Gulfport, MS
Chesterfield, VA
Louisville, KY
Houston, TX
In addition, the Company owns leasehold improvements in Hickory, NC,
Arlington, TX, Portland, OR, Redmond, WA, and Atlanta, GA. All of the
properties noted above are operated as Bassett Furniture Direct
stores.
The Company owns its general corporate office building, three
warehouses, and an outlet store all located in Bassett, Virginia. The
Company also owns leasehold improvements in its High Point, NC
showroom.
In general, these facilities are suitable and are considered to be
adequate for the continuing operations involved. All facilities,
except those held for sale, are in regular use and provide more than
adequate capacity for the Company's manufacturing needs.
The following facilities were sold or disposed of during 2001:
Showroom
Thomasville, NC
Bassett Upholstery
Conover, NC
Bassett Upholstery
Claremont, NC
Warehouse
Los Angeles, CA
PAGE 7
ITEM 3. LEGAL PROCEEDINGS
Subsequent to November 30, 2002, the Company reached a final
settlement with the IRS regarding the non-deductibility of interest
expense on loans associated with the Company's corporate owned life
insurance plan ("COLI" plan). The Company had sufficient reserves on
hand at November 30, 2002 to cover the negotiated settlement amount
and, as such, there will be no further tax related charges associated
with the COLI.
The Company is also involved in various claims and actions, including
environmental matters, which arise in the normal course of business.
Although the final outcome of these matters cannot be determined,
based on the facts presently known, it is management's opinion that
the final resolution of these matters will not have a material
adverse effect on the Company's financial position or future results
of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PAGE 8
ITEM 4b. EXECUTIVE OFFICERS OF THE REGISTRANT
John E. Bassett III, 44, served from 1988 to 1997 as the Vice
President and General Manager of Bassett Table and as Vice President
of Wood Manufacturing since 1997.
Jay R. Hervey, Esq., 43, was an Associate with the Richmond Office of
McGuireWoods, LLP from 1992 to 1997 and has been the General Counsel,
Vice President and Secretary for the Company since 1997.
Dennis Hoy, 44, was a furniture buyer with Marlo Furniture from 1987
until 1996 and has been with the Company since 1996, as Casegoods and
Merchandise Manager and as Vice President of Merchandising. In 1999,
he was promoted to Vice President and General Manager, Upholstery.
Matthew S. Johnson, 41, has been with the Company for 16 years, most
recently as Vice President of Wood Merchandising. In 2000, he was
promoted to Vice President of Merchandising and Design.
Mark Jordan, 49, was Director of Product Development and Plant
Manager for Ethan Allen from 1974 to 1999. In 1999 he joined the
Company as Plant Manager. In 2001, he was promoted to Vice President
of Upholstery Manufacturing and in 2002 he was elevated to Vice
President and General Manager of Upholstery.
Charles T. King, 40, was with Coopers and Lybrand from 1985 to 1988,
and McMillan, Pate and King, CPA's from 1989 to 1998 and joined the
Company in 1998 as Retail Controller. In 2001, he was promoted to
Vice President and Controller.
Barry C. Safrit, 40, was with CHF Industries from 1995 until 1998 as
Controller and as Chief Financial Officer and joined the Company as
Vice President and Chief Accounting Officer in 1998 and was promoted
to Chief Financial Officer in 2001.
Keith R. Sanders, 58, was with Ethan Allen from 1995 until 1998 as
the Vice President of Manufacturing and Vice President of Upholstery
and has been the Vice President of Upholstery Manufacturing for the
Company from 1998 to 1999. In 1999, he was promoted to Executive Vice
President, Operations.
Robert H. Spilman, Jr., 46, has been with the Company since 1984. He
was the Company's Executive Vice President of Marketing and
Merchandising from 1994 until 1997 and served as President and Chief
Operating Officer from 1997 to 2000. In 2000, he was promoted to
Chief Executive Officer and President.
Thomas R. Swanston, 71, was with Ethan Allen from 1992 until 1999 as
General Manager of Business Development, and later served as advisor
to the chairman. He joined the Company as Executive Vice President of
Sales and Marketing in 2001.
PAGE 9
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The information contained in the Annual Report under the caption
"Investor Information" with respect to number of stockholders, market
prices and dividends paid is incorporated herein by reference
thereto.
ITEM 6. SELECTED FINANCIAL DATA
The information for the five years ended November 30, 2002, contained
in "Other Business Data" in the Annual Report is incorporated herein
by reference thereto.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information contained in "Management's Discussion and Analysis of
Financial Condition and Result of Operations" in the Annual Report is
incorporated herein by reference thereto.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The information contained in "Management's Discussion and Analysis of
Financial Condition and Result of Operations" in the Annual Report is
incorporated herein by reference thereto.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and notes to consolidated
financial statements of the Registrant and its subsidiaries contained
in the Annual Report are incorporated herein by reference thereto. In
addition, financial statements of the registrant's significant
non-consolidated subsidiaries are included in this Form 10-K on pages
F-1 to F-17 and F-18 to F-36. Quarterly results of operations are
included under the caption "Other Business Data" in the Annual Report
to Shareholders and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained on pages 3 through 5 and page 12 of the
Proxy Statement under the "Election of Directors" and "Section 16 (a)
Beneficial Ownership Reporting Compliance" is incorporated herein by
reference thereto. Please see section entitled "Executive Officers of
the Registrant" in Item 4b of Part I of this report for information
concerning executive officers.
ITEM 11. EXECUTIVE COMPENSATION
The information contained on pages 6 through 12 of the Proxy
Statement under the captions "Organization, Compensation and
Nominating Committee Report," "Stockholder Return Performance Graph,"
"Executive Compensation," "Supplemental Retirement Income Plan,"
"Deferred Compensation Agreement," and "Director Compensation" is
incorporated herein by reference thereto.
PAGE 10
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained on pages 1 through 5 of the Proxy Statement
under the headings "Principal Stockholders and Holdings of
Management" and "Election of Directors" is incorporated herein by
reference thereto.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of November 30, 2002
with respect to shares of Company Common stock that may be issued
under existing equity compensation plans, including the 1993 Long
Term Incentive Stock Option Plan, the 1997 Employee Stock Plan, the
1993 Stock Plan for Non-Employee Directors, and the 2000 Employee
Stock Purchase Plan (ESPP). All equity compensation plans currently
in place have been approved by the stockholders.
(a) (b) (c)
Plan Number of Securities to Weighted Average Number of Securities
be Issued upon Exercise Exercise Price of Remaining Available for
of Outstanding Options Outstanding Options Future Issuance Under
Equity Compensation Plans
(excluding securities
reflected in column (a))
- -----------------------------------------------------------------------------------------------------------
Equity Compensation Plans 1,859,445 $21.07 659,278 (2)
Approved by Stockholders (1)
Equity Compensation Plans 0 n/a 0
Not Approved by
Stockholders (3)
==============================================================================
Total 1,859,445 659,278
==============================================================================
(1) Includes the following plans: 1993 Long Term Incentive Stock Option Plan;
1997 Employee Stock Plan; 1993 Stock Plan for Non-Employee Directors; 2000
Employee Stock Purchase Plan
(2) Includes shares available under the 1997 Plan (275,675), the 1993
Non-Employee Directors Plan (10,644) and the 2000 ESPP (372,959)
(3) There are no equity compensation plans in place not approved by
stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. CONTROLS AND PROCEDURES
a. Quarterly evaluation of the Company's Disclosure Controls. Within the
90 days prior to the date of this Annual Report on Form 10-K, the
Company evaluated the effectiveness of the design and operation of
its "disclosure controls and procedures" ("Disclosure Controls").
Disclosure Controls are procedures that are designed with the
objective of ensuring that information required to be disclosed in
our reports filed under the Securities Exchange Act of 1934 (the
"Exchange Act"), such as this Annual Report, is recorded, processed,
summarized and reported within the time periods specified in the
Securities and Exchange Commission's (SEC) rules and forms.
Disclosure Controls are also designed with the objective of ensuring
that such
PAGE 11
information is accumulated and communicated to our management,
including the CEO and CFO, as appropriate to allow timely decisions
regarding required disclosure.
The Company's management, including the CEO and CFO, does not expect
that our Disclosure Controls will prevent all error and all fraud. A
control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives
of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs.
Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company
have been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. The design of any
system of controls also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all
potential future conditions.
Based upon our controls evaluation, our CEO and CFO have concluded
that, subject to the limitations noted above, our Disclosure Controls
are effective to ensure that the information required to be disclosed
by the Company in its periodic reports is accumulated and
communicated to our management, including the CEO and CFO, as
appropriate to allow timely decisions regarding disclosure and is
recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms.
b. Changes in internal controls. There have been no significant changes
in the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of the
controls evaluation.
PAGE 12
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The following consolidated financial statements of the
registrant and its subsidiaries, included in the Annual
Report are incorporated herein by reference thereto:
Consolidated Balance Sheets--November 30, 2002 and
November 24, 2001
Consolidated Statements of Income--Years Ended
November 30, 2002, November 24, 2001 and November 25,
2000
Consolidated Statements of Stockholders' Equity--
Years Ended November 30, 2002, November 24, 2001 and
November 25, 2000
Consolidated Statements of Cash Flows-- Years Ended
November 30, 2002, November 24, 2001 and November 25,
2000
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
International Home Furnishings Center, Inc. Financial
Statements are included herein on pages F-1 to F-17.
LRG Furniture, LLC Financial Statements are included
herein on pages F-18 in F-36.
(2) Financial Statement Schedule:
Schedule II - Analysis of Valuation and Qualifying Accounts
for the years ended November 30, 2002, November 24, 2001,
and November 25, 2000
(3) Listing of Exhibits
3A. Articles of Incorporation as amended are incorporated
herein by reference to Form 10-Q for the fiscal
quarter ended February 28, 1994.
3B. By-laws as amended are incorporated herein by
reference to Form 10-K for the fiscal year ended
November 24, 2001.
4A. Credit Agreement with a Bank Group dated October 25,
2000 is incorporated herein by reference to Form 10-K
for the fiscal year ended November 25, 2000.
4B. First Amendment to Credit Agreement with a Bank Group
dated October 5, 2001, is incorporated herein by
reference to Form 10-K for the fiscal year ended
November 24, 2001.
** 10A. Bassett 1993 Long Term Incentive Stock Option Plan is
incorporated herein by reference to the Registrant's
Registration Statement on Form S-8 (no.33-52405)
filed on February 25, 1994.
** 10B. Bassett Executive Deferred Compensation Plan is
incorporated herein by reference to Form 10-K for the
fiscal year ended November 30, 1997.
PAGE 13
** 10C. Bassett Supplemental Retirement Income Plan is
incorporated herein by reference to Form 10-K for
the fiscal year ended November 30, 1997.
** 10D. Bassett 1993 Stock Plan for Non-Employee
Directors as amended is incorporated herein by
reference to Form 10-K for the fiscal year ended
November 25, 2000.
** 10E. Bassett 1997 Employee Stock Plan is incorporated
herein by reference to the Registrant's Registration
Statement on Form S-8 (no. 333-60327) filed on
July 31, 1998.
13. Portions of the Registrant's Annual Report to
Stockholders for the year ended November 30, 2002.
21. List of subsidiaries of the Registrant
23A. Consent of Independent Auditors.
23B. Consent of Independent Auditors.
23C. Notice Regarding Lack of Consent of Arthur Andersen
**Management contract or compensatory plan or arrangement of the
Company.
(b) Form 8-K was filed May 14, 2002 indicating a change in the
Company's auditors.
PAGE 14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 (Registrant)
By: /s/ Paul Fulton Date: 2-21-03
--------------------------------------- ------------------
Paul Fulton
Chairman of the Board of Directors
By: /s/ Robert H. Spilman Jr. Date: 2-20-03
--------------------------------------- ------------------
Robert H. Spilman Jr.
President and Chief Executive Officer
Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By: /s/ Peter W. Brown Date: 2-20-03
------------------------------------------ ------------------
Peter W. Brown
Director
By: /s/ Willie D. Davis Date: 2-20-03
------------------------------------------ ------------------
Willie D. Davis
Director
By: /s/ Alan T. Dickson Date: 2-20-03
------------------------------------------ ------------------
Alan T. Dickson
Director
By: Date:
------------------------------------------ ------------------
Howard H. Haworth
Director
By: /s/ Michael E. Murphy Date: 2-20-03
------------------------------------------ ------------------
Michael E. Murphy
Director
By: /s/ Dale C. Pond Date: 2-20-03
------------------------------------------ ------------------
Dale C. Pond
Director
By: /s/ David A. Stonecipher Date: 2/20/03
------------------------------------------ ------------------
David A. Stonecipher
Director
By: /s/ Barry C. Safrit Date: 2-20-03
------------------------------------------ ------------------
Barry C. Safrit
Vice President and Chief Financial Officer
PAGE 15
CERTIFICATIONS
I, Robert H. Spilman, Jr., President and Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Bassett Furniture
Industries, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
February 20, 2003
/s/ Robert H. Spilman, Jr.
-------------------------------------
Robert H. Spilman, Jr.
President, Chief Executive Officer
PAGE 16
CERTIFICATIONS
I, Barry C. Safrit, Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Bassett Furniture
Industries, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
February 20, 2003
/s/ Barry C. Safrit
-----------------------------------------
Barry C. Safrit
Vice President, Chief Financial Officer
PAGE 17
ANNUAL REPORT ON FORM 10-K
ITEM 15(a)(1)
CERTAIN EXHIBITS
YEAR ENDED NOVEMBER 30, 2002
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
BASSETT, VIRGINIA
INTERNATIONAL HOME FURNISHINGS
CENTER, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 2002, 2001 AND 2000
INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Page No.
--------
INDEPENDENT AUDITORS' REPORT........................................................ 1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets...................................................... 2
Consolidated Statements of Income................................................ 3
Consolidated Statements of Stockholders' Equity (Deficit)........................ 4
Consolidated Statements of Cash Flows............................................ 5
Notes to Consolidated Financial Statements....................................... 7
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
International Home Furnishings Center, Inc.
High Point, North Carolina
We have audited the accompanying consolidated balance sheets of International
Home Furnishings Center, Inc. and subsidiary as of October 31, 2002 and 2001 and
the related consolidated statements of income, stockholders' equity (deficit),
and cash flows for each of the three years in the period ended October 31, 2002.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of International Home
Furnishings Center, Inc. and subsidiary at October 31, 2002 and 2001 and the
results of their operations and their cash flows for each of the three years in
the period ended October 31, 2002 in conformity with accounting principles
generally accepted in the United States of America.
/s/ Dixon Odom, PLLC
High Point, North Carolina
November 25, 2002
----------
PAGE 1
F-2
INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 2002 AND 2001
===============================================================================
ASSETS 2002 2001
-------------- --------------
CURRENT ASSETS
Cash and cash equivalents $ 4,637,147 $ 8,848,172
Restricted cash 18,956,684 24,479,827
Short-term investments 103,993 98,570
Receivables
Trade 2,528,957 2,552,434
Interest 7,126 10,677
Deferred income tax benefit 2,959,000 3,028,000
Prepaid expenses 302,233 192,271
-------------- --------------
TOTAL CURRENT ASSETS 29,495,140 39,209,951
-------------- --------------
PROPERTY AND EQUIPMENT, at cost
Land and land improvements 3,380,218 3,293,772
Buildings, exclusive of theater complex 88,959,454 88,350,771
Furniture and equipment 3,827,883 3,707,139
Construction in progress 179,518 -
-------------- --------------
96,347,073 95,351,682
Accumulated depreciation (48,481,947) (46,121,761)
-------------- --------------
47,865,126 49,229,921
-------------- --------------
OTHER ASSETS
Theater complex, at cost less amortization 847,089 890,344
Deferred income tax benefit 600,680 -
Deferred financing costs, net of accumulated amortization of $1,121,845 and
$508,803 at October 31, 2002 and 2001, respectively 1,858,390 2,411,052
Interest rate cap agreement, at fair value 149,636 46,613
-------------- --------------
3,455,795 3,348,009
-------------- --------------
$ 80,816,061 $ 91,787,881
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES $ 1,017,609 $ 1,014,684
Accounts payable, trade
Accrued property taxes 1,877,578 1,840,732
Other accrued expenses 802,814 851,281
Rents received in advance 7,586,834 7,765,348
Income taxes payable 1,308,304 1,949,956
Current maturities of long-term debt 2,880,770 2,627,187
-------------- --------------
TOTAL CURRENT LIABILITIES 15,473,909 16,049,188
-------------- --------------
LONG-TERM DEBT 127,674,565 130,555,336
-------------- --------------
OTHER LONG-TERM LIABILITIES
Supplemental retirement benefits 2,525,475 1,924,223
Interest rate floor agreement, at fair value 3,035,082 -
Deferred income taxes - 587,000
-------------- --------------
5,560,557 2,511,223
-------------- --------------
COMMITMENTS (Notes G and L)
STOCKHOLDERS' DEFICIT
Common stock, $5 par value, 1,000,000 shares authorized, 481,628 and 527,638
shares issued in 2002 and 2001, respectively 2,408,140 2,638,190
Additional paid-in capital 154,592 169,360
Accumulated deficit (68,604,302) (60,135,416)
Accumulated other comprehensive loss (1,851,400) -
-------------- --------------
(67,892,970) (57,327,866)
-------------- --------------
$ 80,816,061 $ 91,787,881
============== ==============
PAGE 2
F-3
INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED OCTOBER 31, 2002, 2001 AND 2000
===============================================================================
2002 2001 2000
-------------- -------------- --------------
OPERATING REVENUES
Rental income $ 35,822,245 $ 34,682,203 $ 31,620,514
Other revenues 6,943,477 6,973,398 6,922,474
-------------- -------------- --------------
TOTAL OPERATING REVENUES 42,765,722 41,655,601 38,542,988
-------------- -------------- --------------
OPERATING EXPENSES
Compensation and benefits 5,293,040 4,642,208 4,242,802
Market and promotional 2,348,642 2,589,746 2,593,966
Maintenance and building costs 1,211,953 1,012,997
858,194
Depreciation expense 2,387,170 2,647,449 2,179,109
Rent 152,234 152,234 152,234
Property taxes and insurance 2,546,391 2,269,932 1,997,121
Utilities 1,739,924 1,872,132 1,655,730
Other operating costs 1,069,496 1,373,183
535,776
-------------- -------------- --------------
TOTAL OPERATING EXPENSES 16,748,850 16,559,881 14,214,932
-------------- -------------- --------------
INCOME FROM OPERATIONS 26,016,872 25,095,720 24,328,056
-------------- -------------- --------------
NONOPERATING INCOME
Interest income 393,601 1,071,901 808,703
Dividend income 6,275 4,597 4,652
-------------- -------------- --------------
TOTAL NONOPERATING INCOME 399,876 1,076,498 813,355
-------------- -------------- --------------
NONOPERATING EXPENSES
Interest expense 6,130,042 7,870,387 4,109,489
-------------- -------------- --------------
TOTAL NONOPERATING EXPENSES 6,130,042 7,870,387 4,109,489
-------------- -------------- --------------
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 20,286,706 18,301,831 21,031,922
PROVISION FOR INCOME TAXES 8,000,000 7,166,000 8,101,000
-------------- -------------- --------------
INCOME BEFORE EXTRAORDINARY ITEM 12,286,706 11,135,831 12,930,922
EXTRAORDINARY ITEM
Loss on early extinguishment of debt, net
of income tax benefit of $1,217,000 (1,886,426)
- -
-------------- -------------- --------------
NET INCOME $ 12,286,706 $ 9,249,405 $ 12,930,922
============== ============== ==============
BASIC EARNINGS PER COMMON SHARE
Income before extraordinary item $ 25.13 $ 21.11 $ 24.51
Extraordinary item - (3.58) -
-------------- -------------- --------------
Net income $ 25.13 $ 17.53 $ 24.51
============== ============== ==============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 488,939 527,638 527,638
============== ============== ==============
PAGE 3
F-4
INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED OCTOBER 31, 2002, 2001 AND 2000
===============================================================================
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN ACCUMULATED COMPREHENSIVE
STOCK CAPITAL DEFICIT LOSS TOTAL
---------- ---------- ------------ ------------- ------------
BALANCE (DEFICIT), OCTOBER 31, 1999 $2,638,190 $169,360 $(21,637,373) $ - $(18,829,823)
Net income - - 12,930,922 - 12,930,922
---------- -------- ------------ ----------- ------------
BALANCE (DEFICIT), OCTOBER 31, 2000 2,638,190 169,360 (8,706,451) - (5,898,901)
Net income - - 9,249,405 - 9,249,405
Dividends paid ($115.00 per common share) - - (60,678,370) - (60,678,370)
---------- -------- ------------ ----------- ------------
BALANCE (DEFICIT), OCTOBER 31, 2001 2,638,190 169,360 (60,135,416) - (57,327,866)
Purchase and retirement of 46,010 shares
of common stock (230,050) (14,768) (8,755,349) - (9,000,167)
Dividends paid ($24.916 per common share)
- - (12,000,243) - (12,000,243)
Comprehensive income (loss):
Net income
- - 12,286,706 - 12,286,706
Other comprehensive loss:
Increase in fair value of interest
rate floor hedging activity, net of
deferred tax of $1,491,866 - - - (2,333,431) (2,333,431)
Reclassification adjustment for
losses recognized in net income,
net of deferred tax of $308,184 - - - 482,031 482,031
---------- -------- ------------ ----------- ------------
Total comprehensive income 10,435,306
------------
BALANCE (DEFICIT), OCTOBER 31, 2002 $2,408,140 $154,592 $(68,604,302) $(1,851,400) $(67,892,970)
========== ======== ============ =========== ============
PAGE 4
F-5
INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 2002, 2001 AND 2000
2002 2001 2000
---------------- ---------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 12,286,706 $ 9,249,405 $ 12,930,922
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 3,043,467 3,209,295 2,301,760
Decrease in fair value of interest rate cap agreement 729,979 265,887 -
Decrease in fair value of interest rate floor agreement (833,000) - -
Loss on early extinguishment of debt - 3,103,426 -
Provision for losses on accounts receivable 19,828 25,154 6,341
(Gain) loss on disposal of assets (3,000) 45,352 (3,134)
Deferred income taxes 65,000 (2,931,000) (354,000)
Change in assets and liabilities
(Increase) decrease in trade and interest receivables 7,200 67,770 (394,166)
(Increase) decrease in prepaid expenses (109,962) 524,901 89,057
Increase in accounts payable and accrued
expenses 100,923 39,047 207,521
Increase (decrease) in rents received in advance (178,514) 6,262,396 (110,737)
Increase (decrease) in income taxes payable (641,652) 1,949,956 -
Increase in supplemental retirement benefits 601,252 179,200 240,796
---------------- ---------------- --------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 15,088,227 21,990,789 14,914,360
---------------- ---------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase and construction of property and equipment (1,131,994) (6,690,764) (8,764,159)
Proceeds from sale of property and equipment 3,000 - 4,000
Purchase of short-term investments (5,423) (4,081) (3,711)
(Increase) decrease in restricted cash 5,523,143 (22,203,853) -
---------------- ---------------- --------------
NET CASH PROVIDED (USED)
BY INVESTING ACTIVITIES 4,388,726 (28,898,698) (8,763,870)
---------------- ---------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt - 135,000,000 -
Principal payments on long-term debt (2,627,188) (57,472,061) (9,295,564)
Cost incurred to extinguish debt early - (2,720,580) -
Purchase of interest rate cap (833,000) (312,500) -
Proceeds from sale of interest rate floor 833,000 - -
Dividends paid (12,000,243) (60,678,370) -
Retirement of common stock (9,000,167) - -
Financing costs paid (60,380) (2,919,855) -
---------------- ---------------- --------------
NET CASH PROVIDED (USED)
BY FINANCING ACTIVITIES (23,687,978) 10,896,634 (9,295,564)
---------------- ---------------- --------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (4,211,025) 3,988,725 (3,145,074)
CASH AND CASH EQUIVALENTS, BEGINNING 8,848,172 4,859,447 8,004,521
---------------- ---------------- --------------
CASH AND CASH EQUIVALENTS, ENDING $ 4,637,147 $ 8,848,172 $ 4,859,447
================ ================ ==============
PAGE 5
F-6
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION Cash paid during the year for:
Income taxes $ 8,575,614 $ 6,302,511 $ 8,357,298
Interest, net of amount capitalized 5,708,508 7,699,674 4,166,000
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING
AND INVESTING ACTIVITIES
Accounts payable incurred for acquisition of property and
equipment $ 92,096 $ 201,715 $ 2,924,796
================ ================ ==============
Increase in fair value of interest rate floor agreement,
net of deferred income taxes of $1,183,682 $ 1,851,400 $ - $ -
================ ================ ==============
PAGE 6
F-7
INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
NOTE A - DESCRIPTION OF BUSINESS
The Company is the lessor of permanent exhibition space to furniture and
accessory manufacturers which are headquartered throughout the United States and
in many foreign countries. This exhibition space, located in High Point, North
Carolina, is used by the Home Furnishings Industry to showcase its products at
the International Home Furnishings Market held each April and October. The
details of the operating leases with the Company's tenants are described in Note
I.
The Company has been in business since June 27, 1919, and operates under the
trade name of "International Home Furnishings Center."
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
The accounting policies relative to the carrying values of property and
equipment, theater complex and interest rate cap and floor agreements are
indicated in the captions on the consolidated balance sheets. Other significant
accounting policies are as follows:
Principles of Consolidation
The consolidated financial statements include the accounts of International Home
Furnishings Center, Inc. and its wholly-owned subsidiary, IHFC Properties,
L.L.C., a company organized on December 21, 2000. All material intercompany
transactions have been eliminated. The Company and its subsidiary are referred
to collectively herein as "the Company." Notwithstanding the consolidation of
the Company and IHFC Properties, L.L.C. in these financial statements, IHFC
Properties, L.L.C. is a separate entity, with separate assets and liabilities
and has its own separate financial statements.
Rental Income
Income from rental of exhibition space is recognized under the operating method.
Aggregate rentals are reported as income on the straight-line basis over the
lives of the leases, and expenses are charged as incurred against such income.
Future rentals under existing leases are not recorded as assets in the
accompanying consolidated balance sheets.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Investment Securities
The Company has investments in debt and marketable equity securities. Debt
securities consist of obligations of state and local governments and U. S.
corporations. Marketable equity securities consist primarily of investments in
mutual funds.
Page 7
F-8
INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investment Securities (Continued)
Management determines the appropriate classification of securities at the date
individual investment securities are acquired, and the appropriateness of such
classification is reassessed at each balance sheet date. Since the Company
neither buys investment securities in anticipation of short-term fluctuations in
market prices nor commits to holding debt securities to their maturities,
investments in debt and marketable equity securities have been classified as
available-for-sale. Available-for-sale securities are stated at fair value, and
unrealized holding gains and losses, if significant, net of the related deferred
tax effect, are reported as a separate component of accumulated other
comprehensive income in stockholders' equity. Premiums and discounts on
investments in debt securities are amortized over their contractual lives.
Interest on debt securities is recognized in income as accrued, and dividends on
marketable equity securities are recognized in income when declared. Realized
gains and losses are included in income and are determined on the basis of the
specific securities sold.
Property, Equipment and Depreciation
Expenditures for maintenance, repairs, and minor renewals are charged to expense
as incurred. Major renewals and betterments are capitalized. Depreciation is
provided primarily on the straight-line method over the following estimated
useful lives:
Land improvements 10 years
Building structures 20 to 50 years
Building components 5 to 20 years
Furniture and equipment 3 to 10 years
In accordance with the provisions of Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," the Company periodically reviews long-lived assets
when indications of impairment exist, and if the value of the assets is
impaired, an impairment loss would be recognized.
Deferred Financing Costs
Costs associated with obtaining long-term financing have been deferred and are
being amortized on the interest method over the term of the related debt.
Amortization expense charged to operations during the years ended October 31,
2002, 2001 and 2000 was $613,042, $522,725 and $83,530, respectively.
Reporting Comprehensive Income
Comprehensive income is the total of net income and other comprehensive income.
Other comprehensive income represents changes in equity, other than net income,
from transactions and other events and circumstances from non-owner sources.
Accordingly, comprehensive income includes all changes in equity during a period
except those resulting from investments by stockholders and distributions to
stockholders.
Page 8
F-9
INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Derivative Instruments
The Company holds and issues derivative instruments for the purpose of hedging
the risks related to the variability of cash flows caused by changes in interest
rates. The Company's objectives are to decrease the volatility of earnings and
cash flows associated with changing interest rates by entering into interest
rate floor and cap agreements that effectively limit the range of interest rate
exposure on its debt (see Note E).
The Company designates its derivatives based upon criteria established by
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). For a derivative
designated as a cash flow hedge, the effective portion of the derivative's gain
or loss is initially reported as a component of other comprehensive income and
subsequently reclassified into earnings when the hedged exposure affects
earnings. The ineffective portion of the gain or loss is reported in earnings
immediately.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in the
consolidated financial statements and consist of taxes currently due plus
deferred taxes related to temporary differences between the reported amounts of
assets and liabilities and their tax bases. The deferred tax assets and
liabilities represent the future tax return consequences of those differences,
which will either be taxable or deductible when the assets and liabilities are
recovered or settled. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
Earnings Per Common Share
The Company follows the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," which specifies the computation,
presentation and disclosure requirements for earnings per share ("EPS"). Basic
EPS excludes all dilution and has been computed using the weighted average
number of common shares outstanding during the year. Diluted EPS reflects the
potential dilution that would occur if securities or other contracts to issue
common stock were exercised or converted into common stock. The Company has no
dilutive potential common shares.
Retirement Plans
The Company maintains a 401(k) qualified retirement plan covering eligible
employees under which participants may contribute up to 25% of their
compensation subject to maximum allowable contributions. The Company is
obligated to contribute, on a matching basis, 50% of the first 6% of
compensation voluntarily contributed by participants. The Company may also make
additional contributions to the plan if it so elects.
Page 9
F-10
INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Retirement Plans (Continued)
In 1991, the Company adopted a nonqualified supplemental retirement benefits
plan for key management employees. Benefits payable under the plan are based
upon the participant's average compensation during his last five years of
employment and are reduced by benefits payable under the Company's qualified
retirement plan and by one-half of the participant's social security benefits.
Benefits under the plan do not vest until the attainment of normal retirement
age; however, a reduced benefit is payable if employment terminates prior to
normal retirement age because of death or disability. The vested portion of the
benefits under this plan amounted to approximately $1,406,000 and $1,345,000 at
October 31, 2002 and 2001, respectively. The Company has no obligation to fund
this supplemental plan.
Fair Value of Financial Instruments
The carrying amounts of the Company's significant financial instruments, none of
which are held for trading purposes, approximate fair value at October 31, 2002
and 2001. Cash, cash equivalents and restricted cash approximate fair value
because of the short maturities of these instruments. Long-term debt
approximates fair value because of its floating interest rate terms. Derivative
financial instruments are carried at fair value.
Use of Estimates
The preparation of consolidated 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
the disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
NOTE C - RESTRICTED CASH
The Company has restricted, interest-bearing cash accounts held by the lender
under the escrow provisions of the term loan agreement described in Note E. The
restricted cash balances are held for the following purposes at October 31, 2002
and 2001:
2002 2001
------------- -------------
Taxes and insurance $ 1,170,665 $ 767,025
Required repairs 1,131,629 1,120,729
Replacements 235,806 142,251
Environmental 240,057 802,882
Debt service 1,332,213 7,438,700
Operating expenses 1,054,868 677,394
Ground rent 51,382 48,360
Cash management 13,740,064 13,482,486
------------- -------------
$ 18,956,684 $ 24,479,827
============= =============
Page 10
F-11
INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
NOTE C - RESTRICTED CASH (CONTINUED)
All rents and other income from operation of the Company's property are
deposited directly into a lockbox account controlled by the lender under the
Company's cash management agreement. In May and November of each year during the
term of the loan, the lender will disburse to the Company amounts in the cash
management account in excess of the amounts needed to replenish the various
escrow accounts.
The Company has granted the lender a security interest in each of the restricted
cash accounts as additional security for the outstanding term loan.
NOTE D - INVESTMENT IN DEBT AND MARKETABLE EQUITY SECURITIES
The following is a summary of the Company's investment in available-for-sale
securities as of October 31, 2002 and 2001:
2002
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ----------- ------------
Debt securities
State and local governments $ 2,976,644 $ - $ - $ 2,976,644
Equity securities 103,993 - - 103,993
------------ ------------ ----------- ------------
$ 3,080,637 $ - $ - $ 3,080,637
============ ============ =========== ============
2001
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ----------- ------------
Debt securities
State and local governments $ 3,015,466 $ - $ - $ 3,015,466
Corporate 3,000,000 - - 3,000,000
Equity securities 98,570 - - 98,570
------------ ------------ ----------- ------------
$ 6,114,036 $ - $ - $ 6,114,036
============ ============ =========== ============
Available-for-sale securities are classified in the following balance sheet
captions as of October 31, 2002 and 2001:
2002 2001
--------------- ---------------
Cash and cash equivalents $ 2,976,644 $ 6,015,466
Short-term investments 103,993 98,570
--------------- ---------------
$ 3,080,637 $ 6,114,036
=============== ===============
All the Company's debt securities mature within three months.
Page 11
F-12
INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
NOTE E - LONG-TERM DEBT
Long-term debt consists of the following at October 31, 2002 and 2001:
2002 2001
--------------- ---------------
Term note payable, Bank of America, N.A. Principal
payments are due monthly based on an amortization
schedule provided by the lender. Interest is
payable monthly at the LIBOR rate plus 2.1%. At
October 31, 2002, the interest rate was 3.9%. The
note matures in December 2003 and has two
one-year extension periods available, which the
Company intends to exercise. The loan is
collateralized by land and buildings, restricted
cash (Note C), rents and assignment of leases
with tenants. $ 130,555,335 $ 133,182,523
Less current maturities 2,880,770 2,627,187
--------------- ---------------
$ 127,674,565 $ 130,555,336
=============== ===============
The aggregate maturities of long-term debt are due as follows:
Year Ending October 31,
2003 $ 2,880,770
2004 3,158,836
2005 3,463,739
2006 121,051,990
---------------
$ 130,555,335
===============
During the year ended October 31, 2001, the Company entered into an interest
rate cap agreement that had a notional amount of $133,182,523 at October 31,
2001. The notional amount decreased as principal payments were made on the
Company's term debt and was to be equal to the term debt until the agreement's
expiration in January 2004. Under the agreement, the Company was to receive an
amount equal to the interest it incurred on its term debt in excess of 8%, if
any. The $265,887 decrease in the fair value of the interest rate cap agreement
was charged to earnings as financing expense during the year ended October 31,
2001. In 2002, the Company paid $26,613 to terminate this agreement. The $26,613
was charged to earnings as financing expense for the year ended October 31,
2002.
Page 12
F-13
INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
NOTE E - LONG-TERM DEBT (CONTINUED)
During the year ended October 31, 2002, the Company paid $833,000 to execute an
interest rate cap agreement that has a notional amount of $130,555,335 at
October 31, 2002. The notional amount will decrease as principal payments are
made on the Company's term debt and will be equal to the term debt until the
agreement expires December 6, 2005. Under the agreement, the Company will
receive an amount equal to the LIBOR rate in excess of 8%, if any. The Company
has designated this interest rate cap agreement as a cash flow hedge of interest
payments once the LIBOR rate exceeds 8%. Since the LIBOR rate remained below 8%
during the year ended October 31, 2002, the cap agreement was not yet in effect;
therefore, the $683,364 decrease in the fair value of the interest rate cap
agreement was charged to earnings during the year ended October 31, 2002 as a
part of financing expense.
The Company also entered into an interest rate floor agreement during the year
ended October 31, 2002. In connection with the execution of the floor agreement,
the Company received $833,000. The notional amount of the floor was $130,555,335
at October 31, 2002. The notional amount will decrease as principal payments are
made on the Company's term debt and will be equal to the term debt until the
agreement expires January 6, 2006. Under the agreement, the Company will pay an
amount equal to the excess of 2.63% over the LIBOR rate, if any. Since the LIBOR
rate decreased below the floor of 2.63% during the year ended October 31, 2002,
the initial $833,000 has been reflected in earnings as a part of financing
expense, and the change in fair value of the interest rate floor agreement has
been recorded in accumulated other comprehensive income, net of tax, for the
year ended October 31, 2002.
Total interest cost incurred for the years ended October 31, 2002, 2001 and 2000
was $6,134,336, $8,241,933 and $4,303,766, respectively. Of the interest cost
for the years ended October 31, 2002, 2001 and 2000, $4,293, $371,546 and
$194,277, respectively, was capitalized as part of the building construction
costs.
During the year ended October 31, 2001, the Company recorded an extraordinary
loss of $1,886,426 after income taxes as a result of the early extinguishment of
term debt in the amount of $54,039,689. The loss consisted primarily of costs
associated with the early extinguishment and the write-off of unamortized
financing costs of $382,846. The extinguishment of the debt was financed with a
portion of the proceeds from the $135,000,000 term loan.
Page 13
F-14
INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
NOTE F - INCOME TAXES
The provision for income taxes consists of the following for the years ended
October 31, 2002, 2001 and 2000:
2002 2001 2000
------------- ------------- -------------
Federal:
Current $ 6,560,000 $ 7,365,000 $ 6,975,000
Deferred 53,000 (2,415,000) (287,000)
------------- ------------- -------------
6,613,000 4,950,000 6,688,000
------------- ------------- -------------
State:
Current 1,375,000 1,515,000 1,480,000
Deferred 12,000 (516,000) (67,000)
------------- ------------- -------------
1,387,000 999,000 1,413,000
------------- ------------- -------------
TOTAL $ 8,000,000 $ 5,949,000 $ 8,101,000
============= ============= =============
Deferred tax allocated directly to
stockholders' deficit $ 1,183,682 $ - $ -
============= ============= =============
A reconciliation of the income tax provision at the federal statutory rate to
the income tax provision at the effective tax rate is as follows:
2002 2001 2000
------------- ------------- -------------
Income taxes computed at the federal
statutory rate $ 7,100,000 $ 5,319,000 $ 7,360,000
State taxes, net of federal benefit 902,000 649,000 918,000
Nontaxable investment income (24,000) (48,000) (112,000)
Other, net 22,000 29,000 (65,000)
------------- ------------- -------------
$ 8,000,000 $ 5,949,000 $ 8,101,000
============= ============= =============
Page 14
F-15
INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
NOTE F - INCOME TAXES (CONTINUED)
The components of deferred income taxes consist of the following:
2002 2001
------------ ------------
Deferred income tax assets:
Rents received in advance $ 2,959,000 $ 3,028,000
Supplemental retirement benefits 985,000 750,000
Interest rate floor agreement 1,183,680 70,000
Deferred financing costs 16,000 9,000
------------ ------------
TOTAL DEFERRED TAX ASSETS 5,143,680 3,857,000
------------ ------------
Deferred income tax liabilities:
Depreciation (1,526,000) -
Interest rate cap agreement (58,000) (1,416,000)
------------ ------------
TOTAL DEFERRED TAX LIABILITIES (1,584,000) (1,416,000)
------------ ------------
TOTAL NET DEFERRED
TAX ASSETS $ 3,559,680 $ 2,441,000
============ ============
NOTE G - LAND LEASE COMMITMENT
During 1975, the Company completed construction of an eleven-story exhibition
building. The building is constructed on land leased from the City of High
Point, North Carolina under a noncancelable lease. The lease is for an initial
term of fifty years with three options to renew for periods of ten years each
and a final renewal option for nineteen years. Annual rental under the lease is
$152,234 as of October 31, 2002 and is subject to adjustment at the end of each
five-year period, such adjustment being computed as defined in the lease
agreement. As part of the lease agreement, the Company constructed a theater
complex for public use and office space for use by the City of High Point on the
lower levels of the building. Annual rental cash payments over the initial
fifty-year lease term are being reduced by $39,121 which represents amortization
of the cost of the theater and office complex constructed for the City of High
Point. At the termination of the lease, the building becomes the property of the
City of High Point. Under the terms of the lease, the Company is responsible for
all expenses applicable to the exhibition portion of the building. The City of
High Point is responsible for all expenses applicable to the theater complex and
office space constructed for use by the City.
NOTE H - RETIREMENT EXPENSE
Amounts expensed under the Company's retirement plans amounted to $790,130,
$350,669 and $394,166 for the years ended October 31, 2002, 2001 and 2000,
respectively, including $601,252, $179,200 and $240,796 under the supplemental
retirement benefits plan for the years ended October 31, 2002, 2001 and 2000,
respectively.
Page 15
F-16
INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
NOTE H - RETIREMENT EXPENSE (CONTINUED)
During 2002, the Company accelerated the normal retirement date for one of its
key employees covered under the nonqualified supplemental retirement plan
resulting in a substantial increase in expense for the year.
NOTE I - RENTALS UNDER OPERATING LEASES
The Company's leasing operations consist principally of leasing exhibition
space. Property on operating leases consists of substantially all of the asset
"buildings, exclusive of theater complex" included on the consolidated balance
sheets. Accumulated depreciation on this property amounted to $45,154,925 at
October 31, 2002 and $42,925,163 at October 31, 2001. Leases are typically for
five-year periods and contain provisions to escalate rentals based upon either
the increase in the consumer price index or increases in ad valorem taxes,
utility rates and charges, minimum wage imposed by federal and state
governments, maintenance contracts for elevators and air conditioning,
maintenance of common areas, social security payments, increases resulting from
collective bargaining contracts, if any, and such other similar charges and
rates required in operating the Company. Tenants normally renew their leases.
The following is a schedule of minimum future rentals under noncancelable
operating leases as of October 31, 2002, exclusive of amounts due under
escalation provisions of lease agreements:
Year Ending October 31,
2003 $ 28,907,366
2004 25,351,016
2005 17,061,970
2006 6,587,870
2007 1,549,702
-------------
Total minimum future rentals $ 79,457,924
=============
Rental income includes contingent rentals under escalation provisions of leases
of $1,380,026, $1,164,693 and $823,536 for the years ended October 31, 2002,
2001 and 2000, respectively. Rental income from related parties amounted to
$647,926, $2,682,719 and $2,374,813 for the years ended October 31, 2002, 2001
and 2000, respectively.
NOTE J - CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash deposits in excess of federally insured
limits and trade accounts receivable from customers predominantly in the Home
Furnishings Industry. As of October 31, 2002, the Company's bank balances
exceeded federally insured limits by $15,861,894. The Company's trade accounts
receivable are generally collateralized by merchandise in leased exhibition
spaces which is in the Company's possession.
Page 16
F-17
INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
NOTE K - STOCKHOLDERS' DEFICIT
The stockholders' deficit resulted from the payment of dividends substantially
in excess of accumulated earnings. The dividends in excess of accumulated
earnings were financed, in part, with the proceeds of long-term debt. Although
interest on this debt will negatively impact future earnings, management
believes, based on projections of future operations and cash flows, that future
earnings will provide adequate equity capital for the Company and that operating
cash flows will be sufficient to provide for debt service and for the Company's
other financing and investing needs.
NOTE L - CONSTRUCTION COMMITMENTS
At October 31, 2002, the Company had outstanding commitments for building
improvements of approximately $419,000.
Page 17
FINANCIAL STATEMENTS
LRG Furniture, LLC
Years ended November 30, 2002 and 2001 with
Report of Independent Auditors
LRG Furniture, LLC
Financial Statements
CONTENTS
Report of Independent Auditors...........................................................1
Financial Statements
Balance Sheets...........................................................................3
Statements of Operations.................................................................4
Statements of Changes in Members' Deficit................................................5
Statements of Cash Flows.................................................................6
Notes to Financial Statements............................................................7
F-18
Report of Independent Auditors
Board of Directors and Members
LRG Furniture, LLC
We have audited the accompanying balance sheet of LRG Furniture, LLC (a Virginia
limited liability company) as of November 30, 2002, and the related statement of
operations, changes in members' deficit, and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit. The financial statements of LRG Furniture, LLC as of and for the
year ended November 30, 2001 were audited by other auditors who have ceased
operations and whose report dated December 21, 2001, expressed an unqualified
opinion on those financial statements before the revision described in Note 3.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of LRG Furniture, LLC as of
November 30, 2002, and the results of its operations and its cash flows for the
year then ended, in conformity with accounting principles generally accepted in
the United States.
As discussed in Note 3 to the financial statements, effective December 1, 2001,
the Company adopted Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets ("FAS 142").
As discussed above, the financial statements of LRG Furniture, LLC as of
November 30, 2001 and for the year then ended were audited by other auditors who
have ceased operations. As described in Note 3, these financial statements have
been revised to include the transitional disclosures of FAS 142. We applied
procedures with respect to the disclosures in Note 3 pertaining to 2001
financial statement revisions. In our opinion, the FAS 142 disclosures for 2001
in Note 3 are appropriate. However, we were not engaged to audit, review, or
apply any procedures to the 2001 financial statements of the Company other than
with respect to such disclosures and, accordingly, we do not express an opinion
or any other form of assurance on the 2001 financial statements taken as a
whole.
/s/ Ernst & Young LLP
December 20, 2002
1
F-19
The following report is a copy of a report previously issued by Arthur Andersen
LLP and has not been reissued by Arthur Andersen LLP. As discussed in the
Goodwill and Intangible Assets note, the corporation has presented the
transitional disclosures for 2001 required by SFAS No. 142. The Arthur Andersen
LLP report does not extend to these changes to the 2001 consolidated financial
statements. The adjustments to the 2001 consolidated financial statements were
reported on by Ernst & Young LLP as stated in their report appearing herein.
To the Members of LRG Furniture, LLC:
We have audited the accompanying balance sheets of LRG FURNITURE, LLC (a
Virginia limited liability company) as of November 30, 2001 and 2000, and the
related statements of operations and changes in members' deficit 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.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of LRG Furniture, LLC as of
November 30, 2001 and 2000, and the results of its operations and its cash flows
for the years then ended, in conformity with accounting principles generally
accepted in the United States.
/s/ Arthur Andersen LLP
Houston, Texas
December 21, 2001
F-20
LRG Furniture, LLC
Balance Sheets
NOVEMBER 30
ASSETS 2002 2001
----------------------------------
Current assets:
Cash and cash equivalents $ 1,520,991 $ 2,456,466
Accounts receivable, net of allowances of $74,259 and
$60,910 in 2002 and 2001, respectively 361,785 644,338
Merchandise inventories, net 5,864,637 10,119,254
Prepaid expenses 70,421 72,053
----------------------------------
Total current assets 7,817,834 13,292,111
Property and equipment:
Computer equipment 338,987 374,909
Equipment 210,181 355,885
Furniture and fixtures 532,686 1,027,155
Leasehold improvements 1,084,914 1,369,775
Vehicles 159,692 174,798
----------------------------------
2,326,460 3,302,522
Less - accumulated depreciation (679,031) (661,893)
----------------------------------
1,647,429 2,640,629
Other assets, net 74,149 776,379
----------------------------------
$9,539,412 $ 16,709,119
==================================
LIABILITIES AND MEMBERS' DEFICIT
Current Liabilities:
Current portion of long-term debt $ 2,591,592 $ 2,466,836
Accounts payable, primarily to Members 4,906,749 9,882,446
Customer deposits 1,545,986 2,390,342
Accrued liabilities 1,146,440 1,026,186
----------------------------------
Total current liabilities 10,190,767 15,765,810
Long-term debt 100,000 1,306,344
Notes payable to members and deferred interest payable 12,109,666 13,291,482
Commitments and contingencies - -
Members' deficit (12,861,021) (13,654,517)
----------------------------------
$ 9,539,412 $16,709,119
==================================
The accompanying notes to the financial statements are an integral part of these
balance sheets.
2
F-21
LRG Furniture, LLC
Statements of Operations
YEARS ENDED NOVEMBER 30
2002 2001
----------------------------------
Sales $ 45,735,769 $ 62,577,684
Cost of goods sold 24,181,141 34,638,022
----------------------------------
Gross profit 21,554,628 27,939,662
Operating and general expenses 22,718,156 33,553,602
----------------------------------
Loss from operations (1,163,528) (5,613,940)
Interest expense 816,764 1,134,030
----------------------------------
Net loss $ (1,980,292) $ (6,747,970)
==================================
The accompanying notes to the financial statements are an integral part of these
statements.
3
F-22
LRG Furniture, LLC
Statements of Changes in Members' Deficit
For the years ended November 30, 2002 and 2001
Members' deficit, November 30, 2000 $ (6,906,547)
Net loss-fiscal 2001 (6,747,970)
----------------
Members' deficit, November 30, 2001 (13,654,517)
Net loss-fiscal 2002 (1,980,292)
Members' contributions 2,773,788
----------------
Members' deficit, November 30, 2002 $ (12,861,021)
================
The accompanying notes to the financial statements are an integral part of these
statements.
4
F-23
LRG Furniture, LLC
Statements of Cash Flows
YEARS ENDED NOVEMBER 30
2002 2001
-----------------------------------
Cash flows from operating activities:
Net loss $ (1,980,292) $ (6,747,970)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 306,786 828,786
Loss on sale of property and equipment - 235,312
Changes in operating assets and liabilities, net of
effects from acquisitions and divestitures:
Accounts receivable (60,947) 36,829
Merchandise inventories 411,343 2,173,743
Prepaid expenses (24,165) 39,757
Accounts payable and accrued liabilities (1,372,701) (970,878)
Customer deposits 87,563 (739,389)
Other 17,414 (5,049)
-----------------------------------
Net cash used in operating activities (2,614,999) (5,148,859)
-----------------------------------
Cash flows from investing activities:
Purchases of property and equipment (214,728) (206,232)
Proceeds from sale of certain assets, net 228,263 204,389
-----------------------------------
Net cash used in investing activities 13,535 (1,843)
-----------------------------------
Cash flows from financing activities:
Proceeds from long-term debt - 500,000
Repayment of long-term debt - (1,827,320)
Proceeds from notes payable to Members 1,322,990 4,100,000
Increase in deferred interest payable 342,999 643,334
-----------------------------------
Net cash provided by financing activities 1,665,989 3,416,014
-----------------------------------
Net decrease in cash (935,475) (1,734,688)
Cash and cash equivalents, beginning of year 2,456,466 4,191,154
-----------------------------------
Cash and cash equivalents, end of year $ 1,520,991 $ 2,456,466
===================================
Supplemental disclosure of cash flow information - cash
paid during the year for interest $ 297,545 $ 479,430
===================================
The accompanying notes to the financial statements are an integral part of these
statements.
5
F-24
LRG Furniture, LLC
Notes to Financial Statements
November 30, 2002 and 2001
1. ORGANIZATION AND OPERATIONS
LRG Furniture, LLC (the "Company") was formed as a limited liability company
under the laws of Virginia on November 29, 1999. The Company was formed as a
joint venture between Bassett Furniture Industries, Inc. ("Bassett") and Bassett
Direct Plus Texas, LLC ("BDPT") (collectively referred to herein as the
"Members"). Bassett and BDPT were credited with 51% and 49%, respectively, of
the combined members' equity of $2,677,489 at the date of formation.
The Company currently operates eight retail furniture stores in Texas and
Nevada. These stores operate under the "Bassett Furniture Direct" name and
substantially all of their purchases are contractually obligated from Bassett
and its affiliates.
2. CONTINUING OPERATIONS
The Company has experienced significant losses from operations since inception.
The Company incurred a net loss of $1,980,000 and $6,748,000 in the years 2002
and 2001, respectively, and has Members' deficit of $12,861,000 and $13,655,000
as of November 30, 2002 and 2001, respectively. Management has implemented a
profit improvement program that includes evaluation and realignment of the
Company's business to improve profitability. This program has resulted in
significant operational changes, overall downsizing of the Company's
administrative and operating overhead and disposals of selected stores (see Note
10). These store disposals have left the Company with eight stores in the Texas
and Nevada markets. As a result of these actions, the Company expects to
substantially reduce losses from operations, however, there can be no assurances
that management's program will be successful.
The Members have historically provided, and are currently providing, sufficient
financial support to the Company to fund the Company's obligations and working
capital requirements as those obligations become due. The Members loaned a total
of $4,100,000 to the Company in 2001. Management of Bassett has committed to
provide the necessary level of financial support to the Company to enable it to
pay its obligations as they become due through November 30, 2003. In addition,
Bassett has guaranteed repayment of all of the Company's third-party long-term
debt.
6
F-25
LRG Furniture, LLC
Notes to Financial Statements (continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
For comparative purposes, certain amounts in the 2001 financial statements have
been reclassified to conform with the 2002 presentation.
CASH AND CASH EQUIVALENTS
Cash includes cash on hand, cash in banks and deposits in-transit from credit
card companies.
REVENUE RECOGNITION AND CONCENTRATION OF CREDIT RISK
The Company recognizes revenue upon the delivery of products to its customers.
There is no concentration of credit risk to any one customer. Allowances are
provided for estimated losses associated with anticipated future returns of
products sold by the Company and inability of customers to pay balances due.
Actual product returns and cash collections could differ from management's
estimates making it reasonably possible that a change in these estimates could
occur in the near term.
MERCHANDISE INVENTORIES
Merchandise inventories are stated at the lower of first-in, first-out (FIFO)
cost or market. Allowances are established to reduce the cost of excess and
obsolete inventories to their estimated net realizable value. Shipping and
handling costs associated with inbound freight are included in cost of sales and
amounts related to merchandise inventory on hand at year-end are capitalized in
merchandise inventories.
7
F-26
LRG Furniture, LLC
Notes to Financial Statements (continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is provided using the
straight-line method over the following estimated useful lives:
Computer equipment 3-5 years
Store fixtures 7 years
Office furniture, fixtures and equipment 7 years
Leasehold improvements Life of lease
Vehicles 5 years
When property is sold or retired, the cost and accumulated depreciation are
removed from the accounts and the resulting gain or loss is recognized in the
statement of operations and changes in members' equity. Expenditures for
maintenance and repairs are charged to operations as incurred.
OTHER ASSETS
Other assets were comprised primarily of an assumed lease contract with an
independent third party with terms that were favorable to its local market value
and refundable deposits with various utilities and property lessors. The
favorable lease contract had a gross balance of $758,867 amortized over the
lease term, which was 15 years. Accumulated amortization related to this
favorable lease contract was $107,136 in 2001. These deposits were refundable at
the discretion of the utility or lessor as applicable. This lease contract was
sold during 2002 as part of the stores that were sold to Bassett (see Note 10).
LONG-LIVED ASSETS
The Company applies Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," which requires that long-lived assets and certain identifiable
intangible assets to be held and used or disposed of by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In the event assets are
impaired, losses are recognized based on the excess carrying amounts over the
estimated discounted future cash flows or fair market value of the asset. SFAS
No. 121 also requires that assets to be disposed of be reported at the lower of
the carrying amount or the fair market value less selling costs. Management does
not believe there are any impairments of long-lived assets at November 30, 2002.
8
F-27
LRG Furniture, LLC
Notes to Financial Statements (continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PREOPENING EXPENSES
Preopening expenses, which consist primarily of payroll and occupancy costs, are
expensed as incurred. Preopening expenses were $193,000 and $177,000 in 2002 and
2001, respectively.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising expense was
$3,152,000 and $4,355,000 in 2002 and 2001, respectively.
SHIPPING AND HANDLING FEES AND COSTS
The Company includes shipping and handling fees billed to customers in net
sales. Shipping and handling costs associated with outbound freight are included
in operating and general expenses and totaled $4,207,000 and $6,442,000 in
fiscal 2002 and 2001, respectively.
CUSTOMER DEPOSITS
Customer deposits relate to amounts paid by customers to the Company at the time
they order goods. These deposits are applied to the ultimate sales price once
goods are delivered to the customer, and are recognized as revenue at that time.
INCOME TAXES
The Company is treated as a pass-through entity for federal income tax purposes.
As a result, the Company is not subject to income tax, but rather the liability
for income taxes from the taxable income generated by the Company is the
obligation of the Members. The Company is treated similarly for state income tax
purposes and, under current law in the states in which the Company is conducting
business, the Company is not subject to state income taxes. Accordingly, no
provision or benefit for federal and state income taxes has been recorded in the
accompanying financial statements.
9
F-28
LRG Furniture, LLC
Notes to Financial Statements (continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash, accounts receivable, accounts
payable and long-term debt. Because of their short maturity, the carrying
amounts of cash, accounts receivable and accounts payable approximate fair
value. The carrying amounts of long-term debt approximate fair value due to the
variable rate nature of bank debt and the Company's belief that its interest
rates on fixed interest rate debt due to its Members approximate fair value
rates for the Company.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2001, the Company adopted Statements of Financial Accounting Standards
("SFAS") No. 140, Accounting for Transfers and Servicing Financial Assets and
Extinguishment of Liabilities. This statement replaces SFAS No. 125, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, but carries over most of the provisions of SFAS No. 125 without
reconsideration. The impact of adopting this pronouncement was not material to
the Company's financial statements.
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, Business Combinations. This statement requires that all business
combinations initiated after June 30, 2001, be accounted for by the purchase
method, eliminating the availability of the pooling-of-interests method. In
addition SFAS No. 141 requires recognition of intangible assets apart from
goodwill if they meet certain criteria. Any acquisition activity performed by
the Company subsequent to the effective date of this statement will be accounted
for under the purchase method. The impact of adopting this pronouncement was not
material to the Company's financial statements.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. This statement supercedes Accounting Principles Board ("APB") Opinion
No. 17, Intangible Assets. SFAS No. 142 establishes new standards for measuring
the carrying value of goodwill related to acquired companies. Instead of
amortizing goodwill over a fixed period of time, the Company will instead
measure the fair value of acquiring businesses annually to determine if goodwill
has been impaired. The Company adopted this statement in fiscal 2002. The
Company did not hold any intangible assets during fiscal 2002, thus, the impact
of adopting this pronouncement was not material to the Company's financial
statements.
10
F-29
LRG Furniture, LLC
Notes to Financial Statements (continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
The following table adjusts the reported net income for the year ended November
30, 2001 to exclude amortization of goodwill:
Reported net loss $(6,748,000)
Amortization of goodwill 368,000
-------------------
Adjusted net loss $(6,380,000)
===================
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This statement supercedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of. In addition, this statement addresses the accounting for the
segment of a business accounted for as a discontinued operation under APB
Opinion 30, Reporting the Results of Operations--Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions. This statement would impact the Company's
reporting if the Company chose to discontinue an operation, and becomes
effective for the Company in fiscal 2003. Management does not expect the impact
of adopting SFAS No. 144 to be material to the Company's financial statements.
In July 2002, the FASB issued SFAS No. 146, Obligations Associated with Disposal
Activities, which is effective for disposal activities initiated after December
31, 2002. SFAS 146 requires that a liability for a disposal obligation should be
recognized and measured at its fair value when it is incurred. Adoption of the
pronouncement is not expected to have a material effect on the Company's
financial statements.
11
F-30
LRG Furniture, LLC
Notes to Financial Statements (continued)
4. LONG-TERM DEBT AND NOTES PAYABLE TO MEMBERS
Long-term debt and notes payable to Members at November 30, 2002 and 2001,
consisted of the following:
2002 2001
-----------------------------
Long-term debt:
Unsecured notes with a bank, payable in monthly
installments as discussed below from January 2001 to
June 2004, plus interest payable monthly ranging from
prime plus 0.5% to 1.0%, as defined in the agreement
(prime was 4.25% at November 30, 2002) $ 883,592 $ 3,773,180
Notes payable to Members:
Unsecured notes and deferred interest payable to Bassett,
accrues interest at 5.5% per year, principle and
interest due November 30, 2007 11,509,666 -
Unsecured notes and deferred interest payable to Bassett,
accrues interest at 8% per year, principle and interest
due November 1, 2004 - 10,316,667
Unsecured demand note payable to Bassett, does not bear
interest - 566,815
Unsecured note payable to BDPT, interest payable
quarterly at 8% per year, $1,808,000 due November 30,
2003, $600,000 due November 30, 2004 2,408,000 2,408,000
-----------------------------
Total notes payable to Members and deferred interest payable 13,917,666 13,291,482
-----------------------------
Total long-term debt and notes payable to Members 14,801,258 17,064,662
Less - Current maturities of long-term debt (2,591,592) (2,466,836)
-----------------------------
$12,209,666 $14,597,826
=============================
12
F-31
LRG Furniture, LLC
Notes to Financial Statements (continued)
4. LONG-TERM DEBT AND NOTES PAYABLE TO MEMBERS (CONTINUED)
The aggregate future annual maturities of long-term debt and deferred interest
payable at November 30, 2002 were as follows:
2003 $ 2,591,592
2004 700,000
2005 -
2006 -
2007 11,509,666
Thereafter -
--------------
$14,801,258
==============
At various dates from March 16, 2000, to August 15, 2000, the Company entered
into a total of eight unsecured notes with a bank for $606,000 each for a total
of $4,848,000. Each note has deferred principal payments of $22,444 beginning 9
months from the close of each note and continuing for 27 months thereafter. The
proceeds of these notes were used primarily to pay for new store opening
inventory. Bassett took over four of these notes during fiscal 2002 in
connection with the sale to Bassett of the associated North Carolina and
Virginia stores. The balance due on the remaining four notes at November 30,
2002 is $583,592. The balance that was due on the eight notes at November 30,
2001 was $3,142,256. Repayment of these loans is guaranteed by Bassett.
On June 4, 2001, the Company entered into an unsecured note with a different
bank for $500,000. The note has deferred principal payments of $16,667 beginning
6 months from the close of the note and continuing for 29 months thereafter. The
proceeds of this note were used primarily to pay for new store opening
inventory. The balance due on this note at November 30, 2002 and 2001 was
$300,000 and $500,000, respectively. Repayment of this loan is guaranteed by
Bassett.
In connection with the acquisition of a Louisville store in 2000 (which was
subsequently sold in 2001, as further discussed in Note 10), the Company assumed
a $252,500 unsecured note payable. The note required monthly principal payments
of $18,704 through June 30, 2002. The balance due on this note at November 30,
2001, was $130,924. Repayment of this note was guaranteed by Bassett. During the
acquisition of this store, the Company had also assumed an unsecured demand note
due to Bassett of $566,815, which was outstanding at November 30, 2001. The
store was sold in December 2001 and both of these notes were settled in
connection with the sale.
13
F-32
LRG Furniture, LLC
Notes to Financial Statements (continued)
4. LONG-TERM DEBT AND NOTES PAYABLE TO MEMBERS (CONTINUED)
On June 1, 2000, August 1, 2000, and May 1, 2001, the Company entered into three
unsecured notes with Bassett for $1,000,000, $5,000,000 and $3,500,000,
respectively. All of these notes had the same terms with deferred principal and
interest payments, all payable November 1, 2004. These Notes were refinanced
with Bassett in March 2002 to three unsecured notes for $3,100,000, $3,000,000,
and $4,250,000 with the same terms and deferred principal and interest
payments, all payable November 30, 2007 (see Note 10).
On November 30, 2001 and 2000, the Company entered into unsecured notes with
BDPT for $600,000 and $1,808,000, respectively. These unsecured notes contain
various restrictive covenants which include, among others, limitations on loans
and contingent liabilities except in the normal course of business. As of
November 30, 2002, the Company was in compliance with all of these covenants.
5. LEASE COMMITMENTS
The Company's administrative offices and retail locations are leased under
noncancelable operating lease agreements that expire from 2003 to 2016. Most of
these leases contain renewal options of 3 to 35 years. Certain of the lease
agreements for retail locations require the payment of contingent rentals based
on a percentage of sales above stipulated levels. No contingent rental expense
was incurred during 2002 or 2001. Certain of the lease agreements contain rent
escalation clauses that are not significant. Total rent expense for 2002 and
2001 was $4,243,000 and $6,242,000, respectively. Rent expense related to
locations owned or leased from the Members was $2,915,000 in 2002 and $3,952,000
in 2001.
14
F-33
LRG Furniture, LLC
Notes to Financial Statements (continued)
5. LEASE COMMITMENTS (CONTINUED)
Future minimum lease commitments for the office and retail locations under
operating leases as of November 30, 2002 are as follows:
BASSETT BDPT OTHER TOTAL
---------------------------------------------------------------
2003 $ 472,800 $ 2,699,136 $ 1,054,380 $ 4,226,316
2004 472,800 2,699,136 981,577 4,153,513
2005 472,800 2,699,136 806,088 3,978,024
2006 472,800 2,699,136 806,088 3,978,024
2007 472,800 2,699,136 599,824 3,771,760
Thereafter 4,609,800 20,826,662 455,301 25,891,763
---------------------------------------------------------------
$ 6,973,800 $ 34,322,342 $ 4,703,258 $ 45,999,400
===============================================================
6. OTHER RELATED-PARTY TRANSACTIONS
Substantially all purchases of merchandise inventories are made from Bassett and
its affiliates. These related entities sell products to the Company at prices
and terms equal to their normal selling prices and terms to unrelated entities.
Accounts payable due to these related parties was $3,895,118 and $9,230,000 in
2002 and 2001, respectively.
Interest expense on borrowings from related parties as described in Note 4 was
$723,132 in 2002 and $789,000 in 2001. Portions of these amounts are included in
notes payable to Members and deferred interest payable in the accompanying
balance sheets at November 30, 2002 and 2001, respectively.
The Company paid salaries to principals of the Members for administrative and
executive services in the amount of $300,000 in both 2002 and 2001.
7. BENEFIT PLAN
EMPLOYEE SAVINGS PLAN
The Company maintains a qualified 401(k) employee savings plan covering
substantially all full-time employees. Under the plan, employees may elect to
contribute up to 15% of their compensation annually. Under the plan, the Company
is not required to make contributions to the plan and no contributions were made
in 2002 or 2001.
15
F-34
LRG Furniture, LLC
Notes to Financial Statements (continued)
8. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS
The Company has certain obligations under various employment agreements through
November 30, 2004, that stipulate, among other things, certain levels of
compensation, bonus potential, other miscellaneous benefits and severance
arrangements. Potential contingent liabilities under these arrangements
approximate $450,000.
LITIGATION
The Company is involved in various legal proceedings encountered in the normal
course of business. In the opinion of management, based on the factors presently
known, the resolution of these matters will not have a material adverse effect
on the Company's financial position or future results of operations.
9. MEMBERS' DEFICIT
The Members' deficit account in the accompanying balance sheets reflects the
initial capital contributed by the Members of $2,677,489 and all losses of the
Company since inception. No distributions have been made to the Members since
inception. During 2002, Bassett contributed $2,774,000 to Members' deficit
consisting of $2,589,000 of debt and related interest of $185,000. The benefits
of this contribution were allocated proportionately to the Members based on the
Members' relative ownership interests in the Company. Under the terms of the
Limited Liability Company Agreement (the LLC Agreement), profits and losses and
any distributions of the Company are allocated to its members based upon the
Members' relative ownership interests in the Company and are made at the sole
discretion of the Board of Managers. Members may not assign or transfer their
rights without consent of the other Member. Both Members have two positions each
in the Board of Directors. There is a single class of Members with the same
rights, powers, duties, obligations, preferences and privileges. Each Member's
liability is limited to the sum of its capital contributions, its share of any
undistributed assets of the Company and any amounts previously distributed to it
from the Company.
The Company's operating agreement provides an option for BDPT to put its
ownership interest to Bassett at a specified formula during fiscal year 2007 and
2010, and conversely, providing a call option for Bassett to purchase BDPT's
interest in the Company at a separate formula during fiscal years 2008 through
2010.
As stated in the Articles of Organization, the latest date on which the Company
is to dissolve is November 30, 2019.
16
F-35
LRG Furniture, LLC
Notes to Financial Statements (continued)
10. SALES AND CLOSURE OF RETAIL STORES
The Company sold its retail furniture store in Knoxville, Tennessee, in January
2001 to an unrelated third party. Substantially all of the inventory in that
location had been sold through a liquidation sale that began in September 2000.
The lease for this location has been assumed by an unrelated third party, who
will utilize the store as a "Bassett Furniture Direct" store going forward.
Losses due to this transaction were insignificant.
The Company closed its retail furniture store in Fredericksburg, Virginia, in
March 2001. Substantially all of the inventory in that location was liquidated
by May 2001. The lease for this location was terminated by Bassett, the owner of
the property, concurrent with the closure of the store. Losses due to the
closure of this store were insignificant.
The Company sold its retail furniture store in Hickory, North Carolina, to
Bassett in July 2001. The principal terms of the agreement called for inventory
and property to be sold at net book value to Bassett. Additionally, Bassett
assumed the customer deposit liability and the lease of the retail facility in
Hickory. There was no gain or loss associated with this transaction.
The Company sold its retail furniture store in Greenville, South Carolina, to an
unrelated third party, in August 2001. The transaction involved the sale of
inventory, property, equipment and leasehold improvements. The buyer also
assumed the customer deposit liability and the future lease commitments for the
store. The Company incurred a loss of approximately $140,000 primarily related
to the disposal of property and equipment.
On December 15, 2000, the Company acquired the assets and assumed the
liabilities of a third-party Bassett Furniture Direct licensee in Louisville,
Kentucky, in a noncash transaction. The fair value of liabilities assumed
exceeded the fair value of assets acquired by $367,569, which was recorded as an
intangible asset. The intangible asset, which related primarily to acquired
order book and customer lists, was amortized as operating and general expenses
during 2001. As part of the transaction, Bassett purchased the related building
and was leasing it to the Company on a month-to-month basis. This store was sold
in December 2001 to an unrelated local furniture retailer. The purchaser bought
substantially all assets and assumed all liabilities of the store. Related
losses on this transaction were not significant.
17
F-36
LRG Furniture, LLC
Notes to Financial Statements (continued)
10. SALES AND CLOSURE OF RETAIL STORES (CONTINUED)
In March 2002, the Company and Bassett entered into an agreement to streamline
the operations of the Company. The agreement called for Bassett to refinance
debt due by the Company to Bassett. Also, as part of the agreement, the Company
sold five stores in North Carolina and Virginia to Bassett for the net book
value as of the effective date of the agreement of approximately $188,000
($5,405,000 of assets and $5,217,000 of liabilities) including bank debt of
approximately $1,481,000.
Sales related to all stores sold, closed or planned to be sold included in the
statement of operations and changes in Members' deficit for the years ended
November 30, 2002 and 2001, were $5,162,883 and $27,944,000, respectively and
related loss from operations for the years ended November 30, 2002 and 2001 were
$533,908 and $4,892,000, respectively.
During September 2002, the Company opened a new store in southwest Houston.
Subsequent to year-end, in December 2002, the Company opened a new store in
southeast Houston.
18
INDEX TO FORM 10-K SCHEDULE
Exhibit No. Report of Independent Public Accountants is included in the
Consent filed as Exhibit 23A to this Annual Report and is
incorporated herein by reference.
F - 37 Report of Previous Independent Public Accountants
F - 38 Bassett Furniture Industries, Inc. Schedule II - Analysis of
Valuation and Qualifying Accounts for the years ended
November 30, 2002, November 24, 2001 and November 25, 2000.
F-37
The following report is a copy of a report previously issued by Arthur Andersen
LLP and has not been reissued by Arthur Andersen LLP.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Bassett Furniture Industries,
Incorporated:
We have audited in accordance with auditing standards generally accepted in the
United States, the financial statements included in the Bassett Furniture
Industries, Incorporated Annual Report to Stockholders incorporated by reference
in the Form 10-K, and have issued our report thereon dated January 15, 2002. Our
audits were made for the purpose of forming an opinion on those statements taken
as a whole. The schedule on page F- is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Greensboro, North Carolina,
January 15, 2002
F-38
BASSETT FURNITURE INDUSTRIES, INC.
Schedule II
Analysis of Valuation and Qualifying Accounts
For the Years Ended November 30, 2002, November 24, 2001 and
November 25, 2000
(in thousands)
Additions
Balance Charged to Balance
Beginning Cost and End
Of Period Expenses Deductions Other Of Period
--------------- ------------- ------------ ------------------- ------------------
(1)
For the Year Ended November 25, 2000:
Reserve deducted from
assets to which it applies-
Allowance for doubtful accounts $2,558 $4,150 $(58) --- $6,650
=============== ============= ============ =================== ==================
Restructuring reserve $1,316 $880 $(853) --- $1,343
=============== ============= ============ =================== ==================
For the Year Ended November 24, 2001:
Reserve deducted from
assets to which it applies-
Allowance for doubtful accounts $6,650 $481 $(4,631) --- $2,500
=============== ============= ============ =================== ==================
Restructuring reserve $1,343 $2,402 $(3,163) --- $582
=============== ============= ============ =================== ==================
For the Year Ended November 30, 2002:
Reserve deducted from
assets to which it applies-
Allowance for doubtful accounts $2,500 $753 $(651) --- $2,602
=============== ============= ============ =================== ==================
Restructuring reserve $582 $1,251 $(1,684) --- $149
=============== ============= ============ =================== ==================
(1) Deductions are for the purpose for which the reserve was created.
INDEX TO EXHIBITS
Exhibit No.
13 Portions of the Bassett Furniture Industries, Incorporated
Annual Report to Stockholders for the year ended November 30,
2002
21 List of subsidiaries of registrant
23A Consent of Independent Auditors
23B Consent of Independent Auditors
23C Notice Regarding Lack of Consent of Arthur Andersen
99A Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99B Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002