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EX-4 - EXHIBIT 4 - BASSETT FURNITURE INDUSTRIES INCex4.htm
EX-31.A - EXHIBIT 31A - BASSETT FURNITURE INDUSTRIES INCex31-a.htm
EX-32.A - EXHIBIT 32A - BASSETT FURNITURE INDUSTRIES INCex32-a.htm
EX-31.B - EXHIBIT 31B - BASSETT FURNITURE INDUSTRIES INCex31-b.htm
EX-32.B - EXHIBIT 32B - BASSETT FURNITURE INDUSTRIES INCex32-b.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 28, 2011

OR

[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________________________ to _______________________

Commission File No. 0-209


BASSETT FURNITURE INDUSTRIES, INCORPORATED
(Exact name of Registrant as specified in its charter)
 
Virginia
54-0135270
(State or other jurisdiction
(I.R.S. Employer
of incorporation or organization)
Identification No.)
 
3525 Fairystone Park Highway
Bassett, Virginia 24055
(Address of principal executive offices)
(Zip Code)

(276) 629-6000
(Registrant's telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.  Yes __ X____No ___ ____

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Large Accelerated Filer _______    Accelerated Filer__ ___     Non-accelerated Filer _ X___

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes __ ____No ___X ____

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ______No _______

At June 30, 2011, 11,550,714 shares of common stock of the Registrant were outstanding.
 
 
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BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

TABLE OF CONTENTS

                                                                                                                                
 ITEM    PAGE
     
  PART I - FINANCIAL INFORMATION  
     
1.
Condensed Consolidated Financial Statements as of  May 28, 2011 (unaudited) and November 27, 2010 and for the periods ended May 28, 2011 (unaudited) and May 29, 2010 (unaudited)
 
     
 
Condensed Consolidated Statements of Operations and Retained Earnings
3
     
 
Condensed Consolidated Balance Sheets
4
     
 
Condensed Consolidated Statements of Cash Flows
5
     
 
Notes to Condensed Consolidated Financial Statements
6
     
2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
27
     
3.
Quantitative and Qualitative Disclosures About Market Risk
40
     
4.
Controls and Procedures
41
     
  PART II - OTHER INFORMATION  
     
1.
Legal Proceedings
42
     
2.
Unregistered Sales of Equity Securities and Use of Proceeds
42
     
3.
Defaults Upon Senior Securities
42
     
6.
Exhibits
42
     
 
 
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE PERIODS ENDED MAY 28, 2011 AND MAY 29, 2010 – UNAUDITED
(In thousands except per share data)
 
   
Quarter Ended
   
Six Months Ended
 
                         
   
May 28, 2011
   
May 29, 2010
   
May 28, 2011
   
May 29, 2010
 
Net sales
  $ 66,261     $ 57,845     $ 130,525     $ 110,736  
Cost of sales
    33,064       29,408       65,480       56,555  
  Gross profit
    33,197       28,437       65,045       54,181  
                                 
Selling, general and administrative expenses excluding
                               
     bad debt and notes receivable valuation charges
    30,879       27,628       61,387       53,529  
Bad debt and notes receivable valuation charges
    6,200       1,115       13,026       3,830  
Licensee debt cancellation charges
    6,447       -       6,447       -  
Restructuring and asset impairment charges
    1,080       -       1,959       -  
Lease exit costs
    2,844       -       3,728       -  
  Loss from operations
    (14,253 )     (306 )     (21,502 )     (3,178 )
                                 
Gain on sale of affiliate
    85,542       -       85,542       -  
Other income (loss), net
    (4,815 )     471       (5,773 )     1,699  
Income (loss) before income taxes
    66,474       165       58,267       (1,479 )
                                 
Income tax expense
    (3,928 )     (48 )     (3,975 )     (96 )
Net income (loss)
  $ 62,546     $ 117     $ 54,292     $ (1,575 )
                                 
Retained earnings-beginning of period
    40,205       48,769       48,459       50,461  
Cash dividends
    (348 )     -       (348 )     -  
Retained earnings-end of period
  $ 102,403     $ 48,886     $ 102,403     $ 48,886  
                                 
Basic earnings (loss) per share
  $ 5.43     $ 0.01     $ 4.72     $ (0.14 )
                                 
Diluted earnings (loss) per share
  $ 5.39     $ 0.01     $ 4.69     $ (0.14 )
                                 
Dividends per share
  $ 0.03     $ -     $ 0.03     $ -  
 
The accompanying notes to condensed consolidated financial statements are an integral part of the condensed consolidated financial statements.
 
 
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PART I – FINANCIAL INFORMATION – CONTINUED
ITEM 1. FINANCIAL STATEMENTS
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MAY 28, 2011 AND NOVEMBER 27, 2010
(In thousands)
 
   
(Unaudited)
       
Assets
 
May 28, 2011
   
November 27, 2010
 
Current assets
           
    Cash and cash equivalents
  $ 69,912     $ 11,071  
    Accounts receivable, net
    15,647       31,621  
    Inventories
    40,757       41,810  
    Other current assets
    9,508       6,969  
Total current assets
    135,824       91,471  
                 
Property and equipment
               
    Cost
    138,866       142,362  
    Less accumulated depreciation
    92,607       96,112  
Property and equipment, net
    46,259       46,250  
                 
Investments
    15,197       15,111  
Retail real estate
    19,020       27,513  
Notes receivable, net
    1,770       7,508  
Other
    15,815       9,464  
Total long-term assets
    51,802       59,596  
Total assets
  $ 233,885     $ 197,317  
                 
Liabilities and Stockholders’ Equity
               
Current liabilities
               
    Accounts payable
  $ 16,588     $ 24,893  
    Accrued compensation and benefits
    7,086       6,652  
Customer deposits
    8,062       9,171  
Other accrued liabilities
    16,527       11,594  
Current portion of real estate notes payable
    5,365       9,521  
Total current liabilities
    53,628       61,831  
                 
Long-term liabilities
               
    Post employment benefit obligations
    10,774       11,004  
    Real estate notes payable
    4,224       4,295  
    Distributions in excess of affiliate earnings
    -       7,356  
   Other long-term liabilities
    5,269       6,526  
Total long-term liabilities
    20,267       29,181  
                 
                 
Stockholders’ equity
               
     Common stock
    57,724       57,795  
     Retained earnings
    102,403       48,459  
     Additional paid-in-capital
    302       478  
     Accumulated other comprehensive loss
    (439 )     (427 )
Total stockholders' equity
    159,990       106,305  
Total liabilities and stockholders’ equity
  $ 233,885     $ 197,317  
 
The accompanying notes to condensed consolidated financial statements are an integral part of the condensed consolidated financial statements.
 
 
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PART I – FINANCIAL INFORMATION – CONTINUED
ITEM 1. FINANCIAL STATEMENTS
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED MAY 28, 2011 AND MAY 29, 2010 – UNAUDITED
(In thousands)
 
   
Six Months Ended
 
   
May 28, 2011
   
May 29, 2010
 
Operating activities:
           
Net income (loss)
  $ 54,292     $ (1,575 )
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
               
Depreciation and amortization
    2,907       2,959  
Equity in undistributed income of investments and unconsolidated affiliated companies
    (1,921 )     (2,204 )
Provision for restructuring and asset impairment charges
    1,959       -  
Licensee debt cancellation charges
    6,447       -  
Lease exit costs
    2,228       -  
Provision for lease and loan guarantees
    1,457       916  
Bad debt and notes receivable valuation charges
    13,026       3,830  
Gain on mortgage settlement
    (436 )     -  
Gain on sale of affiliate
    (85,542 )     -  
Realized income from investments
    (111 )     (2,214 )
Impairment and lease exit charges on retail real estate
    4,790       -  
Other, net
    963       464  
Changes in operating assets and liabilities:
               
             Accounts receivable
    2,000       183  
             Inventories
    2,782       913  
             Other current assets
    (23 )     3,745  
             Accounts payable and accrued liabilities
    (9,439 )     1,497  
          Net cash provided by (used in) operating activities
    (4,621 )     8,514  
                 
Investing activities:
               
Purchases of property, equipment and real estate
    (964 )     (1,503 )
Proceeds from sales of property and equipment
    155       4,235  
Acquisition of retail licensee stores, net of cash acquired
    -       (277 )
Proceeds from sale of affiliate
    67,752       -  
Proceeds from sales of investments
    2,603       8,326  
Purchases of investments
    (2,603 )     (8,076 )
Dividends from affiliate
    3,756       937  
Equity contribution to affiliate
    (980 )     -  
Net cash received on licensee notes
    46       298  
           Net cash used in investing activities
    69,765       3,940  
                 
Financing activities:
               
Net repayments under revolving credit facility
    -       (15,000 )
Repayments of real estate notes payable
    (3,791 )     (7,098 )
Issuance of common stock
    88       71  
Repurchases of common stock
    (473 )     -  
Payments on other notes
    (2,127 )     (555 )
            Net cash used in financing activities
    (6,303 )     (22,582 )
Change in cash and cash equivalents
    58,841       (10,128 )
Cash and cash equivalents - beginning of period
    11,071       23,221  
                 
Cash and cash equivalents - end of period
  $ 69,912     $ 13,093  
 
The accompanying notes to condensed consolidated financial statements are an integral part of the condensed consolidated financial statements.
 
 
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PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
May 28, 2011
(Dollars in thousands except share and per share data)
 
1. Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete financial statements. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.
 
The condensed consolidated financial statements include the accounts of Bassett Furniture Industries, Incorporated (“Bassett”, “we”, “our”, or the “Company”) and our majority owned subsidiaries of which we have operating control. The equity method of accounting is used for our investments in affiliated companies in which we exercise significant influence but do not maintain control.
 
For comparative purposes, certain amounts in the 2010 financial statements have been reclassified to conform to the 2011 presentation.
 
References to “ASC” included hereinafter refer to the Accounting Standards Codification established by the Financial Accounting Standards Board as the source of authoritative GAAP.

2. Interim Financial Presentation
 
All intercompany accounts and transactions have been eliminated in the condensed consolidated financial statements. The results of operations for the three and six months ended May 28, 2011 are not necessarily indicative of results for the fiscal year. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended November 27, 2010.
 
We calculate an anticipated effective tax rate for the year based on our annual estimates of pretax income or loss and use that effective tax rate to record our year-to-date income tax provision.  Any change in annual projections of pretax income or loss could have a significant impact on our effective tax rate for the respective quarter.  For the three and six months ended May 28, 2011, our effective tax rate of approximately 6.8% differs from the blended statutory rate of 38% primarily due to the expected reversal of the valuation allowance on existing deferred tax assets primarily due to the expected utilization of net operating loss carryforwards and credits to significantly offset the taxable gain on the sale of an affiliate (see Note 7). For the six months ended May 29, 2010, no tax benefits on the losses generated were recorded since we remained in a cumulative loss position. In addition, no general tax provision was made for the quarter ended May 29, 2010 as the pre-tax profit for that period could be offset against existing net operating loss carryforwards, and we did not expect to generate taxable income for the full year. The tax provision for the three and six months ended May 29, 2010 represents the accrual of income taxes to be paid in certain states and the accrual of penalties and interest associated with certain unrecognized tax benefits.
 
 
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PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
May 28, 2011
(Dollars in thousands except share and per share data)
 
3. Revenue Recognition

Revenue is recognized when the risks and rewards of ownership and title to the product have transferred to the buyer. This occurs upon the shipment of goods to independent dealers or, in the case of Company-owned retail stores, upon delivery to the customer.

Staff Accounting Bulletin No. 104, Revenue Recognition (“SAB 104”) outlines the four basic criteria for recognizing revenue as follows: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the seller’s price to the buyer is fixed or determinable, and (4) collectibility is reasonably assured. SAB 104 further asserts that if collectibility of all or a portion of the revenue is not reasonably assured, revenue recognition should be deferred until payment is received.  Currently, there is one dealer from whom revenue is being recognized on a cost recovery basis. The following table details the total revenue and cost deferred for each period presented:
 
   
Quarter ended
   
Six Months ended
 
   
May 28, 2011
   
May 29, 2010
   
May 28, 2011
   
May 29, 2010
 
Revenue deferred
  $ (3 )   $ 569     $ 1,254     $ 715  
Cost deferred
    (2 )     398       878       500  
 
The cumulative amount of deferred gross profit is carried in the accompanying balance sheets as a reduction of gross accounts receivable until payment is received.  The reduction of gross accounts receivable related to deferred gross profit was $391 and $494 at May 28, 2011 and November 27, 2010, respectively.
 
4. Accounts Receivable

Accounts receivable consists of the following:
 
   
May 28, 2011
   
November 27, 2010
 
Gross accounts receivable
  $ 24,558     $ 38,987  
Allowance for doubtful accounts
    (8,911 )     (7,366 )
Net accounts receivable
  $ 15,647     $ 31,621  

Activity in the allowance for doubtful accounts was as follows:
 
   
2011
 
       
Balance, November 27, 2010
  $ 7,366  
Additions charged to expense
    8,397  
Write-offs and other deductions
    (6,852 )
Balance, May 28, 2011
  $ 8,911  
 
Additions to the reserve charged to expense include $(35) and $1,777 of bad debt charges (recoveries) recognized in the settlement of receivables owed by licensees acquired during the three and six months ended May 28, 2011, respectively (see Note 10).  Also, $2,927 of the write-offs and other deductions during the six months ended May 28, 2011 related to the acquired licensees.

We believe that the carrying value of our net accounts receivable approximates fair value. The inputs into these fair value estimates reflect our market assumptions and are not observable.  Consequently, the inputs are considered to be Level 3 as specified in the fair value hierarchy in ASC Topic 820, Fair Value Measurements and Disclosures.  See Note 14.
 
 
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PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
May 28, 2011
(Dollars in thousands except share and per share data)
 
5. Inventories
 
Inventories are valued at the lower of cost or market. Cost is determined for domestic furniture inventories using the last-in, first-out (LIFO) method. The costs for imported inventories are determined using the first-in, first-out (FIFO) method.
 
Inventories were comprised of the following:
 
   
May 28, 2011
   
November 27, 2010
 
Wholesale finished goods
  $ 25,732     $ 24,934  
Work in process
    256       244  
Raw materials and supplies
    5,645       6,100  
Retail merchandise
    17,320       18,810  
Total inventories on first-in, first-out method
    48,953       50,088  
LIFO adjustment
    (6,433 )     (6,550 )
Reserve for excess and obsolete inventory
    (1,763 )     (1,728 )
    $ 40,757     $ 41,810  
 
We estimate an inventory reserve for excess quantities and obsolete items based on specific identification and historical write-offs, taking into account future demand, market conditions and the respective valuations at LIFO.  The need for these reserves is primarily driven by the normal product life cycle.  As products mature and sales volumes decline, we rationalize our product offerings to respond to consumer tastes and keep our product lines fresh.  If actual demand or market conditions in the future are less favorable than those estimated, additional inventory write-downs may be required. In determining reserves, we calculate separate reserves on our wholesale and retail inventories.  Our wholesale inventories tend to carry the majority of the reserves for excess quantities and obsolete inventory due to the nature of our distribution model. These wholesale reserves primarily represent design and/or style obsolescence. Typically, product is not shipped to our retail warehouses until a consumer has ordered and paid a deposit for the product. We do not typically hold retail inventory for stock purposes. Consequently, floor sample inventory and inventory for delivery to customers account for the majority of our inventory at retail.  Retail reserves are based on accessory and clearance floor sample inventory in our stores and any inventory that is not associated with a specific customer order in our retail warehouses.

Activity in the reserves for excess quantities and obsolete inventory by segment are as follows:
 
   
Wholesale Segment
   
Retail Segment
   
Total
 
                   
Balance, November 27, 2010
  $ 1,519     $ 209     $ 1,728  
Additions charged to expense
    808       147       955  
Write-offs
    (729 )     (191 )     (920 )
Balance, May 28, 2011
  $ 1,598     $ 165     $ 1,763  
 
Our estimates and assumptions have been reasonably accurate in the past. We have not made any significant changes to our methodology for determining inventory reserves in 2011 and do not anticipate that our methodology is likely to change in the future. A plus or minus 10% change in our inventory reserves would not have been material to our financial statements for the periods presented.

 
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PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
May 28, 2011
(Dollars in thousands except share and per share data)
 
6. Notes Receivable

Our notes receivable consist of the following:
 
   
May 28, 2011
   
November 27, 2010
 
Notes receivable
  $ 6,110     $ 14,914  
Allowance for doubtful accounts and
               
   discounts on notes receivable
    (4,065 )     (6,748 )
Notes receivable, net
    2,045       8,166  
Less: current portion of notes receivable
    (275 )     (658 )
Long term notes receivable
  $ 1,770     $ 7,508  

Our notes receivable, which bear interest at rates ranging from 2% to 6%, consist primarily of amounts due from our licensees from loans made by the Company to help licensees fund their operations.  Approximately 42% and 61% of our notes receivable represent conversions of past due accounts receivable at May 28, 2011 and November 27, 2010, respectively.  We have discontinued these conversions and have no plans to resume this practice. At the inception of the note receivable, we determined whether the note carried a market rate of interest. A discount on the note was recorded if we determined that the note carried an interest rate below the market rate.  We amortize the related note discount over the contractual term of the note and cease amortizing the discount to interest income when the present value of expected future cash flows is less than the carrying value of the note.   Interest income on the notes receivable, which is included in other income (loss), net, was as follows:
 
   
Quarter ended
   
Six months ended
 
   
May 28, 2011
   
May 29, 2010
   
May 28, 2011
   
May 29, 2010
 
Interest income
  $ 34     $ 141     $ 75     $ 267  
          
The initial carrying value of the notes receivable was determined using present value techniques which consider the fair market rate of interest based on the licensee’s risk profile and estimated cash flows to be received. The estimated fair value of our notes receivable portfolio was $2,045 at May 28, 2011 and $8,212 at November 27, 2010.  The inputs into these fair value calculations reflect our market assumptions and are not observable.  Consequently, the inputs are considered to be Level 3 as specified in the fair value hierarchy in ASC Topic 820, Fair Value Measurements and Disclosures.  See Note 14.

Substantially all of our notes receivable comprise a single portfolio segment of financing receivables consisting of notes receivable from current and former licensees. These notes receivable are evaluated in three classes – those due from current licensees, those due from former licensees which are secured by real estate, and those due from former licensees which are unsecured. On a quarterly basis we examine these notes receivable for evidence of impairment. With respect to current licensees,  we consider factors such as licensee capitalization, projected operating performance, the viability of the market in which the licensee operates and the licensee’s operating history, including our cash receipts from the licensee, licensee sales and any underlying collateral.  Our evaluation of former licensees is primarily based upon payment history and an evaluation of the underlying collateral. After considering these factors, should we believe that all or a portion of the expected cash flows attributable to the note receivable will not be received, we record an impairment charge on the note by estimating future cash flows and discounting them at the effective interest rate.  Any difference between the estimated discounted cash flows and the carrying value of the note is recorded as an increase to the allowance for doubtful accounts.  Notes receivable are charged off if they are deemed to be uncollectible with no recoverable collateral value.

These notes receivable, as well as our accounts receivable, are generally secured by the filing of security statements in accordance with the Uniform Commercial Code and/or real estate owned by the maker of the note and in some cases, personal guarantees by our licensees.

 
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PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
May 28, 2011
(Dollars in thousands except share and per share data)
 
Our investment in notes receivable and related allowances, disaggregated by class, are as follows at May 28, 2011:
 
         
Allowance for
       
   
Gross
   
Doubtful Accounts
   
Notes Receivable
 
   
Notes Receivable
   
and Discounts
   
Net
 
                   
                   
Due from current licensees
  $ 1,529     $ (1,454 )   $ 75  
Due from former licencees:
                       
   Secured  by real estate
    2,657       (975 )     1,682  
   Unsecured
    1,636       (1,636 )     -  
Other notes
    288       -       288  
                         
Balance at May 28, 2011
  $ 6,110     $ (4,065 )   $ 2,045  

The notes receivable shown above by class include impaired notes and related allowances as of May 28, 2011 as follows:
 
         
Allowance for
       
   
Gross
   
Doubtful Accounts
   
Notes Receivable
 
   
Notes Receivable
   
and Discounts
   
Net
 
                   
                   
Due from current licensees
  $ 1,454     $ (1,454 )   $ -  
Due from former licencees:
                       
   Secured  by real estate
    1,558       (975 )     583  
   Unsecured
    1,636       (1,636 )     -  
                         
Balance at May 28, 2011
  $ 4,648     $ (4,065 )   $ 583  
 
The average recorded investment in the impaired loans by class for the six months ended May 28, 2011 was as follows:
 
Due from current licensees
  $ 2,008  
Due from former licencess:
       
   Secured  by real estate
    783  
   Unsecured
    144  
Total average recorded
       
   investment in impaired loans
  $ 2,935  

 
10 of 44

 
 
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
May 28, 2011
(Dollars in thousands except share and per share data)
 
The aging of our investment in notes receivable by class, based on scheduled principal due dates, is as follows at May 28, 2011:
 
         
30-90 Days
   
Over 90 Days
       
   
Current
   
Past Due
   
Past Due
   
Total
 
                         
Due from current licensees
  $ 1,422  (1)   $ 11     $ 96     $ 1,529  
Due from former licencees:
                               
   Secured  by real estate
    1,089       10       1,558  (2)     2,657  
   Unsecured
    -       -       1,636  (2)     1,636  
Other notes
    288       -       -       288  
                                 
Balance at May 28, 2011
  $ 2,799     $ 21     $ 3,290     $ 6,110  
 
    (1) Current balance includes principal of $625 on notes which currently require payments of interest only.
    (2) Balance over 90 days past due represents notes in default.

The change in our allowance for doubtful accounts and discounts for the six months ended May 28, 2011, disaggregated by class, is as follows:
 
         
Due from Former Licensees
             
   
Due from Current Licensees
   
Secured by Real Estate
   
Unsecured
   
Other Notes
   
Total
 
                               
Balance, November 27, 2010
  $ 4,825     $ 575     $ 1,348     $ -     $ 6,748  
Additions charged to expense
    3,941       400       288       -       4,629  
Write-offs and other deductions
    (7,292 )     -       -       -       (7,292 )
Amortization of discounts
    (20 )     -       -       -       (20 )
Balance, May 28, 2011
  $ 1,454     $ 975     $ 1,636     $ -     $ 4,065  
 
Additions charged to expense with respect to the allowance for notes due from current licensees for the three and six months ended May 28, 2011 include $0 and $663, respectively, related to the settlement of notes receivable due from a licensee acquired during the first quarter of 2011 (see Note 10).

 
11 of 44

 
 
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
May 28, 2011
(Dollars in thousands except share and per share data)

7. Unconsolidated Affiliated Companies

On May 2, 2011 we sold our 46.9% interest in International Home Furnishings Center, Inc. (“IHFC”) to International Market Centers, L.P. (“IMC”).  Consideration received, the balance of our investment in IHFC at the time of sale, and the resulting gain from the sale are as follows:
 
Consideration received:
     
Cash
  $ 67,752  
Tax escrow receivable (1)
    1,413  
Indemnifcation escrow receivable (2)
    4,695  
Investment in IMC (2)
    1,000  
Balance of cash consideration receivable (1)
    1,400  
         
Total consideration received
  $ 76,260  
         
Investment in IHFC:
       
  Distributions in excess of affiliate earnings
    9,282  
         
Gain on sale of affiliate
  $ 85,542  
         
(1) Included in other current assets in the accompanying condensed consolidated balance sheet at May 28, 2011.
 
(2) Included in other assets in the accompanying condensed consolidated balance sheet at May 28, 2011.
 
 
The tax escrow receivable represents the portion of escrowed sales proceeds expected to be released to us after the settlement of certain outstanding IHFC tax obligations. In addition, $4,695 of proceeds were placed in escrow to indemnify the purchaser with respect to various contingencies.  Any unused portions of these escrowed funds will be released to us over a three year period.  Also in connection with the sale, we acquired a minority equity stake in IMC in exchange for $1,000.  IMC is majority owned by funds managed by Bain Capital Partners and a subsidiary of certain investment funds managed by Oaktree Capital Management, L.P.  Our investment in IMC is accounted for using the cost method as we do not have significant influence over IMC.

IHFC owned and leased out floor space in a showroom facility in High Point, North Carolina. Prior to the sale of our investment in IHFC, we accounted for the investment using the equity method since we did not maintain operating control of IHFC.  At November 27, 2010, our investment reflected a credit balance of $7,356 which is presented in the liabilities section in the accompanying condensed consolidated balance sheets as “distributions in excess of affiliate earnings”. The negative book value resulted from IHFC’s previous refinancing of its real estate based on the market value of the property and using the proceeds to pay a special dividend to its owners.  We recorded income and received dividends from IHFC as follows:
 
   
Quarter ended
   
Six Months ended
 
   
May 28, 2011
   
May 29, 2010
   
May 28, 2011
   
May 29, 2010
 
Income recorded
  $ 922     $ 1,250     $ 1,832     $ 2,136  
Dividends received
    3,756       937       3,756       937  
 
The income is included in other income (loss), net in our condensed consolidated statements of operations and retained earnings.
 
 
12 of 44

 
 
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
May 28, 2011
(Dollars in thousands except share and per share data)
 
Summarized unaudited income statement information for IHFC for its first five months of fiscal 2011 up to the sale of our investment and six months of 2010 is as follows:
 
   
2011
   
2010
 
   
( five months)
   
(six months)
 
Revenue
  $ 15,875     $ 19,525  
Operating income
    9,876       11,889  
Net income
    3,908       4,559  
 
We have a 49% ownership interest in Zenith Freight Lines, LLC (“Zenith”) which is accounted for using the equity method. We recorded the following income from Zenith in other income (loss), net in our condensed consolidated statements of operations and retained earnings:
 
   
Quarter ended
   
Six Months ended
 
   
May 28, 2011
   
May 29, 2010
   
May 28, 2011
   
May 29, 2010
 
Income
  $ 60     $ 49     $ 91     $ 31  
Dividends received
    -       -       -       -  
 
During the second quarter of 2011 we made an additional cash investment in Zenith of $980, which represented our 49% share of a total $2,000 equity contribution to Zenith to partially fund their acquisition of a warehouse facility.

8. Real Estate Notes Payable and Revolving Credit Facility
 
Certain of our retail real estate properties have been financed through commercial mortgages with interest rates ranging from 6.73% to 8.21%. These mortgages are collateralized by the respective properties with net book values totaling approximately $11,776 and $21,721 at May 28, 2011 and November 27, 2010, respectively. The current portion of these mortgages, $5,365 and $9,521 as of May 28, 2011 and November 27, 2010, respectively, has been included as a current liability in the accompanying condensed consolidated balance sheets. The long-term portion, $4,224 and $4,295 as of May 28, 2011 and November 27, 2010, respectively, is presented as real estate notes payable in the condensed consolidated balance sheets.  At the end of the first quarter of 2011, we entered into Discounted Payoff Agreements (“DPOs”) with the lenders on two mortgages which were subsequently paid off during the second quarter of 2011. Under the terms of the DPOs the remaining balance owed was reduced, resulting in a $436 gain on the settlement of these mortgages, which is included in other income (loss), net in our condensed consolidated statements of operations and retained earnings for the six months ended May 28, 2011. Also, one mortgage with a balance owed of $2,435, which came due on February 1, 2011, remained outstanding as of May 28, 2011 under a forbearance agreement with the lender. This mortgage was paid in full on June 30, 2011.
 
The fair value of these mortgages was $9,182 and $13,556 at May 28, 2011 and November 27, 2010, respectively.  In determining the fair value the Company utilized current market interest rates for similar instruments.  The inputs into these fair value calculations reflect our market assumptions and are not observable.  Consequently, the inputs are considered to be Level 3 as specified in the fair value hierarchy in ASC Topic 820, Fair Value Measurements and Disclosures. See Note 14.
 
At May 28, 2011 our revolving credit facility (as amended on October 6, 2009) contained, among other provisions, certain financial covenants with which we were in full compliance. It provided for a variable interest rate of LIBOR plus 2.75% with a 4.25% minimum rate, and allowed borrowings of up to $30,000 subject to the limitations of a borrowing base calculation as set forth in the credit agreement. Borrowings under the facility, which were $-0- at May 28, 2011 and November 27, 2010, were secured by a pledge of certain of our marketable securities and substantially all of our receivables and inventories.
 
With our current level of liquidity, we are in discussions with our bank to develop a new credit agreement and expect to have it in place sometime during the fourth quarter of 2011.  On July 5, 2011, we entered into a temporary renewal agreement with our bank for a $10,000 revolving line of credit that will mature September 5, 2011.  As part of the temporary agreement, we are no longer required to pledge certain of our marketable securities as collateral.
 
At May 28, 2011, we had $3,321 outstanding under standby letters of credit.
 
 
13 of 44

 
 
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
May 28, 2011
(Dollars in thousands except share and per share data)
 
9. Comprehensive Income
 
The following table provides a summary of total comprehensive income (loss):
 
   
Quarter ended
   
Six Months ended
 
   
May 28, 2011
   
May 29, 2010
   
May 28, 2011
   
May 29, 2010
 
Net income (loss)
  $ 62,546     $ 117     $ 54,292     $ (1,575 )
                                 
Other comprehensive income (loss):
                               
Net change in unrealized holding gains & losses
    55       11       (24 )     (1,952 )
Amortization associated with SERP Plan
    6       7       12       13  
                                 
Total comprehensive income (loss)
  $ 62,607     $ 135     $ 54,280     $ (3,514 )

The following table provides a summary of the changes in accumulated other comprehensive income (loss):
 
Balance at November 27, 2010
  $ (427 )
Net change in unrealized holding gains & losses
    (24 )
Amortization associated with SERP Plan
    12  
         
Balance at May 28,  2011
  $ (439 )
 
10. Licensee Acquisitions

As we continually monitor business relationships with our licensees, we may determine from time to time that it is in our best interest to acquire a licensee’s operations in order to mitigate certain risks associated with the poor performance or potential failure of a licensee.  Such risks include loss of receivables or underlying collateral, potential impairment of the value of our investments in real estate used by a licensee or exposure to contingent liabilities under lease guarantees, and potential harm to our market share and brand integrity within a licensee’s market. In addition, we are sometimes approached by our licensees to acquire all or certain stores operated by the licensee.  We evaluate such opportunities considering, among other things, the viability of the market and our participation in the store real estate.

During the six months ended May 28, 2011, we acquired three retail stores operated by a licensee in Virginia and one from another licensee in Nevada. During the six months ended May 29, 2010, we acquired eight retail stores operated by six licensees in Maryland, Missouri, Illinois, New York, Alabama, Mississippi and California. Six stores were acquired pursuant to foreclosure on the underlying assets subject to the terms of our security agreements with the licensees.  Two stores were acquired from licensees following their requests for a buyout.

 
14 of 44

 
 
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
May 28, 2011
(Dollars in thousands except share and per share data)
 
These acquisitions were accounted for in accordance with ASC Topic 805, Business Combinations.  As required by ASC 805, the settlements of certain pre-existing relationships were excluded from the value of the consideration exchanged in the transactions, and gains or losses on such settlements were recognized.  The primary relationships settled involved the write off of accounts and notes receivable which had been foreclosed upon pursuant to security agreements with the licensees, as well as the assumption of certain guaranteed obligations of the licensees. Remaining receivables not foreclosed upon were given as consideration in exchange for net assets acquired. As a result of these settlements, we recognized the following charges:
 
   
Quarter Ended
   
Six Months Ended
 
   
May 28, 2011
   
May 29, 2010
   
May 28, 2011
   
May 29, 2010
 
Bad debt expense (recovery) & notes
                       
     receivable valuation charges
  $ (35 )   $ (110 )   $ 2,440     $ 1,794  
Loan & lease guarantee expense*
    -       48       421       209  
                                 
          Total charges (gains)
  $ (35 )   $ (62 )   $ 2,861     $ 2,003  

      *Included in other income (loss), net in the condensed consolidated statements of
        operations and retained earnings.
     
 
The following table summarizes the net assets acquired and consideration given in the store acquisitions:
 
   
Quarter Ended
   
Six Months Ended
 
   
May 28, 2011
   
May 29, 2010
   
May 28, 2011
   
May 29, 2010
 
Net assets acquired:
                       
Inventory
  $ 601     $ 393     $ 1,729     $ 2,136  
Property & equipment/other
    45       638       567       2,288  
Customer deposits and other
                               
          accrued expenses
    (324 )     (346 )     (1,474 )     (2,038 )
                                 
          Total net assets acquired
  $ 322     $ 685     $ 822     $ 2,386  
                                 
Consideration given:
                               
   Accounts receivable
  $ 322     $ 485     $ 822     $ 2,009  
   Payable to former owner
    -       100       -       100  
   Cash
    -       100       -       277  
                                 
       Total consideration
  $ 322     $ 685     $ 822     $ 2,386  
 
The assets acquired and liabilities assumed were measured at fair value in accordance with ASC 805.  Acquired inventory is valued at expected retail sales price less an allowance for direct selling costs and profit thereon. Acquired property & equipment are valued based upon our estimate of replacement cost less an allowance for age and condition at the time of acquisition.  Customer deposits and accrued expenses are expected to be settled at face value within a short period following acquisition; therefore, face value is assumed to approximate fair value. The inputs into these fair value calculations reflect our market assumptions and are not observable. Consequently, the inputs are considered to be Level 3 as specified in the fair value hierarchy in ASC 820, Fair Value Measurements and Disclosures. See Note 14.

 
15 of 44

 
 
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
May 28, 2011
(Dollars in thousands except share and per share data)
 
Due to the level of settlements involved with these acquisitions and the related losses recognized, no goodwill was recognized in these store acquisitions.  The pro forma impact of the acquisitions on current and prior periods is not presented as we believe it is impractical to do so. We were not able to compile what we believed to be complete, accurate and reliable accounting information to use as a basis for pro forma presentations without an unreasonable effort.  Net sales and operating income (loss) generated by these stores subsequent to their acquisition were as follows:
 
   
Quarter Ended
   
Six Months Ended
 
   
May 28, 2011
   
May 29, 2010
   
May 28, 2011
   
May 29, 2010
 
Net sales
  $ 3,403     $ 3,933     $ 3,770     $ 5,460  
Operating income (loss)
    109       (383 )     100       (752 )

Subsequent to May 28, 2011, we acquired from one licensee the operations of two retail stores, one in Ohio and one in Kentucky.  The acquisitions were funded through the exchange of existing accounts receivable for net assets acquired of approximately $477. We do not expect to incur any charges against earnings in the third quarter of 2011 in connection with these acquisitions.

11. Contingencies
 
We are involved in various legal and 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, we believe that the final resolution of these matters will not have a material adverse effect on our financial position or future results of operations.
 
We lease land and buildings that are used in the operation of our Company-owned retail stores as well as in the operation of certain of our licensee-owned stores.  We had obligations of $69,387 and $80,324 at May 28, 2011 and November 27, 2010, respectively, for future minimum lease payments under non-cancelable operating leases having remaining terms in excess of one year. We also have guaranteed certain lease obligations of licensee operators.  Lease guarantees range from one to ten years. We were contingently liable under licensee lease obligation guarantees in the amount of $3,889 and $5,856 at May 28, 2011 and November 27, 2010, respectively.
 
We have also guaranteed loans to certain of our licensees to finance initial inventory packages and other operating requirements for those stores. These loans generally have three year terms.  The total contingent liabilities with respect to these loan guarantees as of May 28, 2011 and November 27, 2010 were $601 and $2,296, respectively.
 
In the event of default by an independent dealer under the guaranteed lease or loan, we believe that the risk of loss is mitigated through a combination of options that include, but are not limited to, arranging for a replacement dealer, liquidating the collateral (primarily inventory), and pursuing payment under the personal guarantees of the independent dealer. The proceeds of the above options are expected to cover the estimated amount of our future payments under the guarantee obligations, net of recorded reserves. The fair value of lease and loan guarantees (an estimate of the cost to the Company to perform on these guarantees) at May 28, 2011 and November 27, 2010 was $1,255 and $2,304, respectively, and is recorded in other accrued liabilities and other long-term liabilities in the accompanying condensed consolidated balance sheets. The inputs into these fair value calculations reflect our market assumptions and are not observable.  Consequently, the inputs are considered to be Level 3 as specified in the fair value hierarchy in ASC Topic 820, Fair Value Measurements and Disclosures. See Note 14.

 
16 of 44

 
 
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
May 28, 2011
(Dollars in thousands except share and per share data)
 
12.  Post Employment Benefit Obligations
 
We have an unfunded Supplemental Retirement Income Plan (the “Supplemental Plan”) that covers one current and certain former executives.  The liability for this plan was $8,748 and $8,866 as of May 28, 2011 and November 27, 2010, respectively, and is recorded as follows in the condensed consolidated balance sheets:
 
   
May 28, 2011
   
November 27, 2010
 
Other accrued liabilities
  $ 846     $ 846  
Post employment benefit obligations
    7,902       8,020  
                 
Total pension liability
  $ 8,748     $ 8,866  
 
Components of net periodic pension costs are as follows:
 
   
Quarter Ended
   
Six Months Ended
 
   
May 28, 2011
   
May 29, 2010
   
May 28, 2011
   
May 29, 2010
 
Service cost
  $ 12     $ 11     $ 24     $ 22  
Interest cost
    105       106       210       212  
Amortization of transition obligation
    11       11       22       22  
                                 
Net periodic pension cost
  $ 128     $ 128     $ 256     $ 256  
 
We have an unfunded Deferred Compensation Plan that covers one current executive and certain former executives and provides for voluntary deferral of compensation. This plan has been frozen with no additional participants or deferrals permitted. We recognized expense of $83 and $102 for the quarters ended May 28, 2011 and May 29, 2010 respectively, and $166 and $204 for the six months ended May 28, 2011 and May 29, 2010, respectively.  Our liability under this plan was $2,872 and $2,985 as of May 28, 2011 and November 27, 2010, respectively, and is reflected in post employment benefit obligations.
 
 
17 of 44

 
 
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
May 28, 2011
(Dollars in thousands except share and per share data)
 
13. Earnings Per Share
 
The following reconciles basic and diluted loss per share:
 
   
Net Income (Loss)
   
Weighted Average Shares
   
Net Income (Loss) Per Share
 
For the quarter ended May 28, 2011:
                 
                   
Basic earnings per share
  $ 62,546       11,518,630     $ 5.43  
Add effect of dilutive securities:
                       
    Options and restricted shares
    -       79,236       (0.04 )
Diluted earnings per share
  $ 62,546       11,597,866     $ 5.39  
                         
For the quarter ended May 29, 2010:
                       
                         
Basic earnings per share
  $ 117       11,441,663     $ 0.01  
Add effect of dilutive securities:
                       
    Options and restricted shares
    -       37,172       -  
Diluted earnings per share
  $ 117       11,478,835     $ 0.01  
                         
For the six months ended May 28, 2011:
                       
                         
Basic earnings per share
  $ 54,292       11,511,541     $ 4.72  
Add effect of dilutive securities:
                       
    Options and restricted shares
    -       68,138       (0.03 )
Diluted earnings per share
  $ 54,292       11,579,679     $ 4.69  
                         
For the six months ended May 29, 2010:
                       
                         
Basic loss per share
  $ (1,575 )     11,407,583     $ (0.14 )
Add effect of dilutive securities:
                       
    Options and restricted shares *
    -       -       -  
Diluted loss per share
  $ (1,575 )     11,407,583     $ (0.14 )
 
 
* Due to the net loss, the potentially dilutive securities would have been anti-dilutive and are therefore excluded.
 
Options to purchase 1,025,514 and 1,048,000 shares of common stock at May 28, 2011 and May 29, 2010, respectively, were excluded from the computation as their effect is anti-dilutive.
 
14. Financial Instruments and Fair Value Measurements
 
Our financial instruments include cash and cash equivalents, accounts receivable, notes receivable, investment securities, cost and equity method investments, accounts payable, loan and lease guarantees, and long-term debt. Because of their short maturity, the carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value. Our cost and equity method investments generally involve entities for which it is not practical to determine fair values.
 
Our investments consist of our investment in the Fortress Value Recovery Fund I, LLC (“Fortress”) with a value of $832 and a portfolio of marketable securities with a value of $14,365 at May 28, 2011.  At November 27, 2010, our investments included our investment in Fortress of $832 and $14,279 in our marketable securities portfolio.  Collectively, these are included in investments in the accompanying condensed consolidated balance sheets.
 
 
18 of 44

 
 
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
May 28, 2011
(Dollars in thousands except share and per share data)
 
Historically, our marketable securities have been held by two different money managers and consisted of a combination of equity and fixed income securities, including money market funds.  During the second quarter of 2009, we liquidated our equity holdings with one of the managers and reinvested the proceeds in various money market funds, individual bonds and bond funds.  During the first quarter of 2010, we liquidated the equity holdings with the other manager and reinvested those funds in money market accounts.
 
We classify our marketable securities as available-for-sale, which are reported at fair value. Unrealized holding gains and losses, net of the related income tax effect, on available-for-sale securities are excluded from income and are reported as other comprehensive income in stockholders’ equity. Realized gains and losses from securities classified as available-for-sale are included in income.  We measure the fair value of our marketable securities based on quoted prices for identical securities in active markets in accordance with ASC Topic 820, Fair Value Measurements and Disclosures.
 
Although we have the ability to buy and sell the individual marketable securities, we have been required to maintain a certain dollar amount in those brokerage accounts subject to the Securities Account Control Agreement as part of the revolving credit facility (see Note 8).  As of July 5, 2011, these securities are no longer required to be pledged as security under our credit agreement.
 
As of May 28, 2011, available-for-sale securities consisted of the following:
 
   
Cost
   
Gross Unrealized
   
Market
 
   
Basis
   
Gains
   
Losses
   
Value
 
                         
Money market shares
  $ 11,425     $ -     $ -     $ 11,425  
Bond mutual fund shares
    1,175       216       -       1,391  
Government agency obligations
    861       36       -       897  
US Treasury obligations
    647       5       -       652  
                                 
    $ 14,108     $ 257     $ -     $ 14,365  
 
As of November 27, 2010, available-for-sale securities consisted of the following:
 
   
Cost
   
Gross Unrealized
   
Market
 
   
Basis
   
Gains
   
Losses
   
Value
 
                         
Money market shares
  $ 11,368     $ -     $ -     $ 11,368  
Bond mutual fund shares
    990       224       -       1,214  
Government agency obligations
    761       45       -       806  
US Treasury obligations
    876       15       -       891  
                                 
    $ 13,995     $ 284     $ -     $ 14,279  
 
The realized earnings from our marketable securities portfolio include realized gains and losses, based upon specific identification, and dividend and interest income.  Realized earnings were $30 and $44 for the three months ended May 28, 2011 and May 29, 2010, respectively and $111 and $2,214 for the six months ended May 28, 2011 and May 29, 2010, respectively.  Realized earnings for the six months ended May 28, 2011 include $28 of gains previously recorded in other comprehensive income. Realized earnings for the six months ended May 29, 2010, include $1,913 of gains and $21 of losses previously recorded in other comprehensive income. These amounts are recorded in other income (loss), net in our condensed consolidated statements of operations and retained earnings.  Of the $1,549 in fixed income securities, $670 matures in less than five years with the remainder being long-term and maturing in greater than 20 years.
 
 
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PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
May 28, 2011
(Dollars in thousands except share and per share data)
 
In accordance with ASC Topic 320, Investments – Debt and Equity Securities, we review our marketable securities to determine whether a decline in fair value of a security below the cost basis is other than temporary.   Should the decline be considered other than temporary, we write down the cost basis of the security and include the loss in current earnings as opposed to an unrealized holding loss.    No losses for other than temporary impairments were recognized during the three months ended May 28, 2011 and May 29, 2010 and the six months ended May 28, 2011 and May 29, 2010.
 
The Company accounts for items measured at fair value in accordance with ASC Topic 820, Fair Value Measurements and Disclosures.  ASC 820’s valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. ASC 820 classifies these inputs into the following hierarchy:
 
Level 1 Inputs– Quoted prices for identical instruments in active markets.
 
Level 2 Inputs– Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
 
Level 3 Inputs– Instruments with primarily unobservable value drivers.
 
Our investment in Fortress is valued at fair value primarily based on the net asset values which are determined by the fund manager, less a discount for illiquidity.
 
Fortress is in the process of liquidating all of its underlying investments to wind down the fund.  Once this fund is fully liquidated, which is not expected in the near term, we will be paid our pro rata share of the proceeds.  We will continue to monitor the progress of the fund liquidation and adjust our valuation as necessary.
 
The fair values of our marketable securities and our investment in Fortress based on the level of inputs are summarized below:
 
   
Level 1
   
Level 2
   
Level 3
   
Fair Value
 
Assets
                       
   Marketable securities
  $ 14,365     $ -     $ -     $ 14,365  
   Investment in Fortress
    -       -       832       832  
                                 
      Total Assets
  $ 14,365     $ -     $ 832     $ 15,197  
 
There have been no material changes to the assets measured at fair value on a recurring basis which use Level 3 or significant unobservable inputs for the six months ended May 28, 2011.

 
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PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
May 28, 2011
(Dollars in thousands except share and per share data)
 
The carrying values and approximate fair values of certain financial instruments were as follows:
 
 
May 28, 2011
   
November 27, 2010
 
   
Carrying
   
Fair
   
Carrying
   
Fair
 
   
value
   
value
   
value
   
value
 
Assets:
                       
    Cash and cash equivalents
  $ 69,912     $ 69,912     $ 11,071     $ 11,071  
    Accounts receivable, net
    15,647       15,647       31,621       31,621  
Notes receivable, net
    2,045       2,045       8,166       8,212  
Investments
    15,197       15,197       15,111       15,111  
                                 
Liabilities: 
                               
    Accounts payable
  $ 16,588       16,588     $ 24,893     $ 24,893  
    Real estate notes payable
    9,589       9,182       13,816       13,556  
    Lease/loan guarantee reserves
    1,255       1,255       2,304       2,304  
 
15. Restructuring, Asset Impairment, and Other Charges

During the three and six months ended May 28, 2010 and May 29, 2011, we incurred the following charges included in income (loss) from operations:
 
   
Quarter Ended
   
Six Months Ended
 
   
May 28, 2011
   
May 29, 2010
   
May 28, 2011
   
May 29, 2010
 
                         
Licensee debt cancellation charges
  $ 6,447     $ -     $ 6,447     $ -  
                                 
Restructuring and asset impairment charges:
                               
Additional write-downs to idle manufacturing facilities
  $ 993     $ -     $ 993     $ -  
Asset write-downs related to Company-owned
                               
   retail store closures
    87       -       966       -  
                                 
   Total restructuring and asset impairment charges
  $ 1,080     $ -     $ 1,959     $ -  
                                 
Lease exit costs:
                               
Lease exit costs related to Company-owned
                               
   retail store closures
  $ 337     $ -     $ 1,221     $ -  
Charge for modification of existing Company-owned
                               
   retail store lease
    1,500       -       1,500       -  
Changes in estimates related to previously closed
                               
   Company-owned retail stores
    1,007       -       1,007       -  
                                 
   Total lease exit costs
  $ 2,844     $ -     $ 3,728     $ -  
                                 
Total charges related to debt cancellation,
                               
   restructuring, and lease exit costs
                               
   included in income (loss) from operations
  $ 10,371     $ -     $ 12,134     $ -  
 
 
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PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
May 28, 2011
(Dollars in thousands except share and per share data)
 
Licensee Debt Cancellation Charges

During the quarter ended May 28, 2011, we gained significant liquidity as a result of the sale of our investment in IHFC (see Note 7). This liquidity event has enabled us to become more opportunistic in managing our relationships with our licensees and therefore accelerate certain licensees’ ability to rebuild their businesses after several years of extremely difficult industry conditions. As such, during the quarter ended May 28, 2011, we cancelled certain debts of what we consider to be key licensees in select markets.  While the debts cancelled were considered to be collectible over time, we believe that, rather than requiring repayment of these obligations, we will realize a greater long-term benefit by the cancellation of these debts. In exchange for relieving the debts of these licensees and thus strengthening their respective financial positions, we believe these licensees will be in a much better position to reinvest in all aspects of their store operations (new product offerings, personnel, advertising, building appeal, etc) which will ultimately lead to increased sales and profitability of the Bassett brand. As a result of this debt cancellation, we incurred a charge for the three and six months ended May 28, 2011 of $6,447.

Restructuring and Asset Impairment Charges

During the six months ended May 28, 2011, we recorded non-cash asset impairment charges of $1,959. During the three months ended May 28, 2011, we recorded non-cash asset impairment charges of $1,080 which included $87 for the write-off of leasehold improvements related to the closure of a retail store in Albuquerque, New Mexico; $566 for the additional write-down of a previously closed manufacturing facility in Mt. Airy, North Carolina; and $428 for the additional write-down of a previously closed manufacturing facility in Bassett, Virginia. The write-downs of the previously closed manufacturing facilities are based on our estimates of their fair values. The inputs into these fair value estimates reflect our market assumptions and are not observable.  Consequently, the inputs are considered to be Level 3 as specified in the fair value hierarchy in ASC Topic 820, Fair Value Measurements and Disclosures. See Note 14. During the three months ended February 26, 2011, we recorded non-cash asset impairment charges of $879 for the write-off of leasehold improvements and other assets due to the closure of five retail locations in Bear, Delaware; Bel Air, Maryland; Carol Stream, Illinois; Frederick, Maryland; and Spanish Fort, Alabama.

Lease Exit Costs

During the six months ended May 28, 2011, we recorded charges of $3,728 for lease exit costs and lease modifications. During the three months ended May 28, 2011, we recorded charges of $2,844 which included a non-cash charge of $337 for lease exit costs related to the closure of a retail store in Albuquerque, New Mexico; non-cash charges of $1,007 to reflect reduced estimates of recoverable lease costs at four previously closed retail locations; and a charge of $1,500 for a cash payment made for the modification of an existing lease at one of our Company-owned retail store locations. During the three months ended February 26, 2011, we recorded non-cash charges of $884 for lease exit costs associated with the closure of the Bel Air and Frederick, Maryland stores as well as a previously closed location in Lewisville, Texas.

Other income (loss), net for the three and six months ended May 28, 2011 includes non-cash charges of $4,790 for asset impairments and lease termination costs associated with our retail real estate investments, including: asset impairment charges of $2,106 to write down idle retail locations in Henderson, Nevada and Chesterfield, Virginia to appraised values; $1,847 to write off certain tenant improvements deemed to be unrecoverable; and $661 related to lease termination costs for a closed licensee store and $176 related to adjustments of previous estimates.

 
22 of 44

 
 
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
May 28, 2011
(Dollars in thousands except share and per share data)
 
The following table summarizes the activity related to our accrued lease exit costs:
 
   
2011
 
       
Balance at November 27, 2010
  $ 2,847  
         
Provisions associated with Company-owned retail store closures
    1,221  
Provisions associated with licensee store closings
    661  
Provisions made to adjust previous estimates
    1,528  
Payments on unexpired leases
    (806 )
Accretion of interest on obligations
    40  
         
Balance at May 28, 2011
  $ 5,491  
         
Current portion included in other accrued liabilities
  $ 3,165  
Long-term portion included in other long-term liabilities
    2,326  
    $ 5,491  
 
16. Recent Accounting Pronouncements

In January 2010, the FASB issued ASU No. 2010-06, which updates the guidance in ASC Topic 820, Fair Value Measurements and Disclosures, related to disclosures about fair value measurements.  New disclosures will require entities to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and to describe the reasons for the transfers; and to present separately in the reconciliation for fair value measurements in Level 3 information about purchases, sales, issuances and settlements on a gross basis rather than as one net amount.  The ASU  also amends ASC Subtopic 820-10 to clarify certain existing disclosures regarding the level of disaggregation at which fair value measurements are provided for each class of assets and liabilities; and disclosures about inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3.  The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the reconciliation of Level 3 fair value measurements, which become effective for fiscal years beginning after December 15, 2010.  We implemented the new disclosures and clarifications of existing disclosures beginning with our second quarter of fiscal 2010, and the disclosures about purchases, sales, issuances and settlements in the reconciliation of Level 3 fair value measurements will be implemented beginning in our first quarter of fiscal 2012. The adoption of this guidance has not had, and is not expected to have, a material impact on our financial position or results of operations.

In July 2010, the FASB issued ASU No. 2010-20, which updates the guidance in ASC Topic 310, Receivables, related to disclosures about the credit quality of financing receivables and the allowance for credit losses.  The new disclosures require disaggregated information related to financing receivables and include for each class of financing receivables, among other things: a rollforward for the allowance for credit losses, credit quality information, impaired loan information, modification information, non-accrual and past-due information.  The disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010.  In January 2011, ASU No. 2011-01 delayed the effective date for certain requirements of ASU 2010-20 regarding disclosures about troubled debt restructurings until guidance could be issued as to what constitutes a troubled debt restructuring. In April 2011, ASU 2011-02 was issued to provide such guidance and requires disclosures about troubled debt restructurings to become effective for periods beginning on or after June 15, 2011 Accordingly, we have implemented the guidance for period-end disclosures effective as of the end of our first quarter of fiscal 2011, and we have implemented the guidance for period activity disclosures during our second quarter of fiscal 2011(see Note 6).  The guidance regarding troubled debt restructurings will be implemented as of the beginning of our third quarter of fiscal 2011. The adoption of this guidance has not had and is not expected to have a material impact on our financial position or results of operations.

 
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PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
May 28, 2011
(Dollars in thousands except share and per share data)
 
In December 2010, the FASB issued ASU No. 2010-28, which updates the guidance in ASC Topic 350, Intangibles – Goodwill & Other. The amendments in ASU 2010-28 affect all entities that have recognized goodwill and have one or more reporting units whose carrying amount for purposes of performing Step 1 of the goodwill impairment test is zero or negative. The amendments in ASU 2010-28 modify Step 1 so that for those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. This guidance became effective for us at the beginning of our second quarter of fiscal 2011.  The adoption of this guidance is not expected to have a material impact on our financial position or results of operations.

In December 2010, the FASB issued ASU No. 2010-29, which updates the guidance in ASC Topic 805, Business Combinations. The objective of ASU 2010-29 is to address diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. The amendments in ASU 2010-29 specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments affect any public entity as defined by ASC 805 that enters into business combinations that are material on an individual or aggregate basis. This guidance will become effective for us for acquisitions occurring on or after the beginning of our 2012 fiscal year. We do not expect the adoption of this guidance will have a material impact upon our financial position or results of operations.

In May 2011, the FASB issued ASU No. 2011-04, which updated the guidance in ASC Topic 820, Fair Value Measurement. The amendments in this Update generally represent clarifications of Topic 820, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This Update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards. The amendments in this Update are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011, and early application is not permitted. This guidance will become effective for us as of the beginning of our second quarter of fiscal 2012 .The adoption of this guidance is not expected to have a material impact on our financial position or results of operations.

In June 2011, the FASB issued ASU No. 2011-05, which updated the guidance in ASC Topic 220, Comprehensive Income. Under the amendments in this Update, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This Update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments in this Update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments in this Update should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and early application is permitted. This guidance will become effective for us as of the beginning of our 2013 fiscal year. The adoption of this guidance is not expected to have a material impact on our financial position or results of operations.

 
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PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
May 28, 2011
(Dollars in thousands except share and per share data)
 
17. Segment Information
 
We have strategically aligned our business into three reportable segments: Wholesale, Retail and Investments/Real Estate. The wholesale home furnishings segment is involved principally in the design, manufacture, sourcing, sale and distribution of furniture products to a network of Bassett stores (independently-owned stores, Company-owned retail stores and partnership licensees) and independent furniture retailers. Our wholesale segment includes our wood and upholstery operations as well as all corporate selling, general and administrative expenses.
 
Our retail segment consists of Company-owned stores. Our retail segment includes the revenues, expenses, assets and liabilities (including real estate) and capital expenditures directly related to these stores.
 
Our investments/real estate segment consists of our investments, distributions in excess of affiliate earnings (IHFC) and retail real estate related to licensee stores. Although this segment does not have operating earnings, income or loss from the segment is included in other income in our condensed consolidated statements of operations and retained earnings. Our equity investment in IHFC is not included in the identifiable assets of this segment since it had a negative book value at November 27, 2010 and was therefore included in the long-term liabilities section of our condensed consolidated balance sheet. Our entire investment in IHFC was sold during the second quarter of 2011. See Note 7 for further discussion of IHFC.
 
Inter-company net sales elimination represents the elimination of wholesale sales to our Company-owned stores. Inter-company income elimination represents the embedded wholesale profit in the Company-owned store inventory that has not been realized. These profits will be recorded when merchandise is delivered to the end retail consumer.
 
 
25 of 44

 
 
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
May 28, 2011
(Dollars in thousands except share and per share data)
 
The following table presents our segment information:
 
   
Quarter Ended
   
Six Months Ended
 
   
May 28, 2011
   
May 29, 2010
   
May 28, 2011
   
May 29, 2010
 
Net Sales
                       
Wholesale
  $ 45,751     $ 42,822     $ 91,720     $ 83,128  
Retail
    38,009