<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 28, 1999
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)
(540) 629-6000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
--- ---
At October 6, 1999, 12,260,625 shares of common stock of the Registrant were
outstanding.
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<PAGE> 2
PART I - FINANCIAL INFORMATION
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS- UNAUDITED
(in thousands except per share data)
<TABLE>
<CAPTION>
NINE MONTHS ENDED QUARTER ENDED
AUGUST 28, 1999 AUGUST 29, 1998 AUGUST 28, 1999 AUGUST 29,1998
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 291,885 $ 294,761 $ 88,803 $ 98,093
Cost of sales 228,768 240,962 68,579 80,403
--------- --------- --------- ---------
Gross profit 63,117 53,799 20,224 17,690
Selling, general and administrative 53,072 47,761 17,209 15,608
--------- --------- --------- ---------
Income from operations 10,045 6,038 3,015 2,082
Other income, net 10,316 7,837 3,508 1,977
--------- --------- --------- ---------
Income before income taxes 20,361 13,875 6,523 4,059
Income taxes (6,482) (3,354) (2,118) (932)
--------- --------- --------- ---------
Net income 13,879 10,521 4,405 3,127
Retained earnings-beginning of period 193,130 188,761 191,824 190,930
Cash dividends (7,551) (7,812) (2,479) (2,587)
Purchase and retirement of
common stock (10,167) 0 (4,459) 0
--------- --------- --------- ---------
Retained earnings-end of period $ 189,291 $ 191,470 $ 189,291 $ 191,470
========= ========= ========= =========
Basic earnings per share $ 1.10 $ 0.81 $ 0.36 $ 0.24
========= ========= ========= =========
Diluted earnings per share $ 1.10 $ 0.80 $ 0.36 $ 0.24
========= ========= ========= =========
Dividends per share $ 0.60 $ 0.60 $ 0.20 $ 0.20
========= ========= ========= =========
</TABLE>
- ------------------------------------------
The accompanying notes to condensed consolidated financial statements are an
integral part of the condensed consolidated financial statements.
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<PAGE> 3
PART I - FINANCIAL INFORMATION - CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AUGUST 28, 1999 AND NOVEMBER 28, 1998
(in thousands)
<TABLE>
<CAPTION>
(Unaudited)
Assets August 28, 1999 November 28, 1998
- ------ --------------- -----------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 878 $ 5,499
Short-term investments 0 8,923
Trade accounts receivable, net 56,359 59,203
Inventories, net 49,746 47,285
Prepaid expenses 4,825 2,038
Refundable income taxes 2,367 8,018
Deferred income taxes 8,760 12,682
Receivable from sale of bedding division (Note H) 900 0
--------- ---------
Total current assets 123,835 143,648
--------- ---------
Property & equipment
Cost 215,746 185,392
Less allowances for depreciation 129,948 129,005
--------- ---------
Total property & equipment 85,798 56,387
--------- ---------
Other long-term assets
Investment securities 22,654 50,739
Investment in affiliated companies 63,726 52,769
Other 21,997 17,971
--------- ---------
Total other long-term assets 108,377 121,479
--------- ---------
Total assets $ 318,010 $ 321,514
--------- ---------
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities
Accounts payable $ 23,318 $ 20,221
Accrued liabilities 22,173 24,514
--------- ---------
Total current liabilities 45,491 44,735
--------- ---------
Long-term liabilities
Employee benefits 10,881 11,272
Note payable to bank 4,000 0
Deferred income taxes 0 595
--------- ---------
Total long-term liabilities 14,881 11,867
--------- ---------
Commitments and Contingencies (Note E)
Stockholders' Equity
Common stock 61,478 64,425
Additional paid in capital 0 0
Retained earnings 189,291 193,130
Unrealized holding gains, net of tax 7,618 8,286
Unamorized stock compensation (749) (929)
--------- ---------
Total stockholders' equity 257,638 264,912
--------- ---------
Total liabilities and stockholders' equity $ 318,010 $ 321,514
========= =========
</TABLE>
- ------------------------------------------
The accompanying notes to condensed consolidated financial statements are an
integral part of the condensed consolidated financial statements.
3 of 15
<PAGE> 4
PART I - FINANCIAL INFORMATION - CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE NINE MONTHS ENDED AUGUST 28, 1999 AND AUGUST 29, 1998 - UNAUDITED
(in thousands)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net income $ 13,879 $ 10,521
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 6,090 5,200
Equity in undistributed income of affiliated companies (8,405) (3,785)
Provision for losses on trade accounts receivable - 446
Provision for deferred income taxes 3,315 1,088
Net gain from sales of investment securities (1,457) (975)
Net gain from sales of property and equipment - (260)
Compensation earned under restricted stock plan 180 168
Changes in operating assets and liabilities:
Trade accounts receivable 113 (1,104)
Inventories (7,176) (5,039)
Prepaid expenses and other (2,841) 476
Refundable income taxes 5,651 (2,397)
Accounts payable and accrued liabilities 1,888 (5,443)
Long-term liabilities (379) (311)
-------- --------
Net cash provided by (used in) operating activities 10,858 (1,415)
-------- --------
Investing activities:
Purchases of property and equipment (38,153) (13,062)
Proceeds from sales of property and equipment 1,023 3,233
Proceeds from sale of bedding division 6,500 0
Purchases of investment securities - (1796)
Proceeds from sale of investment securities 37,797 53,204
Investments in affiliated companies (7,950) (50,000)
Dividend from affiliate 5,448 31,517
Other (3,477) (5,931)
-------- --------
Net cash provided by investing activities 1,188 17,165
-------- --------
Financing activities:
Issuance of common stock 293 243
Purchases of common stock (13,409) (3,120)
Borrowings from Bank 4,000 -
Cash dividends (7,551) (7,812)
-------- --------
Net cash used in financing activities (16,667) (10,689)
-------- --------
Change in cash and cash equivalents (4,621) 5,061
Cash and cash equivalents, beginning of year 5,499 29,552
-------- --------
Cash and cash equivalents, end of period $ 878 $ 34,613
======== ========
</TABLE>
- ------------------------------------------
The accompanying notes to condensed consolidated financial statements are an
integral part of the condensed consolidated financial statements.
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<PAGE> 5
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
AUGUST 28, 1999 (in thousands except share and per share data)
Note A. Basis of presentation:
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included.
Note B. Inventories:
Inventories are carried at last-in, first-out (LIFO) cost which is not in excess
of market. Inventories at August 28, 1999 and November 28, 1998 consisted of the
following:
<TABLE>
<CAPTION>
August 28, November 28,
1999 1998
---- ----
<S> <C> <C>
Finished goods $ 41,413 $ 37,430
Work in process 10,738 9,169
Raw materials and supplies 24,075 26,506
------------ ------------
Total inventories valued at first-in, first-out (FIFO) cost 76,226 73,105
LIFO adjustment (26,480) (25,820)
------------ ------------
Total inventories $ 49,746 $ 47,285
============ ============
</TABLE>
Note C. Investment in affiliated companies:
Summarized combined income statement information for the Company's equity method
investments for the nine months ended August 28, 1999 and August 29, 1998 are as
follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Revenues $ 34,624 $ 29,927
Income from operations 26,505 16,650
Net income 8,404 9,973
</TABLE>
Note D. Comprehensive income:
For the quarters ended August 28, 1999, and August 29, 1998, total comprehensive
income was $4,151 and $2,619, respectively. Included in total comprehensive
income is net income of $4,405, and $3,127 and unrealized holding gains
(losses), net of tax of ($254) and ($508). Comprehensive income was $13,211 and
$11,697, consisting of net income of $13,879 and $10,521 and unrealized holding
gains (losses), net of tax, of ($668) and $1,176 for the nine month periods
ended August 28, 1999 and August 29, 1998, respectively.
Note E. Contingencies:
Legislation phased out interest deductions on certain policy loans related to
Company owned life insurance (COLI) as of January 1, 1999. The Company recorded
cumulative reductions to income tax expenses of approximately $8,000 as the
result of COLI interest deductions through November 28, 1998. The Internal
Revenue Service, on a national level, is evaluating its position regarding the
deductibility of COLI policy loan interest for years prior to January 1, 1999.
In 1998 and 1999, the IRS issued several Technical Advice Memoranda regarding
the deductibility of certain aspects of COLI for taxpayers unrelated to the
Company. Management understands that the adverse position taken by the IRS will
be subjected to extensive challenges in court. In the event that the IRS
prevails, the outcome could result in a material impact upon the Company's
future income taxes and results of operations.
5 of 15
<PAGE> 6
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
AUGUST 28, 1999 (in thousands except share and per share data)
Note E. Contingencies (continued):
The Company is also involved in various other claims and actions, including a
product specification lawsuit concerning its E. B. Malone subsidiary, and
environmental matters at certain of its plant facilities, which arise in the
normal course of business. Although the final outcome of these legal and
environmental matters cannot be determined, based on the facts presently known,
it is management's opinion that the final resolution of these matters will not
have a material adverse effect on the Company's financial position or future
results of operations.
Note F. Investment Securities:
In the first quarter of 1999, the Company entered into a series of equity index
collars in order to manage equity risk exposures related to its approximate $22
million portfolio of equity securities. The collars expire quarterly over a
period of three years commencing December 1998.
Note G. Earnings per share:
The following reconciles basic and diluted earnings per share.
<TABLE>
<CAPTION>
Income Shares Earnings per share
------------------------------------------------------------
For the nine months ended August 28, 1999
- ---------------------------------------------
<S> <C> <C> <C>
Basic earnings per share $ 13,879 12,609,312 $ 1.10
Effect of dilutive securities:
Options and restricted stock - - -
------------------------------------------------------------
Diluted earnings per share $ 13,879 12,609,312 $ 1.10
========== ========== =========
For the quarter ended August 28, 1999
- ---------------------------------------------
Basic earnings per share $ 4,405 12,419,758 $ 0.36
Effect of dilutive securities:
Options and restricted stock - - -
------------------------------------------------------------
Diluted earnings per share $ 4,405 12,419,758 $ 0.36
========== ========== =========
- ----------------------------------------------------------------------------------------------------------------------------
For the nine months ended August 29, 1998
- ---------------------------------------------
Basic earnings per share $ 10,521 13,014,703 $ 0.81
Effect of dilutive securities:
Options and restricted stock - 103,586 (.01)
------------------------------------------------------------
Diluted earnings per share $ 10,521 13,118,289 $ 0.80
========== ========== =========
For the quarter ended August 29, 1998
- ---------------------------------------------
Basic earnings per share $ 3,127 12,997,947 $ 0.24
Effect of dilutive securities:
Options and restricted stock - 84,848 -
------------------------------------------------------------
Diluted earnings per share $ 3,127 13,082,795 $ 0.24
========== ========== =========
</TABLE>
Options to purchase 1,430,288 shares of common stock at prices ranging from
$22.50 to $37.40 per share were outstanding during the nine months ended August
28, 1999 but were not included in the computation of diluted EPS because the
options' exercise prices were greater than the average market price of the
common shares. In 1998, 804,898 shares ranging from $32.25 to $37.40 were
similarly excluded.
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<PAGE> 7
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
AUGUST 28, 1999 (in thousands except share and per share data)
Note H. Sale of Bedding Division:
During the third quarter, the Company closed the transaction in which it sold
to Premier Bedding Group LLC ("PBG"), a new company formed by LIS Corporation,
substantially all of the assets of its Bedding Division offset by certain
liabilities assumed by PBG. The sale was effective as of April 30, 1999. The
net assets sold by the Company totaled $8.4 million, and were exchanged for
$6.5 million in cash, and a $1.9 million convertible note receivable. The
reductions in these operating assets are excluded from the changes in operating
assets and liabilities on the accompanying condensed statement of cash flows
for the nine months ended August 28, 1999.
The $900 receivable on the August 28, 1999 Balance Sheet is the estimated amount
due from PBG for the post closing purchase price adjustment and cash
transactions between the two companies subsequent to the sale.
The sale was effective as of April 30, 1999, thus no operating results for the
bedding division are included in the Company's third quarter 1999 results. Net
sales and operating income for the bedding division were $9.9 million and $0.2
million, respectively for the third quarter ended August 29,1998. For the nine
month period ended August 28, 1999 net sales were $11.9 million and operating
losses were $0.2 million. For the nine month period ended August 29, 1998, net
sales were $30.4 million and operating income was $0.7 million.
Note I. Note Payable to Bank:
During the third quarter, the company borrowed $4 million in advance of
finalizing a $50 million revolving credit facility with a Bank. The note bears
interest at prime, which was approximately 8.25% at August 28, 1999.
7 of 15
<PAGE> 8
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
AUGUST 28,1999
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Operating Results
The third quarter periods of fiscal 1999 and 1998 each consisted of thirteen
weeks. The nine-month periods for 1999 and 1998 both consisted of thirty-nine
weeks. Since the bedding division was sold effective April 30, 1999, results for
this division were not included for the third quarter of 1999 and included for
only twenty-two weeks for the nine-month period ended August 28, 1999.
For the quarter, net sales decreased 9.5% to $88.8 million in 1999, from $98.1
million in 1998. Sales for the nine months ended August 28, 1999 were $291.9
million, a decrease of $2.9 million, or 1.0% compared to sales of $294.8
million for the nine months ended August 29, 1998. The sales decrease was due
almost entirely to the sale of the bedding division which had net sales of $9.9
million in the third quarter of 1998 and $30.4 for the nine months ended August
29, 1998. In addition, Upholstery division sales were down six percent for the
nine month periods ended August 28, 1999 compared to the year ago period due to
planned attrition in certain distribution channels. Wood Division sales slowed
slightly during the quarter, but continue to be up approximately ten percent
over 1998 due to improved product offerings and the Bassett Furniture Direct
(BFD) expansion.
Branded sales (Wood and Upholstery wholesale) have increased approximately five
percent on a year over year basis. This increase has been led by the BFD stores
which grew from $35 million for the first nine months of 1998 to $52 million for
the first nine months of 1999, but also includes notable gains with two large
national accounts. There are currently 44 BFD stores across the country. For the
nine-month period ended August 28, 1999, sales to BFD's have increased 50% over
the nine months ended August 29, 1998, and now represent 19% of total net sales,
up from 14% in the first nine months of 1998. Retail sales from the seven
company-owned BFD stores, none of which were open in fiscal 1998, totaled $3.9
million for the third quarter and $6.3 million for the first nine months of
1999.
The gross profit margin was 22.8% in the third quarter of 1999 and 21.6% for the
nine month period ended August 28, 1999, compared with 18.0% in the third
quarter of 1998 and 18.3% for the nine month period ended August 29, 1998.
Non-recurring charges of $1.0 million and $4.0 million were recorded to cost of
sales in the third quarter of 1998 and the nine month period ended August 29,
1998, respectively. These charges were primarily related to plant consolidation
inefficiencies incurred in 1998 following the 1997 restructuring decision to
close and consolidate fourteen manufacturing facilities. On a continuing
operations basis, third quarter margins improved from 19.0% in 1998 to 22.8% in
1999 due primarily to the Wood Division, where the impact of price increases,
increased production levels, process improvements, capital spending and product
mix have improved gross margin by approximately two percentage points for this
division. In addition, retail operations with higher gross margins are included
in the 1999 results.
Selling, general, and administrative expenses were 19.4% in the third quarter of
1999 and 18.2% for the nine month period ended August 28, 1999, compared with
15.9% in the third quarter of 1998 and 16.2% for the nine month period ended
August 29, 1998. This increase is due to the Company's new retail operations
which incurred $2.4 million of selling, general, and administrative expenses in
the third quarter of 1999 and $4.3 million for the nine month period ended
August 28, 1999. Comparable 1998 results did not include any expenses for retail
operations. In addition, the Company continues to invest heavily in its brand,
its organizational infrastructure, and information technology.
8 of 15
<PAGE> 9
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
AUGUST 28, 1999
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Operating Results (continued)
The operating margin was 3.4% in the third quarter of 1999 compared to 2.1% in
the third quarter of 1998. For the nine month periods ended August 28, 1999 and
August 29, 1998, operating margin improved from 2.0% to 3.5%. Operating losses
in our retail division approximated $.7 million for the third quarter of 1999
and $1.5 million for the nine month period ended August 28, 1999. These losses
represent both start-up related costs for several of the new company-owned
stores and losses associated with two acquired stores.
Other income increased from $2.0 million in the third quarter of 1998 and $7.8
million for the nine months ended August 28, 1998 to $3.5 million in the third
quarter of 1999 and $10.3 million in the nine months ended August 28, 1999 due
to improved investment earnings and a more strategic investment of our excess
capital.
The effective tax rate was 32% in the third quarter of 1999 and nine months
ended August 28, 1999, compared to 23% in the third quarter of 1998 and 24% for
the nine months ended August 29, 1998. This increase is the result of the phase
out of interest deductions on certain policy loans related to Company owned life
insurance (COLI) and a reduction in tax exempt bond income. The 1999 effective
tax rate is lower than the statutory federal income tax rate due to exclusions
for tax exempt and undistributed affiliate income.
For the quarter ended August 28, 1999, net income was $4.4 million, or $.36 per
diluted share, compared to net income of $3.1 million or $.24 per diluted share,
for the same quarter a year ago. Net income for the nine month period ended
August 28, 1999 was $13.9 million, or $1.10 per diluted share, compared to $10.5
million, or $.80 per diluted share, for the comparable period of the previous
year.
Liquidity and Capital Resources
Cash provided by operating activities for the nine months ended August 28, 1999
was $10.9 million compared to $1.4 million used by operating activities in the
nine month period ended August 29, 1998. This change was due primarily to
improved profitability, a $5.7 million income tax refund received in the second
quarter of 1999, and the unusually high utilization of cash for payables and
accruals in the first nine months of 1998.
The Company has invested $38.2 million in property and equipment in 1999 for
real estate (BFD expansion), manufacturing equipment to improve productivity,
new enterprise wide information systems, and its new dining room table plant. To
fund these expenditures, cash proceeds of $37.8 million were generated from
municipal bonds and equities which were sold or matured during the year. The
Company has also made several new strategic investments in 1999. These
investments in affiliated companies, which now total $7.9 million for the nine
month period ended August 28, 1999 are directly linked to the Company's
marketing and distribution strategies. Cash was also used to fund three
quarterly dividend payments totaling $7.9 million and to repurchase $13.4
million of Company stock.
The Company purchased and retired 254,000 shares of its Common Stock during the
third quarter of 1999 and has now purchased and retired 591,000 shares for the
nine month period ended August 28, 1999. These purchases were part of the
Company's stock repurchase program, approved in 1998, which allows the Company
to repurchase up to 1.3 million shares for an aggregate purchase price not to
exceed $40 million. The average cost of the shares purchased during the third
quarter was $23.79, resulting in a total expenditure of $6.1 million.
9 of 15
<PAGE> 10
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
AUGUST 28, 1999
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Liquidity and Capital Resources (continued)
The increase in other long-term assets from $18.0 million at November 28, 1998
to $22.0 million at August 28, 1999 is primarily related to an increase in the
cash surrender value of the insurance policies supporting the Company's
Corporate owned life insurance (COLI) plan.
The Company borrowed $4 million in the third quarter in advance of entering into
a $50 million revolving credit facility with a Bank. The company expects to
finalize this credit facility arrangement in the fourth quarter. The $4 million
note payable bears interest at rates approximating the prime rate.
The Company plans to invest approximately $40 to $50 million per year over the
next few years to aggressively execute its BFD expansion and upgrade its
manufacturing capabilities. The Company's solid financial position with
significant liquidity and limited debt affords it many options. Management
intends to examine opportunities to strengthen its balance sheet and increase
shareholder value which may require additional debt financing. The Company has
not typically used the debt or equity markets as sources of funds or capital.
The current ratio as of August 28, 1999 and November 28, 1998, respectively, was
2.72 to 1 and 3.21 to 1. Working capital at August 28, 1999 was $78.3 million
compared to $98.9 million at November 28, 1998. The Company's consolidated
financial statements are prepared on the basis of historical dollars and are not
intended to show the impact of inflation or changing prices. Neither inflation
nor changing prices have had a material effect on the Company's consolidated
financial position and results of operations in prior years.
Contingencies
The Company is involved in various claims and litigation, including a product
specification lawsuit concerning a subsidiary, E. B. Malone Corporation, as well
as environmental matters at certain plant facilities, which arise in the normal
course of business. Although the final outcome of these legal and environmental
matters cannot be determined, based on the facts presently known, it is
management's opinion that the final resolution of these matters will not have a
material adverse effect on the Company's financial position or future results of
operations.
Legislation phased out interest deductions on certain policy loans related to
Company owned life insurance (COLI) as of January 1, 1999. The Company recorded
cumulative reductions to income tax expenses of approximately $8,000 as the
result of COLI interest deductions through November 28, 1998. The Internal
Revenue Service, on a national level, is evaluating its position regarding the
deductibility of COLI policy loan interest for years prior to January 1, 1999.
In 1998 and 1999, the IRS issued several Technical Advice Memoranda regarding
the deductibility of certain aspects of COLI for taxpayers unrelated to the
Company. Management understands that the adverse position taken by the IRS will
be subjected to extensive challenges in court. In the event that the IRS
prevails, the outcome could result in a material impact upon the Company's
future income taxes and results of operations.
10 of 15
<PAGE> 11
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
AUGUST 28, 1999
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Year 2000
Over the past few years, the Company has been steadily reengineering its
business processes and information systems to prepare for the conversion to year
2000. Based on our analysis of significant Year 2000 issues management believes
that the Company is taking appropriate and timely actions. The Year 2000 issue
results from the inability of many computer systems and applications to
recognize and process data after the year 1999. This could cause systems to
process critical information incorrectly. The Company's Year 2000 compliance
plan includes three phases discussed in greater detail below. Each significant
internal and external information technology and non-information technology
system that may possibly be affected by a Year 2000 problem, (hereinafter
collectively, the "System[s]") must be confirmed as Year 2000 compliant in Phase
One or be successfully tested through phases two and three to be considered
Year 2000 ready.
Phase One of the Compliance Plan involves a comprehensive audit to identify all
internal and external Systems. Once identification is made, each System is
reviewed and categorized as compliant or non-compliant. In addition, initial
contingency plans are developed based on the importance of any non-compliant
system. Phase Two involves correcting those Systems identified in Phase One as
non-compliant, initial testing (as well as additional testing if needed) of
individual internal Systems, a Year 2000 readiness audit of all existing
software by an external consultant, and formalization of contingency plans.
Phase Three involves comprehensive simultaneous Company wide testing of internal
locations and Systems, final confirmation of the readiness of external Systems,
and finalization of contingency plans. Testing in Phase Two and Phase Three
includes setting internal System clocks ahead to simulate the change from 1999
into 2000 and monitoring System performance before, during, and after the
simulated date change.
The most significant step in moving towards Year 2000 readiness was taken in the
second quarter of 1998 when a comprehensive enterprise wide system (which had
been installed in over 4,400 companies and is Year 2000 compliant) was
purchased. Implementation of the enterprise wide system began immediately
thereafter. In 1998, the Company also engaged a consultant, knowledgeable in the
enterprise wide system being installed, to advise and assist in the installation
and implementation of the system. To further assure readiness, the Company has
or will convert all PC's to Year 2000 compliant Pentium chip PC's by November
1999.
The following Systems successfully completed initial Phase Two testing in
September of 1999: Software-IBM AS/400 Base, Electronic Data Interchange (EDI)
AS/400 Base, EDI IBM 2003 Base, MVS/ESA-IBM 2003 Base (Operating System), and PC
applications; Hardware-Enterprise System AS/400, IBM 2003/125, IBM 9394/2 (Disk
Drives), and PC operating systems. Additional Phase Two testing is scheduled for
October 1999, and Phase Three testing is scheduled for early November 1999;
Non-information technology Internal Systems successfully completed Phase Two
and will be included in final Phase Three testing.
As part of Phases One, Two, and Three the Company has developed and updated
contingency plans and will continue to refine them as test data and other
information develops. Current contingency plans include identifying alternate
means of supply, determining appropriate levels of safety stock, contacting
customers to coordinate orders, arranging alternate means of placing orders, and
printing hard copies of reports that may otherwise only be available on
computer. In addition, if Phase Two and Three testing identify areas of concern,
combined action teams will be prepared and trained to assure rapid response if
needed.
11 of 15
<PAGE> 12
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
AUGUST 28, 1999
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Year 2000 (continued)
The reasonable worst case scenario is an interruption of normal business
operations. To the Company's advantage, our manufacturing facilities do not
operate on the few days before and after the beginning of the New Year.
Therefore, if actual Year 2000 problems present themselves, allowable reaction
time would be increased and business interruption would be reduced by the
previously scheduled holiday time. If Year 2000 issues persist after the
scheduled shutdown, the amount of lost revenue would depend on the duration of
the problem and the amount of deliverable goods in inventory.
The Company continues to work with its customers, suppliers and third-party
service providers to identify external weaknesses and provide solutions which
will prevent the disruption of business activities at that time; it does not
believe that it will be significantly affected by direct suppliers of raw
materials or supplies that will be non-compliant. The Company's actions
included surveying vendors and customers with which it has a material
relationship. To date, the Company has not received any responses that indicate
the possibility of significant problems. However, the Company cannot guarantee
that Year 2000 related systems or hardware issues of its business partners will
be corrected in a timely manner or that the failure of its business partners to
correct these issues would not have a material adverse effect on its future
results of operations or financial condition. The Company does not believe that
it will be significantly affected by non-compliance by companies outside of the
United States.
The Company does not expect the cost of implementation to have a material
adverse effect on its future results of operations, liquidity or capital
resources. The total cost of the new enterprise system is estimated at $9
million. This total includes the Year 2000 Project. The new system was not
purchased to solely achieve Year 2000 compliance in the Company's information
systems. Instead it was purchased to provide management with the information and
tools that it needs to better manage the Company. The Year 2000 problem has
slightly accelerated the timetable for implementation, however. Of the total
project cost, $8 million represents the purchase of new software, new hardware,
and related implementation costs which will be capitalized. The remaining will
be expensed as incurred during 1999 and 2000. As of the end of the third
quarter, the Company has spent approximately $6 million on the project.
Market Risk
The Company has significant investments in equity securities. The Company does
not use these securities for trading purposes and is not a party to any
leveraged derivatives. For securities held, the Company utilizes a sensitivity
analysis technique to evaluate the effect that hypothetical changes in market
prices will have on the Company's investment securities. In the first quarter
of 1999, the Company entered into a series of equity index collars in order to
manage risk exposures related to its portfolio of equity securities. In the
opinion of management, market changes in the Company's equity securities
portfolio are highly correlated to the equity index collars. At August 28,
1999, the potential change in fair value of investment securities and the
equity index collars, assuming a 10% change in market prices was approximately
$2.3 million. This amount is not significant compared with the overall
financial position of the Company. In addition, the Company has investments in
affiliated companies accounted for under the equity method of accounting.
12 of 15
<PAGE> 13
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
AUGUST 28, 1999
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Safe-harbor forward-looking statements
This report contains certain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 with respect to the
financial condition, results of operations and business of Bassett Furniture
Industries, Incorporated. These forward-looking statements involve certain risks
and uncertainties. No assurance can be given that any such matters will be
realized. Factors that may cause actual results to differ materially from those
contemplated by such forward-looking statements include, among others, the
following possibilities: (I) competitive conditions in the industry in which the
Company operates; (II) demand for the Company's products and acceptance of new
products; (III) fluctuations in raw material prices; and (IV) general economic
conditions that are less favorable than expected.
PART II - OTHER INFORMATION
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
AUGUST 28, 1999
Item 4. Submission of matters to a vote of security holders
No matters were submitted to a vote of security holders during the quarter.
Item 6.
a. Exhibits
(27) Financial Data Schedule
b. Reports on Form 8-K:
No reports were filed on Form 8-K during the quarter.
13 of 15
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BASSETT FURNITURE INDUSTRIES, INCORPORATED
/s/ BARRY C. SAFRIT
- -----------------------------------------------------------------
Barry C. Safrit, Vice President, Chief Accounting Officer
October 12, 1999
14 of 15
<PAGE> 15
BASSETT FURNITURE INDUSTRIES, INCORPORATED
EXHIBIT INDEX
<TABLE>
Exhibit No. Exhibit Description Page No.
<S> <C>
27 Financial Data Schedule page 9
</TABLE>
15 of 15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-27-1999
<PERIOD-START> NOV-29-1998
<PERIOD-END> AUG-28-1999
<CASH> 878
<SECURITIES> 0
<RECEIVABLES> 59,659
<ALLOWANCES> 3,300
<INVENTORY> 49,746
<CURRENT-ASSETS> 123,835
<PP&E> 215,746
<DEPRECIATION> 129,948
<TOTAL-ASSETS> 318,010
<CURRENT-LIABILITIES> 45,491
<BONDS> 4,000
0
0
<COMMON> 61,478
<OTHER-SE> 196,160
<TOTAL-LIABILITY-AND-EQUITY> 318,010
<SALES> 291,885
<TOTAL-REVENUES> 302,201
<CGS> 228,768
<TOTAL-COSTS> 281,840
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 20,361
<INCOME-TAX> 6,482
<INCOME-CONTINUING> 13,879
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,879
<EPS-BASIC> 1.10
<EPS-DILUTED> 1.10
</TABLE>
