1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 <TABLE> <S> <C> For the fiscal year ended November 25, 2000 Commission File No. 0-209 </TABLE> BASSETT FURNITURE INDUSTRIES, INCORPORATED ------------------------------------------ (Exact name of registrant as specified in its charter) <TABLE> <S> <C> VIRGINIA 54-0135270 --------------------------------- --------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3525 FAIRYSTONE PARK HIGHWAY BASSETT, VIRGINIA 24055 --------------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 540/629-6000 ------------------------------------ Securities registered pursuant to Section 12(g) of the Act: Name of each exchange Title of each class: on which registered -------------------- --------------------------- Common Stock ($5.00 par value) NASDAQ ------------------------------ ------ </TABLE> Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for at least the past 90 days. [ ] Yes [X] No Form 10-K (a) amendment No. 2 for the year ended November 27, 1999 was filed April 11, 2000, subsequent to the March 31, 2000 filing date Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X] The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of February 20, 2001 was $168,658,727. The number of shares of the Registrant's common stock outstanding on February 20, 2001 was 11,732,781. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the Bassett Furniture Industries, Incorporated Annual Report to Stockholders for the year ended November 25, 2000 (the "Annual Report") are incorporated by reference into Parts I and II of this Form 10-K. (2) Portions of the Bassett Furniture Industries, Incorporated definitive Proxy Statement for its 2001 Annual Meeting of Stockholders to be held March 27, 2001, filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934 (the "Proxy Statement") are incorporated by reference into Part III of this Form 10-K.
2 PAGE 2 PART I ITEM 1. BUSINESS (dollar amounts in thousands except per share data) GENERAL DEVELOPMENT OF BUSINESS Bassett Furniture Industries, Incorporated (the "Company") was incorporated under the laws of the Commonwealth of Virginia in 1930. The executive offices are located in Bassett, Virginia. Material Changes in the Development of Business in the last five years are as follows: In an effort to structure manufacturing capacity to current business demands and in a more efficient manner, the Company made a decision in late 2000 to consolidate production in our Wood Division. This included transferring certain products to different facilities, reducing one facility to rough-end operations only, and eliminating approximately 300 salaried and hourly positions. As a result, the Company recorded a restructuring charge in 2000 of $6,680, of which, $5,800 related to the write-down of property and equipment and $880 related to severance and related employee benefits costs. Early in fiscal year 2000, the Company merged all of its eight Company-owned Bassett Furniture Direct (BFD) stores with a licensee's five BFD stores to form a joint venture known as the LRG Furniture, LLC ("LRG"). Refer to Note G of the Consolidated Financial Statements included in the Annual Report for more information about the joint venture. During 1999 the Company expanded its BFD retail store concept by adding five corporate owned stores to its existing network of licensee operated stores. Additionally, the Company took over operations of two financially troubled BFD stores operated by licensees. During 1999, the Company sold substantially all of the assets of its Bedding Division to Premier Bedding Group LLC ("PBG"). The net assets sold, which totaled $8,400, were exchanged for $6,500 in cash and a $1,900 convertible note receivable. Refer to Note B of the Consolidated Financial Statements included in the Annual Report for more information about the bedding sale. During 1997, the Company commenced the restructuring of certain of its operations and recorded restructuring and impaired asset charges of $20,646. The restructuring plan was the result of management's decision to focus on its core Bassett product line and efforts to improve operating efficiencies. The principal actions of the plan included the closure or sale of fourteen manufacturing facilities, elimination of three product lines (National/Mt. Airy, Impact and veneer production) and the severance of approximately 1,000 employees. Refer to Note N of the Consolidated Financial Statements included in the Annual Report for a detail of restructuring activity and refer to the Management's Discussion and Analysis section of the Annual Report for additional discussion on these topics. OPERATING SEGMENTS The Company's primary business is in wholesale home furnishings. The wholesale home furnishings business is involved principally in the manufacture, sale and distribution of furniture products to a network of independently owned stores and stores owned by an affiliate of the Company. The wholesale business consists primarily of two operating segments, wood and upholstery. Refer to Note R of the Consolidated Financial Statements included in the Annual Report for more information about segment information for 1998, 1999 and 2000 and refer to the Management's Discussion and Analysis section of the Annual Report for additional discussion on this topic.
3 PAGE 3 DESCRIPTION OF BUSINESS The Company is a manufacturer of quality home furnishings and sells a full range of furniture products and accessories through department and furniture stores and an exclusive network of retail stores, some of which are owned by an affiliate while others are independently-owned. Retail stores are located throughout the United States. The Company has thirteen manufacturing facilities throughout the United States. The wood segment is engaged in the manufacture and sale of wood furniture, including bedroom and dining suites and accent pieces, to independent retailers and a retailer, which is an affiliate of the Company. The wood segment accounted for 70%, 66% and 59% of total net sales during 2000, 1999 and 1998, respectively. The Company currently has nine wood manufacturing facilities. The upholstery segment is involved in the manufacture and sale of upholstered frames and cut upholstery items having a variety of frame and fabric options, including sofas, chairs, and love seats. The Company currently has three upholstery manufacturing facilities. The upholstery segment accounted for 27%, 27% and 28% of total net sales during 2000, 1999 and 1998, respectively. Raw materials used by the Company are generally available from numerous sources and are obtained principally from domestic sources. The Company has experienced slight raw materials cost pressures, namely certain lumber species, in 2000. The Company's trademarks , including "Bassett" and the names of its marketing divisions, products and collections are significant to the conduct of its business. This importance is due to consumer recognition of the names and identification with the Company's broad range of products. Certain of the Company's trademarks are licensed to independent retailers for use in full store presentations and in store gallery presentations of the Company's products. The Company also owns certain patents and licenses that are important in the conduct of the Company's business. The furniture industry in which the Company competes is not considered to be a seasonal industry. However, working capital levels will fluctuate based on overall business conditions, and desired service levels. Further, the Company's transition to more BFD stores has led to increased levels of inventories and accounts receivable. Sales to one customer (JC Penney Company) amounted to approximately 16% of gross sales in 2000, 16% and 15% of gross sales in 1999 and 1998, respectively. Additionally, sales to LRG Furniture, LLC (LRG), an affiliate of the Company, were 7% of total sales in 2000. The Company's backlog of orders believed to be firm was at $22,000 at November 25, 2000 and $32,000 at November 27, 1999. It is expected that the November 25, 2000 backlog will be filled within the 2001 fiscal year. The furniture industry is very competitive and there are a large number of manufacturers both within the United States and offshore who compete in the market on the basis of product quality, price, style, delivery and service. Additionally, certain retailers are increasingly sourcing imported product directly thus bypassing domestic furniture manufacturers. Based on annual sales revenue, the Company is one of the largest furniture manufacturers located in the United States. The Company has been successful in this competitive environment because its products represent excellent value combining attractive prices, quality and styling; prompt delivery; and courteous service. The furniture industry is considered to be a "fashion" industry subject to constant fluctuations to meet changing consumer preferences and tastes. As such, the Company is continuously involved in the development of new designs and products. Due to the nature of these efforts and the close relationship to the manufacturing operations, these costs are considered normal operating costs and are not segregated. The Company is not otherwise involved in "traditional" research and development activities nor does the Company sponsor research and development activities of any of its customers. In management's view, the Company has complied in all material respects with all federal, state and local standards in the area of safety, health and pollution and environmental controls. Compliance with these standards did result in a charge to earnings in 1997 and capital spending in 1998 and
4 PAGE 4 1999, but otherwise, has not had a material adverse effect on past earnings or competitive position. The Company is involved in environmental matters at certain of its plant facilities, which arise in the normal course of business. Although the final outcome of these environmental matters cannot be determined, based on the facts presently known, it is management's opinion that the final resolution of these matters will not have a material adverse effect on the Company's financial position or future results of operations. The Company had approximately 4,100 employees at November 25, 2000. The Company has several investments in affiliated companies, including a minority interest in International Home Furnishings Center, Inc. (IHFC) which is a lessor of permanent exhibition space to furniture and accessory manufacturers. The IHFC financial statements are included on pages F-1 to F-13. The Company owns a majority interest in The Bassett Industries Alternative Asset Fund, LP, which invests in a variety of other private partnerships, employing a combination of investment strategies. The Bassett Industries Alternative Asset Fund's year ended on December 31, 2000, as such its financial statements have not been included in this Form 10-K. Form 10-K will be amended to include such statements when available. The Company owns a majority interest in LRG Furniture, LLC, (LRG), which is a retailer of home furnishings. The LRG financial statements are included on pages F-14 to F-24. FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES The Company has no foreign operations, and its export sales were approximately $4.9 million, $10.6 million, and $14.3 million in 2000, 1999, and 1998 respectively. ITEM 2. PROPERTIES At November 25, 2000 the Company owned the following manufacturing facilities, by segment: Wood Segment: J. D. Bassett Manufacturing Company Bassett, VA Bassett Superior Lines Bassett, VA Bassett Chair Company Bassett, VA Bassett Table Company Bassett, VA Bassett Furniture Industries Macon, GA Bassett Dining Table Top Martinsville, VA Bassett Furniture Industries Dublin, GA Bassett Furniture Industries Mt. Airy, NC Bassett Fiberboard Bassett, VA
5 PAGE 5 Upholstery Segment: Bassett Upholstery ** Claremont, NC Bassett Upholstery Division Newton, NC Bassett Upholstery Division Hiddenite, NC Bassett Upholstery Los Angeles, CA Other: Weiman Upholstery Christiansburg, VA The Company owned the real estate of Bassett Furniture Direct retail stores approximating 25,000 square feet each in the following cities: Real Estate: Greenville, SC Concord, NC Greensboro, NC Fredericksburg, VA Knoxville, TN Gulfport, MS Chesterfield, VA In addition, the Company owns leasehold improvements in Hickory, NC and Arlington, TX. All of the properties noted above are operated by Bassett Furniture Direct licensees. The Company also owns its general corporate office building, three warehouses , and an outlet store all located in Bassett, Virginia. The Company also owns a showroom in Thomasville, North Carolina.** In general, these facilities are suitable and are considered to be adequate for the continuing operations involved. All facilities, except those held for sale, are in regular use and provide more than adequate capacity for the Company's manufacturing needs. ** Denotes facilities that were held for sale at November 25, 2000. The following facilities were sold or disposed of during 2000: Bassett Upholstery Division Dumas, AR E. B. Malone Corporation (Former Bedding Division) Lake Wales, FL (2 plants located in VA, and WA)
6 PAGE 6 ITEM 3.LEGAL PROCEEDINGS A suit was filed in June 1997, in California against the Company, two major retailers and certain current and former employees of the Company. Following the dismissal of the class action allegations contained in such suit, the suit consisted of damage claims by nine named plantiffs, together with restitution claims for other purchasers under California Business & Professions Code 17200 which were dismissed subsequent to the end of the fiscal year. Legislation has phased out interest deductions on certain policy loans related to Company owned life insurance (COLI) as of January 1, 1999. The Company has recorded cumulative reductions to income tax expense of approximately $8,000 as the result of COLI interest deductions through 1998. The Internal Revenue Service, on a national level, has pursued an adverse position regarding the deductibility of COLI policy loan interest for years prior to January 1, 1999. The IRS has received favorable rulings on the non-deductibility of COLI loan interest. Management understands that these rulings and 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 potential income tax and interest payments which could be material to the Company's future results of operations. The Company is also involved in various other claims and actions, including environmental matters, which arise in the normal course of business. Although the final outcome of these matters cannot be determined, based on the facts presently known, it is management's opinion that the final resolution of these matters will not have a material adverse effect on the Company's financial position or future results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None.
7 PAGE 7 ITEM 4b. EXECUTIVE OFFICERS OF THE REGISTRANT John E. Bassett III, 42, served from 1988 to 1997 as the Vice President and General Manager of Bassett Table and as Vice President of Wood Manufacturing since 1997. Grover S. Elliott, 60, was the Chief Financial Officer for Cochrane Furniture from 1993 until 1996 and has been with the Company as Vice President of Finance and Investor Relations since 1996. Jay R. Hervey, Esq., 41, was an Associate with the Richmond Office of McGuireWoods, LLP from 1992 through 1997 and has been the General Counsel, Corporate Vice President and Secretary for the Company since 1997. Dennis S. Hoy, 42, was a furniture buyer with Marlo Furniture from 1987 until 1996 and has been with the Company since 1996, as Casegoods and Merchandise Manager and as Vice President of Merchandising. In 1999, he was promoted to Vice President and General Manager, Upholstery. Jack R. Johnson, Jr., 40, has been a sales representative for the Company since 1989 and joined the Company as the Vice President of In-store Licensing in 1999. In 2000, he was promoted to the Vice President of Retail and Marketing. Thomas E. Prato, 45, has been with the Company since 1987 in Advertising and Sales Management and has been the Vice President of Sales since 1998. Steven P. Rindskopf, 45, was the Vice President of Human Resources for The Bali Company (a division of the Sara Lee Corporation) from 1993 until 1997, the Owner and Operator of the Master's Loft (Bookstore & Cafe) Company in 1997, and has been with the Company as Vice President, Administration and Human Resources since 1997. Barry C. Safrit, 38, was with CHF Industries from 1995 until 1998 as Controller and as Chief Financial Officer and joined the Company as Vice President and Chief Accounting Officer in 1998 and was promoted to Chief Financial Officer in 2001. Keith R. Sanders, 56, was with Ethan Allen from 1995 until 1998 as the Vice President of Manufacturing and Vice President of Upholstery and has been the Vice President of Upholstery Manufacturing for the Company from 1998 to 1999. In 1999, he was promoted to Executive Vice President, Operations. Robert H. Spilman, Jr., 44, has been with the Company since 1984. He was the Company's Executive Vice President of Marketing and Merchandising from 1994 until 1997 and served as President and Chief Operating Officer from 1997 to 2000. In 2000, he was promoted to Chief Executive Officer and President.
8 PAGE 8 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The information contained in the Annual Report under the caption "Investor Information" with respect to number of stockholders, market prices and dividends paid is incorporated herein by reference thereto. ITEM 6. SELECTED FINANCIAL DATA The information for the five years ended November 25, 2000, contained in "Other Business Data" in the Annual Report is incorporated herein by reference thereto. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information contained in "Management's Discussion and Analysis of Financial Condition and Result of Operations" in the Annual Report is incorporated herein by reference thereto. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS The information contained in "Management's Discussion and Analysis of Financial Condition and Result of Operations" in the Annual Report is incorporated herein by reference thereto. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements and notes to consolidated financial statements of the Registrant and its subsidiaries contained in the Annual Report are incorporated herein by reference thereto. In addition, financial statements of the registrant's significant non-consolidated subsidiaries are included in this Form 10-K on pages F-1 to F-13 and F-14 to F-24. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information contained on pages 3 through 5 and page 12 of the Proxy Statement under the "Election of Directors" and "Section 16 (a) Beneficial Ownership Reporting Compliance" is incorporated herein by reference thereto. Please see section entitled "Executive Officers of the Registrant" in Item 4b of Part I of this report for information concerning executive officers. ITEM 11. EXECUTIVE COMPENSATION The information contained on pages 6 through 12 of the Proxy Statement under the captions "Organization, Compensation and Nominating Committee Report," "Stockholder Return Performance Graph," "Executive Compensation," "Supplemental Retirement Income Plan," "Deferred Compensation Agreement," and "Director Compensation" is incorporated herein by reference thereto.
9 PAGE 9 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information contained on pages 1 through 5 of the Proxy Statement under the headings "Principal Stockholders and Holdings of Management" and "Election of Directors" is incorporated herein by reference thereto. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) The following consolidated financial statements of the registrant and its subsidiaries, included in the Annual Report are incorporated herein by reference thereto: Consolidated Balance Sheets--November 25, 2000 and November 27, 1999 Consolidated Statements of Income--Years Ended November 25, 2000, November 27, 1999 and November 28, 1998 Consolidated Statements of Stockholders' Equity-- Years Ended November 25, 2000, November 27, 1999 and November 28, 1998 Consolidated Statements of Cash Flows-- Years Ended November 25, 2000, November 27, 1999 and November 28, 1998 Notes to Consolidated Financial Statements Report of Independent Public Accountants International Home Furnishings Center, Inc. Financial Statements are included herein on pages F-1 to F-13. LRG Furniture, LLC Financial Statements are included herein on pages F-14 to F-24. (2) Financial Statement Schedule: Schedule II - Analysis of Valuation and Qualifying Accounts for the years ended November 25, 2000, November 27, 1999, and November 28, 1998 (3) Listing of Exhibits 3A. Articles of Incorporation as amended are incorporated herein by reference to Form 10-Q for the fiscal quarter ended February 28, 1994. 3B. By-laws as amended are incorporated herein by reference to the Form 10-K for the fiscal year ended November 27, 1999. 4. $70 million Credit Agreement with a Bank Group dated October 25, 2000, is filed herewith. ** 10A. Bassett 1993 Long Term Incentive Stock Option Plan is incorporated herein by reference to the Registrant's Registration Statement on Form S-8 (no.33-52405) filed on February 25, 1994.
10 PAGE 10 ** 10B. Bassett Executive Deferred Compensation Plan is incorporated herein by reference to Form 10-K for the fiscal year ended November 30, 1997. ** 10C. Bassett Supplemental Retirement Income Plan is incorporated herein by reference to Form 10-K for the fiscal year ended November 30, 1997. ** 10D. Bassett 1993 Stock Plan for Non-Employee Directors as amended is filed herewith. ** 10E. Bassett 1997 Employee Stock Plan is incorporated herein by reference to the Registrant's Registration Statement on Form S-8 ( no. 333-60327) filed on July 31, 1998. 13. Portions of the Registrant's Annual Report to Stockholders for the year ended November 25, 2000. 21. List of subsidiaries of the Registrant is filed herewith. 23A. Consent of Independent Public Accountants is filed herewith. 23B. Consent of Independent Auditors is filed herewith. **Management contract or compensatory plan or arrangement of the Company. (b) No reports on Form 8-K were filed during the last quarter of the Registrant's 2000 fiscal year.
11 PAGE 11 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BASSETT FURNITURE INDUSTRIES, INCORPORATED (Registrant) <TABLE> <S> <C> By: /s/ PAUL FULTON Date: 2/22/01 ---------------------------------- ------------------ Paul Fulton Chairman of the Board of Directors By: /s/ ROBERT H. SPILMAN JR. Date: 2/22/01 ---------------------------------- ------------------ Robert H. Spilman Jr. President and Chief Executive Officer Director </TABLE> Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. <TABLE> <S> <C> By: /s/ AMY W. BRINKLEY Date: 2/22/01 ---------------------------------- ------------------ Amy W. Brinkley Director By: /s/ PETER W. BROWN Date: 2/22/01 ---------------------------------- ------------------ Peter W. Brown Director By: /s/ WILLIE D. DAVIS Date: 2/22/01 ---------------------------------- ------------------ Willie D. Davis Director By: /s/ ALAN T. DICKSON Date: 2/22/01 ---------------------------------- ------------------ Alan T. Dickson Director By: /s/ HOWARD H. HAWORTH Date: 2/22/01 ---------------------------------- ------------------ Howard H. Haworth Director By: /s/ MICHAEL E. MURPHY Date: 2/22/01 ---------------------------------- ------------------ Michael E. Murphy Director By: /s/ DAVID A. STONECIPHER Date: 2/22/01 ---------------------------------- ------------------ David A. Stonecipher Director By: /s/ BARRY C. SAFRIT Date: 2/22/01 ---------------------------------- ------------------ Barry C. Safrit Vice President and Chief Financial Officer </TABLE>
12 PAGE 12 ANNUAL REPORT ON FORM 10-K ITEM 14(a)(1) CERTAIN EXHIBITS YEAR ENDED NOVEMBER 25, 2000 BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES BASSETT, VIRGINIA INDEX TO EXHIBITS
13 INTERNATIONAL HOME FURNISHINGS CENTER, INC. FINANCIAL STATEMENTS YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998
14 INTERNATIONAL HOME FURNISHINGS CENTER, INC. - -------------------------------------------------------------------------------- TABLE OF CONTENTS <TABLE> <CAPTION> Page No. -------- <S> <C> INDEPENDENT AUDITORS' REPORT.......................................................................... 1 FINANCIAL STATEMENTS Balance Sheets..................................................................................... 2 Statements of Income............................................................................... 3 Statements of Stockholders' Equity (Deficit)....................................................... 4 Statements of Cash Flows........................................................................... 5 Notes to Financial Statements...................................................................... 6 </TABLE>
15 F-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors International Home Furnishings Center, Inc. High Point, North Carolina We have audited the accompanying balance sheets of International Home Furnishings Center, Inc. as of October 31, 2000 and 1999 and the related statements of income, stockholders' equity (deficit), and cash flows for each of the three years in the period ended October 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of International Home Furnishings Center, Inc. at October 31, 2000 and 1999 and the results of its operations and its cash flows for each of the three years in the period ended October 31, 2000 in conformity with generally accepted accounting principles. /s/ DIXON ODOM PLLC High Point, North Carolina November 29, 2000 ------ Page 1
16 F-2 INTERNATIONAL HOME FURNISHINGS CENTER, INC. BALANCE SHEETS OCTOBER 31, 2000 AND 1999 - -------------------------------------------------------------------------------- <TABLE> <CAPTION> ASSETS 2000 1999 -------------- -------------- <S> <C> <C> CURRENT ASSETS Cash and cash equivalents $ 4,859,447 $ 8,004,521 Restricted cash (Note C) 2,275,974 2,275,974 Short-term investments 94,489 90,778 Receivables Trade 2,646,756 2,253,583 Interest 9,279 14,627 Deferred income tax asset 600,000 610,000 Prepaid expenses 717,172 806,229 -------------- -------------- TOTAL CURRENT ASSETS 11,203,117 14,055,712 -------------- -------------- PROPERTY AND EQUIPMENT, at cost Land and land improvements 3,293,772 3,293,772 Buildings, exclusive of theater complex 75,391,981 75,439,170 Furniture and equipment 3,717,945 3,631,421 Construction in progress 11,569,301 - -------------- -------------- 93,972,999 82,364,363 Accumulated depreciation (46,022,092) (43,926,570) -------------- -------------- 47,950,907 38,437,793 -------------- -------------- OTHER ASSETS Theater complex, at cost less amortization (Note G) 933,599 976,854 Deferred financing costs, net of accumulated amortization of $187,943 and $104,413 at October 31, 2000 and 1999, respectively 396,766 480,296 -------------- -------------- 1,330,365 1,457,150 -------------- -------------- TOTAL ASSETS $ 60,484,389 $ 53,950,655 ============== ============== LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Accounts payable, trade $ 3,994,972 $ 780,010 Accrued property taxes 1,702,341 1,667,283 Other accrued expenses 693,418 811,121 Rents received in advance 1,502,952 1,613,689 Current maturities of long-term debt 9,995,880 9,295,564 -------------- -------------- TOTAL CURRENT LIABILITIES 17,889,563 14,167,667 -------------- -------------- LONG-TERM DEBT 45,658,704 55,654,584 -------------- -------------- OTHER LONG-TERM LIABILITIES Supplemental retirement benefits 1,745,023 1,504,227 Deferred income tax liability 1,090,000 1,454,000 -------------- -------------- 2,835,023 2,958,227 -------------- -------------- COMMITMENTS (Notes G and L) STOCKHOLDERS' DEFICIT Common stock, $5 par value, 1,000,000 shares authorized, 527,638 shares issued and outstanding in 2000 and 1999 2,638,190 2,638,190 Additional paid-in capital 169,360 169,360 Accumulated deficit (8,706,451) (21,637,373) -------------- -------------- (5,898,901) (18,829,823) -------------- -------------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 60,484,389 $ 53,950,655 ============== ============== </TABLE> - -------------------------------------------------------------------------------- See accompanying notes to financial statements. Page 2
17 F-3 INTERNATIONAL HOME FURNISHINGS CENTER, INC. STATEMENTS OF INCOME YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998 - -------------------------------------------------------------------------------- <TABLE> <CAPTION> 2000 1999 1998 ---------------- --------------- ---------------- <S> <C> <C> <C> OPERATING REVENUES Rental income $ 31,620,514 $ 31,684,174 $ 31,046,712 Other revenues 6,922,474 6,472,825 6,333,233 ---------------- --------------- ---------------- TOTAL OPERATING REVENUES 38,542,988 38,156,999 37,379,945 ---------------- --------------- ---------------- OPERATING EXPENSES Compensation and benefits 4,242,802 4,084,283 3,648,331 Market and promotional 2,593,966 2,558,772 2,554,960 Maintenance and building costs 858,194 862,804 743,347 Depreciation expense 2,179,109 2,202,723 2,187,359 Rent 152,234 152,234 138,835 Property taxes and insurance 1,997,121 1,987,898 2,012,249 Utilities 1,655,730 1,652,068 1,769,612 Other operating costs 535,776 617,201 472,929 ---------------- --------------- ---------------- TOTAL OPERATING EXPENSES 14,214,932 14,117,983 13,527,622 ---------------- --------------- ---------------- INCOME FROM OPERATIONS 24,328,056 24,039,016 23,852,323 ---------------- --------------- ---------------- NONOPERATING INCOME Interest income 808,703 929,317 802,224 Dividend income 4,652 3,692 4,188 ---------------- --------------- ---------------- TOTAL NONOPERATING INCOME 813,355 933,009 806,412 ---------------- --------------- ---------------- NONOPERATING EXPENSES Interest expense 4,109,489 4,936,077 1,517,248 ---------------- --------------- ---------------- TOTAL NONOPERATING EXPENSES 4,109,489 4,936,077 1,517,248 ---------------- --------------- ---------------- INCOME BEFORE INCOME TAXES 21,031,922 20,035,948 23,141,487 PROVISION FOR INCOME TAXES 8,101,000 7,770,000 9,103,000 ---------------- --------------- ---------------- NET INCOME $ 12,930,922 $ 12,265,948 $ 14,038,487 ================ =============== ================ BASIC EARNINGS PER COMMON SHARE $ 24.51 $ 23.25 $ 26.61 ================ =============== ================ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 527,638 527,638 527,638 ================ =============== ================ </TABLE> - -------------------------------------------------------------------------------- See accompanying notes to financial statements. Page 3
18 F-4 INTERNATIONAL HOME FURNISHINGS CENTER, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998 - -------------------------------------------------------------------------------- <TABLE> <CAPTION> Retained Additional Earnings Common Paid-In (Accumulated Stock Capital Deficit) Total -------------- ------------- ------------- -------------- <S> <C> <C> <C> <C> BALANCE, NOVEMBER 1, 1997 $ 2,638,190 $ 169,360 $ 41,566,702 $ 44,374,252 Net income - - 14,038,487 14,038,487 Dividends paid ($144.64 per common share) - - (76,317,560) (76,317,560) -------------- ------------- ------------- -------------- BALANCE (DEFICIT), OCTOBER 31, 1998 2,638,190 169,360 (20,712,371) (17,904,821) Net income - - 12,265,948 12,265,948 Dividends paid ($25.00 per common share) - - (13,190,950) (13,190,950) -------------- ------------- ------------- -------------- BALANCE (DEFICIT), OCTOBER 31, 1999 2,638,190 169,360 (21,637,373) (18,829,823) Net income - - 12,930,922 12,930,922 -------------- ------------- ------------- -------------- BALANCE (DEFICIT), OCTOBER 31, 2000 $ 2,638,190 $ 169,360 $ (8,706,451) $ (5,898,901) ============== ============= ============= ============== </TABLE> - -------------------------------------------------------------------------------- See accompanying notes to financial statements. Page 4
19 F-5 INTERNATIONAL HOME FURNISHINGS CENTER, INC. STATEMENTS OF CASH FLOWS YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998 - -------------------------------------------------------------------------------- <TABLE> <CAPTION> 2000 1999 1998 -------------- --------------- -------------- <S> <C> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 12,930,922 $ 12,265,948 $ 14,038,487 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,301,760 2,325,374 2,247,363 Provision for losses on accounts receivable 6,341 1,360 5,286 Gain on disposal of assets (3,134) - (1,000) Deferred income taxes (354,000) (500,000) (77,000) Change in assets and liabilities Increase in trade and interest receivables (394,166) (68,728) (290,003) (Increase) decrease in prepaid expenses 89,057 (750,264) 227,098 Increase (decrease) in accounts payable and accrued expenses 207,521 (139,200) 582,272 Increase (decrease) in rents received in advance (110,737) 134,806 (19,689) Increase in supplemental retirement benefits 240,796 541,136 159,350 -------------- --------------- -------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 14,914,360 13,810,432 16,872,164 -------------- --------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES Increase in restricted cash - - (2,275,974) Purchase and construction of property and equipment (8,764,159) (337,457) (484,257) Proceeds from sale of property and equipment 4,000 - 1,000 Purchase of short-term investments (3,711) (7,135) (5,199) -------------- --------------- -------------- NET CASH USED BY INVESTING ACTIVITIES (8,763,870) (344,592) (2,764,430) -------------- --------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term debt - - 75,000,000 Principal payments on long-term debt (9,295,564) (8,667,074) (1,382,778) Payment of deferred financing costs - - (584,709) Dividends paid - (13,190,950) (76,317,560) -------------- --------------- -------------- NET CASH USED BY FINANCING ACTIVITIES (9,295,564) (21,858,024) (3,285,047) -------------- --------------- -------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,145,074) (8,392,184) 10,822,687 CASH AND CASH EQUIVALENTS, BEGINNING 8,004,521 16,396,705 5,574,018 -------------- --------------- -------------- CASH AND CASH EQUIVALENTS, ENDING $ 4,859,447 $ 8,004,521 $ 16,396,705 ============== =============== ============== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Income taxes $ 8,357,298 $ 9,049,420 $ 8,965,827 ============== =============== ============== Interest, net of amount capitalized $ 4,166,000 $ 4,988,768 $ 1,069,696 ============== =============== ============== SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING AND INVESTING ACTIVITIES Accounts payable incurred for acquisition of property and equipment $ 2,924,796 $ - $ - ============== =============== ============== </TABLE> - -------------------------------------------------------------------------------- See accompanying notes to financial statements. Page 5
20 F-6 INTERNATIONAL HOME FURNISHINGS CENTER, INC. NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2000, 1999 AND 1998 - -------------------------------------------------------------------------------- NOTE A - DESCRIPTION OF BUSINESS The Company is the lessor of permanent exhibition space to furniture and accessory manufacturers which are headquartered throughout the United States and in many foreign countries. This exhibition space, located in High Point, North Carolina, is used by the Home Furnishings Industry to showcase its products at the International Home Furnishings Market held each April and October. The details of the operating leases with the Company's tenants are described in Note I. The Company has been in business since June 27, 1919, and operates under the trade name of "International Home Furnishings Center." NOTE B - SIGNIFICANT ACCOUNTING POLICIES The accounting policies relative to the carrying values of property and equipment and theater complex are indicated in the captions on the balance sheets. Other significant accounting policies are as follows: Rental Income Income from rental of exhibition space is recognized under the operating method. Aggregate rentals are reported as income on the straight-line basis over the lives of the leases, and expenses are charged as incurred against such income. Future rentals under existing leases are not recorded as assets in the accompanying balance sheets. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Investment Securities The Company has investments in debt and marketable equity securities. Debt securities consist of obligations of state and local governments and U. S. corporations. Marketable equity securities consist primarily of investments in mutual funds. Management determines the appropriate classification of securities at the date individual investment securities are acquired, and the appropriateness of such classification is reassessed at each balance sheet date. Since the Company neither buys investment securities in anticipation of short-term fluctuations in market prices or commits to holding debt securities to their maturities, investments in debt and marketable equity securities have been classified as available-for-sale. Available-for-sale securities are stated at fair value, and unrealized holding gains and losses, if significant, net of the related deferred tax effect, are reported as a separate component of accumulated other comprehensive income in stockholders' equity. Premiums and discounts on investments in debt securities are amortized over their contractual lives. Interest on debt securities is recognized in income as accrued, and dividends on marketable equity securities are recognized in income when declared. Realized gains and losses are included in income and are determined on the basis of the specific securities sold. - -------------------------------------------------------------------------------- Page 6
21 F-7 INTERNATIONAL HOME FURNISHINGS CENTER, INC. NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2000, 1999 AND 1998 - -------------------------------------------------------------------------------- NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Property, Equipment and Depreciation Additions and major improvements to property and equipment are recorded at cost. Expenditures for maintenance, repairs, and minor renewals are charged to expense as incurred. Depreciation is provided primarily on the straight-line method over the following estimated useful lives: <TABLE> <S> <C> Land improvements 10 years Building structures 20 to 50 years Building components 5 to 20 years Furniture and equipment 3 to 10 years </TABLE> In accordance with the provisions of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," the Company periodically reviews long-lived assets when indicators of impairment exist, and if the value of the assets is impaired, an impairment loss would be recognized. Deferred Financing Costs Costs associated with obtaining the term loan disclosed in Note E have been deferred and are being amortized on the straight-line method over the term of the related debt. Amortization expense charged to operations during the years ended October 31, 2000, 1999 and 1998 was $83,530, $83,530 and $20,883, respectively. Income Taxes Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related to temporary differences between the reported amounts of assets and liabilities and their tax bases. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Earnings Per Common Share The Company follows the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share," which specifies the computation, presentation and disclosure requirements for earnings per share ("EPS"). Basic EPS excludes all dilution and has been computed using the weighted average number of common shares outstanding during the year. Diluted EPS would reflect the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock. The Company has no dilutive potential common shares. - ------------------------------------------------------------------------------- Page 7
22 F-8 INTERNATIONAL HOME FURNISHINGS CENTER, INC. NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2000, 1999 AND 1998 - -------------------------------------------------------------------------------- NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Retirement Plans The Company maintains a 401(k) qualified retirement plan covering eligible employees under which participants may contribute up to 25% of their compensation subject to maximum allowable contributions. The Company is obligated to contribute, on a matching basis, 50% of the first 6% of compensation voluntarily contributed by participants. The Company may also make additional contributions to the plan if it so elects. In 1991, the Company adopted a nonqualified supplemental retirement benefits plan for key management employees. Benefits payable under the plan are based upon the participant's average compensation during his last five years of employment and are reduced by benefits payable under the Company's qualified retirement plan and by one-half of the participant's social security benefits. Benefits under the plan do not vest until the attainment of normal retirement age; however, a reduced benefit is payable if employment terminates prior to normal retirement age because of death or disability. The Company has no obligation to fund this supplemental plan. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE C - RESTRICTED CASH Restricted cash consists of an interest-bearing debt service account. The Company is required to make semi-annual escrow deposits each May and November in amounts sufficient to provide interest and principal payments on the Company's term debt for the ensuing six months. NOTE D - INVESTMENT IN DEBT AND MARKETABLE EQUITY SECURITIES The following is a summary of the Company's investment in available-for-sale securities as of October 31, 2000 and 1999: <TABLE> <CAPTION> 2000 ------------------------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------------- -------------- --------------- --------------- <S> <C> <C> <C> <C> Debt securities State and local governments $ 3,825,717 $ - $ - $ 3,825,717 Equity securities 94,489 - - 94,489 -------------- -------------- --------------- --------------- $ 3,920,206 $ - $ - $ 3,920,206 ============== ============== =============== =============== </TABLE> - -------------------------------------------------------------------------------- Page 8
23 F-9 INTERNATIONAL HOME FURNISHINGS CENTER, INC. NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2000, 1999 AND 1998 - -------------------------------------------------------------------------------- NOTE D - INVESTMENT IN DEBT AND MARKETABLE EQUITY SECURITIES (CONTINUED) <TABLE> <CAPTION> 1999 ------------------------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------------- -------------- --------------- --------------- <S> <C> <C> <C> <C> Debt securities State and local governments $ 5,103,547 $ - $ - $ 5,103,547 U. S. corporations 1,000,000 - - 1,000,000 Equity securities 90,778 - - 90,778 -------------- -------------- --------------- --------------- $ 6,194,325 $ - $ - $ 6,194,325 ============== ============== =============== =============== </TABLE> Available-for-sale securities are classified in the following balance sheet captions as of October 31, 2000 and 1999: <TABLE> <CAPTION> 2000 1999 ---------------- ---------------- <S> <C> <C> Cash and cash equivalents $ 3,825,717 $ 6,103,547 Short-term investments 94,489 90,778 ---------------- ---------------- $ 3,920,206 $ 6,194,325 ================ ================ </TABLE> All the Company's debt securities mature within three months. NOTE E - LONG-TERM DEBT Long-term debt consists of the following at October 31, 2000 and 1999: <TABLE> <CAPTION> 2000 1999 ---------------- ----------------- <S> <C> <C> Term note payable, principal and interest are due in monthly installments of $1,137,987 through August 1, 2005, with interest included at 7.06%, collateralized by land and buildings with a carrying value of $47,584,004 at October 31, 2000 $ 55,654,584 $ 64,950,148 Less current maturities 9,995,880 9,295,564 ---------------- ----------------- $ 45,658,704 $ 55,654,584 ================ ================= </TABLE> - -------------------------------------------------------------------------------- Page 9
24 F-10 INTERNATIONAL HOME FURNISHINGS CENTER, INC. NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2000, 1999 AND 1998 - -------------------------------------------------------------------------------- NOTE E - LONG-TERM DEBT (CONTINUED) The aggregate maturities of long-term debt are due as follows: <TABLE> <CAPTION> Year Ending October 31, <S> <C> <C> 2001 $ 9,995,880 2002 10,735,336 2003 11,529,494 2004 12,378,440 2005 11,015,434 ---------------- $ 55,654,584 ================ </TABLE> Total interest cost incurred for the years ended October 31, 2000, 1999 and 1998 was $4,303,766, $4,936,077 and $1,517,248, respectively. Of the interest cost for the year ended October 31, 2000, $194,277 was capitalized as part of the building construction costs. There was no interest capitalized in the years ended October 31, 1999 and 1998. NOTE F - INCOME TAXES The provision for income taxes consists of the following for the years ended October 31, 2000, 1999 and 1998: <TABLE> <CAPTION> 2000 1999 1998 --------------- -------------- -------------- <S> <C> <C> <C> Federal: Current $ 6,975,000 $ 6,765,000 $ 7,450,000 Deferred (287,000) (395,000) (62,000) --------------- -------------- -------------- 6,688,000 6,370,000 7,388,000 --------------- -------------- -------------- State: Current 1,480,000 1,505,000 1,730,000 Deferred (67,000) (105,000) (15,000) --------------- -------------- -------------- 1,413,000 1,400,000 1,715,000 --------------- -------------- -------------- TOTAL $ 8,101,000 $ 7,770,000 $ 9,103,000 =============== ============== ============== </TABLE> - -------------------------------------------------------------------------------- Page 10
25 F-11 INTERNATIONAL HOME FURNISHINGS CENTER, INC. NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2000, 1999 AND 1998 - -------------------------------------------------------------------------------- NOTE F - INCOME TAXES (CONTINUED) A reconciliation of the income tax provision at the federal statutory rate to the income tax provision at the effective tax rate is as follows: <TABLE> <CAPTION> 2000 1999 1998 --------------- -------------- -------------- <S> <C> <C> <C> Income taxes computed at the federal statutory rate $ 7,360,000 $ 7,013,000 $ 8,100,000 State taxes, net of federal benefit 918,000 910,000 1,115,000 Nontaxable investment income (112,000) (180,000) (196,000) Other, net (65,000) 27,000 84,000 --------------- -------------- -------------- $ 8,101,000 $ 7,770,000 $ 9,103,000 =============== ============== ============== </TABLE> The components of deferred income taxes consist of the following: <TABLE> <CAPTION> 2000 1999 1998 --------------- -------------- -------------- <S> <C> <C> <C> Deferred income tax assets: Rents received in advance $ 600,000 $ 610,000 $ 592,000 Supplemental retirement benefits 700,000 602,000 384,000 --------------- -------------- -------------- TOTAL DEFERRED TAX ASSETS 1,300,000 1,212,000 976,000 Deferred income tax liabilities: Depreciation (1,790,000) (2,056,000) (2,320,000) --------------- -------------- -------------- TOTAL NET DEFERRED TAX LIABILITIES $ (490,000) $ (844,000) $ (1,344,000) =============== ============== ============== </TABLE> NOTE G - LAND LEASE COMMITMENT During 1975, the Company completed construction of an eleven-story exhibition building. The building is constructed on land leased from the City of High Point, North Carolina under a noncancelable lease. The lease is for an initial term of fifty years with three options to renew for periods of ten years each and a final renewal option for nineteen years. Annual rental under the lease is $152,234 as of October 31, 2000 and is subject to adjustment at the end of each five-year period, such adjustment being computed as defined in the lease agreement. As part of the lease agreement, the Company constructed a theater complex for public use and office space for use by the City of High Point on the lower levels of the building. Annual rental cash payments over the initial fifty-year lease term are being reduced by $39,121 which represents amortization of the cost of the theater and office complex constructed for the City of High Point. At the termination of the lease, the building becomes the property of the City of High Point. Under the terms of the lease, the Company is responsible for all expenses applicable to the exhibition portion of the building. The City of High Point is responsible for all expenses applicable to the theater complex and office space constructed for use by the City. - -------------------------------------------------------------------------------- Page 11
26 F-12 INTERNATIONAL HOME FURNISHINGS CENTER, INC. NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2000, 1999 AND 1998 - -------------------------------------------------------------------------------- NOTE H - RETIREMENT EXPENSE Amounts expensed under the Company's retirement plans amounted to $394,166, $691,698 and $268,856 for the years ended October 31, 2000, 1999 and 1998, respectively, including $240,796, $541,136 and $159,350 under the supplemental retirement benefits plan for the years ended October 31, 2000, 1999 and 1998, respectively. NOTE I - RENTALS UNDER OPERATING LEASES The Company's leasing operations consist principally of leasing exhibition space. Property on operating leases consists of substantially all of the asset "buildings, exclusive of theater complex" included on the balance sheets. Accumulated depreciation on this property amounted to $42,943,916 and $40,937,431 at October 31, 2000 and 1999, respectively. Leases are typically for five-year periods and contain provisions to escalate rentals based upon either the increase in the consumer price index or increases in ad valorem taxes, utility rates and charges, minimum wage imposed by federal and state governments, maintenance contracts for elevators and air conditioning, maintenance of common areas, social security payments, increases resulting from collective bargaining contracts, if any, and such other similar charges and rates required in operating the Company. Tenants normally renew their leases. The following is a schedule of minimum future rentals under noncancelable operating leases as of October 31, 2000, exclusive of amounts due under escalation provisions of lease agreements: <TABLE> <CAPTION> Year Ending October 31, <S> <C> <C> 2001 $ 28,398,012 2002 24,874,514 2003 20,149,245 2004 15,359,863 2005 3,960,572 ---------------- Total minimum future rentals $ 92,742,206 ================ </TABLE> Rental income includes contingent rentals under escalation provisions of leases of $823,536, $1,322,521 and $1,401,867 for the years ended October 31, 2000, 1999 and 1998, respectively. Rental income from related parties amounted to $2,374,813, $1,980,775 and $1,894,219 for the years ended October 31, 2000, 1999 and 1998, respectively. NOTE J - CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash deposits in excess of federally insured limits and trade accounts receivable from customers predominantly in the Home Furnishings Industry. As of October 31, 2000, the Company's bank balances exceeded federally insured limits by $1,105,376. The Company's trade accounts receivable are generally collateralized by merchandise in leased exhibition spaces which is in the Company's possession. - -------------------------------------------------------------------------------- Page 12
27 F-13 INTERNATIONAL HOME FURNISHINGS CENTER, INC. NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2000, 1999 AND 1998 - -------------------------------------------------------------------------------- NOTE K - STOCKHOLDERS' DEFICIT During the year ended October 31, 1998, the Company paid dividends of $76,317,560 resulting in a deficit in stockholders' equity of $17,904,821 at October 31, 1998. During the year ended October 31, 1999, the deficit was increased because of the payment of dividends in excess of net income for the year. The 1998 dividends were financed, in part, with the proceeds of a $75,000,000 term loan. Although interest on this debt will negatively impact future earnings, management believes future earnings will provide adequate equity capital for the Company and that operating cash flows will be sufficient to provide for debt service and for the Company's other financing and investing needs. NOTE L - CONSTRUCTION PLANS At October 31, 2000, a project to add additional exhibition space to the existing facilities was in progress. Construction is expected to be completed in time for tenants to utilize the additional exhibition space for the April 2001 International Home Furnishings Market. The cost of the construction is estimated to approximate $14,217,000 and is being funded with operating cash flows. As of October 31, 2000, $11,569,301 of this amount had been incurred. The assessment of the cost and the timetable for completion are management's estimates, and it is reasonably possible that actual and estimated results will differ materially. - -------------------------------------------------------------------------------- Page 13
28 LRG FURNITURE, LLC Financial Statements As of November 30, 2000 and 1999 Together with Report of Independent Public Accountants
29 F-14 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Members of LRG Furniture, LLC: We have audited the accompanying balance sheets of LRG FURNITURE, LLC (a Virginia limited liability company) as of November 30, 2000 and 1999, and the related statements of operations and changes in members' equity (deficit) and cash flows for the year ended November 30, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of LRG Furniture, LLC as of November 30, 2000 and 1999, and the results of its operations and its cash flows for the year ended November 30, 2000, in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP Greensboro, North Carolina February 16, 2001
30 F-15 LRG FURNITURE, LLC BALANCE SHEETS -- NOVEMBER 30, 2000 AND 1999 (NOTE 1) <TABLE> <CAPTION> ASSETS 2000 1999 ------ ---- ---- CURRENT ASSETS: <S> <C> <C> Cash $ 4,191,154 $ 6,015,023 Accounts receivable, net of allowances of $104,000 and $458,000 in 2000 and 1999, respectively 681,167 753,085 Merchandise inventories 11,785,997 9,540,006 Prepaid expenses 106,310 161,115 ------------ ------------ Total current assets 16,764,628 16,469,229 PROPERTY AND EQUIPMENT: Computer equipment 343,577 166,986 Store fixtures 268,302 117,610 Office furniture, fixtures and equipment 1,222,508 982,226 Leasehold improvements 1,590,578 1,540,561 Vehicles 115,692 115,692 ------------ ------------ 3,540,657 2,923,075 Less - Accumulated depreciation (345,033) 0 ------------ ------------ 3,195,624 2,923,075 ------------ ------------ OTHER ASSETS, NET (NOTE 2) 825,775 874,747 ------------ ------------ $ 20,786,027 $ 20,267,051 ============ ============ LIABILITIES AND MEMBERS' EQUITY (DEFICIT) ----------------------------------------- CURRENT LIABILITIES: Current portion of long-term debt (Note 4) $ 1,548,636 $ 0 Accounts payable 10,970,062 9,970,300 Customer deposits 2,983,731 4,493,651 Accrued liabilities 1,082,781 950,611 ------------ ------------ Total current liabilities 16,585,210 15,414,562 ------------ ------------ LONG-TERM DEBT (NOTE 4) 3,299,364 0 ------------ ------------ NOTES PAYABLE TO MEMBERS (NOTE 4) 7,808,000 2,175,000 ------------ ------------ COMMITMENTS AND CONTINGENCIES (NOTES 5, 6 AND 7) MEMBERS' (DEFICIT) EQUITY (6,906,547) 2,677,489 ------------ ------------ $ 20,786,027 $ 20,267,051 ============ ============ </TABLE> The accompanying notes to financial statements are an integral part of these balance sheets.
31 F-16 LRG FURNITURE, LLC STATEMENT OF OPERATIONS AND CHANGES IN MEMBERS' EQUITY (DEFICIT) FOR THE YEAR ENDED NOVEMBER 30, 2000 (NOTE 1) <TABLE> <S> <C> SALES $ 63,058,739 COST OF GOODS SOLD 34,849,470 ------------ Gross profit 28,209,269 OPERATING AND GENERAL EXPENSES 37,294,558 ------------ Loss from operations (9,085,289) OTHER EXPENSE - INTEREST, NET 498,747 ------------ NET LOSS (9,584,036) MEMBERS' EQUITY, BEGINNING OF YEAR 2,677,489 ------------ MEMBERS' DEFICIT, END OF YEAR $ (6,906,547) ============ </TABLE> The accompanying notes to financial statements are an integral part of this statement.
32 F-17 LRG FURNITURE, LLC STATEMENT OF CASH FLOWS FOR THE YEAR ENDED NOVEMBER 30, 2000 (NOTE 1) <TABLE> <S> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (9,584,036) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 345,033 Amortization 53,568 Changes in current assets and liabilities: Accounts receivable 71,918 Inventories (2,245,991) Prepaid expenses 54,805 Accounts payable and accrued liabilities 1,131,932 Customer deposits (1,509,920) Other (4,596) ------------ Net cash used in operating activities (11,687,287) ------------ CASH FLOWS USED IN INVESTING ACTIVITIES - Purchases of property and equipment (617,582) ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from long-term debt 4,848,000 Net proceeds from notes payable to Members 5,633,000 ------------ Net cash provided by financing activities 10,481,000 ------------ NET DECREASE IN CASH (1,823,869) CASH, BEGINNING OF YEAR 6,015,023 ------------ CASH, END OF YEAR $ 4,191,154 ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION - CASH PAID DURING THE YEAR FOR INTEREST $ 393,886 ============ </TABLE> The accompanying notes to financial statements are an integral part of this statement.
33 F-18 LRG FURNITURE, LLC NOTES TO FINANCIAL STATEMENTS NOVEMBER 30, 2000 AND 1999 1. HISTORY AND ORGANIZATION LRG Furniture, LLC (the Company) was formed as a limited liability company under the laws of Virginia on November 29, 1999. The Company was formed as a joint venture between Bassett Furniture Industries, Inc. (Bassett) and Bassett Direct Plus Texas, LLC (BDPT) (collectively referred to herein as the Members). Pursuant to the joint venture, Bassett contributed cash of $4,215,000, reimbursement for excessive customer deposit liability of $1,800,000 and other identifiable assets, at net book value of $8,593,000 offset by liabilities of $8,948,000. Concurrently, BDPT contributed, at net book value, other identifiable assets of $5,659,000 offset by liabilities of $8,642,000. As a result of these transactions, Bassett and BDPT were credited with 51% and 49%, respectively, of the resulting combined equity of $2,677,000. The Company began operations on November 29, 1999, and had minimal activity between inception and November 30, 1999, its first fiscal year-end. As such, the financial statements for the period from November 29, 1999 (inception), to November 30, 1999, are not material for a fair presentation of the Company's results of operations and financial position and have not been presented herein. 2. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES OPERATIONS The Company operates retail furniture stores in North Carolina, South Carolina, Tennessee, Virginia, Nevada and Texas. These stores operate under the "Bassett Furniture Direct" name and substantially all of their purchases are from Bassett and its affiliates. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH Cash includes cash on hand and cash in banks. REVENUE RECOGNITION AND CONCENTRATION OF CREDIT RISK The Company recognizes revenue upon the delivery of products to its customers. In the current year, there is no concentration of credit risk to any one customer. Return allowances are provided for estimated losses associated with anticipated future returns of products sold by the Company. Actual returns could differ from management's estimates making it reasonably possible that a change in these estimates could occur in the near term.
34 F-19 -2- MERCHANDISE INVENTORIES Merchandise inventories are stated at the lower of first-in, first-out (FIFO) cost or market. Allowances are established to reduce the cost of excess and obsolete inventories to their estimated net realizable value. PROPERTY AND EQUIPMENT Property and equipment are carried at cost. Depreciation is provided using the straight-line method over the following estimated useful lives: <TABLE> <S> <C> Computer equipment 3-5 years Store fixtures 7 years Office furniture, fixtures and equipment 7 years Leasehold improvements 15-20 years Vehicles 5 years </TABLE> When property is sold or retired, the cost and accumulated depreciation are removed from the accounts and the resulting gain or loss is recognized in the statement of operations and changes in members' equity. Expenditures for maintenance and repairs are charged to operations as incurred. OTHER ASSETS Other assets are substantially made up of refundable deposits with various utilities and property lessors and a lease contract that has terms that are favorable to its local market value. The deposits are refundable at the discretion of the utility or lessor as applicable and the favorable lease contract is amortized over the lease term, which is 15 years. Accumulated amortization related to this favorable lease contract was $53,568 and $0 in 2000 and 1999, respectively. LONG-LIVED ASSETS The Company applies Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which requires that long-lived assets and certain identifiable intangible assets to be held and used or disposed of by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In the event assets are impaired, losses are recognized based on the excess carrying amounts over the estimated undiscounted cash flows for the asset. SFAS No. 121 also requires that assets to be disposed of be reported at the lower of the carrying amount or the fair market value less selling costs. At November 30, 2000, the Company noted an impairment loss related to one store for $97,000 (Note 10). No other impairment losses have been identified by the Company as of November 30, 2000. PREOPENING EXPENSES Preopening expenses, which consist primarily of payroll and occupancy costs, are expensed as incurred. Preopening expenses were $449,534 in 2000. ADVERTISING COSTS The Company expenses advertising costs as incurred. Advertising expense was $1,949,344 in 2000.
35 F-20 -3- CUSTOMER DEPOSITS Customer deposits relate to amounts paid by customers to the Company at the time they order goods. These deposits are applied to the ultimate sales price once goods are shipped to the customer, and are recognized as revenue at that time. INCOME TAXES The Company is treated as a pass-through entity for federal income tax purposes. As a result, the Company is not subject to income tax, but rather the liability for income taxes from the taxable income generated by the Company is the obligation of the owners of the Company. The Company is treated similarly for state income tax purposes and, under current law in the states in which the Company is conducting business, the Company is not subject to state income taxes. Accordingly, no provision or benefit for federal and state income taxes has been recorded in the accompanying financial statements. RECENT ACCOUNTING PRONOUNCEMENTS In June 2000, the Financial Accounting Standards Board issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." This statement amends the accounting and reporting standards of Statement No. 133 for certain derivative instruments and certain hedging activities. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company has adopted the provisions of this statement in 2001 and has determined that the impact of adopting the statement is immaterial. 3. CONTINUING OPERATIONS The Company has experienced significant losses from operations during 2000. The Company incurred a net loss in 2000 of $9,584,000, and has Members' deficit of $6,907,000 as of November 30, 2000. Management has implemented a profit improvement program that includes evaluation and realignment of the Company's business to improve profitability. This program has resulted in significant operational changes, overall downsizing of the Company's administrative and operating overhead and disposals of selected stores (Note 10). As a result of these actions, the Company expects to reduce its losses substantially in 2001. The Members have historically provided, and are currently providing, sufficient financial support to the Company to fund the Company's obligations and working capital requirements as those obligations become due. The Members loaned a total of $7,808,000 to the Company in 2000 (Note 4). The accompanying financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business, rather than through a process of forced liquidation. Management of Bassett has committed to provide the necessary level of financial support to the Company to enable it to pay its obligations as they become due through November 30, 2002. Bassett, however, is not legally obligated to provide such support. Accordingly, the accompanying financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.
36 F-21 -4- 4. LONG-TERM DEBT AND NOTES PAYABLE TO MEMBERS Long-term debt and notes payable to Members at November 30, 2000, consists of the following: <TABLE> <S> <C> Unsecured notes with a bank, payable in monthly installments as discussed below from January 2001 to September 2003, plus interest payable monthly at prime plus 0.5%, as defined in the agreement (10% at November 30, 2000) $ 4,848,000 Unsecured notes payable to Bassett, interest at 8% per year, entire outstanding balance due November 1, 2004 6,000,000 Unsecured note payable to BDPT, interest payable quarterly at 8% per year, entire outstanding balance due November 30, 2003 1,808,000 ------------ Total long-term debt 12,656,000 Less - Current maturities of long-term debt 1,548,636 ------------ $11,107,364 </TABLE> The aggregate future annual maturities of long-term debt are as follows: <TABLE> <S> <C> 2001 $ 1,548,636 2002 2,154,624 2003 2,952,740 2004 6,000,000 ----------- $12,656,000 =========== </TABLE> At various dates from March 16, 2000, to August 15, 2000, the Company entered into a total of eight unsecured notes with a bank for $606,000 each for a total of $4,848,000. Each note has deferred principal payments of $22,444 beginning 9 months from the close of each note and continuing for 27 months thereafter. The proceeds of these notes were used primarily to pay for new store opening inventory. Repayment of these loans is guaranteed by Bassett. On June 1, 2000, and August 1, 2000, the Company entered into two unsecured notes with Bassett for $1,000,000 and $5,000,000, respectively. Both of these notes have the same terms and both have deferred principal and interest payments, all payable November 1, 2004. On November 30, 2000, the Company entered into an unsecured note with BDPT for $1,808,000. This unsecured note contains various restrictive covenants, which include, among others, limitations on loans and contingent liabilities except in the normal course of business. As of November 30, 2000, the Company was in compliance with all of these covenants.
37 F-22 -5- 5. LEASE COMMITMENTS The Company's administrative offices and retail locations are leased under noncancellable operating lease agreements that expire from 2001 to 2020. Most of these leases contain renewal options of 3 to 35 years. Certain of the lease agreements for retail locations require the payment of contingent rentals based on a percentage of sales above stipulated levels. No contingent rental expense was incurred during 2000. Certain of the lease agreements contain rent escalation clauses. Total rent expense for 2000 was $6,201,000. The Company leases certain of these locations from the Members. Rent expense related to locations owned or leased from the Members was $3,823,000 in 2000.
38 F-23 -6- Future minimum lease commitments for the office and retail locations under operating leases having initial or remaining terms in excess of one year are as follows: <TABLE> <CAPTION> MEMBERS OPERATING TOTAL ------- --------- ----- <S> <C> <C> <C> 2001 $ 3,349,516 $ 2,251,090 $ 5,600,606 2002 3,386,603 2,259,449 5,646,052 2003 3,386,603 2,232,428 5,619,031 2004 3,386,603 1,606,085 4,992,688 2005 3,386,603 1,493,235 4,879,838 Thereafter 33,955,694 7,680,462 41,636,156 ----------- ----------- ----------- $50,851,622 $17,522,749 $68,374,371 =========== =========== =========== </TABLE> Subsequent to November 30, 2000, the Company entered into a lease agreement for one new store that was purchased by the Company from a third-party "Bassett Furniture Direct" licensee (Note 10). This lease is a month-to-month lease and as such does not appear in the future minimum lease commitments above. Also subsequent to November 30, 2000, the Company sold three stores to third parties and these third parties assumed the leases related to these stores (Note 10). As such, the lease commitments related to these three stores are not included in the future minimum lease commitments above. 6. OTHER RELATED-PARTY TRANSACTIONS Substantially all purchases of merchandise inventories are made from Bassett and its affiliates. These related entities sell products to the Company at prices equal to their normal selling prices to unrelated entities. Accounts payable due to these related parties was $10,534,450 and $2,462,152 in 2000 and 1999, respectively. Interest expense on borrowings from related parties as described in Note 4 was $173,333 in 2000 and was accrued at November 30, 2000. The Company paid salaries to related parties for administrative and executive services for $300,000 in 2000. 7. BENEFIT PLAN EMPLOYEE SAVINGS PLAN The Company maintains a qualified 401(k) employee savings plan covering substantially all full-time employees. Under the plan, employees may elect to contribute up to 15% of their compensation annually. Under the plan, the Company is not required to make contributions to the plan and no contributions were made in 2000.
39 F-24 -7- 8. COMMITMENTS AND CONTINGENCIES EMPLOYMENT AGREEMENTS The Company has certain obligations under various employment agreements through November 30, 2004, that stipulate, among other things, certain levels of compensation, bonus potential, other miscellaneous benefits and severance arrangements. Potential contingent liabilities under these arrangements approximate $450,000. LITIGATION The Company is involved in various legal proceedings encountered in the normal course of business. In the opinion of management, the resolution of these matters will not have a material adverse effect on the Company's financial position or future results of operations. 9. MEMBERS' EQUITY (DEFICIT) The Members' equity (deficit) account in the accompanying balance sheets reflects the initial capital contributed by the Members of $2,677,489 and all losses of the Company since inception. No distributions have been made to the Members since inception. Under the terms of the Limited Liability Company Agreement (the LLC Agreement), profits and losses and any distributions of the Company are allocated to its members based upon the Members' relative ownership interests in the Company and are made at the sole discretion of the Board of Managers. Both members have two positions each in the Board of Managers. There is a single class of members with the same rights, powers, duties, obligations, preferences and privileges. Each member's liability is limited to the sum of its capital contributions, its share of any undistributed assets of the Company, and any amounts previously distributed to it from the Company. As stated in the Articles of Organization, the latest date on which the Company is to dissolve is November 30, 2019. 10. SUBSEQUENT EVENTS In December 2000, the Company sold its retail store operation in Columbia, South Carolina, to a local furniture retailer. The transaction involved the sale of inventory, property, equipment and leasehold improvements. The buyer also assumed the customer deposit liability and the future lease commitments for the store facility. The Company incurred a loss of $97,000 primarily related to the disposal of property and equipment. As management made the decision to dispose of this store before year-end and had knowledge that the book value of the property exceeded fair value at year-end, management accrued for these impaired assets in the accompanying financial statements. The Company sold its retail furniture store in Knoxville, Tennessee, in January 2001. Substantially all of the inventory in that location had been sold through a liquidation sale that began in September 2000. The lease for this location has been assumed by a third party, who will operate the store as a "Bassett Furniture Direct" store going forward. No significant gain or loss was realized due to this transaction. On December 15, 2000, the Company purchased assets and assumed liabilities of a third party "Bassett Furniture Direct" licensee in Louisville, Kentucky. As part of the transaction, Bassett purchased the related building and is leasing it to the Company on a month-to-month basis. The Company will operate the facility as a retail furniture store on an ongoing basis.
40 INDEX TO FORM 10-K SCHEDULE Exhibit No. - ----------- F - 25 Report of Independent Public Accountants F - 26 Bassett Furniture Industries, Inc. Schedule II - Analysis of Valuation and Qualifying Accounts for the years ended November 25, 2000, November 27, 1999 and November 28, 1998.
41 F-25 Report of Independent Public Accountants To the Stockholders and Board of Directors of Bassett Furniture Industries, Incorporated: We have audited in accordance with auditing standards generally accepted in the United States, the financial statements included in the Bassett Furniture Industries, Incorporated Annual Report to Stockholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 15, 2001. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedule on page F-26 is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP Greensboro, North Carolina, January 15, 2001.
42 F-26 BASSETT FURNITURE INDUSTRIES, INC. Schedule II Analysis of Valuation and Qualifying Accounts For the Years Ended November 25, 2000, November 27, 1999 and November 28, 1998 (in thousands) <TABLE> <CAPTION> Additions Charged Balance to Balance Beginning Cost and End Of Period Expenses Deductions Other Of Period ------------------------------------------------------------------- (1) <S> <C> <C> <C> <C> <C> For the Year Ended November 28, 1998: Reserve deducted from assets to which it applies- Allowance for doubtful accounts $1,984 $692 $(476) --- $2,200 =================================================================== Restructuring reserve $6,249 --- $(3,760) --- $2,489 =================================================================== For the Year Ended November 27, 1999: Reserve deducted from assets to which it applies- Allowance for doubtful accounts $2,200 $680 $(322) --- $2,558 =================================================================== Restructuring reserve $2,489 --- $(1,173) --- $1,316 =================================================================== For the Year Ended November 25, 2000: Reserve deducted from assets to which it applies- Allowance for doubtful accounts $2,558 $4,150 $(58) --- $6,650 =================================================================== Restructuring reserve $1,316 $880 $(853) --- $1,343 =================================================================== </TABLE> (1) Deductions are for the purpose for which the reserve was created.
43 INDEX TO EXHIBITS <TABLE> <CAPTION> Exhibit No. - ----------- <S> <C> 4 $70 million Credit Agreement with a Bank Group dated October 25, 2000 10D Bassett 1993 Stock Plan for Non-Employee Directors as amended. 13 Portions of the Bassett Furniture Industries, Incorporated Annual Report to Stockholders for the year ended November 25, 2000 21 List of subsidiaries of registrant 23A Consent of Independent Public Accountants 23B Consent of Independent Auditors </TABLE>