UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended November 24, 2001 Commission File No. 0-209 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) </TABLE> Registrant's telephone number, including area code 276/629-6000 ------------------------------ Securities registered pursuant to Section 12(g) of the Act: <TABLE> <CAPTION> Name of each exchange Title of each class: on which registered -------------------- --------------------------------- <S> <C> 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. [X] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X] The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of February 19, 2002 was $202,464,529. The number of shares of the Registrant's common stock outstanding on February 19, 2002 was 11,730,274. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the Bassett Furniture Industries, Incorporated Annual Report to Stockholders for the year ended November 24, 2001 (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 2002 Annual Meeting of Stockholders to be held March 26, 2002, filed with the Securities and exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934 (the "Proxy Statement") are incorporated by reference into Part III of this Form 10-K.
PAGE 2 PART I ITEM 1. BUSINESS (dollar amounts in thousands except per share data) GENERAL DEVELOPMENT OF BUSINESS Bassett Furniture Industries, 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: There have been two significant business developments that have materially affected the Company's operations over the last five years. First, the Company has created and re-channeled sales through a vertically integrated retail sales network. This strategy both builds on the Company's strengths (brand name, balance sheet, product offerings) and better positions the Company to capitalize on the changing furniture retail environment. The independently owned licensee stores, known as Bassett Furniture Direct, accounted for 36% of the Company's sales in 2001. There were 68 stores operating at November 24, 2001. Second, the Company has restructured production capacities and eliminated costs to closely align manufacturing capabilities with the Company's target markets. These efforts have resulted in the elimination of approximately 4,000 salaried and hourly positions over the last five years. The Company restructured production capacities for its Wood Division in 2001. During the first quarter, production was moved from one facility to another and a wood manufacturing facility was identified for closure and was subsequently closed in the second quarter. Additionally, 60 corporate office positions were eliminated in the first and second quarters of 2001. Ongoing efforts to match production with demand, offer more competitively priced products and operate more efficient manufacturing facilities resulted in the announcement and subsequent closure of two additional facilities in Bassett, Virginia during the third quarter of 2001. Production has been moved to other manufacturing facilities in Virginia or has been outsourced. Approximately 800 positions were eliminated as a result of this restructuring activity. Restructuring charges of $6,952 were recognized in 2001. The Company also recorded unusual and non-recurring charges of $1,051 for inventory losses related to discontinued product. This amount is included in 2001 cost of sales. The Company made a decision in late 2000 to consolidate production in its Wood Division. This included transferring certain products to different facilities, reducing one facility to rough-end operations only, and eliminating approximately 300 salaried and hourly positions. As a result, the Company recorded a restructuring charge in 2000 of $6,680, of which, $5,800 related to the write-down of property and equipment and $880 related to severance and related employee benefits costs. Early in fiscal year 2000, the Company merged all of its eight Company-owned Bassett Furniture Direct (BFD) stores with a licensee's five BFD stores to form a joint venture known as the LRG Furniture, LLC ("LRG"). Refer to Note 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
PAGE 3 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 three operating segments: wood, upholstery and import. Refer to Note R of the Consolidated Financial Statements included in the Annual Report for more information about segment information for 1999, 2000 and 2001 and refer to the Management's Discussion and Analysis section of the Annual Report for additional discussion on this topic. 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 ten 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 57%, 62% and 66% of total net sales during 2001, 2000 and 1999, respectively. The Company currently has six wood manufacturing facilities. The upholstery segment is involved in the manufacture and sale of upholstered frames and cut upholstery items having a variety of frame and fabric options, including sofas, chairs, and love seats. The Company currently has three upholstery manufacturing facilities. The upholstery segment accounted for 29%, 27% and 26% of total net sales during 2001, 2000 and 1999, respectively. The import segment sources product, principally from Asia, and sells this product to independent and affiliated retailers. The import segment accounted for 11%, 8% and 5% of total net sales during 2001, 2000 and 1999, respectively. Raw materials used by the Company are generally available from numerous sources and are obtained principally from domestic sources. The Company has also sought to source component parts from overseas markets when it is economically advantageous. The Company currently assembles and finishes these imported components in several of its plants in the United States. The Company's trademarks , including "Bassett" and the names of its marketing divisions, products and collections are significant to the conduct of its business. This importance is due to consumer recognition of the names and identification with the Company's broad range of products. Certain of the Company's trademarks are licensed to independent retailers for use in full store presentations and in store gallery presentations of the Company's products. The Company also owns certain patents and licenses that are important in the conduct of the Company's business. The furniture industry in which the Company competes is not considered to be a seasonal industry. However, working capital levels will fluctuate based on overall business conditions, and desired service levels. Sales to one customer (JC Penney Company) amounted to approximately 15% of gross sales in 2001, 16% and 16% of gross sales in 2000 and 1999, respectively. Additionally, sales to LRG, an affiliate of the Company, were 10% of total sales in 2001 and 7% of total sales in 2000. The Company's backlog of orders believed to be firm was at $19,000 at November 24, 2001 and
PAGE 4 $22,000 at November 25, 2000. It is expected that the November 24, 2001 backlog will be filled within the 2002 fiscal year. The furniture industry is very competitive and there are a large number of manufacturers both within the United States and offshore who compete in the market on the basis of product quality, price, style, delivery and service. Additionally, certain retailers are increasingly sourcing imported product directly, thus bypassing domestic furniture manufacturers. Based on annual sales revenue, the Company is one of the largest furniture manufacturers located in the United States. The Company has been successful in this competitive environment because its products represent excellent value combining attractive prices, quality and styling; prompt delivery; and courteous service. The furniture industry is considered to be a "fashion" industry subject to constant fluctuations to meet changing consumer preferences and tastes. As such, the Company is continuously involved in the development of new designs and products. Due to the nature of these efforts and the close relationship to the manufacturing operations, these costs are considered normal operating costs and are not segregated. The Company is not otherwise involved in "traditional" research and development activities nor does the Company sponsor research and development activities of any of its customers. In management's view, the Company has complied in all material respects with all federal, state and local standards in the area of safety, health and pollution and environmental controls. Compliance with these standards did result in a charge to earnings in 1997 and capital spending in 1998 and 1999, but otherwise, has not had a material adverse effect on past earnings or competitive position. The Company is involved in environmental matters at certain of its plant facilities, which arise in the normal course of business. Although the final outcome of these environmental matters cannot be determined, based on the facts presently known, it is management's opinion that the final resolution of these matters will not have a material adverse effect on the Company's financial position or future results of operations. The Company had approximately 2,900 employees at November 24, 2001. The Company has several investments in affiliated companies, including a minority interest in International Home Furnishings Center, Inc. (IHFC) which is a lessor of permanent exhibition space to furniture and accessory manufacturers. The IHFC financial statements are included on pages F-1 to F-15. The Company owns a majority interest in 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, 2001, 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-16 to F-28.
PAGE 5 FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES The Company has no foreign operations, and its export sales were approximately $3.2 million, $4.9 million, and $10.6 million in 2001, 2000, and 1999 respectively. ITEM 2. PROPERTIES At November 24, 2001 the Company owned the following manufacturing facilities, by segment: Wood Segment: J. D. Bassett Manufacturing Company * Bassett, VA Bassett Superior Lines Bassett, VA Bassett Chair Company * Bassett, VA Bassett Table Company * Bassett, VA Bassett Furniture Industries Macon, GA Bassett Dining Table Top Martinsville, VA Bassett Furniture Industries Dublin, GA Bassett Furniture Industries Mt. Airy, NC Bassett Fiberboard Bassett, VA Upholstery Segment: Bassett Upholstery Division Newton, NC Bassett Upholstery Division Hiddenite, NC Bassett Upholstery Los Angeles, CA Other: Weiman Upholstery Christiansburg, VA Properties designated by an asterisk "*" have ceased manufacturing operations and are currently held for sale in connection with restructuring efforts. The Company owned the real estate of certain Bassett Furniture Direct retail stores, approximating 25,000 square feet each, in the following cities: Real Estate: Greenville, SC Concord, NC Greensboro, NC Fredericksburg, VA Knoxville, TN Gulfport, MS Chesterfield, VA
PAGE 6 Louisville, KY In addition, the Company owns leasehold improvements in Hickory, NC and Arlington, TX, and raw land, intended for retail use, in Houston, TX and Denver, CO. 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. In general, these facilities are suitable and are considered to be adequate for the continuing operations involved. All facilities, except those held for sale, are in regular use and provide more than adequate capacity for the Company's manufacturing needs. The following facilities were sold or disposed of during 2001: Showroom Thomasville, NC Bassett Upholstery Conover, NC Bassett Upholstery Claremont, NC Warehouse Los Angeles, CA ITEM 3. LEGAL PROCEEDINGS 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 should not be material to the Company's future results of operations. The Company is also involved in various claims and actions, including environmental matters, which arise in the normal course of business. Although the final outcome of these matters cannot be determined, based on the facts presently known, it is management's opinion that the final resolution of these matters will not have a material adverse effect on the Company's financial position or future results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None.
PAGE 7 ITEM 4b. EXECUTIVE OFFICERS OF THE REGISTRANT John E. Bassett III, 43, 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, 61, 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., 42, was an Associate with the Richmond Office of McGuireWoods, LLP from 1992 to 1997 and has been the General Counsel, Vice President and Secretary for the Company since 1997. Dennis Hoy, 43, 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., 41, 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. Matthew S. Johnson, 40, has been with the Company for 16 years, most recently as Vice President of Wood Merchandising. In 2000, he was promoted to Vice President of Merchandising and Design. Charles T. King, 39, was with Coopers and Lybrand from 1985 to 1988, and McMillan, Pate and King, CPA's from 1989 to 1998 and joined the Company in 1998 as Retail Controller. In 2001, he was promoted to Vice President and Controller. Thomas E. Prato, 46, has been with the Company since 1987 in Advertising and Sales Management and has been the Vice President of Sales since 1998. Barry C. Safrit, 39, 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, 57, 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., 45, has been with the Company since 1984. He was the Company's Executive Vice President of Marketing and Merchandising from 1994 until 1997 and served as President and Chief Operating Officer from 1997 to 2000. In 2000, he was promoted to Chief Executive Officer and President. Thomas R. Swanston, 70, was with Ethan Allen from 1992 until 1999 as General Manager of Business Development, and later served as advisor to the chairman. He joined the Company as Executive Vice President of Sales and Marketing in 2001.
PAGE 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 24, 2001, 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-15 and F-16 to F-28. 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 11 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 11 of the Proxy Statement under the captions "Organization, Compensation and Nominating Committee Report," "Stockholder Return Performance Graph," "Executive Compensation," "Supplemental Retirement Income Plan," "Deferred Compensation Agreement," and "Director Compensation" is incorporated herein by reference thereto.
PAGE 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 24, 2001 and November 25, 2000 Consolidated Statements of Income--Years Ended November 24, 2001, November 25, 2000 and November 27, 1999 Consolidated Statements of Stockholders' Equity-- Years Ended November 24, 2001, November 25, 2000 and November 27, 1999 Consolidated Statements of Cash Flows-- Years Ended November 24, 2001, November 25, 2000 and November 27, 1999 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-15. LRG Furniture, LLC Financial Statements are included herein on pages F-16 in F-28. (2) Financial Statement Schedule: Schedule II - Analysis of Valuation and Qualifying Accounts for the years ended November 24, 2001, November 25, 2000, and November 27, 1999 (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 filed herewith. 4A. Credit Agreement with a Bank Group dated October 25, 2000 is incorporated herein by reference to Form 10-K for the fiscal year ended November 25, 2000. 4B. First Amendment to Credit Agreement with a Bank Group dated October 5, 2001, is 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.
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 incorporated herein by reference to Form 10-K for the fiscal year ended November 25, 2000. ** 10E. Bassett 1997 Employee Stock Plan is incorporated herein by reference to the Registrant's Registration Statement on Form S-8 ( no. 333-60327) filed on July 31, 1998. 13. Portions of the Registrant's Annual Report to Stockholders for the year ended November 24, 2001. 21. List of subsidiaries of the Registrant 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 2001 fiscal year.
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) By: /s/ PAUL FULTON Date: 2/21/02 --------------------------------------- --------------- Paul Fulton Chairman of the Board of Directors By: /s/ ROBERT H. SPILMAN JR. Date: 2/21/02 --------------------------------------- --------------- Robert H. Spilman Jr. President and Chief Executive Officer Director 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. By: /s/ AMY W. BRINKLEY Date: 2/21/02 --------------------------------------- --------------- Amy W. Brinkley Director By: /s/ PETER W. BROWN Date: 2/21/02 --------------------------------------- --------------- Peter W. Brown Director By: /s/ WILLIE D. DAVIS Date: 2/21/02 --------------------------------------- --------------- Willie D. Davis Director By: /s/ ALAN T. DICKSON Date: 2/21/02 --------------------------------------- --------------- Alan T. Dickson Director By: /s/ HOWARD H. HAWORTH Date: 2/21/02 --------------------------------------- --------------- Howard H. Haworth Director By: Date: 2/21/02 --------------------------------------- --------------- Michael E. Murphy Director By: /s/ DALE C. POND Date: 2/21/02 --------------------------------------- --------------- Dale C. Pond Director By: /s/ DAVID A. STONECIPHER Date: 2/21/02 --------------------------------------- --------------- David A. Stonecipher Director By: /s/ BARRY C. SAFRIT Date: 2/21/02 --------------------------------------- --------------- Barry C. Safrit Vice President and Chief Financial Officer
PAGE 12 ANNUAL REPORT ON FORM 10-K ITEM 14(a)(1) CERTAIN EXHIBITS YEAR ENDED NOVEMBER 24, 2001 BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES BASSETT, VIRGINIA
INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED OCTOBER 31, 2001, 2000 AND 1999
INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY TABLE OF CONTENTS <TABLE> <CAPTION> Page No. -------- <S> <C> INDEPENDENT AUDITORS' REPORT.......................................................................... 1 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets........................................................................ 2 Consolidated Statements of Income.................................................................. 3 Consolidated Statements of Stockholders' Equity (Deficit).......................................... 4 Consolidated Statements of Cash Flows.............................................................. 5 Notes to Consolidated Financial Statements......................................................... 7 </TABLE>
F-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors International Home Furnishings Center, Inc. High Point, North Carolina We have audited the accompanying consolidated balance sheets of International Home Furnishings Center, Inc. and subsidiary as of October 31, 2001 and 2000 and the related consolidated statements of income, stockholders' equity (deficit), and cash flows for each of the three years in the period ended October 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of International Home Furnishings Center, Inc. and subsidiary at October 31, 2001 and 2000 and the results of their operations and their cash flows for each of the three years in the period ended October 31, 2001 in conformity with accounting principles generally accepted in the United States of America. High Point, North Carolina November 30, 2001 /s/ DIXON ODOM, PLLC ---------- Page 1
F-2 INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS OCTOBER 31, 2001 AND 2000 <TABLE> <CAPTION> ASSETS 2001 2000 -------------- -------------- <S> <C> <C> CURRENT ASSETS Cash and cash equivalents $ 8,848,172 $ 4,859,447 Restricted cash 24,479,827 2,275,974 Short-term investments 98,570 94,489 Receivables Trade 2,552,434 2,646,756 Interest 10,677 9,279 Deferred income tax asset 3,028,000 600,000 Prepaid expenses 192,271 717,172 -------------- -------------- TOTAL CURRENT ASSETS 39,209,951 11,203,117 -------------- -------------- PROPERTY AND EQUIPMENT, at cost Land and land improvements 3,293,772 3,293,772 Buildings, exclusive of theater complex 88,350,771 75,391,981 Furniture and equipment 3,707,139 3,717,945 Construction in progress - 11,569,301 -------------- -------------- 95,351,682 93,972,999 Accumulated depreciation (46,121,761) (46,022,092) -------------- -------------- 49,229,921 47,950,907 -------------- -------------- OTHER ASSETS Theater complex, at cost less amortization 890,344 933,599 Deferred financing costs, net of accumulated amortization of $508,803 and $187,943 at October 31, 2001 and 2000, respectively 2,411,052 396,766 Interest rate cap agreement, at fair value 46,613 - -------------- -------------- 3,348,009 1,330,365 -------------- -------------- $ 91,787,881 $ 60,484,389 ============== ============== LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Accounts payable, trade $ 1,014,684 $ 3,994,972 Accrued property taxes 1,840,732 1,702,341 Other accrued expenses 851,281 693,418 Rents received in advance 7,765,348 1,502,952 Income taxes payable 1,949,956 - Current maturities of long-term debt 2,627,187 9,995,880 -------------- -------------- TOTAL CURRENT LIABILITIES 16,049,188 17,889,563 -------------- -------------- LONG-TERM DEBT 130,555,336 45,658,704 -------------- -------------- OTHER LONG-TERM LIABILITIES Supplemental retirement benefits 1,924,223 1,745,023 Deferred income taxes 587,000 1,090,000 -------------- -------------- 2,511,223 2,835,023 -------------- -------------- COMMITMENTS (Note G) STOCKHOLDERS' DEFICIT Common stock, $5 par value, 1,000,000 shares authorized, 527,638 shares issued in 2001 and 2000 2,638,190 2,638,190 Additional paid-in capital 169,360 169,360 Accumulated deficit (60,135,416) (8,706,451) -------------- -------------- (57,327,866) (5,898,901) -------------- -------------- $ 91,787,881 $ 60,484,389 ============== ============== </TABLE> See accompanying notes to financial statements. Page 2
F-3 INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED OCTOBER 31, 2001, 2000 AND 1999 <TABLE> <CAPTION> 2001 2000 1999 --------------- --------------- --------------- <S> <C> <C> <C> OPERATING REVENUES Rental income $ 34,682,203 $ 31,620,514 $ 31,684,174 Other revenues 6,973,398 6,922,474 6,472,825 --------------- --------------- --------------- TOTAL OPERATING REVENUES 41,655,601 38,542,988 38,156,999 --------------- --------------- --------------- OPERATING EXPENSES Compensation and benefits 4,642,208 4,242,802 4,084,283 Market and promotional 2,589,746 2,593,966 2,558,772 Maintenance and building costs 1,012,997 858,194 862,804 Depreciation expense 2,647,449 2,179,109 2,202,723 Rent 152,234 152,234 152,234 Property taxes and insurance 2,269,932 1,997,121 1,987,898 Utilities 1,872,132 1,655,730 1,652,068 Other operating costs 1,373,183 535,776 617,201 --------------- --------------- --------------- TOTAL OPERATING EXPENSES 16,559,881 14,214,932 14,117,983 --------------- --------------- --------------- INCOME FROM OPERATIONS 25,095,720 24,328,056 24,039,016 --------------- --------------- --------------- NONOPERATING INCOME Interest income 1,071,901 808,703 929,317 Dividend income 4,597 4,652 3,692 --------------- --------------- --------------- TOTAL NONOPERATING INCOME 1,076,498 813,355 933,009 --------------- --------------- --------------- NONOPERATING EXPENSES Interest expense 7,870,387 4,109,489 4,936,077 --------------- --------------- --------------- TOTAL NONOPERATING EXPENSES 7,870,387 4,109,489 4,936,077 --------------- --------------- --------------- INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 18,301,831 21,031,922 20,035,948 PROVISION FOR INCOME TAXES 7,166,000 8,101,000 7,770,000 --------------- --------------- --------------- INCOME BEFORE EXTRAORDINARY ITEM 11,135,831 12,930,922 12,265,948 EXTRAORDINARY ITEM Loss on early extinguishment of debt, net of income tax benefit of $1,217,000 (1,886,426) - - --------------- --------------- --------------- NET INCOME $ 9,249,405 $ 12,930,922 $ 12,265,948 =============== =============== =============== BASIC EARNINGS PER COMMON SHARE Income before extraordinary item $ 21.11 $ 24.51 $ 23.25 Extraordinary item (3.58) - - --------------- --------------- --------------- Net income $ 17.53 $ 24.51 $ 23.25 =============== =============== =============== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 527,638 527,638 527,638 =============== =============== =============== </TABLE> See accompanying notes to financial statements. Page 3
F-4 INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) YEARS ENDED OCTOBER 31, 2001, 2000 AND 1999 <TABLE> <CAPTION> Additional Common Paid-In Accumulated Stock Capital Deficit Total -------------- ------------- ------------- -------------- <S> <C> <C> <C> <C> 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) Net income - - 9,249,405 9,249,405 Dividends paid ($115.00 per common share) - - (60,678,370) (60,678,370) -------------- ------------- ------------- -------------- BALANCE (DEFICIT), OCTOBER 31, 2001 $ 2,638,190 $ 169,360 $ (60,135,416) $ (57,327,866) ============== ============= ============= ============== </TABLE> See accompanying notes to financial statements. Page 4
F-5 INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED OCTOBER 31, 2001, 2000 AND 1999 <TABLE> <CAPTION> 2001 2000 1999 ---------------- ---------------- ---------------- <S> <C> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 9,249,405 $ 12,930,922 $ 12,265,948 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,209,295 2,301,760 2,325,374 Decrease in fair value of interest rate cap agreement 265,887 - - Loss on early extinguishment of debt 3,103,426 - - Provision for losses on accounts receivable 25,154 6,341 1,360 (Gain) loss on disposal of assets 45,352 (3,134) - Deferred income taxes (2,931,000) (354,000) (500,000) Change in assets and liabilities (Increase) decrease in trade and interest receivables 67,770 (394,166) (68,728) (Increase) decrease in prepaid expenses 524,901 89,057 (750,264) Increase (decrease) in accounts payable and accrued expenses 39,047 207,521 (139,200) Increase (decrease) in rents received in advance 6,262,396 (110,737) 134,806 Increase in supplemental retirement benefits 179,200 240,796 541,136 Increase in income taxes payable 1,949,956 - - ---------------- ---------------- ---------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 21,990,789 14,914,360 13,810,432 ---------------- ---------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase and construction of property and equipment (6,690,764) (8,764,159) (337,457) Proceeds from sale of property and equipment - 4,000 - Purchase of short-term investments (4,081) (3,711) (7,135) Increase in restricted cash (22,203,853) - - ---------------- ---------------- ---------------- NET CASH USED BY INVESTING ACTIVITIES (28,898,698) (8,763,870) (344,592) ---------------- ---------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of long-term debt 135,000,000 - - Principal payments on long-term debt (57,472,061) (9,295,564) (8,667,074) Cost incurred to extinguish debt early (2,720,580) - - Purchase of interest rate cap (312,500) - - Dividends paid (60,678,370) - (13,190,950) Financing costs paid (2,919,855) - - ---------------- ---------------- ---------------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 10,896,634 (9,295,564) (21,858,024) ---------------- ---------------- ---------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,988,725 (3,145,074) (8,392,184) CASH AND CASH EQUIVALENTS, BEGINNING 4,859,447 8,004,521 16,396,705 ---------------- ---------------- ---------------- CASH AND CASH EQUIVALENTS, ENDING $ 8,848,172 $ 4,859,447 $ 8,004,521 ================ ================ ================ </TABLE> See accompanying notes to financial statements. Page 5
F-6 INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) YEARS ENDED OCTOBER 31, 2001, 2000 AND 1999 <TABLE> <CAPTION> 2001 2000 1999 ---------------- ---------------- ---------------- <S> <C> <C> <C> SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Income taxes $ 6,302,511 $ 8,357,298 $ 9,049,420 Interest, net of amount capitalized 7,699,674 4,166,000 4,988,768 SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING AND INVESTING ACTIVITIES Accounts payable incurred for acquisition of property and equipment $ 201,715 $ 2,924,796 $ - ================ ================ ================ </TABLE> See accompanying notes to financial statements. Page 6
F-7 INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 2001, 2000 AND 1999 NOTE A - DESCRIPTION OF BUSINESS The Company is the lessor of permanent exhibition space to furniture and accessory manufacturers which are headquartered throughout the United States and in many foreign countries. This exhibition space, located in High Point, North Carolina, is used by the Home Furnishings Industry to showcase its products at the International Home Furnishings Market held each April and October. The details of the operating leases with the Company's tenants are described in Note I. The Company has been in business since June 27, 1919, and operates under the trade name of "International Home Furnishings Center." NOTE B - SIGNIFICANT ACCOUNTING POLICIES The accounting policies relative to the carrying values of property and equipment, theater complex and interest rate cap agreement are indicated in the captions on the consolidated balance sheets. Other significant accounting policies are as follows: Principles of Consolidation The consolidated financial statements include the accounts of International Home Furnishings Center, Inc. and its wholly-owned subsidiary, IHFC Properties, L.L.C., a company organized on December 21, 2000. All material intercompany transactions have been eliminated. The Company and its subsidiary are referred to collectively herein as "the Company." Notwithstanding the consolidation of the Company and IHFC Properties, L.L.C. in these financial statements, IHFC Properties, L.L.C. is a separate entity, with separate assets and liabilities and has its own separate financial statements. Rental Income Income from rental of exhibition space is recognized under the operating method. Aggregate rentals are reported as income on the straight-line basis over the lives of the leases, and expenses are charged as incurred against such income. Future rentals under existing leases are not recorded as assets in the accompanying consolidated balance sheets. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Investment Securities The Company has investments in debt and marketable equity securities. Debt securities consist of obligations of state and local governments and U. S. corporations. Marketable equity securities consist primarily of investments in mutual funds. Page 7
F-8 INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 2001, 2000 AND 1999 NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Investment Securities (Continued) Management determines the appropriate classification of securities at the date individual investment securities are acquired, and the appropriateness of such classification is reassessed at each balance sheet date. Since the Company neither buys investment securities in anticipation of short-term fluctuations in market prices 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. Property, Equipment and Depreciation Expenditures for maintenance, repairs, and minor renewals are charged to expense as incurred. Major renewals and betterments are capitalized. Depreciation is provided primarily on the straight-line method over the following estimated useful lives: <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 indications of impairment exist, and if the value of the assets is impaired, an impairment loss would be recognized. Deferred Financing Costs Costs associated with obtaining long-term financing have been deferred and are being amortized on the interest method over the term of the related debt. Amortization expense charged to operations during the years ended October 31, 2001, 2000 and 1999 was $522,725, $83,530 and $83,530, respectively. Derivative Instruments As disclosed in Note E, the Company entered into an interest rate cap agreement to limit its exposure to increasing interest cost on its term debt. The Company's investment in the agreement is carried at fair value, and changes in fair value are included in earnings. The agreement is not designated as a hedge. Page 8
F-9 INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 2001, 2000 AND 1999 NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Income Taxes Income taxes are provided for the tax effects of transactions reported in the consolidated financial statements and consist of taxes currently due plus deferred taxes related to temporary differences between the reported amounts of assets and liabilities and their tax bases. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Earnings Per Common Share The Company follows the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share," which specifies the computation, presentation and disclosure requirements for earnings per share ("EPS"). Basic EPS excludes all dilution and has been computed using the weighted average number of common shares outstanding during the year. Diluted EPS reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock. The Company has no dilutive potential common shares. Retirement Plans The Company maintains a 401(k) qualified retirement plan covering eligible employees under which participants may contribute up to 25% of their compensation subject to maximum allowable contributions. The Company is obligated to contribute, on a matching basis, 50% of the first 6% of compensation voluntarily contributed by participants. The Company may also make additional contributions to the plan if it so elects. In 1991, the Company adopted a nonqualified supplemental retirement benefits plan for key management employees. Benefits payable under the plan are based upon the participant's average compensation during his last five years of employment and are reduced by benefits payable under the Company's qualified retirement plan and by one-half of the participant's social security benefits. Benefits under the plan do not vest until the attainment of normal retirement age; however, a reduced benefit is payable if employment terminates prior to normal retirement age because of death or disability. The vested portion of the benefits under this plan amounted to approximately $1,345,000 at October 31, 2001. The Company has no obligation to fund this supplemental plan. Fair Value of Financial Instruments The carrying amount of the Company's significant financial instruments, none of which are held for trading purposes, approximates fair value at October 31, 2001 and 2000. Cash, cash equivalents and restricted cash approximate fair value because of the short maturities of these instruments. Long-term debt approximates fair value because of its floating interest rate terms. Page 9
F-10 INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 2001, 2000 AND 1999 NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Use of Estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE C - RESTRICTED CASH The Company has restricted, interest-bearing cash accounts held by the lender under the escrow provisions of the term loan agreement described in Note E. The restricted cash balances are held for the following purposes at October 31, 2001: <TABLE> <S> <C> Taxes and insurance $ 767,025 Required repairs 1,120,729 Replacements 142,251 Environmental 802,882 Debt service 7,438,700 Operating expenses 677,394 Ground rent 48,360 Cash management 13,482,486 ---------------- $ 24,479,827 ================ </TABLE> All rents and other income from operation of the Company's property are deposited directly into a lockbox account controlled by the lender under the Company's cash management agreement. In May and November of each year during the term of the loan, the lender will disburse to the Company amounts in the cash management account in excess of the amounts needed to replenish the various escrow accounts. The Company has granted the lender a security interest in each of the restricted cash accounts as additional security for the outstanding term loan. Page 10
F-11 INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 2001, 2000 AND 1999 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, 2001 and 2000: <TABLE> <CAPTION> 2001 ------------------------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------------- -------------- --------------- --------------- <S> <C> <C> <C> <C> Debt securities State and local governments $ 3,015,466 $ - $ - $ 3,015,466 Corporate 3,000,000 - - 3,000,000 Equity securities 98,570 - - 98,570 -------------- -------------- --------------- --------------- $ 6,114,036 $ - $ - $ 6,114,036 ============== ============== =============== =============== 2000 ------------------------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------------- -------------- --------------- --------------- 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> Available-for-sale securities are classified in the following balance sheet captions as of October 31, 2001 and 2000: <TABLE> <CAPTION> 2001 2000 ------------------ ------------------ <S> <C> <C> Cash and cash equivalents $ 6,015,466 $ 3,825,717 Short-term investments 98,570 94,489 ------------------ ------------------ $ 6,114,036 $ 3,920,206 ================== ================== </TABLE> All the Company's debt securities mature within three months. Page 11
F-12 INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 2001, 2000 AND 1999 NOTE E - LONG-TERM DEBT Long-term debt consists of the following at October 31, 2001 and 2000: <TABLE> <CAPTION> 2001 2000 ------------------ ------------------ <S> <C> <C> Term note payable, consisting of three components - A ($94,482,523), B ($12,000,000), and C ($26,700,000). Principal payments are due monthly based on an amortization schedule provided by the lender and are applied first to component A. Interest is payable monthly at varying rates for the three components - LIBOR plus 1.92% for component A, LIBOR plus 2.22% for component B, and LIBOR plus 2.72% for component C. At October 31, 2001, the interest rates were 4.5575% for component A, 4.8575% for component B, and 5.3575% for component C. The note matures in December 2003 and has two one-year extension periods available, which the Company intends to exercise. The loan is collateralized by land and buildings, restricted cash (Note C), rents and assignment of leases with tenants. $ 133,182,523 $ - Term note payable, repaid in fiscal year ended October 31, 2001. $ - $ 55,654,584 ------------------ ------------------ 133,182,523 55,654,584 Less current maturities 2,627,187 9,995,880 ------------------ ------------------ $ 130,555,336 $ 45,658,704 ================== ================== </TABLE> The aggregate maturities of long-term debt are due as follows: <TABLE> <CAPTION> Year Ending October 31, <S> <C> 2002 $ 2,627,187 2003 2,880,776 2004 3,158,841 2005 3,463,746 2006 121,051,973 ------------------ $ 133,182,523 ================== </TABLE> During the year ended October 31, 2001, the Company entered into an interest rate cap agreement that has a notional amount of $133,182,523 at October 31, 2001. The notional amount will decrease as principal payments are made on the Company's term debt and will be equal to the term debt until the agreement expires January 3, 2004. Under the agreement, the Company will receive an amount equal to the interest it incurs on its term debt in excess of 8%, if any. The $265,887 decrease in the fair value of the interest rate cap agreement was charged to earnings during the year ended October 31, 2001. Page 12
F-13 INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 2001, 2000 AND 1999 NOTE E - LONG-TERM DEBT (CONTINUED) Total interest cost incurred for the years ended October 31, 2001, 2000 and 1999 was $8,241,933, $4,303,766 and $4,936,077, respectively. Of the interest cost for the years ended October 31, 2001 and 2000, $371,546 and $194,277, respectively, was capitalized as part of the building construction costs. There was no interest capitalized in the year ended October 31, 1999. The Company recorded an extraordinary loss of $1,886,426 after income taxes as a result of the early extinguishment of term debt in the amount of $54,039,689. The loss consisted primarily of costs associated with the early extinguishment and the write-off of unamortized financing costs of $382,846. The extinguishment of the debt was financed with a portion of the proceeds from the $135,000,000 term loan. NOTE F - INCOME TAXES The provision for income taxes consists of the following for the years ended October 31, 2001, 2000 and 1999: <TABLE> <CAPTION> 2001 2000 1999 --------------- ---------------- ---------------- <S> <C> <C> <C> Federal: Current $ 7,365,000 $ 6,975,000 $ 6,765,000 Deferred (2,415,000) (287,000) (395,000) --------------- ---------------- ---------------- 4,950,000 6,688,000 6,370,000 --------------- ---------------- ---------------- State: Current 1,515,000 1,480,000 1,505,000 Deferred (516,000) (67,000) (105,000) --------------- ---------------- ---------------- 999,000 1,413,000 1,400,000 --------------- ---------------- ---------------- TOTAL $ 5,949,000 $ 8,101,000 $ 7,770,000 =============== ================ ================ </TABLE> 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> 2001 2000 1999 --------------- ---------------- ---------------- <S> <C> <C> <C> Income taxes computed at the federal statutory rate $ 5,319,000 $ 7,360,000 $ 7,013,000 State taxes, net of federal benefit 649,000 918,000 910,000 Nontaxable investment income (48,000) (112,000) (180,000) Other, net 29,000 (65,000) 27,000 --------------- ---------------- ---------------- $ 5,949,000 $ 8,101,000 $ 7,770,000 =============== ================ ================ </TABLE> Page 13
F-14 INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 2001, 2000 AND 1999 NOTE F - INCOME TAXES (CONTINUED) The components of deferred income taxes consist of the following: <TABLE> <CAPTION> 2001 2000 -------------- --------------- <S> <C> <C> Deferred income tax assets: Rents received in advance $ 3,028,000 $ 600,000 Supplemental retirement benefits 750,000 700,000 Interest rate cap 70,000 - Deferred financing costs 9,000 - -------------- --------------- TOTAL DEFERRED TAX ASSETS 3,857,000 1,300,000 Deferred income tax liabilities: Depreciation (1,416,000) (1,790,000) -------------- --------------- TOTAL NET DEFERRED TAX ASSETS (LIABILITIES) $ 2,441,000 $ (490,000) ============== =============== </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, 2001 and is subject to adjustment at the end of each five-year period, such adjustment being computed as defined in the lease agreement. As part of the lease agreement, the Company constructed a theater complex for public use and office space for use by the City of High Point on the lower levels of the building. Annual rental cash payments over the initial fifty-year lease term are being reduced by $39,121 which represents amortization of the cost of the theater and office complex constructed for the City of High Point. At the termination of the lease, the building becomes the property of the City of High Point. Under the terms of the lease, the Company is responsible for all expenses applicable to the exhibition portion of the building. The City of High Point is responsible for all expenses applicable to the theater complex and office space constructed for use by the City. NOTE H - RETIREMENT EXPENSE Amounts expensed under the Company's retirement plans amounted to $350,669, $394,166 and $691,698 for the years ended October 31, 2001, 2000 and 1999, respectively, including $179,200, $240,796 and $541,136 under the supplemental retirement benefits plan for the years ended October 31, 2001, 2000 and 1999, respectively. Page 14
F-15 INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 2001, 2000 AND 1999 NOTE I - RENTALS UNDER OPERATING LEASES The Company's leasing operations consist principally of leasing exhibition space. Property on operating leases consists of substantially all of the asset "buildings, exclusive of theater complex" included on the consolidated balance sheets. Accumulated depreciation on this property amounted to $42,925,163 at October 31, 2001 and $42,943,916 at October 31, 2000. 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, 2001, exclusive of amounts due under escalation provisions of lease agreements: <TABLE> <CAPTION> Year Ending October 31, <S> <C> 2002 $ 30,048,586 2003 26,019,227 2004 22,329,312 2005 15,028,725 2006 2,073,780 ---------------- Total minimum future rentals $ 95,499,630 ================ </TABLE> Rental income includes contingent rentals under escalation provisions of leases of $1,164,693, $823,536 and $1,322,521 for the years ended October 31, 2001, 2000 and 1999, respectively. Rental income from related parties amounted to $2,682,719, $2,374,813 and $1,980,775 for the years ended October 31, 2001, 2000 and 1999, 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, 2001, the Company's bank balances exceeded federally insured limits by $16,509,628. The Company's trade accounts receivable are generally collateralized by merchandise in leased exhibition spaces which is in the Company's possession. NOTE K - STOCKHOLDERS' DEFICIT The stockholders' deficit resulted from the payment of dividends substantially in excess of accumulated earnings. The dividends in excess of accumulated earnings were financed, in part, with the proceeds of long-term debt. Although interest on this debt will negatively impact future earnings, management believes, based on projections of future operations and cash flows, that future earnings will provide adequate equity capital for the Company and that operating cash flows will be sufficient to provide for debt service and for the Company's other financing and investing needs. Page 15
LRG FURNITURE, LLC Financial Statements As of November 30, 2001 and 2000 Together with Report of Independent Public Accountants
F-16 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, 2001 and 2000, and the related statements of operations and changes in members' deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of LRG Furniture, LLC as of November 30, 2001 and 2000, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States. Houston, Texas December 21, 2001 /s/ Arthur Andersen, LLP
F-17 LRG FURNITURE, LLC BALANCE SHEETS -- NOVEMBER 30, 2001 AND 2000 <TABLE> <CAPTION> ASSETS 2001 2000 ------ -------------- ---------------- <S> <C> <C> CURRENT ASSETS: Cash and cash equivalents $ 2,456,466 $ 4,191,154 Accounts receivable, net of allowances of $60,910 and $104,000 in 2001 and 2000, respectively 644,338 681,167 Merchandise inventories, net 10,119,254 11,785,997 Prepaid expenses 72,053 106,310 -------------- ---------------- Total current assets 13,292,111 16,764,628 -------------- ---------------- PROPERTY AND EQUIPMENT: Computer equipment 374,909 343,577 Store fixtures 355,885 268,302 Office furniture, fixtures and equipment 1,027,155 1,222,508 Leasehold improvements 1,369,775 1,590,578 Vehicles 174,798 115,692 -------------- ---------------- 3,302,522 3,540,657 Less - Accumulated depreciation (661,893) (345,033) -------------- ---------------- 2,640,629 3,195,624 -------------- ---------------- OTHER ASSETS, NET (NOTE 3) 776,379 825,775 -------------- ---------------- $16,709,119 $20,786,027 ============== ================ LIABILITIES AND MEMBERS' DEFICIT -------------------------------- CURRENT LIABILITIES: Current portion of long-term debt (Note 5) $ 2,466,836 $ 1,548,636 Accounts payable, primarily to Members (Note 7) 9,882,446 10,970,062 Customer deposits 2,390,342 2,983,731 Accrued liabilities 1,026,186 909,448 -------------- ---------------- Total current liabilities 15,765,810 16,411,877 -------------- ---------------- LONG-TERM DEBT (NOTE 5) 1,306,344 3,299,364 -------------- ---------------- NOTES PAYABLE TO MEMBERS AND DEFERRED INTEREST PAYABLE (NOTE 5) 13,291,482 7,981,333 -------------- ---------------- COMMITMENTS AND CONTINGENCIES (NOTES 6, 9 AND 11) MEMBERS' DEFICIT (13,654,517) (6,906,547) -------------- ---------------- $16,709,119 $20,786,027 ============== ================ </TABLE> The accompanying notes to financial statements are an integral part of these balance sheets.
F-18 LRG FURNITURE, LLC STATEMENTS OF OPERATIONS AND CHANGES IN MEMBERS' DEFICIT FOR THE YEARS ENDED NOVEMBER 30, 2001 AND 2000 <TABLE> <CAPTION> 2001 2000 ------------ ----------- <S> <C> <C> SALES $ 62,577,684 $63,058,739 COST OF GOODS SOLD 34,638,022 34,849,470 ------------ ----------- Gross profit 27,939,662 28,209,269 OPERATING AND GENERAL EXPENSES 33,553,602 37,294,558 ------------ ----------- Loss from operations (5,613,940) (9,085,289) INTEREST EXPENSE 1,134,030 498,747 ------------ ----------- NET LOSS (6,747,970) (9,584,036) MEMBERS' (DEFICIT) EQUITY, BEGINNING OF YEAR (6,906,547) 2,677,489 ------------ ----------- MEMBERS' DEFICIT, END OF YEAR $(13,654,517) $(6,906,547) ============ =========== </TABLE> The accompanying notes to financial statements are an integral part of these statements.
F-19 LRG FURNITURE, LLC STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED NOVEMBER 30, 2001 AND 2000 <TABLE> <CAPTION> 2001 2000 --------------- -------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(6,747,970) $(9,584,036) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 406,772 345,033 Amortization 422,014 53,568 Loss on sale of property and equipment 235,312 0 Changes in operating assets and liabilities: Accounts receivable 36,829 71,918 Merchandise inventories 2,173,743 (2,245,991) Prepaid expenses 39,757 54,805 Accounts payable and accrued liabilities (327,544) 1,131,932 Customer deposits (739,389) (1,509,920) Other (5,049) (4,596) --------------- -------------- Net cash used in operating activities (4,505,525) (11,687,287) --------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (206,232) (617,582) Proceeds on sale of property and equipment 204,389 0 --------------- -------------- Net cash used in investing activities (1,843) (617,582) --------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt 500,000 4,848,000 Repayment of long-term debt (1,827,320) (2,175,000) Proceeds from notes payable to Members 4,100,000 7,808,000 --------------- -------------- Net cash provided by financing activities 2,772,680 10,481,000 --------------- -------------- NET DECREASE IN CASH (1,734,688) (1,823,869) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 4,191,154 6,015,023 --------------- -------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,456,466 $ 4,191,154 =============== ============== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION - CASH PAID DURING THE YEAR FOR INTEREST $ 479,430 $ 393,886 =============== ============== </TABLE> The accompanying notes to financial statements are an integral part of these statements.
F-20 LRG FURNITURE, LLC NOTES TO FINANCIAL STATEMENTS NOVEMBER 30, 2001 AND 2000 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). Bassett and BDPT were credited with 51% and 49%, respectively, of the combined members' equity of $2,677,489 at the date of formation. 2. CONTINUING OPERATIONS The Company has experienced significant losses from operations since inception. The Company incurred a net loss of $6,748,000 and $9,584,000 in the years 2001 and 2000, respectively, and has Members' deficit of $13,655,000 and $6,907,000 as of November 30, 2001 and 2000, respectively. Management has implemented a profit improvement program that includes evaluation and realignment of the Company's business to improve profitability. This program has resulted in significant operational changes, overall downsizing of the Company's administrative and operating overhead and disposals or planned disposals of selected stores (see Note 11). These store disposals will leave the Company with seven stores in the Texas and Nevada markets. As a result of these actions, the Company expects to substantially reduce losses from operations, however, there can be no assurances that management's program will be successful. The Members have historically provided, and are currently providing, sufficient financial support to the Company to fund the Company's obligations and working capital requirements as those obligations become due. The Members loaned a total of $4,100,000 to the Company in 2001 and $7,808,000 in 2000 (see Note 5). Management of Bassett has committed to provide the necessary level of financial support to the Company to enable it to pay its obligations as they become due through November 30, 2003. Bassett, however, is not legally obligated to provide such support. In addition, Bassett has guaranteed repayment of all of the Company's third-party long-term debt. 3. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES OPERATIONS The Company currently operates 12 retail furniture stores in North Carolina, Virginia, Kentucky, Nevada and Texas (see Note 11). These stores operate under the "Bassett Furniture Direct" name and substantially all of their purchases are contractually obligated 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.
F-21 -2- RECLASSIFICATIONS For comparative purposes, certain amounts in the 2000 financial statements have been reclassified to conform with the 2001 presentation. CASH AND CASH EQUIVALENTS Cash includes cash on hand, cash in banks and deposits in-transit from credit card companies. REVENUE RECOGNITION AND CONCENTRATION OF CREDIT RISK The Company recognizes revenue upon the delivery of products to its customers. There is no concentration of credit risk to any one customer. Allowances are provided for estimated losses associated with anticipated future returns of products sold by the Company and inability of customers to pay balances due. Actual product returns and cash collections could differ from management's estimates making it reasonably possible that a change in these estimates could occur in the near term. MERCHANDISE INVENTORIES Merchandise inventories are stated at the lower of first-in, first-out (FIFO) cost or market. Allowances are established to reduce the cost of excess and obsolete inventories to their estimated net realizable value. Shipping and handling costs associated with inbound freight are included in cost of sales and amounts related to merchandise inventory on hand at year-end are capitalized in merchandise inventories. 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 Life of lease 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 comprised primarily of an assumed lease contract with an independent third party that has terms that are favorable to its local market value and refundable deposits with various utilities and property lessors. The favorable lease contract, which has a gross balance of $758,867, is amortized over the lease term, which is 15 years. Accumulated amortization related to this favorable lease contract was $107,136 and $53,568 in 2001 and 2000, respectively. The deposits are refundable at the discretion of the utility or lessor as applicable.
F-22 -3- LONG-LIVED ASSETS The Company applies Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which requires that long-lived assets and certain identifiable intangible assets to be held and used or disposed of by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In the event assets are impaired, losses are recognized based on the excess carrying amounts over the estimated discounted future cash flows or fair market value of the asset. SFAS No. 121 also requires that assets to be disposed of be reported at the lower of the carrying amount or the fair market value less selling costs. Management does not believe there are any impairments of long-lived assets at November 30, 2001. PREOPENING EXPENSES Preopening expenses, which consist primarily of payroll and occupancy costs, are expensed as incurred. Preopening expenses were $177,000 and $450,000 in 2001 and 2000, respectively. ADVERTISING COSTS The Company expenses advertising costs as incurred. Advertising expense was $4,355,000 and $5,931,000 in 2001 and 2000, respectively. SHIPPING AND HANDLING FEES AND COSTS In September 2000, the Emerging Issues Task Force issued EITF 00-10, "Accounting for Shipping and Handling Fees and Costs" (EITF 00-10). EITF 00-10 requires shipping and handling fees billed to customers to be classified as revenue and shipping and handling costs to be either classified as cost of sales or disclosed in the notes to the consolidated financial statements. The Company includes shipping and handling fees billed to customers in net sales. Shipping and handling costs associated with outbound freight are included in operating and general expenses and totaled $6,442,000 and $7,012,000 in fiscal 2001 and 2000, respectively. CUSTOMER DEPOSITS Customer deposits relate to amounts paid by customers to the Company at the time they order goods. These deposits are applied to the ultimate sales price once goods are delivered to the customer, and are recognized as revenue at that time. INCOME TAXES The Company is treated as a pass-through entity for federal income tax purposes. As a result, the Company is not subject to income tax, but rather the liability for income taxes from the taxable income generated by the Company is the obligation of the Members. The Company is treated similarly for state income tax purposes and, under current law in the states in which the Company is conducting business, the Company is not subject to state income taxes. Accordingly, no provision or benefit for federal and state income taxes has been recorded in the accompanying financial statements.
F-23 -4- FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments include cash, accounts receivable, accounts payable and long-term debt. Because of their short maturity, the carrying amounts of cash, accounts receivable and accounts payable approximate fair value. The carrying amounts of long-term debt approximate fair value due to the variable rate nature of bank debt and the Company's belief that its interest rates on fixed interest rate debt due to its Members approximate fair value rates for the Company. RECENT ACCOUNTING PRONOUNCEMENTS In June 2000, the Financial Accounting Standards Board (FASB) 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 adopted the provisions of this statement in 2001 and the impact of adopting the statement is immaterial. In April 2001, the Company adopted SFAS No. 140, "Accounting for Transfers and Servicing Financial Assets and Extinguishment of Liabilities." This statement replaces SFAS No. 125, but carries over most of the provisions of SFAS No. 125 without reconsideration. The impact of adopting this pronouncement was not material to the Company's financial statements. In June 2001, the FASB issued SFAS No. 141, "Business Combinations." This statement requires that all business combinations initiated after June 30, 2001, be accounted for by the purchase method, eliminating the availability of the pooling-of-interests method. In addition SFAS No. 141 requires recognition of intangible assets apart from goodwill if they meet certain criteria. Any acquisition activity performed by the Company subsequent to the effective date of this statement will be accounted for under the purchase method. Management does not expect the impact of adopting SFAS No. 141 to be material to the Company's financial statements. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." This statement supercedes APB Opinion No. 17. SFAS No. 142 establishes new standards for measuring the carrying value of goodwill related to acquired companies. Instead of amortizing goodwill over a fixed period of time, the Company will instead measure the fair value of acquiring businesses annually to determine if goodwill has been impaired. The Company plans to adopt this statement in fiscal 2002. Amortization of intangibles recorded in fiscal 2001 that may no longer be recorded after implementation was $367,569 (see Note 4). Management is currently assessing other implementation issues and has not yet determined whether, or the extent to which, it will affect the financial statements. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of Disposal of Long-Lived Assets." This statement supercedes SFAS No. 121. In addition, this statement addresses the accounting for the segment of a business accounted for as a discontinued operation under APB Opinion 30. This statement would impact the Company's reporting if the Company chose to discontinue an operation, and becomes effective for the Company in fiscal 2003. Management does not expect the impact of adopting SFAS No. 144 to be material to the Company's financial statements.
F-24 -5- 4. ACQUISITION OF LOUISVILLE STORE On December 15, 2000, the Company acquired the assets and assumed the liabilities of a third-party Bassett Furniture Direct licensee in Louisville, Kentucky, in a noncash transaction. The fair value of liabilities assumed (primarily customer deposits and loans payable which are discussed further in Note 5) exceeded the fair value of assets acquired (primarily inventory and leasehold improvements) by $367,569, which was recorded as an intangible asset. The intangible asset, which relates primarily to acquired order book and customer lists, was amortized as operating and general expenses during 2001. As part of the transaction, Bassett purchased the related building and was leasing it to the Company on a month-to-month basis. This store was sold subsequent to year-end (see Note 11). 5. LONG-TERM DEBT AND NOTES PAYABLE TO MEMBERS Long-term debt and notes payable to Members at November 30, 2001 and 2000, consisted of the following: <TABLE> <CAPTION> 2001 2000 --------------- -------------- <S> <C> <C> Long-term debt: Unsecured notes with a bank, payable in monthly installments as discussed below from January 2001 to June 2004, plus interest payable monthly ranging from prime plus 0.5% to 1.0%, as defined in the agreement (prime was 5.0% at November 30, 2001) $ 3,773,180 $ 4,848,000 --------------- -------------- Notes payable to Members: Unsecured notes and deferred interest payable to Bassett, accrues interest at 8% per year, principle and interest due November 1, 2004 10,316,667 6,173,333 Unsecured demand note payable to Bassett, does not bear interest 566,815 0 Unsecured note payable to BDPT, interest payable quarterly at 8% per year, $1,808,000 due November 30, 2003, $600,000 due November 30, 2004 2,408,000 1,808,000 --------------- -------------- Total notes payable to Members and deferred interest payable 13,291,482 7,981,333 --------------- -------------- Total long-term debt and notes payable to Members 17,064,662 12,829,333 Less - Current maturities of long-term debt (2,466,836) (1,548,636) --------------- -------------- $14,597,826 $11,280,697 =============== ============== </TABLE> The aggregate future annual maturities of long-term debt and deferred interest payable are as follows: <TABLE> <S> <C> 2002 $ 2,466,836 2003 3,014,344 2004 11,583,482 2005 0 -------------- $17,064,662 ============== </TABLE>
F-25 -6- 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. The balance due on these notes at November 30, 2001 and 2000, is $3,142,256 and $4,848,000, respectively. Repayment of these loans is guaranteed by Bassett. On June 4, 2001, the Company entered into an unsecured note with the same bank for $500,000. The note has deferred principal payments of $16,667 beginning 6 months from the close of the note and continuing for 29 months thereafter. The proceeds of this note were used primarily to pay for the new store opening inventory. The balance due on this note at November 30, 2001, is $500,000. Repayment of this loan is guaranteed by Bassett. In connection with the acquisition of the Louisville store as discussed in Note 4, the Company assumed a $252,500 unsecured note payable with the same bank. The note requires monthly principal payments of $18,704 through June 30, 2002. The balance due on this note at November 30, 2001, is $130,924. Repayment of this note is guaranteed by Bassett. On June 1, 2000, August 1, 2000, and May 1, 2001, the Company entered into three unsecured notes with Bassett for $1,000,000, $5,000,000 and $3,500,000, respectively. All of these notes have the same terms and have deferred principal and interest payments, all payable November 1, 2004 (see Note 11). In connection with the acquisition of the Louisville store as discussed in Note 4, the Company assumed an unsecured demand note due to Bassett of $566,815 which is still outstanding at November 30, 2001. On November 30, 2000 and 2001, the Company entered into unsecured notes with BDPT for $1,808,000 and $600,000, respectively. These unsecured notes contain various restrictive covenants which include, among others, limitations on loans and contingent liabilities except in the normal course of business. As of November 30, 2001, the Company was in compliance with all of these covenants. 6. LEASE COMMITMENTS The Company's administrative offices and retail locations are leased under noncancelable operating lease agreements that expire from 2003 to 2016. Most of these leases contain renewal options of 3 to 35 years. Certain of the lease agreements for retail locations require the payment of contingent rentals based on a percentage of sales above stipulated levels. No contingent rental expense was incurred during 2001 or 2000. Certain of the lease agreements contain rent escalation clauses that are not significant. Total rent expense for 2001 and 2000 was $6,242,000 and $6,201,000, respectively. Rent expense related to locations owned or leased from the Members was $3,952,000 in 2001 and $3,823,000 in 2000. Future minimum lease commitments for the office and retail locations under operating leases having initial terms in excess of one year are as follows:
F-26 -7- <TABLE> <CAPTION> BASSETT BDPT OTHER TOTAL ------------- ------------- ------------ ------------ <S> <C> <C> <C> <C> 2002 $ 924,000 $ 2,483,000 $ 1,766,000 $ 5,173,000 2003 924,000 2,483,000 1,732,000 5,139,000 2004 924,000 2,483,000 1,203,000 4,610,000 2005 924,000 2,483,000 1,061,000 4,468,000 2006 924,000 2,483,000 1,061,000 4,468,000 Thereafter 8,111,000 21,879,000 3,630,000 33,620,000 ------------- ------------- ------------ ------------ $ 12,731,000 $ 34,294,000 $ 10,453,000 $ 57,478,000 ============= ============= ============ ============ </TABLE> Subsequent to November 30, 2001, the Company sold one store to a third party. The third party assumed the lease related to the store (see Note 11). As such, the lease commitment related to this store is not included in the future minimum lease commitments above. Additionally, Bassett will be assuming the "Bassett" and substantially all of the "Other" lease commitments detailed above in connection with the planned sale of certain stores to Bassett (see Note 11). 7. OTHER RELATED-PARTY TRANSACTIONS Substantially all purchases of merchandise inventories are made from Bassett and its affiliates. These related entities sell products to the Company at prices and terms equal to their normal selling prices and terms to unrelated entities. Accounts payable due to these related parties was $9,230,000 and $10,534,000 in 2001 and 2000, respectively. Interest expense on borrowings from related parties as described in Note 5 was $789,000 in 2001 and $173,000 in 2000. Portions of these amounts are included in notes payable to Members and deferred interest payable in the accompanying balance sheets at November 30, 2001 and 2000, respectively. The Company paid salaries to principals of the Members for administrative and executive services in the amount of $300,000 in both 2001 and 2000. 8. 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 2001 or 2000.
F-27 -8- 9. COMMITMENTS AND CONTINGENCIES EMPLOYMENT AGREEMENTS The Company has certain obligations under various employment agreements through November 30, 2004, that stipulate, among other things, certain levels of compensation, bonus potential, other miscellaneous benefits and severance arrangements. Potential contingent liabilities under these arrangements approximate $450,000. LITIGATION The Company is involved in various legal proceedings encountered in the normal course of business. In the opinion of management, based on the factors presently known, the resolution of these matters will not have a material adverse effect on the Company's financial position or future results of operations. 10. MEMBERS' DEFICIT The Members' deficit account in the accompanying balance sheets reflects the initial capital contributed by the Members of $2,677,489 and all losses of the Company since inception. No distributions have been made to the Members since inception. Under the terms of the Limited Liability Company Agreement (the LLC Agreement), profits and losses and any distributions of the Company are allocated to its members based upon the Members' relative ownership interests in the Company and are made at the sole discretion of the Board of Managers. Members may not assign or transfer their rights without consent of the other Member. Both Members have two positions each in the Board of 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. 11. SALES AND CLOSURE OF RETAIL STORES In December 2000, the Company sold its retail store operation in Columbia, South Carolina, to an unrelated 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 management knew that the book value of the property exceeded fair value at year-end, management accrued for these impaired assets in the accompanying 2000 statement of operations and changes in members' deficit. The Company sold its retail furniture store in Knoxville, Tennessee, in January 2001 to an unrelated third party. Substantially all of the inventory in that location had been sold through a liquidation sale that began in September 2000. The lease for this location has been assumed by an unrelated third party, who will utilize the store as a "Bassett Furniture Direct" store going forward. Losses due to this transaction were insignificant.
F-28 -9- The Company closed its retail furniture store in Fredericksburg, Virginia, in March 2001. Substantially all of the inventory in that location was liquidated by May 2001. The lease for this location was terminated by Bassett, the owner of the property, concurrent with the closure of the store. Losses due to the closure of this store were insignificant. The Company sold its retail furniture store in Hickory, North Carolina, to Bassett in July 2001. The principal terms of the agreement called for inventory and property to be sold at net book value to Bassett. Additionally, Bassett assumed the customer deposit liability and the lease of the retail facility in Hickory. There was no gain or loss associated with this transaction. The Company sold its retail furniture store in Greenville, South Carolina, to an unrelated third party, in August 2001. The transaction involved the sale of inventory, property, equipment and leasehold improvements. The buyer also assumed the customer deposit liability and the future lease commitments for the store. The Company incurred a loss of approximately $140,000 primarily related to the disposal of property and equipment. Subsequent to November 30, 2001, the Company sold its retail furniture store in Louisville, Kentucky to an unrelated local furniture retailer. The purchaser has purchased substantially all assets and assumed all liabilities of the store. Related losses on this transaction are not significant. Subsequent to November 30, 2001, the Company and Bassett entered into an agreement in principle to restructure the balance sheet and streamline the operations of the Company. The agreement calls for Bassett to forgive debt due by the Company of $2,150,000. Also, as part of the agreement, the Company will sell the five remaining stores in North Carolina and Virginia to Bassett for net book value as of the effective date of the agreement of approximately $188,000 ($5,405,000 of assets and $5,217,000 of liabilities) including bank debt of approximately $1,481,000. Sales related to all stores sold, closed or planned to be sold included in the statement of operations and changes in Members' deficit for the year ended November 30, 2001, were $27,944,000 and related loss from operations was $4,892,000.
INDEX TO FORM 10-K SCHEDULE <TABLE> <CAPTION> Exhibit No. - ----------- <S> <C> F-29 Report of Independent Public Accountants F-30 Bassett Furniture Industries, Inc. Schedule II - Analysis of Valuation and Qualifying Accounts for the years ended November 24, 2001, November 25, 2000 and November 27, 1999. </TABLE>
F-29 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, 2002. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedule on page F-30 is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP Greensboro, North Carolina, January 15, 2002
F-30 BASSETT FURNITURE INDUSTRIES, INC. Schedule II Analysis of Valuation and Qualifying Accounts For the Years Ended November 24, 2001, November 25, 2000 and November 27, 1999 (in thousands) <TABLE> <CAPTION> Additions Balance Charged 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 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 ================================================================================== For the Year Ended November 24, 2001: Reserve deducted from assets to which it applies- Allowance for doubtful accounts $6,650 $481 $(4,631) --- $2,500 ================================================================================== Restructuring reserve $1,343 $2,402 $(3,163) --- $582 ================================================================================== </TABLE> (1) Deductions are for the purpose for which the reserve was created.
INDEX TO EXHIBITS <TABLE> <CAPTION> Exhibit No. - ----------- <S> <C> 3B Bylaws, as amended 4B First Amendment to Credit Agreement with a Bank Group dated October 5, 2001 13 Portions of the Bassett Furniture Industries, Incorporated Annual Report to Stockholders for the year ended November 24, 2001 21 List of subsidiaries of registrant 23A Consent of Independent Public Accountants 23B Consent of Independent Auditors </TABLE>