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BASSETT FURNITURE INDUSTRIES INC - Quarter Report: 2010 May (Form 10-Q)

Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended May 29, 2010

OR

 

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

For the transition period from              to             

Commission File No. 0-209

 

 

BASSETT FURNITURE INDUSTRIES, INCORPORATED

(Exact name of Registrant as specified in its charter)

 

 

 

Virginia   54-0135270

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

3525 Fairystone Park Highway

Bassett, Virginia 24055

(Address of principal executive offices)

(Zip Code)

(276) 629-6000

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large Accelerated Filer  ¨            Accelerated Filer  ¨            Non-accelerated Filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

At June 30, 2010, 11,506,021 shares of common stock of the Registrant were outstanding.

 

 

 


Table of Contents

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

TABLE OF CONTENTS

 

ITEM

       PAGE
  PART I—FINANCIAL INFORMATION   

1.

  Condensed Consolidated Financial Statements as of May 29, 2010 (unaudited) and November 28, 2009 and for the periods ended May 29, 2010 (unaudited) and May 30, 2009 (unaudited)   
 

Condensed Consolidated Statements of Operations and Retained Earnings

   3
 

Condensed Consolidated Balance Sheets

   4
 

Condensed Consolidated Statements of Cash Flows

   5
 

Notes to Condensed Consolidated Financial Statements

   6

2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   24

3.

 

Quantitative and Qualitative Disclosures About Market Risk

   39

4.

 

Controls and Procedures

   39
  PART II—OTHER INFORMATION   

1.

 

Legal Proceedings

   41

2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

   41

3.

 

Defaults Upon Senior Securities

   41

6.

 

Exhibits

   41

 

2


Table of Contents

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

FOR THE PERIODS ENDED MAY 29, 2010 AND MAY 30, 2009—UNAUDITED

(In thousands except per share data)

 

     Quarter Ended     Six Months Ended  
     May 29, 2010     May 30, 2009     May 29, 2010     May 30, 2009  

Net sales

   $ 57,845      $ 57,718      $ 110,736      $ 115,529   

Cost of sales

     29,408        32,685        56,555        66,353   
                                

Gross profit

     28,437        25,033        54,181        49,176   

Selling, general and administrative expenses excluding bad debt and notes receivable valuation charges

     27,628        26,115        53,529        52,967   

Bad debt and notes receivable valuation charges

     1,115        5,849        3,830        11,741   

Restructuring and asset impairment charges

     —          1,388        —          1,388   

Lease exit costs

     —          285        —          285   
                                

Loss from operations

     (306     (8,604     (3,178     (17,205

Other income (loss), net

     471        (1,187     1,699        (4,484
                                

Income (loss) before income taxes

     165        (9,791     (1,479     (21,689

Income tax provision

     (48     (65     (96     (130
                                

Net income (loss)

   $ 117      $ (9,856   $ (1,575   $ (21,819

Retained earnings-beginning of period

     48,769        61,197        50,461        73,160   
                                

Retained earnings-end of period

   $ 48,886      $ 51,341      $ 48,886      $ 51,341   
                                

Basic and diluted income (loss) per share

   $ 0.01      $ (0.87   $ (0.14   $ (1.91
                                

The accompanying notes to condensed consolidated financial statements are an integral part of the condensed consolidated financial statements.

 

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Table of Contents

PART I—FINANCIAL INFORMATION—CONTINUED

ITEM 1. FINANCIAL STATEMENTS

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

MAY 29, 2010 AND NOVEMBER 28, 2009

(In thousands)

 

      (Unaudited)
May 29, 2010
   November 28, 2009

Assets

     

Current assets

     

Cash and cash equivalents

   $ 13,093    $ 23,221

Accounts receivable, net

     29,591      34,605

Inventories

     34,281      33,388

Other current assets

     8,706      13,312
             

Total current assets

     85,671      104,526
             

Property and equipment

     

Cost

     142,458      152,153

Less accumulated depreciation

     94,946      101,517
             

Property and equipment, net

     47,512      50,636
             

Investments

     14,980      14,931

Retail real estate

     28,203      28,793

Notes receivable, net

     8,429      8,309

Other

     8,682      9,034
             
     60,294      61,067
             

Total assets

   $ 193,477    $ 216,229
             

Liabilities and Stockholders’ Equity

     

Current liabilities

     

Accounts payable

   $ 18,255    $ 14,711

Accrued compensation and benefits

     4,923      6,490

Customer deposits

     9,032      5,946

Other accrued liabilities

     11,481      11,730

Current portion of real estate notes payable

     7,115      4,393
             

Total current liabilities

     50,806      43,270
             

Long-term liabilities

     

Post employment benefit obligations

     10,528      10,841

Bank debt

     —        15,000

Real estate notes payable

     7,133      16,953

Distributions in excess of affiliate earnings

     9,756      10,954

Other long-term liabilities

     8,177      8,877
             
     35,594      62,625
             

Stockholders’ equity

     

Common stock

     57,480      57,274

Retained earnings

     48,886      50,461

Additional paid-in-capital

     532      481

Accumulated other comprehensive income

     179      2,118
             

Total stockholders’ equity

     107,077      110,334
             

Total liabilities and stockholders’ equity

   $ 193,477    $ 216,229
             

The accompanying notes to condensed consolidated financial statements are an integral part of the condensed consolidated financial statements.

 

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PART I—FINANCIAL INFORMATION—CONTINUED

ITEM 1. FINANCIAL STATEMENTS

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE PERIODS ENDED MAY 29, 2010 AND MAY 30, 2009—UNAUDITED

(In thousands)

 

     Six Months Ended  
     May 29, 2010     May 30, 2009  

Operating activities:

    

Net loss

   $ (1,575   $ (21,819

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

    

Depreciation and amortization

     2,959        3,350   

Equity in undistributed income of investments and unconsolidated affiliated companies

     (2,204     (1,317

Provision for restructuring and asset impairment charges

     —          1,388   

Lease exit costs

     —          285   

Provision for lease and loan guarantees

     916        1,874   

Bad debt and notes receivable valuation charges

     3,830        11,741   

Other than temporary impairment of investments

     —          1,255   

Realized income from investments

     (2,214     (461

Payment to terminate lease

     —          (400

Other, net

     464        325   

Changes in operating assets and liabilities

    

Accounts receivable

     183        (5,136

Inventories

     913        3,055   

Other current assets

     3,745        4,747   

Accounts payable and accrued liabilities

     1,497        (1,647
                

Net cash provided by (used in) operating activities

     8,514        (2,760
                

Investing activities:

    

Purchases of property, equipment and real estate

     (1,503     (713

Proceeds from sales of property and equipment

     4,235        26   

Acquisition of retail licensee stores, net of cash acquired

     (277     (481

Proceeds from sales of investments

     8,326        20,678   

Purchases of investments

     (8,076     (5,273

Dividends from affiliate

     937        2,811   

Net cash received on licensee notes

     298        302   

Other, net

     —          33   
                

Net cash provided by investing activities

     3,940        17,383   
                

Financing activities:

    

Net repayments under revolving credit facility

     (15,000     (1,000

Repayments of real estate notes payable

     (7,098     (394

Issuance of common stock

     71        150   

Repurchases of common stock

     —          (75

Cash dividends

     —          (1,142

Payments on other notes

     (555     (284
                

Net cash used in financing activities

     (22,582     (2,745
                

Change in cash and cash equivalents

     (10,128     11,878   

Cash and cash equivalents—beginning of period

     23,221        3,777   
                

Cash and cash equivalents—end of period

   $ 13,093      $ 15,655   
                

The accompanying notes to condensed consolidated financial statements are an integral part of the condensed consolidated financial statements.

 

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PART I—FINANCIAL INFORMATION—CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED

MAY 29, 2010

(Dollars in thousands except share and per share data)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete financial statements. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

The condensed consolidated financial statements include the accounts of Bassett Furniture Industries, Incorporated (“Bassett”, “we”, “our”, or the “Company”) and our majority owned subsidiaries of which we have operating control. The equity method of accounting is used for our investments in affiliated companies in which we exercise significant influence but do not maintain control.

For comparative purposes, certain amounts in the 2009 financial statements have been reclassified to conform to the 2010 presentation.

References to “ASC” included hereinafter refer to the Accounting Standards Codification established by the Financial Accounting Standards Board as the source of authoritative GAAP.

During the first and second quarter of 2009, the Staff of the Securities and Exchange Commission (the “SEC”) performed a review of our Form 10-K for the year ended November 29, 2008 and, subsequently, our Form 10-Q for the quarter ended February 28, 2009. Among other items, the Staff identified issues with our initial valuation of notes receivable due from our licensees (primarily for amounts converted from past due accounts receivable due from them) and our methodology for determining reserves for our accounts receivable, notes receivable, and loan guarantees. As a result of the SEC’s comments, we reviewed our accounting policies and processes in these areas previously mentioned and determined that we should have recorded lower values for certain of our notes receivable upon inception and, subsequently, recorded additional reserves on those notes due to an error in how we determined an appropriate market rate of interest for those notes. In addition, we also concluded that we should have recognized revenue for certain customers on a cost recovery basis for shipments beginning in the first quarter of 2009 and that additional reserves for loan guarantees should be established. Therefore, we recorded an additional $3,280 of net charges in the quarter ended February 28, 2009 to account for these lower note values, increased reserves and reduced revenue and filed an amended Form 10-Q for the quarter then ended. Of the amount recorded, $1,936 related to periods prior to the quarter ended February 28, 2009. However, based on our consideration of the underlying quantitative and qualitative factors surrounding the prior period errors, the effects on the previous annual and interim periods were determined to be immaterial and, therefore, periods prior to the quarter ended February 28, 2009 have not been restated.

2. Interim Financial Presentation

All intercompany accounts and transactions have been eliminated in the condensed consolidated financial statements. The results of operations for the three and six months ended May 29, 2010 are not necessarily indicative of results for the fiscal year. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended November 28, 2009.

We calculate an anticipated effective tax rate for the year based on our annual estimates of pretax income or loss and use that effective tax rate to record our year-to-date income tax provision. Any change in annual

 

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PART I—FINANCIAL INFORMATION—CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED

MAY 29, 2010

(Dollars in thousands except share and per share data)

 

projections of pretax income or loss could have a significant impact on our effective tax rate for the respective quarter. During the fourth quarter of 2008, we established a valuation allowance against substantially all of our deferred tax assets as we were in a cumulative loss position for the preceding three years, which is considered significant negative evidence as to whether our deferred tax assets will be realized. For the six months ended May 29, 2010 and the three and six months ended May 30, 2009, no tax benefits on the losses generated were recorded since we remained in a cumulative loss position. In addition, no general tax provision was made for the quarter ended May 29, 2010 as the pre-tax profit for that period can be offset against existing net operating loss carryforwards, and we do not expect to generate taxable income for the full year. The tax provision for the three and six months ended May 29, 2010 and May 30, 2009 represents the accrual of income taxes to be paid in certain states and the accrual of penalties and interest associated with certain unrecognized tax benefits.

3. Revenue Recognition

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

Staff Accounting Bulletin No. 104, Revenue Recognition (“SAB 104”) outlines the four basic criteria for recognizing revenue as follows: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the seller’s price to the buyer is fixed or determinable, and (4) collectibility is reasonably assured. SAB 104 further asserts that if collectibility of all or a portion of the revenue is not reasonably assured, revenue recognition should be deferred until payment is received. Currently, there are four dealers from whom revenue is being recognized on a cost recovery basis. The following table details the total revenue and cost deferred for each period presented:

 

     Quarter ended    Six Months ended
     May 29, 2010    May 30, 2009    May 29, 2010    May 30, 2009

Revenue deferred

   $ 569    $ 2,719    $ 715    $ 5,508

Cost deferred

     398      1,903      500      3,855

4. Accounts Receivable

Accounts receivable consists of the following:

 

     May 29, 2010     November 28, 2009  

Gross accounts receivable

   $ 37,835      $ 45,362   

Allowance for doubtful accounts

     (8,244     (10,757
                

Net accounts receivable

   $ 29,591      $ 34,605   
                

Activity in the allowance for doubtful accounts was as follows:

 

Balance, November 28, 2009

   $ 10,757   

Additions charged to expense

     2,822   

Write-offs and other deductions

     (5,335
        

Balance, May 29, 2010

   $ 8,244   
        

 

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PART I—FINANCIAL INFORMATION—CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED

MAY 29, 2010

(Dollars in thousands except share and per share data)

 

Additions to the reserve charged to expense include $1,359 of bad debt charges recognized in the settlement of receivables owed by various licensees acquired during the six months ended May 29, 2010 (see Note 10). Substantially all of the write-offs and other deductions during the six months ended May 29, 2010 related to the acquired licensees.

We believe that the carrying value of our net accounts receivable approximates fair value. The inputs into these fair value estimates reflect our market assumptions and are not observable. Consequently, the inputs are considered to be Level 3 as specified in the fair value hierarchy in ASC Topic 820, Fair Value Measurements and Disclosures. See Note 14.

5. Inventories

Inventories are valued at the lower of cost or market. Cost is determined for domestic furniture inventories using the last-in, first-out (LIFO) method. The costs for imported inventories are determined using the first-in, first-out (FIFO) method.

Inventories were comprised of the following:

 

     May 29, 2010     November 28, 2009  

Wholesale finished goods

   $ 18,875      $ 19,519   

Work in process

     211        199   

Raw materials and supplies

     4,821        6,299   

Retail merchandise

     18,679        15,386   
                

Total inventories on first-in, first-out method

     42,586        41,403   

LIFO adjustment

     (6,440     (6,161

Reserve for excess and obsolete inventory

     (1,865     (1,854
                
   $ 34,281      $ 33,388   
                

We estimate an inventory reserve for excess quantities and obsolete items based on specific identification and historical write-offs, taking into account future demand, market conditions and the respective valuations at LIFO. The need for these reserves is primarily driven by the normal product life cycle. As products mature and sales volumes decline, we rationalize our product offerings to respond to consumer tastes and keep our product lines fresh. If actual demand or market conditions in the future are less favorable than those estimated, additional inventory write-downs may be required. In determining reserves, we calculate separate reserves on our wholesale and retail inventories. Our wholesale inventories tend to carry the majority of the reserves for excess quantities and obsolete inventory due to the nature of our distribution model. These wholesale reserves primarily represent design and/or style obsolescence. Typically, product is not shipped to our retail warehouses until a consumer has ordered and paid a deposit for the product. We do not typically hold retail inventory for stock purposes. Consequently, floor sample inventory and inventory for delivery to customers account for the majority of our inventory at retail. Retail reserves are based on accessory and clearance floor sample inventory in our stores and any inventory that is not associated with a specific customer order in our retail warehouses.

 

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PART I—FINANCIAL INFORMATION—CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED

MAY 29, 2010

(Dollars in thousands except share and per share data)

 

Activity in the reserves for excess quantities and obsolete inventory by segment are as follows:

 

     Wholesale Segment     Retail Segment     Total  

Balance, November 28, 2009

   $ 1,465      $ 389      $ 1,854   

Additions charged to expense

     600        70        670   

Write-offs

     (552     (107     (659
                        

Balance, May 29, 2010

   $ 1,513      $ 352      $ 1,865   
                        

Our estimates and assumptions have been reasonably accurate in the past. We have not made any significant changes to our methodology for determining inventory reserves in 2010 and do not anticipate that our methodology is reasonably likely to change in the future. A plus or minus 10% change in our inventory reserves would not have been material to our financial statements for the periods presented.

6. Notes Receivable

Our notes receivable consist of the following:

 

     May 29, 2010     November 28, 2009  

Notes receivable

   $ 16,793      $ 19,411   

Allowance for doubtful accounts and discounts on notes receivable

     (7,578     (8,950
                

Notes receivable, net

     9,215        10,461   

Less: current portion of notes receivable

     (786     (2,152
                

Long term notes receivable

   $ 8,429      $ 8,309   
                

Our notes receivable, which bear interest at rates ranging from 2% to 8.25%, consist primarily of amounts due from our licensees from loans made by the Company to help licensees fund their operations. Approximately 60% and 64% of our notes receivable represent conversions of past due accounts receivable at May 29, 2010 and November 28, 2009, respectively. At the inception of the note receivable, we determine whether the note bears a market rate of interest. A discount on the note is recorded if we determine that the note bears an interest rate below the market rate. We amortize the related note discount over the contractual term of the note and cease amortizing the discount to interest income when the present value of expected future cash flows is less than the carrying value of the note. Interest income on the notes, which is included in other income (loss), net, was as follows:

 

     Quarter ended    Six months ended
     May 29, 2010    May 30, 2009    May 29, 2010    May 30, 2009

Interest income

   $ 141    $ 174    $ 267    $ 379

The initial carrying value of the notes is determined using present value techniques which consider the fair market rate of interest based on the licensee’s risk profile and estimated cash flows to be received. The estimated fair value of our notes receivable portfolio at May 29, 2010 was $8,781. The inputs into these fair value

 

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PART I—FINANCIAL INFORMATION—CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED

MAY 29, 2010

(Dollars in thousands except share and per share data)

 

calculations reflect our market assumptions and are not observable. Consequently, the inputs are considered to be Level 3 as specified in the fair value hierarchy in ASC Topic 820, Fair Value Measurements and Disclosures. See Note 14.

On a quarterly basis we examine these notes for evidence of impairment, considering factors such as licensee capitalization, projected operating performance, the viability of the market in which the licensee operates and the licensee’s operating history, including our cash receipts from the licensee, licensee sales and any underlying collateral. After considering these factors, should we believe that all or a portion of the expected cash flows attributable to the note receivable will not be received, we record an impairment charge on the note by estimating future cash flows and discounting them at the effective interest rate. Any difference between the estimated discounted cash flows and the carrying value of the note is recorded as an increase to the allowance for doubtful accounts.

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

Activity in the allowance for doubtful accounts and discounts was as follows:

 

Balance, November 28, 2009

   $ 8,950   

Additions charged to expense

     1,008   

Write-offs and other deductions

     (2,331

Amortization of discounts

     (49
        

Balance, May 29, 2010

   $ 7,578   
        

Additions charged to expense include $435 related to the settlement of a note receivable due from one of the licensees acquired during the first quarter of 2010 (see Note 10). Write-offs of $2,180 relate to notes which had been owed by the acquired licensees, one of which had previously been fully reserved.

7. Unconsolidated Affiliated Companies

The International Home Furnishings Center (“IHFC”) owns and leases out floor space in a showroom facility in High Point, North Carolina. We owned 46.85% of IHFC at May 29, 2010 and November 28, 2009, and accounted for the investment using the equity method since we do not maintain operating control of IHFC. Our investment reflects a credit balance of $9,756 and $10,954 at May 29, 2010 and November 28, 2009, respectively, which is reflected in the liabilities section in the accompanying condensed consolidated balance sheets as “distributions in excess of affiliate earnings”. This negative book value resulted from IHFC’s previous refinancing of its real estate based on the market value of the property and using the proceeds to pay a special dividend to its owners. We recorded income and received dividends from IHFC as follows:

 

     Quarter ended    Six Months ended
     May 29, 2010    May 30, 2009    May 29, 2010    May 30, 2009

Income recorded

   $ 1,250    $ 1,413    $ 2,136    $ 2,208

Dividends received

     937      —        937      2,811

 

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PART I—FINANCIAL INFORMATION—CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED

MAY 29, 2010

(Dollars in thousands except share and per share data)

 

Summarized unaudited income statement information for IHFC for its first six months of 2010 and 2009, respectively, is as follows:

 

     2010    2009

Revenue

   $ 19,525    $ 20,253

Operating income

     11,889      12,147

Net income

     4,559      4,712

In addition to our investment in IHFC, we have a 49% ownership interest in Zenith Freight Lines, LLC (“Zenith”). We recorded the following income from Zenith in other income (loss), net in our condensed consolidated statements of operations and retained earnings:

 

     Quarter ended    Six Months ended
     May 29, 2010    May 30, 2009    May 29, 2010    May 30, 2009

Income

   $ 49    $ 141    $ 31    $ 201

Dividends received

     —        —        —        —  

8. Real Estate Notes Payable and Other Long-Term Debt

Certain of our retail real estate properties have been financed through commercial mortgages with interest rates ranging from 6.73% to 8.28%. These mortgages are collateralized by the respective properties with net book values totaling approximately $21,981 and $29,279 at May 29, 2010, and November 28, 2009, respectively. The current portion of these mortgages, $7,115 and $4,393 as of May 29, 2010 and November 28, 2009, respectively, has been included as a current liability in the accompanying condensed consolidated balance sheets. The long-term portion, $7,133 and $16,953 as of May 29, 2010 and November 28, 2009, respectively, is presented as real estate notes payable in the condensed consolidated balance sheets. The fair value of these mortgages was $13,749 and $20,784 at May 29, 2010 and November 28, 2009, respectively. In determining the fair value the Company utilized current market interest rates for similar instruments. The inputs into these fair value calculations reflect our market assumptions and are not observable. Consequently, the inputs are considered to be Level 3 as specified in the fair value hierarchy in ASC Topic 820, Fair Value Measurements and Disclosures. See Note 14.

Our revolving credit facility (as amended on October 6, 2009) contains, among other provisions, a minimum required level of Tangible Net Worth, as defined in the credit agreement, of $90,000 for 2010. It also provides for a variable interest rate of LIBOR plus 2.75% with a 4.25% minimum rate, and allows borrowings of up to $30,000 subject to the limitations of a borrowing base calculation as set forth in the credit agreement. Borrowings outstanding under the facility, which matures November 30, 2010, were $-0- at May 29, 2010 and $15,000 at November 28, 2009, and are secured by a pledge of certain marketable securities and substantially all of our receivables and inventories. The Company has approximately $19,362 available for borrowing under the facility, after deducting amounts for outstanding letters of credit and guarantees under the licensee loan program. We believe the face value of the outstanding obligation under the facility approximates its fair value. The inputs into this fair value estimate reflect our market assumptions and are not observable. Consequently, the inputs are considered to be Level 3 as specified in the fair value hierarchy in ASC Topic 820, Fair Value Measurements and Disclosures. See Note 14.

 

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PART I—FINANCIAL INFORMATION—CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED

MAY 29, 2010

(Dollars in thousands except share and per share data)

 

9. Comprehensive Income

The following table provides a summary of total comprehensive income (loss):

 

     Quarter ended     Six Months ended  
     May 29, 2010    May 30, 2009     May 29, 2010     May 30, 2009  

Net income (loss)

   $ 117    $ (9,856   $ (1,575   $ (21,819

Other comprehensive income (loss):

         

Net change in unrealized holding gains & losses

     11      1,413        (1,952     1,423   

Amortization associated with SERP Plan

     7      6        13        12   
                               

Total comprehensive income (loss)

   $ 135    $ (8,437   $ (3,514   $ (20,384
                               

The following table provides a summary of the changes in accumulated other comprehensive income (loss):

 

Balance at November 28, 2009

   $ 2,118   

Net change in unrealized holding gains & losses

     (1,952

Amortization associated with SERP Plan

     13   
        

Balance at May 29, 2010

   $ 179   
        

10. Licensee Acquisitions

As we continually monitor our business relationships with our licensees, we may determine from time to time that it is in our best interest to acquire a licensee’s operations in order to mitigate certain risks associated with the poor performance or potential failure of a licensee. Such risks include loss of receivables or underlying collateral, potential impairment of the value of our investments in real estate used by a licensee or exposure to contingent liabilities under lease guarantees, and potential harm to our market share and brand integrity within a licensee’s market. In addition, we are sometimes approached by our licensees to acquire all or certain stores operated by the licensee. We evaluate such opportunities considering, among other things, the viability of the market and our participation in the store real estate. During the six months ended May 29, 2010, we acquired 100% controlling interests in eight retail stores operated by six licensees in Maryland, Missouri, Illinois, New York, Alabama, Mississippi, and California. Six stores were acquired pursuant to strict foreclosure and settlement agreements on the underlying assets subject to the terms of our security agreements with the licensees. One store was acquired from a licensee following its request for a buyout, where we already owned the real estate. Another was leased from a former licensee and reopened following that licensee’s store liquidation.

 

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BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED

MAY 29, 2010

(Dollars in thousands except share and per share data)

 

These acquisitions were accounted for in accordance with ASC Topic 805, Business Combinations. As required by ASC 805, the settlements of certain pre-existing relationships were excluded from the value of the consideration exchanged in the transactions, and gains or losses on such settlements were recognized. The primary relationships settled involved the write off of accounts and notes receivable which had been foreclosed upon pursuant to security agreements with the licensees, as well as the assumption of certain guaranteed obligations of the licensees. Remaining receivables not foreclosed upon were given as consideration in exchange for net assets acquired. As a result of these settlements, we recognized the following charges:

 

     Quarter Ended
May 29, 2010
    Six Months Ended
May 29, 2010

Bad debt expense (recovery)

   $ (110     1,794

Loan guarantee expense

     48        209
              

Total charges (gains)

   $ (62   $ 2,003
              

The following table summarizes the net assets acquired and consideration given in the store acquisitions:

 

     Quarter Ended
May 29, 2010
    Six Months Ended
May 29, 2010
 

Net assets acquired:

    

Inventory

   $ 393      $ 2,136   

Fixed assets/other

     638        2,288   

Customer deposits and other accrued expenses

     (346     (2,038
                

Total net assets acquired

   $ 685      $ 2,386   
                

Consideration given:

    

Accounts receivable

   $ 485      $ 2,009   

Payable to former owner

     100        100   

Cash

     100        277   
                

Total consideration

   $ 685      $ 2,386   
                

The assets acquired and liabilities assumed were measured at fair value in accordance with ASC 805. Acquired inventory is valued at expected retail sales price less an allowance for direct selling costs and profit thereon. Acquired fixed assets are valued based upon our estimate of replacement cost less an allowance for age and condition at the time of acquisition. Customer deposits and accrued expenses are expected to be settled at face value within a short period following acquisition; therefore face value is assumed to approximate fair value. The inputs into these fair value calculations reflect our market assumptions and are not observable. Consequently, the inputs are considered to be Level 3 as specified in the fair value hierarchy in ASC 820, Fair Value Measurements and Disclosures. See Note 14.

 

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BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED

MAY 29, 2010

(Dollars in thousands except share and per share data)

 

Due to the level of settlements involved with these acquisitions and the losses recognized thereupon, no goodwill was recognized in these store acquisitions. The pro forma impact of the acquisitions on current and prior periods is not presented as the impact is not material to our results from operations. Net sales and operating losses generated by these stores subsequent to their acquisition were as follows:

 

     Quarter Ended
May 29, 2010
   Six Months Ended
May 29, 2010

Net sales

   $ 3,933    $ 5,460

Operating losses

     383      752

11. Contingencies

We are involved in various legal and environmental matters, which arise in the normal course of business. Although the final outcome of these matters cannot be determined, based on the facts presently known, we believe that the final resolution of these matters will not have a material adverse effect on our financial position or future results of operations.

We lease land and buildings that are used in the operation of our Company-owned retail stores as well as in the operation of certain of our licensee-owned stores. We had obligations of $85,106 and $79,516 at May 29, 2010 and November 28, 2009, respectively, for future minimum lease payments under non-cancelable operating leases having remaining terms in excess of one year. We also have guaranteed certain lease obligations of licensee operators. Lease guarantees range from one to ten years. We were contingently liable under licensee lease obligation guarantees in the amount of $6,694 and $9,822 at May 29, 2010 and November 28, 2009, respectively.

We have also guaranteed loans to certain of our licensees to finance initial inventory packages and other operating requirements for those stores. Theses loans generally have three year terms. The total contingent liabilities with respect to these loan guarantees as of May 29, 2010, and November 28, 2009, were $3,728 and $4,998, respectively.

In the event of default by an independent dealer under the guaranteed lease or loan, we believe that the risk of loss is mitigated through a combination of options that include, but are not limited to, arranging for a replacement dealer, liquidating the collateral (primarily inventory), and pursuing payment under the personal guarantees of the independent dealer. The proceeds of the above options are expected to cover the estimated amount of our future payments under the guarantee obligations, net of recorded reserves. The fair value of lease and loan guarantees (an estimate of the cost to the Company to perform on these guarantees) at May 29, 2010 and November 28, 2009, was $3,190 and $3,366, respectively, and is recorded in other accrued liabilities and other long-term liabilities in the accompanying condensed consolidated balance sheets. The inputs into these fair value calculations reflect our market assumptions and are not observable. Consequently, the inputs are considered to be Level 3 as specified in the fair value hierarchy in ASC Topic 820, Fair Value Measurements and Disclosures. See Note 14.

 

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BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED

MAY 29, 2010

(Dollars in thousands except share and per share data)

 

12. Post Employment Benefit Obligations

We have an unfunded Supplemental Retirement Income Plan (the “Supplemental Plan”) that covers one current and certain former executives. The liability for this plan was $8,242 and $9,857 as of May 29, 2010 and November 28, 2009, respectively, and is recorded as follows in the consolidated balance sheets:

 

     May 29, 2010    November 28, 2009

Other accrued liabilities

   $ 816    $ 2,190

Post employment benefit obligations

     7,426      7,667
             

Total pension liability

   $ 8,242    $ 9,857
             

Components of net periodic pension costs are as follows:

 

     Quarter Ended    Six Months Ended
     May 29, 2010    May 30, 2009    May 29, 2010    May 30, 2009

Service cost

   $ 11    $ 9    $ 22    $ 18

Interest cost

     106      157      212      314

Amortization of transition obligation

     11      11      22      22
                           

Net periodic pension cost

   $ 128    $ 177    $ 256    $ 354
                           

We have an unfunded Deferred Compensation Plan that covers one current executive and certain former executives and provides for voluntary deferral of compensation. This plan has been frozen with no additional participants or deferrals permitted. We recognized expense of $102 and $114 for the quarters ended May 29, 2010 and May 30, 2009, respectively, and $204 and $228 for the six months ended May 29, 2010 and May 30, 2009, respectively. Our liability under this plan was $3,102 and $3,174 as of May 29, 2010 and November 28, 2009, respectively, and is reflected in post employment benefit obligations.

 

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BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED

MAY 29, 2010

(Dollars in thousands except share and per share data)

 

13. Earnings Per Share

The following reconciles basic and diluted loss per share:

 

     Net Income
(Loss)
    Weighted Average
Shares
   Net Income
(Loss) Per
Share
 

For the quarter ended May 29, 2010:

       

Basic income per share

   $ 117      11,441,663    $ 0.01   

Add effect of dilutive securities:

       

Options and restricted shares

     —        37,172      —     
                     

Diluted income per share

   $ 117      11,478,835    $ 0.01   
                     

For the quarter ended May 30, 2009:

       

Basic loss per share

   $ (9,856   11,391,297    $ (0.87

Add effect of dilutive securities:

       

Options and restricted shares*

     —        —        —     
                     

Diluted loss per share

   $ (9,856   11,391,297    $ (0.87
                     

For the six months ended May 29, 2010:

       

Basic loss per share

   $ (1,575   11,428,616    $ (0.14

Add effect of dilutive securities:

       

Options and restricted shares*

     —        —        —     
                     

Diluted loss per share

   $ (1,575   11,428,616    $ (0.14
                     

For the six months ended May 30, 2009:

       

Basic loss per share

   $ (21,819   11,407,583    $ (1.91

Add effect of dilutive securities:

       

Options and restricted shares*

     —        —        —     
                     

Diluted loss per share

   $ (21,819   11,407,583    $ (1.91
                     

 

* Due to the net loss, the potentially dilutive securities would have been anti-dilutive and are therefore excluded.

Options to purchase approximately 1,048,000 and 1,204,000 shares of common stock at May 29, 2010 and May 30, 2009, respectively, were excluded from the computation as their effect is anti-dilutive either due to net losses or because the option exercise prices were below market value during the period.

14. Financial Instruments and Fair Value Measurements

Our financial instruments include cash and cash equivalents, accounts receivable, notes receivable, investment securities, cost and equity method investments, accounts payable, loan and lease guarantees, and long-term debt. Because of their short maturity, the carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value. Our cost and equity method investments generally involve entities for which it is not practical to determine fair values.

Our investments consist of our investment in the Fortress Value Recovery Fund I, LLC (“Fortress”, (formerly known as the DB Zwirn Special Opportunities Fund) formerly held as an investment within the Bassett

 

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BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED

MAY 29, 2010

(Dollars in thousands except share and per share data)

 

Industries Alternative Asset Fund LP (“Alternative Asset Fund”), which was dissolved effective December 31, 2009) with a value of $832 and a portfolio of marketable securities with a value of $14,148 at May 29, 2010. At November 28, 2009, our investments included our investment in the Alternative Asset Fund of $1,045 and $13,886 in our marketable securities portfolio. Collectively, these are included in investments in the accompanying condensed consolidated balance sheets.

Historically, our marketable securities have been held by two different money managers and consisted of a combination of equity and fixed income securities, including money market funds. During the second quarter of 2009, we liquidated our equity holdings with one of the managers and reinvested the proceeds in various money market funds, individual bonds and bond funds. During the first quarter of 2010, we liquidated the equity holdings with the other manager and reinvested those funds in money market accounts.

We classify our marketable securities as available-for-sale, which are reported at fair value. Unrealized holding gains and losses, net of the related income tax effect, on available-for-sale securities are excluded from income and are reported as other comprehensive income in stockholders’ equity. Realized gains and losses from securities classified as available-for-sale are included in income. We measure the fair value of our marketable securities in accordance with ASC Topic 820, Fair Value Measurements and Disclosures.

Although we have the ability to buy and sell the individual marketable securities, we are required to maintain a certain dollar amount in those brokerage accounts subject to the Securities Account Control Agreement as part of the revolving credit facility, see also Note 8.

As of May 29, 2010, available-for-sale securities consisted of the following:

 

     Cost
Basis
   Gross Unrealized    Market
Value
        Gains    Losses   

Money market shares

   $ 11,298    $ —      $ —      $ 11,298

Bond mutual fund shares

     989      154      —        1,143

Government agency obligations

     922      45      —        967

US Treasury obligations

     727      13      —        740
                           
   $ 13,936    $ 212    $ —      $ 14,148
                           

As of November 28, 2009, available-for-sale securities consisted of the following:

 

     Cost
Basis
   Gross Unrealized     Market
Value
        Gains    Losses    

Equity securities

   $ 5,318    $ 1,913    $ (21   $ 7,210

Money market shares

     3,891      —        —          3,891

Bond mutual fund shares

     984      202      —          1,186

Government agency obligations

     1,061      52        1,113

US Treasury obligations

     469      17      —          486
                            
   $ 11,723    $ 2,184    $ (21   $ 13,886
                            

 

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BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED

MAY 29, 2010

(Dollars in thousands except share and per share data)

 

The realized earnings from our marketable securities portfolio include realized gains and losses, based upon specific identification, and dividend and interest income. Realized earnings (losses) were $44 and $357 for the quarters ended May 29, 2010 and May 30, 2009, respectively, and $2,214 and $(794) for the six months ended May 29, 2010 and May 30, 2009, respectively. Realized earnings for the six months ended May 29, 2010 include $1,913 of gains and $21 of losses previously recorded in other comprehensive income. These amounts are recorded in other income (loss), net in our condensed consolidated statements of operations and retained earnings. Of the $1,702 in fixed income securities, $735 matures in less than five years with the remainder being long-term and maturing in greater than 20 years.

In accordance with ASC Topic 320, Investments—Debt and Equity Securities, we review our marketable securities to determine whether a decline in fair value of a security below the cost basis is other than temporary. Should the decline be considered other than temporary, we write down the cost basis of the security and include the loss in current earnings as opposed to an unrealized holding loss. Due to the market fluctuations during the last half of 2008 and the first quarter of 2009 many of our holdings sustained significant losses. Consequently, we recorded a loss of $1,255 for the quarter ended February 28, 2009 for impairments considered to be other than temporary. No losses for other than temporary impairments were recognized during the six months ended May 29, 2010.

The Company accounts for items measured at fair value in accordance with ASC Topic 820, Fair Value Measurements and Disclosures. ASC 820’s valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. ASC 820 classifies these inputs into the following hierarchy:

Level 1 Inputs—Quoted prices for identical instruments in active markets.

Level 2 Inputs—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 Inputs—Instruments with primarily unobservable value drivers.

Our investment in Fortress is valued at fair value primarily based on the net asset values which are determined by the fund manager.

In 2008, we requested that our general partner begin to liquidate all of our investments in the Alternative Asset Fund. During fiscal 2009, we received $19,258 for liquidations associated with various investments in the Fund. At November 28, 2009, the Alternative Asset Fund held only a $749 investment in Fortress, along with some remaining cash that was distributed in early 2010. Due to the level of the remaining assets in the Alternative Asset Fund, the Company and Private Advisors, L.L.C. dissolved the partnership effective December 31, 2009 and the Alternative Asset Fund’s remaining investment interest in Fortress was transferred to the Company.

Fortress is in the process of liquidating all of its underlying investments to wind down the fund. Once fully liquidated, which is not expected in the near term, we will be paid our pro rata share of the proceeds. We will continue to monitor the progress of the fund liquidation and adjust our valuation as necessary.

 

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BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED

MAY 29, 2010

(Dollars in thousands except share and per share data)

 

The fair values of our marketable securities and our investment in Fortress based on the level of inputs are summarized below:

 

     Level 1    Level 2    Level 3    Fair Value

Assets

           

Marketable securities

   $ 14,148    $ —      $ —      $ 14,148

Investment in Fortress

     —        —        832      832
                           

Total Assets

   $ 14,148    $ —      $ 832    $ 14,980
                           

The table below provides a reconciliation of all assets measured at fair value on a recurring basis which use Level 3 or significant unobservable inputs for the six months ended May 29, 2010.

 

     Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3 Inputs)
 
     Investment
in Fortress
   Investment
in Alternative
Asset Fund
 

Balance at November 28, 2009

   $ —      $ 1,045   

Total gains (losses) included in earnings related to change in underlying net assets

     83      (46

Transfer of investment

     749      (749

Redemptions

     —        (250

Transfers in and/or out of Level 3

     —        —     
               

Balance May 29, 2010

   $ 832    $ —     
               

The carrying values and approximate fair values of certain financial instruments as of May 29, 2010 and November 28, 2009 were as follows:

 

     May 29, 2010    November 28, 2009
     Carrying
value
   Fair
value
   Carrying
value
   Fair
value

Assets:

           

Cash and cash equivalents

   $ 13,093    13,093    $ 23,221    $ 23,221

Accounts receivable, net

     29,591    29,591      34,605      34,605

Notes receivable, net

     9,215    8,781      10,461      10,208

Investments

     14,980    14,980      14,931      14,931

Liabilities:

           

Accounts payable

   $ 18,255    18,255    $ 14,711    $ 14,711

Real estate notes payable

     14,248    13,749      21,346      20,784

Bank debt

     —      —        15,000      15,000

Lease/loan guarantee reserves

     3,190    3,190      3,366      3,366

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED

MAY 29, 2010

(Dollars in thousands except share and per share data)

 

15. Recent Accounting Pronouncements

In June 2009, the FASB issued authoritative guidance on the consolidation of VIEs, which became effective for our first quarter of fiscal 2010. This new guidance requires entities to perform a qualitative analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. The enterprise is required to assess, on an ongoing basis, whether it is a primary beneficiary or has an implicit responsibility to ensure that a variable interest entity operates as designed. This guidance changes the previous quantitative approach for determining the primary beneficiary to a qualitative approach based on which entity (a) has the power to direct activities of a variable interest entity that most significantly impact economic performance and (b) has the obligation to absorb losses or receive benefits that could be significant to the variable purpose entity. In addition, it requires enhanced disclosures that will provide investors with more transparent information about an enterprise’s involvement with a variable interest entity. We have adopted these provisions and there was no significant impact on our consolidated financial statements.

In December 2007 the FASB issued Statement on Financial Accounting Standards No. 141(R), “Business Combinations”, now codified primarily in ASC Topic 805. ASC 805 now requires that the acquisition method of accounting, instead of the purchase method, be applied to all business combinations and that an “acquirer” is identified in the process. The guidance requires that fair market value be used to recognize assets and assumed liabilities instead of the cost allocation method where the costs of an acquisition are allocated to individual assets based on their estimated fair values. Goodwill would be calculated as the excess purchase price over the fair value of the assets acquired; however, negative goodwill will be recognized immediately as a gain instead of being allocated to individual assets acquired. Costs of the acquisition will be recognized separately from the business combination. The end result is that the statement improves the comparability, relevance and completeness of assets acquired and liabilities assumed in a business combination. The guidance became effective for us beginning in fiscal 2010. See Note 10 regarding the application of ASC 805 to the acquisition of licensee stores during the three and six months ended May 29, 2010.

In October 2009, the FASB issued ASU No. 2009-13, “Multiple-Deliverable Revenue Arrangements”, (“ASU 2009-13”) and ASU No. 2009-14, “Certain Arrangements That Include Software Elements”, (“ASU 2009-14”). ASU 2009-13 requires entities to allocate revenues in the absence of vendor-specific objective evidence or third party evidence of selling price for deliverables using a selling price hierarchy associated with the relative selling price method. ASU 2009-14 removes tangible products from the scope of software revenue guidance and provides guidance on determining whether software deliverables in an arrangement that includes a tangible product are covered by the scope of the software revenue guidance. ASU 2009-13 and ASU 2009-14 should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. We do not expect that the adoption of ASU 2009-13 or ASU 2009-14 will have a material impact on our consolidated results of operations or financial condition.

In December 2009, the FASB issued ASU No. 2009-16, “Transfers and Servicing: Accounting for the Transfers of Financial Assets (Topic 860)” which amends the ASC to include SFAS No.166, “Accounting for Transfers of Financial Assets—an Amendment of FASB Statement No. 140”. SFAS No. 166 revised SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities—a Replacement of FASB Statement No. 125” requiring additional disclosures about transfers of financial assets, including securitization transactions, and any continuing exposure to the risks related to transferred financial

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED

MAY 29, 2010

(Dollars in thousands except share and per share data)

 

assets. It also eliminates the concept of a “qualifying special-purpose entity”, changes the requirements for derecognizing financial assets, and enhances disclosure requirements. ASU No. 2009-16 is effective prospectively, for annual periods beginning after November 15, 2009, and interim and annual periods thereafter. We do not expect the adoption of this guidance will have a material impact on our financial position or results of operations.

In January 2010, the FASB issued ASU No. 2010-01, “Equity Accounting for Distributions to Shareholders with Components of Stock and Cash (Topic 505)” which clarifies that the stock portion of a distribution to shareholders that allow them to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in earnings per share prospectively and is not a stock dividend. This update became effective for our first quarter of fiscal 2010. The adoption of ASU No. 2010-01 did not have an impact on our consolidated financial position or results of operations.

In January 2010, the FASB issued ASU No. 2010-02, “Consolidation Accounting and Reporting for Decreases in Ownership of a Subsidiary—a Scope Clarification (Topic 810)”. ASU 2010-02 clarifies Topic 810 implementation issues relating to a decrease in ownership of a subsidiary that is a business or non-profit activity. This amendment affects entities that have previously adopted Topic 810-10 (formally SFAS 160). This update became effective for our first quarter of fiscal 2010. The adoption of ASU No. 2010-02 did not have an impact on our consolidated financial position or results of operations.

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

In February 2010, the FASB issued ASU No. 2010-09, which updates the guidance in ASC Topic 855, Subsequent Events, to no longer require companies that file with the United States Securities and Exchange Commission to indicate the date through which they have analyzed subsequent events. This updated guidance became effective immediately upon issuance; therefore we have adopted it as of the first quarter of 2010.

 

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BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED

MAY 29, 2010

(Dollars in thousands except share and per share data)

 

16. Segment Information

We have strategically aligned our business into three reportable segments: Wholesale, Retail and Investments/Real Estate. The wholesale home furnishings segment is involved principally in the design, manufacture, sourcing, sale and distribution of furniture products to a network of Bassett stores (independently-owned stores, Company-owned retail stores and partnership licensees) and independent furniture retailers. Our wholesale segment includes our wood and upholstery operations as well as all corporate selling, general and administrative expenses.

Our retail segment consists of Company-owned stores. Our retail segment includes the revenues, expenses, assets and liabilities (including real estate) and capital expenditures directly related to these stores.

Our investments/real estate segment consists of our investments, distributions in excess of affiliate earnings (IHFC) and retail real estate related to licensee stores. Although this segment does not have operating earnings, income or loss from the segment is included in other income in our condensed consolidated statements of operations and retained earnings. Our equity investment in IHFC is not included in the identifiable assets of this segment since it has a negative book value and is therefore included in the long-term liabilities section of our condensed consolidated balance sheet. See Note 7 for a further discussion of IHFC.

Inter-company net sales elimination represents the elimination of wholesale sales to our Company-owned stores. Inter-company income elimination represents the embedded wholesale profit in the Company-owned store inventory that has not been realized. These profits will be recorded when merchandise is delivered to the end retail consumer.

 

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BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED

MAY 29, 2010

(Dollars in thousands except share and per share data)

 

The following table presents our segment information:

 

     Quarter Ended     Six Months Ended  
     May 29, 2010     May 30, 2009     May 29, 2010     May 30, 2009  

Net Sales

        

Wholesale

   $ 42,822      $ 45,013      $ 83,128      $ 92,960   

Retail

     30,466        25,660        57,503        49,403   

Inter-company elimination

     (15,443     (12,955     (29,895     (26,834
                                

Consolidated

   $ 57,845      $ 57,718      $ 110,736      $ 115,529   
                                

Income (loss) from Operations

        

Wholesale

   $ 1,453      $ (5,015   $ 488      $ (10,730

Retail

     (1,993     (2,166     (3,600     (5,030

Inter-company elimination

     234        250        (66     228   

Restructuring, asset impairment charges and unusual gains, net

     —          (1,388     —          (1,388

Lease exit costs

     —          (285     —          (285
                                

Consolidated

   $ (306   $ (8,604   $ (3,178   $ (17,205
                                

Depreciation and Amortization

        

Wholesale

   $ 467      $ 648      $ 929      $ 1,350   

Retail

     746        743        1,463        1,409   

Investments/real estate

     271        282        567        591   
                                

Consolidated

   $ 1,484      $ 1,673      $ 2,959      $ 3,350   
                                

Capital Expenditures

        

Wholesale

   $ 178      $ 122      $ 250      $ 236   

Retail

     840        2        1,253        477   
                                

Consolidated

   $ 1,018      $ 124      $ 1,503      $ 713   
                                
     As of
May 29, 2010
    As of
November 28, 2009
             

Identifiable Assets

        

Wholesale

   $ 88,736      $ 116,508       

Retail

     61,559        55,997       

Investments/real estate

     43,182        43,724       
                    

Consolidated

   $ 193,477      $ 216,229       
                    

 

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MAY 29, 2010

(Dollars in thousands except share and per share data)

 

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

The following discussion should be read along with the unaudited condensed consolidated financial statements included in this Form 10-Q, as well as the Company’s 2009 Annual Report on Form 10-K filed with the Securities and Exchange Commission, which provides a more thorough discussion of the Company’s products and services, industry outlook, and business trends.

Bassett Furniture Industries, Incorporated (together with its consolidated subsidiaries, “Bassett”, “we”, “our” or the “Company”), based in Bassett, Va., is a leading vertically integrated manufacturer, importer and retailer of high quality, mid-priced home furnishings. With more than 100 Bassett Home Furnishings and Bassett Furniture Direct stores, we have leveraged our strong brand name in furniture into a network of licensed and corporate stores that focus on providing consumers with a friendly environment for buying furniture and accessories. We created our store program in 1997 to provide a single source home furnishings retail store that provides a unique combination of stylish, quality furniture and accessories with a high level of customer service. The store features custom order furniture ready for delivery in less than 30 days, more than 1,000 upholstery fabrics, free in-home design visits, and perfectly coordinated decorating accessories. We believe that our capabilities in custom furniture have become unmatched in recent years. Our manufacturing team takes great pride in the breadth of their options, the precision of their craftsmanship, and the speed of their delivery. The selling philosophy in the stores is based on building strong long term relationships with each customer. Sales people are referred to as Design Consultants and are each trained to evaluate customer needs and ultimately solve their decorating problems.

In order to reach markets that cannot be effectively served by our retail store network, we also distribute our products through other multi-line furniture stores, many of which feature Bassett galleries or design centers. Bassettbaby® cribs and casegoods are sold through specialty stores and mass merchants. We believe this blended strategy provides us the greatest ability to effectively distribute our products throughout the United States and ultimately gain market share.

Our store network included 59 licensee-owned stores and 45 Company-owned and operated stores at May 29, 2010. During the six months ended May 29, 2010, eight licensee stores were acquired. We opened two additional stores in the second quarter of 2010, one new store in Virginia and the other a store in New Jersey that was closed in 2008 by a former licensee. We closed our Mt. Pleasant, SC store in March 2010 as the result of an eminent domain condemnation for which we have received full settlement from the state. We expect that two licensed stores will complete their conversions to multi-brand furniture stores during the third quarter of 2010. We do not have any real estate investments, lease obligations, or lease guarantee exposures with respect to these two stores. Other store closures are possible during the remainder of 2010 that could result in lease exit charges or increases in our lease and loan guarantee reserves.

The following table summarizes the changes in store count during the six months ended May 29, 2010:

 

     November 28,
2009
   Openings    Closed     Transfers     May 29,
2010

Licensee-owned stores

   68    —      (1   (8   59

Company-owned stores

   36    2    (1   8      45
                          

Total

   104    2    (2   —        104
                          

 

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MAY 29, 2010

(Dollars in thousands except share and per share data)

 

Our wholesale operations include an upholstery plant in Newton, North Carolina that produces a wide range of upholstered furniture. We believe that we are an industry leader with our quick-ship custom upholstery offerings. We also operate a custom dining manufacturing facility in Martinsville, Va. Most of our wood furniture and certain of our upholstery offerings are sourced from several foreign plants, primarily in China and Vietnam. We define imported product as fully finished product that is sourced internationally. For the first half of 2010 and 2009, approximately 52% of our wholesale sales were of imported product.

Overall conditions for our industry and our Company have been difficult over the past several years although we have seen some slight improvement during the first six months of 2010. Nevertheless, we have continued to face significant economic pressures as new housing starts remain down and consumers continue to be faced with general economic uncertainty fueled by continuing high unemployment and renewed volatility in the financial markets. In addition, severe winter weather across much of the continental United States during the first quarter of 2010, particularly on the east coast, has further depressed retail sales activity for the quarter. All of these factors have significantly limited the resumption of growth for “big ticket” consumer purchases such as furniture. Consequently, this has put pressure on certain of our dealers’ ability to generate adequate profits to fully pay us for the furniture we have sold to them. As a result, we incurred significantly increased bad debt and notes receivable valuation charges during 2009 as well as during the first half of 2010. For the first half of 2010, we recorded $3,830 in bad debt and notes receivable valuation charges compared to $11,741 for the first half of 2009. Although management will continue to work closely with our licensees to ensure the success of both the licensee and Bassett, further store closures are possible during the remainder of 2010 and beyond that could result in lease exit charges or increases in our lease and loan guarantee reserves. We also may increase the number of Company-owned stores during the remainder of 2010, through acquisitions of certain licensee-owned stores. During the first six months of 2010, we acquired a total of eight licensee stores in Maryland, Missouri, Illinois, New York, Alabama, Mississippi, and California.

Maintenance of a strong balance sheet is a stated management goal and is vital to our retail strategy. The store program entails key business risks, including the realization of receivables and the coverage of both direct and contingent liabilities primarily associated with retail real estate. We have established decision criteria and business disciplines aimed at minimizing potential losses from these risks.

Given the difficult and somewhat unprecedented environment, we have taken several important actions which have improved our results and liquidity. These include:

 

   

Aggressively working with certain licensees to take over or close those stores that are underperforming, resulting in reduced exposure in our accounts receivable.

 

   

Optimizing our inventory levels to improve working capital and cash flow while striving to attain satisfactory service levels to our retail distribution channels, including both Company-owned stores and licensees. Inventory reductions have added significantly to operating cash flow through the first quarter of 2010, and we have begun to increase our investment in imported product during the second quarter of 2010 in order to improve service levels. We expect to make an additional investment in inventory of $3 million to $5 million over the remainder of 2010.

 

   

Right-sizing our expense structure in our corporate retail segment, resulting in a reduction of selling, general and administrative expenses as a percentage of net sales after excluding the effect of newly-added retail stores.

 

   

Implementing cost containment measures in our wholesale segment which have reduced fixed overhead and SG&A expenses to improve our operating margins.

 

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(Dollars in thousands except share and per share data)

 

   

Suspending our quarterly dividend.

 

   

Delaying certain capital expenditures.

We will also continue to work diligently with our network of licensees to improve their operating results. With the existing and planned improvements in our retail program and our strong balance sheet, we believe we are well positioned not only to survive these turbulent times, but also to gain market share as some of our competitors exit the industry.

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

Results of Operations—Quarter and six months ended May 29, 2010 compared with quarter and six months ended May 30, 2009:

Net sales, gross profit, selling, general and administrative (SG&A) expense, and operating income (loss) were as follows for the periods ended May 29, 2010 and May 30, 2009:

 

     Quarter Ended     Six Months Ended  
     May 29, 2010     May 30, 2009     May 29, 2010     May 30, 2009  

Net sales

   $ 57,845      100.0   $ 57,718      100.0   $ 110,736      100.0   $ 115,529      100.0
                                                        

Gross profit

     28,437      49.2     25,033      43.4     54,181      48.9     49,176      42.6

SG&A

     27,628      47.8     26,115      45.2     53,529      48.3     52,967      45.8

Bad debt and notes receivable valuation charges

     1,115      1.9     5,849      10.2     3,830      3.5     11,741      10.2

Unusual charges

     —        0.0     1,673      2.9     —        0.0     1,673      1.5
                                                        

Loss from operations

   $ (306   -0.5   $ (8,604   -14.9   $ (3,178   -2.9   $ (17,205   -14.9
                                                        

On a consolidated basis, we reported net sales for the second quarter of 2010 of $57,845, an increase of $127, or 0.2% from sales levels attained in the second quarter of 2009. Sales for the six months ended May 29, 2010 were $110,736, a decrease of $4,793 or 4.1%. Refer to the quarterly and year-to-date analyses of results for each segment below for a discussion of the factors affecting net sales for each period. Consolidated gross profit margin increases over the prior year of 5.8 points and 6.3 points as a percentage of net sales for the three and six months ended May 29, 2010, respectively, were primarily attributable to improved margins on imported wood products and the retail segment’s increased share of the overall sales mix. Consolidated SG&A increases over the prior year of 2.6 points and 2.5 points as a percentage of sales for the three and six months ended May 29, 2010, respectively, are attributable to the increase in the number of retail stores. SG&A as a percentage of net sales remained stable in our wholesale segment and decreased for our comparable retail stores.

 

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MAY 29, 2010

(Dollars in thousands except share and per share data)

 

Unusual charges

The results for the quarter and six months ended May 30, 2009 included several restructuring and other non-cash items including asset impairment charges of $376 to write-off the remaining leasehold improvements for our Arlington, Texas and Alpharetta, Georgia stores, which ran inventory liquidation sales and closed during the third quarter of 2009. We also recorded a non-cash asset impairment charge of $258 to write-off the remaining leasehold improvements and a $285 lease exit charge associated with the closure of our retail office in Greensboro, North Carolina in May 2009. In addition, we recorded a $434 non-cash impairment charge to write-down the carrying value of our long-lived assets associated with a nonperforming retail location. Lastly, we recorded $320 in severance charges associated with the downsizing announced in March 2009.

Segment Information

We have strategically aligned our business into three reportable segments as described below:

Wholesale. The wholesale home furnishings segment is involved principally in the design, manufacture, sourcing, sale and distribution of furniture products to a network of Bassett stores (licensee-owned stores and Company-owned retail stores) and independent furniture retailers. Our wholesale segment includes our wood and upholstery operations as well as all corporate selling, general and administrative expenses, including those corporate expenses related to both Company- and licensee-owned stores. We eliminate the sales between our wholesale and retail segments as well as the imbedded profit in the retail inventory for the consolidated presentation in our financial statements.

Retail—Company-owned Stores. Our retail segment consists of Company-owned stores and includes the revenues, expenses, assets and liabilities (including real estate) and capital expenditures directly related to these stores.

Investments and Real Estate. Our investments and real estate segment consists of our investments in marketable securities, our investment in the Fortress Value Recovery Fund I, LLC (“Fortress”, (formerly known as the DB Zwirn Special Opportunities Fund) formerly held as an investment within the Bassett Industries Alternative Asset Fund LP (“Alternative Asset Fund”), equity investments in IHFC and Zenith, and retail real estate related to licensee stores. Although this segment does not have operating earnings, income from the segment is included in other income (loss), net, in our condensed consolidated statements of income and retained earnings.

In fiscal 2008, we requested our general partner in the Alternative Asset Fund, Private Advisors, L.L.C., to attempt to liquidate all of our investments in the fund. During fiscal 2009 and 2008, we received $19,258, and $23,250, respectively, for liquidations associated with various investments in the Alternative Asset Fund. As of November 28, 2009, the Alternative Asset Fund held only a $749 investment in Fortress, along with some remaining cash that was distributed in early 2010. Due to the level of the remaining assets in the Alternative Asset Fund, the Company and Private Advisors, L.L.C. dissolved the partnership effective December 31, 2009 and the Alternative Asset Fund’s remaining investment interest in Fortress was transferred to the Company.

 

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MAY 29, 2010

(Dollars in thousands except share and per share data)

 

The following is a discussion of operating results for our wholesale and retail segments:

Wholesale Segment

Results for the wholesale segment for the three and six months ended May 29, 2010 and May 30, 2009 are as follows:

 

     Quarter Ended     Six Months Ended  
     May 29, 2010     May 30, 2009     May 29, 2010     May 30, 2009  

Net sales

   $ 42,822    100.0   $ 45,013      100.0   $ 83,128    100.0   $ 92,960      100.0
                                                      

Gross profit

     13,895    32.4     12,823      28.5     26,741    32.2     26,012      28.0

SG&A

     11,383    26.6     11,989      26.6     22,489    27.1     25,001      26.9

Bad debt and notes receivable valuation charges

     1,059    2.5     5,849      13.0     3,764    4.5     11,741      12.6
                                                      

Income (loss) from operations

   $ 1,453    3.4   $ (5,015   -11.1   $ 488    0.6   $ (10,730   -11.5
                                                      

Quarterly Analysis of Results—Wholesale

Net sales for the wholesale segment were $42,822 for the second quarter of 2010 as compared to $45,013 for the second quarter of 2009, a decrease of 4.9%. While we have seen some slight improvement in demand through our retail distribution channels, wholesale shipments were adversely affected by delays in receiving imported product from certain of our overseas suppliers. Such delays resulted in a limited level of stock outages as we continue to manage inventory levels very closely. In an effort to mitigate the stock outages, we increased inventory levels by the end of the second quarter with respect to our imported goods. Approximately 49% of wholesale shipments during the second quarter of 2010 were imported products compared to approximately 51% for the second quarter of 2009. Gross margins for the wholesale segment were 32.4% for the second quarter of 2010 as compared to 28.5% for the second quarter of 2009. This increase is due to improved margins on the imported wood products as well as the closure of the fiberboard plant during the fourth quarter of 2009 which essentially operated at a breakeven gross profit during 2009. Wholesale SG&A, excluding bad debt and notes receivable valuation charges, decreased $606, or 5.1%, for the second quarter of 2010 as compared to 2009, due primarily to lower spending due to lower sales and continued cost cutting measures. We recorded $1,059 of bad debt and notes receivable valuation charges for the second quarter of 2010 as compared to $5,489 for the second quarter of 2009. This significant decrease in charges is primarily due to our efforts to work diligently with the licensees to control increases in accounts and notes receivable exposure. In addition, many of the distressed licensees for which significant bad debt and notes receivable valuation charges were required in 2009 have since been acquired by us and are now operated as company-owned stores.

Year-to-Date Analysis of Results—Wholesale

Net sales for the wholesale segment were $83,128 for the first half of 2010 as compared to $92,960 for the first half of 2009, a decrease of 10.6%. Wholesale shipments decreased in part due to the softer retail environment in late fiscal 2009 that impacted our shipping rates early in the first quarter. In addition, shipments were adversely affected by delays in receiving imported product from our overseas suppliers. Such delays resulted in a limited level of stock outages as we continue to manage inventory levels very closely. In an effort to mitigate the stock outages, we increased inventory levels by the end of the second quarter with respect to our

 

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MAY 29, 2010

(Dollars in thousands except share and per share data)

 

imported goods. Approximately 52% of wholesale shipments during the first half of 2010 and 2009 were imported products. Gross margins for the wholesale segment were 32.2% for the first half of 2010 as compared to 28.0% for the first half of 2009. This increase is due to improved margins on the imported wood and upholstery products as well as the closure of the fiberboard plant during the fourth quarter of 2009 which essentially operated at a breakeven gross profit during 2009. Wholesale SG&A, excluding bad debt and notes receivable valuation charges, declined $2,512, or 10%, for the first half of 2010 as compared to 2009, due primarily to lower spending due to lower sales and continued cost cutting measures. We recorded $3,764 of bad debt and notes receivable valuation charges for the first half of 2010 as compared to $11,741 for the first half of 2009. This significant decrease in charges is primarily due to our efforts to work diligently with the licensees to control increases in accounts and notes receivable exposure. In addition, many of the distressed licensees for which significant bad debt and notes receivable valuation charges were required in 2009 have since been acquired by us and are now run as company-owned stores.

 

      Quarter Ended     Six Months Ended  
     May 29, 2010     May 30, 2009     May 29, 2010     May 30, 2009  

Wholesale shipments by type:

        

Wood

   $ 18,011    42.0   $ 22,427    49.8   $ 36,865    44.3   $ 47,554    51.2

Upholstery

     24,305    56.8     22,211    49.4     45,378    54.6     44,203    47.5

Other

     506    1.2     375    0.8     885    1.1     1,203    1.3
                                                    

Total

   $ 42,822    100.0   $ 45,013    100.0   $ 83,128    100.0   $ 92,960    100.0
                                                    

The dollar value of wholesale backlog, representing orders received but not yet shipped to dealers and Company stores, was $16,595 at May 29, 2010 as compared with $8,818 at May 30, 2009. A significant portion of the $7,777 increase in wholesale backlog is attributable to delayed shipments resulting from stock outages.

Retail Segment—Company-Owned Retail Stores

Results for the retail segment for the three and six months ended May 29, 2010 and May 30, 2009 are as follows:

 

     Quarter Ended     Six Months Ended  
     May 29, 2010     May 30, 2009     May 29, 2010     May 30, 2009  

Net sales

   $ 30,466      100.0   $ 25,660      100.0   $ 57,503      100.0   $ 49,403      100.0
                                                        

Gross profit

     14,640      48.1     12,117      47.2     28,204      49.0     23,298      47.2

SG&A

     16,633      54.6     14,283      55.7     31,804      55.3     28,328      57.3
                                                        

Loss from operations

   $ (1,993   -6.5   $ (2,166   -8.4   $ (3,600   -6.3   $ (5,030   -10.2
                                                        

 

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MAY 29, 2010

(Dollars in thousands except share and per share data)

 

Results for comparable stores* (30 stores for the quarters ended May 29, 2010 and May 30, 2009; 27 stores for the six months ended May 29, 2010 and May 30, 2009) are as follows:

 

     Quarter Ended     Six Months Ended  
     May 29, 2010     May 30, 2009     May 29, 2010     May 30, 2009  

Net sales

   $ 22,872      100.0   $ 23,266      100.0   $ 40,630      100.0   $ 43,025      100.0
                                                        

Gross profit

     11,094      48.5     10,973      47.2     20,162      49.6     20,314      47.2

SG&A

     11,933      52.2     12,481      53.6     21,798      53.6     23,616      54.9
                                                        

Loss from operations

   $ (839   -3.7   $ (1,508   -6.4   $ (1,636   -4.0   $ (3,302   -7.7
                                                        

Results for all other stores* are as follows:

 

     Quarter Ended     Six Months Ended  
     May 29, 2010     May 30, 2009     May 29, 2010     May 30, 2009  

Net sales

   $ 7,594      100.0   $ 2,394      100.0   $ 16,873      100.0   $ 6,378      100.0
                                                        

Gross profit

     3,546      46.7     1,144      47.8     8,042      47.7     2,984      46.8

SG&A

     4,700      61.9     1,802      75.3     10,006      59.3     4,712      73.9
                                                        

Loss from operations

   $ (1,154   -15.2   $ (658   -27.5   $ (1,964   -11.6   $ (1,728   -27.1
                                                        

 

* “Comparable” stores include those locations that have been open and operated by the Company for all of each respective comparable period. “All other” stores include those which have been acquired, opened or closed during the twelve months ended May 29, 2010.

Quarterly Analysis of Results —Retail

Our Company-owned store network had sales of $30,466 in the second quarter of 2010 as compared to $25,660 in the second quarter of 2009, an increase of 18.7%. The increase was comprised of a $5,200 increase from the net addition of eleven stores since the end of the first quarter of 2009, partially offset by a $394, or 1.7% decrease in comparable store sales. Deliveries to customers were adversely affected during the second quarter of 2010 by stock outages at the wholesale level due to delays in receiving imported product from our overseas suppliers, partially offset by deliveries from a strong order backlog carried over into the second quarter from February 2010.

While we do not recognize sales until goods are delivered to the customer, we track written sales (the dollar value of sales orders taken, rather than delivered) as a key store performance indicator. Written sales for comparable stores during the second quarter of 2010 and 2009 were $21,268 and $21,189, respectively, representing a slight increase.

Gross margins for the quarter increased 0.9 percentage points compared to the second quarter of 2009 due to improved pricing and promotional strategies and improved clearance margins. SG&A increased $2,350 from the second quarter of 2009, comprised of an increase of $2,898 resulting from the net addition of retail stores, partially offset by a decline of $548 at comparable stores due to continued cost containment efforts during the quarter. On a comparable stores basis, SG&A decreased 1.4 percentage points as a percentage of sales for the second quarter of 2010 as compared with the comparable 2009 period. As a result, operating losses for the

 

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comparable stores were reduced by 44.4% to $839. In non-comparable stores, SG&A as a percentage of sales decreased 13.4 percentage points as compared to the second quarter of 2009 primarily because of larger sales backlogs acquired in the 2010 store purchases as compared with those acquired in the second quarter of 2009, resulting in a faster contribution to sales from those stores acquired in the second quarter of 2010.

Year-to-Date Analysis of Results—Retail

Our Company-owned stores had sales of $57,503 in the first half of 2010 as compared to $49,403 in the first half of 2009, an increase of 16.4%. The increase was comprised of a $10,495 increase from the net addition of fourteen stores since the end of fiscal 2008, partially offset by a $2,395 decrease in comparable store sales of 5.6%. Deliveries to customers were adversely affected during the first half of 2010 by stock outages at the wholesale level due to delays in receiving imported product from certain overseas suppliers, by a weak order backlog coming into the year due to a soft retail environment late in fiscal 2009, and severe winter weather in the eastern United States. Written sales for comparable stores during the first half of 2010 and 2009 were $40,572 and $40,818, respectively, representing a 0.6% decrease.

Gross margins for the first half of 2010 increased 1.8 percentage points compared to the first half of 2009 due to improved pricing and promotional strategies and improved clearance margins. SG&A increased $3,476 from the first half of 2009, comprised of an increase of $5,294 resulting from the net addition of retail stores, partially offset by a decline of $1,818 at comparable stores due to lower sales levels and continued cost containment efforts. On a comparable store basis, SG&A decreased 1.3 percentage points as a percentage of sales for the first half of 2010 as compared with the comparable 2009 period, and our operating loss was reduced by 50.5% to $1,636. In non-comparable stores, SG&A decreased 14.6 percentage points as a percentage of sales from the first half of 2009 primarily because of larger sales backlogs acquired in the 2010 store purchases as compared with those acquired in the first half of 2009, resulting in a faster contribution to sales from those stores acquired in the first half of 2010.

The dollar value of our retail backlog, representing orders received but not yet shipped to customers, was $13,222, or an average of $294 per open store, at May 29, 2010 as compared with $10,483, or an average of $276 per open store at May 30, 2009. A significant portion of the $2,739 increase in retail backlog is attributable to the addition of new stores along with delayed shipments resulting from stock outages.

Our retail segment includes the expenses of retail real estate utilized by Company-owned retail stores. Rental income and expenses from our properties utilized by independent licensees and partnership licensees are included in our investment and real estate segment.

Investment and Real Estate Segment and Other Items Affecting Net Loss

Our investments and real estate segment consists of our investments (marketable securities and Fortress (formerly a part of the Alternative Asset Fund)), distributions in excess of affiliate earnings and retail real estate related to licensee-owned stores. Although this segment does not have operating earnings, income (loss) from the segment is included in other income (loss), net in our condensed consolidated statements of operations and retained earnings. Our equity investment in IHFC is not included in the identifiable assets of this segment since it has a negative book value and is therefore included in the long term liabilities section of our condensed consolidated balance sheet.

 

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(Dollars in thousands except share and per share data)

 

Other income and expense items for the quarter and six months ended May 29, 2010 and May 30, 2009, are as follows:

 

     Quarter Ended     Six Months Ended  
     May 29, 2010     May 30, 2009     May 29, 2010     May 30, 2009  

Income (loss) from Alternative Asset Fund

   $ —        $ 118      $ —        $ (1,074

Income (loss) from marketable securities

     44        358        2,214        (794

Income from unconsolidated affiliated companies, net

     1,299        1,554        2,167        2,409   

Interest expense

     (718     (930     (1,628     (1,883

Loan and lease guarantee expense

     (124     (1,448     (916     (1,874

Real estate expense, net

     (110     (209     (237     (510

Other

     80        (630     99        (758
                                

Other income (loss), net

   $ 471      $ (1,187   $ 1,699      $ (4,484
                                

Historically, our marketable securities have been held by two different money managers and consisted of a combination of equity and fixed income securities, including money market funds. During the second quarter of 2009, we liquidated our equity holdings with one of the managers and reinvested the proceeds in various money market funds, individual bonds and bond funds. During the first quarter of 2010, we liquidated the equity holdings with the other manager and reinvested those funds in money market accounts. As a result, we recognized gains of $2,214 during the six months ended May 29, 2010, which included $1,913 of gains and $21 of losses previously recorded in other comprehensive income.

We review our marketable securities to determine whether a decline in fair value of a security below the cost basis is other than temporary. Should the decline be considered other than temporary, we write down the cost basis of the security and include the loss in current earnings as opposed to recording an unrealized holding loss. Due to the continued decline in the financial markets during the first quarter of 2009, many of our holdings sustained significant losses. Consequently, we recorded $1,255 in losses in our consolidated statement of operations for the quarter ended February 28, 2009. No losses for other than temporary impairments were recognized during the six months ended May 29, 2010.

Income from unconsolidated affiliated companies, net includes income from our investment in IHFC as well as income from investment in Zenith. We recognized income from IHFC and Zenith as follows:

 

     Quarter ended    Six Months ended
     May 29, 2010    May 30, 2009    May 29, 2010    May 30, 2009

IHFC

   $ 1,250    $ 1,413    $ 2,136    $ 2,208

Zenith

     49      141      31      201

Loan and lease guarantee expense consists of adjustments to our reserves for the net amount of our estimated losses on loan and lease guarantees that we have entered into on behalf of our licensees. We recognized expense of $124 and $916, respectively, for the quarter and six months ended May 29, 2010 compared to expense of $1,448 and $1,874, respectively, for the comparable 2009 periods to reflect the additional risk that we may have to assume the underlying obligations with respect to our guarantees.

 

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(Dollars in thousands except share and per share data)

 

Income taxes

We calculate an anticipated effective tax rate for the year based on our annual estimates of pretax income or loss and use that effective tax rate to record our year-to-date income tax provision. Any change in annual projections of pretax income or loss could have a significant impact on our effective tax rate for the respective quarter. During the fourth quarter of 2008, we established a valuation allowance against substantially all of our deferred tax assets as we were in a cumulative loss position for the preceding three years, which is considered significant negative evidence as to whether our deferred tax assets will be realized. For the six months ended May 29, 2010 and the three and six months ended May 30, 2009, no tax benefits on the losses generated were recorded since we remained in a cumulative loss position. In addition, no general tax provision was made for the quarter ended May 29, 2010 as the pre-tax profit for that period can be offset against existing net operating loss carryforwards, and we do not expect to generate taxable income for the full year. However, tax provisions of $48 and $96 were recorded for the three and six months ended May 29, 2010, respectively, and $65 and $130 for the three and six months ended May 30, 2009, respectively, related to the accrual of income taxes to be paid in certain states and penalties and interest associated with certain unrecognized tax benefits.

Liquidity and Capital Resources

We are committed to maintaining a strong balance sheet in order to weather the current difficult industry conditions, to allow us to take advantage of opportunities as market conditions improve, and to execute our long-term retail growth strategies.

Due to the continued housing slump and deterioration in the major financial markets and the overall recessionary economic environment, consumer spending has decreased, resulting in significant financial losses for us and damaging the ability of certain of our licensees to generate sufficient cash flow in their businesses. During fiscal 2009, we implemented measures to reduce operating expenses and improve working capital to enhance our cash flow.

Operating cash flow for the current and preceding four fiscal quarters is summarized as follows:

 

2nd quarter 2010

   $ 1,843

1st quarter 2010

     6,671

4th quarter 2009

     6,064

3rd quarter 2009

     944

2nd quarter 2009

     2,296

Cash Flows

We generated $1,843 in operating cash flow during the second quarter of 2010, as compared to $2,296 operating cash flow during the second quarter of 2009, bringing our total cash flow from operations for the first half of 2010 to $8,514, compared with cash used in operating activities of $2,760 for the first half of 2009. Operating cash flow during the second quarter of 2010 declined $4,828 from the first quarter of 2010 in part due to our initiative to replenish our inventory of imported goods to remedy stock outages experienced during the first half of 2010. In addition, the stock outages we experienced had a negative impact on cash collections from our licensees during the second quarter which also contributed to the decline in operating cash flow. We expect a further increase of $3 million to $5 million in import inventory during the remainder of 2010 to improve our service levels to our customers, which should in turn result in improved shipments to and collections from our

 

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customers to fund the additional inventory. The improvement in operating cash flow of $11,274 over the first half of 2009 is the result of continuing cost containment efforts initiated in 2009 as well as improved working capital management, which included significant reductions in inventory levels during 2009 and continuing into 2010.

Our overall cash position decreased for the six months ended May 29, 2010 by $10,128, primarily due to debt repayments of $22,653, partially offset by our operational cash flow of $8,514 and cash flows from investing activities of $3,940. Cash used in financing activities during the first half of 2010 included the repayment of the entire $15,000 outstanding balance under our revolving credit facility, the repayment of the $3,203 mortgage on the Mt. Pleasant, SC property, the repayment of the $2,380 balance on a mortgage which matured on March 1, 2010, principal payments of $1,075 in connection with the extension of two mortgages in December of 2009, plus other regularly scheduled payments on our other mortgages and notes totaling $995, partially offset by proceeds of $71 from the issuance of stock through our Employee Stock Purchase Plan. Cash provided by investing activities of $3,940 during the first half of 2010 included proceeds of $4,175 from the eminent domain settlement on our Mt. Pleasant, SC property and $937 from the resumption of dividend payments by IHFC, partially offset by capital expenditures of $1,503, primarily related to the opening of two company stores. In addition to the $13,093 of cash on-hand, we have investments of $14,980 consisting of $14,148 in bond and money market funds and individual debt securities and $832 in Fortress. While IHFC resumed the payment of dividends in the second quarter of 2010, it is likely that the level and frequency of dividends received from our equity investment in IHFC during the remainder of 2010 will be less than in prior years as IHFC continues to conserve cash in anticipation of completing a debt refinancing by October 31, 2010. We do not believe that this will be materially detrimental to our overall liquidity. With the current level of cash on-hand coupled with the investment holdings and availability on the revolver, we believe we have sufficient liquidity to fund operations for the foreseeable future.

Receivables and Inventory

Cash collections on our accounts and notes receivable have a significant impact on our overall liquidity. While our cash flow from operations during fiscal 2009 was adversely affected by an increase in accounts receivable before reserves due to the continued difficult environment at retail resulting in lower cash collections, this trend eased considerably during the first half of 2010, during which time our management of receivables resulted in a positive contribution to our operating cash flow.

Our percentage of accounts receivable that are over 90 days past due has decreased slightly from approximately 26% at November 28, 2009 to approximately 22% at May 29, 2010. We recorded $3,830 of bad debt and notes receivable valuation charges during the first half of 2010 as compared to $11,741 during the first half of 2009. This significant decrease in charges is primarily due to the Company working diligently with the licensees to better manage accounts and notes receivable exposure.

 

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In response to slow collections from certain of our licensees, those licensees have been placed on a temporary “cash before delivery” program for current orders that is designed to prevent any additional increase in the accounts receivable exposure. We expect the rate of cash collections to increase when the recessionary environment begins to subside such that our total receivables will begin to decrease. The following table reflects our accounts receivable and notes receivable and related bad debt reserves:

 

     May 29, 2010     November 28, 2009  

Gross accounts receivable

   $ 37,835      $ 45,362   

Allowance for doubtful accounts

     (8,244     (10,757
                

Net accounts receivable

   $ 29,591      $ 34,605   
                

Gross notes receivable

   $ 16,793      $ 19,411   

Allowance for doubtful accounts and discounts on notes receivable

     (7,578     (8,950
                

Net notes receivable

   $ 9,215      $ 10,461   
                

Our accounts and notes receivable reserve and notes discount activity for the six months ended May 29, 2010 is as follows:

 

     Accounts
Receivable
    Notes
Receivable
    Total  

Balance at November 28, 2009

   $ 10,757      $ 8,950      $ 19,707   

Bad debt and note valuation charges

     2,822        1,008        3,830   

Write-offs and other deductions

     (5,335     (2,331     (7,666

Discount amortization

     —          (49     (49
                        

Balance at May 29, 2010

   $ 8,244      $ 7,578      $ 15,822   
                        

Our licensee review committee (LRC) consists of our CEO, CAO, Senior VP of Retail, VP of Licensed Retail, and Corporate Director of Credit. The LRC meets frequently to review licensee performance, typically reviewing a wide-range of licensee related issues, including licensee capitalization, projected operating performance, the viability of the market in which the licensee operates and the licensee’s operating history, including our cash receipts from the licensee and its sales. Should a licensee have substantial past due amounts due to us, but is otherwise considered viable and likely to continue as a going concern, the committee has, in the past, decided to move all or a portion of the licensee’s past due accounts receivable to a note receivable. We believed that the note receivable allowed the licensee to focus on keeping current and future amounts current, while continuing to meet its financial obligations to us. Due to continued liquidity issues with certain of our licensees, we no longer believe this to be a prudent strategy and do not plan to convert additional past due receivables into long-term interest bearing notes in the foreseeable future.

Our accounts and notes receivable generally are secured by the filing of security statements in accordance with the Uniform Commercial Code and/or real estate owned by the maker or a guarantor of the note and in some cases, personal guarantees by our licensees. While we have occasionally found it necessary to foreclose on the property or take legal action to satisfy the respective receivable, our practice has generally been to work with the store owner to run a going out of business sale and use any proceeds to fund the remaining receivable. Our success with these events has varied. However, typically the amounts recovered have not been materially

 

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different from the carrying amount of the receivable. Consequently, we generally have not been required to record significant bad debt expenses upon the conclusion of the event.

Our investment in inventory affects our liquidity in several different ways. First, cash paid for raw materials, labor, and factory overhead for the manufacture or assembly of our domestic inventories is typically paid out well in advance of receiving cash from the sale of these inventories. Payments for our imported inventories are funded much further in advance of receiving cash from the sale of these inventories as compared to our domestically manufactured or assembled inventories. The length of our import supply chain necessitates complex forecasting of future demand levels and is highly judgmental. In economic downturns, the speed at which we can respond to decreasing demand is slowed, as we may have imported inventory in shipment or being manufactured at any given time. In addition, we may also have inventory commitments under purchase orders that have not begun the manufacturing process. Consequently, as inventories build temporarily during downturns or as we near new product roll-outs, our liquidity is reduced as we have more cash invested in our products. Second, the availability under our revolving credit facility is impacted by changes in our inventory balances. Lastly, if we fail to respond to changes in consumer tastes quickly enough, inventories may build and decrease our liquidity.

Our inventories consist of the following:

 

     May 29, 2010     November 28, 2009  

Wholesale finished goods

   $ 18,875      $ 19,519   

Work in process

     211        199   

Raw materials and supplies

     4,821        6,299   

Retail merchandise

     18,679        15,386   
                

Total inventories on first-in, first-out method

     42,586        41,403   

LIFO adjustment

     (6,440     (6,161

Reserve for excess and obsolete inventory

     (1,865     (1,854
                
   $ 34,281      $ 33,388   
                

We estimate an inventory reserve for excess quantities and obsolete items based on specific identification and historical write-offs, taking into account future demand, market conditions and the respective valuations at LIFO. The need for these reserves is primarily driven by the normal product life cycle. As products mature and sales volumes decline, we rationalize our product offerings to respond to consumer tastes and keep our product lines fresh. If actual demand or market conditions in the future are less favorable than those estimated, additional inventory write-downs may be required. In determining reserves, we calculate separate reserves on our wholesale and retail inventories. Our wholesale inventories tend to carry the majority of the reserves for excess quantities and obsolete inventory due to the nature of our distribution model. These wholesale reserves primarily represent design and/or style obsolescence. Typically, product is not shipped to our retail warehouses until a consumer has ordered and paid a deposit for the product. We do not typically hold retail inventory for stock purposes. Consequently, floor sample inventory and inventory for delivery to customers account for the majority of our inventory at retail. Retail reserves are based on accessory and clearance floor sample inventory in our stores and any inventory that is not associated with a specific customer order in our retail warehouses.

 

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Activity in the reserves for excess quantities and obsolete inventory by segment are as follows:

 

     Wholesale Segment     Retail Segment     Total  

Balance, November 28, 2009

   $ 1,465      $ 389      $ 1,854   

Additions charged to expense

     600        70        670   

Write-offs

     (552     (107     (659
                        

Balance, May 29, 2010

   $ 1,513      $ 352      $ 1,865   
                        

Our estimates and assumptions have been reasonably accurate in the past. We have not made any significant changes to our methodology for determining inventory reserves in the first half of 2010 and do not anticipate that our methodology is reasonably likely to change in the future. A plus or minus 10% change in our inventory reserves would not have been material to our financial statements for the periods presented.

In recent years and continuing through the first quarter of fiscal 2009, we have returned significant amounts of capital to our shareholders in the form of dividends and share repurchases, the funding for which have been primarily from the orderly liquidation of our Alternative Asset Fund investment and net liquidations of our marketable securities portfolio. However, due to unprecedented turmoil in the financial markets, further erosion of home furnishings sales, and general uncertainty regarding the depths to which current economic conditions could worsen, the Board of Directors suspended regular quarterly dividends commencing with the second quarter of 2009. Cash dividends paid for the first quarter of 2009 were $1,142, and $75 was paid for the repurchase of shares during 2009.

During 2009 we received $19,258 for the liquidation of our investments in Styx Partners, L.P. and HBK Fund. L.P., both of which were part of the Alternative Asset Fund. Due to the level of the remaining assets in the Alternative Asset Fund, we dissolved our partnership with Private Advisors, L.L.C. effective December 31, 2009, and the Fund’s remaining investment interest in Fortress was transferred to us along with a cash distribution of $250. We do not expect the liquidation of our interest in Fortress to be accomplished in the near term.

During the second quarter of 2010 we repaid the entire $15,000 previously outstanding on our revolving credit facility, resulting in $20,123 of availability at May 29, 2010 after deducting amounts for outstanding letters of credit and guarantees under the licensee loan program. The revolving credit facility contains, among other provisions, certain financial covenants including a minimum required level of Tangible Net Worth, as defined in the credit agreement. On October 6, 2009, we amended the facility resulting in a decrease in the total facility from $45,000 to $30,000, an adjustment in the variable interest rate to LIBOR plus 2.75% with a 4.25% minimum rate (4.25% on May 29, 2010 and November 28, 2009) and a reset of the Tangible Net Worth requirement at a minimum of $95,000 for fiscal 2009 and $90,000 for fiscal 2010. At May 29, 2010, our Tangible Net Worth was $107,004. Borrowings under the facility, which matures on November 30, 2010, are secured by a pledge of certain marketable securities and substantially all of our receivables and inventories. In addition, to the extent the value of the marketable securities falls below $16,000, our Borrowing Base, as defined, is decreased by 125% of the difference between $16,000 and the actual value of those securities. At May 29, 2010, the value of our marketable securities portfolio was $14,148. We have initiated discussions with our bank regarding the amendment and extension of the facility beyond its current maturity. While there can be no assurance that these discussions will result in a favorable outcome, we expect to have an amended and extended facility in place prior to November 30, 2010.

 

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Three mortgages on our real estate totaling $6,881 will mature during the twelve month period following May 29, 2010. We expect to satisfy these obligations through a combination of refinancing, borrowing from our revolving credit facility, and operating cash flow. However, there can be no assurance that any of these strategies will be successful.

Critical Accounting Policies and Estimates

There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, included in our 10-K for the fiscal year ended November 28, 2009, except as follows:

Business Combinations—Effective as of the beginning of our first fiscal quarter of 2010, we have adopted the provisions of Statement on Financial Accounting Standards No. 141(R), “Business Combinations”, now codified primarily in ASC Topic 805. ASC 805 now requires that the acquisition method of accounting, instead of the purchase method, be applied to all business combinations and that an “acquirer” is identified in the process. The guidance requires that fair market value be used to recognize assets and assumed liabilities instead of the cost allocation method where the costs of an acquisition are allocated to individual assets based on their estimated fair values. Goodwill would be calculated as the excess purchase price over the fair value of the assets acquired; however, negative goodwill will be recognized immediately as a gain instead of being allocated to individual assets acquired. Costs of the acquisition will be recognized separately from the business combination. Our application of the new guidance in ASC 805 is expected to be primarily associated with the acquisition of licensee stores. In applying ASC 805, we will identify all pre-existing relationships with a licensee for the purpose of recognizing any gains or losses associated with the settlement of those relationships before accounting for the effects of the business combination. The most common relationship settlement in a licensee acquisition will be the settlement of receivables in exchange for certain assets, and the assumption of lease or loan obligations subject to our guarantees. Once the effects of these settlements have been accounted for, goodwill will be recognized to the extent, if any, that the fair value of the remaining consideration given exceeds the fair value of the net assets acquired. For the purposes of determining the gain or loss on the settlement of pre-existing relationships and for determining goodwill under the acquisition method, we will utilize fair value measurements for assets received, liabilities assumed, and consideration given. In a licensee store acquisition, the assets typically assumed will include inventory and leasehold improvements and other property and equipment, with net liabilities primarily consisting of customer deposits and other accrued expenses. Acquired inventory is valued at expected retail sales price less an allowance for direct selling costs and profit thereon. Acquired fixed assets are valued based upon our estimate of replacement cost less an allowance for age and condition at the time of acquisition. Customer deposits and accrued expenses are expected to be settled at face value within a short period following acquisition; therefore face value is assumed to approximate fair value. The inputs into these fair value calculations reflect our market assumptions and are not observable. Consequently, the inputs are considered to be Level 3 as specified in the fair value hierarchy in ASC Topic 820, Fair Value Measurements and Disclosures.

Off-Balance Sheet Arrangements

We utilize stand-by letters of credit in the procurement of certain goods in the normal course of business. We lease land and buildings that are primarily used in the operation of both Company-owned and licensee stores. We have guaranteed certain lease obligations of licensee operators of the stores, as part of our retail expansion strategy. We also have guaranteed loans of certain of our dealers to finance initial inventory packages for these stores. See Note 11 to our condensed consolidated financial statements for further discussion of operating leases, lease guarantees and loan guarantees, including descriptions of the terms of such commitments and methods used to mitigate risks associated with these arrangements.

 

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Contingencies

We are involved in various legal and environmental matters, which arise in the normal course of business. Although the final outcome of these matters cannot be determined, based on the facts presently known, it is our opinion that the final resolution of these matters will not have a material adverse effect on our financial position or future results of operations.

 

Item 3. Quantitative and Qualitative Disclosure About Market Risk:

We are exposed to market risk from increases in interest rates on our revolving credit facility. The outstanding borrowings under the credit facility bear interest at a variable rate based upon LIBOR. The interest cost of the credit facility is affected by changes in short-term interest rates and increases in those rates can adversely affect our results of operations.

We are exposed to market risk from changes in the value of foreign currencies. Substantially all of our imports purchased outside of North America are denominated in U.S. dollars. Therefore, we believe that gains or losses resulting from changes in the value of foreign currencies relating to foreign purchases not denominated in U.S. dollars will not be material to our results from operations in fiscal 2010.

We are exposed to market risk from changes in the cost of raw materials used in our manufacturing processes, principally wood, woven fabric, and foam products. A recovery in home construction could result in increases in wood and fabric costs from current levels, and the cost of foam products, which are petroleum-based, are sensitive to changes in the price of oil.

We have potential exposure to market risk related to the current weakness in the commercial real estate market. Our retail real estate holdings of $28,203 for licensee-operated stores as well as our holdings of $19,029 for Company-owned stores at May 29, 2010 could suffer significant impairment in value if we are forced to close additional stores and sell or lease the related properties in the current market. Additionally, if we are required to assume responsibility for payment under the $6,694 of lease obligations we have guaranteed on behalf of licensees as of May 29, 2010, we may not be able to secure sufficient sublease income in the current market to offset the payments required under the guarantees.

 

Item 4. Controls and Procedures:

The Company’s principal executive officer and principal accounting officer have evaluated the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon their evaluation, the principal executive officer and principal accounting officer concluded that the Company’s disclosure controls and procedures are effective at a reasonable assurance level. There has been no change in the Company’s internal control over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Safe-harbor, forward-looking statements:

The discussion in items 2 and 3 above contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations and business of Bassett Furniture Industries, Incorporated and subsidiaries. Such forward-looking statements are

 

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PART I—FINANCIAL INFORMATION—CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

MAY 29, 2010

(Dollars in thousands except share and per share data)

 

identified by use of forward-looking words such as “anticipates”, “believes”, “plans”, “estimates”, “expects”, “aimed” and “intends” or words or phrases of similar expression. These forward-looking statements involve certain risks and uncertainties. No assurance can be given that any such matters will be realized. Important factors that could cause actual results to differ materially from those contemplated by such forward-looking statements are listed in our Annual Report on Form 10-K for fiscal 2009 and include:

 

   

competitive conditions in the home furnishings industry

 

   

general economic conditions

 

   

overall retail traffic levels and consumer demand for home furnishings

 

   

ability of our customers and consumers to obtain credit

 

   

Bassett store openings

 

   

store closings and the profitability of the stores (independent licensees and Company-owned retail stores)

 

   

ability to implement our Company-owned retail strategies and realize the benefits from such strategies as they are implemented

 

   

fluctuations in the cost and availability of raw materials, labor and sourced products (including fabrics from troubled suppliers)

 

   

results of marketing and advertising campaigns

 

   

information and technology advances

 

   

ability to execute global sourcing strategies

 

   

performance of our marketable securities portfolio and our investment in Fortress

 

   

delays or difficulties in converting some of our non-operating assets to cash

 

   

future tax legislation, or regulatory or judicial positions

 

   

ability to efficiently manage the import supply chain to minimize business interruption

 

   

effects of profit improvement initiatives in our domestic wood operations

 

   

continued profitability of our unconsolidated affiliated companies, particularly IHFC and its ability to pay dividends

 

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PART II—OTHER INFORMATION

BASSETT FURNITURE INDUSTRIES INCORPORATED AND SUBSIDIARIES

May 29, 2010

 

Item 1. Legal Proceedings

None.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 6. Exhibits

 

a. Exhibits:

 

     Exhibit 3a—Articles of Incorporation as amended are incorporated herein by reference to the Exhibit to Form 10-Q for the fiscal quarter ended February 28, 1994.

 

     Exhibit 3b—By-laws as amended are incorporated herein by reference to Exhibit 3 to Form 8-K filed on December 21, 2004.

 

     Exhibit 4—Second Amendment and Waiver to Third Amended and Restated Credit Agreement and Omnibus Amendment to Guaranty and Note Purchase Agreements is incorporated herein by reference to Form 10-Q for the fiscal quarter ended August 29, 2009.

 

     Exhibit 31a—Chief Executive Officer’s certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

     Exhibit 31b—Chief Accounting Officer’s certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

     Exhibit 32a—Chief Executive Officer’s certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

     Exhibit 32b—Chief Accounting Officer’s certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

BASSETT FURNITURE INDUSTRIES, INCORPORATED

 

/s/    ROBERT H. SPILMAN, JR.      

Robert H. Spilman, Jr., President and

Chief Executive Officer

July 8, 2010

/s/    J. MICHAEL DANIEL      

J. Michael Daniel, Vice President and

Chief Accounting Officer

July 8, 2010

 

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