ITEM 1. BUSINESS (dollar amounts in thousands except per share data)
GENERAL DEVELOPMENT OF BUSINESS
Bassett Furniture Industries, Incorporated was incorporated under the laws of the Commonwealth of Virginia in 1930. The executive offices are located in Bassett, Virginia.
During 1997, the Company commenced the restructuring of certain of its operations and recorded restructuring and impaired asset charges of $20,646. The restructuring plan is the result of management's decision to focus on its core Bassett product line and efforts to improve operating efficiencies. The principal actions of the plan include the closure or sale of fourteen manufacturing facilities, elimination of three product lines (National/Mt. Airy, Impact and veneer production) and the severance of approximately 1,000 employees. Refer to Note J of the Consolidated Financial Statements included in the Annual Report for a detail of restructuring activity for 1997 and 1998 and refer to the Management Discussion and Analysis section of the annual report for additional discussion on this topic.
There have been no other material changes in the mode of conducting business in the fiscal year beginning December 1, 1997.
INDUSTRY SEGMENT
In accordance with the instructions for this item, Bassett Furniture Industries, Incorporated and its subsidiaries, all of which are wholly-owned (Company), is deemed to have been engaged in only one business segment, manufacture and sale of household furniture, for the three years ended November 28, 1998.
DESCRIPTION OF BUSINESS
The Company manufactures and sells a full line of furniture for the home, including bedroom and dining suites and accent pieces; occasional tables, wall and entertainment units; home office systems and computer work stations; upholstered sofas, chairs and love seats (motion and stationary); recliners; and mattresses and box springs. The Company's products are distributed through a large number of retailers, principally in the United States. The retailers selling the Company's products include mass merchandisers, department stores, independent furniture stores, chain furniture stores, proprietary retail outlets called Bassett Furniture Direct, and Bassett Gallery stores, decorator showrooms, warehouse showrooms, specialty stores and rent-to-own stores.
The Company's significant product lines are: wood, upholstery and bedding, which accounted for 60%, 30% and 10% of net sales during 1998, respectively.
Raw materials used by the Company are generally available from numerous sources and are obtained principally from domestic sources. The Company has not experienced significant raw materials cost pressures in 1998.
The Company's trademark "Bassett" and the names of its marketing divisions and product collections are significant to the conduct of its business. This importance is due to consumer recognition of the names and identification with the Company's broad range of products. The Company owns certain patents and licenses that are important in the conduct of the Company's business.
The furniture industry in which the Company competes is not considered to be a seasonal industry. There are no special practices in the furniture industry, or applicable to the Company, that would have a significant effect on working capital items.
Sales to one customer (J. C. Penney Company) amounted to approximately 15% of gross sales in 1998, 1997 and 1996. The Company's backlog of orders believed to be firm was $35,000 at November 28,1998 and $43,000 at November 30, 1997. It is expected that the November 28, 1998 backlog will be filled within the 1999 fiscal year.
The furniture industry is very competitive and there are a large number of manufacturers both within the United States and offshore who compete in the market on the basis of product quality, price, style, delivery and service. Based on annual sales revenue, the Company is one of the largest furniture manufacturers located in the United States. The Company has been successful in this competitive environment because its products represent excellent value combining attractive prices and superior quality and styling; prompt delivery; and courteous service. Competition from foreign manufacturers is not any more significant in the marketplace today than competition from domestic manufacturers.
The furniture industry is considered to be a "fashion" industry subject to constant change to meet the changing consumer preferences and tastes. As such, the Company is continuously involved in the development of new designs and products. Due to the nature of these efforts and the close relationship to the manufacturing operations, these costs are considered normal operating costs and are not segregated. The Company is not otherwise involved in "traditional" research and development activities nor does the Company sponsor research and development activities of any of its customers.
In management's view, the Company has complied in all material respects with all federal, state and local standards in the area of safety, health and pollution and environmental controls. Compliance with these standards has not had a material adverse effect on past earnings, capital expenditures or competitive position. The Company is involved in environmental matters at certain of its plant facilities, which arise in the normal course of business. Although the final outcome of these environmental matters cannot be determined, based on the facts presently known, it is management's opinion that the final resolution of these matters will not have a material adverse effect on the Company's financial position or future results of operations.
The Company had approximately 5,400 employees at November 28, 1998.
The Company owns a minority interest in International Home Furnishings Center, which is a lessor of permanent exhibition space to furniture and accessory manufacturers.
FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
The Company has no foreign operations, and its export sales were approximately $14.3 million, $12.5 million, and $11.7 million in 1998, 1997 and 1996 respectively.
ITEM 2.
ITEM 2. PROPERTIES
At November 28, 1998 the Company owns the following manufacturing facilities:
The Company also owns its general corporate office building in Bassett, Virginia (brick, concrete and steel), two warehouses in Bassett, Virginia (brick and concrete) and a showroom in High Point, North Carolina (brick, concrete and steel).
In general, these facilities are suitable and are considered to be adequate for the continuing operations involved. All facilities, except those held for sale, are in regular use.
Properties designated by an asterisk "*" have ceased manufacturing operations and are currently held for sale in connection with the restructuring efforts.
The following facilities were sold or disposed of during 1998:
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
A suit was filed in June, 1997, in the Superior Court of the State of California for the County of Los Angeles (the "Superior Court") against the Company, two major retailers and certain current and former employees of the Company. The suit sought certification of a class consisting of all consumers who purchased certain mattresses and box springs from the major retailers which were manufactured by a subsidiary of the Company, E.B. Malone Corporation, with different specifications than those originally manufactured for the sale by these retailers. The suit alleged various causes of action, including negligent misrepresentation, breach of warranty, violations of
deceptive practices laws and fraud. Plaintiffs sought compensatory damages of $100 million and punitive damages. In 1997, the Superior Court twice sustained the Company's demurrers to several of plaintiffs' causes of action, but granted the plaintiffs leave to amend. In February, 1998, the Superior Court sustained the Company's demurrers to many of the individual claims, this time without granting plaintiffs leave to amend. The Superior Court also sustained the Company's demurrer to the class action allegations in plaintiffs' Third Amended Complaint, without granting leave to amend, and transferred the entire action out of the class action department. Plaintiffs have filed a notice of appeal from the class action ruling. Plaintiffs also filed a petition for a writ of mandamus or other extraordinary relief seeking immediate review of the other demurrer rulings, which petition was denied. The suit was subsequently transferred from the Superior Court for the County of Los Angeles to the Superior Court for Orange County. After the case was transferred to Orange County, the plaintiffs stipulated to a dismissal with prejudice of all individual defendants. Additionally, all remaining claims against the Company were stayed by the Court pending Plaintiffs' appeal of the dismissal of their class action allegations. Although it is impossible to predict the ultimate outcome of this litigation, the Company intends to vigorously defend this suit because it believes that the damages sought are unjustified and because this case is inappropriate for class action treatment. Because the Company believes that the two major retailers were unaware of the changes in specifications, the Company has agreed to indemnify the two major retailers with respect to the above.
The Company is also involved in various other claims and actions which arise in the normal course of business. Although the final outcome of these legal matters cannot be determined, based on the facts presently known, it is management's opinion that the final resolution of these matters will not have a material adverse effect on the Company's financial position or future results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 4b. EXECUTIVE OFFICERS OF THE REGISTRANT
Johne F. Albanese, 38, has been with the Company since 1993 as the Vice President of Marketing and Communications (1993-1996) and Vice President of the Retail Group (since 1997).
John E. Bassett III, 40, has been with the Company since before 1993 as the Vice President and General Manager of Bassett Table and the Vice President of Wood Manufacturing.
David R. Bilyeu, 38, was the Director of Information Systems with Tokico, Inc from 1993 until 1995, the Vice President and Director of Information Systems with Harman, Inc from 1995 until 1997, and has been with the Company as Vice President and Chief Information Officer since 1997.
Grover S. Elliot, 58, was the Chief Financial Officer for Cochrane Furniture from 1993 until 1996 and has been with the Company as Vice President of Finance and Investor Relations since 1996.
Paul Fulton, 64, was the President of the Sara Lee Corporation (package food & consumer products division) until 1993, from 1994 until 1997 he was Dean of the Kenan-Flagler Business School at the University of North Carolina at Chapel Hill, and has been Chairman and Chief Executive Officer of the Company since 1997.
Janice E. Hamlin, 45, was the Vice President of Retail Business and Product Development with Warner Bros. Consumer Products (Time Warner) from 1990 until 1996, the Vice President of Marketing for Viacom Retail Group from 1996 until 1997, and has been with the Company as Vice President of Marketing since 1997.
Jay R. Hervey, Esq., 39, was an Associate with the Richmond Office of McGuire, Woods, Battle and Boothe from 1993 through 1997 and has been the General Counsel, Corporate Vice President and Secretary for the Company since 1997.
Dennis S. Hoy, 40, was a furniture buyer with Marlo Furniture from 1987 until 1996 and has been with the Company working in the Impact Division, as Casegoods and Merchandise Manager and as Vice President of Merchandising since 1996.
John S. Lupo, 52, was the Senior Vice President and General Merchandise Manager of Wal-Mart, Inc from 1993-1996, the Senior Vice President and Chief Operating Officer of Wal-Mart International from 1996-1998, and has been the Executive Vice President for Sales and Marketing for the Company since October of 1998.
Thomas E. Prato, 43, has been with the Company since 1987 and is currently the Vice President of Sales.
Steven P. Rindskopf, 43, was the Vice President of Human Resources for The Bali Company (a division of the Sara Lee Corporation) from 1993 until 1997, the Owner & Operator of the Master's Loft (Bookstore & Cafe) Company from 1997 until 1997, and has been with the Company as Vice President, Administration and Human Resources since 1997.
Barry C. Safrit, 36, was with CHF Industries from 1993 until 1998 as Controller and as Chief Financial Officer and has been the Vice President and Chief Accounting Officer for the Company since October of 1998.
Keith R. Sanders, 54, was with Ethan Allen from 1993 until 1998 as the Vice President of Manufacturing and Vice President of Upholstery and has been the Vice President of Upholstery and Manufacturing for the Company since 1998.
Robert H. Spilman, Jr., 42, was the Company's Executive Vice President of Marketing and Merchandising from 1993 until 1997 and has served as President and Chief Operating Officer since 1997.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The information contained in the Annual Report under the caption "Investor Information" with respect to number of stockholders, market prices and dividends paid is incorporated herein by reference thereto.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The information for the five years ended November 28, 1998, contained in "Other Business Data" in the Annual Report is incorporated herein by reference thereto.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information contained in "Management's Discussion and Analysis of Financial Condition and Result of Operations" in the Annual Report is incorporated herein by reference thereto.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The information contained in "Management's Discussion and Analysis of Financial Condition and Result of Operations" in the Annual Report is incorporated herein by reference thereto.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and notes to consolidated financial statements of the Registrant and its subsidiaries contained in the Annual Report are incorporated herein by reference thereto. In addition, financial statements of the registrant's 50% or less owned significant subsidiary are included in this Form 10-K on pages to .
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Bassett Furniture Industries decided to change its independent Public Accountants from KPMG LLP (KPMG) to Arthur Andersen effective November 21, 1997, and KPMG was notified on that date. This decision was approved unanimously by the Board of Directors. The new management team at Bassett Furniture Industries, since taking charge in August 1997, has changed the Company's management focus and philosophy to more of a strategic focus and emphasis on return on assets employed. Management believes that Arthur Andersen's "business risk" audit approach is directly aligned with the Company's philosophy and will provide this Company's management team with invaluable information towards managing the Company better and planning for the future.
During the Company's fiscal year ended November 30, 1996 and the subsequent interim period through November 21, 1997, there were no disagreements with KPMG on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which if not resolved to their satisfaction would have caused them to make reference to the subject matter of the disagreements in connection with their opinion.
The audit report of KPMG on the consolidated financial statements of the Company for the fiscal year ended November 30, 1996 did not contain an adverse opinion or disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope or accounting principles.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained on pages 3 through 5 and page 11 of the Proxy Statement under the "Election of Directors" and "Section 16 (a) Beneficial Ownership Reporting Compliance" is incorporated herein by reference thereto. Please see section entitled "Executive Officers of the Registrant" in part I of this report for information concerning executive officers.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information contained on pages 5 through 10 of the Proxy Statement under the captions "Organization, Compensation and Nominating Committee Report," "Stockholder Return Performance Graph," "Executive Compensation," "Supplemental Retirement Income Plan" and "Director Compensation" is incorporated herein by reference thereto.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained on pages 1 through 5 of the Proxy Statement under the headings "Principal Stockholders and Holdings of Management" and "Election of Directors" is incorporated herein by reference thereto.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained on page 5 of the Proxy statement under the heading "Certain Transactions" is incorporated herein by reference thereto.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The following consolidated financial statements of the registrant and its subsidiaries, included in the annual report of the registrant to its stockholders for the year ended November 28, 1998 are incorporated herein by reference thereto:
Consolidated Balance Sheets--November 28, 1998 and November 30, 1997
Consolidated Statements of Operations--Years Ended November 28, 1998, November 30, 1997 and 1996
Consolidated Statements of Stockholders' Equity-- Years Ended November 28, 1998, November 30, 1997 and 1996
Consolidated Statements of Cash Flows-- Years Ended November 28, 1998, November 30, 1997 and 1996
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
Financial Statements of certain significant 50% or less owned persons are included herein on pages to.
(2) All financial statement schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
(3) Listing of Exhibits
3A. Articles of Incorporation as amended are incorporated herein by reference to Form 10- Q for the fiscal quarter ended February 28, 1994.
3B. By-laws as amended are filed herewith.
** 10A. Bassett 1993 Long Term Incentive Stock Option Plan is incorporated herein by reference to the Registrant's Registration Statement on Form S-8 (no.33-52405) filed on February 25, 1994.
** 10B. Bassett Executive Deferred Compensation Plan is incorporated herein by reference to form 10-K for the fiscal year ended November 30, 1997.
** 10C. Bassett Supplemental Retirement Income Plan is incorporated herein by reference to form 10-K for the fiscal year ended November 30, 1997.
** 10D. Bassett 1993 Stock Plan for Non-Employee Directors is as amended filed herewith.
** 10E. Bassett 1997 Employee Stock Plan is incorporated herein by reference to the Registrant's Registration Statement on Form S-8 ( no. 333-60327) filed on July 31, 1998.
13. The registrant's Annual Report to Stockholders for the year ended November 28, 1998.*
21. List of subsidiaries of the registrant.
23A. Consent of Arthur Andersen LLP is filed herewith.
23B. Consent of KPMG LLP is filed herewith.
23C. Consent of Dixon Odom PLLC is filed herewith.
27. Financial Data Schedule (EDGAR filing only)
*With the exception of the information incorporated in this Form 10-K by reference thereto, the Annual Report shall not be deemed "filed" as a part of this Form 10-K.
**Management contract or compensatory plan or arrangement of the Company.
(b) No reports on Form 8-K were filed during the last quarter of the registrant's 1998 fiscal year.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BASSETT FURNITURE INDUSTRIES, INCORPORATED (Registrant)
By: /s/ PAUL FULTON Date: 2/25/99 ---------------------------------------- -------------- Paul Fulton Chairman of the Board of Directors and Chief Executive Officer
By: /s/ ROBERT H. SPILMAN JR. Date: 2/25/99 ---------------------------------------- -------------- Robert H. Spilman Jr. President and Chief Operating Officer
Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By: /s/ AMY W. BRINKLEY Date: 2/25/99 ---------------------------------------- -------------- Amy W. Brinkley Director
By: /s/ PETER W. BROWN Date: 2/25/99 ---------------------------------------- -------------- Peter W. Brown Director
By: /s/ THOMAS E. CAPPS Date: 2/26/99 ---------------------------------------- -------------- Thomas E. Capps Director
By: /s/ WILLIE D. DAVIS Date: 2/25/99 ---------------------------------------- -------------- Willie D. Davis Director
By: /s/ ALAN T. DICKSON Date: 2/25/99 ---------------------------------------- -------------- Alan T. Dickson Director
By: /s/ WILLIAM H. GOODWIN, JR. Date: 2/26/99 --------------------------------------- -------------- William H. Goodwin, Jr. Director
SIGNATURES Continued
By: /s/ HOWARD H. HAWORTH Date: 2/26/99 ---------------------------------------- -------------- Howard H. Haworth Director
By: /s/ JAMES W. MCGLOTHLIN Date: 2/26/99 ---------------------------------------- -------------- James W. McGlothlin Director
By: /s/ THOMAS W. MOSS, JR. Date: 2/26/99 ---------------------------------------- -------------- Thomas W. Moss, Jr. Director
By: Date: ---------------------------------------- -------------- Michael E. Murphy Director
By: /s/ ALBERT F. SLOAN Date: 2/26/99 ---------------------------------------- -------------- Albert F. Sloan Director
By: /s/ BARRY C. SAFRIT Date: 2/25/99 ---------------------------------------- -------------- Barry C. Safrit Vice President and Chief Accounting Officer (Principal Financial Officer)
ANNUAL REPORT ON FORM 10-K ITEM 14(a)(1) AND (c)
CERTAIN EXHIBITS
YEAR ENDED NOVEMBER 28, 1998
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
BASSETT, VIRGINIA
INTERNATIONAL HOME FURNISHINGS CENTER, INC.
FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
INTERNATIONAL HOME FURNISHINGS CENTER, INC. - -------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
To the Board of Directors International Home Furnishings Center, Inc. High Point, North Carolina
We have audited the accompanying balance sheets of International Home Furnishings Center, Inc. as of October 31, 1998 and 1997 and the related statements of income, stockholders' equity (deficit), and cash flows for each of the three years in the period ended October 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of International Home Furnishings Center, Inc. at October 31, 1998 and 1997 and the results of its operations and its cash flows for each of the three years in the period ended October 31, 1998 in conformity with generally accepted accounting principles.
/s/ DIXON ODOM PLLC
High Point, North Carolina November 25, 1998
INTERNATIONAL HOME FURNISHINGS CENTER, INC. BALANCE SHEETS OCTOBER 31, 1998 AND 1997 - -------------------------------------------------------------------------------
- ------------------------------------------------------------------------------- See accompanying notes to financial statements. Page 2
INTERNATIONAL HOME FURNISHINGS CENTER, INC. STATEMENTS OF INCOME YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996 - -------------------------------------------------------------------------------
- ------------------------------------------------------------------------------- See accompanying notes to financial statements. Page 3
INTERNATIONAL HOME FURNISHINGS CENTER, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996 - -------------------------------------------------------------------------------
- ------------------------------------------------------------------------------- See accompanying notes to financial statements. Page 4
INTERNATIONAL HOME FURNISHINGS CENTER, INC. STATEMENTS OF CASH FLOWS YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996 - -------------------------------------------------------------------------------
- ------------------------------------------------------------------------------- See accompanying notes to financial statements. Page 5
NOTE A - DESCRIPTION OF BUSINESS
The Company is the lessor of permanent exhibition space to furniture and accessory manufacturers which are headquartered throughout the United States and in many foreign countries. This exhibition space, located in High Point, North Carolina, is used by the Home Furnishings Industry to showcase its products at the International Home Furnishings Market held each April and October. The details of the operating leases with the Company's tenants are described in Note J.
The Company has been in business since June 27, 1919, and operates under the trade name of "International Home Furnishings Center."
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
The accounting policies relative to the carrying values of property and equipment and theater complex are indicated in the captions on the balance sheets. Other significant accounting policies are as follows:
Rental Income
Income from rental of exhibition space is recognized under the operating method. Aggregate rentals are reported as income on the straight-line basis over the lives of the leases, and expenses are charged as incurred against such income. Future rentals under existing leases are not recorded as assets in the accompanying balance sheets.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.
Investment Securities
The Company has investments in debt and marketable equity securities. Debt securities consist of obligations of state and local governments and U. S. corporations. Marketable equity securities consist primarily of investments in mutual funds.
Management determines the appropriate classification of securities at the date of adoption and thereafter at the date individual investment securities are acquired, and the appropriateness of such classification is reassessed at each balance sheet date. Since the Company neither buys investment securities in anticipation of short-term fluctuations in market prices or commits to holding debt securities to their maturities, investments in debt and marketable equity securities have been classified as available-for-sale. Available-for-sale securities are stated at fair value, and unrealized holding gains and losses, if significant, net of the related deferred tax effect, are reported as a separate component of stockholders' equity. Premiums and discounts on investments in debt securities are amortized over their contractual lives. Interest on debt securities is recognized in income as accrued, and dividends on marketable equity securities are recognized in income when declared. Realized gains and losses are included in income and are determined on the basis of the specific securities sold.
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property, Equipment and Depreciation
Additions to property and equipment are recorded at cost. Expenditures for maintenance, repairs, and minor renewals are charged to expense as incurred. Depreciation is provided primarily on the straight-line method over the following estimated useful lives:
Deferred Financing Costs
Costs associated with obtaining the term loan disclosed in Note F have been deferred and are being amortized on the straight-line method over the term of the related debt. Amortization expense charged to operations during the year ended October 31, 1998 was $20,883.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related to temporary differences between the reported amounts of assets and liabilities and their tax bases. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Earnings Per Common Share
During the year ended October 31, 1998, the Company adopted FASB Statement No. 128, "Earnings Per Share," which specifies the computation, presentation and disclosure requirements for earnings per share ("EPS"). It replaces the presentation of primary and fully diluted EPS with basic and diluted EPS. Basic EPS excludes all dilution and has been computed using the weighted average number of common shares outstanding during the year. Diluted EPS would reflect the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock. The Company has no dilutive potential common shares.
Retirement Plans
The Company maintains a 401(k) qualified retirement plan covering eligible employees under which participants may contribute up to 25% of their compensation subject to maximum allowable contributions. The Company is obligated to contribute, on a matching basis, 50% of the first 6% of compensation voluntarily contributed by participants. The Company may also make additional contributions to the plan if it so elects.
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NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Retirement Plans (Continued)
In 1991, the Company adopted a nonqualified supplemental retirement benefits plan for key management employees. Benefits payable under the plan are based upon the participant's average compensation during his last five years of employment and are reduced by benefits payable under the Company's qualified retirement plan and by one-half of the participant's social security benefits. Benefits under the plan do not vest until the attainment of normal retirement age; however, a reduced benefit is payable if employment terminates prior to normal retirement age because of death or disability. The Company has no obligation to fund this supplemental plan.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
NOTE C - ACQUISITION AND MERGER OF AFFILIATED COMPANY
On November 8, 1995, the Company and Southern Furniture Exposition Building, Inc. (SFEB) agreed to a plan to merge SFEB into the Company. On that date, in anticipation of the merger, six shareholders of SFEB who owned 527,638 shares (95.01%) of the SFEB outstanding common stock exchanged their shares in SFEB for 527,638 shares (100%) of the common stock of the Company. As of January 4, 1996, the date SFEB was merged into the Company, the Company acquired and retired the remaining 4.99% (27,705 shares) of the common stock of SFEB for cash of $7,637,955.
Because the Company and SFEB were commonly controlled, the exchange of stock and resulting merger has been accounted for at historical cost in a manner similar to a pooling of interest. Accordingly, the accompanying financial statements for the year ended October 31, 1996 are based on the assumption that the two companies were combined for the full year.
NOTE D - RESTRICTED CASH
Restricted cash consists of an interest-bearing debt service account. The Company makes semi-annual escrow deposits each May and November in amounts sufficient to provide interest and principal payments on the Company's term debt for the ensuing six months.
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NOTE E - INVESTMENT IN DEBT AND MARKETABLE EQUITY SECURITIES
The following is a summary of the Company's investment in available-for-sale securities as of October 31, 1998 and 1997:
Available-for-sale securities are classified in the following balance sheet captions as of October 31, 1998 and 1997:
All the Company's debt securities mature within one year.
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NOTE F - LONG-TERM DEBT
Long-term debt consists of the following at October 31, 1998:
The aggregate maturities of long-term debt are due as follows:
Under the provisions of the loan agreement, the Company is required, among other things, to comply with restrictive loan covenants including maintaining certain financial ratios and minimum levels of net worth and working capital. The Company was in compliance with the terms of the loan agreement at October 31, 1998.
NOTE G - INCOME TAXES
The provision for income taxes consisted of the following for the years ended October 31, 1998, 1997 and 1996:
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NOTE G - INCOME TAXES (CONTINUED)
A reconciliation of the income tax provision at the federal statutory rate to the income tax provision at the effective tax rate is as follows:
The components of deferred income taxes consist of the following:
NOTE H - LAND LEASE COMMITMENT
During 1975, the Company completed construction of an eleven-story exhibition building. The building is constructed on land leased from the City of High Point, North Carolina under a noncancelable lease. The lease is for an initial term of fifty years with three options to renew for periods of ten years each and a final renewal option for nineteen years. Annual rental under the lease is $138,835 as of October 31, 1998 and is subject to adjustment at the end of each five-year period, such adjustment being computed as defined in the lease agreement. As part of the lease agreement, the Company constructed a theater complex for public use and office space for use by the City of High Point on the lower levels of the building. Annual rental cash payments over the initial fifty-year lease term are being reduced by $39,121 which represents amortization of the cost of the theater and office complex constructed for the City of High Point. At the termination of the lease, the building becomes the property of the City of High Point. Under the terms of the lease, the Company is responsible for all expenses applicable to the exhibition portion of the building. The City of High Point is responsible for all expenses applicable to the theater complex and office space constructed for use by the City.
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NOTE I - RETIREMENT EXPENSE
Amounts expensed under the Company's retirement plans amounted to $268,856, $293,974 and $277,553 for the years ended October 31, 1998, 1997 and 1996, respectively, including $159,350, $147,547 and $136,617 under the supplemental retirement benefits plan for the years ended October 31, 1998, 1997 and 1996, respectively.
NOTE J - RENTALS UNDER OPERATING LEASES
The Company's leasing operations consist principally of leasing exhibition space. Property on operating leases consists of substantially all of the asset "buildings, exclusive of theater complex" included on the balance sheets. Accumulated depreciation on this property amounted to $38,909,532 and $36,893,568 at October 31, 1998 and 1997, respectively. Leases are typically for five-year periods and contain provisions to escalate rentals based upon either the increase in the consumer price index or increases in ad valorem taxes, utility rates and charges, minimum wage imposed by federal and state governments, maintenance contracts for elevators and air conditioning, maintenance of common areas, social security payments, increases resulting from collective bargaining contracts, if any, and such other similar charges and rates required in operating the Company. Tenants normally renew their leases.
The following is a schedule of minimum future rentals under noncancelable operating leases as of October 31, 1998, exclusive of amounts due under escalation provisions of lease agreements:
Rental income includes contingent rentals under escalation provisions of leases of $1,401,867, $1,534,413 and $1,270,969 for the years ended October 31, 1998, 1997 and 1996, respectively.
NOTE K - CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash deposits in excess of federally insured limits and trade accounts receivable from customers predominantly in the Home Furnishings Industry. As of October 31, 1998, the Company's bank balances exceeded federally insured limits by $3,054,561. The Company's trade accounts receivable are generally collateralized by merchandise in leased exhibition spaces which is in the Company's possession.
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NOTE L - STOCKHOLDERS' DEFICIT
During the year ended October 31, 1998, the Company paid dividends of $76,317,560 resulting in a deficit in stockholders' equity of $17,904,821 at October 31, 1998. The dividends were financed, in part, with the proceeds of a $75,000,000 term loan. Although interest on the debt will negatively impact future earnings, management believes future earnings will restore stockholders' equity to a substantial positive amount and that operating cash flows will be sufficient to provide for debt service and for the Company's other financing and investing needs.
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INDEX TO EXHIBITS