XNAS:BSET Bassett Furniture Industries Quarterly Report 10-Q Filing - 8/25/2012

Effective Date 8/25/2012

XNAS:BSET Fair Value Estimate
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XNAS:BSET Consider Buying
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XNAS:BSET Consider Selling
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XNAS:BSET Fair Value Uncertainty
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XNAS:BSET Economic Moat
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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 August 25, 2012

OR

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

For the transition period from                                                          to                                                           

Commission File No. 0-209


BASSETT FURNITURE INDUSTRIES, INCORPORATED
(Exact name of Registrant as specified in its charter)
 
 
  Virginia   54-0135270  
  (State or other jurisdiction   (I.R.S. Employer  
  of incorporation or organization)   Identification No.)  
 
3525 Fairystone Park Highway
Bassett, Virginia 24055
(Address of principal executive offices)
(Zip Code)

(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 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes _ X___No _______

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.
Large Accelerated Filer _______    Accelerated Filer__ X _     Non-accelerated Filer _ ____   Smaller Reporting Company _______

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes __ ____No ___X ____

At September 30, 2012, 10,892,037 shares of common stock of the Registrant were outstanding.
 
 
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BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

TABLE OF CONTENTS
 
ITEM
 
PAGE
     
PART I - FINANCIAL INFORMATION
     
1.
Condensed Consolidated Financial Statements as of  August 25, 2012 (unaudited) and November 26, 2011 and for the periods ended August 25, 2012 (unaudited) and August 27, 2011 (unaudited)
 
     
 
Condensed Consolidated Statements of Income 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
29
     
3.
Quantitative and Qualitative Disclosures About Market Risk
48
     
4.
Controls and Procedures
48
     
PART II - OTHER INFORMATION
     
1.
Legal Proceedings
50
     
1A.
Risk Factors
50
     
2.
Unregistered Sales of Equity Securities and Use of Proceeds
50
     
3.
Defaults Upon Senior Securities
50
     
6.
Exhibits
51
 
 
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE PERIODS ENDED AUGUST 25, 2012 AND AUGUST 27, 2011 – UNAUDITED
(In thousands except per share data)

   
Quarter Ended
   
Nine Months Ended
 
                         
   
August 25, 2012
   
August 27, 2011
   
August 25, 2012
   
August 27, 2011
 
Net sales
  $ 64,438     $ 59,417     $ 192,860     $ 189,942  
Cost of sales
    30,620       30,166       91,710       95,646  
Gross profit
    33,818       29,251       101,150       94,296  
                                 
Selling, general and administrative expenses excluding bad debt and notes receivable valuation charges
    32,891       29,267       97,099       90,653  
Bad debt and notes receivable valuation charges
    161       90       416       13,116  
Licensee debt cancellation charges
    -       -       -       6,447  
Restructuring and asset impairment charges
    -       123       711       2,082  
Lease exit costs
    -       -       359       3,728  
Income (loss) from operations
    766       (229 )     2,565       (21,730 )
                                 
Gain on sale of affiliate
    -       -       -       85,542  
Income from Continued Dumping & Subsidy Offset Act
    -       -       9,010       -  
Other income (loss), net
    (315 )     304       (2,239 )     (5,470 )
Income before income taxes
    451       75       9,336       58,342  
                                 
Income tax benefit (expense)
    1,920       342       481       (3,633 )
Net income
  $ 2,371     $ 417     $ 9,817     $ 54,709  
                                 
Retained earnings-beginning of period
    102,417       102,403       96,331       48,459  
Purchase and retirement of common stock
    (2,282 )     (544 )     (2,515 )     (544 )
Cash dividends
    (545 )     (346 )     (1,672 )     (694 )
Retained earnings-end of period
  $ 101,961     $ 101,930     $ 101,961     $ 101,930  
                                 
Basic earnings per share
  $ 0.22     $ 0.04     $ 0.89     $ 4.76  
                                 
Diluted earnings per share
  $ 0.21     $ 0.04     $ 0.88     $ 4.72  
                                 
Dividends per share
  $ 0.05     $ 0.03     $ 0.15     $ 0.06  

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 BALANCE SHEETS
AUGUST 25, 2012 AND NOVEMBER 26, 2011
(In thousands)

Assets
 
(Unaudited)
August 25,
2012
   
November 26,
2011
 
Current assets
           
Cash and cash equivalents
  $ 57,967     $ 69,601  
Accounts receivable, net
    14,468       14,756  
Marketable securities
    3,206       2,939  
Inventories
    54,544       45,129  
Other current assets
    7,614       7,778  
Total current assets
    137,799       140,203  
                 
Property and equipment
               
Cost
    148,608       143,824  
Less accumulated depreciation
    93,177       93,878  
Property and equipment, net
    55,431       49,946  
                 
Investments
    -       806  
Retail real estate
    12,872       16,257  
Notes receivable, net
    1,703       1,802  
Other
    13,934       14,160  
Total long-term assets
    28,509       33,025  
Total assets
  $ 221,739     $ 223,174  
                 
Liabilities and Stockholders’ Equity
               
Current liabilities
               
Accounts payable
  $ 19,170     $ 18,821  
Accrued compensation and benefits
    6,692       7,201  
Customer deposits
    11,072       9,238  
Dividends payable
    545       6,063  
Other accrued liabilities
    11,938       10,302  
Current portion of real estate notes payable
    212       202  
Total current liabilities
    49,629       51,827  
                 
Long-term liabilities
               
Post employment benefit obligations
    10,919       11,226  
Real estate notes payable
    3,502       3,662  
Other long-term liabilities
    2,293       4,024  
Total long-term liabilities
    16,714       18,912  
                 
                 
Stockholders’ equity
               
Common stock
    54,411       56,712  
Retained earnings
    101,961       96,331  
Accumulated other comprehensive loss
    (976 )     (608 )
Total stockholders' equity
    155,396       152,435  
Total liabilities and stockholders’ equity
  $ 221,739     $ 223,174  

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 AUGUST 25, 2012 AND AUGUST 27, 2011 – UNAUDITED
(In thousands)
 
   
NineMonths Ended
 
   
August 25, 2012
   
August 27, 2011
 
Operating activities:
           
Net income
  $ 9,817     $ 54,709  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Depreciation and amortization
    3,931       4,150  
Equity in undistributed income of investments and unconsolidated affiliated companies
    (157 )     (1,782 )
Provision for restructuring and asset impairment charges
    711       2,082  
Non-cash portion of lease exit costs
    359       2,228  
Licensee debt cancelation charges
    -       6,447  
Provision for lease and loan guarantees
    197       1,315  
Bad debt and notes receivable valuation charges
    416       13,116  
Gain on mortgage settlements
    -       (1,305 )
Gain on sale of affilate
    -       (85,542 )
Other than temporary impairment on investments
    806       -  
Impairment and lease exit charges on retail real estate
    -       4,790  
Deferred income taxes
    (658 )     (111 )
Other, net
    1,042       343  
Changes in operating assets and liabilities
               
Accounts receivable
    (316 )     746  
Inventories
    (8,948 )     1,091  
Other current assets
    (1,122 )     248  
Accounts payable and accrued liabilities
    853       (14,859 )
Net cash provided by (used in) operating activities
    6,931       (12,334 )
                 
Investing activities:
               
Purchases of property and equipment
    (6,858 )     (2,459 )
Proceeds from sales of property and equipment
    17       189  
Proceeds from sale of affiliate
    1,410       69,152  
Release of collateral restrictions on cash equivalents
    -       11,240  
Proceeds from sales of investments
    1,186       2,925  
Purchases of investments
    (1,303 )     (2,925 )
Dividends from affiliate
    -       3,756  
Equity contribution to affiliate
    -       (980 )
Acquisition of retail licensee store
    (485 )     -  
Other, net
    84       127  
Net cash provided by (used in) investing activities
    (5,949 )     81,025  
                 
Financing activities:
               
Repayments of real estate notes payable
    (149 )     (6,375 )
Issuance of common stock
    295       136  
Repurchases of common stock
    (5,572 )     (2,084 )
Cash dividends
    (7,190 )     (348 )
Payments on other notes
    -       (2,202 )
Net cash used in financing activities
    (12,616 )     (10,873 )
Change in cash and cash equivalents
    (11,634 )     57,818  
Cash and cash equivalents - beginning of period
    69,601       11,071  
Cash and cash equivalents - end of period
  $ 57,967     $ 68,889  
 
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
AUGUST 25, 2012
(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.
 
References to “ASC” included hereinafter refer to the Accounting Standards Codification established by the Financial Accounting Standards Board as the source of authoritative GAAP.
 
The condensed consolidated financial statements include the accounts of Bassett Furniture Industries, Incorporated (“Bassett”, “we”, “our”, or the “Company”) and our wholly-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. In accordance with ASC Topic 810, we have evaluated our licensees and certain other entities to determine whether they are variable interest entities (“VIEs”) of which we are the primary beneficiary and thus would require consolidation in our financial statements. To date we have concluded that none of our licensees nor any other of our counterparties represent VIEs.

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 nine months ended August 25, 2012 are not necessarily indicative of results for the full 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 26, 2011.
 
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. Due to the losses incurred prior to fiscal 2011, 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.  While our long-term financial outlook remains positive, we concluded that our ability to rely on our long-term outlook and forecasts as to future taxable income was limited due to uncertainty created by the weight of the negative evidence.  As a result, we recorded a valuation allowance on certain of the deferred tax assets.  In fiscal 2011, due to the gain recognized on the sale of our interest in International Home Furnishings Center, Inc. (“IHFC”)(see Note 16), we were able to utilize net operating loss carry forwards and credits to significantly offset the taxable gain, resulting in a significant reduction of the valuation allowance. However, as the gain on the sale of IHFC does not represent a source of recurring future taxable income, we continued to carry a valuation allowance against substantially all of our deferred tax assets as of November 26, 2011. The effective tax rate for the quarter ended August 25, 2012 differs from the blended statutory rate of approximately 38% due to the impact of releasing a portion of the valuation allowance against our net deferred tax assets. The reduction in the valuation allowance was primarily due to favorable provision-to-return adjustments related to our 2011 Federal income tax return. These adjustments were related to changes in estimates for temporary differences which created additional tax benefit due to the resulting decline in our deferred tax asset balance and a corresponding decline in the valuation allowance. In addition, we also corrected an immaterial error in the current quarter to reduce our valuation allowance for certain deferred tax assets which we will be able to utilize during fiscal 2012 or 2013. We also released a portion of our reserve for uncertain tax positions due to the expiration of the statute of limitations which resulted in an additional benefit. The favorable impact of reducing our valuation allowance was partially offset by the accrual of penalties and interest associated with certain unrecognized tax benefits. For the nine months ended August 25, 2012, the effective rate differs from the blended statutory rate due to the release of a portion of the valuation allowance against our deferred taxes and the release of a portion of our reserve for uncertain tax benefits as noted above, as well as the recognition of a tax benefit for a reduction of tax effects on our other comprehensive income. For the three and nine months ended August 27, 2011, our effective tax rates differed significantly from the blended statutory rate of 38% primarily due to the reversal of the valuation allowance on certain deferred tax assets due to the utilization of net operating loss carryforwards and credits to significantly offset the taxable gain on the sale of IHFC.
 
 
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PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
AUGUST 25, 2012
(Dollars in thousands except share and per share data)
 
 
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) collectability is reasonably assured. SAB 104 further asserts that if collectability of all or a portion of the revenue is not reasonably assured, revenue recognition should be deferred until payment is received.  When circumstances indicate that all four criteria will not be met for a particular dealer, we will account for revenue from that dealer on a cost recovery basis, deferring the recognition of revenue and cost of sales until such time as payment is received for a shipment of goods to the dealer. Currently, there are no dealers for whom revenue is being recognized on a cost recovery basis, and there were no reductions of gross accounts receivable related to cost recovery revenue deferrals at August 25, 2012 or November 26, 2011. The following table details the total revenue and cost deferred for each period presented:
 
The following table details the total revenue and cost deferred for each period presented:
 
   
Quarter Ended
   
Nine Months Ended
 
   
August 25, 2012
   
August 27, 2011
   
August 25, 2012
   
August 27, 2011
 
Revenue deferred
  $ -     $ 424     $ -     $ 1,678  
Cost deferred
    -       297       -       1,175  

4. Accounts Receivable

Accounts receivable consists of the following:

   
August 25, 2012
   
November 26, 2011
 
Gross accounts receivable
  $ 16,711     $ 16,848  
Allowance for doubtful accounts
    (2,243 )     (2,092 )
Accounts receivable, net
  $ 14,468     $ 14,756  

At August 25, 2012 and November 26, 2011, approximately 69% and 67%, respectively, of gross accounts receivable, and approximately 88% and 79%, respectively, of the allowance for doubtful accounts were attributable to amounts owed to us by our licensees. Our remaining receivables are due from national account customers and traditional distribution channel customers.
 
 
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PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
AUGUST 25, 2012
(Dollars in thousands except share and per share data)
 
Activity in the allowance for doubtful accounts was as follows:
 
   
2012
 
       
Balance at November 26, 2011
  $ 2,092  
Additions charged to expense
    417  
Write-offs and other deductions
    (266 )
Balance at August 25, 2012
  $ 2,243  
 
 

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:
 
 
   
August 25, 2012
   
November 26,
2011
 
Wholesale finished goods
  $ 31,261     $ 26,873  
Work in process
    328       222  
Raw materials and supplies
    8,149       5,660  
Retail merchandise
    23,361       20,504  
Total inventories on first-in, first-out method
    63,099       53,259  
LIFO adjustment
    (7,449 )     (6,955 )
Reserve for excess and obsolete inventory
    (1,106 )     (1,175 )
    $ 54,544     $ 45,129  
 
 
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
AUGUST 25, 2012
(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 at November 26, 2011
  $ 987     $ 188     $ 1,175  
Additions charged to expense
    866       251       1,117  
Write-offs
    (1,011 )     (175 )     (1,186 )
Balance at August 25, 2012
  $ 842     $ 264     $ 1,106  

 
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 2012 and do not anticipate that our methodology is 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:
 
   
August 25, 2012
   
November 26,
2011
 
Notes receivable
  $ 5,917     $ 6,017  
Allowance for doubtful accounts and discounts on notes receivable
    (4,139 )     (4,140 )
Notes receivable, net
    1,778       1,877  
Less: current portion of notes receivable
    (75 )     (75 )
Long term notes receivable
  $ 1,703     $ 1,802  

Our notes receivable, which bear interest at rates ranging from 2% to 6%, consist primarily of amounts due from our licensees from loans made by the Company to help licensees fund their operations.  Approximately 44% of our notes receivable represent conversions of past due accounts receivable at August 25, 2012 and November 26, 2011.  We have discontinued these conversions and have no plans to resume this practice. At the inception of the note receivable, we determined whether the note carried a market rate of interest. A discount on the note was recorded if we determined that the note carried an interest rate below the market rate.  Interest income on the notes is recognized on a cash basis and is not material.

The initial carrying value of the notes receivable was 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 was $1,778 at August 25, 2012 and $1,877 at November 26, 2011.  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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PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
AUGUST 25, 2012
(Dollars in thousands except share and per share data)

Substantially all of our notes receivable comprise a single portfolio of financing receivables from current and former licensees. These notes receivable are evaluated in three classes – those due from current licensees, those due from former licensees which are secured by real estate, and those due from former licensees which are unsecured. On a quarterly basis, we examine these notes receivable for evidence of impairment. With respect to current licensees, we consider 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.  Our evaluation of former licensees is primarily based upon payment history and an evaluation of the 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.  Notes receivable are charged off if they are deemed to be uncollectible with no recoverable collateral value. Each note within a class is evaluated individually using the criteria described above as applicable to its respective class.

These notes receivable, as well as our accounts receivable, are generally 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.

Our investment in notes receivable and related allowances, disaggregated by class, are as follows at August 25, 2012:
 
   
Gross
Notes Receivable
   
Allowance for
Doubtful Accounts
and Discounts
   
Notes Receivable
Net
 
                   
                   
Due from current licensees
  $ 1,529     $ (1,529 )   $ -  
Due from former licencees:
                       
Secured by real estate
    2,657       (975 )     1,682  
Unsecured
    1,635       (1,635 )     -  
Other notes
    96       -       96  
                         
Balance at August 25, 2012
  $ 5,917     $ (4,139 )   $ 1,778  
 
The notes receivable shown above by class include impaired notes and related allowances as of August 25, 2012 as follows:
 
   
Gross
Notes Receivable
   
Allowance for
Doubtful Accounts
and Discounts
   
Notes Receivable
Net
 
                   
                   
Due from current licensees
  $ 1,529     $ (1,529 )   $ -  
Due from former licencees:
                       
Secured by real estate
    1,558       (975 )     583  
Unsecured
    1,635       (1,635 )     -  
                         
Balance at August 25, 2012
  $ 4,722     $ (4,139 )   $ 583  
 
 
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PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
AUGUST 25, 2012
(Dollars in thousands except share and per share data)
 
The average recorded investment in the impaired notes by class for the nine months ended August 25, 2012 was as follows:

Due from current licensees
  $ -  
Due from former licencess:
       
Secured by real estate
    583  
Unsecured
    -  
Total average recorded investment in impaired loans
  $ 583  


The aging of our investment in notes receivable by class, based on scheduled principal due dates, is as follows at August 25, 2012:

   
Current
   
30-90 Days
Past Due
   
Over 90 Days
Past Due (1)
   
Total
 
                         
Due from current licensees
  $ 1,137     $ 86     $ 306     $ 1,529  
Due from former licencees:
                               
Secured by real estate
    947       29       1,681       2,657  
Unsecured
    -       -       1,635       1,635  
Other notes
    96       -       -       96  
                                 
Balance at August 25, 2012
  $ 2,180     $ 115     $ 3,622     $ 5,917  
 
(1) Balance over 90 days past due represents notes in default.
 
The change in our allowance for doubtful accounts and discounts for the nine months ended August 25, 2012 (disaggregated by class) was as follows:
 
         
2012 Activity by Class
             
         
Due from Former Licensees
             
   
Due from Current Licensees
   
Secured by Real
Estate
   
Unsecured
   
Other Notes
   
Total
 
                               
Balance, November 26, 2011
  $ 1,529     $ 975     $ 1,636     $ -     $ 4,140  
Recovery credited to expense
    -       -       (1 )     -       (1 )
Write-offs and other deductions
    -       -       -       -       -  
Amortization of discounts
    -       -       -       -       -  
Balance, August 25, 2012
  $ 1,529     $ 975     $ 1,635     $ -     $ 4,139  

 
We have ceased amortization of discounts as the notes to which they relate are on non-accrual status.
 
 
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PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
AUGUST 25, 2012
(Dollars in thousands except share and per share data)

 
7.    Unconsolidated Affiliated Companies
 
We own 49% of Zenith Freight Lines, LLC, (“Zenith”) which provides domestic transportation and warehousing services primarily to furniture manufacturers and distributors and also provides home delivery services to furniture retailers.  We have contracted with Zenith to provide for substantially all of our domestic freight, transportation and warehousing needs for the wholesale business.  In addition, Zenith provides home delivery services for several of our Company-owned retail stores.  Our investment in Zenith was $6,294 and $6,137 at August 25, 2012 and November 26, 2011, respectively. We recorded the following income from Zenith in other income (loss), net in our condensed consolidated statements of income and retained earnings:
 
   
Quarter Ended
   
Nine Months Ended
 
   
August 25, 2012
   
August 27, 2011
   
August 25, 2012
   
August 27, 2011
 
Income
  $ 23     $ (139 )   $ 157     $ (48 )
Dividends received
    -       -       -       -  
 

Prior to May 2, 2011, we owned a 46.9% interest in International Home Furnishings Center, Inc (“IHFC”). On May 2, 2011, we sold our entire interest in IHFC, resulting in a one-time gain of $85,542 which was recognized during the second quarter of fiscal 2011 (see Note 16). IHFC owned and leased out floor space in a showroom facility in High Point, North Carolina. Prior to the sale of our investment in IHFC, we accounted for the investment using the equity method since we did not maintain operating control of IHFC.  We recorded income and received dividends from IHFC as follows:

   
Quarter Ended
   
Nine Months Ended
 
   
August 25, 2012
   
August 27, 2011
   
August 25, 2012
   
August 27, 2011
 
Income
  $ -     $ -     $ -     $ 1,832  
Dividends received
    -       -       -       3,756  
 
The income is included in other income (loss), net in our condensed consolidated statements of income and retained earnings.
 
 
Summarized unaudited income statement information for IHFC for its first five months of fiscal 2011 up to the sale of our interest was as follows:
 
Revenue
  $ 15,875  
Operating income
    9,876  
Net income
    3,908  
 
 
In connection with the sale of IHFC, we acquired a minority equity stake in the buyer, International Market Centers, L.P. (“IMC”), in exchange for $1,000. IMC is majority owned by funds managed by Bain Capital Partners and a subsidiary of certain investment funds managed by Oaktree Capital Management, L.P. Our investment in IMC is accounted for using the cost method as we do not have significant influence over IMC.

8.    Real Estate Notes Payable and Bank Credit Facility

Real Estate Notes Payable

The real estate notes payable are summarized as follows:
 
   
August 25, 2012
   
November 26, 2011
 
Real estate notes payable
  $ 3,714     $ 3,864  
Less:
               
Current portion of real estate notes payable
    (212 )     (202 )
    $ 3,502     $ 3,662  
 
 
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PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
AUGUST 25, 2012
(Dollars in thousands except share and per share data)
 
Certain of our retail real estate properties have been financed through commercial mortgages with interest rates of 6.73%. These mortgages are collateralized by the respective properties with net book values totaling approximately $6,431 and $6,558 at August 25, 2012 and November 26, 2011, respectively. The portion of these mortgages due within one year, $212 and $202 as of August 25, 2012 and November 26, 2011, respectively, has been presented as current portion of real estate notes payable in the accompanying condensed consolidated balance sheets. The long-term portion, $3,502 and $3,662 as of August 25, 2012 and November 26, 2011, respectively, is presented as real estate notes payable in the condensed consolidated balance sheets.  During the nine months ended August 27, 2011, we entered into Discounted Payoff Agreements (“DPOs”) with the lenders on three mortgages which were subsequently paid off during fiscal 2011. Under the terms of these DPOs, the remaining balance owed was reduced, resulting in a $1,305 gain on the settlement of these mortgages, of which $869 was recognized during the quarter ended August 27, 2011.  This gain is included in other income (loss), net, in our condensed consolidated statement of income and retained earnings for the three and nine months ended August 27, 2011.
 
The fair value of these mortgages was $3,720 and $3,804 at August 25, 2012 and November 26, 2011, respectively.  In determining the fair value, we 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.

 
Bank Credit Facility
 
On December 9, 2011, we entered into a new credit agreement with our bank which extends a $3,000 line of credit which is used primarily to back our outstanding letters of credit. This credit facility contains covenants requiring us to maintain certain key financial ratios, however, there is no requirement to pledge assets as collateral. We were in compliance with all covenants under the agreement and expect to remain in compliance for the foreseeable future.
 
At August 25, 2012 and November 26, 2011, we had $1,966 and $2,318, respectively, outstanding under standby letters of credit, leaving availability under the line of $1,034 and $682, respectively.
 
See Note 19 – Subsequent Events, regarding a commitment by our bank to increase our line of credit.

9. Comprehensive Income
 
The following table provides a summary of total comprehensive income:
 
 
   
Quarter Ended
   
Nine Months Ended
 
   
August 25, 2012
   
August 27, 2011
   
August 25, 2012
   
August 27, 2011
 
Net income
  $ 2,371     $ 417     $ 9,817     $ 54,709  
                                 
Other comprehensive income (loss):
                               
Net change in unrealized holding gains and losses
    42       (2 )     119       (27 )
Amortization associated with SERP Plan
    8       6       24       19  
Changes in related deferred tax effects (see Note 2)
    -       -       (511 )     -  
                                 
Total comprehensive income
  $ 2,421     $ 421     $ 9,449     $ 54,701  

 
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PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
AUGUST 25, 2012
(Dollars in thousands except share and per share data)
 
The following table provides a summary of the changes in accumulated other comprehensive income (loss):
 
Balance at November 26, 2011
  $ (608 )
Net change in unrealized holding gains and losses
    119  
Amortization associated with SERP Plan
    24  
Changes in related deferred tax effects (see Note 2)
    (511 )
         
Balance at August 25,  2012
  $ (976 )
 
10. Licensee Acquisitions

As we continually monitor 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 three and nine months ended August 25, 2012, we acquired one store located in Knoxville, Tennessee because our licensee desired to exit that market. The acquisition price for the Knoxville store was $673, funded through the exchange of $485 in cash and $188 in existing accounts receivable for the net assets acquired from the licensee plus recognized goodwill.

During the three and nine months ended August 27, 2011, we acquired two and six retail stores, respectively: two operated by a licensee with one store in Kentucky and another in Ohio; three operated by a licensee in Virginia; and one operated by a licensee in Nevada. These stores were acquired pursuant to a strict foreclosure and settlement agreement on the underlying assets subject to the terms of our security agreement with the licensee.  These acquisitions were funded through the exchange of existing accounts receivable for the net assets acquired from the licensee.

These acquisitions were accounted for in accordance with ASC Topic 805, Business Combinations.  The following table summarizes the net assets acquired and consideration given in the store acquisitions:
 
   
Quarter Ended
   
Nine Months Ended
 
   
August 25, 2012
   
August 27, 2011
   
August 25, 2012
   
August 27, 2011
 
Net assets acquired:
                       
Inventory
  $ 467     $ 837     $ 467     $ 2,566  
Property and equipment/other
    35       152       35       719  
Goodwill
    375       -       375       -  
Customer deposits and other accrued expenses
    (204 )     (682 )     (204 )     (2,156 )
                                 
Total net assets acquired
  $ 673     $ 307     $ 673     $ 1,129  
                                 
Consideration given:
                               
Accounts receivable
  $ 188     $ 307     $ 188     $ 1,129  
Cash
    485       -       485       -  
                                 
Total consideration
  $ 673     $ 307     $ 673     $ 1,129  
 
 
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PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
AUGUST 25, 2012
(Dollars in thousands except share and per share data)
 
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 property and equipment 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.

The pro forma impact of the acquisitions on current and prior periods is not presented as we believe it is impractical to do so. We were not able to compile what we believed to be complete, accurate and reliable accounting information to use as a basis for pro forma presentations without an unreasonable effort.  Net sales and operating loss generated by these stores subsequent to their acquisition were as follows:
            
 
   
Quarter Ended
   
Nine Months Ended
 
   
August 25, 2012
   
August 27,2011
   
August 25, 2012
   
August 27, 2011
 
Net sales
  $ 237     $ 2,551     $ 237     $ 6,321  
Operating loss
    (34 )     (418 )     (34 )     (318 )
 

 
In connection with the Knoxville store acquisition, we recognized $375 of goodwill, primarily associated with the strength of the local market and the general health of the store at the time of acquisition.  The carrying value of our goodwill, which is not deductible for tax purposes, is included in other long-term assets in the accompanying condensed consolidated balance sheets, by reporting unit, is as follows:
 
   
Wholesale
   
Retail
   
Total
 
                   
Balance as of November 26, 2011
  $ 276     $ 159     $ 435  
Goodwill from store acquisition
    236       139       375  
                         
Balance as of August 25, 2012
  $ 512     $ 298     $ 810  
 
 
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.
 
In 2009 our former vendor, Colonial Trading, Inc. (“Colonial”) filed a lawsuit against us alleging, among other things, breach of contract by the Company after we cancelled orders for cribs following product recalls.  We filed counterclaims for breach of contract and warranty.  On August 1, 2012, a jury returned a verdict in favor of Colonial in the amount of $1,354.  Colonial has filed motions to treble the damages and collect its attorney’s fees.  Currently, arguments on these motions are before the court and no judgment has been entered.  We will assess our alternatives upon the entry of a judgment, including whether to appeal.  We currently have reserves to cover substantially all of the jury verdict amount.
 
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 $74,911 and $73,249 at August 25, 2012 and November 26, 2011, respectively, for future minimum lease payments under non-cancelable operating leases having initial terms in excess of one year.
 
 
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PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
AUGUST 25, 2012
(Dollars in thousands except share and per share data)
 
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 $2,214 and $2,515 at August 25, 2012 and November 26, 2011, respectively.
 
We have also guaranteed loans to certain of our licensees to finance initial inventory packages and other operating requirements for those stores. These loans generally have three year terms.  The total contingent liabilities with respect to these loan guarantees as of August 25, 2012 and November 26, 2011 were $27 and $186, 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 August 25, 2012 and November 26, 2011 was $602 and $508, 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.
 

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 $9,154 and $9,326 as of August 25, 2012 and November 26, 2011, respectively, and is recorded as follows in the condensed consolidated balance sheets:
 
Components of net periodic pension costs are as follows:
 
   
August 25,
2012
   
November 26, 2011
 
Other accrued liabilities
  $ 866     $ 866  
Post employment benefit obligations
    8,288       8,460  
                 
Total pension liability
  $ 9,154     $ 9,326  
 
Components of net periodic pension costs are as follows:
 
 
   
Quarter Ended
   
Nine Months Ended
 
   
August 25, 2012
   
August 27, 2011
   
August 25, 2012
   
August 27, 2011
 
Service cost
  $ 14     $ 12     $ 41     $ 36  
Interest cost
    94       105       282       315  
Amortization of transition obligation
    11       11       32       33  
Amortization of actuarial loss
    3       -       8       -  
                                 
Net periodic pension cost
  $ 122     $ 128     $ 363     $ 384  
 
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 $78 and $83 for the quarters ended August 25, 2012 and August 27, 2011 respectively, and $234 and $249 for the nine months ended August 25, 2012 and August 27, 2011 respectively.  Our liability under this plan was $2,631 and $2,818 as of August 25, 2012 and November 26, 2011, respectively, and is reflected in post employment benefit obligations.
 
 
16 of 52

 
 
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
AUGUST 25, 2012
(Dollars in thousands except share and per share data)
 
13. Earnings Per Share
 
The following reconciles basic and diluted earnings per share:
 
   
Net Income
   
Weighted Average Shares
   
Net Income Per Share
 
For the quarter ended August 25, 2012:
                 
                   
Basic earnings per share
  $ 2,371       10,945,784     $ 0.22  
Add effect of dilutive securities:
                       
Options and restricted shares
    -       123,835       (0.01
Diluted earnings per share
  $ 2,371       11,069,619     $ 0.21  
                         
For the quarter ended August 27, 2011:
                       
                         
Basic earnings per share
  $ 417       11,454,409     $ 0.04  
Add effect of dilutive securities:
                       
Options and restricted shares
    -       124,849          
Diluted earnings per share
  $ 417       11,579,258     $ 0.04  
                         
                         
For the nine months ended August 25, 2012:
                       
                         
Basic earnings per share
  $ 9,817       11,074,265     $ 0.89  
Add effect of dilutive securities:
                       
Options and restricted shares
    -       97,727       (0.01 )
Diluted earnings per share
  $ 9,817       11,171,992     $ 0.88  
                         
For the nine months ended August 27, 2011:
                       
                         
Basic earnings per share
  $ 54,709       11,492,497     $ 4.76  
Add effect of dilutive securities:
                       
Options and restricted shares
    -       87,826       (0.04 )
Diluted earnings per share
  $ 54,709       11,580,323     $ 4.72  
 
For the three months ended August 25, 2012 and August 27, 2011, options to purchase 472,500 and 928,514 shares of common stock, respectively, were excluded from the computation as their effect was anti-dilutive.
 
For the nine months ended August 25, 2012 and August 27, 2011, options to purchase 713,500 and 928,514 shares of common stock, respectively, were excluded from the computation as their effect was anti-dilutive.
 
 
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PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
AUGUST 25, 2012
(Dollars in thousands except share and per share data)
 
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 values. Our cost and equity method investments generally involve entities for which it is not practical to determine fair values.
 
We classify our marketable securities, which are reported at fair value, as available-for-sale. Unrealized holding gains and losses, net of the related income tax effect, if any, 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 based on quoted prices for identical securities in active markets in accordance with ASC Topic 820, Fair Value Measurements and Disclosures.  As of August 25, 2012, available-for-sale securities consisted of the following:
 
   
Cost
   
Gross Unrealized
   
Market
 
   
Basis
   
Gains
   
Losses
   
Value
 
                         
Bond mutual fund shares
  $ 1,249     $ 273     $ -     $ 1,522  
Government agency obligations
    1,059       34       -       1,093  
US Treasury obligations
    573       18       -       591  
    $ 2,881     $ 325     $ -     $ 3,206  
 
 
As of November 26, 2011, available-for-sale securities consisted of the following:
 
   
Cost
   
Gross Unrealized
   
Market
 
   
Basis
   
Gains
   
Losses
   
Value
 
                         
Bond mutual fund shares
  $ 1,175     $ 149     $ (4 )   $ 1,320  
Government agency obligations
    908       38       -       946  
US Treasury obligations
    648       26       (1 )     673  
    $ 2,731     $ 213     $ (5 )   $ 2,939  
 
 
The realized earnings from our marketable securities portfolio include realized gains and losses, based upon specific identification, and dividend and interest income.  Realized earnings were $21 and $33 for the three months ended August 25, 2012 and August 27, 2011, respectively, and $116 and $137 for the nine months ended August 25, 2012 and August 27, 2011, respectively.  Realized earnings for the nine months ended August 25, 2012 and August 27, 2011 include $33 and $28, respectively, of gains previously recorded in other comprehensive income. These amounts are recorded in other income (loss), net in our condensed consolidated statements of income and retained earnings.  Future maturities of the $1,684 in fixed income securities at August 25, 2012 are as follows:
 
Less than 5 years
  $ -  
5-10 years
    561  
11-20 years
    29  
Over 20 years
    1,094  
         
    $ 1,684  
 
 
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PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
AUGUST 25, 2012
(Dollars in thousands except share and per share data)
 
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.  No losses for other than temporary impairments in our marketable securities portfolio were recognized during the three and nine months ended August 25, 2012 or August 27, 2011.
 
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 the Fortress Value Recovery Fund I, LLC (“Fortress”) has been valued at fair value primarily based on the net asset values which are determined by the fund manager, less a discount for illiquidity.  Due to significant declines in net asset values during the first quarter of 2012, the highly illiquid nature of the investment, and the high degree of uncertainty regarding our ability to recover our investment in the foreseeable future, we have fully impaired the carrying amount of this investment resulting in a charge of $806 during the nine months ended August 25, 2012, which is included in other loss, net, in the condensed consolidated statements of income and retained earnings.
 
The fair values of our marketable securities based on the level of inputs are summarized below:
 
   
Level 1
   
Level 2
   
Level 3
   
Fair Value
 
Assets
                       
Marketable securities
  $ 3,206     $ -     $ -     $ 3,206  
Total Assets
  $ 3,206     $ -     $ -     $ 3,206  
 
The changes to the assets measured at fair value on a recurring basis which use Level 3 or significant unobservable inputs for the nine months ended August 25, 2012 were as follows:
 
   
Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3 Inputs)
 
       
   
Investment
in
Fortress
 
       
Balance at November 26, 2011
  $ 806  
         
Total losses included in earnings related to change in underlying net assets
    (806 )
Balance August 25, 2012
  $ -  
 
 
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The carrying values and approximate fair values of certain financial instruments were as follows:
 
   
August 25, 2012
   
November 26, 2011
 
   
Carrying
value
   
Fair
value
   
Carrying
value
   
Fair
value
 
Assets:
                       
Cash and cash equivalents
  $ 57,967     $ 57,967     $ 69,601     $ 69,601  
Accounts receivable, net
    14,468       14,468       14,756       14,756  
Notes receivable, net
    1,778       1,778       1,877       1,877  
Investments
    3,206       3,206       3,745       3,745  
                                 
Liabilities:
                               
Accounts payable
  $ 19,170       19,170     $ 18,821     $ 18,821  
Real estate notes payable
    3,714       3,720       3,864       3,804  
Lease/loan guarantee reserves
    602       602       508       508  
 
 
 
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PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
AUGUST 25, 2012
(Dollars in thousands except share and per share data)
15. Restructuring, Asset Impairment, and Other Charges

During the three and nine months ended August 25, 2012 and August 27, 2011, we incurred the following charges included in income (loss) from operations:
 
   
Quarter Ended
   
Nine Months Ended
 
   
August 25, 2012
   
August 27, 2011
   
August 25, 2012
   
August 27, 2011
 
                         
Licensee debt cancellation charges
  $ -     $ -     $ -     $ 6,447  
                                 
Restructuring and asset impairment charges:
                         
Write-downs and demolition costs related to idle manufacturing facilities
  $ -     $ 123     $ 588     $ 1,116  
Asset write-downs related to Company-owned retail store closures
    -       -       123       966  
                                 
Total restructuring and asset impairment charges
  $ -     $ 123     $ 711     $ 2,082  
                                 
Lease exit costs:
                               
Lease exit costs related to Company-owned retail store closures
  $ -     $ -     $ 228     $ 1,221  
Charge for modification of existing Company-owned retail store lease
    -       -       -       1,500  
Changes in estimates related to previously closed Company-owned retail stores
    -       -       131       1,007  
                                 
Total lease exit costs
  $ -     $ -     $ 359     $ 3,728  
                                 
Total charges related to debt cancellation, restructuring, asset impairment, and lease exit costs included in income (loss) from operations
  $ -     $ 123     $ 1,070     $ 12,257  
 
Licensee Debt Cancellation Charges

During the nine months ended August 27, 2011, we gained significant liquidity as a result of the sale of our investment in IHFC (see Note 16). This liquidity event enabled us to become more opportunistic in managing our relationships with our licensees and therefore accelerate certain licensees’ ability to rebuild their businesses after several years of extremely difficult industry conditions. As such, during the nine months ended August 27, 2011, we cancelled certain debts of what we consider to be key licensees in select markets.  While the debts cancelled were considered to be collectible over time, we believe that, rather than requiring repayment of these obligations, we will realize a greater long-term benefit by the cancellation of these debts. In exchange for relieving the debts of these licensees and thus strengthening their respective financial positions, we believe these licensees will be in a much better position to reinvest in all aspects of their store operations (new product offerings, personnel, advertising, building appeal, etc.) which will ultimately lead to increased sales and profitability of the Bassett brand. As a result of this debt cancellation, we incurred a charge for the nine months ended August 27, 2011 of $6,447.
 
 
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PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
AUGUST 25, 2012
(Dollars in thousands except share and per share data)
 
Restructuring and Asset Impairment Charges

During the nine months ended August 25, 2012, we incurred costs of $203 associated with the demolition of a previously closed manufacturing facility in Bassett, Virginia; non-cash charges of $385 associated with the write-down of a previously closed manufacturing facility in Mt. Airy, North Carolina; and $123 associated with the write off of abandoned leasehold improvements following the relocation of a retail store near Richmond, Virginia.

During the three months ended August 27, 2011, we recorded non-cash asset impairment charges of $123 associated with the demolition of a previously closed manufacturing facility in Bassett, Virginia. During the nine months ended August 27, 2011, we recorded non-cash asset impairment charges of $2,082, which included $966 for the write-off of leasehold improvements related to the closure of six retail locations in Albuquerque, New Mexico; Bear, Delaware; Bel Air, Maryland; Carol Stream, Illinois; Frederick, Maryland; and Spanish Fort, Alabama; $566 for the additional write-down of a previously closed manufacturing facility in Mt. Airy, North Carolina; and $550 for the additional write-down of a previously closed manufacturing facility in Bassett, Virginia. The write-downs of the previously closed manufacturing facilities are based on our estimates of their fair values. 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.

When analyzing our properties for potential impairment, we consider such qualitative factors as our experience in leasing and/or selling real estate properties as well as specific site and local market characteristics. Upon the closure of a Bassett Home Furnishings store, we generally write off all tenant improvements which are only suitable for use in such a store.


Lease Exit Costs

During the nine months ended August 25, 2012, we incurred non-cash charges of $228 for lease exit costs associated with the relocation of a retail store near Richmond, Virginia, as well as $131 of non-cash charges to reflect reduced estimates of recoverable lease costs at several previously closed retail locations.

During the nine months ended August 27, 2011, we recorded charges of $3,728 for lease exit costs and lease modifications which included: non-cash charges of $1,221 for lease exit costs related to the closure of retail stores in Albuquerque, New Mexico, Bel Air and Frederick, Maryland,  and a previously closed location in Lewisville, Texas; non-cash charges of $1,007 to reflect reduced estimates of recoverable lease costs at four previously closed retail locations; and a charge of $1,500 for a cash payment made for the modification of an existing lease at one of our Company-owned retail store locations.
 
 
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PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
AUGUST 25, 2012
(Dollars in thousands except share and per share data)
The following table summarizes the activity related to our accrued lease exit costs:
 
Balance at November 26, 2011
  $ 4,358  
         
Provisions associated with Company-owned retail store closures
    228  
Provisions made to adjust previous estimates
    210  
Payments on unexpired leases
    (1,752 )
Accretion of interest on obligations
    116  
         
Balance at August 25, 2012
  $ 3,160  
         
Current portion included in other accrued liabilities
  $ 1,813  
Long-term portion included in other long-term liabilities
    1,347  
    $ 3,160  
 

16. Non-Operating Income and Expense

Income from the Continued Dumping & Subsidy Offset Act

During the nine months ended August 25, 2012,  the U.S. Customs and Border Protection (“Customs”) made a distribution to us of $9,010 representing our share of the final distribution of duties that have been withheld by Customs under the Continued Dumping and Subsidy Offset Act of 2000 (“CDSOA”). We have received annual distributions in past years under the CDSOA as a result of our support of an antidumping petition on imports of wooden bedroom furniture from China, such distributions having been recognized in income during the fourth quarter of each fiscal year when our annual share was determined. Certain manufacturers who did not support the antidumping petition (“Non-Supporting Producers”) filed actions in the United States Court of International Trade challenging the CDSOA's “support requirement” and seeking to share in the distributions. As a result, Customs held back a portion of those distributions (“the Holdback”) pending resolution of the Non-Supporting Producers' claims. The Court of International Trade dismissed all of the actions of the Non-Supporting Producers, who appealed to the United States Court of Appeals for the Federal Circuit (“the Court of Appeals”). While the Court of Appeals denied the Non-Supporting Producers request for an injunction to block the final distribution of the Holdback and allowed Customs to distribute the funds in April of 2012, the appeal is still pending before the court. Should the Court of Appeals reverse the decisions of the United States Court of International Trade which ordered the release of the final distribution, it is possible that Customs may seek to have us return all or a portion of our share of the distribution.
 
 
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PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
AUGUST 25, 2012
(Dollars in thousands except share and per share data)

Gain on Sale of Affiliate

On May 2, 2011 we sold our 46.9% interest in International Home Furnishings Center, Inc. (“IHFC”) to International Market Centers, L.P. (“IMC”).  Consideration received, the balance of our investment in IHFC at the time of sale, and the resulting gain from the sale are as follows:
 
Gain on sale of affiliate:
       
Consideration received:
       
Cash received at and subsequent to closing (1)
  $
70,565
 
Indemnification escrow receivable (2)
   
4,695
 
Investment in IMC (3)
   
1,000
 
         
Total consideration received
  $
76,260
 
         
Investment in IHFC:
       
Distributions in excess of affiliate earnings
   
9,282
 
         
Gain on sale of affiliate
  $
85,542
 
 
 
(1)
$67,752 received at closing on May 2, 2011; additional consideration of $1,400 recognized as receivable at closing was received during the third quarter of 2011; and $1,413 of tax contingency escrowed at closing was released to us during the first quarter of fiscal 2012.
 
(2)
$2,348 included in other current assets in the accompanying condensed consolidated balance sheet at August 25, 2012, with the remainder included in other non-current assets.
 
(3)
Included in other non-current assets in the accompanying condensed consolidated balance sheet at August 25, 2012.
 
 
 
Other Income (Loss), Net

Other income (loss), net, for the three and nine months ended August 25, 2012 and August 27, 2011 consists of the following:

   
Quarter Ended
   
Nine Months Ended
 
   
August 25, 2012
   
August 27, 2011
   
August 25, 2012
   
August 27, 2011
 
                         
Write down for impairment of Fortress (Note 14)
  $ -     $ -     $ (806 )   $ -  
Income (loss) from unconsolidated affiliated companies, net (Note 7)
    23       (139 )     157       1,784  
Interest expense
    (72 )     (416 )     (228 )     (824 )
Loan and lease guarantee recovery (expense)
    23       141       (197 )     (1,315 )
Retail real estate impairment charges
    -       -       -       (3,953 )
Lease exit costs
    -       -       (74 )     (837 )
Gain on mortgage settlements (Note 8)
    -       869       -       1,305  
Other
    (289 )     (151 )     (1,091 )     (1,630 )
                                 
Other income (loss) net
  $ (315 )   $ 304     $ (2,239 )   $ (5,470 )
 
 
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PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
AUGUST 25, 2012
(Dollars in thousands except share and per share data)
 
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. Income shown above for the three months ended August 25, 2012 and August 27, 2011 represents the net recovery of previous charges when the final settlement of a loan or lease guarantee obligation is less than the estimated amount. Charges shown above for the nine months ended August 25, 2012 and August 27, 2011 are to recognize expense reflecting the additional risk that we may have to assume the underlying obligations with respect to our guarantees, net of any recoveries.
 
Retail real estate impairment charges for the three and nine months ended August 27, 2011 include non-cash asset impairment charges of $2,106 to write down idle retail locations in Henderson, Nevada and Chesterfield, Virginia to appraised value and $1,847 to write off certain tenant improvements deemed to be unrecoverable.
 
During the nine months ended August 25, 2012, we incurred $74 of non-cash charges to reflect reduced estimates of recoverable lease costs at one idle retail location. Lease exit costs of $837 for the three and nine months ended August 27, 2011 consist of non-cash charges incurred during the third quarter of 2011 related to lease termination costs at three idle retail locations.

17. Recent Accounting Pronouncements

In December 2010, the FASB issued ASU No. 2010-29, which updates the guidance in ASC Topic 805, Business Combinations. The objective of ASU 2010-29 is to address diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. The amendments in ASU 2010-29 specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments affect any public entity as defined by ASC 805 that enters into business combinations that are material on an individual or aggregate basis. This guidance became effective for us for acquisitions occurring on or after the beginning of our 2012 fiscal year. The adoption of this guidance has not had and is not expected to have a material impact upon our financial position or results of operations.

In May 2011, the FASB issued ASU No. 2011-04, which updated the guidance in ASC Topic 820, Fair Value Measurement. The amendments in this Update generally represent clarifications of Topic 820, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This Update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards. The amendments in this Update are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011, and early application is not permitted. This guidance became effective for us as of the beginning of our second quarter of fiscal 2012. The adoption of this guidance did not have a material impact on our financial position or results of operations.

In June 2011, the FASB issued ASU No. 2011-05, which updated the guidance in ASC Topic 220, Comprehensive Income. Under the amendments in this Update, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This Update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments in this Update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments in this Update should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and early application is permitted. In December of 2011, the FASB issued ASU No. 2011-12, which defers only those provisions within ASU 2011-05 pertaining to reclassification adjustments out of accumulated other comprehensive income. This guidance, except for those provisions deferred by ASU 2011-12, will become effective for us as of the beginning of our 2013 fiscal year. The adoption of this guidance will not have an impact on our financial position or results of operations.
 
 
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PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
AUGUST 25, 2012
(Dollars in thousands except share and per share data)
In December 2011, the FASB issued ASU No. 2011-11, which updated the guidance in ASC Topic 210, Balance Sheet. The amendments in this Update require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The scope of this amendment would include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. The amendments in this Update will become effective for us as of the beginning of our 2014 fiscal year. The adoption of this guidance is not expected to have a material impact on our financial position or results of operations.

In July 2012, the FASB issued ASU No. 2012-02, which updated the guidance in ASC Topic 350, Intangibles – Goodwill and Other. The amendments in this Update will allow an entity to first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test. Under these amendments, an entity would not be required to calculate the fair value of an indefinite-lived intangible asset unless the entity determines, based on qualitative assessment, that it is not more likely than not, the indefinite-lived intangible asset is impaired. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. The amendments, which become effective for us as of the beginning of our 2013 fiscal year, are not expected to have an impact on our financial condition or results of operations.

18. 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 (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.
 
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 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 (loss), net, in our condensed consolidated statements of income and retained earnings. Our entire investment in IHFC was sold during the third quarter of 2011. See Note 7 for 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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PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
AUGUST 25, 2012
(Dollars in thousands except share and per share data)

The following table presents our segment information:

   
Quarter Ended
   
Nine Months Ended
 
   
August 25, 2012
   
August 27, 2011
   
August 25, 2012
   
August 27, 2011
 
Net Sales
                       
Wholesale
  $ 44,805     $ 41,905     $ 133,355     $ 133,626  
Retail
    41,178       33,609       122,800       108,598  
Inter-company elimination
    (21,545 )     (16,097 )     (63,295 )     (52,282 )
Consolidated
  $ 64,438     $ 59,417     $ 192,860     $ 189,942  
                                 
Income (loss) from Operations
                               
Wholesale
  $ 1,711     $ 1,540     $ 5,575     $ (6,504 )
Retail
    (1,503 )     (1,775 )     (2,437 )     (3,911 )
Inter-company elimination
    558       129       497       942  
Licensee debt cancellation charge
    -       -       -       (6,447 )
Restructuring and asset impairment charges
    -       (123 )     (711 )     (2,082 )
Lease exit costs
    -       -       (359 )     (3,728 )
Consolidated
  $ 766     $ (229 )   $ 2,565     $ (21,730 )
                                 
Depreciation and Amortization
                               
Wholesale
  $ 259     $ 271     $ 825     $ 959  
Retail
    929       832       2,700       2,483  
Investments/real estate
    128       140       406       708  
Consolidated
  $ 1,316     $ 1,243     $ 3,931     $ 4,150  
                                 
Capital Expenditures
                               
Wholesale
  $ 1,268     $ 361     $ 2,303     $ 493  
Retail
    1,238       1,134       4,545       1,966  
Investments & real estate
    -       -       10          
Consolidated
  $ 2,506     $ 1,495     $ 6,858     $ 2,459  
 
Identifiable Assets
 
As of
August 25, 2012
   
As of
November 26, 2011
                 
Wholesale
  $ 140,765     $ 142,361                  
Retail
    64,896       60,811                  
Investments/real estate
    16,078       20,002                  
Consolidated
  $ 221,739     $ 223,174                  
 
 
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PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
AUGUST 25, 2012
(Dollars in thousands except share and per share data)

Note 19. Subsequent Events

Expansion of Credit Facility

Subsequent to August 25, 2012, we received a commitment from our bank to expand our credit line to $15,000.  This new line will be secured by our accounts receivable and inventory. The new facility will contain certain covenants requiring us to maintain certain key financial ratios. We expect this facility will be in place prior to the end of fiscal 2012.

Special Dividend
 
On August 29, 2012, our Board of Directors declared a special dividend of $1.25 per share payable on October 26, 2012 to shareholders of record on October 12, 2012. Based on our number of shares issued and outstanding as of August 25, 2012, the total amount of the dividend will be approximately $13,600.

 
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PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
AUGUST 25, 2012
(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 2011 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 is a leading retailer, manufacturer and marketer of branded home furnishings. Our products are sold primarily through a network of Company-owned and licensee-owned branded stores under the Bassett Home Furnishings (“BHF”) name, with additional distribution through other wholesale channels including multi-line furniture stores, many of which feature Bassett galleries or design centers, specialty stores and mass merchants. We were founded in 1902 and incorporated under the laws of Virginia in 1930. Our rich 110-year history has instilled the principles of quality, value, and integrity in everything that we do, while simultaneously providing us with the expertise to respond to ever-changing consumer tastes and to meet the demands of a global economy.

With 86 BHF stores at August 25, 2012, we have leveraged our strong brand name in furniture into a network of corporate and licensed 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 750 upholstery fabrics, free in-home design visits, and 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 its options, the precision of its craftsmanship, and the speed of its 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 provide comprehensive solutions for their home decor. We continue to strengthen the sales and design talent within our Company-owned retail stores.  During 2011, our Design Consultants completed extensive Design Certification training coursework. This coursework has strengthened their skills related to our house call and design business, and is intended to increase business with our most valuable customers.
 
In order to reach markets that cannot be effectively served by our retail store network, we also distribute our products through other wholesale channels including multi-line furniture stores, many of which feature Bassett galleries or design centers, 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.  In September of 2011, we announced the formation of a strategic partnership with HGTV, a division of Scripps Networks, LLC. This strategic alliance will combine our 110 year heritage in the furniture industry with the penetration of 99 million households in the United States that HGTV enjoys today.  The in-store design centers in our Bassett Home Furnishings network have been co-branded with HGTV to more forcefully market the concept of a “home makeover”, an important point of differentiation for our stores that also mirrors much of the programming content on the HGTV network.  During the fourth quarter of fiscal 2012, new HGTV Home branded furniture will begin arriving on independent retailers’ floors.
 
Our store network included 51 Company-owned and operated stores and 35 licensee-owned stores at August 25, 2012. During the nine months ended August 25, 2012, we opened two new stores, one in Torrance, California in the Los Angeles market and one in Paramus, New Jersey in the New York City market; and we acquired one store from a licensee in Knoxville, Tennessee. We also relocated a store within the Richmond, Virginia market, closing the previous location in Glen Allen, Virginia and opening the new location in Short Pump, Virginia.  One additional store located in Austin, Texas was closed during the second quarter of 2012.
 
 
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PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
AUGUST 25, 2012
(Dollars in thousands except share and per share data)
 
The following table summarizes the changes in store count during the nine months ended August 25, 2012:
 
   
November 26, 2011
   
Openings
   
Closed
   
Transfers
   
August 25, 2012
 
Licensee-owned stores
    39       -       (3 )     (1 )     35  
Company-owned stores
    49       3       (2 )     1       51  
                                         
Total
    88       3       (5 )     -       86  
 
 
Our wholesale operations include an upholstery complex 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, Virginia.  Most of our wood furniture and certain upholstery offerings are sourced from several foreign plants, primarily in Vietnam, Indonesia, and China. We define imported product as fully finished product that is sourced internationally. For the first nine months of 2012, approximately 50% of our wholesale sales were of imported product compared to 53% for the first nine months of 2011.
 
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 last year. 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 volatile fuel prices.  These conditions 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, prior to 2012 we incurred significant bad debt and notes receivable valuation charges.  Beginning during the second half of 2011 and continuing into 2012, this trend improved significantly as we only incurred bad debt charges of $416 for the first nine months of 2012 compared with $13,116 for the first nine months of 2011, reflecting improved credit positions with our current fleet of licensees.  We believe that the current level of bad debt and notes receivable valuation charges for the first three quarters of 2012 is more indicative of the expected trend of future charges. 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 should any licensees experience severe deteriorations in their credit positions from which we believe they are unlikely to recover.
 
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.
 
 
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PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
AUGUST 25, 2012
(Dollars in thousands except share and per share data)

Results of Operations – Quarter and nine months ended August 25, 2012 compared with quarter and nine months ended August 27, 2011:
 
Net sales, gross profit, selling, general and administrative (SG&A) expense, and income (loss) from operations were as follows for the periods ended August 25, 2012 and August 27, 2011:
 
   
Quarter Ended
   
Nine Months Ended
 
   
August 25, 2012
   
August 27, 2011
   
August 25, 2012
   
August 27, 2011
 
                                                 
Net sales
  $ 64,438       100.0 %   $ 59,417       100.0 %   $ 192,860       100.0 %   $ 189,942       100.0 %
Gross profit
    33,818       52.5 %     29,251       49.2 %     101,150       52.4 %     94,296       49.6 %
SG&A expenses
    32,891       51.0 %     29,267       49.3 %     97,099       50.3 %     90,653       47.7 %
Bad debt and notes receivable valuation charges
    161       0.3 %     90       0.2 %     416       0.2 %     13,116       6.9 %
Licensee debt cancellation charges
    -       0.0 %     -       0.0 %     -       0.0 %     6,447       3.4 %
Restructuring and asset impairment charges
    -       0.0 %     123       0.1 %     711       0.4 %     2,082       1.0 %
Lease exit costs
    -       0.0 %     -       0.0 %     359       0.2 %     3,728       2.0 %
                                                                 
Income (loss) from operations
  $ 766       1.2 %   $ (229 )     -0.4 %   $ 2,565       1.3 %   $ (21,730 )     -11.4 %
 
On a consolidated basis, we reported net sales for the third quarter of 2012 of $64,438, an increase of $5,021, or 8.5%, from sales levels attained in the third quarter of 2011.  For the first nine months of 2012, we reported net sales of $192,860, an increase of $2,918, or 1.5%, from the first nine months of 2011. Refer to the quarterly and year-to-date analyses of sales for each segment below for a discussion of the factors affecting net sales for each period. Consolidated gross profit margin increased over the prior year by 3.3 points as a percentage of net sales for the three months ended August 25, 2012, primarily attributable to additional retail markup realized as the result of the continued expansi