UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., 20549
FORM 10-K
Commission File No. 0-209
BASSETT FURNITURE INDUSTRIES, INCORPORATED
(Exact name of registrant as specified in its charter)
(State or other jurisdiction
of incorporation or organization)
(I.R.S. Employer
Identification No.)
Registrant’s telephone number, including area code 276/629-6000
Securities registered pursuant to Section 12(g) of the Act:
Title of each class:
Name of each exchangeon which registered
Common Stock ($5.00 par value)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for at least the past 90 days. x Yes ¨ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x Yes ¨ No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). x Yes ¨ No
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of May 31, 2003 was $159,529,439.
The number of shares of the Registrant’s common stock outstanding on January 28, 2004 was 11,642,964.
DOCUMENTS INCORPORATED BY REFERENCE
PART I
(dollar amounts in thousands except per share data)
General Development of Business
Bassett Furniture Industries Inc., (together with its consolidated subsidiaries, “Bassett” or the “Company”) based in Bassett, Va., is a leading manufacturer, marketer, sourcer and retailer of branded home furnishings. Bassett’s products, designed to provide quality, style and value, are sold through Bassett Furniture Direct™ stores, @t Home with Bassett® galleries, and other furniture and department stores. Bassett was founded in 1902 and incorporated under the laws of Virginia in 1930.
Material Changes in the Development of Business in the last five years are as follows:
There have been two significant business developments that have materially affected the Company’s operations over the last five years. First, the Company has created and re-channeled sales through a vertically integrated retail sales network. This strategy both builds on the Company’s strengths (brand name, balance sheet, product offerings) and better positions the Company to capitalize on the changing furniture retail environment. Licensee stores, primarily independently owned, known as Bassett Furniture Direct (BFD), accounted for 53% of the Company’s sales in 2003. Bassett’s full range of furniture products and accessories are sold through an exclusive network of 101 BFD stores, of which 82 are independently owned, 13 are controlled and consolidated by the Company (“Bassett-owned retail stores”) and six are operated by joint ventures (“partnership licensees”), as well as over 1,000 furniture and department stores located throughout the United States. Second, the Company has restructured production capacities and reduced costs to better align manufacturing capabilities with the Company’s new selling strategies. As a result of these restructurings, the Company has reduced its number of facilities from 13 to 7 and reduced headcount from 4,700 to 2,400.
The Bassett Furniture Direct store program, which began in 1997, entailed not only the creation of a new prototype store, but also includes an internal, cultural transformation aimed at re-focusing company practices and strategies to the ultimate end user, the consumer. The strategy also focused on re-styling the Bassett lines and suites with accessories. Bassett Furniture Direct acts as both a furniture design center and a moderate price point leader – two characteristics that combined with custom product and quick delivery offer the Company a unique selling proposition in the furniture industry.
Other significant business developments that impacted the retail store program and manufacturing operations are summarized below.
In the fourth quarter of 2003, the Company acquired an additional 29% ownership in LRG Furniture, LLC, (“LRG”) (an affiliate of the Company) bringing the Company’s total ownership in LRG to 80%. As part of this transaction, the Company acquired two stores in Las Vegas, Nevada, from LRG for net book value of $1,200.
The Company closed the wood manufacturing plant in Dublin, Georgia, in the first quarter of 2003. The Company recorded a charge of $3,200 in the first quarter of 2003 representing a $1,500 write-down of property and equipment and $1,700 of severance and related employee benefit costs for 320 employees associated with the closure.
The Company closed its California upholstery plant during the fourth quarter of 2002 and consolidated production into two remaining upholstery manufacturing facilities in North Carolina. The Company incurred restructuring charges of $1,251, which relate entirely to severance and employee benefit costs for approximately 200 employees. In the fourth quarter of 2003, the Company sold this facility, yet deferred the gain from this sale until payment is received in 2004.
PAGE 2
Effective March 4, 2002, the Company purchased five stores in North Carolina and Virginia from LRG an affiliate of the Company, for net book value (which approximated $0). Included in this transaction were inventories of $3,439, payables of $4,213 and notes payable to bank of $1,189.
The Company restructured production capacities for its Wood Division in 2001. During the first quarter, production was moved from one facility to another and a wood manufacturing facility was identified for closure and subsequently closed in the second quarter. Additionally, 60 corporate office positions were eliminated in the first and second quarters of 2001. Ongoing efforts to match production with demand, offer more competitively priced products and operate more efficient manufacturing facilities resulted in the announcement and subsequent closure of two additional facilities in Bassett, Virginia during the third quarter of 2001. Production has been moved to other manufacturing facilities in Virginia or has been outsourced. Approximately 800 positions were eliminated as a result of this restructuring activity. Restructuring charges of $6,952 were recognized in 2001. The Company also recorded unusual and non-recurring charges of $1,051 for inventory losses related to discontinued product. This amount is included in 2001 cost of sales.
The Company made a decision in late 2000 to consolidate production in its Wood Division. This included transferring certain products to different facilities, reducing one facility to rough-end operations only, and eliminating approximately 300 salaried and hourly positions. As a result, the Company recorded a restructuring charge in 2000 of $6,680, of which, $5,800 related to the write-down of property and equipment and $880 related to severance and related employee benefits costs.
Early in fiscal year 2000, the Company merged all of its eight Company-owned Bassett Furniture Direct (BFD) stores with a licensee’s five BFD stores to form LRG. Refer to Note H of the Consolidated Financial Statements included in the Annual Report for more information about the joint venture.
During 1999, the Company sold substantially all of the assets of its Bedding Division to Premier Bedding Group LLC (“PBG”). The net assets sold, which totaled $8,400, were exchanged for $6,500 in cash and a $1,900 convertible note receivable.
Refer to Note N of the Consolidated Financial Statements included in the Annual Report for a detail of restructuring activity and refer to the Management’s Discussion and Analysis section of the Annual Report for additional discussion on these topics.
Operating Segments
The Company’s primary business is in wholesale home furnishings. The wholesale home furnishings business is involved principally in the manufacture, sale and distribution of furniture products to a network of independently owned stores and stores owned by the Company and by affiliates of the Company. The wholesale business consists primarily of three operating segments: wood, upholstery and import. Stores operated and controlled by the Company are included in the retail segment.
Refer to Note R of the Consolidated Financial Statements included in the Annual Report for more information about segment information for 2001, 2002 and 2003 and refer to the Management’s Discussion and Analysis section of the Annual Report for additional discussion on this topic.
Description of Business
Bassett is a manufacturer, retailer and importer of quality home furnishings. Bassett’s full range of furniture products and accessories are sold through an exclusive retail store network composed
PAGE 3
of 82 independently owned, thirteen owned and controlled by the Company (“Bassett-owned retail stores”) and six operated by joint ventures (“partnership licensees”) retail stores known as Bassett Furniture Direct (“BFD”) and over 1,000 furniture and department stores located throughout the United States. The Company has eight domestic manufacturing facilities.
The wood segment is engaged in the manufacture and sale of wood furniture, including bedroom and dining suites and accent pieces, to independent and affiliated retailers. The wood segment accounted for 47%, 51%, and 57% of wholesale sales during 2003, 2002 and 2001, respectively. The Company currently has five wood manufacturing facilities. The upholstery segment is involved in the manufacture and sale of upholstered frames and cut upholstery items having a variety of frame and fabric options, including sofas, chairs, and love seats. The Company currently has two upholstery manufacturing facilities. The upholstery segment accounted for 34%, 33%, and 29% of wholesale sales during 2003, 2002 and 2001, respectively. The import segment sources product, principally from Asia, and sells this product to independent and affiliated retailers. The import segment accounted for 16%, 13%, and 11% of wholesale sales during 2003, 2002 and 2001, respectively. The retail segment operates 13 Bassett Furniture Direct stores in North Carolina, Nevada and Texas. The retail segment accounted for 16% and 5% of total net sales in 2003 and 2002.
The Company uses lumber, fabric, leather and other materials in the production of wood and upholstered furniture. These components originate from a variety of domestic and international suppliers and are widely available. Prices for these components in aggregate have been relatively stable over the last several years. The Company currently assembles and finishes these imported components in several of its plants in the United States.
The Company’s trademarks, including “Bassett” and the names of its marketing divisions, products and collections are significant to the conduct of its business. This importance is due to consumer recognition of the names and identification with the Company’s broad range of products. Certain of the Company’s trademarks are licensed to independent retailers for use in full store and store gallery presentations of the Company’s products. The Company also owns certain patents and licenses that are important in the conduct of the Company’s business.
The furniture industry in which the Company competes is not considered to be a seasonal industry. However, working capital levels will fluctuate based on overall business conditions and desired service levels.
Sales to one customer (JCPenney) amounted to approximately 3%, 9%, and 15% of gross sales in 2003, 2002 and 2001, respectively. Additionally, sales to LRG were 10% and 7% of net sales in 2002 and 2001, respectively. The Company’s backlog of orders believed to be firm was $19,000 at November 29, 2003, and $18,014 at November 30, 2002. It is expected that the November 29, 2003, backlog will be filled within the 2004 fiscal year.
The furniture industry is very competitive and there are a large number of manufacturers both within the United States and offshore who compete in the market on the basis of product quality, price, style, delivery and service. Additionally, certain retailers are increasingly sourcing imported product directly, thus bypassing domestic furniture manufacturers. Based on annual sales revenue, the Company is one of the largest furniture manufacturers located in the United States. The Company has been successful in this competitive environment because its products represent excellent value combining attractive prices, quality and styling; prompt delivery; and courteous service.
The furniture industry is considered to be a “fashion” industry subject to constant fluctuations to meet changing consumer preferences and tastes. As such, the Company is continuously involved in the development of new designs and products. Due to the nature of these efforts and the close relationship to the manufacturing operations, these costs are considered normal operating costs and are not segregated. The Company is not otherwise involved in “traditional” research and development activities nor does the Company sponsor research and development activities of any of its customers.
PAGE 4
In management’s view, the Company has complied in all material respects with all federal, state and local standards in the area of safety, health and pollution and environmental controls. Compliance with these standards resulted with capital spending in 1998 and 1999, but otherwise, has not had a material adverse effect on past earnings or competitive position. The Company is involved in environmental matters at certain of its plant facilities, which arise in the normal course of business. Although the final outcome of these environmental matters cannot be determined, based on the facts presently known, it is management’s opinion that the final resolution of these matters will not have a material adverse effect on the Company’s financial position or future results of operations.
The Company employed approximately 2,400 people as of November 29, 2003, none of whom were subject to collective bargaining arrangements. The Company has not experienced any recent work stoppages. The Company considers its relationship with its employees to be good.
The Company has several investments in affiliated companies, including a minority interest in International Home Furnishings Center, Inc. (IHFC) which is a lessor of permanent exhibition space to furniture and accessory manufacturers. The IHFC financial statements are included on pages F-1 to F-16. The Company owns a majority interest in LRG, which is a retailer of home furnishings. The Company consolidated LRG in 2003. See Notes G and H to the consolidated financial statements for discussion of affiliates.
The Alternative Asset Fund commenced operations on July 1, 1998. Private Advisors, L.L.C. is the general partner (General Partner) of the Alternative Asset Fund. The Company and General Partner are currently the only two partners. The objective of the Alternative Asset Fund is to achieve consistent positive returns, while attempting to reduce risk and volatility, by placing its capital with a variety of hedge funds and experienced portfolio managers. Such hedge funds and portfolio managers employ a variety of trading styles or strategies, including, but not limited to, convertible arbitrage, merger or risk arbitrage, distressed debt, long/short equity, multi- strategy and other market — neutral strategies. The General Partner has discretion to make all investment and trading decisions, including the selection of investment managers. The General Partner selects portfolio managers on the basis of various criteria, including, among other things, the manager’s investment performance during various time periods and market cycles, the fund’s infrastructure, and the manager’s reputation, experience, training and investment philosophy. In addition, the General Partner requires that each portfolio manager have a substantial personal investment in the investment program. The Company’s investment in the Alternative Asset Fund, which totaled $45,251 at November 29, 2003, includes investments in various other private limited partnerships, which contain contractual commitments with elements of market risk. See Note F to the consolidated financial statements for further discussion.
Foreign and Domestic Operations and Export Sales
The Company has no foreign operations, and its export sales were approximately $2.9 million, $2.9 million, and $3.2 million, in 2003, 2002, and 2001 respectively.
Available Information
Through its website www.bassettfurniture.com, the Company makes available free of charge as soon as reasonably practible after electronically filing or furnishing with the SEC, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments thereto.
The Company owns the following manufacturing facilities, by segment:
Wood Segment:
J. D. Bassett Manufacturing Company *
Bassett, VA
Bassett Superior Lines
Bassett Chair Company *
Bassett Table Company *
Bassett Furniture Industries
Macon, GA
Martinsville, VA
Bassett Furniture Industries*
Dublin, GA
Mt. Airy, NC
Bassett Fiberboard
Upholstery Segment:
Bassett Upholstery Division
Newton, NC
Hiddenite, NC
PAGE 5
Other:
Weiman Upholstery
Christiansburg, VA
Properties designated by a single asterisk “*” have ceased manufacturing operations and are currently either held for sale or are idle facilities in connection with restructuring efforts.
The Company owns the real estate used by certain Bassett Furniture Direct retail stores, ranging from 15,000 to 25,000 square feet each, in the following cities:
Greenville, SC
Concord, NC
Greensboro, NC
Fredericksburg, VA
Knoxville, TN
Gulfport, MS
Chesterfield, VA
Louisville, KY
Houston, TX
In addition, the Company owns leasehold improvements in Hickory, NC, Arlington, TX, Portland, OR, Redmond, WA, Atlanta, GA, Albuquerque, NM, and Virginia Beach, VA All of the properties noted above are operated as Bassett Furniture Direct stores.
The Company owns its general corporate office building, one warehouse, and an outlet store all located in Bassett, Virginia. The Company also owns leasehold improvements in its High Point, NC showroom.
In general, these facilities are suitable and are considered to be adequate for the continuing operations involved. All facilities, except those indicated above as held for sale or idle, are in regular use and provide more than adequate capacity for the Company’s manufacturing needs.
The following facilities were disposed of during 2003:
Bassett Upholstery
Los Angeles, CA
The following facilities were sold or disposed of during 2001:
Showroom
Thomasville, NC
Conover, NC
Claremont, NC
Warehouse
PAGE 6
During 2003, the Company reached a final settlement with the IRS regarding the non-deductibility of interest expense on loans associated with the Company’s corporate owned life insurance plan (“COLI” plan). The Company had previously recorded reserves to cover the negotiated settlement amount and, as such, there were no further tax related charges associated with the COLI.
The Company is also involved in various claims and actions, including environmental matters, which arise in the normal course of business. Although the final outcome of these matters cannot be determined, based on the facts presently known, it is management’s opinion that the final resolution of these matters will not have a material adverse effect on the Company’s financial position or future results of operations.
None.
PAGE 7
John E. Bassett III, 45, has been with the Company since 1981 and served as Vice President of Wood Manufacturing from 1997 to 2001 and as Vice President Global Sourcing since 2001.
Jay R. Hervey, Esq., 44, has served as the General Counsel, Vice President and Secretary for the Company since 1997.
Dennis Hoy, 45, has been with the Company since 1996, as Casegoods and Merchandise Manager and as Vice President of Merchandising until 1999. He served as Vice President and General Manager, Upholstery until 2001, Vice President Corporate Retail from 2001 to 2002, and now serves as Vice President of Wood Merchandising.
Matthew S. Johnson, 42, has been with the Company for 17 years, most recently as Vice President of Wood Merchandising from 1998 to 2000. Since 2000, he has been serving as Vice President of Merchandising and Design.
Mark S. Jordan, 50, was Director of Product Development and Plant Manager for Ethan Allen from 1974 to 1999. In 1999 he joined the Company as Plant Manager. In 2001, he was promoted to Vice President of Upholstery Manufacturing and in 2002 he was promoted to Vice President and General Manager of Upholstery.
Charles T. King, 41, was with McMillan, Pate and King, CPAs from 1989 to 1998 and joined the Company in 1998 as Retail Controller. In 2001, he was promoted to Vice President and Controller. In 2003, he was promoted to Vice President of Retail Finance.
Barry C. Safrit, 41, was with CHF Industries from 1995 until 1998 as Controller and as Chief Financial Officer and joined the Company as Vice President and Chief Accounting Officer in 1998. He was promoted to Vice President and Chief Financial Officer in 2001.
Keith R. Sanders, 59, was with Ethan Allen from 1995 until 1998 as the Vice President of Manufacturing and Vice President of Upholstery and has been the Vice President of Upholstery Manufacturing for the Company from 1998 to 1999. In 1999, he was promoted to Executive Vice President, Operations.
Robert H. Spilman, Jr., 47, has been with the Company since 1984. He was the Company’s Executive Vice President of Marketing and Merchandising from 1994 until 1997 and served as President and Chief Operating Officer from 1997 to 2000. In 2000, he was promoted to Chief Executive Officer and President.
Thomas M. Brockman, 49, joined the Company in late 2003 as Vice President of the Wood Division. From 2000 to 2003 he was the Vice President of Manufacturing for the Mid East Region of Ethan Allen.
PAGE 8
PART II
The information contained in the Annual Report under the caption “Investor Information” with respect to number of stockholders, market prices and dividends paid is incorporated herein by reference thereto.
The information for the five years ended November 29, 2003, contained in “Other Business Data” in the Annual Report is incorporated herein by reference thereto.
The information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report is incorporated herein by reference thereto.
The information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Market Risk” in the Annual Report is incorporated herein by reference thereto.
The consolidated financial statements and notes to consolidated financial statements of the Registrant and its subsidiaries contained in the Annual Report are incorporated herein by reference thereto. In addition, financial statements of the registrant’s significant non-consolidated subsidiaries are included in this Form 10-K on pages F-1 to F-16. Quarterly results of operations are included under the caption “Other Business Data” in the Annual Report to shareholders and are incorporated herein by reference.
a. Evaluation of the Company’s Disclosure Controls. As of the end of the period covered by this Annual Report on Form 10-K, the Company’s principal executive officer and principal financial officer have evaluated the effectiveness of the Company’s “disclosure controls and procedures” (“Disclosure Controls”). Disclosure Controls, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this Annual Report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (SEC) rules and forms. Disclosure Controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
The Company’s management, including the CEO and CFO, does not expect that our Disclosure Controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have
PAGE 9
been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Based upon their controls evaluation, our CEO and CFO have concluded that, subject to the limitations noted above, our Disclosure Controls are effective to ensure that the information required to be disclosed by the Company in its periodic reports is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding disclosure and is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
b. Changes in internal control over financial reporting. There have been no significant changes in the Company’s internal controls during the Company’s fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART III
The information contained on pages 3 through 5 and page 11 of the Proxy Statement under the “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” is incorporated herein by reference thereto. Please see section entitled “Executive Officers of the Registrant” in Item 4b of Part I of this report for information concerning executive officers.
The Board of Directors has determined that Michael E. Murphy, a member of the Registrant’s Audit Committee, is an audit committee financial expert (as that term is defined under Item 401(h) of Regulation S-K). The Registrant has made its code of ethics available on its website at www.bassettfurniture.com. The charters for the Audit Committee and the Organization, Compensation and Nominating Committee are also available on the Registrant’s website.
The information contained on pages 6 through 11 of the Proxy Statement under the captions “Organization, Compensation and Nominating Committee Report,” “Stockholder Return Performance Graph,” “Executive Compensation,” “Supplemental Retirement Income Plan,” “Deferred Compensation Agreement,” and “Director Compensation” is incorporated herein by reference thereto.
The information contained on pages 1 through 5 of the Proxy Statement under the headings “Principal Stockholders and Holdings of Management” and “Election of Directors” is incorporated herein by reference thereto.
The following table provides information as of November 29, 2003 with respect to shares of Company Common stock that may be issued under existing equity compensation plans, including the 1993 Long Term Incentive Stock Option Plan, the 1997 Employee Stock Plan, the 1993 Stock Plan for Non-Employee Directors, and the 2000 Employee Stock Purchase Plan (ESPP). All equity compensation plans currently in place have been approved by the stockholders.
PAGE 10
Plan
Equity Compensation Plans Approved by Stockholders (1)
Equity Compensation Plans Not Approved by Stockholders (3)
Total
The information contained on page 12 of the Proxy Statement under the caption “Audit and Other Fees” is incorporated herein by reference thereto.
PAGE 11
PART IV
Articles of Incorporation as amended are incorporated herein by reference to
Form 10-Q for the fiscal quarter ended February 28, 1994.
PAGE 12
PAGE 13
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BASSETT FURNITURE INDUSTRIES, INCORPORATED (Registrant)
/s/ Robert H. Spilman, Jr.
Date: January 30, 2004
Robert H. Spilman, Jr.
President and Chief Executive Officer
Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Paul Fulton
Paul Fulton
Chairman of the Board of Directors
/s/ Peter W. Brown
Peter W. Brown
By:
/s/ Willie D. Davis
Willie D. Davis
/s/ Alan T. Dickson
Alan T. Dickson
/s/ Howard H. Haworth
Howard H. Haworth
/s/ Michael E. Murphy
Michael E. Murphy
/s/ Dale C. Pond
Dale C. Pond
/s/ David A. Stonecipher
David A. Stonecipher
/s/ Barry C. Safrit
Barry C. Safrit
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
PAGE 14
ANNUAL REPORT ON FORM 10-K
ITEM 15(a)(1)
CERTAIN EXHIBITS
YEAR ENDED NOVEMBER 29, 2003
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
BASSETT, VIRGINIA
INTERNATIONAL HOME FURNISHINGS
CENTER, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended October 31, 2003, 2002 and 2001
International Home Furnishings Center, Inc. and Subsidiary
TABLE OF CONTENTS
Independent Auditors’ Report
Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders’ Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
F-1
INDEPENDENT AUDITORS’ REPORT
To the Board of Directors
International Home Furnishings Center, Inc.
High Point, North Carolina
We have audited the accompanying consolidated balance sheets of International Home Furnishings Center, Inc. and subsidiary as of October 31, 2003 and 2002 and the related consolidated statements of income, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended October 31, 2003. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of International Home Furnishings Center, Inc. and subsidiary at October 31, 2003 and 2002 and the results of their operations and their cash flows for each of the three years in the period ended October 31, 2003 in conformity with accounting principles generally accepted in the United States of America.
/s/ Dixon Odom PLLC
Dixon Odom PLLC
November 26, 2003
Page 1
F-2
INTERNATIONAL HOME FURNISHINGS CENTER, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
October 31, 2003 and 2002
ASSETS
CURRENT ASSETS
Cash and cash equivalents
Restricted cash
Short-term investments
Receivables
Trade
Interest
Deferred income tax benefit
Prepaid expenses
TOTAL CURRENT ASSETS
PROPERTY AND EQUIPMENT, at cost
Land and land improvements
Buildings, exclusive of theater complex
Furniture and equipment
Construction in progress
Accumulated depreciation
OTHER ASSETS
Theater complex, at cost less amortization
Deferred financing costs, net of accumulated amortization of $1,724,614 and $1,121,845 at October 31, 2003 and 2002, respectively
Interest rate cap agreement, at fair value
LIABILITIES LESS STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES
Accounts payable, trade
Accrued property taxes
Other accrued expenses
Rents received in advance
Income taxes payable
Current maturities of long-term debt
TOTAL CURRENT LIABILITIES
LONG-TERM DEBT
OTHER LONG-TERM LIABILITIES
Supplemental retirement benefits
Interest rate floor agreement, at fair value
COMMITMENTS (Notes G and L)
STOCKHOLDERS’ DEFICIT
Common stock, $5 par value, 1,000,000 shares authorized, 481,628 shares issued in 2003 and 2002
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
See accompanying notes.
Page 2
F-3
CONSOLIDATED STATEMENTS OF INCOME
OPERATING REVENUES
Rental income
Other revenues
TOTAL OPERATING REVENUES
OPERATING EXPENSES
Compensation and benefits
Market and promotional
Maintenance and building costs
Depreciation expense
Rent
Property taxes and insurance
Utilities
Other operating costs
TOTAL OPERATING EXPENSES
INCOME FROM OPERATIONS
NONOPERATING INCOME
Interest income
Dividend income
TOTAL NONOPERATING INCOME
NONOPERATING EXPENSES
Interest expense
TOTAL NONOPERATING EXPENSES
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM
PROVISION FOR INCOME TAXES
INCOME BEFORE EXTRAORDINARY ITEM
EXTRAORDINARY ITEM
Loss on early extinguishment of debt, net of income tax benefit of $1,217,000
NET INCOME
BASIC EARNINGS PER COMMON SHARE
Income before extraordinary item
Extraordinary item
Net income
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
Page 3
F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
BALANCE (DEFICIT), OCTOBER 31, 2000
Dividends paid ($115.00 per common share)
BALANCE (DEFICIT), OCTOBER 31, 2001
Purchase and retirement of 46,010 shares of common stock
Dividends paid ($24.916 per common share)
Comprehensive income (loss):
Other comprehensive loss:
Change in fair value of interest rate floor hedging activity, net of deferred tax benefit of $1,491,866
Reclassification adjustment for losses recognized in net income, net of deferred tax benefit of $308,184
Total comprehensive income
BALANCE (DEFICIT), OCTOBER 31, 2002
Dividends paid ($22.84 per common share)
Comprehensive income:
Other comprehensive income:
Change in fair value of interest rate floor hedging activity, net of deferred tax benefit of $470,706
Reclassification adjustment for losses recognized in net income, net of deferred tax benefit of $675,438
BALANCE (DEFICIT), OCTOBER 31, 2003
Page 4
F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Decrease in fair value of interest rate cap agreements
Decrease in fair value of interest rate floor agreement
Loss on early extinguishment of debt
Provision for losses on accounts receivable
(Gain) loss on disposal of assets
Deferred income taxes
Change in assets and liabilities
(Increase) decrease in trade and interest receivables
(Increase) decrease in prepaid expenses
Increase (decrease) in accounts payable and accrued expenses
Increase (decrease) in rents received in advance
Increase (decrease) in income taxes payable
Increase in supplemental retirement benefits
NET CASH PROVIDED BY OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase and construction of property and equipment
Proceeds from sale of property and equipment
Purchase of short-term investments
(Increase) decrease in restricted cash
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt
Principal payments on long-term debt
Cost incurred to extinguish debt early
Purchase of interest rate cap
Proceeds from sale of interest rate floor
Dividends paid
Retirement of common stock
Financing costs paid
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING
CASH AND CASH EQUIVALENTS, ENDING
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes
Interest, net of amount capitalized
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING AND INVESTING ACTIVITIES
Accounts payable incurred for acquisition of property and equipment
Increase (decrease) in fair value of interest rate floor agreement, net of deferred income taxes of $204,732 in 2003 and deferred income tax benefit of $1,183,682 in 2002
Page 5
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2003, 2002 and 2001
NOTE A - DESCRIPTION OF BUSINESS
The Company is the lessor of permanent exhibition space to furniture and accessory manufacturers which are headquartered throughout the United States and in many foreign countries. This exhibition space, located in High Point, North Carolina, is used by the Home Furnishings Industry to showcase its products at the International Home Furnishings Market held each April and October. The details of the operating leases with the Company’s tenants are described in Note I.
The Company has been in business since June 27, 1919, and operates under the trade name of “International Home Furnishings Center.”
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
The accounting policies relative to the carrying values of property and equipment, theater complex and interest rate cap and floor agreements are indicated in the captions on the consolidated balance sheets. Other significant accounting policies are as follows:
Principles of Consolidation
The consolidated financial statements include the accounts of International Home Furnishings Center, Inc. and its wholly-owned subsidiary, IHFC Properties, LLC, a company organized on December 21, 2000. All material intercompany transactions have been eliminated. The Company and its subsidiary are referred to collectively herein as “the Company.” Notwithstanding the consolidation of the Company and IHFC Properties, LLC in these financial statements, IHFC Properties, LLC is a separate entity, with separate assets and liabilities and has its own separate financial statements.
Rental Income
Income from rental of exhibition space is recognized under the operating method. Aggregate rentals are reported as income on the straight-line basis over the lives of the leases, and expenses are charged as incurred against such income. Future rentals under existing leases are not recorded as assets in the accompanying consolidated balance sheets.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Investment Securities
The Company has investments in debt and marketable equity securities. Debt securities consist of obligations of state and local governments and U. S. corporations. Marketable equity securities consist primarily of investments in mutual funds.
Page 6
F-7
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment Securities (Continued)
Management determines the appropriate classification of securities at the date individual investment securities are acquired, and the appropriateness of such classification is reassessed at each balance sheet date. Since the Company neither buys investment securities in anticipation of short-term fluctuations in market prices nor commits to holding debt securities to their maturities, investments in debt and marketable equity securities have been classified as available-for-sale. Available-for-sale securities are stated at fair value, and unrealized holding gains and losses, if significant, net of the related deferred tax effect, are reported as a separate component of accumulated other comprehensive income in stockholders’ equity. Premiums and discounts on investments in debt securities are amortized over their contractual lives. Interest on debt securities is recognized in income as accrued, and dividends on marketable equity securities are recognized in income when declared. Realized gains and losses are included in income and are determined on the basis of the specific securities sold.
Property, Equipment and Depreciation
Expenditures for maintenance, repairs, and minor renewals are charged to expense as incurred. Major renewals and betterments are capitalized. Depreciation is provided primarily on the straight-line method over the following estimated useful lives:
Land improvements
Building structures
Building components
In accordance with the provisions of Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company periodically reviews long-lived assets when indications of impairment exist, and if the value of the assets is impaired, an impairment loss would be recognized.
Deferred Financing Costs
Costs associated with obtaining long-term financing have been deferred and are being amortized on the interest method over the term of the related debt. Amortization expense charged to operations during the years ended October 31, 2003, 2002 and 2001 was $602,769, $613,042 and $522,725, respectively.
Reporting Comprehensive Income
Comprehensive income is the total of net income and other comprehensive income. Other comprehensive income represents changes in equity, other than net income, from transactions and other events and circumstances from non-owner sources. Accordingly, comprehensive income includes all changes in equity during a period except those resulting from investments by stockholders and distributions to stockholders.
Page 7
F-8
Derivative Instruments
The Company holds and issues derivative instruments for the purpose of hedging the risks related to the variability of cash flows caused by changes in interest rates. The Company’s objectives are to decrease the volatility of earnings and cash flows associated with changing interest rates by entering into interest rate floor and cap agreements that effectively limit the range of interest rate exposure on its debt (see Note E).
The Company designates its derivatives based upon criteria established by Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. For a derivative designated as a cash flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of other comprehensive income and subsequently reclassified into earnings when the hedged exposure affects earnings. The ineffective portion of the gain or loss is reported in earnings immediately.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in the consolidated financial statements and consist of taxes currently due plus deferred taxes related to temporary differences between the reported amounts of assets and liabilities and their tax bases. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Earnings Per Common Share
The Company follows the provisions of Statement of Financial Accounting Standards No. 128,Earnings Per Share, which specifies the computation, presentation and disclosure requirements for earnings per share (“EPS”). Basic EPS excludes all dilution and has been computed using the weighted average number of common shares outstanding during the year. Diluted EPS reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock. The Company has no dilutive potential common shares.
Retirement Plans
The Company maintains a 401(k) qualified retirement plan covering eligible employees under which participants may contribute up to 25% of their compensation subject to maximum allowable contributions. The Company is obligated to contribute, on a matching basis, 50% of the first 6% of compensation voluntarily contributed by participants. The Company may also make additional contributions to the plan if it so elects.
Page 8
Retirement Plans (Continued)
In 1991, the Company adopted a nonqualified supplemental retirement benefits plan for key management employees. Benefits payable under the plan are based upon the participant’s average compensation during his last five years of employment and are reduced by benefits payable under the Company’s qualified retirement plan and by one-half of the participant’s social security benefits. Benefits under the plan do not vest until the attainment of normal retirement age; however, a reduced benefit is payable if employment terminates prior to normal retirement age because of death or disability. The vested portion of the benefits under this plan amounted to approximately $2,225,000 and $1,406,000 at October 31, 2003 and 2002, respectively. The Company has no obligation to fund this supplemental plan.
Fair Value of Financial Instruments
The carrying amounts of the Company’s significant financial instruments, none of which are held for trading purposes, approximate fair value at October 31, 2003 and 2002. Cash, cash equivalents and restricted cash approximate fair value because of the short maturities of these instruments. Long-term debt approximates fair value because of its floating interest rate terms. Derivative financial instruments are carried at fair value.
Use of Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
NOTE C - RESTRICTED CASH
The Company has restricted, interest-bearing cash accounts held by the lender under the escrow provisions of the term loan agreement described in Note E. The restricted cash balances are held for the following purposes at October 31, 2003 and 2002:
Taxes and insurance
Required repairs
Replacements
Environmental
Debt service
Operating expenses
Ground rent
Cash management
Page 9
F-10
NOTE C - RESTRICTED CASH (Continued)
All rents and other income from operation of the Company’s property are deposited directly into a lockbox account controlled by the lender under the Company’s cash management agreement. Monthly during the term of the loan, the lender will disburse to the Company amounts in the cash management account in excess of the amounts needed to replenish the various escrow accounts.
The Company has granted the lender a security interest in each of the restricted cash accounts as additional security for the outstanding term loan.
NOTE D - INVESTMENT IN DEBT AND MARKETABLE EQUITY SECURITIES
The following is a summary of the Company’s investment in available-for-sale securities as of October 31, 2003 and 2002:
Fair
Value
Debt securities
State and local governments
Equity securities
Available-for-sale securities are classified in the following balance sheet captions as of October 31, 2003 and 2002:
All the Company’s debt securities mature within three months.
Page 10
F-11
NOTE E - LONG-TERM DEBT
Long-term debt consists of the following at October 31, 2003 and 2002:
Term note payable, Bank of America, N.A. Principal payments are due monthly based on an amortization schedule provided by the lender. Interest is payable monthly at the LIBOR rate plus 2.1%. At October 31, 2003, the interest rate was 3.22%. The note matures in December 2003 and has two one-year extension periods available, which the Company intends to exercise. The loan is collateralized by land and buildings, restricted cash (Note C), rents and assignment of leases with tenants.
Less current maturities
The aggregate maturities of long-term debt are due as follows:
Year Ending October 31,
2004
2005
2006
During the year ended October 31, 2001, the Company entered into an interest rate cap agreement that had a notional amount of $133,182,523 at October 31, 2001. The notional amount decreased as principal payments were made on the Company’s term debt and was to be equal to the term debt until the agreement’s expiration in January 2004. Under the agreement, the Company was to receive an amount equal to the interest it incurred on its term debt in excess of 8%, if any. The $265,887 decrease in the fair value of the interest rate cap agreement was charged to earnings as financing expense during the year ended October 31, 2001. In 2002, the Company paid $26,613 to terminate this agreement. The $26,613 was charged to earnings as financing expense for the year ended October 31, 2002.
Page 11
F-12
NOTE E - LONG-TERM DEBT (Continued)
During the year ended October 31, 2002, the Company paid $833,000 to execute an interest rate cap agreement that had a notional amount of $127,674,559 at October 31, 2003 and $130,555,335 at October 31, 2002. The notional amount will decrease as principal payments are made on the Company’s term debt and will be equal to the term debt until the agreement expires on December 6, 2005. Under the agreement, the Company will receive an amount equal to the LIBOR rate in excess of 8%, if any. The Company has designated this interest rate cap agreement as a cash flow hedge of interest payments once the LIBOR rate exceeds 8%. Since the LIBOR rate remained below 8% during the years ended October 31, 2003 and 2002, the cap agreement was not yet in effect; therefore, the $69,201 and $683,364 decrease in the fair value of the interest rate cap agreement was charged to earnings during the years ended October 31, 2003 and 2002, respectively, as a part of financing expense.
The Company also entered into an interest rate floor agreement during the year ended October 31, 2002. In connection with the execution of the floor agreement, the Company received $833,000. The notional amount of the floor agreement was $127,674,559 at October 31, 2003 and $130,555,335 at October 31, 2002. The notional amount will decrease as principal payments are made on the Company’s term debt and will be equal to the term debt until the agreement expires on January 6, 2006. Under the agreement, the Company will pay an amount equal to the excess of 2.63% over the LIBOR rate, if any. Since the LIBOR rate decreased below the floor of 2.63% during the years ended October 31, 2003 and 2002, the initial $833,000 has been reflected in earnings as a part of financing expense, and the change in fair value of the interest rate floor agreement has been recorded in accumulated other comprehensive income, net of tax, for the years ended October 31, 2003 and 2002.
Total interest cost incurred for the years ended October 31, 2003, 2002 and 2001 was $6,209,799, $6,134,335 and $8,241,933, respectively. Of the interest cost for the years ended October 31, 2003, 2002 and 2001, $4,578, $4,293 and $371,546, respectively, was capitalized as part of the building construction costs.
Page 12
F-13
NOTE F - INCOME TAXES
The provision for income taxes consists of the following for the years ended October 31, 2003, 2002 and 2001:
Federal:
Current
Deferred
State:
TOTAL
Deferred tax (benefit) allocated directly to stockholders’ deficit
Income taxes computed at the federal statutory rate
State taxes, net of federal benefit
Nontaxable investment income
Other, net
Page 13
F-14
NOTE F - INCOME TAXES (Continued)
The components of deferred income taxes consist of the following:
Deferred income tax assets:
Interest rate floor agreement
Deferred financing costs
TOTAL DEFERRED TAX ASSETS
Deferred income tax liabilities:
Depreciation
Interest rate cap agreement
TOTAL DEFERRED TAX LIABILITIES
TOTAL NET DEFERRED TAX ASSETS
NOTE G - LAND LEASE COMMITMENT
During 1975, the Company completed construction of an eleven-story exhibition building. The building is constructed on land leased from the City of High Point, North Carolina under a noncancelable lease. The lease is for an initial term of fifty years with three options to renew for periods of ten years each and a final renewal option for nineteen years. Annual rental under the lease is $152,234 as of October 31, 2003 and is subject to adjustment at the end of each five-year period, such adjustment being computed as defined in the lease agreement. As part of the lease agreement, the Company constructed a theater complex for public use and office space for use by the City of High Point on the lower levels of the building. Annual rental cash payments over the initial fifty-year lease term are being reduced by $39,121 which represents amortization of the cost of the theater and office complex constructed for the City of High Point. At the termination of the lease, the building becomes the property of the City of High Point. Under the terms of the lease, the Company is responsible for all expenses applicable to the exhibition portion of the building. The City of High Point is responsible for all expenses applicable to the theater complex and office space constructed for use by the City.
NOTE H - RETIREMENT EXPENSE
Amounts expensed under the Company’s retirement plans amounted to $464,715, $790,130 and $350,669 for the years ended October 31, 2003, 2002 and 2001, respectively, including $280,923, $601,252 and $179,200 under the supplemental retirement benefits plan for the years ended October 31, 2003, 2002 and 2001, respectively.
Page 14
F-15
NOTE H - RETIREMENT EXPENSE (Continued)
During 2002, the Company accelerated the normal retirement date for one of its key employees covered under the nonqualified supplemental retirement plan resulting in a substantial increase in expense for the year.
NOTE I - RENTALS UNDER OPERATING LEASES
The Company’s leasing operations consist principally of leasing exhibition space. Property on operating leases consists of substantially all of the asset “buildings, exclusive of theater complex” included on the consolidated balance sheets. Accumulated depreciation on this property amounted to $47,728,365 at October 31, 2003 and $45,154,925 at October 31, 2002. Leases are typically for five-year periods and contain provisions to escalate rentals based upon either the increase in the consumer price index or increases in ad valorem taxes, utility rates and charges, minimum wage imposed by federal and state governments, maintenance contracts for elevators and air conditioning, maintenance of common areas, social security payments, increases resulting from collective bargaining contracts, if any, and such other similar charges and rates required in operating the Company. Tenants normally renew their leases.
The following is a schedule of minimum future rentals under noncancelable operating leases as of October 31, 2003, exclusive of amounts due under escalation provisions of lease agreements:
2007
2008
Total minimum future rentals
Rental income includes contingent rentals under escalation provisions of leases of $1,390,371, $1,380,026 and $1,164,693 for the years ended October 31, 2003, 2002 and 2001, respectively. Rental income from related parties amounted to $628,643, $647,926 and $2,682,719 for the years ended October 31, 2003, 2002 and 2001, respectively.
NOTE J - CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash deposits in excess of federally insured limits and trade accounts receivable from customers predominantly in the Home Furnishings Industry. As of October 31, 2003, the Company’s bank balances exceeded federally insured limits by $17,145,320. The Company’s trade accounts receivable are generally collateralized by merchandise in leased exhibition spaces which is in the Company’s possession.
Page 15
F-16
NOTE K - STOCKHOLDERS’ DEFICIT
The stockholders’ deficit resulted from the payment of dividends substantially in excess of accumulated earnings. The dividends in excess of accumulated earnings were financed, in part, with the proceeds of long-term debt. Although interest on this debt will negatively impact future earnings, management believes, based on projections of future operations and cash flows, that future earnings will provide adequate equity capital for the Company and that operating cash flows will be sufficient to provide for debt service and for the Company’s other financing and investing needs.
NOTE L - CONSTRUCTION COMMITMENTS
At October 31, 2003, the Company had outstanding commitments for building improvements of approximately $1,200,000.
Page 16
F-17
The following report is a copy of a report previously issued by Arthur Andersen LLP and has not been reissued by Arthur Andersen LLP.
Report of Independent Public Accountants
To the Stockholders and Board of Directors of Bassett Furniture Industries, Incorporated:
We have audited in accordance with auditing standards generally accepted in the United States, the financial statements included in the Bassett Furniture Industries, Incorporated Annual Report to Stockholders incorporated by reference in the Form 10-K, and have issued our report thereon dated January 15, 2002. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedule on page F- is the responsibility of the Company’s management and is presented for purposes of complying with the Securities and Exchange Commission’s rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Greensboro, North Carolina,
January 15, 2002
F-18
Bassett Furniture Industries, Inc.
Schedule II
Analysis of Valuation and Qualifying Accounts
For the Years Ended November 29, 2003, November 30, 2002, and November 24, 2001
(in thousands)
Balance
Beginning
Of Period
Additions
Charged to
Cost andExpenses
End
For the Year Ended November 24, 2001:
Reserve deducted from assets to which it applies-
Allowance for doubtful accounts
Restructuring reserve
For the Year Ended November 30, 2002:
For the Year Ended November 29, 2003:
INDEX TO EXHIBITS