Note 3 - Business Combination - Acquisition of Zenith

6 Months Ended

May 28, 2016

Notes to Financial Statements

Business Combination Disclosure [Text Block]

3. Business Combination – Acquisition of Zenith

Prior to February 2, 2015 we held a 49% interest in Zenith for which we used the equity method of accounting. Zenith provides domestic transportation and warehousing services primarily to furniture manufacturers and distributors and also provides home delivery services to furniture retailers. We historically have contracted with Zenith to provide substantially all of our domestic freight, transportation and warehousing needs for the wholesale business. In addition, Zenith provides home delivery services for many of our Company-owned retail stores. On February 2, 2015, we acquired the remaining 51% of Zenith in exchange for cash, Bassett common stock and a note payable with a total fair value of $19,111. The value of the Bassett common stock was based on the closing market price of our shares on the acquisition date, discounted for lack of marketability due to restrictions on the seller’s ability to transfer the shares. The restrictions on one half of the shares expired on the first anniversary of the acquisition, with the remainder expiring on the second anniversary. The note is payable in three annual installments of $3,000 each beginning February 2, 2016, and has been discounted to its fair value as of the date of the acquisition based on our estimated borrowing rate.

The carrying value of our 49% interest in Zenith prior to the acquisition was $9,480 (see Note 8, unconsolidated affiliated company). In connection with the acquisition, this investment was remeasured to a fair value of $16,692 resulting in the recognition of a gain of $7,212 during the six months ended May 30, 2015. The impact of this gain upon our basic and diluted earnings per share was approximately $0.42, net of the related tax expense. The remeasured fair value of our prior interest in Zenith was estimated based on the fair value of the consideration transferred to acquire the remaining 51% of Zenith less an estimated control premium.

Under the acquisition method of accounting, the fair value of the consideration transferred along with the fair value of our previous 49% interest in Zenith was allocated to the tangible and intangible assets acquired and the liabilities assumed based on their estimated fair values as of the acquisition date with the remaining unallocated amount recorded as goodwill.

The total fair value of the acquired business was determined as follows:

Fair value of consideration transferred in exchange for 51% of Zenith:
Cash	$	9,000
Bassett common stock, 89,485 shares, par value $5.00 per share, fair value at closing $18.72 per share		1,675
Note payable		8,436
Total fair value of consideration transferred to seller		19,111
Less effective settlement of previous amounts payable to Zenith at acquisition		(3,622	)
Total fair value of consideration net of effective settlement		15,489
Fair value of Bassett's previous 49% interest in Zenith		16,692
Total fair value of acquired business	$	32,181

The allocation of the fair value of the acquired business is as follows:

Allocation of the fair value of consideration transferred:
Identifiable assets acquired:
Acquired cash and cash equivalents	$	1,677
Accounts receivable, net		3,399
Prepaid expenses and other current assets		496
Property and equipment		18,110
Other long-term assets		646
Intangible assets		6,362
Total identifiable assets acquired		30,690
Liabilities assumed:
Accounts payable and accrued liabilities		(4,038	)
Notes payable		(4,329	)
Total liabilities assumed		(8,367	)
Net identifiable assets acquired		22,323
Goodwill		9,858
Total net assets acquired	$	32,181

Goodwill was determined based on the residual difference between the fair value of the consideration transferred and the value assigned to tangible and intangible assets and liabilities. Approximately $6,982 of the acquired goodwill is deductible for tax purposes. Among the factors that contributed to a purchase price resulting in the recognition of goodwill were Zenith’s reputation for best-in-class, fully integrated logistical services which are uniquely tailored to the needs of the furniture industry, as well as their ability to provide expedited delivery service which is increasingly in demand in the furniture industry.

A portion of the fair value of consideration transferred was assigned to identifiable intangible assets as follows:

	Useful Life
Description:	In Years		Fair Value
Customer relationships		15	$	3,038
Trade names	Indefinite			2,490
Technology - customized applications		7		834
Total acquired intangible assets			$	6,362

The finite-lived intangible assets are being amortized on a straight-line basis over their useful lives. The indefinite-lived intangible asset and goodwill are not amortized but will be tested for impairment annually or between annual tests if an indicator of impairment exists.

The fair values of consideration transferred and net assets acquired were determined using a combination of Level 2 and Level 3 inputs as specified in the fair value hierarchy in ASC 820,

Fair Value Measurements and Disclosures

. See Note 4.

Acquisition costs related to the Zenith acquisition totaled $88 and $209 during the three and six months ended May 28, 2015, respectively, and are included in selling, general and administrative expenses in the condensed consolidated statements of income. The acquisition costs are primarily related to legal, accounting and valuation services.

The revenue and pre-tax profit of Zenith that is included in our condensed consolidated statements of income is as follows:

	Quarter Ended				Six Months Ended
	May 28, 2016		May 30, 2015		May 28, 2016		May 30, 2015 (1)
Zenith revenue (2)	$	13,677	$	12,086	$	28,148	$	15,345
Zenith pre-tax income	$	614	$	982	$	1,309	$	962

(1)	From date of acquisition, February 2, 2015.
(2)	Net of eliminated inter-company transactions. See Note 14.

The pro forma results of operations for the acquisition of Zenith have not been presented because they are not material to our consolidated results of operations.