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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission file number 0-14938
STANLEY FURNITURE COMPANY, INC.
(Exact name of Registrant as specified in its Charter)
Delaware 54-1272589
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1641 Fairystone Park Highway, Stanleytown, VA 24168
(Address of principal executive offices, Zip Code)
Registrant's telephone number, including area code: (540) 627-2000 Securities
registered pursuant to Section 12(b) of the Act: None Securities registered
pursuant to Section 12(g) of the Act:
Common Stock, par value $.02 per share
(Title of Class)
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 (or for such shorter period that the Registrant was
required to file such reports), and (2)has been subject to such filing
requirements for the past 90 days: Yes (x) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter)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.[ ]
Aggregate market value of the voting stock held by non-affiliates of the
Registrant based on the closing price on January 28, 2000: $123 million
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock as of January 28, 2000:
Common Stock, par value $.02 per share 7,113,655
(Class of Common Stock) Number of Shares
Documents incorporated by reference: Portions of the Registrant's Proxy
Statement for its Annual Meeting of Stockholders scheduled for April 19, 2000
are incorporated by reference into Part III.
TABLE OF CONTENTS
Part I Page
Item 1 Business......................................................... 3
Item 2 Properties....................................................... 6
Item 3 Legal Proceedings................................................ 6
Item 4 Submission of Matters to a Vote of Security Holders.............. 6
Part II
Item 5 Market for Registrant's Common Equity and Related Stockholder
Matters...................................................... 8
Item 6 Selected Financial Data.......................................... 9
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................ 10
Item 7A Quantitative and Qualitative Disclosures about Market Risks...... 13
Item 8 Financial Statements and Supplementary Data...................... 13
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure......................................... 13
Part III
Items 10 through 13....................................................... 13
Part IV
Item 14 Exhibits, Financial Statement Schedule and Reports on Form 8-K 13
Signatures .......................................................... 18
Index to Financial Statements and Schedule............................ F-1
Stanley Furniture Company, Inc.
PART I
Item 1. Business
General
The Company is a leading designer and manufacturer of residential wood
furniture exclusively targeted at the upper-medium price range. The Company
offers diversified product lines across all major style and product categories
within this price range. Its product depth and extensive style selections make
the Company a complete wood furniture resource for retailers in its price range
and allow the Company to respond more quickly to shifting consumer preferences.
The Company has established a broad distribution network that includes
independent furniture stores, department stores, and national and regional
furniture chains. To produce its products and support its broad distribution
network, the Company has developed efficient and flexible manufacturing
processes that it believes are unique in the furniture industry. The Company
emphasizes continuous improvement in its manufacturing processes to enable it to
continue providing competitive advantages to its customers, such as quick
delivery, reduced inventory investment, high quality, and value.
Products and Styles
The Company's product lines cover all major design categories, and include
collections (dining room, bedroom, tables and entertainment units), youth
bedroom (Young AmericaTM) and home office furniture. The Company believes that
the diversity of its product lines enables it to anticipate and respond quickly
to changing consumer preferences and provides retailers a complete wood
furniture resource in the upper-medium price range. The Company intends to
continue developing its product styles with particular emphasis on home office
and youth bedroom. The Company believes that its products represent good value
and that the quality and style of its furniture compare favorably with more
premium-priced products.
The Company provides products in a variety of woods, veneers, and
finishes. The number of styles by product line currently marketed by the Company
is set forth in the following table:
Number of Styles
Collections:
Dining room..................................................... 18
Bedroom......................................................... 22
Tables.......................................................... 15
Entertainment units............................................. 9
Youth bedroom (Young America(TM)).................................. 15
Home office........................................................ 7
These product lines cover all major design categories including European
traditional, contemporary/transitional, American traditional, and country/casual
designs.
The Company designs and develops new product styles each year to replace
discontinued items or styles and, if desired, to expand product lines. The
Company's product design process begins with marketing personnel identifying
customer needs and conceptualizing product ideas, which generally consist of a
group of related furniture pieces. A variety of sketches are produced, usually
by Company designers, from which prototype furniture pieces are built. The
Company's engineering department then prepares the prototype for actual
full-scale production. The Company consults with its marketing personnel, sales
representatives, and selected customers throughout this process and introduces
its new product styles at the fall and spring international furniture markets.
Distribution
The Company has developed a broad domestic and international customer base
and sells its furniture through approximately 70 independent sales
representatives to independent furniture retailers, department stores and
regional chain stores. Representative customers include Homelife, Rooms To Go,
J.C. Penney, Furnitureland South, Baer's, Breuners Home Furnishings, Robb &
Stucky, Nebraska Furniture Mart, Jordan's and Wickes. The Company believes this
broad network reduces its exposure to regional recessions, and allows it to
capitalize on emerging channels of distribution. The Company offers tailored
marketing programs to address each channel of distribution.
The general marketing practice followed in the furniture industry is to
exhibit products at international and regional furniture markets. In the spring
and fall of each year, an eight-day furniture market is held in High Point,
North Carolina, which is attended by most buyers and is regarded by the industry
as the international market. The Company utilizes approximately 60,000 square
feet of showroom space at the High Point market to introduce new products,
increase sales of its existing products, and test ideas for future products.
The Company has sold to approximately 3,500 customers during 1999, and
approximately 6% of the Company's sales in 1999 were to international customers.
No single customer accounted for more than ten percent of the Company's sales in
1999. No material part of the Company's business is dependent upon a single
customer, the loss of which would have a material effect on the business of the
Company. The loss of several of the Company's major customers could have a
material impact on the business of the Company.
Manufacturing
The Company's manufacturing operations complement its product and
distribution strategy by emphasizing continuous improvement in quality and
customer responsiveness while reducing costs. The Company's manufacturing
processes produce smaller, more frequent and cost-effective runs. The Company
focuses on identifying and eliminating manufacturing bottlenecks and waste,
employing statistical process control and, in turn, adjusting manufacturing
schedules on a daily basis, using cellular manufacturing in the production of
components, and improving its relationships with suppliers by establishing
primary supplier relationships. In addition, a key element of the Company's
manufacturing processes is to involve all Company personnel, from hourly
associates to management, in the improvement of the manufacturing processes by
encouraging and responding to ideas to improve quality and to reduce
manufacturing lead times.
The Company operates manufacturing facilities in North Carolina and
Virginia consisting of an aggregate of more than 3.6 million square feet. The
Company considers its present equipment to be generally modern, adequate and
well maintained.
The Company schedules production of its various styles based upon actual
and anticipated orders. The Company's manufacturing processes enable it to fill
orders through manufacturing rather than inventory. As a result, the Company
shipped customer orders within 25 days on average during 1999 with average
finished goods inventory turns of 8.1. Since the Company ships customer orders
on average in about three weeks, management believes that the size of its
backlog is not necessarily indicative of its long-term operations. The Company's
backlog of unshipped orders was $42.4 million at December 31, 1999 and $36.6
million at December 31, 1998.
Raw Materials
The principal materials used by the Company in manufacturing its products
include lumber, veneers, plywood, particle board, hardware, glue, finishing
materials, glass products, laminates, fabrics and metals. The Company uses a
variety of species of lumber, including cherry, oak, ash, poplar, pine, maple,
and mahogany. The Company's five largest suppliers accounted for approximately
15% of its purchases in 1999. The Company believes that its sources of supply
for these materials are adequate and that it is not dependent on any one
supplier.
Competition
The Company is the fourteenth largest furniture manufacturer in North
America based on 1998 sales, according to Furniture/Today, a trade publication.
The furniture industry is highly competitive and includes a large number of
foreign and domestic manufacturers, none of which dominates the market. The
markets in which the Company competes include a large number of relatively small
manufacturers; however, certain competitors of the Company have substantially
greater sales volumes and financial resources than the Company. Competitive
factors in the upper-medium price range include style, price, quality, delivery,
design, service, and durability. The Company believes that its manufacturing
processes, its long-standing customer relationships and customer responsiveness,
its consistent support of existing diverse product lines that are high quality
and good value, and its experienced management are competitive advantages.
Associates
At December 31, 1999, the Company employed approximately 3,100 associates.
None of the Company's associates is represented by a labor union. The Company
considers its relations with its associates to be good.
Patents and Trademarks
The trade names of the Company represent many years of continued business,
and the Company believes such names are well recognized and associated with
quality in the furniture industry. The Company owns a number of patents,
trademarks, and licenses, none of which is considered to be material to the
Company.
Governmental Regulations
The Company is subject to federal, state, and local laws and regulations
in the areas of safety, health, and environmental pollution controls. Compliance
with these laws and regulations has not in the past had any material effect on
the Company's earnings, capital expenditures, or competitive position; however,
the effect of such compliance in the future cannot be predicted. Management
believes that the Company is in material compliance with applicable federal,
state, and local environmental regulations.
Forward-Looking Statements
Certain statements made in this Annual Report on Form 10-K are not based
on historical facts, but are forward-looking statements. These statements can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," or "anticipates" or the negative thereof or
other variations thereon or comparable terminology, or by discussions of
strategy. These statements reflect the Company's reasonable judgment with
respect to future events and are subject to risks and uncertainties that could
cause actual results to differ materially from those in the forward-looking
statements. Such risks and uncertainties include the cyclical nature of the
furniture industry, fluctuations in the price for lumber which is the most
significant raw material used by the Company, competition in the furniture
industry, capital costs, delays in planned expansions and general economic
conditions.
Item 2. Properties
Set forth below is certain information with respect to the Company's
principal properties. The Company believes that all these properties are well
maintained and in good condition. All Company plants are equipped with automatic
sprinkler systems and modern fire protection equipment, which management
believes are adequate. All facilities set forth below are active and
operational. The Company believes its manufacturing facilities are being
efficiently utilized and each facility is focused on specific product lines to
optimize efficiency. The Company estimates that its facilities are presently
operating near capacity, principally on a one-shift basis. The Martinsville, VA
facility is expected to begin production in early 2000 and is anticipated to add
approximately $50-$60 million in additional sales capacity when in full
production in two to three years.
Approximate Owned
Facility Size or
Location Primary Use (Square Feet) Leased
Stanleytown, VA Manufacturing 1,721,000 Owned
and Corporate
Headquarters
Martinsville, VA Manufacturing 300,000 Owned
West End, NC Manufacturing 470,000 Owned(1)
Lexington, NC Manufacturing 635,000 Owned
Robbinsville, NC Manufacturing 540,000 Owned
High Point, NC Showroom 63,000 Leased(2)
- ------------------------------------
(1) This plant leases its lumber yard; lease expires May 31, 2007.
(2) Lease expires October 31, 2004.
Item 3. Legal Proceedings
On July 9, 1999, the United States Environmental Protection Agency served
the Company with an administrative complaint citing the alleged failure of a
July 1998 compliance test of one boiler at the Stanleytown, Virginia facility
and seeking a civil fine in the amount of $175,000. The Company intends to
vigorously contest the complaint and in August 1999 filed its answer seeking an
elimination of the civil fine. The Company believes that the cost related to the
complaint will not have a material adverse effect on the Company's financial
condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Executive Officers of the Registrant
The Company's executive officers and their ages as of January 1, 2000 as
follows:
Name Age Position
Albert L. Prillaman........... 54 Chairman, President and Chief
Executive Officer
John W. Johnson ............ 55 Senior Vice President-Manufacturing
Douglas I. Payne ............ 41 Senior Vice President -
Finance and Administration,
Treasurer and Secretary
William A. Sibbick............ 43 Senior Vice President -Sales
Kelly S. Cain ............... 45 Senior Vice President -
Product Development
and Merchandising
Robert A. Sitler, Jr.......... 39 Vice President - Human Resources
Albert L. Prillaman has been President and Chief Executive Officer of the
Company since December 1985 and Chairman of the Board of Directors since
September 1988. Prior thereto, Mr. Prillaman served as a Vice President of the
Company and President of the Stanley Furniture division of the Company's
predecessor since 1983, and in various executive and other capacities with the
Stanley Furniture division of the predecessors of the Company since 1969. Mr.
Prillaman is a director of American Woodmark Corporation.
John W. Johnson has been Senior Vice President-Manufacturing since
December 1998. He was Vice President of Manufacturing from November 1984 until
December 1998. Prior to that time, Mr. Johnson held various management positions
related to manufacturing since his employment by the Company in 1966.
Douglas I. Payne has been Senior Vice President-Finance and Administration
since December 1996. He was Vice President of Finance and Treasurer of the
Company from September 1993 to December 1996. Prior to that time, Mr. Payne held
various financial management positions since his employment by the Company in
1983. Mr. Payne has been Secretary of the Company since 1988.
William A. Sibbick has been Senior Vice President-Sales since December
1997. He was Vice President-Product Development and Merchandising-Dining Room
and Occasional from December 1996 to December 1997. He was Vice President -
Product Development and Merchandising from April 1995 until December 1996. Prior
to that time, Mr. Sibbick held various management positions related to product
development since his employment by the Company in 1989.
Kelly S. Cain has been Senior Vice President-Product Development and
Merchandising since December 1997. He was Vice President-Product Development and
Merchandising for bedroom product lines from December 1996 to December 1997. He
was Vice President-Sales National Accounts from April 1993 to December 1996.
Prior to that time, Mr. Cain held various management positions in sales and
marketing since his employment by the Company in 1985.
Robert A. Sitler, Jr. has been Vice President-Human Resources since
December 1998. He was a plant manager from December 1996 to December 1998 and a
plant superintendent from August 1995 to December 1996. Prior to that time, he
held various management positions in manufacturing and credit since his
employment by the Company in 1985.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock is quoted on The Nasdaq Stock Market ("Nasdaq")
under the symbol STLY. The table below sets forth the high and low sales prices
per share, for the periods indicated, as reported by Nasdaq, adjusted to reflect
a two-for-one stock split, distributed in the form of a stock dividend on May
15, 1998.
High Low
1999
First Quarter.............. $22.63 $16.50
Second Quarter............. 23.63 19.00
Third Quarter.............. 24.50 18.75
Fourth Quarter............. 22.25 17.00
1998
First Quarter.............. $20.13 $13.50
Second Quarter............. 27.50 17.88
Third Quarter.............. 27.50 16.50
Fourth Quarter............. 19.75 10.38
As of January 24, 2000, there were approximately 2,500 beneficial stockholders.
To date the Company has retained all earnings to finance the growth and
development of its business. However, the Company will continue to evaluate its
dividend policy, and any future payments will depend upon the financial
condition, capital requirements, and earnings of the Company, as well as other
factors that the Board of Directors may deem relevant. The Company's ability to
pay dividends is restricted under certain loan covenants. See Note 3 of the
Notes to Financial Statements.
Item 6. Selected Financial Data
Years Ended December 31,
1999 1998 1997 1996 1995
(in thousands, except per share data)
Income Statement Data:
Net sales.................................. $264,717 $247,371 $211,905 $201,905 $174,179
Cost of sales.............................. 196,631 186,931 159,453 153,332 137,621
-------- -------- -------- -------- --------
Gross profit............................. 68,086 60,440 52,452 48,573 36,558
Selling, general and administrative
expenses................................. 33,796 32,496 29,949 30,403 26,454
Unusual items, net (1)..................... (136)
-------- -------- -------- -------- --------
Operating income......................... 34,290 27,944 22,503 18,170 10,240
Other expense, net ........................ 388 411 276 616 433
Interest expense........................... 3,478 4,164 3,538 3,344 3,534
-------- -------- -------- -------- --------
Income from continuing operations
before income taxes.................... 30,424 23,369 18,689 14,210 6,273
Income taxes............................... 11,211 8,886 7,102 5,470 2,384
-------- -------- -------- -------- --------
Income from continuing operations........ $ 19,213 $ 14,483 $ 11,587 $ 8,740 $ 3,889
======== ======== ======== ======== ========
Basic Earnings Per Share:(2)
Income from continuing operations.......... $ 2.70 $ 2.07 $ 1.38 $ .92 $ .41
======== ======== ======== ======== ========
Weighted average shares(3)................. 7,119 7,008 8,394 9,444 9,454
======== ======== ======== ======== ========
Diluted Earnings Per Share:(2)
Income from continuing operations.......... $ 2.47 $ 1.82 $ 1.25 $ .88 $ .41
======== ======== ======== ======== ========
Weighted average shares(3)................. 7,770 7,963 9,278 9,890 9,454
======== ======== ======== ======== ========
Balance Sheet and Other Data:
Cash....................................... $ 3,597 $ 6,791 $ 756 $ 8,126 $ 298
Inventories................................ 43,580 46,514 45,730 40,239 40,167
Working capital............................ 38,531 44,408 41,440 46,225 42,422
Total assets............................... 170,522 154,374 143,225 141,510 134,551
Long-term debt including
current maturities (3) .................. 38,404 43,539 52,577 39,350 41,067
Stockholders' equity (3)(4)................ 79,573 62,368 48,247 61,617 54,739
Capital expenditures(5).................... 25,566 6,680 4,076 3,599 14,225
(1) In 1995, the Company recognized a pretax credit of $1.1 million after it
was released from a lease obligation at a previously closed manufacturing
facility. Also included is a pretax charge for a severance accrual.
(2) Amounts have been retroactively adjusted to reflect the two-for-one stock
split, distributed in the form of a stock dividend, on May 15, 1998.
(3) The Company purchased 226,750, 315,000 and 2,326,402 shares of its common
stock for a total consideration of $4.7 million, $5.6 million and $25.3
million in 1999, 1998 and 1997, respectively. In 1998, the Company issued
103,400 shares to the Stanley Retirement Plan.
(4) No dividends have been paid on the Company's common stock during any of
the years presented.
(5) In 1999, the Company spent $10 million on expansion projects at existing
facilities and $15 million to purchase and equip a new facility. In 1995,
the Company spent $10 million to purchase two previously leased
manufacturing facilities.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the Selected
Financial Data and the Financial Statements and Notes thereto contained
elsewhere herein.
Results of Operations
The following table sets forth the percentage relationship to net sales of
certain items included in the Statements of Income:
For the Years Ended
December 31,
1999 1998 1997
Net sales.............................. 100.0% 100.0% 100.0%
Cost of sales.......................... 74.3 75.6 75.3
----- ----- -----
Gross profit......................... 25.7 24.4 24.7
Selling, general and administrative
expenses............................. 12.7 13.1 14.1
----- ----- -----
Operating income.................. 13.0 11.3 10.6
Other expenses, net.................... .2 .1 .1
Interest expense....................... 1.3 1.7 1.6
----- ----- -----
Income from operations before
income taxes....................... 11.5 9.5 8.9
Income taxes........................... 4.2 3.6 3.4
----- ----- -----
Income from operations............... 7.3% 5.9% 5.5%
===== ===== =====
1999 Compared to 1998
Net sales increased $17.3 million, or 7.0%, for 1999 compared to 1998. The
Company ceased its upholstery operations in the second half of 1998. Excluding
upholstered product sales in 1998, wood furniture sales increased 9.1% for 1999.
The increase was due to higher unit volume and to a lesser extent higher average
selling prices. Capacity constraints limited shipments during 1999.
Gross profit margin for 1999 increased to 25.7% from 24.4% for 1998. The
increase resulted primarily from improved operating efficiencies and the
favorable impact in 1999 from the phase out of upholstered products in the prior
year.
Selling, general and administrative expenses as a percentage of net sales
were 12.7% and 13.1% for 1999 and 1998, respectively. The lower percentage in
1999 was due principally to higher net sales. Expenditures in 1999 were higher
due principally to selling expenses directly attributable to increased sales.
However, the majority of the increase was offset by the elimination of
expenditures related to upholstered products.
As a result of the above, operating income increased to $34.3 million, or
13.0% of net sales, from $27.9 million, or 11.3% of net sales, in 1998.
Interest expense for 1999 decreased due to lower average debt levels.
The Company's effective income tax rate declined to 36.9% for 1999 from
38.0% in 1998, due to state income tax credits related to expansion projects.
1998 Compared to 1997
Net sales increased $35.5 million, or 16.7%, for 1998 compared to 1997.
The increase was due primarily to higher unit volume.
Gross profit margin for 1998 decreased to 24.4% from 24.7% for 1997. The
decrease resulted primarily from higher raw material costs, principally lumber,
partially offset by improved operating efficiencies.
Selling, general and administrative expenses as a percentage of net sales
were 13.1% and 14.1% for 1998 and 1997, respectively. The lower percentage in
1998 was due principally to higher net sales. The majority of the increased
expenditures in 1998 were selling expenses directly attributable to the sales
increase.
During the second half of 1998, the Company ceased its upholstery
operations. Upholstered products accounted for less than 3.0% of net sales and
resulted in a pretax operating loss of approximately $1 million in both 1998 and
1997.
As a result of the above, operating income increased to $27.9 million, or
11.3% of net sales, from $22.5 million, or 10.6% of net sales, in 1997.
Interest expense for 1998 increased due to higher average debt levels
resulting from the Company's repurchases of its common stock in 1997 and 1998.
The Company's effective income tax rate was 38% for both 1998 and 1997.
Financial Condition, Liquidity and Capital Resources
The Company generated cash from operations of $27.8 million in 1999
compared to $25.0 million in 1998 and $8.3 million in 1997. The increase in 1999
compared to 1998 was due primarily to increased sales. The increase in 1998
compared to 1997 was due primarily to increased sales and to a lesser extent,
lower tax payments. The Company used the cash generated from operations in 1999,
1998 and 1997 to fund capital expenditures, reduce borrowings and repurchase its
common stock.
Net cash used by investing activities was $23.0 million in 1999 compared
to $6.5 million and $4.2 million in 1998 and 1997, respectively. The 1999
increase was due principally to increased capital expenditures related to
capacity expansion projects. Capital expenditures for 1999 aggregated $25.6
million, reflecting $22.9 million of cash expenditures and $2.7 million in
accounts payable. Approximately $10 million was used to expand production
capability at existing facilities to add $30-$35 million of increased sales
capacity on an annualized basis for the Company's bedroom and Young America(TM)
youth bedroom products. This new capacity enabled the Company to increase sales
13% in the fourth quarter of 1999 compared to the prior year quarter.
Approximately $15 million was used to purchase and equip a facility dedicated to
the production of home office furniture. This facility is expected to begin
operation in the first quarter of 2000 and should provide $50-$60 million of
sales capacity on an annualized basis when in full production in two to three
years. The remaining expenditures in 1999 and the expenditures in 1998 and 1997
were primarily for plant and equipment and other assets in the normal course of
business. Capital expenditures in 2000 are anticipated to be approximately $6-$7
million.
Net cash used by financing activities was $7.9 million, $12.5 million and
$11.5 million in 1999, 1998 and 1997, respectively. In 1999, the purchase of
common stock and the reduction in borrowings were financed from operations, cash
on hand and the proceeds from the exercise of stock options. In 1998, the
purchase of common stock and the reduction in borrowings were financed by cash
generated from operations and the proceeds from the exercise of stock options.
In 1997, the purchase of common stock was financed by the private placement of
debt, the revolving credit facility and cash generated from operations.
During 1999, the Company's Board of Directors increased the authorization
to repurchase shares of its common stock to $20 million. Consequently, the
Company may, from time to time, either directly or through agents, repurchase
its common stock in the open market, through negotiated purchases or otherwise,
at prices and on terms satisfactory to the Company. Since October 1998, the
Company has utilized $10.3 million to purchase a total of 541,750 shares of its
common stock at an average price of $18.94 per share, including the purchase of
226,750 shares at an average price of $20.76 per share in 1999. Depending on
market prices and other conditions relevant to the Company, such purchases may
be discontinued at any time.
At December 31, 1999, long-term debt, including current maturities, was
$38.4 million. Approximately $24.0 million of additional borrowing capacity was
available under a revolving credit facility. Also, the Company had cash on hand
of $3.6 million. Annual debt service requirements are $5.2 million in 2000, $6.7
million in 2001, $6.8 million in 2002, $6.9 million in 2003, and $7.0 million in
2004. The Company believes that its financial resources are adequate to support
its capital needs and debt service requirements.
Year 2000
The conversion from calendar year 1999 to calendar year 2000 occurred
without any disruption to the Company's critical business systems. Since 1996,
the Company has been upgrading its information systems with Year 2000 (Y2K)
compliant software and hardware. These actions have minimized Y2K related
capital costs and expenses, which is estimated at less than $1.0 million. The
Company will continue to monitor Y2K related exposures both internally and with
its suppliers, customers and other business partners. Such monitoring will be
ongoing and encompassed in normal operations and associated costs are not
expected to be significant.
Item 7A.Quantitative and Qualitative Disclosures about Market Risks
Not applicable.
Item 8. Financial Statements and Supplementary Data
The financial statements and schedule listed in Items 14(a)(1) and (a)(2)
hereof are incorporated herein by reference and are filed as part of this
report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
In accordance with general instruction G(3) of Form 10-K, the information
called for by Items 10, 11, 12, and 13 of Part III is incorporated by reference
to the Registrant's definitive Proxy Statement for its Annual Meeting of
Stockholders scheduled for April 19, 2000, except for information concerning the
executive officers of the Registrant which is included in Part I of this report
under the caption "Executive Officers of the Registrant."
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K
(a) Documents filed as a part of this Report:
(1) The following financial statements are included in this report on Form 10-K:
Report of Independent Accountants
Balance Sheets as of December 31, 1999 and 1998
Statements of Income for each of the three years in the period ended
December 31, 1999
Statements of Changes in Stockholders' Equity for each of the three years
in the period ended December 31, 1999
Statements of Cash Flows for each of the three years in the period ended
December 31, 1999
Notes to Financial Statements
(2) Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts for each of the three
years in the period ended December 31, 1999
(b) The following reports on Form 8-K were filed by the Registrant during the
last quarter of the period covered by this report:
None.
(c) Exhibits:
3.1 The Restated Certificate of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.1 to the Registrant's Form 10-K
(Commission File No. 0-19938) for the year ended December 31, 1998).
3.2 The By-laws of the Registrant (incorporated by reference to Exhibit
3.2 to the Registrant's Registration Statement on Form S-1,
No. 33-7300).
3.3 Amendment adopted March 21, 1988 to the By-laws of the Registrant
(incorporated by reference to Exhibit 3.3 to the Registrant's Form 10-K
(Commission File No. 0-14938) for the year ended December 31, 1987).
3.4 Amendments adopted February 8, 1993 to the By-laws of the Registrant
(incorporated by reference to Exhibit 3.4 to the Registrant's
Registration Statement on Form S-1 No. 33-57432).
4.1 The Certificate of Incorporation and By-laws of the Registrant as
currently in effect (incorporated by reference to Exhibits 3.1 through
3.4 hereto).
4.2 Note Agreement dated February 15, 1994 between the Registrant and the
Prudential Insurance Company of America (Incorporated by reference to
Exhibit 4.6 to the Registrant's Form 10-K (Commission File No. 0-14938)
for the year ended December 31, 1993).
4.3 Letter Amendment, dated October 14, 1996, to Note Agreements, dated
February 15, 1994 and June 29, 1995, between the Registrant and The
Prudential Insurance Company of America (incorporated by reference to
Exhibit 4.1 to the Registrant's Form 10-Q (Commission File No. 0-14938)
for the quarter ended September 29, 1996).
4.4 Letter Amendment, dated June 16, 1997, to Note Agreements, dated
February 15, 1994 and June 29, 1995, between the Registrant and The
Prudential Insurance Company of America (incorporated by reference to
Exhibit 4.1 to the Registrant's Statement on Form 8-K (Commission File
No. 0-14938) filed July 9, 1997).
4.5 Note Purchase and Private Shelf Agreement, dated as of June 29, 1995,
among the Company, The Prudential Insurance Company of America and the
affiliates of Prudential who become Purchasers as defined therein
(incorporated by reference to Exhibit 4.1 to the Registrant's Form 8-K
(Commission File No. 0-14938) filed December 2, 1997).
4.6 Amendment, dated as of May 10, 1999, to Note Agreements, dated February
15, 1994 and June 29, 1995, between the Registrant and The Prudential
Insurance Company of America (incorporated by reference to Exhibit 4.1
to the Registrant's Form 10-Q (Commission File No. 0-14938) for the
quarter ended June 26, 1999).
Pursuant to Regulation S-K, Item 601(b)(4)(iii), instruments evidencing
long term debt less than 10% of the Registrant's total assets have been omitted
and will be furnished to the Securities and Exchange Commission upon request.
10.1 Employment Agreement made as of January 1, 1991 between Albert L.
Prillaman and the Company (incorporated by reference to Exhibit 10.1 to
the Registrant's Form 10-K (Commission File No. 0-14938)
for the year ended December 31, 1991).(2)
10.2 Lease dated February 23, 1987 between Stanley Interiors Corporation
and Southern Furniture Exposition Building, Inc. d/b/a Southern
Furniture Market Center (incorporated by reference to Exhibit 10.10 to
the Registrant's Form 10-K (Commission File No. 0-14938) for the year
ended December 31, 1987).
10.3 Lease dated June 30, 1987 between A. Allan McDonald, Virginia Cary
McDonald, C. R. McDonald, Dorothy V. McDonald, and Lillian S. McDonald,
as lessor, and Stanley Interiors Corporation, as lessee (incorporated
by reference to Exhibit 10.14 to the Registrant's Form 10-K
(Commission File No. 0-14938) for the year ended December 31, 1987).
10.4 The Stanley Retirement Plan, as restated effective January 1, 1989,
adopted April 20, 1995 (incorporated by reference to Exhibit 10.4 to
the Registrant's Form 10-K (Commission File No. 0-14938) for the year
ended December 31, 1995).(2)
10.5 Amendment No. 1, The Stanley Retirement Plan, effective December 31,
1995, adopted December 15, 1995 (incorporated by reference to Exhibit
10.5 to the Registrant's Form 10-K (Commission File No. 0-14938)
for the year ended December 31, 1995).(2)
10.6 Supplemental Retirement Plan of Stanley Furniture Company, Inc., as
restated effective January 1, 1993. (incorporated by reference to
Exhibit 10.8 to the Registrant's Form 10-K (Commission File
No. 0-14938) for the year ended December 31, 1993).(2)
10.7 First Amendment to Supplemental Retirement Plan of Stanley Furniture
Company, Inc., effective December 31, 1995, adopted December 15, 1995
(incorporated by reference to Exhibit 10.7 to the Registrant's Form
10-K (Commission File No. 0-14938) for the year ended December 31,
1995).(2)
10.8 Stanley Interiors Corporation Deferred Compensation Capital Enhancement
Plan, effective January 1, 1986, as amended and restated effective
August 1, 1987 (incorporated by reference to Exhibit 10.12 to the
Registrant's Registration Statement on Form S-1(Commission File No.
0-14938), No. 33-7300).(2)
10.9 Split Dollar Insurance Agreement dated as of March 21, 1991 between
Albert L. Prillaman and the Registrant (incorporated by reference to
Exhibit 10.43 to the Registrant's Form 10-K (Commission File
No. 0-14938) for the year ended December 31, 1991).(2)
10.10 Second Amended and Restated Revolving Credit Facility and Term Loan
Agreement dated February 15, 1994 (the "Second Amended and Restated
Credit Facility") between the Registrant, National Canada Finance
Corp., and the National Bank of Canada (incorporated by reference to
Exhibit 10.17 to Registrant's Form 10-K (Commission File No. 0-14938)
for the year ended December 31, 1994).
10.11 First Amendment to Second Amended and Restated Credit Facility dated as
of August 21, 1995 (incorporated by reference to Exhibit 10.14 to
Registrant's Form 10-K (Commission File No. 0-14938) for the year ended
December 31, 1995).
10.12 1992 Stock Option Plan (incorporated by reference to Registrant's
Registration Statement on Form S-8 No. 33-58396).(2)
10.13 1994 Stock Option Plan. (incorporated by reference to Exhibit 10.18 to
the Registrant's Form 10-K (Commission File No. 0-14938) for the year
ended December 31, 1994).(2)
10.14 1994 Executive Loan Plan. (incorporated by reference to Exhibit 10.19
to the Registrant's Form 10-K (Commission File No. 0-14938) for the
year ended December 31, 1994).(2)
10.15 Employment agreement dated as of June 1, 1996, between Douglas I. Payne
and the Registrant (incorporated by reference to Exhibit 10.1 to the
Registrant's Form 10-Q (Commission File No. 0-14938) for the quarter
ended June 30, 1996).(2)
10.16 Amendment No. 1, dated as of October 1, 1996, to the Employment
Agreement, dated as of January 1, 1991, between the Registrant and
Albert L. Prillaman (incorporated by reference to Exhibit 10.4 to
the Registrant's Form 10-Q (Commission File No. 0-14938) for the
quarter ended September 29, 1996).(2)
10.17 Assignment and Transfer Agreement, dated as of October 8, 1996, between
National Canada Finance Corp. and National Bank of Canada relating to
the Second Amended and Restated Revolving Credit Facility (incorporated
by reference to Exhibit 10.1 to the Registrant's Form 10-Q (Commission
File No. 0-14938) for the quarter ended September 29, 1996).
10.18 Second Amendment, dated as of October 14, 1996, to the Second Amended
and Restated Revolving Credit Facility (incorporated by reference to
Exhibit 10.2 to the Registrant's Form 10-Q (Commission File No.
0-14938) for the quarter ended September 29, 1996).
10.19 Third Amendment, dated as of June 24, 1997, to the Second Amended and
Restated Revolving Credit Facility and Term Loan Agreement dated
February 15, 1994 between the Registrant, National Canada Finance
Corp., and the National Bank of Canada (incorporated by reference to
Exhibit 99.4 to the Registrant's Form 8-K (Commission File No. 0-14938)
filed July 9, 1997).
10.20 Fourth Amendment, dated February 24, 1998, to the Second Amended and
Restated Revolving Credit Facility and Term Loan Agreement dated
February 15, 1994 between the Registrant, National Canada Finance
Corp., and the National Bank of Canada (incorporated by reference to
Exhibit 10.1 to the Registrant's Form 10-Q (Commission File No.
0-14938) for the quarter ended March 28, 1998).
10.21 Fifth Amendment, dated as of March 10, 1999, to the Second Amended and
Restated Revolving Credit Facility and Term Loan Agreement dated
February 15, 1994 among the Registrant, National Canada Finance Corp.,
and the National Bank of Canada (incorporated by reference to Exhibit
10.1 to the Registrant's Form 10-Q (Commission File No. 0-14938) for
the quarter ended March 27, 1999).
10.22 Employment Agreement dated as of April 1, 1999 between John W. Johnson
and the Registrant (incorporated by reference to Exhibit 10.2 to the
Registrant's Form 10-Q (Commission File No. 0-14938) for the quarter
ended March 27, 1999).(2)
10.23 Employment Agreement dated as of April 1, 1999 between William A.
Sibbick, Jr. and the Registrant (incorporated by reference to Exhibit
10.3 to the Registrant's Form 10-Q (Commission File No. 0-14938)
for the quarter ended March 27, 1999).(2)
10.24 Employment Agreement dated as of April 1, 1999 between Kelly S. Cain
and the Registrant (incorporated by reference to Exhibit 10.4 to the
Registrant's Form 10-Q (Commission File No. 0-14938) for the quarter
ended March 27, 1999).(2)
21 Listing of Subsidiaries:
Charter Stanley Foreign Sales Corporation, a United States Virgin
Islands Corporation.
23 Consent of PricewaterhouseCoopers LLP(1)
27 Financial Data Schedule.(1)
- ------------------------------------
(1) Filed herewith
(2) Management contract or compensatory plan
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.
STANLEY FURNITURE COMPANY, INC.
February 4, 2000 By: /s/Albert L. Prillaman
Albert L. Prillaman
Chairman, President, and
Chief Executive Officer
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.
Signature Title Date
/s/Albert L. Prillaman Chairman, President, and Chief February 4, 2000
(Albert L. Prillaman) Executive Officer, and Director
(Principal Executive Officer)
/s/Douglas I. Payne Senior Vice President - Finance February 4, 2000
(Douglas I. Payne) and Administration, Treasurer
and Secretary (Principal
Financial and Accounting Officer)
/s/Robert G. Culp, III Director February 4, 2000
(Robert G. Culp, III)
/s/David V. Harkins Director February 4, 2000
(David V. Harkins)
/s/Edward J. Mack Director February 4, 2000
(Edward J. Mack)
/s/Thomas L. Millner Director February 4, 2000
(Thomas L. Millner)
/s/T. Scott McIlhenny, Jr. Director February 4, 2000
(T.Scott McIlhenny, Jr.)
STANLEY FURNITURE COMPANY, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1999
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Financial Statements Page
Report of Independent Accountants.................................... F-2
Balance Sheets as of December 31, 1999 and 1998...................... F-3
Statements of Income for each of the three years in the period
ended December 31, 1999............................................ F-4
Statements of Changes in Stockholders' Equity for each of the
three years in the period ended December 31, 1999.................. F-5
Statements of Cash Flows for each of the three years in the period
ended December 31, 1999............................................ F-6
Notes to Financial Statements........................................ F-7
Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts for each of the
three years in the period ended December 31, 1999.................. S-1
Report of Independent Accountants
To the Board of Directors and Stockholders of
Stanley Furniture Company, Inc.
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of Stanley
Furniture Company, Inc. at December 31, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States. In addition, in our opinion, the financial statement schedule
listed in the accompanying index presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Richmond, Virginia
January 24, 2000
STANLEY FURNITURE COMPANY, INC.
BALANCE SHEETS
(in thousands, except share data)
December 31,
1999 1998
---------- ----------
ASSETS
Current assets:
Cash .......................................................... $ 3,597 $ 6,791
Accounts receivable, less allowances of $2,050 and $1,906...... 32,133 29,141
Inventories:
Finished goods............................................... 22,393 22,853
Work-in-process.............................................. 8,432 7,495
Raw materials................................................ 12,755 16,166
-------- --------
Total inventories.......................................... 43,580 46,514
Prepaid expenses and other current assets...................... 1,011 903
Deferred income taxes.......................................... 2,463 1,980
-------- --------
Total current assets......................................... 82,784 85,329
Property, plant and equipment, net............................... 72,100 52,474
Goodwill, less accumulated amortization of $3,696 and $3,360..... 9,744 10,080
Other assets..................................................... 5,894 6,491
-------- --------
Total assets................................................. $170,522 $154,374
======== ========
LIABILITIES
Current liabilities:
Current maturities of long-term debt........................... $ 5,236 $ 5,136
Accounts payable............................................... 25,836 21,837
Accrued salaries, wages and benefits........................... 10,864 11,939
Other accrued expenses......................................... 2,317 2,009
-------- --------
Total current liabilities.................................... 44,253 40,921
Long-term debt, exclusive of current maturities.................. 33,168 38,403
Deferred income taxes............................................ 11,072 10,694
Other long-term liabilities...................................... 2,456 1,988
-------- --------
Total liabilities.............................................. 90,949 92,006
-------- --------
STOCKHOLDERS' EQUITY
Common stock, $.02 par value, 10,000,000 shares authorized,
7,113,655 and 7,069,715 shares issued and outstanding.......... 142 141
Capital in excess of par value................................... 35,064 37,073
Retained earnings................................................ 44,367 25,154
-------- --------
Total stockholders' equity..................................... 79,573 62,368
-------- --------
Total liabilities and stockholders' equity.................. $170,522 $154,374
======== ========
The accompanying notes are an integral part
of the financial statements.
STANLEY FURNITURE COMPANY, INC.
STATEMENTS OF INCOME
(in thousands, except per share data)
For the Years Ended
December 31,
---------------------------------------
1999 1998 1997
---- ---- ----
Net sales........................................ $264,717 $247,371 $211,905
Cost of sales.................................... 196,631 186,931 159,453
-------- -------- --------
Gross profit................................... 68,086 60,440 52,452
Selling, general and administrative expenses..... 33,796 32,496 29,949
-------- -------- --------
Operating income............................... 34,290 27,944 22,503
Other expense, net............................... 388 411 276
Interest expense................................. 3,478 4,164 3,538
-------- -------- --------
Income before income taxes..................... 30,424 23,369 18,689
Income taxes..................................... 11,211 8,886 7,102
-------- -------- --------
Net income..................................... $ 19,213 $ 14,483 $ 11,587
======== ======== ========
Earnings per share:
Basic.......................................... $ 2.70 $ 2.07 $ 1.38
======== ======== ========
Diluted........................................ $ 2.47 $ 1.82 $ 1.25
======== ======== ========
Weighted average shares outstanding:
Basic.......................................... 7,119 7,008 8,394
======== ======== ========
Diluted........................................ 7,770 7,963 9,278
======== ======== ========
The accompanying notes are an integral part
of the financial statements.
STANLEY FURNITURE COMPANY, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For each of the three years in the period ended December 31, 1999
(in thousands)
Capital
Common Stock In Retained
------------------- Excess of Earnings
Shares Amount Par Value (Deficit)
------ ---- -------- --------
Balance at January 1, 1997............................. 9,158 $183 $62,350 $ (916)
Purchase and retirement of stock....................... (2,326) (46) (25,283)
Compensation expense for executive loan plan, net...... 133
Exercise of stock options.............................. 34 239
Net income............................................. 11,587
----- ---- ------- -------
Balance at December 31, 1997......................... 6,866 137 37,439 10,671
Purchase and retirement of stock....................... (315) (6) (5,547)
Issuance of stock to the Stanley
Retirement Plan...................................... 103 2 1,872
Compensation expense and stock issuance related
to the executive loan plan........................... 100 2 131
Exercise of stock options.............................. 316 6 3,178
Net income............................................. 14,483
----- ---- ------- -------
Balance at December 31, 1998......................... 7,070 141 37,073 25,154
Purchase and retirement of stock....................... (227) (4) (4,704)
Exercise of stock options.............................. 271 5 2,695
Net income............................................. 19,213
----- ---- ------- -------
Balance at December 31, 1999......................... 7,114 $142 $35,064 $44,367
===== ==== ======= =======
The accompanying notes are an integral part
of the financial statements.
STANLEY FURNITURE COMPANY, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
For the Years Ended
December 31,
---------------------------------------
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Cash received from customers.................... $261,566 $245,492 $207,590
Cash paid to suppliers and employees............ (220,642) (209,030) (187,346)
Interest paid................................... (3,527) (4,228) (3,403)
Income taxes paid, net.......................... (9,620) (7,211) (8,529)
-------- -------- --------
Net cash provided by operating activities..... 27,777 25,023 8,312
-------- -------- --------
Cash flows from investing activities:
Capital expenditures............................ (22,866) (6,680) (4,076)
Purchase of other assets........................ (157) (106) (143)
Proceeds from sale of assets.................... 297
-------- -------- --------
Net cash used by investing activities......... (23,023) (6,489) (4,219)
-------- -------- --------
Cash flows from financing activities:
Purchase and retirement of common stock......... (4,708) (5,553) (25,329)
Issuance of senior notes........................ 10,000
Repayment of senior notes....................... (5,135) (5,086) (725)
Proceeds from (repayment of) revolving
credit facility, net.......................... (3,952) 3,952
Proceeds from exercise of stock options......... 1,299 1,556 160
Other, net...................................... 596 536 479
-------- -------- --------
Net cash used by financing activities......... (7,948) (12,499) (11,463)
-------- -------- --------
Net increase (decrease) in cash................... (3,194) 6,035 (7,370)
Cash at beginning of year......................... 6,791 756 8,126
-------- -------- --------
Cash at end of year............................. $ 3,597 $ 6,791 $ 756
======== ======== ========
The accompanying notes are an integral part
of the financial statements.
STANLEY FURNITURE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Organization and Basis of Presentation
Stanley Furniture Company, Inc. (the "Company") is a leading designer and
manufacturer of wood furniture exclusively targeted at the upper-medium price
range of the residential market.
The Company operates in one business segment. Substantially all revenues
result from the sale of residential furniture products. Substantially all of the
Company's trade accounts receivable are due from retailers in this market, which
consists of a large number of entities with a broad geographical dispersion.
Revenue Recognition
Revenue is recognized upon shipment of product.
Inventories
Inventories are valued at the lower of cost or market. Cost for all
inventories is determined using the first-in, first-out (FIFO) method.
Property, Plant and Equipment
Depreciation of property, plant and equipment is computed using the
straight-line method based upon the estimated useful lives. Gains and losses
related to dispositions and retirements are included in income. Maintenance and
repairs are charged to income as incurred; renewals and betterments are
capitalized.
Capitalized Software Cost
The Company amortizes certain purchased computer software costs using the
straight-line method over the economic lives of the related products not to
exceed five years. Unamortized cost at December 31, 1999 and 1998 was $815,000
and $831,000, respectively.
Goodwill and Long-lived Assets
Goodwill is being amortized on a straight-line basis over 40 years. The
Company continually evaluates the potential impairment of long-lived assets,
including goodwill, on the basis of whether the carrying value is fully
recoverable from projected, undiscounted net cash flows.
Income Taxes
Deferred income taxes are determined based on the difference between the
financial statement and income tax bases of assets and liabilities using enacted
tax rates in effect in the years in which the differences are expected to
reverse. Deferred tax expense represents the change in the deferred tax
asset/liability balance. Income tax credits are reported as a reduction of
income tax expense in the year in which the credits are generated.
Fair Value of Financial Instruments
The fair value of the Company's long-term debt is estimated using
discounted cash flow analysis based on the incremental borrowing rates currently
available to the Company for loans with similar terms and maturities. At
December 31, 1999, the fair value approximated the carrying amount. The fair
value of trade receivables, trade payables and letters of credit approximate the
carrying amount because of the short maturity of these instruments.
STANLEY FURNITURE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. Summary of Significant Accounting Policies (continued)
Pension Plans
The Company's funding policy is to contribute to all qualified plans
annually an amount equal to the normal cost and a portion of the unfunded
liability, but not to exceed the maximum amount that can be deducted for federal
income tax purposes.
Earnings per Common Share
Basic earnings per share is computed based on the average number of common
shares outstanding. Diluted earnings per share reflects the increase in average
common shares outstanding that would result from the assumed exercise of
outstanding stock options, calculated using the treasury stock method.
Stock Options
The Company applies Accounting Principles Board Opinion No. 25 in
accounting for stock options and discloses the fair value of options granted as
permitted by Statement of Financial Accounting Standards No. 123.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Changes in such estimates may affect amounts reported in
future periods.
2. Property, Plant and Equipment
Depreciable
lives (in thousands)
(in years) 1999 1998
---------- ---- ----
Land and buildings.......................... 20 to 50 $ 35,871 $34,699
Machinery and equipment..................... 5 to 12 62,120 51,728
Office furniture and equipment.............. 3 to 10 1,732 1,772
Construction in progress.................... 15,528 1,876
-------- -------
Property, plant and equipment, at cost.... 115,251 90,075
Less accumulated depreciation............... 43,151 37,601
-------- -------
Property, plant and equipment, net........ $ 72,100 $52,474
======== =======
Capital expenditures for 1999 aggregated $25.6 million, reflecting $22.9
million of cash expenditures and $2.7 million in accounts payable.
STANLEY FURNITURE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. Long-Term Debt
(in thousands)
1999 1998
---- ----
7.28% Senior notes due March 15, 2004................ $21,429 $25,714
7.57% Senior note due June 30, 2005.................. 6,975 7,825
7.43% Senior notes due November 18, 2007............. 10,000 10,000
-------- --------
Total.............................................. 38,404 43,539
Less current maturities.............................. 5,236 5,136
--------- ---------
Long-term debt, exclusive of current maturities...... $33,168 $38,403
======= =======
The Company has a revolving credit facility which provides for borrowings
of up to $25.0 million through August 2000, automatically renewable thereafter
for one year periods unless terminated by either party. Interest under the
facility is payable monthly at prime (8.5% on December 31, 1999) or, at the
Company's option, the reserve adjusted LIBOR plus .75% per annum (6.75% on
December 31, 1999). The Company utilizes letters of credit to collateralize
certain insurance policies and inventory purchases. Outstanding letters of
credit at December 31, 1999 were $1.0 million. At December 31, 1999, $24.0
million of additional borrowings were available under the revolving credit
facility.
The above loan agreements require the Company to maintain certain
financial covenants. The Company's ability to pay dividends with respect to the
common stock is restricted to $25.0 million plus 50% of the Company's
consolidated net earnings, adjusted for net cash proceeds received by the
Company from the sale of its stock and the amount of payments for redemption,
purchase or other acquisition of its capital stock, subsequent to January 1,
1999. At December 31, 1999, these covenants limit additional borrowings to $59
million and limit funds available to pay dividends and repurchase the Company's
common stock to $31 million.
Annual debt service requirements are $5.2 million in 2000, $6.7 million in
2001, $6.8 million in 2002, $6.9 million in 2003 and $7.0 million in 2004.
4. Income Taxes
The provision for income taxes consists of (in thousands):
1999 1998 1997
---- ---- ----
Current:
Federal............................ $10,435 $8,558 $6,454
State.............................. 881 1,292 757
------- ------ ------
Total current.................... 11,316 9,850 7,211
------- ------ ------
Deferred:
Federal............................ (93) (852) (96)
State.............................. (12) (112) (13)
------- ------ ------
Total deferred................... (105) (964) (109)
------- ------ ------
Income taxes................... $11,211 $8,886 $7,102
======= ====== ======
STANLEY FURNITURE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. Income Taxes (continued)
A reconciliation of the difference between the federal statutory income
tax rate and the effective income tax rate follows:
1999 1998 1997
---- ---- ----
Federal statutory rate.................. 35.0% 35.0% 35.0%
State taxes, net of federal benefit..... 2.4 3.3 2.6
Goodwill................................ .4 .5 .6
Life insurance.......................... (.5) (.6) (.7)
Tax savings from foreign sales
corporation........................... (.3) (.2) (.5)
Other, net.............................. (.1) 1.0
----- ---- ----
Effective income tax rate............. 36.9% 38.0% 38.0%
==== ==== ====
The income tax effects of temporary differences that comprise deferred tax
assets and liabilities at December 31 follow (in thousands):
1999 1998
---- ----
Current deferred tax assets (liabilities):
Accounts receivable.................................. $ 497 $ 444
Inventory............................................ 48 141
Employee benefits.................................... 1,903 1,452
Other accrued expenses............................... 15 (57)
------- -------
Net current deferred tax asset..................... $ 2,463 $ 1,980
======= =======
Noncurrent deferred tax liabilities:
Property, plant and equipment........................ $10,201 $ 9,681
Employee benefits.................................... 871 1,013
------- -------
Net noncurrent deferred tax liability.............. $11,072 $10,694
======= =======
5. Stockholders' Equity
During 1999, the Company's Board of Directors increased the authorization
to repurchase its common stock to $20 million. Since October 1998, the Company
has utilized $10.3 million to purchase 541,750 shares of its common stock at an
average price of $18.94 per share, including the purchase of 226,750 shares at
an average price of $20.76 in 1999.
In 1998, the Company contributed 103,400 shares of its common stock, with
a fair value of $1.9 million, to the Stanley Retirement Plan.
The Company effected a two-for-one stock split, distributed in the form of
a stock dividend on May 15, 1998, to stockholders of record on May 1, 1998. All
related amounts have been retroactively adjusted to reflect the stock split.
STANLEY FURNITURE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. Stockholders' Equity (continued)
In addition to its common stock, the Company's authorized capital includes
1,000,000 shares of "blank check" preferred stock. None was outstanding during
the three years ended December 31, 1999. The Board of Directors is authorized to
issue such stock in series and to fix the designation, powers, preferences,
rights, limitations and restrictions with respect to any series of such shares.
Such "blank check" preferred stock may rank prior to common stock as to dividend
rights, liquidation preferences or both, may have full or limited voting rights
and may be convertible into shares of common stock.
Basic and diluted earnings per share are calculated using the following
share data (in thousands):
1999 1998 1997
---- ---- ----
Weighted average shares outstanding
for basic calculation.................... 7,119 7,008 8,394
Effect of stock options...................... 651 955 884
----- ----- -----
Weighted average shares outstanding
for diluted calculation............. 7,770 7,963 9,278
===== ===== =====
6. Employee Stock Plans
The Company's stock option plans provide for the granting of stock options
up to an aggregate of 1,400,000 shares of common stock to key employees. The
exercise price may not be less than the fair market value of the Company's
common stock on the grant date. Granted options vest 20% annually.
At December 31, 1999 and 1998, options to purchase 727,256 and 930,878
shares, were exercisable with a weighted-average exercise price of approximately
$5.00. At December 31, 1999, no shares were available for grant. Activity for
the three years ended December 31, 1999 follows:
Number Weighted-Average
of shares Exercise Price
Outstanding at January 1, 1997....................... 1,360,474 $ 4.87
Lapsed............................................. (18,000) 4.59
Exercised.......................................... (33,804) 4.74
Granted............................................ 35,000 10.06
---------
Outstanding at December 31, 1997..................... 1,343,670 4.95
Lapsed............................................. (36,400) 7.43
Exercised.......................................... (316,392) 4.95
Granted............................................ 43,000 17.75
---------
Outstanding at December 31, 1998..................... 1,033,878 5.47
Lapsed............................................. (5,000) 5.73
Exercised.......................................... (270,762) 4.80
Granted............................................ 5,700 19.13
---------
Outstanding at December 31, 1999..................... 763,816 $ 5.82
=========
STANLEY FURNITURE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. Employee Stock Plans (continued)
Options outstanding at December 31, 1999, include 683,116 shares with
exercise prices ranging from $4.25 to $6.06 and a weighted-average remaining
contractual life of approximately 5 years. The remaining options have exercise
prices ranging from $8.19 to $19.13 with a weighted-average remaining
contractual life of approximately 8 years.
The estimated per share weighted-average fair value of stock options
granted during 1999, 1998, and 1997 was $12.73, $11.78 and $7.25, respectively,
on the date of grant. A risk-free interest rate of 6.5%, 4.7% and 5.4% for 1999,
1998, and 1997, respectively, and a 50% volatility rate with an expected life of
10 years was assumed in estimating the fair value.
The following table summarizes the pro forma effects assuming compensation
cost for such awards had been recorded based upon the estimated fair value (in
thousands, except per share data):
1999 1998 1997
------------------ -------------------- ---------------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
Net income......................... $19,213 $18,902 $14,483 $14,175 $11,587 $11,326
Basic earnings per share........... 2.70 2.65 2.07 2.02 1.38 1.35
Diluted earnings per share......... 2.47 2.44 1.82 1.79 1.25 1.23
In 1994, the Company entered into a contractual agreement to issue 100,000
shares of common stock to the chief executive officer at $5.00 per share (the
market price on the date of the agreement) in exchange for a non-recourse 7.6%
note receivable. The principal amount plus accrued interest was forgiven over
time, subject to the executive's continued employment. The contractual agreement
was completed in 1998 and 100,000 shares were issued to the chief executive
officer. Compensation expense was $271,000 and $285,000 for 1998 and 1997,
respectively.
7. Employee Benefit Plans
Defined Contribution Plan
The Company maintains a defined contribution plan covering substantially
all of its employees. Discretionary matching and profit sharing contributions
were $1.5 million in both 1999 and 1998, and $1.2 million in 1997.
STANLEY FURNITURE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. Employee Benefit Plans (continued)
Pension Plans
Benefits do not accrue under the Company's pension plans after 1995. The
financial status of the plans at December 31 follows (in thousands):
1999 1998
------------------------------- -----------------------------
Stanley Supple- Stanley Supple-
Retirement mental Retirement mental
Plan Plan Plan Plan
------------- ---------- ------------- --------
Change in benefit obligation:
Beginning benefit obligation............... $17,963 $ 1,444 $17,146 $ 1,210
Interest cost.............................. 1,177 97 1,188 91
Actuarial loss (gain)...................... (3,019) 924 160
Benefits paid ............................. (2,740) (34) (1,582) (17)
Settlement cost............................ 1,158 287
------- ------- ------- -------
Ending benefit obligation.............. 14,539 1,507 17,963 1,444
------- ------- ------- -------
Change in plan assets:
Beginning fair value of plan assets........ 19,028 17,170
Actual return on plan assets............... 1,777 1,201
Employer contributions..................... 2,239
Benefits paid.............................. (2,740) (1,582)
------- ------- ------- -------
Ending fair value of plan assets....... 18,065 19,028
------- ------- ------- -------
Funded status................................. 3,526 (1,507) 1,065 (1,444)
Unrecognized loss............................. 2,450 5,420
------- ------- ------- -------
Prepaid (accrued) pension costs........... $ 5,976 $(1,507) $ 6,485 $(1,444)
======= ======= ======= =======
At December 31, 1999, the Stanley Retirement Plan assets included Company
stock with a fair value of $1.9 million.
Components of net periodic pension cost follow (in thousands):
1999 1998 1997
---- ---- ----
Interest cost.......................... $1,274 $1,279 $1,279
Expected return on plan assets......... (1,411) (1,290) (1,216)
Net amortization and deferral.......... 333 435 179
------ ------ ------
Net periodic benefit cost........... 196 424 242
Settlement expense..................... 409 376
------ ------ ------
Total expense....................... $ 605 $ 800 $ 242
====== ====== ======
STANLEY FURNITURE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. Employee Benefit Plans (continued)
The assumptions used as of December 31 to determine the plans' financial
status and pension cost were:
1999 1998 1997
---- ---- ----
Discount rate for funded status........ 8.00% 6.65% 7.00%
Discount rate for pension cost......... 6.65% 7.00% 7.75%
Return on assets....................... 7.50% 7.50% 7.50%
Postretirement Benefits Other Than Pensions
The Company provides health care benefits to eligible retired employees
between the ages of 55 and 65 and provides life insurance benefits to eligible
retired employees from age 55 until death. The plan's financial status at
December 31 follows (in thousands):
1999 1998
------- -------
Change in benefit obligation:
Beginning benefit obligation......................... $3,568 $3,641
Service cost......................................... 45 44
Interest cost........................................ 212 239
Actuarial (gain) loss................................ (552) 93
Plan participants' contributions..................... 125 105
Benefits paid........................................ (487) (554)
------ ------
Ending benefit obligation........................ 2,911 3,568
------ ------
Change in plan assets:
Beginning fair value of plan assets..................
Employer contributions............................... 362 449
Plan participants' contributions..................... 125 105
Benefits paid........................................ (487) (554)
------ ------
Ending fair value of plan assets.................
------ ------
Funded status.......................................... (2,911) (3,568)
Unrecognized net loss.................................. 487 946
Unrecognized transition obligation..................... 1,694 1,824
------ ------
Accrued benefit cost................................. $ (730) $ (798)
====== ======
Components of net periodic postretirement benefit cost were (in
thousands):
1999 1998 1997
---- ---- ----
Service cost.................................... $ 45 $ 44 $ 36
Interest cost................................... 212 239 261
Amortization of transition obligation........... 130 130 131
Amortization and deferral....................... 32 41 29
---- ---- ----
Net periodic postretirement benefit cost.. $419 $454 $457
==== ==== ====
STANLEY FURNITURE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. Employee Benefit Plans (continued)
The weighted-average discount rates used in determining the actuarial
present value of the projected benefit obligation were 8.00%, 6.65% and 7.00%
for 1999, 1998 and 1997, respectively. The rate of increase in future health
care benefit cost used in determining the obligation for 1999 was 8% gradually
decreasing to 5.5% beginning in 2004, and for 1998 and 1997 was 9% gradually
decreasing to 5.5% beginning in 2004.
An increase or decrease in the assumed health care cost trend rate of one
percentage point in each future year would affect the accumulated postretirement
benefit obligation at December 31, 1999, by approximately $75,000 and the annual
postretirement benefit cost by approximately $12,000.
Deferred Compensation
The Company has a deferred compensation plan, funded with life insurance
policies, which permits certain management employees to defer portions of their
compensation and earn a fixed rate of return. The accrued liabilities relating
to this plan of $1.4 million at December 31, 1999 and 1998, are included in
accrued salaries, wages and benefits and other long-term liabilities. The cash
surrender value, net of policy loans, is included in other assets.
8. Leases
The Company leases showroom space and certain other equipment. Rental
expenses charged to operations were $1.5 million, $1.2 million, and $1.1 million
in 1999, 1998 and 1997, respectively. Future minimum lease payments, net of
subleases, are approximately as follows: 2000 - $959,000; 2001 - $859,000;
2002 - $645,000; and 2003 - $503,000.
STANLEY FURNITURE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. Supplemental Cash Flow Information
(in thousands)
1999 1998 1997
---- ---- ----
Net income.......................................... $19,213 $14,483 $11,587
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation..................................... 5,801 5,328 5,000
Amortization..................................... 546 447 432
Deferred income taxes............................ (105) (964) (109)
Other, net....................................... 140 555 340
Changes in assets and liabilities:
Accounts receivable............................ (2,992) (1,714) (4,331)
Inventories.................................... 2,933 (784) (5,491)
Prepaid expenses and other current assets...... (201) 315 (2,180)
Accounts payable............................... 1,299 3,673 3,534
Accrued salaries, wages and benefits........... (1,075) 2,125 (27)
Other accrued expenses......................... 1,710 1,760 (713)
Other assets................................... 40 36 32
Other long-term liabilities.................... 468 (237) 238
------- ------- -------
Net cash provided by operating activities.... $27,777 $25,023 $ 8,312
======= ======= =======
10. Quarterly Results of Operations (Unaudited)
(in thousands, except per share data)
1999 Quarters: First Second Third Fourth
----- ------ ----- ------
Net sales............................ $63,661 $63,384 $65,319 $72,353
Gross profit......................... 16,046 16,444 17,116 18,480
Net income........................... 4,188 4,395 4,957 5,674
Net income per share:
Basic............................. $ .59 $ .62 $ .69 $ .80
Diluted........................... .54 .56 .64 .74
1998 Quarters: First Second Third Fourth
----- ------ ----- ------
Net sales............................ $57,691 $61,863 $63,832 $63,985
Gross profit......................... 14,145 15,273 15,383 15,639
Net income........................... 3,270 3,580 3,706 3,927
Net income per share:
Basic............................. $ .48 $ .51 $ .52 $ .56
Diluted........................... .41 .45 .46 .50
STANLEY FURNITURE COMPANY, INC.
SCHEDULE II - VALUATION AND QUALIFYING
ACCOUNTS For each of the Three Years in the Period
Ended December 31, 1999
(In thousands)
Column A Column B Column C Column D Column E
- --------------------------------------------------------------------------------
Charged
Balance at (Credited) Balance
Beginning to Costs & at End of
Descriptions of Period Expenses Deductions Period
1999
Doubtful receivables.... $1,163 $270 $256(a) $1,177
Discounts, returns,
and allowances........ 743 130(b) 873
------ ---- ---- ------
$1,906 $400 $256 $2,050
====== ==== ==== ======
1998
Doubtful receivables.... $1,116 $435 $388(a) $1,163
Discounts, returns,
and allowances........ 779 (36)(b) 743
------ ---- ---- ------
$1,895 $399 $388 $1,906
====== ==== ==== ======
1997
Doubtful receivables.... $1,332 $ 20 $236(a) $1,116
Discounts, returns,
and allowances........ 613 166(b) 779
------ ---- ---- ------
$1,945 $186 $236 $1,895
====== ==== ==== ======
- ------------------------------------
(a) Uncollectible receivables written off, net of recoveries.
(b) Represents net increase (decrease) in the reserve.
S-1