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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, 2003
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: (276) 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. ( )
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2): Yes (x) No ( )
Aggregate market value of the voting and non-voting equity stock held by
non-affiliates of the Registrant based on the closing price on June 28, 2003:
$155 million
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock as of February 13, 2004:
Common Stock, par value $.02 per share 6,201,047
-------------------------------------- ---------------------
(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 14, 2004
are incorporated by reference into Part III.
TABLE OF CONTENTS
Part I Page
Item 1 Business.......................................... 3
Item 2 Properties........................................ 7
Item 3 Legal Proceedings................................. 7
Item 4 Submission of Matters to a Vote of Security Holders 7
Part II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters............................... 9
Item 6 Selected Financial Data........................... 10
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations............... 11
Item 7A Quantitative and Qualitative Disclosures about
Market Risks...................................... 16
Item 8 Consolidated Financial Statements and Supplementary
Data.............................................. 16
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............... 16
Item 9A Controls and Procedures........................... 16
Part III
Item 10 Directors and Executive Officers of the Company... 16
Item 11 Executive Compensation............................ 17
Item 12 Security Ownership of Certain Beneficial Owners and
Management........................................ 17
Item 13 Certain Relationships and Related Transactions.... 17
Item 14 Principal Accountant Fees and Services............ 17
Part IV
Item 15 Exhibits, Financial Statement Schedule and Reports on
Form 8-K.......................................... 17
Signatures .................................................. 21
Index to Consolidated Financial Statements and Schedule....... F-1
2
Stanley Furniture Company, Inc.
PART I
Item 1. Business
General
Stanley Furniture Company, Inc. (the "Company" or "Stanley") 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. This
product depth and extensive style selection makes the Company a complete wood
furniture resource for retailers in its price range and allows 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 regional furniture chains. To provide its products
and support this broad distribution network, the Company has implemented a
blended operating strategy combining efficient and flexible manufacturing
processes with offshore sourcing of component parts and finished goods. The
Company emphasizes continuous improvement in its manufacturing and sourcing
processes to enable it to continue providing competitive advantages to its
customers, such as quick delivery, reduced inventory investment, high quality,
and value.
In 2001, the Company began to expand its offshore sourcing as it began
implementing its blended operating strategy. The increased offshore sourcing
created excess capacity in the Company's manufacturing facilities and the
Company closed its former West End, North Carolina facility beginning in late
2001 and realigned production at its Lexington, North Carolina facility in 2003.
Products and Styles
The Company's product lines cover all major design categories, and include
dining room, bedroom, home office, home entertainment, accent tables and youth
furniture marketed as Young America(R). Recently the Company began expanding its
Young America(R) offerings to include playroom, accent pieces for the bath and
infant furniture marketed as Young America Baby(TM). 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 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
----------------
Dining room................................................... 24
Bedroom....................................................... 24
Youth furniture (Young America(R))............................ 22
Home entertainment and accent tables.......................... 20
Home office................................................... 18
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 prior to
3
full-scale production. The Company consults with its marketing personnel, sales
representatives, and selected customers throughout this process and introduces
its new product styles primarily 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 60 independent sales
representatives to independent furniture retailers, department stores and
regional furniture chains. Representative customers in alphabetical order
include, Carson Pirie Scott, Dillards, Federated Department Stores,
Furnitureland South, Jordan's, Marshall Fields, Nebraska Furniture Mart, Raymour
& Flanigan, Robb & Stucky and Rooms To Go Kids. 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 63,000 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 sold to approximately 2,600 customers during 2003, and
approximately 4% of the Company's sales in 2003 were to international customers.
No single customer accounted for more than ten percent of the Company's sales in
2003. 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 and Offshore Sourcing
The Company's manufacturing strategy combines offshore sourcing with
domestic manufacturing. The Company's domestic manufacturing operations
complement its product and distribution strategy by emphasizing continuous
improvement in quality and customer responsiveness while reducing costs. These
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 also integrates the sourcing of selected component parts and
finished items with its manufacturing operations to further enhance its product
and distribution strategy. The Company acquires selected finished items and
component parts from a limited number of offshore suppliers who can meet the
Company's quality specifications, production efficiency and scheduling
requirements. Approximately 20% of the Company's sales volume in 2003 came from
products sourced from six countries with China representing the largest volume.
Approximately 30% of 2004 sales is expected to come from sourced products.
The Company operates manufacturing facilities in North Carolina and
Virginia consisting of an aggregate of approximately 3.2 million square feet.
The Company considers its present facilities to be generally modern,
well-equipped and well-maintained.
The Company shipped customer orders within 15 days on average during 2003
with average finished goods inventory turns of 5.5. The Company schedules
production of its various styles based upon actual and anticipated orders. Since
the Company ships customer orders on average in 15 days, management believes
that the size of its backlog is not necessarily indicative of its long-term
4
operations. The Company's backlog of unshipped orders was $19.6 million at
December 31, 2003 and $15.4 million at December 31, 2002.
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 and
maple. The Company's five largest suppliers accounted for approximately 24% of
its purchases in 2003. 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 ranked 21st among the largest furniture manufacturers in North
America based on 2002 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. In
addition, competition has significantly increased from foreign manufacturers in
countries such as China which have lower production costs. 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 sourcing strategy, 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, 2003, the Company employed approximately 2,500 associates.
None of the Company's associates are represented by a labor union. The Company
considers its relations with its associates to be good.
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
excellent quality and styling in the furniture industry. The Company owns a
number of trademarks, 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 safety, health and environmental regulations.
5
Forward-Looking Statements
Certain statements made in this report 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," "estimates," "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 competition in the furniture industry including
competition from lower-cost foreign manufacturers, the Company's success in
implementing its blended strategy of expanded offshore sourcing and domestic
manufacturing, disruptions in offshore sourcing including those arising from
supply or distribution disruptions or changes in political or economic
conditions affecting the countries from which the Company obtains offshore
sourcing, international trade policies of the United States and countries from
which the Company obtains offshore sourcing, the cyclical nature of the
furniture industry, fluctuations in the price for lumber which is the most
significant raw material used by the Company, fluctuations in foreign freight
cost, credit exposure to customers, capital costs and general economic
conditions. Any forward looking statement speaks only as of the date of this
filing, and the Company undertakes no obligation to update or revise any
forward-looking statements, whether as a result of new developments or
otherwise.
Available Information
The Company files annual, quarterly and current reports, proxy
statements and other information with the Securities and Exchange Commission
(the "SEC"). These filings are available to the public over the Internet at the
SEC's web site at http://www.sec.gov. You may also read and copy any document
that the Company files at the SEC's public reference room located at 450 Fifth
Street, NW, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference room.
The Company's principal Internet address is www.stanleyfurniture.com.
The Company makes available free of charge on www.stanleyfurniture.com its
annual, quarterly and current reports, and amendments to those reports, as soon
as reasonably practicable after the Company electronically files such material
with, or furnishes it to, the SEC.
In addition, you may request a copy of these filings (excluding
exhibits) at no cost by writing, telephoning, faxing or e-mailing the Company at
the following address, telephone number, fax number or e-mail address:
Stanley Furniture Company, Inc.
1641 Fairystone Park Highway
Stanleytown, Virginia 24168
Attention: Mr. Douglas I. Payne
Telephone: (276) 627-2000
Fax 276-629-5114
Or E-mail your request to: Investor@Stanleyfurniture.com
6
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. Production capacity and extent of utilization of the Company's
facilities are difficult to quantify with certainty because maximum capacity and
utilization varies periodically depending upon the product being manufactured,
the amount of component parts and finished items outsourced, and the utilization
of the labor force at the facility. In this context, the Company estimates that
its facilities operated at approximately 70-75% of capacity in 2003, principally
on a one shift basis. The Company believes available capacity at its facilities
together with the integration of selected imported component parts and finished
items will be adequate to expand production to meet anticipated product
requirements.
Approximate Owned
Facility Size or
Location Primary Use (Square Feet) Leased
- -------- ----------- ----------- ------
Stanleytown, VA Manufacturing and
Corporate Headquarters 1,721,000 Owned
Martinsville, VA Manufacturing 300,000 Owned
Lexington, NC Manufacturing 635,000 Owned
Robbinsville, NC Manufacturing 540,000 Owned
High Point, NC Showroom 63,000 Leased
Item 3. Legal Proceedings
In the normal course of business, the Company is involved in claims and
lawsuits none of which currently, in management's opinion, will have a material
adverse affect on the Company's consolidated financial statements.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
7
Executive Officers of the Registrant
The Company's executive officers and their ages as of January 1, 2004 are
as follows:
Name Age Position
- ---- --- --------
Albert L. Prillaman........... 58 Chairman
Jeffrey R. Scheffer........... 48 President and Chief Executive Officer
Douglas I. Payne.............. 45 Executive Vice President -Finance and
Administration and Secretary
Philip D. Haney............... 49 Executive Vice President - Marketing/
Sales - Stanley Collections
Robert A. Sitler, Jr.......... 43 Senior Vice President - Operations
R. Glenn Prillaman............ 32 Senior Vice President - Marketing/
Sales - Young America(R)
Albert L. Prillaman has been Chairman of the Board of Directors since
September 1988. Mr. Prillaman served as Chief Executive Officer of the Company
from December 1985 to December 2002. Mr. Prillaman also served as President from
1985 until April 2001. Prior to 1985, Mr. Prillaman served as 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 Company since 1969. Albert L.
Prillaman is the father of R. Glenn Prillaman.
Jeffrey R. Scheffer has been Chief Executive Officer since December 2002.
Mr. Scheffer has been President since April 2001. He also served as Chief
Operating Officer from April 2001 to December 2002. Prior to his employment with
the Company, Mr. Scheffer served as President of American Drew, a furniture
manufacturer, for five years.
Douglas I. Payne has been Executive Vice President - Finance and
Administration since April 2001. Mr. Payne previously held the position of
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.
Philip D. Haney has been Executive Vice President - Marketing/Sales -
Stanley Collections since August 2003. Mr. Haney previously held the position of
Executive Vice President - Marketing and Sales since his employment by the
company in October 2002. Prior to his employment with the Company, Mr. Haney
served as President of Karastan Rug and Home from August 2002 to October 2002
and was Senior Vice President, Marketing and Sales at Karastan from 1998 to
August 2002.
Robert A. Sitler, Jr. has been Senior Vice President - Operations since
November 2003. Mr. Sitler previously held the position of Vice President -
Manufacturing Services since November 2001. Prior to that time, Mr. Sitler held
various management positions in credit, manufacturing, human resources, supply
management and global sourcing since his employment by the company in 1985.
R. Glenn Prillaman has been Senior Vice President - Marketing/Sales - Young
America(R) since August 2003. Mr. Prillaman previously held the position of Vice
President - Product Manager since January 2002. Mr. Prillaman held various
management positions in product development for Young America(R) since his
return to the Company in June 1999. From January 1996 to June 1999, Mr.
Prillaman was employed by various golf course management companies and golf
equipment manufacturers. From September 1994 to January 1996, Mr. Prillaman was
employed by the Company in product development and was an independent sales
representative for the Company from July 1993 to August 1994. R. Glenn Prillaman
is the son of Albert L. Prillaman.
8
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.
Dividends
High Low Paid
2003
First Quarter.............. $25.15 $18.26 $.05
Second Quarter............. 27.42 20.69 .05
Third Quarter.............. 33.19 26.18 .05
Fourth Quarter............. 33.08 29.50 .05
2002
First Quarter.............. $33.25 $23.29
Second Quarter............. 36.82 26.44
Third Quarter.............. 27.05 17.70
Fourth Quarter............. 26.20 19.75
As of February 13, 2004, there were approximately 1,800 beneficial stockholders.
Prior to 2003 the Company used all earnings to finance the growth and
development of its business and to repurchase its common stock. Accordingly no
cash dividends were paid through December 31, 2002. The Company's Board of
Directors initiated an annual dividend policy of $.20 per share in January 2003
and increased the annual dividend policy to $.40 per share in January 2004. The
Company's dividend policy is subject to review and revision by the Board of
Directors 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
and repurchase its common stock is restricted under certain loan covenants. See
Note 3 of the Notes to Consolidated Financial Statements.
Equity Compensation Plan Information
The following table summarizes our equity compensation plans as of
December 31, 2003:
Number of shares to be Weighted-average Number of shares
issued upon exercise exercise price of remaining available for
of outstanding options, outstanding options, future issuance under
warrants and rights warrants, and rights equity compensation plans
Equity compensation plans
approved by stockholders 719,000 $25.68 241,000
Equity compensation plans
not approved by stockholders(1) 100,000 $27.88
------- ------ --------
Total 819,000 $25.95 241,000
======= ====== =======
(1) Represents a one time option grant to Jeffrey R. Scheffer, in connection
with his employment as President and Chief Operating Officer of the Company
in April 2001.
9
Item 6. Selected Financial Data
Years Ended December 31,
-------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(in thousands, except per share data)
Income Statement Data:
Net sales .......................... $260,641 $239,485 $234,322 $283,092 $264,717
Cost of sales ...................... 198,788 180,905 181,356 214,499 196,631
Restructuring and related charges(1) 3,548 2,290
-------- -------- -------- -------- --------
Gross profit ................... 61,853 55,032 50,676 68,593 68,086
Selling, general and administrative
expenses ......................... 35,637 32,671 30,482 33,656 33,796
Unusual charge(2) .................. 2,800
Restructuring and related charges(1) 733
-------- -------- -------- -------- --------
Operating income ................. 26,216 22,361 16,661 34,937 34,290
Other expense (income), net ........ (203) (219) 47 (82) 388
Interest expense ................... 2,748 3,090 4,007 4,003 3,478
-------- -------- -------- -------- --------
Income before income taxes ....... 23,671 19,490 12,607 31,016 30,424
Income taxes ....................... 8,521 6,919 4,286 11,476 11,211
-------- -------- -------- -------- --------
Net income ....................... $ 15,150 $ 12,571 $ 8,321 $ 19,540 $ 19,213
======== ======== ======== ======== ========
Basic Earnings Per Share:
Net income ......................... $ 2.40 $ 1.90 $ 1.26 $ 2.76 $ 2.70
======== ======== ======== ======== ========
Weighted average shares ............ 6,326 6,609 6,610 7,076 7,119
======== ======== ======== ======== ========
Diluted Earnings Per Share:
Net income ......................... $ 2.34 $ 1.85 $ 1.21 $ 2.63 $ 2.47
======== ======== ======== ======== ========
Weighted average shares(3) ......... 6,462 6,782 6,900 7,429 7,770
======== ======== ======== ======== ========
Cash dividends paid per share ...... $ .20
========
Balance Sheet and Other Data:
Cash ............................... $ 2,509 $ 9,227 $ 1,955 $ 1,825 $ 3,597
Inventories ........................ 54,638 54,158 49,522 54,423 43,580
Working capital .................... 64,455 62,944 51,271 53,759 38,531
Total assets ....................... 164,203 172,485 163,003 179,206 170,522
Long-term debt including
current maturities ............... 22,700 29,614 37,053 52,169 38,404
Stockholders' equity(3) ............ 102,558 99,687 87,294 79,477 79,573
Capital expenditures(4) ............ 1,243 1,037 4,172 6,068 25,566
Stock repurchases:
Shares ........................... 566 158 86 869 227
Total cost ....................... $ 14,788 $ 3,066 $ 1,973 $ 19,754 $ 4,708
(1) The Company recorded restructuring and related charges in 2002 of $3.6
million (or $.34 per diluted share) and $3.0 million (or $.29 per diluted
share) in 2001 for the closure of a manufacturing facility. See Note 8 of
Notes to Consolidated Financial Statements.
(2) In 2001, the Company recorded a $2.8 million (or $.26 per diluted share)
charge to write off amounts due from a major customer. See Note 9 of Notes
to Consolidated Financial Statements.
(3) In 2002, the Company issued 49,000 shares to the Stanley Retirement Plan.
(4) The 1999 capital expenditures were primarily for capacity expansion
projects including a new facility.
10
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 Consolidated Financial Statements and Notes thereto
contained elsewhere herein.
Overview
Over the past few years the residential wood furniture industry has
experienced a surge in low cost imported products, primarily from China. Imports
have grown dramatically in the past few years and according to industry sources
it is estimated that imports now account for approximately half of all
residential wood furniture sold in the United States.
In response to this trend we continue to develop a blended strategy of
combining our domestic manufacturing capabilities with an expanding offshore
sourcing program and to realign manufacturing capacity. We are integrating
selected imported component parts and finished items in our product line to
lower costs, provide design flexibility and offer a better value to our
customers. Sourced products represented approximately 20% of our sales in 2003
and we anticipate this percentage to level off at approximately 30% of sales for
2004.
The increase in offshore sourcing has created excess capacity in our
manufacturing facilities which has caused us to reduce and realign manufacturing
capacity. We closed a manufacturing facility in 2002 (our former West End, North
Carolina factory) and reduced operations at another manufacturing facility in
2003. We have realigned production so that each of our current manufacturing
facilities is focused on specific product lines of compatible products to
improve quality and lower production costs.
These actions have reduced our manufacturing capacity by approximately 15%
to 20%. However, we operated at approximately 70% to 75% of this reduced
capacity in 2003. Near-term operating margins will continue to be negatively
impacted by low capacity utilization rates as the proportion of sourced goods is
expected to grow from approximately 20% of sales in 2003 to approximately 30% of
sales in 2004.
We are reluctant to further reduce our manufacturing capacity at the
present time in order to provide protective capacity for improved demand and the
uncertainty of the outcome of the dumping investigation currently being
conducted by the U.S. Department of Commerce and the International Trade
Commission. If the investigation determines Chinese manufacturers are illegally
dumping wooden bedroom furniture into the U. S. market, tariffs will be applied
to future imports of wooden bedroom furniture from China. While we cannot
predict the outcome or quantify the potential impact, we believe a favorable
ruling on behalf of the petitioners will have a positive impact on our financial
performance since we source a smaller percentage of wooden bedroom furniture
from China than most of our competition.
We will continue to evaluate our manufacturing capacity needs considering
increased offshore sourcing, current and anticipated demand for our products,
the outcome of the dumping investigation regarding wooden bedroom furniture
produced in China, overall market conditions and other factors we consider
relevant. Further capacity reductions could cause asset impairment or other
restructuring charges in the future.
11
Results of Operations
The following table sets forth the percentage relationship to net sales of
certain items included in the Consolidated Statements of Income:
For the Years Ended
December 31,
-------------------------
2003 2002 2001
----- ----- -----
Net sales .................................. 100.0% 100.0% 100.0%
Cost of sales .............................. 76.3 75.5 77.4
Restructuring and related charges .......... 1.5 1.0
----- ----- -----
Gross profit ............................. 23.7 23.0 21.6
Selling, general and administrative expenses 13.6 13.6 13.0
Unusual charge ............................. 1.2
Restructuring and related charges .......... .3
----- ----- -----
Operating income ......................... 10.1 9.4 7.1
Other income, net .......................... .1 .1
Interest expense ........................... 1.1 1.3 1.7
----- ----- -----
Income before income taxes ............... 9.1 8.2 5.4
Income taxes ............................... 3.3 2.9 1.8
----- ----- -----
Net income ............................... 5.8% 5.3% 3.6%
===== ===== =====
2003 Compared to 2002
Net sales increased $21.2 million, or 8.8%, in 2003 compared to 2002.
The increase was due primarily to higher unit volume. We believe this higher
unit volume is due to gains in market share resulting from our blended operating
strategy that has allowed us to offer improved product styling and value to our
customers. While industry sales trends improved in the second half of 2003, the
industry reported a sales decrease in 2003.
Gross profit margin for 2003 increased to 23.7% from 23.0% in 2002. Lower
gross profit margin in 2002 was due primarily to restructuring and related
charges resulting from closing a factory to reduce our manufacturing capacity.
The gross profit margin for 2003 increased due to savings from sourcing
initiatives and the realignment of manufacturing capacity. These savings were
mostly offset by transition and start up costs from increased offshore sourcing,
lower production levels at our manufacturing facilities, and other inflationary
costs including wages and employee benefits.
Selling, general and administrative expenses as a percentage of net sales
was 13.6% for both 2003 and 2002. Selling, general and administrative
expenditures increased $3.0 million in 2003 due primarily to higher sales,
expansion of our offshore sourcing program and increased marketing and product
development costs. These increases were partially offset by a $780,000 decrease
in bad debt expense. We recognized $760,000 of bad debt expense in 2002 compared
to a net reversal of $20,000 in 2003 due to a decrease in accounts receivable
from certain customers experiencing financial difficulties. We expect the trend
of higher sourcing costs and increases in certain marketing and product
development costs to continue in 2004.
As a result of the above, operating income for 2003 increased to $26.2
million, or 10.1% as a percentage of net sales, from $22.4 million, or 9.4% as a
percentage of net sales, in 2002.
Interest expense for 2003 decreased due primarily to lower average debt
levels.
The Company's effective income tax rate for 2003 increased to 36.0% from
35.5% in 2002, due primarily to higher state income taxes resulting from the
phase-out of certain state tax credits.
12
2002 Compared to 2001
Net sales increased $5.2 million, or 2.2%, for 2002 compared to 2001. The
increase was due primarily to higher unit volume.
Gross profit margin for 2002 increased to 23.0% from 21.6% in 2001. The
increase was due primarily to cost savings resulting from closing our former
West End, North Carolina facility, offshore sourcing initiatives and lower raw
material cost. This improvement was partially offset by increased restructuring
related charges, lower production levels and higher wage and employee benefit
expenses, primarily increased health care claims and pension expense.
Selling, general and administrative expenses for 2002 as a percentage of
net sales increased to 13.6% from 13.0% for 2001. Selling, general and
administrative expenses increased $2.2 million compared to 2001 primarily as a
result of the reinstatement of management bonuses due to higher earnings, higher
selling expenses related to new product introductions and increased sales.
An unusual charge of $2.8 million was recorded in 2001 to write off
amounts due from a major customer, which declared bankruptcy and closed its
stores.
As a result of closing a facility to reduce our manufacturing capacity, we
recorded total restructuring and related charges of $6.5 million. In 2002, we
recorded restructuring and related charges, as a component of cost of sales, of
$3.5 million pretax, that included $1.7 million for accelerated depreciation and
$1.8 million for other exit costs, including plant operating inefficiencies and
severance cost. In 2001, we recorded restructuring and related charges of $3.0
million that included $2.0 million in accelerated depreciation and $1.0 million
for other exit costs. The restructuring accrual at December 31, 2002 of $450,000
consists of a lease obligation for real estate and severance cost.
As a result of the above, operating income increased to $22.4 million from
$16.7 million in 2001.
Interest expense for 2002 decreased due primarily to lower average debt
levels.
The Company's effective income tax rate increased to 35.5% for 2002 from
34.0% in 2001. The lower 2001 percentage was due to lower state income taxes.
Financial Condition, Liquidity and Capital Resources
Our sources of liquidity include cash on hand, cash from operations and
amounts available under a $25.0 million credit facility. These sources have been
adequate for day-to-day expenditures, debt payments, purchases of the Company's
stock, capital expenditures and payment of cash dividends to stockholders. We
expect these sources of liquidity to continue to be adequate for the future.
Working capital has increased due to higher overall finished goods
inventory levels as the proportion of our sales from sourced products has
increased. To support our delivery performance, we maintain a higher inventory
level of sourced products compared to those we manufacture. This is partially
offset by lower raw material inventories. We expect this trend to continue in
2004.
Capital expenditures for 2004 are anticipated to be approximately $2.0
million to $3.0 million for normal replacements and improvements. As both our
sales and the proportion of sourced goods increase we anticipate the need for
additional warehouse space. Near-term we anticipate leasing space to accommodate
our needs. However, should we decide to invest in our own facilities this could
increase our anticipated capital expenditures.
During 2003, the Company purchased 566,000 shares of its stock in the open
market at an average price of $26.15. At December 31, 2003, approximately $10.2
13
million remains authorized by our Board of Directors to repurchase shares of the
Company's common stock. Consequently, we may, from time to time, either directly
or through agents, repurchase our common stock in the open market, through
negotiated purchases or otherwise, at prices and on terms satisfactory to the
Company. Depending on market prices and other conditions relevant to the
Company, such purchases may be discontinued at any time. The Company's Board of
Directors initiated an annual dividend policy of $.20 per share in January 2003
and increased the annual dividend policy to $.40 per share in January 2004. The
aggregate payments for 2004 are expected to be approximately $2.5 million.
The Company generated cash from operations of $14.3 million in 2003
compared to $16.1 million in 2002 and $19.8 million in 2001. The increase in
cash received from customers and cash paid to suppliers and employees for 2003
was due primarily to higher sales. Higher tax payments in 2003 compared to 2002
resulted from timing of estimated tax payments and higher income. The decrease
in cash generated from operations for 2002 compared to 2001 is attributable
primarily to reduced collections from customers as a majority of the sales
increase occurred in the fourth quarter of 2002 and was collected in the first
quarter of 2003. Offsetting this decrease in 2002 was lower tax payments
required during 2002 as overpayments in 2001 were applied to 2002. The cash
generated from operations in 2003, 2002 and 2001 was used to repurchase common
stock, reduce borrowings, pay cash dividends and fund capital expenditures,
reflecting the Company's balanced strategy regarding its use of capital.
Net cash used by investing activities was $1.3 million in 2003 compared to
$342,000 and $4.2 million in 2002 and 2001, respectively. The decline in capital
expenditures for both 2003 and 2002 compared to 2001 is due to the relocation of
a significant portion of the machinery and equipment from a previously closed
facility to other Company facilities and used in lieu of normal replacements.
The expenditures in 2003, 2002 and 2001 were primarily for plant and equipment
and other assets in the normal course of business. In 2002, the Company received
net proceeds of $695,000 from the sale of real estate at its former West End,
North Carolina facility.
Net cash used by financing activities was $19.7 million, $8.5 million and
$15.4 million in 2003, 2002 and 2001, respectively. In 2003 and 2002, cash from
operations and proceeds from the exercise of stock options provided cash for
purchase and retirement of the Company's common stock and senior debt payments.
In 2003, these funds were also used to pay cash dividends. In 2001, cash from
operations and proceeds from the issuance of $10.0 million in senior notes
provided cash for reduction of borrowings under the revolving credit facility,
senior debt payments, capital expenditures and purchase and retirement of the
Company's common stock. In 2002, 85,914 shares of the Company's common stock
were surrendered by an executive officer to the Company in payment of a $2.6
million outstanding loan and accrued interest, relating to stock option
exercises in 2000.
At December 31, 2003, long-term debt including current maturities was
$22.7 million. Debt service requirements are $7.0 million in 2004, $4.3 million
in 2005, $2.9 million in 2006 and $2.9 million in 2007. As of December 31, 2003,
approximately $25.0 million of additional borrowings were available under the
Company's revolving credit facility and cash on hand was $2.5 million.
The following table sets forth the Company's contractual cash obligations and
other commercial commitments at December 31, 2003:
Payment due or commitment expiration
Less than Over
Total 1 year 2-3 years 4-5 years 5 years
Contractual cash obligations:
Long-term debt ...................... $22,700 $ 7,014 $ 7,114 $ 4,286 $ 4,286
Operating leases .................... 1,125 774 294 57
------- ------- ------- ------- -------
Total contractual cash obligations $23,825 $ 7,788 $ 7,408 $ 4,343 $ 4,286
======= ======= ======= ======= =======
Other commercial commitments:
Letters of credit ................... $ 2,382 $ 2,382
======= =======
14
Critical Accounting Policies
Management has chosen accounting policies that are necessary to accurately
and fairly report the Company's operational and financial position. Below are
the critical accounting policies that involve the most significant judgments and
estimates used in the preparation of the Company's consolidated financial
statements.
Allowance for doubtful accounts - The Company maintains an allowance for
doubtful receivables for estimated losses resulting from the inability of trade
customers to make required payments. The Company provides an allowance for
specific customer accounts where collection is doubtful and also provides an
allowance for other accounts based on historical collection and write-off
experience. Judgment is critical because some customers have experienced
financial difficulties. As the financial condition of these customers change,
the level of such allowances will be reevaluated. During 2003, the credit
exposure related to certain customer accounts experiencing financial
difficulties declined resulting in a decrease in the allowance for doubtful
receivables.
Inventory valuation - Inventory is valued at the lower of cost or market.
Cost for all inventories is determined using the first-in, first-out (FIFO)
method. The Company evaluates its inventory to determine excess or slow moving
items based on current order activity and projections of future demand. For
those items identified, the Company estimates its market value or net sales
value based on current trends. Those items having a net sales value less than
cost are written down to their net sales value. This process recognizes
projected inventory losses when they become evident rather than at the time they
are sold.
Long-lived assets - Property and intangible assets are reviewed for
possible impairment when events indicate that the carrying amount of an asset
may not be recoverable. Assumptions and estimates used in the evaluation of
impairment may affect the carrying value of long-lived assets, which could
result in impairment charges in future periods. Depreciation and amortization
policies reflect judgments on the estimated useful lives of assets.
Tax Contingencies - Tax contingencies are recorded to address potential
exposures involving tax positions the Company has taken that could be challenged
by taxing authorities. These potential exposures result from the varying
applications of statutes, rules, regulations and interpretations. The Company's
estimate of the value of its tax contingencies contains assumptions based on
past experiences and judgments about potential actions by taxing jurisdictions.
The ultimate resolution of these matters may be greater or less than the amount
that the Company has accrued.
Pension costs - The Company's pension expense is developed from actuarial
valuations. Inherent in these valuations are key assumptions, including discount
rates and expected return on plan assets, which are usually updated on an annual
basis at the beginning of each year. The Company is required to consider current
market conditions, including changes in interest rates, in making these
assumptions. Changes in pension costs may occur in the future due to changes in
these assumptions. The key assumptions used in developing 2003 net pension costs
were 6.5% for both the discount rate and expected return on plan assets compared
to 7.25% and 7.50%, respectively, in 2002. As a result, net pension cost
increased $301,000, excluding the impact of settlement expense. In establishing
its expected return on plan assets assumption, the Company reviews asset
allocation considering plan maturity and develops return assumptions based on
different asset classes adjusting for plan operating expenses. Actual asset
over/under performance compared to expected returns will respectively
decrease/increase unrecognized loss. The change in the unrecognized loss will
change amortization cost in upcoming periods. A one percentage point change in
the expected return assumption in the current year would have resulted in a
change in pension expense of approximately $150,000. Net pension cost for 2004
is expected to increase slightly, primarily as a result of a reduction in the
discount rate from 6.5% to 6.0%.
15
The Company does not have transactions or relationships with "special
purpose" entities, and the Company does not have any off balance sheet financing
other than normal operating leases primarily for showroom and certain technology
equipment.
Item 7A. Quantitative and Qualitative Disclosures about Market Risks
Because the Company's obligation under its revolving credit facility bears
interest at a variable rate, the Company is sensitive to changes in prevailing
interest rates. A one-percentage point fluctuation in market interest rates
would not have had a material impact on earnings in 2003.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements and schedule listed in Items
15(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.
Item 9a. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. The Company's
principal executive officer and principal financial officer have concluded
that the Company's disclosure controls and procedures (as defined in
Exchange Act Rule 13a-14(c)), based on their evaluation of such controls
and procedures conducted as of the end of the period covered by this
report, are effective to ensure that information required to be disclosed
by the Company in the reports it files under the Securities Exchange Act of
1934, as amended, is recorded, processed, summarized and reported within
the time periods specified in the rules and forms of the Securities and
Exchange Commission and that such information is accumulated and
communicated to the Company's management, including its principal executive
officer and principal financial officer, as appropriate to allow timely
decisions regarding required disclosure.
(b) Changes in internal controls. There have been no significant changes in
the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of the
evaluation referred to above.
PART III
Item 10. Directors and Executive Officers of the Company
Information relating to the directors of the Company is set forth under the
caption "Election of Directors" of the Company's proxy statement (the "2004
Proxy Statement") for its annual meeting of shareholders scheduled for April 14,
2004. Such information is incorporated herein by reference.
Information relating to compliance with section 16(a) of the Exchange Act is set
forth under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance" of the Company's 2004 Proxy Statement and is incorporated herein by
reference.
Information relating to the Board of Directors determinations concerning whether
a member of the Audit Committee of the Board is a "financial expert" as that
term is defined under Item 401(h) of Regulation S-K is set forth under the
caption "Board and Board Committee Information" of the Company's 2004 Proxy
Statement and is incorporated herein by reference.
16
Information concerning the executive officers of the Company is included in Part
I of this report under the caption "Executive Officers of the Company."
The Company has adopted a code of ethics that applies to the Company's
associates, including the principal executive officer, principal financial
officer, principal accounting officer or controller, or person performing
similar functions. The Company's code of ethics is posted on its website at
www.stanleyfurniture.com.
Item 11. Executive Compensation
Information relating to executive compensation for the Company is set forth
under the caption "Compensation of Executive Officers" of the Company's 2004
Proxy Statement. Such information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information for the Company relating to this item is set forth under the caption
"Security Ownership of Certain Beneficial Owners and Management" of the
Company's 2004 Proxy Statement. Such information is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
None
Item 14 Principal Accountant Fees and Services
Information for the Company relating to this item is set forth under the caption
"Independent Public Accountants" of the Company's 2004 Proxy Statement. Such
information is incorporated herein by reference.
PART IV
Item 15. Exhibits, Financial Statement Schedule and Reports on Form 8-K
--------------------------------------------------------------
(a) Documents filed as a part of this Report:
(1) The following consolidated financial statements are included in this report
on Form 10-K:
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 2003 and 2002
Consolidated Statements of Income for each of the three years in the
period ended December 31, 2003
Consolidated Statements of Changes in Stockholders' Equity for each of the
three years in the period ended December 31, 2003 Consolidated Statements
of Cash Flows for each of the three years in the period ended December 31,
2003 Notes to Consolidated Financial Statements
(2) Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts for each of the three
years in the period ended December 31, 2003
(b) The following reports on Form 8-K were filed by the Registrant during the
last quarter of the period covered by this report: A report on Form 8-K
was filed October 14, 2003 to announce the Board of Directors
authorization of additional funds for its stock repurchase program and
quarterly cash dividend.
17
(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 By-laws of the Registrant as amended (incorporated by reference to
Exhibit 3 to the Registrant's Form 10-Q (Commission File
No. 0-14938) for the quarter ended September 27, 2003).
4.1 The Certificate of Incorporation and By-laws of the Registrant as
currently in effect (incorporated by reference to Exhibits
3.1 and 3.2 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).
4.7 Private Shelf Agreement dated as of September 9, 1999, as amended as of
April 26, 2001, among the Company, The Prudential Insurance Company of
America and the affiliates of Prudential who became purchasers as
defined therein (incorporated by reference to Exhibit 4.1 to the
Registrant's Form 10Q (Commission File No 0-14938) for the quarter
ended June 30, 2001).
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)
(2) Management contract or compensatory plan
18
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 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)
10.5 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)
10.6 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)
10.7 1992 Stock Option Plan (incorporated by reference to Registrant's
Registration Statement on Form S-8 No. 33-58396).(2)
10.8 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)
10.9 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)
10.10 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)
10.11 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)
10.12 2000 Incentive Compensation Plan (incorporate by reference to Exhibit
A to the Registrant's Proxy Statement (Commission File No. 0-14938)
for the special meeting of stockholders held on August 24, 2000). (2)
10.13 Amendment No. 2 to The Stanley Furniture Company, Inc. 1992 Stock
Option Plan dated as of July 1, 2000 (incorporated by
reference to Exhibit 10.2 to the Registrant's Form 10-Q (Commission
File No. 0-14938) for the quarter ended September 1,
2000). (2)
10.14 Amendment No. 1 to The Stanley Furniture Company, Inc. 1994 Stock
Option Plan dated as of July 1, 2000 (incorporated by
reference to Exhibit 10.3 to the Registrant's Form 10-Q (Commission
File No. 0-14938) for the quarter ended September 1,
2000).(2)
(2) Management contract or compensatory plan
19
10.15 Employment Agreement made as of April 9, 2001 between Jeffrey R.
Scheffer 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, 2001). (2)
10.16 Option Agreement, dated April 30, 2001, between the Registrant and
Jeffery R. Scheffer (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, 2001). (2)
10.17 Agreement, dated April 25, 2002, between Stanley Furniture Company,
Inc. and Albert L. Prillaman (incorporated by reference to Exhibit
99.2 to the Registrant's Form 8-K (Commission File No. 0-14938) filed
on April 25, 2002). (2)
10.18 Second Amendment to Supplemental Retirement Plan of Stanley Furniture
Company, Inc. effective January 1, 2002 (incorporated by reference to
Exhibit 10.33 to the Registrant's Form 10-K (commission file No.
0-14938) for the year ended December 31, 2002). (2)
10.19 Second Amendment, dated March 1, 2003, to the Employment Agreement,
dated January 1, 1991, between the Registrant and Albert L. Prillaman
(incorporated by reference to Exhibit 10.1 to the Registrant's Form
10-Q (Commission File No. 0-14938) for the quarter ended March 29,
2003). (2)
10.20 First Amendment, dated March 1, 2003, to the Employment Agreement,
dated April 9, 2001, between the Registrant and Jeffrey R. Scheffer
(incorporated by reference to Exhibit 10.2 to the Registrant's Form
10-Q (Commission File No 0-14938) for the quarter ended March 29,
2003). (2)
10.21 Credit Agreement, dated August 29, 2003, between the Registrant and
SouthTrust Bank (incorporated by reference to Exhibit 10.1 to the
Registrant's Form 10-Q (Commission File No. 0-14938) for the quarter
ended September 27, 2003).
21 List of Subsidiaries(1)
23 Consent of PricewaterhouseCoopers LLP(1)
31.1 Certification by Jeffrey R. Scheffer, Chief Executive Officer of the
Company, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(1)
31.2 Certification by Douglas I. Payne, Chief Financial Officer of the
Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.(1)
32.1 Certification of Jeffrey R. Scheffer, Chief Executive Officer of the
Company, pursuant to 18 U. S. C. Section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002 (1)
32.2 Certification of Douglas I. Payne, Chief Financial Officer of the
Company, pursuant to 18 U. S. C. Section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002 (1)
- ------------------------------------
(1) Filed herewith
(2) Management contract or compensatory plan
20
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 20, 2004 By: /s/Jeffrey R. Scheffer
----------------------
Jeffrey R. Scheffer
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 and Director February 20, 2004
- --------------------------
(Albert L. Prillaman)
/s/Jeffrey R. Scheffer President and Chief Executive Officer February 20, 2004
- --------------------------
(Jeffrey R. Scheffer) and Director
(Principal Executive Officer)
/s/Douglas I. Payne Executive Vice President - Finance February 20, 2004
- -------------------------
(Douglas I. Payne) and Administration and
Secretary (Principal Financial
and Accounting Officer)
/s/Robert G. Culp, III Director February 20, 2004
- ----------------------------
(Robert G. Culp, III)
/s/Michael P. Haley Director February 20, 2004
- ---------------------------
(Michael P. Haley)
Director February 20, 2004
- ---------------------------
(Thomas L. Millner)
/s/T. Scott McIlhenny, Jr. Director February 20, 2004
- ---------------------------
(T. Scott McIlhenny, Jr.)
21
F5
STANLEY FURNITURE COMPANY, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2003
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Consolidated Financial Statements Page
Report of Independent Auditors.......................................................... F-2
Consolidated Balance Sheets as of December 31, 2003 and 2002............................ F-3
Consolidated Statements of Income for each of the three years in the period
ended December 31, 2003............................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for each of the
three years in the period ended December 31, 2003..................................... F-5
Consolidated Statements of Cash Flows for each of the three years in the period
ended December 31, 2003............................................................... F-6
Notes to Consolidated 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, 2003..................................... S-1
F1
Report of Independent Auditors
To the Board of Directors and Stockholders of
Stanley Furniture Company, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, stockholders' equity and cash flows present
fairly, in all material respects, the financial position of Stanley Furniture
Company, Inc. and its subsidiaries at December 31, 2003 and December 31, 2002,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, 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 our opinion.
As discussed in Note 10 to the consolidated financial statements, the Company
changed its accounting policy for goodwill amortization during 2002.
PricewaterhouseCoopers LLP
Greensboro, North Carolina
February 13, 2004
F2
STANLEY FURNITURE COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31,
2003 2002
-------- --------
ASSETS
Current assets:
Cash .......................................................... $ 2,509 $ 9,227
Accounts receivable, less allowances of $2,546 and $2,633 ..... 30,120 27,832
Inventories:
Finished goods .............................................. 37,815 35,537
Work-in-process ............................................. 7,638 6,922
Raw materials ............................................... 9,185 11,699
-------- --------
Total inventories ......................................... 54,638 54,158
Prepaid expenses and other current assets ..................... 2,855 1,311
Deferred income taxes ......................................... 2,855 2,876
-------- --------
Total current assets ........................................ 92,977 95,404
Property, plant and equipment, net .............................. 55,154 59,539
Goodwill ........................................................ 9,072 9,072
Other assets .................................................... 7,000 8,470
-------- --------
Total assets ................................................ $164,203 $172,485
======== ========
LIABILITIES
Current liabilities:
Current maturities of long-term debt .......................... $ 7,014 $ 6,914
Accounts payable .............................................. 10,595 13,386
Accrued salaries, wages and benefits .......................... 9,511 9,781
Other accrued expenses ........................................ 1,402 2,379
-------- --------
Total current liabilities ................................... 28,522 32,460
Long-term debt, exclusive of current maturities ................. 15,686 22,700
Deferred income taxes ........................................... 12,560 13,084
Other long-term liabilities ..................................... 4,877 4,554
-------- --------
Total liabilities ............................................. 61,645 72,798
-------- --------
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Common stock, $.02 par value, 10,000,000 shares authorized,
6,201,047 and 6,568,717 shares issued and outstanding ........... 124 131
Capital in excess of par value (net of stock option loans) ...... 3,819 14,757
Retained earnings ............................................... 98,680 84,799
Accumulated other comprehensive loss ............................ (65)
-------- --------
Total stockholders' equity .................................... 102,558 99,687
-------- --------
Total liabilities and stockholders' equity ................. $164,203 $172,485
======== ========
The accompanying notes are an integral part
of the consolidated financial statements.
F3
STANLEY FURNITURE COMPANY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
For the Years Ended
December 31,
-------------------------------
2003 2002 2001
------- -------- --------
Net sales ....................................... $260,641 $239,485 $234,322
Cost of sales ................................... 198,788 180,905 181,356
Restructuring and related charges (Note 8) ...... 3,548 2,290
-------- -------- --------
Gross profit .................................. 61,853 55,032 50,676
Selling, general and administrative expenses .... 35,637 32,671 30,482
Unusual charge (Note 9) ......................... 2,800
Restructuring and related charges (Note 8) ...... 733
-------- -------- --------
Operating income .............................. 26,216 22,361 16,661
Other expense (income), net ..................... (203) (219) 47
Interest expense ................................ 2,748 3,090 4,007
-------- -------- --------
Income before income taxes .................... 23,671 19,490 12,607
Income taxes .................................... 8,521 6,919 4,286
-------- -------- --------
Net income .................................... $ 15,150 $ 12,571 $ 8,321
======== ======== ========
Earnings per share:
Basic ......................................... $ 2.40 $ 1.90 $ 1.26
======== ======== ========
Diluted ....................................... $ 2.34 $ 1.85 $ 1.21
======== ======== ========
Weighted average shares outstanding:
Basic ......................................... 6,326 6,609 6,610
======== ======== ========
Diluted ....................................... 6,462 6,782 6,900
======== ======== ========
The accompanying notes are an integral part
of the consolidated financial statements.
F4
STANLEY FURNITURE COMPANY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For each of the three years in the period ended December 31, 2003
(in thousands)
Accumulated
Capital in Stock Other
Common Stock Excess of Option Retained Comprehensive
Shares Amount Par Value Loans Earnings Loss Total
Balance at January 1, 2001.................. 6,596 $132 $18,160 $(2,722) $63,907 $ 79,477
Net income.................................. 8,321 8,321
Purchase and retirement of stock............ (86) (2) (1,971) (1,973)
Exercise of stock options................... 133 3 819 (16) 806
Tax benefit on exercise of stock options.... 529 529
Stock option loan payments.................. 134 134
----- ---- ------ ------ ------ ------ --------
Balance at December 31, 2001.............. 6,643 133 17,537 (2,604) 72,228 87,294
Net income.................................. 12,571 12,571
Purchase and retirement of stock............ (158) (2) (3,064) (3,066)
Issuance of stock to Stanley Retirement Plan 49 1 1,179 1,180
Exercise of stock options................... 121 2 1,199 (72) 1,129
Tax benefit on exercise of stock options.... 871 871
Stock option loan payments.................. (86) (3) (2,949) 2,660 (292)
------- ---- ------- ------ ------ ----- -------
Balance at December 31, 2002.............. 6,569 131 14,773 (16) 84,799 99,687
Net Income.................................. 15,150 15,150
Minimum pension liability, net of
deferred income tax benefit of $40...... $ (65) (65)
-------
Comprehensive income..................... 15,085
-------
Purchase and retirement of stock............ (566) (11) (14,769) (8) (14,788)
Exercise of stock options................... 198 4 2,345 2,349
Tax benefit on exercise of stock options.... 1,475 1,475
Stock option loan payments.................. 11 11
Dividends paid, $0.20 per share............. (1,261) (1,261)
----- ---- ------- ---- ------- ----- --------
Balance at December 31, 2003.............. 6,201 $124 $ 3,824 $ (5) $98,680 $ (65) $102,558
===== ==== ======= ===== ======= ====== ========
The accompanying notes are an integral part of the
consolidated financial statements.
F5
STANLEY FURNITURE COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Years Ended
December 31,
------------------------------------
2003 2002 2001
---------- --------- ---------
Cash flows from operating activities:
Cash received from customers ................... $ 258,589 $ 235,017 $ 241,273
Cash paid to suppliers and employees ........... (231,712) (213,794) (212,169)
Interest paid .................................. (2,793) (3,155) (4,011)
Income taxes paid .............................. (9,740) (1,949) (5,290)
--------- --------- ---------
Net cash provided by operating activities .... 14,344 16,119 19,803
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures ........................... (1,243) (1,037) (4,172)
Other .......................................... (104) 695 (71)
--------- --------- ---------
Net cash used by investing activities ........ (1,347) (342) (4,243)
--------- --------- ---------
Cash flows from financing activities:
Purchase and retirement of common stock ........ (14,788) (3,066) (1,973)
Issuance of senior notes ....................... 10,000
Repayment of senior notes ...................... (6,914) (6,839) (6,715)
Dividends paid ................................. (1,261)
Repayment of revolving credit facility ......... (600) (18,401)
Proceeds from exercise of stock options ........ 2,360 1,205 940
Proceeds from insurance policy loans ........... 888 795 719
--------- --------- ---------
Net cash used by financing activities ........ (19,715) (8,505) (15,430)
--------- --------- ---------
Net increase (decrease) in cash .................. (6,718) 7,272 130
Cash at beginning of year ........................ 9,227 1,955 1,825
--------- --------- ---------
Cash at end of year ............................ $ 2,509 $ 9,227 $ 1,955
========= ========= =========
The accompanying notes are an integral part
of the consolidated financial statements.
F6
STANLEY FURNITURE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Organization and Basis of Presentation
The consolidated financial statements include Stanley Furniture Company,
Inc. (the "Company") and its wholly owned subsidiaries. All significant
inter-company accounts and transactions have been eliminated. 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 at the time risks and rewards of ownership transfer
to the buyer.
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, 2003 and 2002 was $189,000
and $237,000, respectively.
Income Taxes
Deferred income taxes are determined based on the difference between the
consolidated 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, 2003, the fair value is not materially different than its carrying
value. The fair value of trade receivables, trade payables and letters of credit
approximate the carrying amount because of the short maturity of these
instruments.
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.
F7
STANLEY FURNITURE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Summary of Significant Accounting Policies (continued)
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. No stock-based
employee compensation cost is reflected in net income, as all options granted
under those plans had an exercise price equal to the market value of the common
stock at date of grant.
The estimated per share weighted-average fair value of stock options
granted during 2003, 2002 and 2001 was $11.45, $14.36 and $14.70, respectively,
on the date of grant. A risk-free interest rate of 3.9%, 4.0% and 5.1% for 2003,
2002 and 2001, respectively, and a volatility rate of 40 to 50% with an expected
life of 8 to 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):
2003 2002 2001
-------- -------- --------
Net income as reported .................. $ 15,150 $ 12,571 $ 8,321
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects ............ 1,618 1,783 1,940
-------- -------- --------
Pro forma net income .................. $ 13,532 $ 10,788 $ 6,381
======== ======== ========
Earnings per share:
Basic - as reported ................... $ 2.40 $ 1.90 $ 1.26
======== ======== ========
Basic - pro forma ..................... $ 2.14 $ 1.63 $ 0.97
======== ======== ========
Diluted - as reported ................. $ 2.34 $ 1.85 $ 1.21
======== ======== ========
Diluted - pro forma ................... $ 2.11 $ 1.60 $ 0.93
======== ======== ========
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 amounts reported in the consolidated financial
statements and accompanying notes. Changes in such estimates may affect amounts
reported in future periods.
F8
STANLEY FURNITURE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Property, Plant and Equipment
Depreciable
lives (in thousands)
(in years) 2003 2002
-------- -------- --------
Land and buildings ..................... 20 to 50 $ 38,606 $ 38,237
Machinery and equipment ................ 5 to 12 74,550 74,204
Office furniture and equipment ......... 3 to 10 1,846 1,710
-------- --------
Property, plant and equipment, at cost 115,002 114,151
Less accumulated depreciation .......... 59,848 54,612
-------- --------
Property, plant and equipment, net ... $ 55,154 $ 59,539
======== ========
3. Debt
(in thousands)
2003 2002
------- -------
7.28% Senior notes due through March 15, 2004 ........ $ 4,286 $ 8,571
7.57% Senior note due through June 30, 2005 .......... 2,700 3,900
7.43% Senior notes due through November 18, 2007 ..... 5,714 7,143
6.94% Senior notes due through May 3, 2011 ........... 10,000 10,000
Revolving credit facility
------- -------
Total .............................................. 22,700 29,614
Less current maturities .............................. 7,014 6,914
------- -------
Long-term debt, exclusive of current maturities .... $15,686 $22,700
======= =======
During 2003, the Company entered into a new revolving credit agreement.
The new agreement provides for maximum borrowings of $25.0 million and matures
in August 2005. Interest is payable monthly at the reserve adjusted LIBOR plus
..50% per annum (1.62% on December 31, 2003) or, at the Company's option, prime
minus 1.0% (3.0% on December 31, 2003). The Company utilizes letters of credit
to collateralize certain insurance policies and inventory purchases. Outstanding
letters of credit at December 31, 2003, were $2.4 million. At December 31, 2003,
no borrowings were outstanding 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 its
common stock and to repurchase its 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, 2003, these covenants limit funds
available to pay dividends and repurchase the Company's common stock to $23.3
million.
Annual principal requirements are $7.0 million in 2004, $4.3 million in
2005, $2.9 million in 2006, $2.9 million in 2007 and $1.4 million in 2008.
F9
STANLEY FURNITURE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Income Taxes
The provision for income taxes consists of (in thousands):
2003 2002 2001
------ ------ ------
Current:
Federal .............. $8,190 $4,515 $3,980
State ................ 794 294 554
------ ------ ------
Total current ...... 8,984 4,809 4,534
------ ------ ------
Deferred:
Federal .............. (400) 1,973 (228)
State ................ (63) 137 (20)
------ ------ ------
Total deferred ..... (463) 2,110 (248)
------ ------ ------
Income taxes ..... $8,521 $6,919 $4,286
====== ====== ======
A reconciliation of the difference between the federal statutory income tax rate and the effective income tax rate follows:
2003 2002 2001
---- ---- ----
Federal statutory rate ............... 35.0% 35.0% 35.0%
State tax, net of federal benefit .... 2.6 2.8 2.1
State tax credits and adjustments .... (1.0) (1.6) (2.7)
Goodwill ............................. .9
Life insurance ....................... (1.0) (1.1) (1.5)
Other, net ........................... .4 .4 .2
---- ---- ----
Effective income tax rate .......... 36.0% 35.5% 34.0%
==== ==== ====
The income tax effects of temporary differences that comprise deferred tax
assets and liabilities at December 31 follow (in thousands):
2003 2002
------- -------
Current deferred tax assets (liabilities):
Accounts receivable ........................ $ 961 $ 1,007
Employee benefits .......................... 1,847 1,721
Other accrued expenses ..................... 47 148
------- -------
Net current deferred tax asset ........... $ 2,855 $ 2,876
======= =======
Noncurrent deferred tax liabilities:
Property, plant and equipment .............. $11,799 $11,687
Employee benefits .......................... 761 1,397
------- -------
Net noncurrent deferred tax liability .... $12,560 $13,084
======= =======
F10
STANLEY FURNITURE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Stockholders' Equity
The Company used $14.8 million of cash to purchase 566,000 shares of its
stock on the open market at an average price of $26.15 in 2003. For the three
years ending December 31, 2003, the Company has used $19.8 million of cash to
purchase 810,000 shares of its common stock on the open market at an average
price of $24.50. At December 31, 2003, approximately $10.2 million remains under
the current Board of Directors authorization to repurchase shares of the
Company's common stock.
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, 2003. 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):
2003 2002 2001
----- ----- -----
Weighted average shares outstanding
for basic calculation .................. 6,326 6,609 6,610
Effect of stock options .................... 136 173 290
----- ----- -----
Weighted average shares outstanding
for diluted calculation ........... 6,462 6,782 6,900
===== ===== =====
F11
STANLEY FURNITURE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Employee Stock Plans
The Company's stock option plans provide for the granting of stock options
up to an aggregate of 2,500,000 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 generally vest 20% annually. At
December 31, 2003, 241,000 shares were available for grant.
Activity for the three years ended December 31, 2002 follows:
Number Weighted-Average
of shares Exercise Price
Outstanding at January 1, 2001 ...... 806,464 $ 15.56
Lapsed ............................ (13,000) 26.03
Exercised ......................... (132,952) 6.19
Granted ........................... 550,000 27.88
---------
Outstanding at December 31, 2001 .... 1,210,512 22.07
Lapsed ............................ (62,000) 26.18
Exercised ......................... (120,756) 9.88
Granted ........................... 45,000 26.48
---------
Outstanding at December 31, 2002 .... 1,072,756 20.73
Lapsed ............................ (60,000) 26.33
Exercised ......................... (197,756) 11.88
Granted ........................... 4,000 21.90
---------
Outstanding at December 31, 2003 .... 819,000 $ 25.95
=========
Summarized information regarding stock options outstanding and exercisable
at December 31, 2003 follows:
Outstanding Exercisable
---------------------------------- ----------------------
Range of Average Average Average
Exercise Price Shares Life Price Shares Price
-------------- --------- ------ -------- -------- -------
Up to $20 38,000 3.3 $ 10.45 38,000 $ 10.45
$20 to $27 316,000 7.2 24.62 244,000 24.75
$27 to $36 465,000 8.0 28.12 281,000 28.12
------- --- ------- ------- -------
819,000 7.5 $25.95 563,000 $25.47
======= === ====== ======= ======
F12
STANLEY FURNITURE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. Employee Benefit Plans
Defined Contribution Plan
The Company maintains a defined contribution plan covering substantially
all of its employees and makes discretionary matching and profit sharing
contributions. The total plan cost, including employer contributions, was $1.5
million in 2003, $1.4 million in 2002 and $1.5 million in 2001.
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):
2003 2002
--------------------------------------------
Stanley Supple- Stanley Supple-
Retirement mental Retirement mental
Plan Plan Plan Plan
-------- -------- -------- ---------
Change in benefit obligation:
Beginning benefit obligation .................... $ 14,915 $ 1,750 $ 14,722 $ 1,499
Interest cost ................................... 917 112 1,042 110
Actuarial loss (gain) ........................... 332 111 1,692 202
Benefits paid ................................... (1,957) (82) (3,126) (61)
Settlement cost ................................. 364 585
-------- -------- -------- --------
Ending benefit obligation ................... 14,571 1,891 14,915 1,750
-------- -------- -------- --------
Change in plan assets:
Beginning fair value of plan assets ............. 14,949 15,423
Actual return on plan assets .................... 2,125 (1,598)
Employer contributions .......................... 82 4,250 61
Benefits paid ................................... (1,957) (82) (3,126) (61)
-------- -------- -------- --------
Ending fair value of plan assets ............ 15,117 14,949
-------- -------- -------- --------
Funded status ...................................... 546 (1,891) 34 (1,750)
Unrecognized loss (gain) ........................... 5,938 105 7,658
-------- -------- -------- --------
Net amount recognized .......................... $ 6,484 $ (1,786) $ 7,692 $ (1,750)
======== ======== ======== ========
Amount recognized in the consolidated balance sheet:
Prepaid (accrued) benefit cost .................. $ 6,484 $ (1,891) $ 7,692 $ (1,750)
Accumulated other comprehensive loss ............ 105
-------- -------- -------- --------
Net amount recognized ....................... $ 6,484 $ (1,786) $ 7,692 $ (1,750)
======== ======== ======== ========
The Company made contributions totaling $4.3 million to the Stanley
Retirement Plan during 2002. The 2002 contributions included $1.2 million in
Company stock. No contributions were made in 2003.
F13
STANLEY FURNITURE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. Employee Benefit Plans (continued)
The Company maintains an investment policy for the management of the
assets of The Stanley Retirement Plan. The objective of this policy is to build
a structured portfolio designed to achieve the most desirable balance between
investment return and asset protection by investing in equities of high quality
companies and in high quality fixed income securities which are broadly balanced
and represent all market sectors. The investment structure provides the
necessary liquidity for payment of retirement benefits. The target allocation
and the actual allocation for assets of The Stanley Retirement Plan at December
31, 2003 and December 31, 2002, the measurement date, are as follows:
Target
Allocation Percentage of Assets
2003 2002
---- ----
Equity................................. 30 to 90% 54.6% 43.5%
Fixed income........................... 30 to 60% 35.0 23.7
Other.................................. 3 to 25% 10.4 32.8
------ ------
Total 100.0% 100.0%
===== =====
At December 31, 2003 and 2002, the Stanley Retirement Plan assets included
Company stock with a fair value of $1.1 million and $1.2 million, respectively.
The benefit obligation of the Supplemental Plan, a nonqualified plan,
exceeded the accrued benefit cost at December 31, 2003. The net accrued benefit
cost of the Supplemental Plan includes a minimum pension liability of $105,000
at year-end 2003.
Components of pension cost follow (in thousands):
2003 2002 2001
---- ---- ----
Interest cost.......................... $1,028 $ 1,152 $ 1,195
Expected return on plan assets......... (958) (1,117) (1,247)
Net amortization and deferral.......... 573 307 45
------ ------- -------
Net (credit) cost................... 643 342 (7)
Settlement expense..................... 682 1,674 468
------ ------- -------
Total expense....................... $1,325 $ 2,016 $ 461
====== ======= =======
The assumptions used to determine the plans' financial status and pension
cost were:
2003 2002 2001
---- ---- ----
Discount rate for funded status............. 6.00% 6.50% 7.25%
Discount rate for pension cost.............. 6.50% 7.25% 7.60%
Return on assets............................ 6.50% 7.50% 7.50%
F14
STANLEY FURNITURE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. Employee Benefit Plans (continued)
The Company's pension expense is developed from actuarial valuations.
Inherent in these valuations are key assumptions, including discount rates and
expected return on plan assets, which are reviewed and updated on an annual
basis at the beginning of each year. The Company is required to consider current
market conditions, including changes in interest rates, in making assumptions.
In establishing its expected return on assets assumption, the Company reviews
asset allocation considering plan maturity and develops return assumptions based
on different asset classes adjusting for plan operating expenses. The return
assumptions are established after reviewing historical returns of broader market
indexes, as well as historical performance of the investments of The Stanley
Retirement Plan.
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, the measurement date, follows (in thousands):
2003 2002
------- -------
Change in benefit obligation:
Beginning benefit obligation................................ $ 3,137 $ 3,026
Service cost................................................ 58 48
Interest cost............................................... 187 211
Actuarial loss.............................................. 78 276
Plan participants' contributions............................ 171 187
Benefits paid............................................... (398) (611)
-------- -------
Ending benefit obligation............................... 3,233 3,137
-------- -------
Change in plan assets:
Beginning fair value of plan assets.........................
Employer contributions...................................... 227 424
Plan participants' contributions............................ 171 187
Benefits paid............................................... (398) (611)
-------- --------
Ending fair value of plan assets........................
-------- --------
Funded status................................................. (3,233) (3,137)
Unrecognized net loss......................................... 1,111 1,087
Unrecognized transition obligation............................ 1,174 1,304
-------- --------
Accrued benefit cost........................................ $ (948) $ (746)
======== ========
Components of net periodic postretirement benefit cost were (in
thousands):
2003 2002 2001
---- ---- ----
Service cost............................................ $ 58 $ 48 $ 40
Interest cost........................................... 187 211 222
Amortization of transition obligation................... 130 130 130
Amortization and deferral............................... 53 47 40
---- ---- ----
Net periodic postretirement benefit cost.......... $428 $436 $432
==== ==== ====
F15
STANLEY FURNITURE COMPANY, INC.
NOTES TO CONSOLIDATED 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 6.00% in 2003, 6.50% in
2002 and 7.25% in 2001.
Assumed health care cost trend rates at December 31:
2003 2002 2001
---- ---- ----
Health care cost assumed trend rate for next year....... 8.5% 9.0% 10.0%
Rate that the cost trend rate gradually declines to..... 5.0% 5.0% 5.0%
Year that the rate reaches the rate it is assumed to
remain at............................................. 2011 2011 2011
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, 2003, by approximately $80,000 and the annual
postretirement benefit cost by approximately $11,000.
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 $1.6 million at both December 31, 2003 and December 31, 2002 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. Policy loan interest of $911,000, $789,000 and $703,000 was charged to
interest expense in 2003, 2002 and 2001, respectively.
8. Restructuring and Related Charges
Beginning in December 2001, the Company has executed a plan to consolidate
its manufacturing operations to maximize production efficiencies as a result of
excess capacity created by expanded offshore sourcing. Manufacturing operations
at its former West End, North Carolina facility were phased out during 2002,
including the sale of real estate. The remaining restructuring accrual at
December 31, 2003 of $188,000 consists of a lease obligation.
9. Unusual Charge
An unusual charge of $2.8 million was recorded in 2001 to write off
amounts due from a major customer, which declared bankruptcy and closed its
stores.
F16
STANLEY FURNITURE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Goodwill
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standard No. 142, ("SFAS 142"), "Goodwill and Other Intangible Assets". In
accordance with SFAS 142, the Company discontinued goodwill amortization and
tested goodwill of $9.1 million for impairment as of January 1, 2002 and
December 31, 2002 and 2003 determining that no impairment loss was necessary.
The Company will continue to test goodwill for impairment at least annually. The
following table presents net income on a comparable basis, after adjustment for
goodwill amortization (in thousands, except per share amounts):
2003 2002 2001
--------- --------- ---------
Net income:
As reported .......................... $ 15,150 $ 12,571 $ 8,321
Goodwill amortization (net of tax) ... 336
---------- ---------- ---------
Adjusted net income ................ $ 15,150 $ 12,571 $ 8,657
========== ========== =========
Basic earnings per share:
As reported .......................... $ 2.40 $ 1.90 $ 1.26
========== ========== =========
As adjusted .......................... $ 2.40 $ 1.90 $ 1.31
========== ========== =========
Diluted earnings per share:
As reported .......................... $ 2.34 $ 1.85 $ 1.21
========== ========== =========
As adjusted .......................... $ 2.34 $ 1.85 $ 1.25
========== ========== =========
11. Commitments and Contingencies
The Company leases showroom space and certain technology equipment. Rental
expenses charged to operations were $1.3 million, $1.2 million and $1.4 million
in 2003, 2002 and 2001, respectively. Future minimum lease payments are
approximately as follows: 2004 - $774,000; 2005 - $191,000; 2006 - $103,000;
2007 - $57,000 and 2008 - $0.
In the normal course of business, the Company is involved in claims and
lawsuits, none of which currently, in management's opinion, will have a material
adverse affect on the Company's Consolidated Financial Statements.
F17
STANLEY FURNITURE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. Supplemental Cash Flow Information
(in thousands)
2003 2002 2001
-------- -------- --------
Net income .......................................... $ 15,150 $ 12,571 $ 8,321
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ..................................... 5,623 5,724 5,900
Amortization ..................................... 160 214 565
Unusual charge ................................... 2,800
Restructuring charge ............................. 1,755 1,990
Deferred income taxes ............................ (463) 2,110 (248)
Other, net ....................................... 2 34 29
Changes in assets and liabilities:
Accounts receivable ............................ (2,288) (3,970) 6,563
Inventories .................................... (480) (4,636) 4,600
Prepaid expenses and other current assets ...... 403 (418) (2,300)
Accounts payable ............................... (2,791) 1,545 (7,666)
Accrued salaries, wages and benefits ........... (270) 721 (1,719)
Other accrued expenses ......................... (977) 544 1,313
Other assets ................................... 57 40 49
Other long-term liabilities .................... 218 (115) (394)
-------- -------- --------
Net cash provided by operating activities .... $ 14,344 $ 16,119 $ 19,803
======== ======== ========
13. Quarterly Results of Operations (Unaudited)
(in thousands, except per share data)
2003 Quarters: First Second Third Fourth
------- ------- ------- -------
Net sales ............. $61,298 $61,409 $65,227 $72,707
Gross profit .......... 14,622 14,565 15,641 17,025
Net income ............ 3,466 3,536 3,716 4,432
Net income per share:
Basic .............. $ .53 $ .54 $ .61 $ .72
Diluted ............ .52 .53 .59 .70
Dividend paid per share .05 .05 .05 .05
2002 Quarters:
Net sales ............. $59,574 $55,268 $61,338 $63,305
Gross profit .......... 11,563 12,621 15,161 15,687
Net income ............ 1,867 2,615 4,139 3,950
Net income per share:
Basic .............. $ .28 $ .39 $ .63 $ .60
Diluted ............ .27 .37 .62 .59
-----------------------------------
F18
STANLEY FURNITURE COMPANY, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For each of the Three Years in the Period Ended December 31, 2003
(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
- -------------------------------------------------------------------------------------------------------------------
2003
Doubtful receivables.................... $2,053 $ (20) $ 191(a) $1,842
Discounts, returns,
and allowances........................ 580 124(b) 704
------ ------- ------- ------
$2,633 $ 104 $ 191 $2,546
====== ======= ======= ======
2002
Doubtful receivables.................... $1,457 $ 760 $ 164(a) $2,053
Discounts, returns,
and allowances........................ 567 13(b) 580
------ ------- ------- ------
$2,024 $ 773 $ 164 $2,633
====== ======= ======= ======
2001
Doubtful receivables.................... $1,277 $3,150 $2,971(a) $1,456
Discounts, returns,
and allowances........................ 953 (385)(b) 568
------ ------ ------ ------
$2,230 $2,765 $2,971 $2,024
====== ====== ====== ======
- ------------------------------------
(a) Uncollectible receivables written-off, net of recoveries.
(b) Represents net increase (decrease) in the reserve.
S-1