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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 0-14938
STANLEY FURNITURE COMPANY, INC.
(Exact name of Registrant as specified in its
Charter)
Delaware 54-1272589
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1641 Fairystone Park Highway, Stanleytown, VA 24168
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (540) 627-2000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.02 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports),and (2) has been subject to
such filing requirements for the past 90 days: Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K.[ ]
Aggregate market value of the voting stock held by non-affiliates of the
registrant based on the closing price on January 27, 1997: $60,782,714
Indicate the number of shares outstanding of each of the Registrant's classes
of common stock as of January 27, 1997:
Common Stock, par value $.02 per share 4,579,042
(Class of Common Stock) Number of Shares
Documents incorporated by reference: Portions of the Registrant's Proxy
Statement for its Annual Meeting of Shareholders scheduled for April 24, 1997
are incorporated by reference into Part III.
TABLE OF CONTENTS
Part I Page
Item 1 Business............................. 3
Item 2 Properties........................... 9
Item 3 Legal Proceedings.................... 9
Item 4 Submission of Matters to a Vote
of Security Holders................ 9
Part II
Item 5 Market for Registrant's Common Equity
and Related Stockholder Matters.... 12
Item 6 Selected Financial Data.............. 13
Item 7 Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 15
Item 8 Financial Statements and
Supplementary Data................. 18
Item 9 Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure............... 18
Part III
Items 10 through 13.............................. 19
Part IV
Item 14 Exhibits, Financial Statement
Schedule and Reports on Form 8-K... 19
Signatures....................................... 25
Index to Financial Statements and Schedule....... F-1
Stanley Furniture Company, Inc.
PART I
Item 1. Business
General
The Company is a leading designer and manufacturer of
residential furniture exclusively targeted at the upper-medium
price range. The Company offers diversified product lines across
all major style and product categories within this price range.
Its product depth and extensive style selections make the Company
a complete furniture resource for retailers in its price range and
allow the Company to respond more quickly to shifting consumer
preferences. The Company has established a broad distribution
network in the United States that includes independent furniture
stores, department stores, and national and regional furniture
chains. To produce its products and support its broad distribution
network, the Company has developed efficient and flexible
manufacturing processes that it believes are unique in the
furniture industry. The Company emphasizes continuous improvement
in its manufacturing processes to enable it to continue providing
competitive advantages to its customers, such as quick delivery,
reduced inventory investment, high quality, and value.
Business Strategy and Competitive Advantages
The Company's goal is to offer the best products and value in
the upper-medium price range, and its business strategy is designed
to provide superior quality, responsive customer service, and quick
delivery. The Company believes its business strategy gives it and
its customers competitive advantages. The key elements of the
Company's business strategy include:
Diversified Product Lines. The Company's product lines
cover all major design categories, and include bedroom, dining
room, youth bedroom (Young AmericaTM), living room tables,
entertainment centers, home office (The OfficeTM), and upholstery.
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 furniture resource in
the upper-medium price range. The Company has recently expanded
its styles in youth and home office furniture to respond to growing
consumer demand for these products. The Company intends to
continue expanding its product styles with particular emphasis on
upholstery, home office, and entertainment centers. 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. To emphasize this comparison the Company
uses the marketing theme, "We Just Look Expensive."
Broad Distribution Network. The Company has developed a
diverse and extensive customer base that provides the Company with
access to a variety of markets and flexibility to adapt to market
changes. The Company believes this broad distribution network
reduces its exposure to regional recessions. The Company sells its
furniture domestically through approximately 60 independent sales
representatives to independent furniture retailers and national and
regional chain stores. Representative customers include Sears,
J.C. Penney, Homestead House, Huffman Koos, Robb & Stucky, Nebraska
Furniture Mart, Furnitureland South, and Haverty's. In addition,
the Company has recently increased its emphasis on international
distribution. Approximately 8% of the Company's sales in 1996 were
to international customers. The Company has sold to over 3,600
customers during the past twelve months, and no single customer
accounted for more than ten percent of sales. The Company intends
to continue to pursue all channels of distribution compatible with
its products and price range with particular emphasis on national
and regional chains and international outlets.
Efficient Manufacturing Operations. The Company's operating
strategy is to continuously improve customer responsiveness,
quality, and operating efficiency. The Company's manufacturing
processes, which support its product and distribution strategy,
focus on quick delivery while minimizing inventory levels and
improving quality by producing smaller, more frequent, and cost-
effective production runs. As a result, the Company shipped
customer orders within 17.5 days on average during 1996 with
average finished goods inventory turns of 6.3. The Company
believes its ability to deliver its products within these time
frames, while maintaining a high level of inventory turnover, is
superior to that of its competitors. In addition, the Company
believes its quality performance consistently outperforms the
industry when measured by returns and allowances as reported by the
American Furniture Manufacturers Association. Consistent with the
Company's philosophy of providing its customers with a competitive
advantage, the Company's quick delivery reduces its customers'
inventory investment and price markdowns, and the high quality of
the Company's products minimizes its customers' redelivery costs.
Products and Styles
The Company's diverse product lines and styles provide
retailers a complete furniture resource for the purchase of upper-
medium priced furniture and enables the Company to respond quickly
to changing consumer preferences.
The Company provides wood 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
Bedroom....................................... 30
Dining room................................... 28
Youth bedroom (Young America)................ 19
Occasional:
Living room tables......................... 28
Entertainment centers...................... 18
Home office (The Office).................. 8
These product lines cover all major design categories
including European traditional, contemporary/transitional,
eighteenth century, and country/nostalgia designs.
The Company introduced upholstered furniture products in the
fall of 1994, allowing the Company to expand its product offerings
in the upper-medium price range. The Company's entry into the
upholstery business takes advantage of its existing distribution
network without requiring a significant capital investment. The
Company's upholstered products consist mainly of stationary sofas,
sleepers, love seats, and chairs. Since initial introduction, the
Company has expanded its upholstered products and currently offers
a variety of frames and approximately 450 fabric selections.
The Company designs and develops new product styles each year
to replace discontinued items or styles and, if desired, expand
product lines. The Company's product design process begins with
marketing personnel identifying customer needs and conceptualizing
product ideas, which generally consist of a group of related
furniture pieces. A variety of sketches are produced, usually by
Company designers, from which prototype furniture pieces are built.
The Company's engineering department then prepares the
prototype for actual full-scale production. The Company consults
with its marketing personnel, sales representatives, and selected
customers throughout this process and strives to introduce its new
product styles at the fall and spring international furniture
markets.
Distribution
The Company has developed a varied and extensive customer base
that provides it with access to a variety of markets and the
flexibility to adapt to market changes. The Company believes this
broad network reduces its exposure to regional recessions. The
Company sells its furniture domestically through approximately 60
independent sales representatives to independent furniture
retailers and national and regional chain stores. In marketing its
products to independent retailers, the Company utilizes a
promotional incentive sales program, the "Stanley Preferred
Retailer." There are more than 500 Stanley Preferred Retailers,
which account for approximately half of the Company's sales. This
program is designed to encourage independent retailers to commit
retail floor space to the Company's products. The Stanley
Preferred Retailer program is designed to be flexible and is
adapted to the merchandising and marketing plans of retailers by
accommodating geographic, style, and promotional preferences. To
participate, a retailer must commit a specified amount of floor
space to the Company's products and achieve specified sales
volumes. In return the participating retailer receives product
discounts during promotional periods and merchandising materials,
among other incentives.
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, a nine-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 60,000 square feet of
showroom space at the High Point market to introduce new products,
increase sales of its existing products, and test ideas for future
products.
No single customer accounted for more than ten percent of the
Company's sales in 1996. No material part of the Company's
business is dependent upon a single customer, the loss of which
would have a material effect on the business of the Company. The
loss of several of the Company's major customers could have a
material impact on the business of the Company.
Manufacturing
The Company's manufacturing operations complement its product
and distribution strategy by emphasizing continuous improvement in
quality and customer responsiveness while reducing costs. The
Company's manufacturing processes produce smaller, more frequent
and cost effective runs. The Company focuses on identifying and
eliminating manufacturing bottlenecks and waste, employing
statistical process control and, in turn, adjusting manufacturing
schedules on a daily basis, using cellular manufacturing in the
production of components, and improving its relationships with
suppliers by establishing primary supplier relationships. In
addition, a key element of the Company's manufacturing processes is
to involve all Company personnel, from hourly associates to
management, in the improvement of the manufacturing processes by
encouraging and responding to ideas to improve quality and to
reduce manufacturing lead times.
The Company operates manufacturing facilities in North
Carolina and Virginia consisting of an aggregate of more than three
million square feet. The Company considers its present equipment to
be generally modern, adequate and well maintained.
The Company schedules production of its various styles based
upon actual and anticipated orders. The Company's manufacturing
processes enable it to fill orders through manufacturing rather
than inventory. Since the Company ships customer orders on average
in less than three weeks, management believes that the size of its
backlog is not necessarily indicative of its long-term operations.
The Company's backlog of unshipped orders was $23.6 million and
$21.5 million at December 31, 1996 and 1995, respectively.
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, metals, frames, filling, and cushioning materials. The
Company uses a variety of species of lumber, including cherry, oak,
ash, poplar, pine, maple, and mahogany. The Company's five largest
suppliers accounted for approximately 24% of its purchases in 1996.
The Company believes that its sources of supply for these materials
are adequate and that it is not dependent on any one supplier.
Competition
The Company is the fifteenth largest out of more than 600
furniture manufacturers in North America based on 1995 sales,
according to Furniture/Today, a trade publication. The furniture
industry is highly competitive and includes a large number of
foreign and domestic manufacturers, none of which dominates the
market. The markets in which the Company competes include a large
number of relatively small manufacturers; however, certain
competitors of the Company have greater sales volumes and greater
financial resources than the Company. Competitive factors in the
upper-medium price range include style, price, quality, delivery,
design, service, and durability. The Company believes that its
manufacturing processes, its long-standing customer relationships
and customer responsiveness, its consistent support of existing
diverse product lines that are high quality and good value, and its
experienced management are competitive advantages.
Associates
At December 31, 1996, the Company employed approximately 2,700
associates. None of the Company's associates is represented by a
labor union. The Company considers its relations with its
associates to be good.
Patents and Trademarks
The trade names of the Company represent many years of
continued business, and the Company believes such names are well
recognized and associated with quality in the furniture industry.
The Company owns a number of patents, trademarks, and licenses,
none of which is considered to be material to the Company.
Governmental Regulations
The Company is subject to federal, state, and local laws and
regulations in the areas of safety, health, and environmental
pollution controls. Compliance with these laws and regulations has
not in the past had any material effect on the Company's earnings,
capital expenditures, or competitive position; however, the effect
of such compliance in the future cannot be predicted. Management
believes that the Company is in material compliance with applicable
federal, state, and local environmental regulations.
Regulations issued in December 1995 under the Clean Air Act
Amendments of 1990 may require the Company to reformulate certain
furniture finishes or institute process changes to reduce emissions
of hazardous volatile organic compounds. The furniture industry
and its suppliers are attempting to develop water-based and other
forms of complaint finishing materials to replace commonly-used
organic-based finishes that are a major source of regulated
emissions. The Company cannot at this time estimate the impact of
these new standards on the Company's operations and future capital
expenditure requirements, or the cost of compliance.
Forward-Looking Statements
Certain statements made in this Annual Report on Form 10-K are
not based on historical facts, but are forward-looking statements.
These statements can be identified by the use of forward-looking
terminology such as "believes," "expects," "may," "will," "should,"
or "anticipates" or the negative thereof or other variations
thereon or comparable terminology, or by discussions of strategy.
See, e.g. "Business Strategy and Competitive Advantages." These
statements reflect the Company's reasonable judgment with respect
to future events and are subject to risks and uncertainties that
could cause actual results to differ materially from those in the
forward-looking statements. Such risks and uncertainties include
the cyclical nature of the furniture industry, fluctuations in the
price for lumber which is the most significant raw material used by
the Company, competition in the furniture industry, capital costs
and general economic conditions.
Item 2. Properties
Set forth below is certain information with respect to the
Company's principal properties. The Company believes that all
these properties are well maintained and in good condition. The
Company believes its manufacturing facilities are being efficiently
utilized and that it could increase production at its facilities if
required by customer demand. Each facility is focused on specific
product lines to optimize efficiency. The Company estimates that
its facilities are presently operating at approximately 85% of
capacity, principally on a one-shift basis. 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.
Approximate Owned
Facility Size or
Location Primary Use (Square Feet) Leased
Stanleytown, VA Manufacturing 1,660,000 Owned
and Corporate
Headquarters 61,000 Owned
West End, NC Manufacturing 470,000 Owned
West End, NC Lumber Yard Leased(1)
Lexington, NC Manufacturing 635,000 Owned
Robbinsville, NC Manufacturing 540,000 Owned
High Point, NC Showroom 60,000 Leased(2)
(1) Lease expires May 31, 2007.
(2) Lease expires October 31, 1999. Approximately 8,000 square feet is
subleased.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Executive Officers of the Registrant
The Company's executive officers and their ages as of December
31, 1996 are as follows:
Name Age Position
Albert L. Prillaman........ 51 Chairman, President
and Chief Executive
Officer
C. William Cubberley, Jr... 56 Senior Vice President-
Sales and Marketing
Bobby I. Hodges............ 59 Senior Vice President-
Manufacturing
Douglas I. Payne........... 38 Senior Vice President-
Finance and
Administration,
Treasurer and Secretary
William A. Sibbick......... 40 Vice President-Product
Development and
Merchandising-Dining
Room and Occasional
Joe G. Bost................ 49 Vice President-Product
Development and
Merchandising-Upholstery
Kelly S. Cain.............. 42 Vice President-Product
Development and
Merchandising-Bedroom
and Youth
Albert L. Prillaman has been President and Chief Executive
Officer of the Company since December 1985 and Chairman of the
Board of Directors since September 1988. Prior thereto, Mr.
Prillaman had served as a Vice President of the Company and
President of the Stanley Furniture division of the Company's
predecessor since 1983, and in various executive and other
capacities with the Stanley Furniture division of the predecessors
of the Company since 1969. Mr. Prillaman is a director of Main
Street Bank Group Incorporated.
C. William Cubberley, Jr. has been Senior Vice President-Sales
and Marketing of the Company since April 1995. He has been a Vice
President of the Company since December 1990 and Senior Vice
President-Sales and Marketing of the Stanley Furniture division
since October 1988. Mr. Cubberley was Senior Vice President-Sales
of the Stanley Furniture division from January 1986 to
October 1988, when he became Senior Vice President - Sales and
Marketing of the Stanley Furniture division.
Bobby I. Hodges has been Senior Vice President-Manufacturing
of the Company since April 1995. He has been a Vice President
since June 1993. He was Senior Vice President-Manufacturing of the
Stanley Furniture division from January 1986 until June 1993. He
was Vice President-Manufacturing of the Stanley Furniture division
from December 1983 until January 1986. Prior to that time, Mr.
Hodges was employed by the Company in various positions related to
manufacturing management.
Douglas I. Payne has been Senior Vice President-Finance and
Administration since December 1996. He was Vice President of
Finance and Treasurer of the Company since September 1993. He was
Vice President-Treasurer of the Company from December 1989 to
September 1993, was Treasurer of the Company from June 1986 to
December 1989 and he was Assistant Treasurer of the Company from
August 1985 to June 1986. Mr. Payne has been Secretary of the
Company since September 1988.
William A. Sibbick has been Vice President-Product Development
and Merchandising-Dining Room and Occasional since December 1996.
He was Vice President - Product Development and Merchandising from
April 1995 until December 1996. He was Vice President - Product
Development from June 1993 until April 1995. He was Vice
President-Senior Product Manager of the Stanley Furniture division
from January 1992 until June 1993. Prior to that time, he had been
Vice President-Product Manager since his employment in March 1989.
Joe G. Bost has been Vice President-Product Development and
Merchandising-Upholstery since December 1996. He was Vice
President-Upholstery from April 1995 until December 1996. He was
President of the Company's Norman's of Salisbury division since his
employment in January 1993 until April 1995. Prior to joining the
Company, Mr. Bost was Senior Vice-President of Sales, Marketing,
Administration and Manufacturing of Hickorycraft, Inc., a
manufacturer of upholstery and occasional tables, a position he
held since 1987.
Kelly S. Cain was elected Vice President-Product Development
and Merchandising for bedroom product lines in December 1996.
Since July 1985, he held various management positions in sales and
marketing.
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 as reported by
Nasdaq.
High Low
1996
First Quarter.......................... $10.75 $ 8.00
Second Quarter......................... 12.13 10.00
Third Quarter.......................... 17.50 10.25
Fourth Quarter......................... 20.75 14.00
1995
First Quarter.......................... $ 9.50 $ 7.00
Second Quarter......................... 8.38 7.00
Third Quarter.......................... 8.75 7.00
Fourth Quarter......................... 9.00 7.75
The quotations reflect interdealer prices, without retail
mark-up, mark-down or commissions and may not necessarily represent
actual transactions. As of January 27, 1997, there were
approximately 1,500 beneficial stockholders. The Company currently
retains all earnings to finance the growth and development of its
business. However, the Company will continue to evaluate its
dividend policy, and any future payments will depend upon the
financial condition, capital requirements, and earnings of the
Company, as well as other factors that the Board of Directors may
deem relevant. The Company's ability to pay dividends with respect
to the Common Stock is restricted, under certain covenants in loan
agreements, to 50% of the Company's consolidated net earnings,
adjusted for any net cash proceeds received by the Company from the
sale of its stock and the amount of any payments for redemption,
purchase or other acquisition of its capital stock, subsequent to
January 1, 1994. As of December 31, 1996, $8.3 million was
available for the payment of dividends under these restrictions.
Item 6. Selected Financial Data
Years Ended December 31,
1996 1995 1994 1993 1992
(in thousands, except per share data)
Income Statement Data:
Net sales...................... $201,905 $174,179 $184,342 $167,091 $166,501
Cost of sales:
From products sold........... 153,332 137,621 148,453 134,972 132,984
Business interruption
insurance (1).............. (5,036)
Gross profit............. 48,573 36,558 35,889 37,155 33,517
Selling, general and admin-
istrative expenses........... 30,403 26,454 26,483 25,976 25,117
Unusual items, net(2).......... (136)
Restructuring credit (3)....... (2,078)
Operating income........... 18,170 10,240 9,406 11,179 10,478
Other expense, net............. 616 433 444 1,346 686
Gain on insurance settlement
(4).......................... (2,379) (2,186)
Interest expense............... 3,344 3,534 2,969 3,048 7,058
Income from continuing
operations before income
taxes...................... 14,210 6,273 8,372 8,971 2,734
Income taxes................... 5,470 2,384 3,256 3,691 1,053
Income from continuing
operations................. $ 8,740 $ 3,889 $ 5,116 $ 5,280 $ 1,681
Income from continuing
operations per common share.. $ 1.71 $ .82 $ 1.08 $ 1.39 $ .56
Weighted average number of
shares, fully diluted(5)..... 5,119 4,727 4,744 3,792 2,996
Supplementary Income From Con-
tinuing Operations Per
Common Share Data:
Before non-recurring gain(6). $ 1.71 $ .82 $ .77 $ .90 $ .68
Non-recurring gain on
insurance.................. .31 .29
As reported................ $ 1.71 $ .82 $ 1.08 $ 1.19 $ .68
Weighted average number of
shares, fully diluted(7)..... 5,119 4,727 4,744 4,725 4,725
Balance Sheet Data:
Cash........................... $ 8,126 $ 298 $ 301 $ 200 $ 649
Inventories.................... 40,239 40,167 39,905 37,684 33,343
Working capital................ 46,225 42,422 42,912 40,833 34,650
Total assets................... 141,510 134,551 124,519 124,859 114,302
Long-term debt including
current maturities........... 39,350 41,067 33,395 32,647 48,582
Common stockholders' equity
(5) (8)...................... 61,617 54,739 50,830 47,204 29,959
Selected Financial Data (continued)
(1) In 1993, the Company recorded $5.0 million of business interruption
insurance replacing the gross profit on lost sales due to the fire which
occurred in February 1993 at its Stanleytown, Virginia facility. See Note 8
of the Notes to Financial Statements.
(2) In 1995, the Company recognized a pretax credit of $1.1 million after
it was released from a lease obligation at its previously closed Waynesboro,
Virginia manufacturing facility. Also included is a pretax charge for a
severance accrual. See Note 4 of the Notes to Financial Statements.
(3) In 1991, the Company recorded pretax charges in anticipation of the
closing of the Waynesboro, Virginia facility to eliminate excess capacity and
the transfer of certain product lines to other manufacturing facilities.
Operating income for 1992 includes a restructuring credit of $2.1 million
from lower than anticipated costs of closing the Waynesboro facility.
(4) In 1994, the Company recorded a pretax gain of $2.4 million as part of
the final insurance settlement. Also, in 1993, a $2.2 million pretax gain
was recorded since insurance proceeds exceeded the book value of leasehold
improvements and equipment destroyed in the fire. See Note 8 of the Notes to
Financial Statements.
(5) In July 1993, the Company completed a public offering of 1,725,000
shares of common stock at $8.50 per share. The net proceeds of $13.1 million
were used to reduce debt. Primary per share information is the same as fully
diluted per share information, for all periods presented except for 1996.
For this period, primary weighted average common shares were 4,945,000 and
primary income from continuing operations per common share before gain on
insurance settlement, net of income taxes was $1.77.
(6) Income from continuing operations before insurance related gains was
$3.7 million in 1994 and $4.3 million in 1993.
(7) The 1993 and 1992 periods include the effect of pro forma adjustments
for the July 1993 public offering of 1,725,000 shares of Common Stock,
assuming the 1993 public offering occurred at the beginning of each year.
(8) No dividends have been paid on the Common Stock during any of the years
presented.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion should be read in conjunction with
the Selected Financial Data and the Financial Statements and Notes
thereto contained elsewhere herein.
Results of Operations
The following table sets forth the percentage relationship to
net sales of certain items included in the Statements of Income:
For the Years Ended
December 31,
1996 1995 1994
Net sales................................ 100.0% 100.0% 100.0%
Cost of sales............................ 75.9 79.0 80.5
Gross profit........................... 24.1 21.0 19.5
Selling, general and administrative
expenses............................... 15.1 15.2 14.4
Unusual items, net....................... (.1)
Operating income....................... 9.0 5.9 5.1
Other expenses, net...................... .3 .3 .3
Gain on insurance settlement............. (1.3)
Interest expense......................... 1.7 2.0 1.6
Income from continuing operations
before income taxes.................... 7.0 3.6 4.5
Income taxes............................. 2.7 1.4 1.7
Income from continuing operations...... 4.3% 2.2% 2.8%
1996 Compared to 1995
Net sales increased $27.7 million, or 15.9%, for the year
ended December 31, 1996 compared to 1995. The increase was due
principally to higher unit volume.
Gross profit margin for 1996 increased to 24.1% from 21.0% for
the comparable 1995 period. The higher gross profit margin was due
primarily to stabilizing raw material costs, improved operating
efficiencies, and the leveraging of fixed costs due to increased
production levels.
Selling, general and administrative expenses as a percentage
of net sales were 15.1% and 15.2% for 1996 and 1995, respectively.
These expenses increased for the 1996 period due principally to (i)
higher selling cost resulting from increased sales and increased
merchandising expenses, (ii) increased compensation expense
pursuant to the Company's incentive compensation plan for key
employees, and (iii) increased provision for bad debts.
During the second quarter of 1995, the Company recognized an
unusual item consisting of the net effect of (i) an accrual
reversal as a result of being released from a lease obligation at
its previously closed Waynesboro, Virginia facility and (ii) a
charge for severance resulting from the resignation of a former
officer.
As a result of the above, operating income for 1996 increased
to $18.2 million, or 9.0% of net sales, from $10.2 million, or 5.9%
of net sales, in 1995.
The Company's effective income tax rate was 38.5% and 38.0%
for 1996 and 1995, respectively.
1995 Compared to 1994
Net sales decreased $10.2 million, or 5.5%, from 1994 levels
due principally to lower unit volume, partially offset by the
additional volume from upholstered products and higher average
selling prices.
Gross profit margin increased to 21.0% in 1995 from 19.5% in
1994. The higher gross profit margin was due principally to
increased prices, a moderation in lumber cost increases, a more
favorable product mix and the favorable impact from the purchase of
the previously leased manufacturing facilities. The increase in
gross profit was slightly offset by an increased overhead
absorption rate resulting from lower output levels in 1995.
Selling, general and administrative expenses were
approximately the same for both years. However, as a percentage of
net sales, these expenses increased to 15.2% in 1995 from 14.4% in
1994. The higher percentage was due principally to lower net sales
and increased selling cost associated with new products.
As a result of the above, operating income increased to $10.2
million, or 5.9% of net sales, in 1995 from $9.4 million, or 5.1%
of net sales, in 1994.
Interest expense for 1995 increased due principally to higher
debt levels, resulting from the purchase of two previously leased
manufacturing facilities in June 1995 and also due to slightly
higher interest rates.
The Company's effective tax rate in 1995 decreased to 38.0%
from 38.9% in 1994. The lower tax rate in 1995 is principally due
to an increase in non-taxable income and increased benefits from
export sales.
Financial Condition, Liquidity and Capital Resources
During August 1995, the Company amended its $25.0 million
revolving credit facility, extending its maturity date to August
1998. The interest rate under the facility was reduced to prime
(8.25% on December 31, 1996) or, at the Company's option, the
reserve adjusted LIBOR plus 1.0% per annum. In June 1995, the
Company issued a $10.0 million 7.57% senior note due 2005 in a
private placement of debt, and the proceeds were used to purchase
two previously leased manufacturing facilities. In February 1994,
the Company completed the private placement of $30.0 million of
7.28% senior notes due 2004. The proceeds from the senior notes
were used to repay an existing term note and a portion of the
revolving credit facility.
At December 31, 1996, long-term debt including current
maturities was $39.4 million, and approximately $22.8 million of
additional borrowing capacity was available under the revolving
credit facility. Annual debt service requirements are $725,000 in
1997, $5.1 million in both 1998 and 1999, $5.2 million in 2000 and
$5.3 million in 2001. The Company believes that its financial
resources are adequate to support its capital needs and debt
service requirements.
Operating Cash Flows
The Company generated cash from operations of $15.3 million in
1996 principally as a result of higher sales and improved margins.
The Company used $7.5 million of the cash generated in 1996
primarily to fund capital expenditures, reduce borrowings and
repurchase common stock. During 1995, cash generated from
operations of $6.6 million was used to reduce borrowings under the
revolving credit facility and to fund capital expenditures in the
normal course of business. The increase in cash generated from
operations was due principally to lower tax payments of $1.0
million in 1995 compared to $4.5 million in 1994. Tax payments
were higher in 1994 principally due to the timing of installment
payments for 1993, resulting from the utilization of net operating
losses carried forward from 1992. Also, refunds attributed to 1994
reduced tax payments for 1995. Cash generated from operations in
1995 also increased as a result of less cash paid to suppliers and
employees due to reduced production levels. During 1994, cash
provided by operations of $4.1 million and net borrowings of $1.2
million were used to fund capital expenditures.
Operating cash flows in 1994 include proceeds of $4.6 million
received from insurance in connection with the fire that occurred
in February 1993 at the Company's Stanleytown, Virginia facility.
Cash paid to suppliers in 1994 included costs of $2.7 million
incurred in connection with the fire. Excluding the effect of the
fire, cash was required in the 1994 period to support higher
accounts receivable requirements reflecting higher sales levels,
higher payments to suppliers and employees as a result of higher
production levels and higher tax payments as discussed above.
These higher payments in the 1994 period were partially offset by
lower interest payments due principally to lower debt levels.
Investing Activities
Net cash used by investing activities was $4.0 million in 1996
compared to $14.7 million and $5.2 million in 1995 and 1994,
respectively. In the 1995 period, proceeds from the issuance of
senior notes and additional borrowings from the revolving credit
facility were used to purchase two previously leased plant
facilities for $10.5 million. The 1996 and 1994 expenditures, and
the remaining expenditures for 1995, were primarily for plant and
equipment and other assets in the normal course of business.
Financing Activities
Net cash used by financing activities was $3.5 million in 1996
compared to cash provided by financing activities of $8.1 million
and $1.2 million in 1995 and 1994, respectively. In 1996, the
purchase of common stock and the reduction in borrowings was
financed by cash generated from operations. The 1995 borrowings
provided cash for the purchase of the two previously leased plant
facilities and other capital expenditures. Cash provided by
financing activities in the 1994 period was used to fund capital
expenditures.
Discontinued Operations
Beginning in 1991, the Company's Norman's of Salisbury fabric
division ("Norman's") was reflected as a discontinued operation.
In 1994, the Company ceased operations at Norman's and liquidated
the division resulting in a $2.8 million ($4.5 million pretax)
additional loss provision. In 1996, the Company was released from
a lease obligation resulting from the purchase and concurrent
resale of certain facilities at its former Norman's division. This
obligation was accrued as part of the 1994 charge to discontinued
operations. Accordingly, in 1996, the Company recorded an after
tax gain of $246,000, or $.05 per share, as a partial reversal of
this accrual.
Item 8. Financial Statements and Supplementary Data
The financial statements and schedule listed in Items 14(a)(1)
and (a)(2) hereof are incorporated herein by reference and are
filed as part of this report.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
PART III
In accordance with general instruction G(3) of Form 10-K, the
information called for by items 10, 11, 12, and 13 of Part III is
incorporated by reference to the Registrant's definitive Proxy
Statement for its Annual Meeting of Stockholders scheduled for
April 24, 1997, except for information concerning the executive
officers of the registrant which is included in Part I of this
report under the caption "Executive Officers of the Registrant."
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on
Form 8-K
(a) Documents filed as a part of this Report:
(1) The following financial statements are included in this
report on Form 10-K:
Report of Independent Accountants
Balance Sheets - as of December 31, 1996 and 1995
Statements of Income - for each of the three years in the
period ended December 31, 1996
Statements of Changes in Stockholders' Equity for each of the
three years in the period ended December 31, 1996
Statements of Cash Flows - for each of the three years in the
period ended December 31, 1996
Notes to Financial Statements
(2) Financial Statement Schedule:
Schedule II - Valuation of Qualifying Accounts - for each
of the three years in the period ended December 31, 1996
(b) The following reports on Form 8-K were filed by the Registrant
during the last quarter of the period covered by this report:
None.
(c) Exhibits:
2.1 Agreement and Plan of Merger dated as of July 24, 1992 by
and among the Registrant, Stanley Holding Corporation, Stanley
Acquisition Corporation, the ML-Lee Acquisition Fund
(Retirement Accounts) II, L.P., and the persons listed on
Schedules I and II thereto (incorporated by reference to
Exhibit 2.1 to the Registrant's Registration Statement on Form
S-4 No. 33-50050).
3.1 The Certificate of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.1 to the Registrant's
Registration Statement on Form S-1, No. 33-7300).
3.2 The By-laws of the Registrant (incorporated by reference to
Exhibit 3.2 to the Registrant's Registration Statement on Form
S-1, No. 33-7300).
3.3 Amendment adopted March 21, 1988 to the By-laws of the
Registrant (incorporated by reference to Exhibit 3.3 to the
Registrant's Form 10-K (Commission File No. 0-14938) for the
year ended December 31, 1987).
3.4 Amendments adopted February 8, 1993 to the By-laws of the
Registrant (incorporated by reference to Exhibit 3.4 to the
Registrant's Registration Statement on Form S-1 No. 33-57432).
3.5 Certificate of Stock Designation dated May 1, 1991 of the
Registrant as modified by an Amendment to Certificate of
Designation dated May 31, 1991 (incorporated by reference to
Exhibit 3.6 to the Registrant's Form 10-K for the year ended
December 31, 1991).
3.6 Certificate of Merger dated as of November 9, 1992
(incorporated by reference to Exhibit 3.6 to the Registrant's
Statement on Form S-1 No. 33-57432).
3.7 Certificate of Amendment dated June 30, 1993. (incorporated by
reference to Exhibit 3.7 to the Registrant's Form 10-K for the
year ended December 31, 1994).
4.1 The Certificate of Incorporation and By-laws of the Registrant
as currently in effect (incorporated by reference to Exhibits
3.1 through 3.7 hereto).
4.2 Registration Rights Agreement dated as of November 9, 1992 by
and among the Registrant, ML-Lee Acquisition Fund, L.P., ML -
Lee Acquisition Fund II, L.P., ML-Lee Acquisition Fund
(Retirement Accounts) II, L.P., Lee Stockholders (as defined
therein) and Management Stockholders (as defined therein)
(incorporated by reference to Exhibit 4.3 to the Registrant's
Statement on Form S-1 No. 33-57432).
4.3 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 for
the year ended December 31, 1993).
4.4 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 for the quarter ended September 29, 1996).
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 for
the year ended December 31, 1991).(2)
10.2 Lease dated February 23, 1987 between Stanley Interiors
Corporation and Southern Furniture Exposition Building, Inc.
d/b/a Southern Furniture Market Center (incorporated by
reference to Exhibit 10.10 to the Registrant's Form 10-K 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 for the year ended
December 31, 1987).
10.4 The Stanley Retirement Plan, as restated effective January 1,
1989, adopted April 20, 1995 (incorporated by reference to
Exhibit 10.4 to the Registrant's Form 10-K for the year ended
December 31, 1995).(2)
10.5 Amendment No. 1, The Stanley Retirement Plan, effective
December 31, 1995, adopted December 15, 1995 (incorporated by
reference to Exhibit 10.5 to the Registrant's Form 10-K for
the year ended December 31, 1995).(2)
10.6 Supplemental Retirement Plan of Stanley Furniture Company,
Inc., as restated effective January 1, 1993. (incorporated by
reference to Exhibit 10.8 to the Registrant's Form 10-K for
the year ended December 31, 1993).(2)
(2) Management contract or compensatory plan
10.7 First Amendment to Supplemental Retirement Plan of Stanley
Furniture Company, Inc., effective December 31, 1995, adopted
December 15, 1995 (incorporated by reference to Exhibit 10.7
to the Registrant's Form 10-K for the year ended December 31,
1995).(2)
10.8 Stanley Interiors Corporation Deferred Compensation Capital
Enhancement Plan, effective January 1, 1986, as amended and
restated effective August 1, 1987 (incorporated by reference
to Exhibit 10.12 to the Registrant's registration Statement
on Form S-1, No. 33-7300).(2)
10.9 Stanley 401(k) Retirement Savings Plan, as amended and
restated effective January 1, 1996 (incorporated by reference
to Exhibit 10.9 to the Registrant's Form 10-K for the year
ended December 31, 1995).(2)
10.10 Management Agreement with Thomas H. Lee Company entered into
September 29, 1988 by and among the Registrant, as successor
to Interiors Acquisition Corporation, Stanley Holding
Corporation, Stanley Acquisition Corporation and Thomas H.
Lee Company (incorporated by reference to Exhibit (c)(9) to
the Registrant's Rule 13e-3 Transaction Statement filed
October 14, 1988).
10.11 Employment Agreement made as of January 1, 1991 between
William Cubberley, Jr. and the Registrant (incorporated by
reference to Exhibit 10.42 to the Registrant's Form 10-K for
the year ended December 31, 1991).(2)
10.12 Split Dollar Insurance Agreement dated as of March 21, 1991
between Albert L. Prillaman and the Registrant (incorporated
by reference to Exhibit 10.43 to the Registrant's Form 10-K
for the year ended December 31, 1991).(2)
10.13 Second Amended and Restated Revolving Credit Facility and
Term Loan Agreement dated February 15, 1994 (the "Second
Amended and Restated Credit Facility") between the
Registrant, National Canada Finance Corp., and the National
Bank of Canada (incorporated by reference to Registrant's
Form 10-K for the year ended December 31 1994).
10.14 First Amendment to Second Amended and Restated Credit
Facility dated as of August 21, 1995 (incorporated by
reference to Registrant's Form 10-K for the year ended
December 31, 1995).
(2) Management contract or compensatory plan
10.15 1992 Stock Option Plan (incorporated by reference to
Registrant's Registration Statement on Form S-8, No. 33-
58396).(2)
10.16 1994 Stock Option Plan. (incorporated by reference to Exhibit
10.18 to the Registrant's Form 10-K for the year ended
December 31, 1994).(2)
10.17 1994 Executive Loan Plan. (incorporated by reference to
Exhibit 10.19 to the Registrant's Form 10-K for the year
ended December 31, 1994).(2)
10.18 Loan and Stock Purchase Agreement dated as of December 2,
1994 by Albert L. Prillaman. (incorporated by reference to
Exhibit 10.20 to the Registrant's Form 10-K for the year
ended December 31, 1994).(2)
10.19 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 for
the quarter ended June 30, 1996).(2)
10.20 Amendment No. 1 to Employment Agreement between C. William
Cubberley, Jr. and the Registrant, dated as of June 1, 1996
(incorporated by reference to Exhibit 10.2 to the
Registrant's Form 10-Q for the quarter ended June 30,
1996).(2)
10.21 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 for
the quarter ended September 29, 1996).
10.22 Assignment and Transfer Agreement, dated as of October 8,
1996, between National Canada Finance Corp. and National Bank
of Canada relating to the Second Amended and Restated
Revolving Credit Facility (incorporated by reference to
Exhibit 10.1 to the Registrant's Form 10-Q for the quarter
ended September 29, 1996).
10.23 Second Amendment, dated as of October 14, 1996, to the Second
Amended and Restated Revolving Credit Facility (incorporated
by reference to Exhibit 10.2 to the Registrant's Form 10-Q
for the quarter ended September 29, 1996).
(2) Management contract or compensatory plan
10.24 Amendment No. 1, dated as of November 1, 1996, between the
Registrant and the Thomas H. Lee Company to the Management
Agreement, dated September 29, 1988, among the Registrant's
predecessors and the Thomas H. Lee Company (incorporated by
reference to Exhibit 10.3 to the Registrant's Form 10-Q for
the quarter ended September 29, 1996).
10.25 Amendment No. 2, dated as of November 13, 1996, between the
Registrant and the Thomas H. Lee Company to the Management
Agreement, dated September 29, 1988, among the Registrant's
predecessors and the Thomas H. Lee Company (incorporated by
reference to Exhibit 99.2 to the Registrant's Registration
Statement on Form S-3 No. 333-14063).
10.26 Stock Purchase Agreement, dated as of November 13, 1996,
between the Registrant and the Selling Stockholders listed on
Schedule 1 thereto (incorporated by reference to Exhibit 99.1
to the Registrant's Registration Statement on Form S-3 No.
333-14063).
10.27 First Amendment to Loan and Stock Pledge Agreement, dated
December 31, 1996, by Albert L. Prillaman.(1)
11 Schedule of Computation of Earnings Per Share.(1)
21 Listing of Subsidiaries:
Charter Stanley Foreign Sales Corporation, a United
States Virgin Islands Corporation.
23 Consent of Coopers & Lybrand L.L.P.(1)
27 Financial Data Schedule.(1)
(1) Filed herewith
(2) Management contract or compensatory plan
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
STANLEY FURNITURE COMPANY, INC.
February 7, 1997 By: /s/Albert L. Prillaman
Albert L. Prillaman
President, Chief Executive
Officer, and Chairman of the
Board
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 President, Chief February 7, 1997
(Albert L. Prillaman) Executive Officer,
Chairman of the
Board, and Director
(Principal Executive
Officer)
/s/Douglas I. Payne Senior Vice President February 7, 1997
(Douglas I. Payne) -Finance and
Administration,
Treasurer and
Secretary (Principal
Financial and
Accounting Officer)
/s/David V. Harkins Director February 7, 1997
(David V. Harkins)
/s/C. Hunter Boll Director February 7, 1997
(C. Hunter Boll)
/s/Edward J. Mack Director February 7, 1997
(Edward J. Mack)
STANLEY FURNITURE COMPANY, INC.
ANNUAL REPORT ON FORM 10-K
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
FOR THE YEAR ENDED DECEMBER 31, 1996
Financial Statements Page
Report of Independent Accountants......................... F- 2
Balance Sheets as of December 31, 1996 and 1995........... F- 3
Statements of Income for each of the three years
in the period ended December 31, 1996................... F- 4
Statements of Changes in Stockholders' Equity for each
of the three years in the period ended
December 31, 1996...................................... F- 5
Statements of Cash Flows for each of the three years
in the period ended December 31, 1996................... F- 6
Notes to Financial Statements............................. F- 7
Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts for
each of the three years in the period ended
December 31, 1996....................................... S- 1
F-1
To The Board of Directors and Stockholders Of
Stanley Furniture Company, Inc.
We have audited the financial statements and financial statement
schedule of Stanley Furniture Company, Inc. listed in the index on
page F-1. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards 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. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Stanley
Furniture Company, Inc. as of December 31, 1996 and 1995, and the
results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles. In addition, in our
opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information
required to be included therein.
Coopers & Lybrand L.L.P.
Richmond, Virginia
January 24, 1997
F-2
STANLEY FURNITURE COMPANY, INC.
BALANCE SHEETS
(in thousands, except share data)
December 31,
1996 1995
ASSETS
Current assets:
Cash............................................. $ 8,126 $ 298
Accounts receivable, less allowances of
$1,945 and $1,157.............................. 23,096 22,732
Inventories:
Finished goods................................. 20,953 22,391
Work-in-process................................ 6,142 5,368
Raw materials.................................. 13,144 12,408
40,239 40,167
Prepaid expenses and other
current assets................................. 486 435
Deferred income taxes............................ 1,886 2,420
Total current assets........................... 73,833 66,052
Property, plant and equipment, at cost............. 80,737 78,399
Less accumulated depreciation.................... 28,024 24,168
52,713 54,231
Goodwill, less accumulated amortization
of $2,688 and $2,352............................. 10,752 11,088
Other assets....................................... 4,212 3,180
$141,510 $134,551
LIABILITIES
Current liabilities:
Current maturities of long-term debt............. $ 725 $ 650
Accounts payable................................. 14,630 13,637
Accrued salaries, wages and benefits............. 9,584 6,619
Other accrued expenses........................... 2,669 2,724
Total current liabilities...................... 27,608 23,630
Long-term debt, exclusive of current maturities.... 38,625 40,417
Deferred income taxes.............................. 11,673 12,180
Other long-term liabilities........................ 1,987 3,585
Total liabilities................................ 79,893 79,812
STOCKHOLDERS' EQUITY
Common stock, $.02 par value, 10,000,000
shares authorized, 4,579,042 and
4,726,578 shares issued and outstanding.......... 91 94
Capital in excess of par value..................... 62,442 64,547
Deficit............................................ (916) (9,902)
Total stockholders' equity....................... 61,617 54,739
$141,510 $134,551
The accompanying notes are an integral part
of the financial statements.
F-3
STANLEY FURNITURE COMPANY, INC.
STATEMENTS OF INCOME
(in thousands, except per share data)
For the Years Ended
December 31,
1996 1995 1994
Net sales......................... $201,905 $174,179 $184,342
Cost of sales..................... 153,332 137,621 148,453
Gross profit.................... 48,573 36,558 35,889
Selling, general and administrative
expenses........................ 30,403 26,454 26,483
Unusual items, net................. (136)
Operating income ................ 18,170 10,240 9,406
Gain on insurance settlement....... (2,379)
Other expense, net................. 616 433 444
Interest expense................... 3,344 3,534 2,969
Income from continuing operations
before income taxes............ 14,210 6,273 8,372
Income taxes....................... 5,470 2,384 3,256
Income from continuing operations.. 8,740 3,889 5,116
Discontinued operations, including
provision for operating losses
of $1,721 in 1994, net of income
taxes............................ 246 (2,758)
Net income .................... $ 8,986 $ 3,889 $ 2,358
Primary earnings per share:
Continuing operations............ $ 1.77 $ .82 $ 1.08
Discontinued operations.......... .05 (.58)
Net income..................... $ 1.82 $ .82 $ .50
Weighted average number of shares.. 4,945 4,727 4,744
Fully diluted earnings per share:
Continuing operations............ $ 1.71 $ .82 $ 1.08
Discontinued operations.......... .05 (.58)
Net income..................... $ 1.76 $ .82 $ .50
Weighted average number of shares.. 5,119 4,727 4,744
The accompanying notes are an integral part
of the financial statements.
F-4
STANLEY FURNITURE COMPANY, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For each of the three years in the period ended December 31, 1996
(in thousands)
Adjust-
Capital ment for
in Minimum
Common Stock Excess of Pension
Shares Amount Par Value Liability Deficit
Balance at January 1,
1994................. 4,722 $94 $64,381 $(1,122) $(16,149)
Exercise of stock
options.............. 5 66
Adjustment for minimum
pension liability.... 1,122
`
Compensation expense
related to executive
loan plan............ 80
Net income............. 2,358
Balance at December 31,
1994............... 4,727 94 64,527 -0- (13,791)
Compensation expense
related to executive
loan plan, net....... 20
Net income............. 3,889
Balance at December 31,
1995............... 4,727 94 64,547 -0- (9,902)
Purchase and retirement
of common stock...... (150) (3) (2,265)
Compensation expense
related to executive
loan plan............ 133
Other.................. 2 27
Net income............. 8,986
Balance at December 31,
1996............... 4,579 $91 $62,442 $ -0- $ (916)
The accompanying notes are an integral part
of the financial statements.
F-5
STANLEY FURNITURE COMPANY, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
For the Years Ended
December 31,
1996 1995 1994
Cash flows from operating activities:
Cash received from customers............. $200,793 $175,189 $183,458
Cash paid to suppliers and employees..... (176,739) (164,022) (176,194)
Interest paid............................ (3,483) (3,535) (2,464)
Income taxes paid, net................... (5,259) (1,033) (4,463)
Proceeds received on insurance coverage.. 4,625
Operating activities of discontinued
operations............................. (867)
Net cash provided by operating
activities........................... 15,312 6,599 4,095
Cash flows from investing activities:
Capital expenditures..................... (3,599) (14,225) (4,968)
Purchase of other assets................. (370) (467) (650)
Proceeds from sale of assets............. 13 25 108
Investing activities of discontinued
operations............................. 357
Net cash used by investing activities.. (3,956) (14,667) (5,153)
Cash flows from financing activities:
Purchase and retirement of common stock.. (2,268)
Issuance of senior notes................. 10,000 30,000
Repayment of senior note................. (650)
Repayment of term note................... (16,569)
Repayment of revolving credit
facility, net.......................... (914) (2,320) (12,685)
Other, net............................... 304 385 413
Net cash (used) provided by financing
activities........................... (3,528) 8,065 1,159
Net increase (decrease) in cash............ 7,828 (3) 101
Cash at beginning of year.................. 298 301 200
Cash at end of year...................... $ 8,126 $ 298 $ 301
The accompanying notes are an integral part
of the financial statements.
F-6
STANLEY FURNITURE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Organization and Basis of Presentation
Stanley Furniture Company, Inc. (the "Company") is a leading
designer and manufacturer of furniture exclusively targeted at the
upper-medium price range of the residential market.
The Company operates predominantly in one business segment.
Substantially all revenues result from the sale of home
furnishings, primarily residential furniture products.
Substantially all of the Company's trade accounts receivable are
due from retailers in this market, which consist of a large number
of entities with a broad geographical dispersion.
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, 1996 and 1995 was $720,000 and $473,000, respectively.
Goodwill and Long-lived Assets
Goodwill is being amortized on a straight-line basis over 40
years. The Company continually evaluates the existence of
impairment of long-lived assets, including goodwill, on the basis
of whether it is fully recoverable from projected, undiscounted net
cash flows.
Income Taxes
Deferred income taxes are determined based on the difference
between the financial statement and income tax bases of assets and
liabilities using enacted tax rates in effect in the years in which
the differences are expected to reverse. Deferred tax expense
represents the change in the deferred tax asset/liability balance.
Income tax credits are reported as a reduction of federal income
tax expense in the year in which the credits are generated.
F-7
STANLEY FURNITURE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. Summary of Significant Accounting Policies (continued)
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, and at December 31, 1996, the fair
value approximated the carrying amount. The fair value of trade
receivables, trade payables and letters of credit approximate the
carrying amount because of the short maturity of these instruments.
Pension Plans
The Company's funding policy is to contribute to all qualified
plans annually an amount equal to the normal cost and a portion of
the unfunded liability but not to exceed the maximum amount that
can be deducted for federal income tax purposes.
Earnings Per Common Share
Earnings per common share are based upon the weighted average
number of shares outstanding. Outstanding stock options are
treated as common stock equivalents for purposes of computing
primary and fully diluted earnings per share.
Stock Options
The Company applies Accounting Principles Board Opinion No. 25
in accounting for stock options and discloses the fair value of
options granted as permitted by Statement of Financial Accounting
Standards No. 123.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results
could differ from those estimates.
2. Property, Plant and Equipment at December 31
Depreciable
lives (in thousands)
(in years) 1996 1995
Land and buildings............. 20 to 50 $33,694 $33,594
Machinery and equipment........ 5 to 12 45,120 43,127
Office furniture and equipment. 3 to 10 1,794 1,540
Construction in progress....... 129 138
$80,737 $78,399
F-8
STANLEY FURNITURE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. Long-Term Debt at December 31
(in thousands)
1996 1995
7.28% Senior notes due March 15, 2004......... $30,000 $30,000
7.57% Senior note due June 30, 2005........... 9,350 10,000
Revolving credit facility..................... 914
Other......................................... 153
Total..................................... 39,350 41,067
Less current maturities....................... 725 650
$38,625 $40,417
During August 1995, the Company amended its $25.0 million
revolving credit facility, extending its maturity date to August
1998. The interest rate under the facility was reduced to prime
(8.25% on December 31, 1996) or, at the Company's option, the
reserve adjusted LIBOR plus 1.0% per annum. As of December 31,
1996, approximately $22.8 million of additional borrowings were
available under the revolving credit facility.
The above loan agreements require the Company to maintain
certain financial covenants and limit funds available ($8.3 million
at December 31, 1996) to pay dividends and repurchase its common
stock.
Annual debt service requirements are $725,000 in 1997, $5.1
million in both 1998 and 1999, $5.2 million in 2000 and $5.3
million in 2001.
The Company utilizes letters of credit to collateralize
certain insurance policies and inventory purchases. Outstanding
letters of credit at December 31, 1996 were $2.2 million.
4. Unusual Items
During 1995, the Company was released from a lease obligation
at its previously closed Waynesboro, Virginia manufacturing
facility. Accordingly, the Company recognized a pretax credit of
$1.1 million related to the reversal of an accrual set up in 1991
for the closing of the facility. Unusual items also included a
pretax charge for severance resulting from the resignation of a
former officer of the Company.
F-9
STANLEY FURNITURE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. Income Taxes
The provision for income taxes on income from continuing
operations consists of (in thousands):
1996 1995 1994
Current:
Federal......................... $5,217 $1,750 $2,314
State........................... 952 412 669
Total current................. 6,169 2,162 2,983
Deferred:
Federal......................... (567) 156 214
State........................... (132) 66 59
Total deferred.............. (699) 222 273
Income taxes................ $5,470 $2,384 $3,256
A reconciliation of the difference between the federal
statutory income tax rate and the effective income tax rate on
income from continuing operations at December 31 follows:
1996 1995 1994
Federal statutory rate.......... 35.0% 35.0% 35.0%
State taxes, net of federal
benefit....................... 3.8 5.0 5.0
Goodwill........................ 0.8 1.9 1.4
Life insurance.................. (0.7) (1.5) (0.9)
Tax savings from foreign sales
corporation................... (1.4) (0.8) (0.4)
Tax credits..................... (0.2) (0.8)
Other, net...................... 1.0 (1.4) (0.4)
Effective income tax rate..... 38.5% 38.0% 38.9%
The income tax effects of temporary differences that comprise
deferred tax assets and liabilities at December 31 follow (in
thousands):
1996 1995
Current deferred tax assets (liabilities):
Accounts receivable...................... $ 618 $ 379
Inventory................................ (521) (432)
Employee benefits........................ 1,692 1,834
Other accrued expenses................... 97 639
Net current deferred tax asset......... $1,886 $2,420
Noncurrent deferred tax (assets) liabilities:
Inventory................................ $ 500
Property, plant and equipment............ $11,229 11,552
Employee benefits........................ 444 215
Restructuring costs...................... (95)
Other.................................... 8
Net noncurrent deferred tax liability.. $11,673 $12,180
F-10
STANLEY FURNITURE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. Stockholders' Equity, Stock Options, and Related Matters
The Company's stock option plans provide for the granting of
stock options up to an aggregate of 700,000 shares of common stock
to key employees. The exercise price may not be less than the fair
market value of the Company's common stock on the grant date.
Granted options vest 20% annually.
At December 31, 1996 and 1995, options to purchase 385,443 and
263,023 shares, were exercisable with a weighted-average exercise
price of $9.66 and $9.59, respectively. At December 31, 1996,
12,151 shares were available for grant. Activity for the three
years ended December 31, 1996 follows:
Number Weighted-Average
of shares Exercise Price
Outstanding at January 1, 1994....... 668,317 $12.46
Exercised.......................... (5,112) 12.46
Cancelled.......................... (602,834) 12.86
Granted............................ 609,629 10.00
Outstanding at December 31, 1994..... 670,000 9.86
Cancelled or lapsed................ (162,047) 9.84
Granted............................ 170,000 8.75
Outstanding at December 31, 1995..... 677,953 9.59
Lapsed............................. (15,216) 9.80
Exercised.......................... (2,500) 9.75
Granted............................ 20,000 14.78
Outstanding at December 31, 1996..... 680,237 $ 9.74
The exercise price of options outstanding at December 31,
1996, ranged from $8.50 to $16.38 with a weighted-average remaining
contractual life of 8.2 years.
The estimated per share weighted-average fair value of stock
options granted during 1996 and 1995 was $8.00 and $6.00,
respectively, on the date of grant. A risk-free interest rate of
6.8% and 6.2% for 1996 and 1995, respectively, and a 50% volatility
rate with an expected life of 10 years for both 1996 and 1995, was
assumed in estimating the fair value.
F-11
STANLEY FURNITURE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. Stockholders' Equity, Stock Options, and Related Matters
(continued)
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):
1996 1995
As Reported Pro Forma As Reported Pro Forma
Net Income.................. $8,986 $8,754 $3,889 $3,685
Primary earnings per share.. $ 1.82 $ 1.79 $ .82 $ .78
Fully diluted earnings per
share..................... $ 1.76 $ 1.72 $ .82 $ .78
During 1994, the Company entered into a contractual agreement
to issue 50,000 shares of common stock to the chief executive
officer at $10 per share (the market price on the date of the
agreement) in exchange for a non-recourse 7.6% note receivable. One
tenth of the prinicpal amount plus accrued interest is due each
December 31 until 1998 and the remaining principal is due January
2, 1999. The Company agreed to forgive the accrued interest plus
one tenth of the initial principal amount each December 31, if the
executive remains employed by the Company. During 1996, the
Company agreed to forgive the outstanding loan balance over the
remaining three years, subject to the executive's continued
employment. Compensation expense was $308,000, $98,000 and
$160,000 for 1996, 1995 and 1994, respectively.
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,
1996. 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.
During 1996, a secondary offering of 1,000,000 shares of the
Company's common stock owned by the ML-Lee Acquisition Fund, L.P.
and certain affiliates of the Thomas H. Lee Company was completed.
In connection with the offering, the Company incurred approximately
$325,000 of expenses. The Company also purchased 150,000 shares of
its common stock, which were subject to the over-allotment option
from the secondary offering, for an aggregate consideration of $2.3
million.
F-12
STANLEY FURNITURE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. Employee Benefit Plans
Defined Contribution Plan
The Company maintains a defined contribution plan covering
substantially all of its employees. Discretionary matching and
profit sharing contributions for 1996 totaled $856,000. Prior to
1996, the Company made no contributions.
Pension Plans
Benefits were accrued under the Company's pension plans
through 1995. The Stanley Retirement Plan covers substantially all
employees hired prior to 1995. The Supplemental Plan is unfunded
and covers certain key employees hired prior to 1989. Stanley
Retirement Plan assets are invested in fixed income and equity
securities. Benefits under both plans are based on average
compensation and service through 1995. The financial status of the
plans at December 31 follows (in thousands):
1996 1995
Stanley Supple- Stanley Supple-
Retirement mental Retirement mental
Plan Plan Plan Plan
Accumulated benefit obligation:
Vested...................... $(14,334) $ (990) $(14,641) $ (897)
Nonvested................... (1,636) (1,127) (97)
Accumulated benefit obligation $(15,970) $ (990) $(15,768) $ (994)
Projected benefit obligation.. $(15,970) $ (990) $(15,768) $ (994)
Plan assets at fair value..... 16,116 15,842
Plan assets more than
(less than) projected benefit
obligation.................. 146 (990) 74 (994)
Unrecognized (gain) loss...... 3,994 (62) 3,206
Prepaid (accrued) pension
costs..................... $ 4,140 $(1,052) $ 3,280 $ (994)
F-13
STANLEY FURNITURE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. Employee Benefit Plans (continued)
Components of net periodic pension cost follow (in thousands):
1996 1995 1994
Service cost.................... $ 774 $ 904
Interest cost................... $1,295 1,256 1,315
Actual return on assets......... (618) (1,320) (109)
Net amortization and deferral... (55) 965 (589)
Loss on curtailment............. 31
$ 622 $1,706 $1,521
The assumptions used as of December 31 to determine the plans'
financial status and pension cost were:
1996 1995 1994
Discount rate for funded status..... 7.75% 7.67% 9.00%
Discount rate for pension cost...... 7.67% 9.00% 7.75%
Salary progression.................. N/A 5.00% 5.00%
Return on assets.................... 7.50% 7.75% 8.00%
A reduction in the discount rate of 0.25% would create an
additional minimum pension liability of $4.5 million and would
result in a charge to stockholders' equity of $2.7 million, net of
deferred taxes.
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.
Substantially all of the Company's employees are eligible for these
benefits after satisfying service and age provisions. Employees
who elect benefits at retirement contribute to the cost of
coverage. The plan is unfunded.
F-14
STANLEY FURNITURE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. Employee Benefit Plans (continued)
The plan's financial status at December 31 follows (in
thousands):
1996 1995
Retirees.................................... $(3,049) $(4,875)
Fully eligible active plan participants..... (254) (232)
Other active plan participants.............. (300) (714)
Total accumulated postretirement
benefit obligation...................... (3,603) (5,821)
Unrecognized net loss....................... 741 2,752
Unrecognized transition obligation.......... 2,084 2,272
Net accrued postretirement benefit cost... $ (778) $ (797)
Components of net periodic postretirement benefit cost were
(in thousands):
1996 1995 1994
Service cost.............................. $ 35 $ 93 $ 74
Interest cost............................. 274 510 242
Amortization of transition obligation..... 130 134 359
Amortization and deferral................. 33 182 21
$ 472 $ 919 $696
The weighted-average discount rates used in determining the
actuarial present value of the projected benefit obligation were
7.75%, 7.67% and 9.0% for 1996, 1995 and 1994, respectively. The
rate of increase in future health care benefit cost used in
determining the obligation for 1996 was 10% gradually decreasing to
5.5% beginning in 2003; for 1995 was 12% gradually decreasing to 6%
beginning in 2002; and, for 1994 was 15% gradually decreasing to 7%
beginning in 2005.
Increasing the assumed health care cost trend rate by one
percentage point in each future year would increase the accumulated
postretirement benefit obligation at December 31, 1996 by $94,000
and the annual postretirement benefit cost by $12,000.
Deferred Compensation
The Company has a deferred compensation plan, funded with life
insurance policies, which permits certain management employees to
defer portions of their compensation and earn a fixed rate of
return. The accrued liabilities relating to this plan of $1.4
million at December 31, 1996 and 1995, 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.
F-15
STANLEY FURNITURE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. Insurance Claim Accounting
In February 1993, a fire at the Stanleytown, Virginia facility
damaged approximately 12% of the Company's total manufacturing
facilities. The Company's insurance coverage provided for the
complete replacement of the damaged building (which was
leased), equipment and inventory, and reimbursement for business
interruption losses. In 1994, the Company reached a final insurance
settlement and recorded a gain of $2.4 million.
9. Discontinued Operations
Beginning in 1991, the Company's Norman's of Salisbury fabric
division ("Norman's") was reflected as a discontinued operation.
In 1994, the Company ceased operations at Norman's and liquidated
the division resulting in a $2.8 million ($4.5 million pretax)
additional loss provision. In 1996, the Company was released from
a lease obligation resulting from the purchase and concurrent
resale of certain facilities at its former Norman's division. This
obligation was accrued as part of the 1994 charge to discontinued
operations. Accordingly, in 1996, the Company recorded an after
tax gain of $246,000, or $.05 per share, as a partial reversal of
this accrual.
10. Leases
The Company leased a substantial portion of its facilities
under operating leases through June 1995, at which time the Company
purchased these facilities. Rental expenses charged to operations
were $970,000, $1.4 million and $1.9 million in 1996, 1995 and
1994, respectively. The Company continues to lease showroom space
and certain other equipment. Future minimum lease payments, net of
subleases, are approximately as follows: 1997 - $762,000; 1998 -
$545,000; 1999 -$409,000; and thereafter - $12,000.
11. Related Party Transactions
At December 31, 1996, approximately 35% of the Company's
common stock is owned by the ML-Lee Acquisition Fund, L.P. (the
"Majority Stockholder") and certain affiliates of the Thomas H. Lee
Company. The Company has entered into a management agreement with
an affiliate of its Majority Stockholder. Fees paid pursuant to
this agreement amounted to $241,000 in 1996, and $250,000 in both
1995 and 1994.
F-16
STANLEY FURNITURE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. Supplemental Cash Flow Information
(in thousands)
1996 1995 1994
Net income......................... $ 8,986 $ 3,889 $ 2,358
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation................... 4,774 4,503 3,996
Amortization................... 426 416 425
Other, net..................... 463 118 249
Loss on disposal of fabric
division..................... (246) 2,758
Changes in assets and
liabilities:
Accounts receivable.......... (364) 1,028 (1,011)
Inventories.................. (72) (262) (2,221)
Prepaid expenses and other
current assets............. (1,347) (1,030) (892)
Insurance claim receivable... 2,029
Operating assets of
discontinued operations.... (867)
Accounts payable............. 993 (1,022) (922)
Accrued salaries, wages and
benefits................... 2,965 (500) 585
Other accrued expenses....... (479) 137 (632)
Deferred income taxes........ (134) 222 189
Other assets................... 29 25 22
Other long-term liabilities.... (682) (925) (1,971)
Net cash provided by
operating activities....... $15,312 $ 6,599 $ 4,095
F-17
STANLEY FURNITURE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. Quarterly Results of Operations (Unaudited)
The Company's unaudited quarterly results of operations were
as follows (in thousands, except per share data):
First Second Third Fourth
Fiscal 1996 Quarters:
Net sales................... $48,190 $47,282 $52,550 $53,882
Gross profit................ 10,769 11,087 12,778 13,939
Net income from continuing
operations................ 1,583 1,704 2,615 2,839
Net income from continuing
operations per share,
fully diluted............. .33 .36 .52 .56
Fiscal 1995 Quarters:
Net sales................... $44,989 $38,163 $44,706 $46,321
Gross profit................ 9,101 8,050 9,095 10,312
Net income.................. 794 719 998 1,378
Net income per share,
fully diluted............. .17 .15 .21 .29
F-18
STANLEY FURNITURE COMPANY, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For each of the Three Years in the Period Ended December 31, 1996
(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
1996
Doubtful receivables... $ 600 $ 860 $128(a) $1,332
Discounts, returns,
and allowances....... 557 56(b) 613
$1,157 $ 916 $128 $1,945
1995
Doubtful receivables... $ 528 $ 302 $230(a) $ 600
Discounts, returns,
and allowances....... 405 152(b) 557
$ 933 $ 454 $230 $1,157
1994
Doubtful receivables... $ 472 $ 195 $139(a) $ 528
Discounts, returns,
and allowances....... 355 50 (b) 405
$ 827 $ 245 $139 $ 933
(a) Uncollectible receivables written off, net of recoveries.
(b) Represents net increase in required reserve.
S-1