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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, 1998
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 21, 1999: $142 million
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock as of January 29, 1999:
Common Stock, par value $.02 per share 7,069,715
(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 29, 1999
are incorporated by reference into Part III.
TABLE OF CONTENTS
Part I Page
Item 1 Business............................................... 3
Item 2 Properties............................................. 6
Item 3 Legal Proceedings...................................... 6
Item 4 Submission of Matters to a Vote of Security Holders.... 6
Part II
Item 5 Market for Registrant's Common Equity and Related Stockholder
Matters................................................ 8
Item 6 Selected Financial Data................................ 9
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................. 10
Item 8 Financial Statements and Supplementary Data............ 13
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................... 13
Part III
Items 10 through 13............................................. 13
Part IV
Item 14 Exhibits, Financial Statement Schedule and Reports
on Form 8-K............................................ 13
Signatures .................................................... 17
Index to Financial Statements and Schedule...................... F-1
Stanley Furniture Company, Inc.
PART I
Item 1. Business
General
The Company is a leading designer and manufacturer of residential wood
furniture exclusively targeted at the upper-medium price range. The Company
offers diversified product lines across all major style and product categories
within this price range. Its product depth and extensive style selections make
the Company a complete wood furniture resource for retailers in its price range
and allow the Company to respond more quickly to shifting consumer preferences.
The Company has established a broad distribution network that includes
independent furniture stores, department stores, and national and regional
furniture chains. To produce its products and support its broad distribution
network, the Company has developed efficient and flexible manufacturing
processes that it believes are unique in the furniture industry. The Company
emphasizes continuous improvement in its manufacturing processes to enable it to
continue providing competitive advantages to its customers, such as quick
delivery, reduced inventory investment, high quality, and value.
Products and Styles
The Company's product lines cover all major design categories, and include
bedroom, dining room, youth bedroom (Young AmericaTM), living room tables,
entertainment centers and home office. The Company believes that the diversity
of its product lines enables it to anticipate and respond quickly to changing
consumer preferences and provides retailers a complete wood furniture resource
in the upper-medium price range. The Company intends to continue expanding its
product styles with particular emphasis on home office and youth bedroom. The
Company believes that its products represent good value and that the quality and
style of its furniture compare favorably with more premium-priced products.
The Company provides products in a variety of woods, veneers, and
finishes. The number of styles by product line currently marketed by the Company
is set forth in the following table:
Number of Styles
----------------
Bedroom.......................................................... 26
Dining room...................................................... 19
Youth bedroom (Young America(TM))................................ 19
Occasional:
Living room tables........................................... 16
Entertainment centers........................................ 10
Home office.................................................. 6
These product lines cover all major design categories including European
traditional, contemporary/transitional, American traditional, and country/casual
designs.
The Company phased out of its upholstered product line during 1998, which
represented approximately two percent of sales in 1998.
The Company designs and develops new product styles each year to replace
discontinued items or styles and, if desired, to expand product lines. The
Company's product design process begins with marketing personnel identifying
customer needs and conceptualizing product ideas, which generally consist of a
group of related furniture pieces. A variety of sketches are produced, usually
by Company designers, from which prototype furniture pieces are built. The
Company's engineering department then prepares the prototype for actual
full-scale production. The Company consults with its marketing personnel, sales
representatives, and selected customers throughout this process and introduces
its new product styles at the fall and spring international furniture markets.
Distribution
The Company has developed a broad domestic and international customer base
and sells its furniture through approximately 70 independent sales
representatives to independent furniture retailers and national and regional
chain stores. Representative customers include Sears Homelife, J.C. Penney,
Rhodes, Rooms To Go, Baer's, Breuners Home Furnishings, Robb & Stucky, Nebraska
Furniture Mart, Furnitureland South, Jordan's and Wickes. The Company believes
this broad network reduces its exposure to regional recessions, and allows it to
capitalize on emerging channels of distribution. The Company offers tailored
marketing programs to address each channel of distribution.
The general marketing practice followed in the furniture industry is to
exhibit products at international and regional furniture markets. In the spring
and fall of each year, 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 approximately 60,000 square feet
of showroom space at the High Point market to introduce new products, increase
sales of its existing products, and test ideas for future products.
The Company has sold to over 3,500 customers during 1998, and
approximately 6% of the Company's sales in 1998 were to international customers.
No single customer accounted for more than ten percent of the Company's sales in
1998. 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. As a result, the Company
shipped customer orders within 22 days on average during 1998 with average
finished goods inventory turns of 7.8. Since the Company ships customer orders
on average in about three weeks, management believes that the size of its
backlog is not necessarily indicative of its long-term operations. The Company's
backlog of unshipped orders was $36.6 million at December 31, 1998 and $34.9
million at December 31, 1997.
Raw Materials
The principal materials used by the Company in manufacturing its products
include lumber, veneers, plywood, particle board, hardware, glue, finishing
materials, glass products, laminates, fabrics and metals. The Company uses a
variety of species of lumber, including cherry, oak, ash, poplar, pine, maple,
and mahogany. The Company's five largest suppliers accounted for approximately
17% of its purchases in 1998. 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 furniture manufacturer in North
America based on 1997 sales, according to Furniture/Today, a trade publication.
The furniture industry is highly competitive and includes a large number of
foreign and domestic manufacturers, none of which dominates the market. The
markets in which the Company competes include a large number of relatively small
manufacturers; however, certain competitors of the Company have substantially
greater sales volumes and financial resources than the Company. Competitive
factors in the upper-medium price range include style, price, quality, delivery,
design, service, and durability. The Company believes that its manufacturing
processes, its long-standing customer relationships and customer responsiveness,
its consistent support of existing diverse product lines that are high quality
and good value, and its experienced management are competitive advantages.
Associates
At December 31, 1998, the Company employed approximately 2,875 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 as part of the National Emission Standards for Hazardous Air Pollutants
program and negotiated into the Furniture Maximum Achievable Control Technology
Standard, require the Company to reformulate certain furniture finishes and
institute process and administrative changes to reduce emissions of hazardous
air pollutants. The Company believes it is in compliance with these regulations
by its use of compliant coatings and by training its associates in work practice
standards. The Company cannot at this time estimate the future impact of these
standards on the Company's operations and capital expenditure requirements.
Forward-Looking Statements
Certain statements made in this Annual Report on Form 10-K are not based
on historical facts, but are forward-looking statements. These statements can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," or "anticipates" or the negative thereof or
other variations thereon or comparable terminology, or by discussions of
strategy. These statements reflect the Company's reasonable judgment with
respect to future events and are subject to risks and uncertainties that could
cause actual results to differ materially from those in the forward-looking
statements. Such risks and uncertainties include the cyclical nature of the
furniture industry, fluctuations in the price for lumber which is the most
significant raw material used by the Company, competition in the furniture
industry, capital costs 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 each facility is focused on
specific product lines to optimize efficiency. The Company estimates that its
facilities are presently operating near capacity, principally on a one-shift
basis. 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(1)
Lexington, NC Manufacturing 635,000 Owned
Robbinsville, NC Manufacturing 540,000 Owned
High Point, NC Showroom 80,000 Leased(2)
- ------------------------------------
(1) This plant leases its lumber yard; lease expires May 31, 2007. (2) Lease
expires October 31, 1999. Approximately 17,500 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 January 1, 1999 are
as follows:
Name Age Position
Albert L. Prillaman.............. 53 Chairman, President and Chief
Executive Officer
John W. Johnson.................. 54 Senior Vice President -
Manufacturing
Douglas I. Payne ............... 40 Senior Vice President -
Finance and Administration,
Treasurer and Secretary
William A. Sibbick............... 42 Senior Vice President -
Sales
Kelly S. Cain .................. 44 Senior Vice President -
Product Development
and Merchandising
Robert A. Sitler, Jr............. 38 Vice President - Human
Resources
Albert L. Prillaman has been President and Chief Executive Officer of the
Company since December 1985 and Chairman of the Board of Directors since
September 1988. Prior thereto, Mr. Prillaman served as a Vice President of the
Company and President of the Stanley Furniture division of the Company's
predecessor since 1983, and in various executive and other capacities with the
Stanley Furniture division of the predecessors of the Company since 1969. Mr.
Prillaman is a director of Main Street BankGroup Incorporated.
John W. Johnson was elected Senior Vice President-Manufacturing in
December 1998. He was Vice President of Manufacturing from November 1984 until
December 1998. Prior to that time, Mr. Johnson held various management positions
related to manufacturing since his employment by the Company in 1966.
Douglas I. Payne has been Senior Vice President-Finance and Administration
since December 1996. He was Vice President of Finance and Treasurer of the
Company from September 1993 to December 1996. He was Vice President-Treasurer of
the Company from December 1989 to September 1993. Prior to that time, Mr. Payne
held various financial management positions since his employment by the Company
in 1983. Mr. Payne has been Secretary of the Company since 1988.
William A. Sibbick has been Senior Vice President-Sales since December
1997. He was Vice President-Product Development and Merchandising-Dining Room
and Occasional from December 1996 to December 1997. He was Vice President
Product Development and Merchandising from April 1995 until December 1996. 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, Mr. Sibbick was Vice
President-Product Manager since his employment by the Company in 1989.
Kelly S. Cain has been Senior Vice President-Product Development and
Merchandising since December 1997. He was Vice President-Product Development and
Merchandising for bedroom product lines from December 1996 to December 1997.
Prior to that time, Mr. Cain held various management positions in sales and
marketing since his employment by the Company in 1985.
Robert A. Sitler, Jr. was elected Vice President-Human Resources in
December 1998. Prior thereto, he held various management positions in
manufacturing and credit since his employment by the Company in March 1985.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock is quoted on The Nasdaq Stock Market ("Nasdaq")
under the symbol STLY. The table below sets forth the high and low sales prices
per share, for the periods indicated, as reported by Nasdaq, adjusted to reflect
a two-for-one stock split, distributed in the form of a stock dividend on May
15, 1998.
High Low
1998
First Quarter.................... $20.13 $13.50
Second Quarter................... 27.50 17.88
Third Quarter.................... 27.50 16.50
Fourth Quarter................... 19.75 10.38
1997
First Quarter.................... $13.00 $ 9.13
Second Quarter................... 11.75 8.50
Third Quarter.................... 14.88 11.38
Fourth Quarter................... 14.50 11.38
As of January 13, 1999, there were approximately 2,200 beneficial stockholders.
To-date, the Company has retained all earnings to finance the growth and
development of its business. However, the Company will continue to evaluate its
dividend policy, and any future payments will depend upon the financial
condition, capital requirements, and earnings of the Company, as well as other
factors that the Board of Directors may deem relevant. The Company's ability to
pay dividends is restricted under certain loan coventants. See Note 3 of the
Notes to Financial Statements.
Item 6. Selected Financial Data
Years Ended December 31,
1998 1997 1996 1995 1994
(in thousands, except per share data)
Income Statement Data:
Net sales.................................. $247,371 $211,905 $201,905 $174,179 $184,342
Cost of sales.............................. 186,931 159,453 153,332 137,621 148,453
----------- ----------- ----------- ----------- -----------
Gross profit............................. 60,440 52,452 48,573 36,558 35,889
Selling, general and admin-
istrative expenses....................... 32,496 29,949 30,403 26,454 26,483
Unusual items, net (1)..................... (136)
----------- ----------- ----------- ----------- -----------
Operating income......................... 27,944 22,503 18,170 10,240 9,406
Other expense, net ........................ 411 276 616 433 444
Gain on insurance settlement(2) ........... (2,379)
Interest expense........................... 4,164 3,538 3,344 3,534 2,969
----------- ----------- ----------- ----------- -----------
Income from continuing
operations before income
taxes.................................. 23,369 18,689 14,210 6,273 8,372
Income taxes............................... 8,886 7,102 5,470 2,384 3,256
----------- ----------- ----------- ----------- -----------
Income from continuing
operations............................. $ 14,483 $ 11,587 $ 8,740 $ 3,889 $ 5,116
=========== =========== =========== =========== ===========
Basic Earnings Per Share:(3)
Income from continuing
operations.............................. $ 2.07 $ 1.38 $ .92 $ .41 $ .54
=========== =========== =========== =========== ===========
Weighted average shares(4)................. 7,008 8,394 9,444 9,454 9,450
=========== =========== =========== =========== ===========
Diluted Earnings Per Share:(3)
Income from continuing
operations(2)........................... $ 1.82 $ 1.25 $ .88 $ .41 $ .54
=========== =========== =========== =========== ===========
Weighted average shares(4)................. 7,963 9,278 9,890 9,454 9,488
=========== =========== =========== =========== ===========
Balance Sheet Data:
Cash....................................... $ 6,791 $ 756 $ 8,126 $ 298 $ 301
Inventories................................ 46,514 45,730 40,239 40,167 39,905
Working capital............................ 44,408 41,440 46,225 42,422 42,912
Total assets............................... 154,374 143,225 141,510 134,551 124,519
Long-term debt including
current maturities (4) .................. 43,539 52,577 39,350 41,067 33,395
Stockholders' equity (4)(5)................ 62,368 48,247 61,617 54,739 50,830
(1) In 1995, the Company recognized a pretax credit of $1.1 million after it
was released from a lease obligation at a previously closed manufacturing
facility. Also included is a pretax charge for a severance accrual.
(2) In 1994, the Company recorded a pretax gain of $2.4 million as part of the
final insurance settlement due to a fire in 1993. Income from continuing
operations before the insurance related gain was $3.7 million, or $.39 per
diluted share.
(3) Amounts have been retroactively adjusted to reflect the two-for-one stock
split, distributed in the form of a stock dividend, on May 15, 1998.
(4) In 1998, the Company purchased 315,000 shares of its common stock for a
total consideration of $5.6 million and issued 103,400 shares to the Stanley
Retirement Plan. In 1997, the Company purchased 2,326,402 shares of its common
stock for a total consideration of $25.3 million. See Note 5 of the Notes to
Financial Statements.
(5) No dividends have been paid on the Company's 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,
1998 1997 1996
----- ----- -----
Net sales......................... 100.0% 100.0% 100.0%
Cost of sales..................... 75.6 75.3 75.9
----- ----- -----
Gross profit........ ........... 24.4 24.7 24.1
Selling, general and administrative
expenses........................ 13.1 14.1 15.1
----- ----- -----
Operating income............. 11.3 10.6 9.0
Other expenses, net............... .1 .1 .3
Interest expense.................. 1.7 1.6 1.7
------ ------ ------
Income from continuing operations
before income taxes........... 9.5 8.9 7.0
Income taxes...................... 3.6 3.4 2.7
------ ------ ------
Income from continuing operations 5.9% 5.5% 4.3%
====== ====== ======
1998 Compared to 1997
Net sales increased $35.5 million, or 16.7%, for 1998 compared to 1997.
The increase was due primarily to higher unit volume.
Gross profit margin for 1998 decreased to 24.4% from 24.7% for 1997. The
decrease resulted primarily from higher raw material costs, principally lumber,
partially offset by improved operating efficiencies.
Selling, general and administrative expenses as a percentage of net sales
were 13.1% and 14.1% for 1998 and 1997, respectively. The lower percentage in
1998 was due principally to higher net sales. The majority of the increased
expenditures in 1998 were selling expenses directly attributable to the sales
increase.
During the second half of 1998, the Company phased out of its upholstery
operations. Upholstered products accounted for less than 3.0% of net sales and
resulted in a pretax operating loss of approximately $1 million in each of the
past three years.
As a result of the above, operating income increased to $27.9 million, or
11.3% of net sales, from $22.5 million, or 10.6% of net sales, in 1997.
Interest expense for 1998 increased due to higher average debt levels
resulting from the Company's repurchases of its common stock in 1997 and 1998.
The Company's effective income tax rate was 38% for both 1998 and 1997.
1997 Compared to 1996
Net sales increased $10.0 million, or 5.0%, for 1997 compared to 1996. The
increase was due primarily to higher average selling prices and to a lesser
extent higher unit volume.
Gross profit margin for 1997 increased to 24.7% from 24.1% for 1996. The
higher gross profit margin in 1997 was due primarily to lower raw material costs
as a percentage of net sales and improved operating efficiencies. However, gross
profit margin declined from 25.2% for the first half of 1997 to 24.4% for the
second half of 1997, due primarily to increased lumber cost.
Selling, general and administrative expenses as a percentage of net sales
were 14.1% and 15.1% for 1997 and 1996, respectively. These expenses were lower
in 1997 due primarily to lower selling expenses and a reduced provision for bad
debts.
As a result of the above, operating income for 1997 increased to $22.5
million, or 10.6% of net sales, from $18.2 million, or 9.0% of net sales, in
1996.
Interest expense for 1997 increased due to higher debt levels resulting
from the Company's June and November 1997 repurchases of its common stock.
Including the December 1996 purchase of 300,000 shares, the Company acquired a
total of 2,626,402 shares of its common stock for a total consideration of $27.6
million.
The Company's effective income tax rate was 38.0% and 38.5% for 1997 and
1996, respectively.
Financial Condition, Liquidity and Capital Resources
The Company generated cash from operations of $25.0 million in 1998
compared to $8.3 million in 1997. The increase was due primarily to increased
sales and to a lesser extent, lower tax payments. The Company generated cash
from operations of $15.3 million in 1996. The decrease in cash generated from
operations in 1997 compared to 1996 was due primarily to higher payments to
suppliers and employees, due to increased production, and higher tax payments.
The Company used the cash generated from operations in 1998, 1997 and 1996 to
fund capital expenditures, reduce borrowings and repurchase its common stock.
Net cash used by investing activities was $6.5 million in 1998 compared to
$4.2 million and $4.0 million in 1997 and 1996, respectively. Expenditures were
primarily for plant and equipment and other assets in the normal course of
business. Capital expenditures in 1999 are anticipated to be approximately $14
million. Approximately $10 million of capital spending in 1999 will be used to
expand existing facilities to add approximately $30-$35 million of increased
sales capacity on an annualized basis.
Net cash used by financing activities was $12.5 million, $11.5 million and
$3.5 million in 1998, 1997 and 1996, respectively. In 1998 and 1996, the
purchase of common stock and the reduction in borrowings were financed by cash
generated from operations. In 1997, the purchase of common stock was financed by
the private placement of debt, the revolving credit facility and cash generated
from operations. Also, in 1998 and 1997, the Company received proceeds from the
exercise of stock options.
In October 1998, the Company's Board of Directors authorized the use of up
to $10.0 million to repurchase shares of its common stock. Consequently, the
Company may, from time to time, either directly or through agents, repurchase
its common stock in the open market through negotiated purchases or otherwise,
at prices and on terms satisfactory to the Company. The Company utilized $5.6
million of the authorized $10.0 million to purchase a total of 315,000 shares
during 1998. Depending on market prices and other conditions relevant to the
Company, such purchases may be discontinued at any time.
In November 1997, the Company issued $10.0 million of 7.43% senior notes
due 2007 in a private placement of debt. The proceeds were used to purchase
826,402 shares of its common stock from the ML-Lee Acquisition Fund, L.P. and
certain of its affiliates.
At December 31, 1998, long-term debt including current maturities was
$43.5 million. Approximately $24.0 million of additional borrowing capacity was
available under a revolving credit facility. Also, the Company had cash on hand
of $6.8 million. Annual debt service requirements are $5.1 million in 1999, $5.2
million in 2000, $6.7 million in 2001, $6.8 million in 2002, and $6.9 million in
2003. The Company believes that its financial resources are adequate to support
its capital needs and debt service requirements.
Year 2000
In early 1998, the Company initiated a cross-functional team to identify
and address internal hardware, software and equipment compliance issues arising
from the many challenges posed by the Year 2000. Key financial information and
operational systems, including equipment with embedded microprocessors, have
been inventoried and assessed. Detailed plans are in place for system
modifications or replacements, and a compliance plan for equipment with embedded
technology has been developed and is currently being implemented.
Since 1996, the Company has been upgrading its information systems
technology, with Year 2000 compliant software, to support its sales,
manufacturing and administrative functions. The cost of information and
operational systems upgrades is estimated at less than $1.0 million. Computers
and peripheral devices are approximately seventy-five percent compliant at this
point. Final compliance and testing for both information and operational systems
is scheduled for completion by mid-1999. The estimated cost to complete Year
2000 compliance is less than $100,000.
In addition, the Company is communicating with key customers, suppliers,
financial institutions and others with whom it does business to determine Year
2000 compliance and is currently assessing the potential impact on operations if
third parties are not successful in converting their systems in a timely manner.
The Company believes it is taking reasonable steps to prevent major
interruptions in its business, resulting from the Year 2000 compliance issue.
However, if the Company or its key suppliers do not complete enhancements in a
timely manner or if their remedial efforts are not successful, the Year 2000
compliance issue may have a material adverse impact on the operations of the
Company. Contingency plans are currently being developed to minimize the impact
of any such interruptions, such as, backup procedures, identification of
alternate suppliers and/or increasing inventory safety stocks, and such plans
are expected to be in place by the end of 1999.
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 29, 1999, 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, 1998 and 1997
Statements of Income for each of the three years in the period ended
December 31, 1998
Statements of Changes in Stockholders' Equity for each of the three years
in the period ended December 31, 1998
Statements of Cash Flows for each of the three years in the period ended
December 31, 1998
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, 1998
(b) The following reports on Form 8-K were filed by the Registrant during the
last quarter of the period covered by this report:
None.
(c) Exhibits:
3.1 The Restated Certificate of Incorporation of the Registrant.(1)
3.2 The By-laws of the Registrant (incorporated by reference to Exhibit
3.2 to the Registrant's Registration Statement on Form S-1, No.
33-7300).
3.3 Amendment adopted March 21, 1988 to the By-laws of the Registrant
(incorporated by reference to Exhibit 3.3 to the Registrant's Form 10-K
(Commission File No. 0-14938) for the year ended December 31, 1987).
3.4 Amendments adopted February 8, 1993 to the By-laws of the Registrant
(incorporated by reference to Exhibit 3.4 to the Registrant's
Registration Statement on Form S-1 No. 33-57432).
4.1 The Certificate of Incorporation and By-laws of the Registrant as
currently in effect (incorporated by reference to Exhibits 3.1 through
3.4 hereto).
4.2 Note Agreement dated February 15, 1994 between the Registrant and the
Prudential Insurance Company of America. (Incorporated by reference to
Exhibit 4.6 to the Registrant's Form 10-K (Commission File No. 0-14938)
for the year ended December 31, 1993).
4.3 Letter Amendment, dated October 14, 1996, to Note Agreements, dated
February 15, 1994 and June 29, 1995, between the Registrant and The
Prudential Insurance Company of America (incorporated by reference to
Exhibit 4.1 to the Registrant's Form 10-Q (Commission File No. 0-14938)
for the quarter ended September 29, 1996).
4.4 Letter Amendment, dated June 16, 1997, to Note Agreements, dated
February 15, 1994 and June 29, 1995, between the Registrant and The
Prudential Insurance Company of America (incorporated by reference to
Exhibit 4.1 to the Registrant's Statement on Form 8-K (Commission File
No. 0-14938) filed July 9, 1997).
4.5 Note Purchase and Private Shelf Agreement, dated as of June 29, 1995,
among the Company, The Prudential Insurance Company of America and the
affiliates of Prudential who become Purchasers as defined therein
(incorporated by reference to Exhibit 4.1 to the Registrant's Form 8-K
(Commission File No. 0-14938) filed December 2, 1997).
Pursuant to Regulation S-K, Item 601(b)(4)(iii), instruments evidencing
long term debt less than 10% of the Registrant's total assets have been omitted
and will be furnished to the Securities and Exchange Commission upon request.
10.1 Employment Agreement made as of January 1, 1991 between Albert L.
Prillaman and the Company (incorporated by reference to Exhibit 10.1 to
the Registrant's Form 10-K (Commission File No. 0-14938) for the year
ended December 31, 1991).(2)
10.2 Lease dated February 23, 1987 between Stanley Interiors Corporation and
Southern Furniture Exposition Building, Inc. d/b/a Southern Furniture
Market Center (incorporated by reference to Exhibit 10.10 to the
Registrant's Form 10-K (Commission File No. 0-14938) for the year ended
December 31, 1987).
10.3 Lease dated June 30, 1987 between A. Allan McDonald, Virginia Cary
McDonald, C. R. McDonald, Dorothy V. McDonald, and Lillian S. McDonald,
as lessor, and Stanley Interiors Corporation, as lessee (incorporated
by reference to Exhibit 10.14 to the Registrant's Form 10-K (Commission
File No. 0-14938) for the year ended December 31, 1987).
10.4 The Stanley Retirement Plan, as restated effective January 1, 1989,
adopted April 20, 1995 (incorporated by reference to Exhibit 10.4 to
the Registrant's Form 10-K (Commission File No. 0-14938) for the year
ended December 31, 1995).(2)
10.5 Amendment No. 1, The Stanley Retirement Plan, effective December 31,
1995, adopted December 15, 1995 (incorporated by reference to Exhibit
10.5 to the Registrant's Form 10-K (Commission File No. 0-14938) for
the year ended December 31, 1995).(2)
10.6 Supplemental Retirement Plan of Stanley Furniture Company, Inc.,
as restated effective January 1, 1993.(incorporated by reference to
Exhibit 10.8 to the Registrant's Form 10-K (Commission File No.
0-14938) for the year ended December 31, 1993).(2)
10.7 First Amendment to Supplemental Retirement Plan of Stanley Furniture
Company, Inc., effective December 31, 1995, adopted December 15, 1995
(incorporated by reference to Exhibit 10.7 to the Registrant's Form
10-K (Commission File No. 0-14938) for the year ended December 31,
1995).(2)
10.8 Stanley Interiors Corporation Deferred Compensation Capital Enhancement
Plan, effective January 1, 1986, as amended and restated effective
August 1, 1987 (incorporated by reference to Exhibit 10.12 to the
Registrant's Registration Statement on Form S-1(Commission File No.
0-14938), No. 33-7300).(2)
10.9 Split Dollar Insurance Agreement dated as of March 21, 1991 between
Albert L. Prillaman and the Registrant (incorporated by reference to
Exhibit 10.43 to the Registrant's Form 10-K (Commission File No.
0-14938) for the year ended December 31, 1991).(2)
10.10 Second Amended and Restated Revolving Credit Facility and Term Loan
Agreement dated February 15, 1994 (the "Second Amended and Restated
Credit Facility") between the Registrant, National Canada Finance
Corp., and the National Bank of Canada (incorporated by reference to
Exhibit 10.17 to Registrant's Form 10-K (Commission File No. 0-14938)
for the year ended December 31, 1994).
10.11 First Amendment to Second Amended and Restated Credit Facility dated as
of August 21, 1995 (incorporated by reference to Exhibit 10.14 to
Registrant's Form 10-K (Commission File No. 0-14938) for the year ended
December 31, 1995).
10.12 1992 Stock Option Plan (incorporated by reference to Registrant's
Registration Statement on Form S-8 No.33-58396).(2)
10.13 1994 Stock Option Plan. (incorporated by reference to Exhibit 10.18 to
the Registrant's Form 10-K (Commission File No. 0-14938) for the year
ended December 31, 1994).(2)
10.14 1994 Executive Loan Plan. (incorporated by reference to Exhibit 10.19
to the Registrant's Form 10-K (Commission File No.0-14938) for the year
ended December 31, 1994).(2)
10.15 Employment agreement dated as of June 1, 1996, between Douglas I. Payne
and the Registrant (incorporated by reference to Exhibit 10.1 to the
Registrant's Form 10-Q (Commission File No. 0-14938) for the quarter
ended June 30, 1996).(2)
10.16 Amendment No. 1, dated as of October 1, 1996, to the Employment
Agreement, dated as of January 1, 1991, between the Registrant and
Albert L. Prillaman (incorporated by reference to Exhibit 10.4 to the
Registrant's Form 10-Q (Commission File No. 0-14938) for the quarter
ended September 29, 1996).
10.17 Assignment and Transfer Agreement, dated as of October 8, 1996, between
National Canada Finance Corp. and National Bank of Canada relating to
the Second Amended and Restated Revolving Credit Facility (incorporated
by reference to Exhibit 10.1 to the Registrant's Form 10-Q (Commission
File No. 0-14938) for the quarter ended September 29, 1996).
10.18 Second Amendment, dated as of October 14, 1996, to the Second Amended
and Restated Revolving Credit Facility (incorporated by reference to
Exhibit 10.2 to the Registrant's Form 10-Q (Commission File No.
0-14938) for the quarter ended September 29, 1996).
10.19 Stock Purchase Agreement, dated as of June 27, 1997 among the
Registrant and the Selling Stockholders named therein (incorporated by
reference to Exhibit 99.1 to the Registrant's Form 8-K (Commission File
No. 0-14938) filed July 9, 1997).
10.20 Stock Purchase Agreement, dated as of November 11, 1997 among the
Registrant and the Selling Stockholders named therein (incorporated by
reference to Exhibit 99.2 to the Registrant's Form 8-K (Commission File
No. 0-14938) filed December 2, 1997).
10.21 Third Amendment, dated as of June 24, 1997, to the Second Amended and
Restated Revolving Credit Facility and Term Loan Agreement dated
February 15, 1994 between the Registrant, National Canada Finance
Corp., and the National Bank of Canada (incorporated by reference to
Exhibit 99.4 to the Registrant's Form 8-K (Commission File No. 0-14938)
filed July 9, 1997).
10.22 Fourth Amendment, dated February 24, 1998, to the Second Amended and
Restated Revolving Credit Facility and Term Loan Agreement dated
February 15, 1994 between the Registrant, National Canada Finance
Corp., and the National Bank of Canada (incorporated by reference to
Exhibit 10.1 to the Registrant's Form 10-Q (Commission File No.
0-14938) for the quarter ended March 28, 1998.
21 Listing of Subsidiaries:
Charter Stanley Foreign Sales Corporation, a United States Virgin
Islands Corporation.
23 Consent of PricewaterhouseCoopers LLP(1)
27 Financial Data Schedule.(1)
- ------------------------------------
(1) Filed herewith
(2) Management contract or compensatory plan
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
STANLEY FURNITURE COMPANY, INC.
February 5, 1999 By: /s/Albert L. Prillaman
Albert L. Prillaman
Chairman, President, and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/Albert L. Prillaman Chairman, President, and Chief February 5, 1999
(Albert L. Prillaman) Executive Officer, and Director
(Principal Executive Officer)
/s/Douglas I. Payne Senior Vice President - Finance February 5, 1999
(Douglas I. Payne) and Administration, Treasurer
and Secretary (Principal
Financial and Accounting Officer)
/s/David V. Harkins Director February 5, 1999
(David V. Harkins)
/s/Edward J. Mack Director February 5, 1999
(Edward J. Mack)
/s/Thomas L. Millner Director February 5, 1999
(Thomas L. Millner)
/s/T. Scott McIlhenny, Jr. Director February 5, 1999
(T.Scott McIlhenny, Jr.)
STANLEY FURNITURE COMPANY, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Financial Statements Page
Report of Independent Accountants.................................... F-2
Balance Sheets as of December 31, 1998 and 1997...................... F-3
Statements of Income for each of the three years in the period
ended December 31, 1998............................................ F-4
Statements of Changes in Stockholders' Equity for each of the
three years in the period ended December 31, 1998.................. F-5
Statements of Cash Flows for each of the three years in the period
ended December 31, 1998............................................ 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, 1998.................. S-1
Report of Independent Accountants
To The Board of Directors and Stockholders of
Stanley Furniture Company, Inc.
In our opinion, the accompanying balance sheets and the related statements of
income, changes in stockholders' equity and cash flows present fairly, in all
material respects, the financial position of Stanley Furniture Company, Inc. as
of December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedule listed on page F-1 of Form 10-K
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Richmond, Virginia
January 22, 1999
STANLEY FURNITURE COMPANY, INC.
BALANCE SHEETS
(in thousands, except share data)
December 31,
1998 1997
----------- -----------
ASSETS
Current assets:
Cash ......................................................................... $ 6,791 $ 756
Accounts receivable, less allowances of $1,906 and $1,895..................... 29,141 27,427
Inventories:
Finished goods.............................................................. 22,853 21,220
Work-in-process............................................................. 7,495 6,997
Raw materials............................................................... 16,166 17,513
----------- -----------
Total inventories......................................................... 46,514 45,730
Prepaid expenses and other current assets..................................... 903 1,571
Deferred income taxes......................................................... 1,980 770
----------- -----------
Total current assets......................................................... 85,329 76,254
Property, plant and equipment, net.............................................. 52,474 51,714
Goodwill, less accumulated amortization of $3,360 and $3,024.................... 10,080 10,416
Other assets.................................................................... 6,491 4,841
----------- -----------
Total assets................................................................ $ 154,374 $ 143,225
=========== ===========
LIABILITIES
Current liabilities:
Current maturities of long-term debt.......................................... $ 5,136 $ 5,086
Accounts payable.............................................................. 21,837 18,164
Accrued salaries, wages and benefits.......................................... 11,939 9,687
Other accrued expenses........................................................ 2,009 1,877
----------- -----------
Total current liabilities................................................... 40,921 34,814
Long-term debt, exclusive of current maturities................................. 38,403 47,491
Deferred income taxes........................................................... 10,694 10,448
Other long-term liabilities..................................................... 1,988 2,225
----------- -----------
Total liabilities............................................................. 92,006 94,978
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, $.02 par value, 10,000,000 shares authorized,
7,069,715 and 6,865,518 shares issued and outstanding........................ 141 137
Capital in excess of par value.................................................. 37,073 37,439
Retained earnings............................................................... 25,154 10,671
----------- -----------
Total stockholders' equity.................................................... 62,368 48,247
----------- -----------
Total liabilities and stockholders' equity................................. $ 154,374 $ 143,225
=========== ===========
The accompanying notes are an integral part
of the financial statements.
STANLEY FURNITURE COMPANY, INC.
STATEMENTS OF INCOME
(in thousands, except per share data)
For the Years Ended
December 31,
--------------------------------------------
1998 1997 1996
--------- --------- ---------
Net sales..................... $247,371 $211,905 $201,905
Cost of sales................. 186,931 159,453 153,332
--------- --------- ---------
Gross profit................. 60,440 52,452 48,573
Selling, general and
administrative expenses....... 32,496 29,949 30,403
---------- ---------- ----------
Operating income............. 27,944 22,503 18,170
Other expense, net............. 411 276 616
Interest expense............... 4,164 3,538 3,344
---------- ---------- ----------
Income from continuing operations
before income taxes........ 23,369 18,689 14,210
Income taxes................... 8,886 7,102 5,470
---------- ---------- ----------
Income from continuing
operations.................... 14,483 11,587 8,740
Gain from discontinued
operations, net of taxes...... 246
---------- ---------- ----------
Net income................. $ 14,483 $ 11,587 $ 8,986
========== ========== ==========
Basic earnings per share:
Continuing operations....... $ 2.07 $ 1.38 $ .92
Discontinued operations..... .03
---------- ---------- ----------
Net income................ $ 2.07 $ 1.38 $ .95
========== ========== ==========
Weighted average shares
outstanding................ 7,008 8,394 9,444
========== ========== ==========
Diluted earnings per share:
Continuing operations....... $ 1.82 $ 1.25 $ .88
Discontinued operations..... .03
---------- ---------- ----------
Net income.................. $ 1.82 $ 1.25 $ .91
========== ========== ==========
Weighted average shares
outstanding................ 7,963 9,278 9,890
========== ========== ==========
The accompanying notes are an integral part
of the financial statements.
STANLEY FURNITURE COMPANY, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For each of the three years in the period ended
December 31, 1998
(in thousands)
Capital
In Retained
Common Stock Excess of Earnings
Shares Amount Par Value (Deficit)
------- ------ -------- ---------
Balance at January 1, 1996.................................... 9,454 $189 $64,452 $ (9,902)
Purchase and retirement of stock.............................. (300) (6) (2,262)
Compensation expense for executive loan plan, net............. 133
Other......................................................... 4 27
Net income.................................................... 8,986
------- ------ -------- ---------
Balance at December 31, 1996................................ 9,158 183 62,350 (916)
Purchase and retirement of stock.............................. (2,326) (46) (25,283)
Compensation expense for executive loan plan, net............. 133
Exercise of stock options..................................... 34 239
Net income.................................................... 11,587
------- ------ -------- ---------
Balance at December 31, 1997................................ 6,866 137 37,439 10,671
Purchase and retirement of stock.............................. (315) (6) (5,547)
Issuance of stock to the Stanley
Retirement Plan............................................. 103 2 1,872
Compensation expense and stock issuance related
to the executive loan plan.................................. 100 2 131
Exercise of stock options..................................... 316 6 3,178
Net income.................................................... 14,483
------- ------ -------- ---------
Balance at December 31, 1998................................ 7,070 $141 $37,073 $25,154
======= ====== ======== =========
The accompanying notes are an integral part
of the financial statements.
STANLEY FURNITURE COMPANY, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
For the Years Ended
December 31,
---------------------------------------------
1998 1997 1996
----------- ---------- ----------
Cash flows from operating activities:
Cash received from customers.............................. $245,492 $207,590 $200,793
Cash paid to suppliers and employees...................... (209,030) (187,346) (176,739)
Interest paid............................................. (4,228) (3,403) (3,483)
Income taxes paid, net.................................... (7,211) (8,529) (5,259)
----------- ---------- ----------
Net cash provided by operating activities............... 25,023 8,312 15,312
----------- ---------- ----------
Cash flows from investing activities:
Capital expenditures...................................... (6,680) (4,076) (3,599)
Purchase of other assets.................................. (106) (143) (370)
Proceeds from sale of assets.............................. 297 13
----------- ---------- ----------
Net cash used by investing activities................... (6,489) (4,219) (3,956)
----------- ---------- ----------
Cash flows from financing activities:
Purchase and retirement of common stock................... (5,553) (25,329) (2,268)
Issuance of senior notes.................................. 10,000
Repayment of senior notes................................. (5,086) (725) (650)
Proceeds from (repayment of) revolving
credit facility, net.................................... (3,952) 3,952 (914)
Proceeds from exercise of stock options................... 1,556 160
Other, net................................................ 536 479 304
----------- ---------- ----------
Net cash used by financing activities................... (12,499) (11,463) (3,528)
----------- ---------- ----------
Net increase (decrease) in cash............................. 6,035 (7,370) 7,828
Cash at beginning of year................................... 756 8,126 298
----------- ---------- ----------
Cash at end of year....................................... $ 6,791 $ 756 $ 8,126
=========== ========== ==========
The accompanying notes are an integral part
of the financial statements.
STANLEY FURNITURE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Organization and Basis of Presentation
Stanley Furniture Company, Inc. (the "Company") is a leading designer
and manufacturer of wood furniture exclusively targeted at the upper-medium
price range of the residential market.
The Company operates predominantly 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.
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, 1998 and 1997 was $831,000
and $838,000, respectively.
Goodwill and Long-lived Assets
Goodwill is being amortized on a straight-line basis over 40 years. The
Company continually evaluates the potential impairment of long-lived assets,
including goodwill, on the basis of whether the carrying value is fully
recoverable from projected, undiscounted net cash flows.
Income Taxes
Deferred income taxes are determined based on the difference between the
financial statement and income tax bases of assets and liabilities using enacted
tax rates in effect in the years in which the differences are expected to
reverse. Deferred tax expense represents the change in the deferred tax
asset/liability balance. Income tax credits are reported as a reduction of
income tax expense in the year in which the credits are generated.
Fair Value of Financial Instruments
The fair value of the Company's long-term debt is estimated using
discounted cash flow analysis based on the incremental borrowing rates currently
available to the Company for loans with similar terms and maturities. At
December 31, 1998, the fair value approximated the carrying amount. The fair
value of trade receivables, trade payables and letters of credit approximate the
carrying amount because of the short maturity of these instruments.
STANLEY FURNITURE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. Summary of Significant Accounting Policies (continued)
Pension Plans
The Company's funding policy is to contribute to all qualified plans
annually an amount equal to the normal cost and a portion of the unfunded
liability, but not to exceed the maximum amount that can be deducted for federal
income tax purposes.
Earnings per Common Share
Basic earnings per share is computed based on the average number of common
shares outstanding. Diluted earnings per share reflects the increase in average
common shares outstanding that would result from the assumed exercise of
outstanding stock options, calculated using the treasury stock method.
Stock Options
The Company applies Accounting Principles Board Opinion No. 25 in
accounting for stock options and discloses the fair value of options granted as
permitted by Statement of Financial Accounting Standards No. 123.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Changes in such estimates may affect amounts reported in
future periods.
2. Property, Plant and Equipment
Depreciable
lives (in thousands)
(in years) 1998 1997
----------- -------- --------
Land and buildings.................................... 20 to 50 $34,699 $33,941
Machinery and equipment............................... 5 to 12 51,728 48,180
Office furniture and equipment........................ 3 to 10 1,772 1,836
Construction in progress.............................. 1,876 588
-------- --------
Property, plant and equipment, at cost.............. 90,075 84,545
Less accumulated depreciation......................... 37,601 32,831
-------- --------
Property, plant and equipment, net.................... $52,474 $51,714
======== ========
STANLEY FURNITURE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. Long-Term Debt
(in thousands)
1998 1997
-------- --------
7.28% Senior notes due March 15, 2004............................... $25,714 $30,000
7.57% Senior note due June 30, 2005................................. 7,825 8,625
7.43% Senior notes due November 18, 2007............................ 10,000 10,000
Revolving credit facility........................................... 3,952
-------- --------
Total............................................................. 43,539 52,577
Less current maturities............................................. 5,136 5,086
-------- --------
Long-term debt, exclusive of current maturities................... $38,403 $47,491
======== ========
The revolving credit facility provides for borrowings of up to $25.0
million through June 2000, automatically renewable thereafter for one year
periods unless terminated by either party. Interest under the facility is
payable monthly at prime (7.75% on December 31, 1998) or, at the Company's
option, the reserve adjusted LIBOR plus 1.0% per annum (6.07% on December 31,
1998). The Company utilizes letters of credit to collateralize certain insurance
policies and inventory purchases. Outstanding letters of credit at December 31,
1998 were $1.0 million. At December 31, 1998, $24.0 million of additional
borrowings were available under the revolving credit facility.
The above loan agreements require the Company to maintain certain
financial covenants. The Company's ability to pay dividends with respect to the
common stock is restricted to $25.0 million plus 50% of the Company's
consolidated net earnings, adjusted for net cash proceeds received by the
Company from the sale of its stock and the amount of payments for redemption,
purchase or other acquisition of its capital stock, subsequent to January 1,
1997. At December 31, 1998, these covenants limit additional borrowings to $32.7
million and limit funds available to pay dividends and repurchase the Company's
common stock to $8.9 million.
Annual debt service requirements are $5.1 million in 1999, $5.2 million in
2000, $6.7 million in 2001, $6.8 million in 2002 and $6.9 million in 2003.
4. Income Taxes
The provision for income taxes on income from continuing operations
consists of (in thousands):
1998 1997 1996
------ ------ ------
Current:
Federal............... $8,558 $6,454 $5,217
State................. 1,292 757 952
------ ------ ------
Total current....... 9,850 7,211 6,169
------ ------ ------
Deferred:
Federal............... (852) (96) (567)
State................. (112) (13) (132)
------ ------ ------
Total deferred...... (964) (109) (699)
------ ------ ------
Income taxes...... $8,886 $7,102 $5,470
====== ====== ======
STANLEY FURNITURE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. Income Taxes (continued)
A reconciliation of the difference between the federal statutory income
tax rate and the effective income tax rate on income from continuing operations
follows:
1998 1997 1996
----- ----- -----
Federal statutory rate...................... 35.0% 35.0% 35.0%
State taxes, net of federal benefit......... 3.3 2.6 3.8
Goodwill.................................... .5 .6 .8
Life insurance.............................. (.6) (.7) (.7)
Tax savings from foreign sales
corporation............................... (.2) (.5) (1.4)
Other, net.................................. 1.0 1.0
----- ----- -----
Effective income tax rate................. 38.0% 38.0% 38.5%
===== ===== =====
The income tax effects of temporary differences that comprise deferred tax
assets and liabilities at December 31 follow (in thousands):
1998 1997
--------- ---------
Current deferred tax assets (liabilities):
Accounts receivable......................................... $ 444 $ (180)
Inventory................................................... 141 (18)
Employee benefits........................................... 1,452 901
Other accrued expenses...................................... (57) 67
--------- ---------
Net current deferred tax asset............................ $ 1,980 $ 770
========= =========
Noncurrent deferred tax liabilities:
Property, plant and equipment............................... $ 9,681 $ 10,236
Employee benefits........................................... 1,013 212
--------- ---------
Net noncurrent deferred tax liability..................... $ 10,694 $ 10,448
========= =========
5. Stockholders' Equity
The Company effected a two-for-one stock split, distributed in the form of
a stock dividend on May 15, 1998, to stockholders of record on May 1, 1998. All
related amounts have been retroactively adjusted to reflect the stock split.
In 1998, the Company contributed 103,400 shares of its common stock, with
a fair value of $1.9 million, to the Stanley Retirement Plan.
During 1998, the Company's Board of Directors authorized the use of up to
$10 million to repurchase its common stock. The Company purchased 315,000 shares
for approximately $5.6 million in 1998.
STANLEY FURNITURE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. Stockholders' Equity (continued)
In 1997, the Company completed two transactions for the purchase of its
common stock owned by the ML-Lee Acquisition Fund, L.P. and certain of its
affiliates (the "Lee Fund"). In June 1997, 1.5 million shares were purchased for
an aggregate purchase price of $15.0 million and in November 1997, 826,402
shares were purchased for an aggregate purchase price of $10.3 million. Assuming
the shares were repurchased at the beginning of the year and financed entirely
by borrowings under the revolving credit facility at an assumed rate of 7.25%,
the pro forma diluted earnings per share would have been $1.39 for 1997.
During 1996, a secondary offering of 2,000,000 shares of the Company's
common stock owned by the Lee Fund was completed. In connection with the
offering, the Company incurred approximately $325,000 of expenses. The Company
also purchased 300,000 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.
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, 1998. 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):
1998 1997 1996
----- ----- -----
Weighted average shares outstanding
for basic calculation.................... 7,008 8,394 9,444
Add: Effect of stock options................ 955 884 446
----- ----- -----
Weighted average shares outstanding,
adjusted for diluted calculation.... 7,963 9,278 9,890
===== ===== =====
6. Employee Stock Plans
During 1994, the Company entered into a contractual agreement to issue
100,000 shares of common stock to the chief executive officer at $5.00 per share
(the market price on the date of the agreement) in exchange for a non-recourse
7.6% note receivable. One tenth of the principal amount plus accrued interest
was due each December 31 until 1998 and the remaining principal was 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 remained
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 $271,000, $285,000
and $308,000 for 1998, 1997 and 1996, respectively. At December 31, 1998, the
contractual agreement was completed and 100,000 shares were issued to the chief
executive officer.
STANLEY FURNITURE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. Employee Stock Plans (continued)
The Company's stock option plans provide for the granting of stock options
up to an aggregate of 1,400,000 shares of common stock to key employees. The
exercise price may not be less than the fair market value of the Company's
common stock on the grant date. Granted options vest 20% annually.
At December 31, 1998 and 1997, options to purchase 930,878 and 992,376
shares, were exercisable with a weighted-average exercise price of approximately
$5.00. At December 31, 1998, 702 shares were available for grant. Activity for
the three years ended December 31, 1998 follows:
Number Weighted-Average
of shares Exercise Price
---------- ----------------
Outstanding at January 1, 1996............................ 1,355,906 $ 4.80
Lapsed.................................................. (30,432) 4.90
Exercised............................................... (5,000) 4.88
Granted................................................. 40,000 7.39
----------
Outstanding at December 31, 1996.......................... 1,360,474 4.87
Lapsed.................................................. (18,000) 4.59
Exercised............................................... (33,804) 4.74
Granted................................................. 35,000 10.06
----------
Outstanding at December 31, 1997.......................... 1,343,670 4.95
Lapsed.................................................. (36,400) 7.43
Exercised............................................... (316,392) 4.95
Granted................................................. 43,000 17.75
----------
Outstanding at December 31, 1998.......................... 1,033,878 $ 5.47
==========
Options outstanding at December 31, 1998, include 953,878 shares with an
exercise price ranging from $4.25 to $6.06 and a weighted-average remaining
contractual life of approximately 6 years. The remaining options have an
exercise price ranging from $8.19 to $18.75 with a weighted-average remaining
contractual life of approximately 9 years.
The estimated per share weighted-average fair value of stock options
granted during 1998, 1997, and 1996 was $11.78, $7.25 and $4.00 respectively, on
the date of grant. A risk-free interest rate of 4.7%, 5.4% and 6.8% for 1998,
1997, and 1996 respectively, and a 50% volatility rate with an expected life of
10 years was assumed in estimating the fair value.
STANLEY FURNITURE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. Stock Options (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):
1998 1997 1996
-------------------- -------------------- --------------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
-------- ------- -------- ------- -------- ------
Net income.......................... $14,483 $14,175 $11,587 $11,326 $8,986 $8,754
Basic earnings per share............ 2.07 2.02 1.38 1.35 .95 .93
Diluted earnings per share.......... 1.82 1.79 1.25 1.23 .91 .90
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 1998, 1997 and 1996 totaled $1.5 million, $1.2 million and $856,000,
respectively.
Pension Plans
Benefits did not accrue under the Company's pension plans after 1995.
The financial status of the plans at December 31 follows (in thousands):
1998 1997
---------------------------- ----------------------------
Stanley Supple- Stanley Supple-
Retirement mental Retirement mental
Plan Plan Plan Plan
---------- ------- ---------- --------
Change in benefit obligation:
Beginning benefit obligation............... $17,146 $ 1,210 $15,970 $ 990
Interest cost.............................. 1,188 91 1,200 79
Actuarial loss............................. 924 160 1,472 157
Benefits paid.............................. (1,582) (17) (1,496) (16)
Settlement cost............................ 287
---------- ------- ---------- --------
Ending benefit obligation.............. 17,963 1,444 17,146 1,210
---------- ------- ---------- --------
Change in plan assets:
Beginning fair value of plan assets........ 17,170 16,116
Actual return on plan assets............... 1,201 1,726
Employer contributions..................... 2,239 824
Benefits paid.............................. (1,582) (1,496)
---------- ------- ---------- --------
Ending fair value of plan assets....... 19,028 17,170
---------- ------- ---------- --------
Funded status................................. 1,065 (1,444) 24 (1,210)
Unrecognized loss (gain)...................... 5,420 4,776 (5)
---------- ------- ---------- --------
Prepaid (accrued) pension costs........... $ 6,485 $(1,444) $ 4,800 $(1,215)
========== ======= ========== ========
STANLEY FURNITURE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. Employee Benefit Plans (continued)
At December 31, 1998, the Stanley Retirement Plan assets included Company
stock with a fair value of $1.9 million. These shares were contributed during
1998.
Components of net periodic pension cost follow (in thousands):
1998 1997 1996
-------- -------- --------
Interest cost.......................... $ 1,279 $ 1,279 $ 1,295
Expected return on plan assets......... (1,290) (1,216) (1,228)
Net amortization and deferral.......... 435 179 555
-------- -------- --------
Net periodic benefit cost........... 424 242 622
Settlement expense..................... 376
-------- -------- --------
Total expense....................... $ 800 $ 242 $ 622
======== ======== ========
The assumptions used as of December 31 to determine the plans' financial
status and pension cost were:
1998 1997 1996
---- ---- ----
Discount rate for funded status............. 6.65% 7.00% 7.75%
Discount rate for pension cost.............. 7.00% 7.75% 7.67%
Return on assets............................ 7.50% 7.50% 7.50%
STANLEY FURNITURE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. Employee Benefit Plans (continued)
Postretirement Benefits Other Than Pensions
The Company provides health care benefits to eligible retired employees
between the ages of 55 and 65 and provides life insurance benefits to eligible
retired employees from age 55 until death. The plan's financial status at
December 31 follows (in thousands):
1998 1997
-------- --------
Change in benefit obligation:
Beginning benefit obligation................................ $3,641 $3,603
Service cost................................................ 44 36
Interest cost............................................... 239 261
Actuarial gain.............................................. 93 183
Plan participants' contributions............................ 105 112
Benefits paid............................................... (554) (554)
-------- --------
Ending benefit obligation............................... 3,568 3,641
-------- --------
Change in plan assets:
Beginning fair value of plan assets.........................
Employer contributions...................................... 449 442
Plan participants' contributions............................ 105 112
Benefits paid............................................... (554) (554)
-------- --------
Ending fair value of plan assets........................
Funded status................................................. (3,568) (3,641)
Unrecognized net loss......................................... 946 895
Unrecognized transition obligation............................ 1,824 1,954
-------- --------
Accrued benefit cost........................................ $ (798) $ (792)
======== ========
Components of net periodic postretirement benefit cost were (in
thousands):
1998 1997 1996
------ ------ ------
Service cost............................................ $ 44 $ 36 $ 35
Interest cost........................................... 239 261 274
Amortization of transition obligation................... 130 131 130
Amortization and deferral............................... 41 29 33
------ ------ ------
Net periodic postretirement benefit cost.......... $ 454 $ 457 $ 472
====== ====== ======
STANLEY FURNITURE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. Employee Benefit Plans (continued)
The weighted-average discount rates used in determining the actuarial
present value of the projected benefit obligation were 6.65%, 7.00% and 7.75%
for 1998, 1997 and 1996, respectively. The rate of increase in future health
care benefit cost used in determining the obligation for 1998 and 1997 was 9%
gradually decreasing to 5.5% beginning in 2004, and for 1996 it was 10%
gradually decreasing to 5.5% beginning in 2003.
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, 1998, by approximately $100,000 and the
annual postretirement benefit cost by approximately $13,000.
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, 1998 and 1997, are included in
accrued salaries, wages and benefits and other long-term liabilities. The cash
surrender value, net of policy loans, is included in other assets.
8. Leases
The Company leases showroom space and certain other equipment. Rental
expenses charged to operations were $1.2 million, $1.1 million, and $970,000 in
1998, 1997 and 1996, respectively. Future minimum lease payments, net of
subleases, are approximately as follows: 1999 - $1.2 million; 2000 - $234,000;
2001 - $142,000; and thereafter - $68,000.
9. Discontinued Operations
In 1996, the Company was released from a lease obligation resulting from
the purchase and concurrent resale of certain facilities at a former division,
which ceased operations in 1994. Accordingly, the Company recorded an after tax
gain of $246,000, or $.03 per share, as a partial reversal of a previous
accrual, representing the final adjustment for the cost of the closure.
10. Related Party Transactions
During 1996 and 1997, the Company completed three purchases of its common
stock from the Lee Fund totaling 2.6 million shares for a total consideration of
$27.6 million. The Lee Fund sold to public investors its remaining ownership in
January 1998. The Company maintained a management agreement with an affiliate of
the Lee Fund which was terminated in November 1997. Fees paid pursuant to this
agreement amounted to $125,000 in 1997 and $241,000 in 1996.
STANLEY FURNITURE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. Supplemental Cash Flow Information
(in thousands)
1998 1997 1996
------- ------- -------
Net income............................................ $14,483 $11,587 $ 8,986
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation....................................... 5,328 5,000 4,774
Amortization....................................... 447 432 426
Other, net......................................... 555 340 463
Loss on disposal of fabric division................ (246)
Changes in assets and liabilities:
Accounts receivable.............................. (1,714) (4,331) (364)
Inventories...................................... (784) (5,491) (72)
Prepaid expenses and other current assets........ 315 (2,180) (1,347)
Accounts payable................................. 3,673 3,534 993
Accrued salaries, wages and benefits............. 2,125 (27) 2,965
Other accrued expenses........................... 1,760 (713) (479)
Deferred income taxes............................ (964) (109) (134)
Other assets..................................... 36 32 29
Other long-term liabilities...................... (237) 238 (682)
------- ------- -------
Net cash provided by operating activities...... $25,023 $ 8,312 $15,312
======= ======= =======
12. Quarterly Results of Operations (Unaudited)
(in thousands, except per share data)
1998 Quarters: First Second Third Fourth
----- ------ ----- ------
Net sales............................ $57,691 $61,863 $63,832 $63,985
Gross profit......................... 14,145 15,273 15,383 15,639
Net income........................... 3,270 3,580 3,706 3,927
Net income per share:
Basic............................. $ .48 $ .51 $ .52 $ .56
Diluted........................... .41 .45 .46 .50
1997 Quarters:
Net sales............................ $49,631 $49,469 $54,270 $58,534
Gross profit......................... 12,461 12,488 13,288 14,214
Net income........................... 2,772 2,756 2,935 3,125
Net income per share:
Basic............................. $ .30 $ .30 $ .38 $ .42
Diluted........................... .28 .28 .34 .38
STANLEY FURNITURE COMPANY, INC.
SCHEDULE II - VALUATION AND QUALIFYING
ACCOUNTS For each of the Three Years in the Period
Ended December 31, 1998
(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
1998
Doubtful receivables.. $1,116 $435 $388(a) $1,163
Discounts, returns,
and allowances...... 779 (36)(b) 743
------ ---- ---- ------
$1,895 $399 $388 $1,906
====== ==== ==== ======
1997
Doubtful receivables.. $1,332 $ 20 $236(a) $1,116
Discounts, returns,
and allowances....... 613 166(b) 779
------ ---- ---- ------
$1,945 $186 $236 $1,895
====== ==== ==== ======
1996
Doubtful receivables.. $ 600 $860 $128(a) $1,332
Discounts, returns,
and allowances....... 557 56(b) 613
------ ---- ---- ------
$1,157 $916 $128 $1,945
====== ==== ==== ======
- ------------------------------------
(a) Uncollectible receivables written off, net of recoveries.
(b) Represents net decrease in the reserve.
S-1