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EX-32.2 - EXHIBIT 32.2 - HG Holdings, Inc.exhibit32_2.htm
EX-32.1 - EXHIBIT 32.1 - HG Holdings, Inc.exhibit32_1.htm
EX-31.2 - EXHIBIT 31.2 - HG Holdings, Inc.exhibit31_2.htm
EX-31.1 - EXHIBIT 31.1 - HG Holdings, Inc.exhibit31_1.htm
EX-23.1 - EXHIBIT 23.1 - HG Holdings, Inc.exhibit23_1.htm
EX-21 - EXHIBIT 21 - HG Holdings, Inc.exhibit21.htm

 

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, 2016
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 incorporation or organization)         

(I.R.S. Employer Identification No.)

 

 

200 North Hamilton Street, No. 200, High Point, North Carolina, 27260

     (Address of principal executive offices, Zip Code)

 

Registrant’s telephone number, including area code:  (336) 884-7700

Securities registered pursuant to Section 12(b) of the Act:

 

                                     Title of each class                                                                       Name of each exchange on which registered

    Common Stock, par value $.02 per share                                                                 Nasdaq Stock Market

     Preferred Stock Purchase Rights                                                                             Nasdaq Stock Market

 

Securities registered pursuant to Section 12(g) of the Act:  None

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: Yes ( )  No (x)

 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act: Yes ( )  No (x)

 

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 whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.504 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).  Yes (X)  No ( )

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ( )

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act, (check one):

 

Large accelerated filer   ( )

Accelerated filer                  ( )

Non-accelerated filer     ( )

Smaller reporting company (x)

(Do not check if a smaller reporting company)

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ( ) No (x)

 

Aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant based on the closing price on June 30, 2016:  $30 million.

 

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock as of February 17, 2016:

 

                 Common Stock, par value $.02 per share                                    14.730,805                              

                                (Class of Common Stock)                                          Number of Shares

 

Documents incorporated by reference:  Portions of the Registrant’s Proxy Statement for our Annual Meeting of Stockholders scheduled for May 25, 2017 are incorporated by reference into Part III.

 

 


 

 

TABLE OF CONTENTS

 

Part I

Page

Item 1

Business

3

Item 1A

Risk Factors

6

Item 1B

Unresolved Staff Comments

6

Item 2

Properties

6

Item 3

Legal Proceedings

6

Item 4

Mine Safety Disclosures  

6

Part II

Item 5

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

7

Item 6

Selected Financial Data

8

Item 7

Management’s Discussion and Analysis of Financial Condition and Results of Operation

8

Item 7A

Quantitative and Qualitative Disclosures About Market Risk

13

Item 8

Financial Statements and Supplementary Data  

13

Item 9

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure  

14

Item 9A

Controls and Procedures

14

Item 9B

Other Information

14

Part III

Item 10

Directors, Executive Officers and Corporate Governance

14

Item 11

Executive Compensation

15

Item 12

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               

15

Item 13

Certain Relationships and Related Transactions, and Director Independence

15

Item 14

Principal Accounting Fees and Services

15

Part IV

Item 15

Exhibits, Financial Statement Schedules

16

Item 16

10-K Summary

18

Signatures

19

 

Index to Consolidated Financial Statements and Schedule 

F-1

 

2

 


 

Table of Contents

 

Stanley Furniture Company, Inc.

 

PART I

Item 1.     Business

 

General

 

Incorporated in Delaware in 1924, we are a leading design, marketing and distribution resource in the upscale segment of the wood residential furniture market.  We offer a diversified product line supported by an overseas sourcing model.  We market our brands through a network of brick-and-mortar furniture retailers, online retailers and interior designers worldwide.  We also market and sell directly to the consumer through an omni-channel approach to e-commerce. 

 

Products

 

Our products are marketed as fashionable wood residential home furnishings which differentiate from other products in the market through styling execution as well as wide selections for the entire home including dining, bedroom, living room, home office, home entertainment, accent items and nursery and youth furniture.  Our target consumer ranges from an affluent, discerning consumer utilizing the talents of an interior designer, to a more practical consumer driven to purchase by convenience, immediate gratification from stock availability or a particular retail event.  Regardless, we target a consumer who values the interior aesthetics of the home.

 

We believe that our products represent good value and that the quality and design of our furniture, combined with our broad selection and dependable service, differentiates our products in the marketplace.

 

We provide products in a variety of wood species and finishes.  Our products are designed to appeal to a broad range of consumer tastes in the upscale segment and cover all major style categories.

 

We continually design and develop new styles to replace those we discontinue and to expand our product lines into markets where opportunity for growth exists.  Our in-house product development process, which normally spans approximately one year but can be shorter or longer based upon the complexity of the concept, begins with identifying customer preferences and marketplace trends and conceptualizing product ideas. Company designers produce a variety of sketches from which prototype furniture pieces are built for review prior to full-scale engineering and production.  We consult with our marketing and operations personnel, core suppliers, independent sales representatives and selected customers throughout this process and introduce our new product designs primarily at international furniture markets in High Point, North Carolina and Las Vegas, Nevada, which are each held two times per year for a total of four markets. 

 

Marketing/Brands

 

We believe that the diversity of our product offerings enables us to anticipate and address changing consumer preferences and provide retailers a complete wood furniture resource in the upscale segment. Our products are marketed under the Stanley Furniture and Stone & Leigh brands, but also under a licensing agreement with Coastal Living® magazine.  We market our brand through a series of efforts targeted both to the wholesale trade and directly to the consumer. Coastal Living® is a registered trademark of Time Inc. Lifestyle Group and is used under license.

 

Distribution

 

We have developed a broad domestic and international customer base.  We sell our furniture mainly through independent sales representatives to a variety of wholesale customers such as owner-operated furniture stores, interior design & architecture professionals, decorators, smaller specialty retailers, regional furniture chains, buying clubs and e-commerce retailers.  We also market and sell directly to the consumer through an omni-channel approach to eCommerce. We believe this broad network reduces exposure to fluctuations in regional economic conditions, places our brand in as many venues as possible where the consumer may shop and allows us to capitalize on emerging channels of distribution.  We offer tailored marketing programs to address each specific distribution channel. Our independent sales representatives along with our customer care managers sell and support our products.

 

In 2016, we sold product to approximately 2,600 customers and recorded approximately 11% of our sales from international customers.  No single customer accounted for more than 10% of our sales in 2016 and no part of the business is dependent upon a single customer, the loss of which would have a material effect on our business.  The loss of several major customers could have a material impact on our business.

 

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Table of Contents

 

Overseas Sourcing

 

Our product is currently sourced from independently owned factories in Southeast Asia, primarily in Vietnam and Indonesia. We operate a support organization in each country to manage partner-vendor relationships. In early 2016, we established a strategic manufacturing alliance with one such source in Vietnam outside of Ho Chi Minh City: Starwood Manufacturing VN Corporation. This strategic alliance allowed for the utilization of a stand-alone, dedicated manufacturing facility. While the agreement did not obligate us to utilize the facility should certain market-driven and/or other factors not make this facility our best choice, it did establish clear goals for differentiation in overseas sourcing for our company related to production lead times and delivery and warehouse and logistics. Our intentions were to eventually transition substantially all of our overseas production to this facility in order to differentiate in the marketplace through several competitive operational advantages.

 

As the year progressed, both parties realized that the alliance would not be able to provide the production requirements previously agreed upon. The facility’s capacity was unable to keep up with growing demand for more recently introduced products. Throughout the year, we continued sourcing from the same small group of established vendors with which we have conducted business for several years. Over the course of the first half of 2017, we will be utilizing available capacity at these vendors’ factories to align overseas supply with the demand for our newer, more marketable products.  Although the facility making our products at Starwood will not be our only supplier, we plan for them to remain a vendor going forward.

 

Generally, we enter into standard purchase arrangements for finished goods inventory with our overseas vendors.  The terms of these arrangements are customary for our industry and do not contain any long-term purchase obligations. We generally negotiate firm pricing with our foreign suppliers in U.S. Dollars for a term of one year. We accept exposure to exchange rate movement after this period and do not use any derivative instruments to manage or hedge currency risk. We generally expect to recover any substantial price increases from these suppliers in the price we charge our own customers for these goods.

 

Logistics

 

We warehouse our products primarily in domestic warehouses with some warehousing abroad. We consider our facilities to be generally modern, well equipped and well maintained.  We use a small group of furniture specific transportation providers for delivery. While most of our products are delivered to retailers from our warehouses, we also ship directly to wholesale customers from Asia.  Our transportation vendor base includes white-glove delivery services which deliver directly from our domestic warehouses to the retail consumer.

 

Products are ordered from overseas suppliers based upon both actual and forecasted demand. Because long lead times are generally associated with overseas operations, we strive to maintain inventory levels that will service most of our wholesale customers’ orders within a maximum of 30 days from receipt of their order.  Our backlog of unshipped orders was $6.3 million at December 31, 2016 and $6.2 million at December 31, 2015.   

 

Competition

 

The furniture industry is highly competitive, fragmented, and includes a large number of competitors. The barriers to entry are very low, and there is little feasible intellectual property protection in our industry to prevent competitors from imitating furniture designs of another manufacturer. Very few of our competitors manufacture residential wood  furniture in the United States.

 

We compete with a host of varying business models within the industry including, but not limited to, former manufacturers who have adopted a strictly pass-through model from overseas vendor to wholesale customers; national lifestyle retailers who sell directly to the retail consumer through a vertical model; and overseas vendors who sell directly to wholesale customers. Some competitors have greater financial resources and often offer extensively advertised, highly promoted product. 

 

Competitive factors in the upscale segment of the industry include design, quality, service, selection and price. We believe the flexibility and relative influence we maintain with overseas vendors, the continued diversification of our distribution strategy, our long-standing customer relationships, our responsiveness to customers, our consistent support of high-quality and diverse product lines, the heritage of our brand and our experienced management team are all competitive advantages.

 

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Associates

 

At December 31, 2016, we employed approximately 70 associates domestically and 48 associates overseas, all of which are full-time employees. We consider our relationship with our associates to be very good. None of our associates are represented by a labor union. 

 

Trademarks

 

Our trade names represent many years of continued business, and we believe these names are well recognized and associated with excellent quality and styling in the furniture industry. We own a number of trademarks and design patents, none of which are considered to be material.

 

Governmental Regulations

 

We are subject to federal, state and local laws and regulations in the areas of safety, health and environmental protection.  Compliance with these laws and regulations has not in the past had any material effect on our earnings, capital expenditures or competitive position.  However, the impact of such compliance in the future cannot be predicted.  We believe that we are in material compliance with applicable federal, state and local safety, health and environmental regulations.

 

Forward-Looking Statements

 

Certain statements made in this report are not based on historical facts, but are forward-looking statements. These statements can be identified by the use of forward-looking terminology such as “believes,” “estimates,” “expects,” “may,” “will,” “should,” “could,” or “anticipates,” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. These statements reflect our 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 disruptions in foreign sourcing including those arising from supply or distribution disruptions or those arising from changes in political, economic and social conditions, as well as laws and regulations, in countries from which we source products, international trade policies of the United States and countries from which we source products, the inability to raise prices in response to inflation and increasing costs, lower sales due to worsening of current economic conditions, the cyclical nature of the furniture industry, business failures or loss of large customers, failure to anticipate or respond to changes in consumer tastes, fashions and perceived values in a timely manner, competition in the furniture industry, environmental, health, and safety  compliance costs, and failure or interruption of our information technology infrastructure. Any forward-looking statement speaks only as of the date of this filing and we undertake no obligation to update or revise any forward-looking statements, whether as a result of new developments or otherwise.

 

Available Information

 

Our principal Internet address is www.stanleyfurniture.com. We make available free of charge on this web site our annual, quarterly and current reports, and amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.

 

In addition, you may request a copy of these filings (excluding exhibits) at no cost by writing, telephoning, faxing or e-mailing us at the following address, telephone number, fax number or e-mail address:

 

Stanley Furniture Company, Inc.

200 North Hamilton Street, No. 200

High Point, North Carolina 27260

Attention: Ms. Anita W. Wimmer

Telephone: 336-884-7698, Fax: 336-884-7760

Or e-mail your request to: Investor@Stanleyfurniture.com

 

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Table of Contents

 

Item 1A.  Risk Factors

 

Not required to be provided by a smaller reporting company.

 

Item 1B.   Unresolved Staff Comments

 

None.

 

Item 2.      Properties

 

Set forth below is certain information with respect to our principal properties. We believe that all these properties are well maintained and in good condition. A majority of our distribution facilities are equipped with automatic sprinkler systems and modern fire protection equipment, which we believe are adequate. All facilities set forth below are active and operational.

 

Approximate

Facility Size

(Square Feet)

Owned

or

Leased

Location

Primary Use

Martinsville, VA

 

Distribution

 

300,000

 

Leased

High Point, NC

Showroom/Office

56,000

Leased

Las Vegas, NV

 

Showroom

 

11,500

 

Leased

Vietnam

Distribution

115,000(1)

Leased

Mocksville, NC

 

Distribution

 

50,000(1)

 

Leased

                   
          (1)   
Estimated space as of December 31, 2016.  Leased footage is a function of amount of product held with no minimum space commitments.

 

Item 3.     Legal Proceedings

 

In the normal course of business, we are involved in claims and lawsuits none of which currently, in our opinion, will have a material adverse effect on our consolidated financial statements.

 

Item 4.     Mine Safety Disclosures

 

Not Applicable.

 

Executive Officers of the Registrant

 

Our executive officers who are elected annually and their ages as of January 1, 2017 are as follows:

 

Name

Age

Position

Glenn Prillaman

 

45

 

President and Chief Executive Officer

Anita W. Wimmer

 

53

 

Vice President - Finance/Corporate Controller

 

 

Glenn Prillaman has been President and Chief Executive Officer since February 2010. Mr. Prillaman was President and Chief Operating Officer from August 2009 until February 2010.  He was our Executive Vice President – Marketing and Sales from September 2008 until August 2009.  He held the position of Senior Vice President – Marketing and Sales from September 2006 until September 2008 and was our Senior Vice President – Marketing/Sales – Young America® from August 2003 to September 2006.  Mr. Prillaman held various management positions in product development from June 1999 to August 2003. Prior to this Mr. Prillaman represented the company as a sales agent from 1993 to 1996.

 

Anita W. Wimmer has been principal financial and accounting officer and Secretary since August 2014 and has also served as Vice President – Finance/Corporate Controller since April 2014 and Assistant Secretary from April 1999 until August 2014.  She served as Vice President – Corporate Controller from April 2012 until April 2014 and as Vice President – Controller and Treasurer from April 2005 until April 2012.  Prior to this, Mrs. Wimmer held various financial positions since her employment with Stanley in March 1993.

 

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Table of Contents

 

PART II

 

Item 5.     Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Market Prices

 

Our 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.

 

2016

2015

High

Low

High

Low

First Quarter

$

2.88

 

$

2.25

 

$

3.64

 

$

2.71

Second Quarter

2.90

2.42

3.39

2.62

Third Quarter

 

3.65

 

 

1.66

 

 

3.31

 

 

2.75

Fourth Quarter

1.99

0.86

3.04

2.60

 

As of February 10, 2016, we have approximately 1,762 beneficial stockholders.  In August 2016, our Board of Directors authorized the payment of two special dividends totaling up to $1.50 per share. The initial special dividend of $1.25 per share was paid on August 19, 2016.  The second special dividend of $0.25 per share was paid on November 18, 2016.  Our revolving credit facility prohibits the declaration or payment of additional dividends.

 

Issuer Purchases of Equity Securities

 

The following table summarizes the repurchases of our equity securities during the 12-month period ended December 31, 2016:

 

Period

Total Number of Shares Purchased

Average Price Paid per Share

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)

Approximate Dollar Value of Shares that May Yet be Purchased under the Plans or Programs(1)

January 1 to February 6, 2016

-

-

3,981,271

February 7 to March 5, 2016

405,468(2)

2.53

400,000

2,969,271

March 6 to April 2, 2016

-

-

2,969,271

Three months ended April 2, 2016

405,468(2)

400,000

October 3 to November 5, 2016

-

-

2,969,271

November 6 to December 3, 2016

-

-

2,969,271

December 4 to December 31, 2016

1,394(2)

0.98

-

2,969,271

Three months ended December 31, 2016

1,394(2)

-

Twelve months ended December 31, 2016

406,862(2)

400,000

 

(1)

In July 2012, the Board of Directors authorized the purchase of up to $5.0 million of our common stock.  These repurchases may be made from time to time in the open market, in privately negotiated transactions, or otherwise, at prices the company deems appropriate.

(2)

Includes 5,468 shares and 1,394 shares tendered by recipients of restricted stock awards on March 1, 2016 and December 20, 2016, respectively, to satisfy tax withholding obligations on vested restricted stock.

 

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Equity Compensation Plan Information

 

  The following table summarizes our equity compensation plans as of December 31, 2016:

 

Number of shares

to be issued upon

exercise of

outstanding options,

warrants and rights

Weighted-average

exercise price

of outstanding

options, warrants

and rights

Number of shares

remaining available

for future issuance

under equity

compensation plans

Equity compensation plans approved by stockholders

1,129,582

 

$5.35

 

1,482,510

 

 

Item 6.      Selected Financial Data

 

Not required to be provided by a smaller reporting company.

 

Item 7.      Management’s Discussion and Analysis of Financial Condition and Results of Operation

 

Overview

 

We have taken a number of strategic steps over the last several years to reposition our company. We have closed domestic manufacturing facilities and moved to an overseas sourcing model. We discontinued an unprofitable product line, and we are in the process of launching a new one.  We implemented a new enterprise operating system, opened new trade showrooms and consolidated corporate offices.  We attempted to establish a strategic overseas manufacturing alliance that did not meet our immediate demands for product, so we have reverted back to a multi-sourcing model that is meeting our costs and quality requirements.  In addition, we have taken strategic steps to align our cost structure in response to lower sales volume related to these changes. 

 

In January 2015, we announced our re-entry into the nursery and youth product category with the launch of a new brand, Stone & Leigh.  New designs were introduced to the trade at the High Point Market in April 2015. Our experience developing and marketing nursery and youth product, our relationships with wholesale customers within the nursery and youth furniture segment and the minimal investment required for the launch should allow us to reenter this part of the market successfully. This product line began shipping in late 2015, but due to production delays, we did not realize the product line’s expected growth potential in 2016.  Once we begin to properly service this product line, we expect it to be a source of growth in 2017.

 

In addition to the consumer marketing efforts to launch our new Stone & Leigh youth and nursery furniture brand, we are beginning new consumer advertising and wholesale customer support plans to increase revenue and more effectively reach target consumers of the Stanley adult product lines. These efforts, along with more valuable product should produce growth for the adult furniture product lines under the Stanley and Coastal Living® brands.

 

In the first quarter of 2016, we made the decision to liquidate our twenty-seven corporate-owned life insurance policies with a $28.1 million cash surrender value. We received $22.4 million in proceeds, comprised of the cash surrender value net of outstanding loans and accrued interest.  The decision to liquidate was made after continued review of the financial stability of the issuer of the policies and the limited risk we were willing to accept. 

 

During 2016, the Board of Directors engaged Stephens Inc. as financial advisor to assist with its consideration of potential strategic and capital allocation opportunities.  As part of this strategic review, the Board decided to return excess cash to shareholders and that the company leverage its operating assets to fund fluctuations in working capital. As a result, the Board declared an initial special dividend of $1.25 per share which was distributed to shareholders in August 2016. A second dividend of $.25 per share was distributed to shareholders in November 2016 after a revolving credit facility was obtained to fund potential fluctuations in working capital.

 

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Results of Operations

 

The following table sets forth the percentage relationship to net sales of certain items included in the Consolidated Statements of Operations:

 

For the Years Ended

December 31,

2016

2015

Net sales

100.0

%

100.0

%

Cost of sales

81.1

 

76.1

 

Gross profit 

18.9

23.9

Selling, general and administrative expenses

31.4

 

22.1

 

Operating (loss) income

(12.5)

1.8

CDSOA income, net

2.4

9.2

Other income, net

.1

.1

Interest expense, net

.2

 

1.7

 

(Loss) income from continuing operations before income taxes

(10.2)

9.4

Income tax expense

1.6

 

.1

 

(Loss) income from continuing operations

(11.8)

9.3

Loss from discontinued operations

-

 

-

 

Net (loss) income

(11.8

)%

9.3

%

 

 

2016 Compared to 2015

 

Net sales decreased $12.8 million, or 22.3%, in 2016 compared to 2015. The decrease was due to lower unit volume and lower average selling prices. Lower unit volume was primarily a result of delays in shipping new product introduced in 2015 as the production ramp up of the new factory in Vietnam dedicated solely to our new product has taken longer than originally anticipated.  The initial orders of 2015 introductions are shipping and should begin to generate orders on retail floors in the near term. Lower average selling prices were the result of aggressive discounting to move older discontinued product. Additionally, inline product was discounted to achieve additional floor space to fuel future sales and generate cash. 

 

Gross profit decreased to $8.4 million, or 18.9% of net sales, from $13.7 million, or 23.9% of net sales, in 2015. The decrease in gross profit and gross margin was driven by lower sales volume, higher discounting, higher quality costs, and the decrease in cash surrender value growth on corporate owned life insurance policies.  Partially offsetting the impact of these items was lower ocean freight costs.  The prior year contained higher freight costs resulting from West Coast port issues.   

 

Selling, general and administrative expenses for 2016 were $14.0 million, or 31.4% of net sales, compared to $12.7 million, or 22.1% of net sales, in 2015.  Higher expenses in the current year were primarily due to the decline in cash surrender value growth of corporate-owned life insurance policies as we continued to pay down policy loans throughout 2015 and then the surrendering of these polices in the first quarter of 2016.  The decline in cash surrender value growth of corporate-owned life insurance policies, net of expenses, was $1.3 million in 2016. Approximately 60% of the cash surrender value growth was in selling, general and administrative expenses and the remaining 40% was in cost of goods sold.  The elimination of this cash surrender value growth was partially offset by the elimination of interest expense on the policy loans taken against the cash surrender value.  Selling, general and administrative expenses also increased as a result of fees related to the engagement of Stephens, Inc. to review strategic and capital allocation opportunities for the company, increased advertising cost and the cost related to adopting a stockholder’s right plan. The higher selling, general and administrative percentages in the current year were due to higher expenditures and lower sales impairing absorption for fixed costs.

 

As a result of the above, our operating loss was $5.6 million, or (12.5%) of net sales, in 2016, compared to operating income of $1.0 million, or 1.8% of net sales, in 2015.  

 

During the current year we received $1.1 million in funds under the CDSOA compared to $5.3 million in 2015.

 

Interest expense for 2016 decreased $846,000 from the comparable 2015 period. Interest expense is composed of interest on loans against cash surrender value of insurance policies used to fund our legacy deferred compensation plan. The decrease in expense was due to paying down these outstanding loans with excess cash starting in late 2015 and eventually paying them off when we liquidated our corporate-owned life insurance policies in the first quarter of 2016.

 

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Our 2016 effective tax rate was negative 15.8%. As indicated above, we surrendered our corporate-owned life insurance policies during the first quarter of 2016, which resulted in taxable income. The premiums paid and the growth in surrender value of these policies were excludable from taxable income over the life of these polices when held until death of the covered lives, but this growth, net of premiums paid, became taxable when we surrendered the policies. The aggregate impact of the surrender of these policies in the first quarter of this year was $24.0 million in taxable income. Most of this income was offset by net operating loss carryforwards. The income tax expense associated with the surrender of the corporate-owned life insurance policies was largely recognized during the first quarter when the policies were surrendered. The income tax expense recognized was the result of alternative minimum tax liability associated with the surrender of the corporate-owned life insurance policies and state income taxes. The alternative minimum tax limits our ability to offset all of our income with net operating loss carryforwards. Our 2015 effective tax rate expense was 1.4% and was primarily generated from the federal alternative minimum tax.

 

Financial Condition, Liquidity and Capital Resources

 

Sources of liquidity include cash on hand, revolving credit facility and cash generated from operations. While we believe that our business strategy will be successful, we cannot predict with certainty the ultimate impact on our revenues, operating costs and cash flow from operations. We expect cash on hand and borrowings under the revolving credit facility to be adequate for ongoing operational and capital expenditures over the next twelve months.  At December 31, 2016, we had $4.2 million in cash and $663,000 in restricted cash.

 

Working capital, excluding cash on hand and restricted cash, decreased during 2016 to $18.8 million from $21.2 million at December 31, 2015. The decrease was primarily the result of a decrease in accounts receivable as a result of our lower sales volumes, increase in accounts payable as our vendor terms improved and increase in deferred revenue. Partially offsetting these factors was an increase in inventories. Inventories have increased even as sales have decreased mainly due to the receipt of partial orders from overseas. As a result, customer orders cannot be shipped if all items are not received, resulting in higher inventories until these delinquent items have been received.     

 

Cash used by operating activities was $2.6 million in 2016 compared to cash generated from operations of $4.6 million in 2015. The cash use in 2016 was due to lower sales volumes, elimination of cash surrender value from company-owned life insurance policies, decrease in CDSOA proceeds and higher tax payments on the taxable income from the surrender of our corporate-owned life insurance policies. These were partially offset by lower freight costs and lower interest payments on loans against corporate owned life insurance policies. The cash provided by operations in 2015 was mostly from the receipt of $5.3 million in proceeds from the CDSOA, partially offset by $988,000 of interest paid on loans against corporate-owned life insurance policies.

 

Cash generated from investing activities in 2016 was due to $28.1 million in proceeds from the surrender of corporate-owned life insurance policies. Cash provided by investing activities of $516,000 in the prior year was the result of restricted cash decreasing due to a reduction in outstanding letters of credit required by our insurance company for potential workers compensation claims

 

Net cash used by financing activities in 2016 was $27.8 million compared to $5.5 million in 2015.  During the current year we used $21.3 million for a special dividend, $5.5 million to pay off the remaining outstanding life insurance policy loans in conjunction with our decision to surrender these corporate-owned life insurance policies and $1.0 million for the repurchase and retirement of 400,000 shares of our common stock.  In 2015 we used $5.5 million to pay-down life insurance policy loans.

 

We have a secured $6 million revolving credit facility with Wells Fargo Bank, National Association with an excess availability requirement of $2 million resulting in maximum borrowings of $4.0 million under the facility, subject to borrowing base eligibility requirements.  The credit facility matures in October 2018 and is secured by our accounts receivable, inventory and certain other assets. Borrowings under the credit facility bear interest at a variable per annum rate equal to the daily three month London Bank Interbank Offered Rate plus 3.5%. 

 

The credit facility contains covenants that, among other things limits our ability to incur certain types of debt or liens, pay dividends, enter into mergers and consolidations or use proceeds of borrowing for other than permitted uses. The credit facility also includes a covenant requiring us to maintain a minimum fixed charge ratio of not less than 1.10 to 1.0 with an initial compliance date at December 31, 2017. We were in compliance with all covenants under the credit facility as of December 31, 2016.

 

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Continued Dumping and Subsidy Offset Act (“CDSOA”)

 

The CDSOA provides for distribution of monies collected by U.S. Customs and Border Protection (“Customs”) for imports covered by antidumping duty orders entering the United States through September 30, 2007 to eligible domestic producers that supported a successful antidumping petition (“Supporting Producers”) for wooden bedroom furniture imported from China. Antidumping duties for merchandise entering the U.S. after September 30, 2007 have remained with the U.S. Treasury.

 

In November 2015 and 2016, Customs distributed $1.2 million and $3.3 million in collected duties that were available for distribution in 2015 and 2016, respectively. Our portion of these distributions were $412,000 and $1.1 million, respectively, representing 33.6% of the balance available for distribution in 2015 and 33.5% of the balance available for distribution in 2016. As of October 1, 2016, Customs reported that approximately $1.4 million in cash deposits or other security paid at the time of import on subject entries remains in a clearing account balance, which potentially may become available for distribution under the CDSOA to eligible domestic manufacturers in connection with the case involving bedroom furniture imported from China. The final amounts available for distribution may be higher or lower than the preliminary amounts reported in the clearing account due to liquidations, reliquidations, protests, and other events affecting entries.  Assuming that our percentage allocation in the future is the same as it was for the 2016 distribution (approximately 33.5% of the funds distributed) and that the $1.4 million collected by the government as of October 1, 2016 does not change, we could receive approximately $460,000 in CDSOA funds at some point in the future.

 

Due to the uncertainty of the administrative processes, we cannot provide assurances as to future amounts of additional CDSOA funds that ultimately will be received, if any, and we cannot predict when we may receive any additional CDSOA funds. 

 

New Accounting Pronouncements

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The amendments in ASU 2016-13 require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.  The amendment is effective for public entities for annual reporting periods beginning after December 15, 2019, however early application is permitted for reporting periods beginning after December 15, 2018. The Company does not anticipate ASU 2016-13 to have a material impact to the consolidated financial statements.

 

In February 2016, the FASB issued its final lease accounting standard, FASB Accounting Standard Codification ("ASC"), Leases (Topic 842) (“ASU 2016-02”), which requires lessees to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease).  The lease liability will be equal to the present value of lease payments and the right-of -use asset will be based on the lease liability, subject to adjustment such as for initial direct costs.  For income statement purposes, the new standard retains a dual model similar to ASC 840, requiring lases to be classified as either operating or finance.  For lessees, operating leases will result in straight-line expense (similar to current accounting by lessees for operating leases under ASC 840) while finance leases will result in a front-loaded expense pattern (similar to current accounting by lessees for capital leases under ASC 840).  Our leases as of December 31, 2016, principally relate to real estate leases for corporate office, showrooms and warehousing.  The new standard will be effective for the first quarter of our fiscal year ending December 31, 2019. Early adoption is permitted. We are evaluating the effect that ASU 2016-02 by reviewing all long-term leases and determining the potential impact it will have on our consolidated financial statements and related disclosures. The standard is to be applied under the modified retrospective method, with elective reliefs, which requires application of the new guidance for all periods presented.

 

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). The amendments in ASU 2016-09 simplify several aspects of the accounting for share-based payment transactions. The new guidance requires that excess tax benefits (which represent the excess of actual tax benefits receive at the date of vesting or settlement over the benefits recognized over the vesting period or upon issuance of share-based payments) be recorded in the income statement as a reduction of income or income taxes when the awards vest or are settled. The new guidance also requires excess tax benefits to be classified as an operating activity in the statement of cash flows rather than as a financing activity.  The new standard will be effective for the first quarter of our fiscal year ending December 31, 2017. The adoption of this new standard will reduce our reported income taxes and will increase cash flows from operating activities; however, the amounts of that reduction/increase is dependent upon the underlying vesting or exercise activity and related future stock prices.

 

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In August 2016, FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230).  The guidance is intended to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This standard will be effective for the first quarter of our fiscal year ending December 31, 2018.  Early adoption is permitted, provided all amendments are adopted in the same period. In November 2016, FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash.  We have reviewed the standard and determined that our statement of cash flows will include changes in restricted cash with related disclosures. The guidance requires application using a retrospective transition method.  We do not anticipate ASU 2016-15 or ASU 2016-18 to have a material impact to our consolidated financial statements.

 

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (“ASU 2015-11”). The amendments in ASU 2015-11 require an entity to measure in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonable predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using last-in, first-out (“LIFO”) or the retail inventory method. The amendments do not apply to LIFO or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (“FIFO”) or average cost.  The amendment is effective for public entities for fiscal years beginning after December 15, 2016 and should be applied prospectively, however early adoption is permitted. The Company does not anticipate ASU 2015-11 to have a material impact to the consolidated financial statements.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606).  This standard is intended to improve, and converge with international standards, the financial reporting requirements for revenue from contracts with customers.  The new standard will be effective for the first quarter of our fiscal year ending December 31, 2018.  Early adoption is permitted but we do not expect to early adopt this new accounting pronouncement.  In preparation for this new standard, we are identifying all forms of agreements with our customers and will begin to evaluate the provisions in such agreements in light of the five-step model specified by the new guidance.  The five-step model includes: 1) determination of whether a contract – an agreement between two or more parties that creates legally enforceable rights and obligations exists; 2) identification of the performance obligations in the contract; 3) determination of the transaction price; 4) allocation of the transaction price to the performance obligations in the contract; and 5) recognition of revenue when (or as) the performance obligation is satisfied.  We are also evaluating the impact of the new standard on certain common practices currently employed by us and others in our industry, such as co-operative advertising, pricing allowances and consumer coupons.  We are in the initial phases and have not yet determined the impact of the new standard on our financial statements or whether we will adopt on a full or modified retrospective basis in the first quarter of our fiscal year ending December 31, 2018.

 

Critical Accounting Policies

 

We have chosen accounting policies that are necessary to accurately and fairly report our operational and financial position.  Below are the critical accounting policies that involve the most significant judgments and estimates used in the preparation of our consolidated financial statements.

 

            Revenue Recognition - Sales are recognized when title and risk of loss pass to the customer, which typically occurs at the time of shipment.  In some cases, however, title does not pass until the shipment is delivered to the customer. Revenue includes amounts billed to customers for shipping.  Provisions are made at the time revenue is recognized for estimated product returns and for incentives that may be offered to customers. Amounts collected in advance of shipment are reflected as deferred revenue on the consolidated balance sheet and then recognized as revenue as the risk of loss passes to the customer.

 

            Allowance for doubtful accounts – We maintain an allowance for doubtful accounts for estimated losses resulting from the failure of our customers to make required payments.  We perform ongoing credit evaluations of our customers and monitor their payment patterns.  Should the financial condition of our customers deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required which would reduce our earnings.

 

Inventory valuation – Inventory is valued at the lower of cost or market.  Cost for all inventories is determined using the first-in, first-out (FIFO) method.  We evaluate our inventory to determine excess or slow moving items based on current order activity and projections of future demand.  For those items identified, we estimate our market value based on current trends.  Those items having a market value less than cost are written down to their market value. If we fail to forecast demand accurately, we could be required to write off additional non-saleable inventory, which would also reduce our earnings.

 

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Deferred taxes - We recognize deferred tax assets and liabilities based on the estimated future tax effects of differences between the financial statements and the tax basis of assets and liabilities given the enacted tax laws. We evaluate the need for a deferred tax asset valuation allowance by assessing whether it is more likely than not that the company will realize its deferred tax assets in the future. The assessment of whether or not a valuation allowance is required often requires significant judgment, including the forecast of future taxable income. Adjustments to the deferred tax valuation allowance are made to earnings in the period when such assessment is made.

 

In preparation of our consolidated financial statements, we exercise judgment in estimating the potential exposure to unresolved tax matters and apply a more likely than not criteria approach for recording tax benefits related to uncertain tax positions. While actual results could vary, we believe we have adequate tax accruals with respect to the ultimate outcome of such unresolved tax matters. 

 

Long-lived assets – Property, plant and equipment is reviewed for possible impairment when events indicate that the carrying amount of an asset may not be recoverable. Assumptions and estimates used in the evaluation of impairment may affect the carrying value of long-lived assets, which could result in impairment charges in future periods that would lower our earnings. Our depreciation policy reflects judgments on the estimated remaining useful lives of assets. 

 

Accruals for self-insurance reserves – Accruals for self-insurance reserves (including workers’ compensation and employee medical) are determined based on a number of assumptions and factors, including historical payment trends and claims history, actuarial assumptions and current and estimated future economic conditions. These estimated liabilities are not discounted. If actual trends differ from these estimates, the financial results could be impacted. Historical trends have not differed materially from these estimates.

 

Actuarially valued benefit accruals and expenses – We maintain three actuarially valued benefit plans. These are our deferred compensation plan, our supplemental employee retirement plan and our postretirement health care benefits program. The liability for these programs and the majority of their annual expense are developed from actuarial valuations. Inherent in these valuations are key assumptions, including discount rates and mortality projections, which are usually updated on an annual basis near the beginning of each year.  We are required to consider current market conditions, including changes in interest rates in making these assumptions. Changes in projected liability and expense may occur in the future due to changes in these assumptions. The key assumptions used in developing the projected liabilities and expenses associated with the plans are outlined in Note 7 of the consolidated financial statements.

 

Stock-Based Compensation - We record share-based payment awards at fair value on the grant date of the awards, based on the estimated number of awards that are expected to vest, over the vesting period. The fair value of stock options was determined using the Black-Scholes option-pricing model. The fair value of the restricted stock awards was based on the closing price of the Company’s common stock on the date of the grant. For awards with performance conditions, we recognize compensation cost over the expected period to achieve the performance conditions, provided achievement of the performance conditions are deemed probable.

 

Off-Balance Sheet Arrangements

 

We do not have transactions or relationships with “special purpose” entities, and we do not have any off-balance sheet financing other than normal operating leases primarily for warehousing, showroom and office space, and certain technology equipment.

 

Item 7A.   Quantitative and Qualitative Disclosures about Market Risk

 

Not required to be provided by a smaller reporting company.

 

Item 8.      Financial Statements and Supplementary Data

 

The consolidated financial statements and schedule listed in items 15(a) (1) and (a) (2) hereof are incorporated herein by reference and are filed as part of this report.

 

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Item 9.      Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None.

 

Item 9A.   Controls and Procedures

 

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures 

 

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act).  Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report.

 

Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f).  Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control – Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2016.

 

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting that occurred during the fourth quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

Item 9B.   Other Information

 

None.

 

PART III

 

Item 10.    Directors, Executive Officers and Corporate Governance 

 

Information related to our directors is set forth under the caption “Election of Directors” of our proxy statement (the “2017 Proxy Statement”) for our annual meeting of shareholders scheduled for May 25, 2017. Such information is incorporated herein by reference.

 

Information relating to compliance with section 16(a) of the Exchange Act is set forth under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” of our 2017 Proxy Statement and is incorporated herein by reference.

 

Information relating to the Audit Committee and Board of Directors’ determinations concerning whether a member of the Audit Committee of the Board is a “financial expert” as that term is defined under Item 407(d) (5) of Regulation S-K is set forth under the caption “Board and Board Committee Information” of our 2017 Proxy Statement and is incorporated herein by reference.

 

Information concerning our executive officers is included in Part I of this report under the caption “Executive Officers of the Registrant.”

 

We have adopted a code of ethics that applies to our associates, including the principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions.  Our code of ethics is posted on our website at www.stanleyfurniture.com. Amendments to and waivers from our code of ethics will be posted to our website when permitted by applicable SEC and NASDAQ rules and regulations.

 

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Item 11.            Executive Compensation

 

Information relating to our executive compensation is set forth under the caption “Executive Compensation” of our 2017 Proxy Statement. Such information is incorporated herein by reference.

 

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

Our information relating to this item is set forth under the caption “Security Ownership of Certain Beneficial Owners and Management” of our 2017 Proxy Statement. Such information is incorporated herein by reference.

 

Information concerning our equity compensation plan is included in Part II of this report under the caption “Equity Compensation Plan Information.”

 

Item 13.    Certain Relationships and Related Transactions, and Director Independence

 

Our information relating to this item is set forth under the captions “Corporate Governance – Review of Transactions with Related Persons” and “Corporate Governance - Board and Board Committee Information” of our 2017 Proxy Statement. Such information is incorporated herein by reference.

 

Item 14.    Principal Accounting Fees and Services

 

Our information relating to this item is set forth under the caption “Independent Public Auditors” of our 2017 Proxy Statement. Such information is incorporated herein by reference.

 

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PART IV

 

Item 15.    Exhibits, Financial Statement Schedules

 

(a)

Documents filed as a part of this Report:

(1)

The following consolidated financial statements are included in this report on Form 10-K:

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2016 and 2015

 

Consolidated Statements of Operations for each of the two years in the period ended December 31, 2016

 

Consolidated Statements of Comprehensive (Loss) Income for each of the two years ended in the period ended December 31, 2016

 

Consolidated Statements of Changes in Stockholders’ Equity for each of the two years in the period ended December 31, 2016

 

Consolidated Statements of Cash Flows for each of the two years in the period ended December 31, 2016

 

Notes to Consolidated Financial Statements

 

(2)

Financial Statement Schedule:

Schedule II – Valuation and Qualifying Accounts for each of the two years in the period ended December 31, 2016

(b)

Exhibits:

3.1

The Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 10-Q (Commission File No. 0-14938) for the quarter ended July 2, 2005).

3.2

By-laws of the Registrant as amended (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 8-K (Commission File No. 0-14938) filed December 11, 2015).

3.3

Certificate of Designation of Series A Participating Preferred Stock of Stanley Furniture Company, Inc. (incorporated by reference to Exhibit 3.1 to Registrant’s Form 8-K (Commission Rule No. 0-14938) filed December 6, 2016).

4.1

The Certificate of Incorporation, By-laws and Certificate of Designation of Series A Participating Preferred Stock of the Registrant as currently in effect (incorporated by reference to Exhibits 3.1, 3.2 and 3.3 hereto).

4.2

Rights Agreement, dated as of December 5, 2016, between Stanley Furniture Company, Inc. and Continental Stock Transfer & Trust Company, as Rights Agent (incorporated by reference to Exhibit 4.1 to Registrant’s Form 8-K (Commission Rule No. 0-14938) filed December 6, 2016).

4.3

Amendment No. 1, dated as of January 30, 2017, to the Rights Agreement, dated as of December 5, 2016, between Stanley Furniture Company, Inc. and Continental Stock Transfer & Trust Company, as Rights Agent (incorporated by reference to Exhibit 4.1 to Registrant’s Form 8-K (Commission Rule No. 0-14938) filed January 30, 2017).

 

10.1

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).(1)

10.2

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).(1)

10.3

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 10.1 to the Registrant’s Form 8-K (Commission File No. 0-14938), filed December 10, 2014.(1)

10.4

2000 Incentive Compensation Plan (incorporated by reference to Exhibit A to the Registrant’s Proxy  Statement (Commission File No. 0-14938) for the special meeting of stockholders held on August 24, 2000).(1)

10.5

Second Amendment to Supplemental Retirement Plan of Stanley Furniture Company, Inc. effective January 1, 2002 (incorporated by reference to Exhibit 10.33 to the Registrant’s Form 10-K (Commission File No. 0-14938) for the year ended December 31, 2002).(1)

10.6

Form of Stock Option Award under 2000 Incentive Plan (ISO) (incorporated by reference to Exhibit 10.23 to the Registrant’s Form 10-K (Commission File No. 0-14938) for the year ended December 31, 2004).(1)

10.7

Form of Stock Option Award under 2000 Incentive Plan (ISO/NSO) (incorporated by reference to Exhibit 10.24 to the Registrant’s Form 10-K (Commission File No. 0-14938) for the year ended December 31, 2004).(1)

10.8

Form of Stock Option Award under 2000 Incentive Plan (Directors) (incorporated by reference to Exhibit 10.25 to the Registrant’s Form 10-K (Commission File No. 0-14938) for the year ended December 31, 2004).(1)

10.9

Form of Indemnification Agreement between the Registrant and each of its Directors (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K (Commission File No. 0-14938) filed on September 25, 2008).

10.10

Change in Control Protection Agreement, originally dated December 11, 2009, by and between Stanley Furniture Company, Inc. and Glenn Prillaman and amended and restated effective December 11, 2015 (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K (commission File No. 0-14938) filed on December 11, 2015).(1)

10.11

Change in Control Protection Agreement, dated December 11, 2015, by and between Stanley Furniture Company, Inc. and Anita Wimmer (incorporated by reference to Exhibit 10.2 to the Registrant’s Form 8-K (commission File No. 0-14938) filed on December 11, 2015).(1)

10.12

2008 Incentive Compensation Plan (incorporated by reference to Exhibit A to the Registrant’s Proxy Statement (Commission File No. 0-14938) for the annual meeting of stockholders held on April 15, 2008).(1)

                     

                                                                

(1)

Management contract or compensatory plan

 

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10.13

Form of Stock Option Award under 2008 Incentive Plan (Officers) (incorporated by reference to Exhibit 10.21 to the Registrant’s Form 10-K (Commission File No. 0-14938) for the year ended December 31, 2008).(1)

10.14

Form of Stock Option Award under 2008 Incentive Plan (Directors) (incorporated by reference to Exhibit 10.22 to the Registrant’s Form 10-K (Commission File No. 0-14938) for the year ended December 31, 2008).(1)

10.15

Form of Restricted Stock Grant under 2008 Incentive Plan (Officers) (incorporated by reference to Exhibit 10.16 to the Registrant’s Form 10-K (Commission File No. 0-14938) for the year ended December 31, 2012.(1)

10.16

Form of Restricted Stock Award under 2008 Incentive Plan (Directors) (incorporated by reference to Exhibit 10.17 to the Registrant’s Form 10-K (Commission File No. 0-14938) for the year ended December 31, 2012).(1)

10.17

2012 Incentive Compensation Plan (incorporated by reference to Exhibit A to the Registrant’s Proxy Statement (Commission File No. 0-14938) for the annual meeting of stockholders held on April 18, 2012).(1)

10.18

Form of Stock Option Award under 2012 Incentive Plan (Officers) (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, 2012).(1)

10.19

Form of Restricted Stock Award under 2012 Incentive Plan (Officers) (time vesting) (incorporated by reference to Exhibit 10.20 to the Registrant’s Form 10-K (Commission File No. 0-14938) for the year ended December 31, 2012).(1)

10.20

Form of Restricted Stock Award under 2012 Incentive Plan (Directors) (incorporated by reference to Exhibit 10.21 to Registrant’s Form 10-K (Commission File No. 0-14938) for year ended December 31, 2014). (1)

10.21

Form of Restricted Stock Award under 2012 Incentive Plan (Officers) (time and performance vesting) (incorporated by reference to Exhibit 10.22 to Registrant’s Form 10-K (Commission File No. 0-14938) for year ended December 31, 2014).(1)

10.22

Form of Restricted Stock Award under 2012 Incentive Plan (Officers) (performance vesting) (incorporated by reference to Exhibit 10.23 to Registrant’s Form 10-K (Commission File No. 0-14938) for year ended December 31, 2014).(1)

10.23

Agreement dated February 12, 2015 by and among Stanley Furniture Company, Inc. and the entities and natural persons listed on Exhibit A thereto (incorporated by reference to Exhibit 99.1 to Registrant’s Form 8-K (Commission File No. 0-14938) filed February 12, 2015).

10.24

Agreement dated January 7, 2016 by and among Stanley Furniture Company, Inc. and the entities and natural persons listed on Exhibit A thereto (incorporated by reference to Exhibit 10.1 to Registrant’s Form 8-K (Commission File No. 0-14938) filed January 8, 2016).

10.25

Credit Agreement, dated as of October 25, 2016, by and between Stanley Furniture Company, Inc. and Well Fargo Bank, National Association (incorporated by reference to Exhibit 10.1 to Registrant’s Form 10-Q (Commission Rule No. 0-14938) for the quarter ended October 1, 2016).

 

10.26

Security Agreement, dated as of October 25, 2016, by and among Stanley Furniture Company, Inc., Stanley Furniture Company 2.0, LLC and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.2 to Registrant’s Form 10-Q (Commission Rule No. 0-14938) for the quarter ended October 1, 2016).

                        

                                                                      

(1)

Management contract or compensatory plan

 

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10.27

Amendment effective as of November 30, 2016 to Employment Agreement between Stanley Furniture Company, Inc. and Glenn Prillaman dated July 22, 2016 (incorporated by reference to Exhibit 10.1 to Registrant’s Form 8-K (Commission Rule No. 0-14938) filed December 2, 2016).(1)

10.28

Amendment effective as of November 30, 2016 to Change in Control Protection Agreement between Stanley Furniture Company, Inc. and Anita Wimmer effective as of December 11, 2015 (incorporated by reference to Exhibit 10.2 to Registrant’s Form 8-K (Commission Rule No. 0-14938) filed December 2, 2016).(1)

10.29

Agreement, dated as of January 30, 2017, by and among Stanley Furniture Company, Inc. and the entities and natural persons listed on Exhibit A thereto (incorporated by reference to Exhibit 10.1 to Registrant’s Form 8-K (Commission Rule No. 0-14938) filed January 30, 2017).

10.30

Amendment No. 1, dated as of January 30, 2017, to the Agreement, dated as of January 7, 2016, by and among Stanley Furniture Company, Inc. and the entities and natural persons listed on Exhibit A thereto (incorporated by reference to Exhibit 10.2 to Registrant’s Form 8-K (Commission Rule No. 0-14938) filed January 30, 2017).

21

List of Subsidiaries. (2)

23.1

Consent of BDO USA, LLP. (2)

31.1

Certification by Glenn Prillaman, our Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended. (2)

31.2

Certification by Anita W. Wimmer, our Principal Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended. (2)

32.1

Certification by Glenn Prillaman, our Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(3)

32.2

Certification by Anita W. Wimmer, our Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(3)

101

The following financial statements from the Company's Annual Report on Form 10-K for the year ended December 31, 2016, formatted in Extensible Business Reporting Language (“XBRL”): (i) consolidated balance sheets, (ii) consolidated statements of operations, (iii) condensed consolidated statements of comprehensive (loss) income, (iv) condensed consolidated statements of cash flows, (v) the notes to the consolidated financial statements, and (vi) document and entity information. (2)

                   

                                                                                                                                

(1)

Management contract or compensatory plan

(2)

Filed Herewith

(3)

Furnished Herewith

 

 

Item 16.   10-K Summary

 

None.

 

18


 

Table of Contents

 

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 22, 2017

By:

/s/Glenn Prillaman

Glenn Prillaman

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/John D. Lapey

Chairman and Director

February 22, 2017

(John D. “Ian” Lapey)

/s/Glenn Prillaman

President and Chief Executive Officer (Principal Executive Officer) and Director

February 22, 2017

(Glenn Prillaman)

/s/Anita W. Wimmer

Vice-President – Finance/Corporate Controller (Principal Financial and Accounting Officer)

February 22, 2017

(Anita W. Wimmer)

/s/Michael P. Haley

Director

February 22, 2017

(Michael P. Haley)

/s/T. Scott McIlhenny, Jr.

Director

February 22, 2017

(T. Scott McIlhenny, Jr.)

/s/Jeffrey S. Gilliam

Director

February 22, 2017

(Jeffrey S. Gilliam)

/s/Justyn R. Putnam

Director

February 22, 2017

(Justyn R. Putnam)

 

 

 

 

 

/s/Steven A. Hale

 

Director

 

February 22, 2017

(Steven A. Hale)

 

 

 

 

 

19



 

Table of Contents

 

STANLEY FURNITURE COMPANY, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2016

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

Page

Report of Independent Registered Public Accounting Firm  

F-2

Consolidated Financial Statements

Consolidated Balance Sheets as of December 31, 2016 and 2015

F-4

Consolidated Statements of Operations for each of the two years in the period ended December 31, 2016

F-5

Consolidated Statements of Comprehensive (Loss) Income for each of the two years in the period ended December 31, 2016  

F-6

Consolidated Statements of Changes in Stockholders' Equity for each of the two years in the period ended December 31, 2016

F-7

Consolidated Statements of Cash Flows for each of the two years in the period ended December 31, 2016

F-8

Notes to Consolidated Financial Statements  

F-9

Financial Statement Schedule

Schedule II – Valuation and Qualifying Accounts for each of the two years in the period ended December 31, 2016  

S-1

 

F-1


 


Table of Contents

Report of Independent Registered Public Accounting Firm

 

Board of Directors and Stockholders

Stanley Furniture Company, Inc.

High Point, North Carolina

We have audited the accompanying consolidated balance sheets of Stanley Furniture Company, Inc. as of December 31, 2016 and 2015 and the related consolidated statements of operations and comprehensive (loss) income, stockholders’ equity, and cash flows for the years ended December 31, 2016 and 2015. In connection with our audits of the financial statements, we have also audited the financial statement schedule listed in the accompanying index. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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, as well as evaluating the overall presentation of the financial statements and schedule.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Stanley Furniture Company, Inc. at December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.

Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

 

 

/s/ BDO USA, LLP

Raleigh, North Carolina

February 22, 2017

F-2


 

Table of Contents

 

STANLEY FURNITURE COMPANY, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

 

 

December 31,

2016

2015

ASSETS

 

 

 

 

 

Current assets:

Cash

$

4,212

 

$

6,497

Restricted cash

663

663

Accounts receivable, less allowances of $272 and $404

 

3,492

 

 

6,925

Inventory, net

22,951

20,934

Prepaid expenses and other current assets

 

729

 

 

959

Total current assets

32,047

35,978

 

 

 

 

 

 

Property, plant and equipment, net

1,606

1,787

Cash surrender value of life insurance policies, net

 

-

 

 

22,253

Other assets

 

2,868

 

3,128

Total assets

$

36,521

 

$

63,146

LIABILITIES

 

 

 

 

 

Current liabilities:

Accounts payable

$

5,674

 

$

5,441

Accrued salaries, wages and benefits

1,371

1,367

Deferred revenue

 

759

 

 

442

Other accrued expenses

 

593

 

334

Total current liabilities

 

8,397

 

 

7,584

Deferred compensation

 

4,219

 

 

4,301

Supplemental retirement plan

1,724

1,797

Other long-term liabilities

 

2,199

 

 

1,812

Total liabilities

 

16,539

 

15,494

 

 

 

 

 

 

Commitments and Contingencies (Footnote 10)

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

Common stock, $0.02 par value, 25,000,000 shares authorized,

 

 

 

 

 

14,730,805 and 14,906,831 shares issued and outstanding at December 31, 2016 and 2015, respectively

 

275

 

 

283

Capital in excess of par value

16,840

17,521

Retained earnings

 

5,129

 

 

32,023

Accumulated other comprehensive loss

 

(2,262)

 

(2,175)

Total stockholders’ equity

 

19,982

 

 

47,652

Total liabilities and stockholders’ equity

$

36,521

$

63,146

The accompanying notes are an integral part of the consolidated financial statements.

 

F-3


 

 

Table of Contents


STANLEY FURNITURE COMPANY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

 

 

For the Years Ended December 31,

 

2016

 

2015

Net sales

$

44,574 

 

$

57,364 

 

 

 

 

 

 

Cost of sales

 

36,160 

 

 

43,679 

 

 

 

 

 

 

 Gross profit  

 

8,414 

 

 

13,685 

 

 

 

 

 

 

Selling, general and administrative expenses

 

13,982 

 

 

12,661 

 

 

 

 

 

 

 Operating (loss) income

 

(5,568)

 

 

1,024 

 

 

 

 

 

 

Income from Continued Dumping and Subsidy Offset Act, net

 

1,103 

 

 

5,308 

Other income, net

 

26 

 

 

42 

Interest expense, net

 

101 

 

 

947 

 

 

 

 

 

 

(Loss) income from continuing operations before income taxes

 

(4,540)

 

 

5,427 

 

 

 

 

 

 

Income tax expense

 

718 

 

 

76 

 

 

 

 

 

 

 Net (loss) income from continuing operations

 

(5,258)

 

 

5,351 

 Net (loss) from discontinued operations

 

 

 

(11)

 

 

 

 

 

 

 Net (loss) income

$

(5,258)

 

$

5,340 

 

 

 

 

 

 

Basic (loss) income per share:

 

 

 

 

 

   (Loss) income from continuing operations

$

(0.37)

 

$

0.37 

   (Loss) from discontinued operations

 

 

 

        Net (loss) income

$

(0.37)

 

$

0.37 

 

 

 

 

 

 

Diluted (loss) income per share:

 

 

 

 

 

   (Loss) income from continuing operations

$

(0.37)

 

$

0.37 

   (Loss) from discontinued operations

 

 

 

        Net (loss) income

$

(0.37)

 

$

0.37 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

   Basic

 

14,139 

 

 

14,273 

   Diluted

 

14,139 


 

14,542 

 

 

 

 

 

 

Dividend per share:

 

 

 

 

 

   Special dividend

$

1.50 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-4


 

Table of Contents

STANLEY FURNITURE COMPANY, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

 (in thousands)

 

 For the Years Ended
 December 31,

2016

 2015

Net (loss) income

$

(5,258)

 

$

5,340

Other comprehensive (loss) income:

Amortization of prior service credit

 

-

 

 

92

Actuarial loss (gain)

174

(497)

Amortization of actuarial loss

 

(87)

 

 

(117)

Adjustments to net periodic postretirement loss (benefit)

 

87

 

(522)

Comprehensive (loss) income

$

(5,345)

 

$

5,862

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-5


 

Table of Contents

 

STANLEY FURNITURE COMPANY, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For each of the two years in the period ended December 31, 2016

(in thousands)

Accumulated

Capital in

Other

Common Stock

Excess of

Retained

Comprehensive

Shares

 

Amount

 Par Value

 Earnings

 (Loss) Income

 Total

Balance at December 31, 2014

14,780

 

 

283

 

 

16,710

 

 

26,683

 

 

(2,697)

 

 

40,979

Net income

-

 

 

-

 

 

-

 

 

5,340

 

 

-

 

 

5,340

Other comprehensive income

-

-

-

-

522

522

Restricted stock grants

229

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

Restricted stock forfeited

(98)

-

-

-

-

-

Stock purchase and retirement for tax withholdings on

    vesting of restricted awards

(4)

 

 

-

 

 

(13)

 

 

-

 

 

-

 

 

(13)

Stock-based compensation

-

 

-

 

824

 

-

 

-

 

824

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2015

14,907

$

283

$

17,521

$

32,023

$

(2,175)

$

47,652

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss 

-

-

-

(5,258)

-

(5,258)

Other comprehensive loss

-

 

 

-

 

 

-

 

 

-

 

 

(87)

 

 

(87)

Special dividends declared

-

-

-

(21,636)

-

(21,636)

Restricted stock grants

231

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

Stock purchase and retirement

(400)

(8)

(1,004)

-

-

(1,012)

Stock purchase and retirement for tax withholdings

    on vesting of restricted awards

(7)

 

 

-

 

 

(15)

 

 

-

 

 

-

 

 

(15)

Stock-based compensation

-

 

-

 

338

 

-

 

-

 

338

Balance at December 31, 2016

14,731

 

$

275

 

$

16,840

 

$

5,129

 

$

(2,262)

 

$

19,982

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-6


 

Table of Contents

 

STANLEY FURNITURE COMPANY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

For the Years Ended

December 31,

2016

 2015

Cash flows from operating activities:

 

 

 

 

 

Cash received from customers

$

48,248

$

56,271

Cash paid to suppliers and employees

 

(51,243)

 

 

(55,898)

Cash from Continued Dumping and Subsidy Offset Act, net

1,103

5,308

Interest paid, net

 

(191)

 

 

(987)

Income tax payments

 

(510)

 

(105)

Net cash (used in) provided by operating activities

 

(2,593)

 

 

4,589

Cash flows from investing activities:

 

 

 

 

 

Proceeds from surrender of corporate-owned life insurance policies

28,139

-

Decrease in restricted cash

 

-

 

 

527

Proceeds from sale of assets

-

4

Purchase of other assets

 

(14)

 

 

(15)

Net cash provided by investing activities

 

28,125

 

516

 

 

 

 

 

 

Cash flows from financing activities:

Stock purchase and retirement for tax withholdings on vesting of restricted awards

 

(15)

 

 

(13)

Payments on insurance policy loans

(5,495)

(5,461)

Payment of dividends

 

(21,282)

 

 

-

Purchase and retirement of common stock

 

(1,012)

 

-

Net cash used by financing activities

 

(27,804)

 

 

(5,474)

Cash flows from discontinued operations:

 

 

 

 

 

Cash (used in) provided by operating activities

 

(13)

 

1,282

Net cash (used in) provided by discontinued operations

 

(13)

 

 

1,282

Net (decrease) increase cash

 

(2,285)

 

 

913

Cash at beginning of year

 

6,497

 

5,584

    Cash at end of year

$

4,212

 

$

6,497

Reconciliation of net (loss) income to net cash (used in) provided by operating activities:

 

 

 

 

 

Net (loss) income

$

(5,258)

 

$

5,340

Loss from discontinued operations

-

11

Depreciation

 

181

 

 

185

Amortization

289

285

Stock-based compensation

 

338

 

 

824

Other, net

-

14

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable

3,433

(1,072)

Inventories

 

(2,017)

 

 

3,282

Prepaid expenses and other assets

(176)

(1,747)

Accounts payable

 

233

 

 

(542)

Accrued salaries, wages and benefits

(250)

177

Other accrued expenses

 

235

 

 

(1,109)

Other long-term liabilities

 

399

 

(1,059)

Net cash (used in) provided by operating activities

$

(2,593)

 

$

4,589

The accompanying notes are an integral part of the consolidated financial statements.

 

F-7


 

 

Table of Contents


STANLEY FURNITURE COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.       Summary of Significant Accounting Policies

 

Organization and Basis of Presentation

The consolidated financial statements include Stanley Furniture Company, Inc. and our wholly owned subsidiaries.  All significant inter-company accounts and transactions have been eliminated.  We are a leading design, marketing and sourcing resource in the middle-to-upscale segment of the wood furniture residential market.

 

For financial reporting purposes, we operate in one reportable segment where substantially all revenues are from the sale of residential wood furniture products.

 

Cash

We consider all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

 

Restricted Cash

Restricted cash includes collateral deposits required under the Company’s line of credit agreement, to guarantee the Company’s workers compensation insurance policy.  The restricted cash balance is expected to mature over the next twelve months.

 

Accounts Receivable

Substantially all of our accounts receivable are due from retailers and dealers that sell residential home furnishings, which consist of a large number of entities with a broad geographic dispersion. We continually perform credit evaluations of our customers and generally do not require collateral. Once we have determined the receivable is uncollectible, it is charged against the allowance for doubtful accounts.  In the event a receivable is determined to be potentially uncollectible, we engage collection agencies to attempt to collect amounts owed to us after all internal collection attempts have ended.

 

Revenue Recognition

Sales are recognized when title and risk of loss pass to the customer, which typically occurs at the time of shipment.  In some cases, however, title does not pass until the shipment is delivered to the customer. Revenue includes amounts billed to customers for shipping.  Provisions are made at the time revenue is recognized for estimated product returns and for incentives that may be offered to customers. Amounts collected in advance of shipment are reflected as deferred revenue on the consolidated balance sheet and then recognized as revenue as the risk of loss passes to the customer.

 

Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market. Cost is determined based solely on those charges incurred in the acquisition and production of the related inventory (i.e. material, freight, labor and overhead). Management regularly examines inventory to determine if there are indicators that the carrying value exceeds its net realizable value. Experience has shown that the most significant indicators of the need for inventory markdowns are the age of the inventory and the planned discontinuance of certain items. As a result, we provide inventory valuation write-downs based upon established percentages based on age of the inventory and planned discontinuance of certain items. As of December 31, 2016 and 2015, we had approximately $23.0 million and $20.9 million of finished goods, net of a valuation allowance of $1.3 million and $1.4 million, respectively.

 

Property, Plant and Equipment

Depreciation of property, plant and equipment is computed using the straight-line method based upon the estimated useful lives. Depreciation expense is charged to cost of sales or selling, general and administrative expenses based on the nature of the asset.  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. Assets are reviewed for possible impairment when events indicate that the carrying amount of an asset may not be recoverable. Assumptions and estimates used in the evaluation of impairment may affect the carrying value of property, plant and equipment, which could result in impairment charges in future periods. Our depreciation policy reflects judgments on the estimated useful lives of assets.

 

F-8


 

 

Table of Contents

 

STANLEY FURNITURE COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

1.         Summary of Significant Accounting Policies (continued)

 

Capitalized Software Cost

We amortize purchased computer software costs using the straight-line method over the estimated economic lives of the related products. Unamortized cost at December 31, 2016 and 2015 was approximately $2.4 million and $2.7 million, respectively, and is included in other assets.

 

Cash Surrender Value of Life Insurance Policies

At December 31, 2015, we owned 27 life insurance policies as a funding arrangement for our deferred compensation plan discussed in Note 7. These corporate-owned policies had a net cash surrender value of $22.3 million.  We had $5.5 million in loans and accrued interest outstanding against the cash surrender value. The growth in cash surrender value of these corporate-owned policies, net of related premiums and plan administrative costs, is included in operating income.  Interest on the insurance policy loans is recorded as interest expense below operating income. In the first quarter of 2016, we liquidated the corporate-owned life insurance policies with cash surrender value of $28.1 million. We received $22.4 million in proceeds, net of outstanding loans and accrued interest.

 

Actuarially valued benefit accruals and expenses

We maintain three actuarially valued benefit plans. These are our deferred compensation plan, our supplemental employee retirement plan and our postretirement health care benefits program. The liability for these programs and the majority of their annual expense are developed from actuarial valuations.  Inherent in these valuations are key assumptions, including discount rates and mortality projections, which are usually updated on an annual basis near the beginning of each year.  We are required to consider current market conditions, including changes in interest rates in making these assumptions. Changes in projected liability and expense may occur in the future due to changes in these assumptions. The key assumptions used in developing the projected liabilities and expenses associated with the plans are outlined in Note 7 of the consolidated financial statements.

 

Income Taxes

Deferred income taxes are determined based on the difference between the consolidated financial statement and income tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Deferred tax expense represents the change in the deferred tax asset/liability balance. Income tax credits are reported as a reduction of income tax expense in the year in which the credits are generated.  A valuation allowance is recorded when it is more likely than not that a deferred tax asset will not be realized.  Interest and penalties on uncertain tax positions are recorded as income tax expense.

 

Fair Value of Financial Instruments

Accounting for fair value measurements requires disclosure of the level within the fair value hierarchy in which fair value measurements in their entirety fall, segregating fair value measurements using quoted prices in active markets for identical assets or liabilities (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3).  The fair value of receivables and payables approximate the carrying amount because of the short maturity of these instruments.

 

Earnings per Common Share

Basic earnings per share is computed based on the weighted average number of common shares outstanding. Diluted earnings per share includes any dilutive effect of outstanding stock options and restricted stock calculated using the treasury stock method.

 

F-9


 

 

Table of Contents

 

STANLEY FURNITURE COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

1.         Summary of Significant Accounting Policies (continued)

 

Stock-Based Compensation

We record share-based payment awards at fair value on the grant date of the awards, based on the estimated number of awards that are expected to vest, over the vesting period.  The fair value of stock options was determined using the Black-Scholes option-pricing model.  The fair value of the restricted stock awards was based on the closing price of the Company’s common stock on the date of the grant.  For awards with performance conditions, we recognize compensation cost over the expected period to achieve the performance conditions, provided achievement of the performance conditions are deemed probable.

 

Use of Estimates

The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.  Changes in such estimates may affect amounts reported in future periods.

                                              

Reclassifications

As of December 31, 2015, the Company reclassified approximately $442,000 of amounts collected in advance of shipment from accounts payable to deferred revenue.  As both accounts payable and deferred revenue are presented as current liabilities, management does not believe there to be a material impact on the consolidated financial statements taken as a whole.

 

New Accounting Pronouncements

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”).  The amendments in ASU 2016-13 require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.  In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.  The amendment is effective for public entities for annual reporting periods beginning after December 15, 2019, however early application is permitted for reporting periods beginning after December 15, 2018.  The Company does not anticipate ASU 2016-13 to have a material impact to the consolidated financial statements.

 

In February 2016, the FASB issued its final lease accounting standard, FASB Accounting Standard Codification ("ASC"), Leases (Topic 842) (“ASU 2016-02”), which requires lessees to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease).  The lease liability will be equal to the present value of lease payments and the right-of -use asset will be based on the lease liability, subject to adjustment such as for initial direct costs.  For income statement purposes, the new standard retains a dual model similar to ASC 840, requiring lases to be classified as either operating or finance.  For lessees, operating leases will result in straight-line expense (similar to current accounting by lessees for operating leases under ASC 840) while finance leases will result in a front-loaded expense pattern (similar to current accounting by lessees for capital leases under ASC 840).  Our leases as of December 31, 2016, principally relate to real estate leases for corporate office, showrooms and warehousing.  The new standard will be effective for the first quarter of our fiscal year ending December 31, 2019. Early adoption is permitted. We are evaluating the effect that ASU 2016-02 by reviewing all long-term leases and determining the potential impact it will have on our consolidated financial statements and related disclosures. The standard is to be applied under the modified retrospective method, with elective reliefs, which requires application of the new guidance for all periods presented.

 

F-10


 

 

Table of Contents

 

STANLEY FURNITURE COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

1.         Summary of Significant Accounting Policies (continued)

 

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”).  The amendments in ASU 2016-09 simplify several aspects of the accounting for share-based payment transactions. The new guidance requires that excess tax benefits (which represent the excess of actual tax benefits receive at the date of vesting or settlement over the benefits recognized over the vesting period or upon issuance of share-based payments) be recorded in the income statement as a reduction of income or income taxes when the awards vest or are settled.  The new guidance also requires excess tax benefits to be classified as an operating activity in the statement of cash flows rather than as a financing activity. The new standard will be effective for the first quarter of our fiscal year ending December 31, 2017. The adoption of this new standard will reduce our reported income taxes and will increase cash flows from operating activities; however, the amounts of that reduction/increase is dependent upon the underlying vesting or exercise activity and related future stock prices.

 

In August 2016, FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230).  The guidance is intended to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This standard will be effective for the first quarter of our fiscal year ending December 31, 2018. Early adoption is permitted, provided all amendments are adopted in the same period.  In November 2016, FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash.  We have reviewed the standard and determined that our statement of cash flows will include changes in restricted cash with related disclosures. The guidance requires application using a retrospective transition method. We do not anticipate ASU 2016-15 or ASU 2016-18 to have a material impact to our consolidated financial statements.

 

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (“ASU 2015-11”). The amendments in ASU 2015-11 require an entity to measure in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonable predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using last-in, first-out (“LIFO”) or the retail inventory method. The amendments do not apply to LIFO or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (“FIFO”) or average cost. The amendment is effective for public entities for fiscal years beginning after December 15, 2016 and should be applied prospectively, however early adoption is permitted. The Company does not anticipate ASU 2015-11 to have a material impact to the consolidated financial statements.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This standard is intended to improve, and converge with international standards, the financial reporting requirements for revenue from contracts with customers.  The new standard will be effective for the first quarter of our fiscal year ending December 31, 2018.  Early adoption is permitted but we do not expect to early adopt this new accounting pronouncement. In preparation for this new standard, we are identifying all forms of agreements with our customers and will begin to evaluate the provisions in such agreements in light of the five-step model specified by the new guidance.  The five-step model includes: 1) determination of whether a contract – an agreement between two or more parties that creates legally enforceable rights and obligations exists; 2) identification of the performance obligations in the contract; 3) determination of the transaction price; 4) allocation of the transaction price to the performance obligations in the contract; and 5) recognition of revenue when (or as) the performance obligation is satisfied.  We are also evaluating the impact of the new standard on certain common practices currently employed by us and others in our industry, such as co-operative advertising, pricing allowances and consumer coupons.  We are in the initial phases and have not yet determined the impact of the new standard on our financial statements or whether we will adopt on a full or modified retrospective basis in the first quarter of our fiscal year ending December 31, 2018.

 

F-11


 

Table of Contents

 

STANLEY FURNITURE COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

2.      Property, Plant and Equipment

 

Depreciable

lives

(in years)

(in thousands)

2016

2015

Machinery and equipment

5 to 12

 

$

2,675

 

$

2,675

Leasehold improvements

15

 

1,833

 

1,833

Property, plant and equipment, at cost

 

 

 

4,508

 

 

4,508

Less accumulated depreciation

 

2,902

 

2,721

Property, plant and equipment, net

 

 

$

1,606

 

$

1,787


 

3.       Debt

 

We have a secured $6.0 million revolving credit facility with Wells Fargo Bank, National Association with an excess availability requirement of $2.0 million resulting in maximum borrowings of $4.0 million under the facility, subject to borrowing base eligibility requirements. The credit facility matures in October 2018 and is secured by our accounts receivable, inventory and certain other assets. Borrowings under the credit facility bear interest at a variable per annum rate equal to the daily three month London Bank Interbank Offered Rate plus 3.5%. 

 

The credit facility contains covenants that, among other things limit our ability to incur certain types of debt or liens, pay dividends, enter into mergers and consolidations or use proceeds of borrowing for other than permitted uses. The credit facility also includes a covenant requiring us to maintain a minimum fixed charge ratio of not less than 1.1 to 1.0 for the trailing twelve months with an initial compliance date at December 31, 2017.

 

At December 31, 2016, no borrowings were outstanding under this revolving credit facility. 

 

4.      Income Taxes

 

The provision for income tax expense (benefit) consists of (in thousands):

 

2016

2015

Current:

 

 

 

 

 

Federal

$

525

$

52

State

 

193

 

 

24

Total current

 

718

 

76

Deferred:

 

 

 

Federal

-

-

State

 

-

 

 

-

Total deferred

 

-

 

-

Income tax expense (benefit)

$

718

 

$

76

 

F-12


 

 

Table of Contents

 

STANLEY FURNITURE COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

4.         Income Taxes (continued)

 

A reconciliation of the difference between the federal statutory income tax rate and the effective income tax rate follows:

 

2016

2015

Federal statutory rate

35.0

%

 

35.0

%

State tax, net of federal benefit

(6.1)

.6

State tax credits and adjustments

1.8

 

 

(1.9)

 

Change in cash surrender value of

    life insurance policies

(185.1)

(9.0)

Valuation allowance increase (decrease)

143.2

 

 

(23.6)

 

Other, net

(4.6)

 

.3

 

Effective income tax rate

(15.8)

%

 

1.4

%

 

 

The income tax effects of temporary differences that comprise deferred tax assets and liabilities at December 31 follow (in thousands):

 

2016

2015

Noncurrent deferred tax assets (liabilities):

 

 

 

 

 

Accounts receivable

$

99

$

150

Other accrued expenses

 

587

 

 

248

Property, plant and equipment

(1,190)

(1,255)

Employee benefits

 

3,979

 

 

4,252

Contribution carryforward

181

278

AMT credit

 

1,205

 

 

676

Net operating loss

 

7,727

 

14,845

Gross non-current deferred tax assets

 

12,588

 

 

19,194

Less valuation allowance

 

(12,588)

 

(19,194)

Net noncurrent deferred tax assets

$

-

 

$

-

 

 

We have U.S. federal net operating loss carryforwards of approximately $20.6 million which are available to reduce future taxable income. The federal net operating loss will begin expiring in 2033.  We have combined state net operating loss carryforwards of $18.4 million that will expire at various times beginning in 2027.

 

During 2016, we recorded a non-cash credit to our valuation allowance of $6.6 million against our December 31, 2016 deferred tax assets.  The primary assets which are covered by this valuation allowance are employee benefits and net operating losses in excess of the amounts which can be carried back to prior periods. The valuation allowance was calculated in accordance with the provisions of ASC 740, Income Taxes, which requires an assessment of both positive and negative evidence when measuring the need for a valuation

allowance. Our results over the most recent three-year period were heavily affected by our business restructuring activities. Our cumulative loss, excluding income from the Continued Dumping and Subsidy Offset Act, in the most recent three-year period, in our view, represented sufficient negative evidence to require a valuation allowance. We intend to maintain a valuation allowance until sufficient positive evidence exists to support its reversal, resulting in no deferred tax asset balance being recognized.  Should we determine that we will not be able to realize all or part of our deferred tax asset in the future, an adjustment to the deferred tax asset will be charged to income in the period such determination is made. 

 

F-13


 

Table of Contents

 

STANLEY FURNITURE COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

4.         Income Taxes (continued)

 

The unrecognized tax benefits activity for the year ended December 31 follows (in thousands):

 

2016

2015

Unrecognized tax benefits balance at January 1

$

307

 

$

309

Gross increases in tax positions of prior years

 

164

 

-

Lapse of statute of limitations

-

 

(2)

Unrecognized tax benefits balance at December 31

$

471

 

$

307

 

 

As of December 31, 2016 and 2015, we had approximately $97,000 and $76,000 of accrued interest related to uncertain tax positions, respectively.

 

Total amount of unrecognized tax benefits that would affect our effective tax rate if recognized is $307,000 at December 31, 2016 and $200,000 at December 31, 2015. The 2010 through 2015 tax years remain open to examination by major taxing jurisdictions.   

 

5.       Stockholders’ Equity

 

In addition to common stock, authorized capital includes 1,000,000 shares of “blank check” preferred stock. None was outstanding during the two years ended December 31, 2016. 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):

 

2016

2015

Weighted average shares outstanding

    for basic calculation

14,139

 

14,273

Dilutive effect of stock options

-

269

Weighted average shares outstanding

    for diluted calculation

14,139

 

14,542

 

 

In 2016, the dilutive effect of stock options and restricted shares was not recognized since we had a net loss. Approximately 1.1 million shares in 2016 and 1.2 million shares in 2015 that were issuable upon the exercise of stock options were not included in the diluted per share calculation because they were anti-dilutive. In 2016 and 2015, approximately 544,000 and 51,000 shares of restricted stock, respectively, were not included because they were anti-dilutive.

 

We will repurchase common shares that are tendered by recipients of restricted stock awards to satisfy tax withholding obligations on vested restricted stock.  During 2016 and 2015, we repurchased 6,862 shares for approximately $15,000 and 4,622 shares for approximately $13,000, respectively.

 

In July 2012, the Board of Directors authorized the purchase of up to $5.0 million of our common stock. These repurchases may be made from time to time in the open market, in privately negotiated transactions, or otherwise, at prices the Company deems appropriate.  During 2016, we repurchased 400,000 shares of common stock for approximately $1.0 million. In 2015, no repurchases of our common stock were made pursuant to this authorization. As of December 31, 2016, we have $3.0 million remaining on this authorization to repurchase our common stock.

 

F-14


 

Table of Contents

 

STANLEY FURNITURE COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

5.       Stockholders’ Equity (continued)

 

During 2016, the Board of Directors declared two special dividends totaling $1.50 per share. The first special dividend of $1.25 per share was distributed to shareholders on August 19, 2016 and the second special dividend of $.25 per share was distributed to shareholders on November 18, 2016. Approximately $354,000 in dividends payable relate to unvested restricted shares.

 

In the fourth quarter of 2016, the Board of Directors adopted a Rights Agreement designed to protect the Company’s substantial net operating loss carryforwards.  Under the Rights Agreement, company stockholders of record as of December 15, 2016 received one preferred share purchase right for each share of common stock they owned on such date. If a person or group acquires beneficial ownership of 4.9% or more of the Company’s outstanding common stock (subject to certain specified exceptions), the rights will become exercisable.  The rights will also become exercisable if a person or group that already owns 4.9% or more of the Company’s outstanding common stock acquires an additional 1% or more of the Company’s outstanding common stock.  If the rights become exercisable, all holders of rights, other than the person or group triggering the rights, will be entitled to purchase Company common stock at a 50% discount. Rights held by the person or group triggering the rights will become void and will not be exercisable. The rights have a de minimis fair value.

 

The rights trade with the Company’s common stock. The Rights Agreement and the rights will expire on the first day after the Company’s 2017 annual meeting of stockholders unless the Company’s stockholders approve the Rights Agreement at the meeting, in which case the Rights Agreement and the rights will expire on December 5, 2019 (unless the Company’s NOLs are utilized prior to that date). The Board may amend the Rights Agreement in any way or redeem the rights at any time unless and until the rights are triggered.

 

The Rights Agreement includes a procedure for the Board to consider requests to exempt a particular transaction from triggering the exercisability of the rights under the Rights Agreement if the transaction (i) does not (x) create a significant risk of the Company’s NOLs being impaired or (y) constitute a default under the change-in-control covenant included in the Company’s credit facility or (ii) is otherwise in the best interests of the Company.

 

The Company entered into Amendment No. 1, dated January 30, 2017, to the Rights Agreement. This amendment amends the definition of Acquiring Person in the Rights Agreement to exclude any member of the Hale Group (Hale Partnership Fund, LP and certain affiliates that are parties to the agreement (Hale Agreement) dated January 30, 2017 with the Company), provided that any purchases made by members of the Hale Group after December 5, 2016 are made in compliance with Section 1(h) of the Hale Agreement.

 

6.       Stock Based Compensation

           

The Stanley Furniture Company, Inc. 2012 Incentive Compensation Plan (Incentive Compensation Plan) provides for the granting of performance grants, performance shares, stock options, restricted stock, restricted stock units, and stock appreciation rights to employees and certain service providers.  Under this plan, the aggregate number of common shares that may be issued through awards of any form is 1.6 million. In addition, shares authorized under the 2008 Incentive Compensation Plan are also available for issuance under the Incentive Compensation Plan if they are unissued or subsequently expire, are forfeited or terminate unexercised. 

 

Stock Options                                                                                                                   

The options are issued at market value on the date of grant and have a term of 10 years from the grant date. In general, employee grants vest ratably over a four to five-year period and Director grants vest after one year. The fair value of each option is amortized into compensation expense on a straight-line basis between the grant date for the option and each vesting date. We have estimated the fair value of all stock option awards as of the date of the grant by applying the Black-Scholes pricing valuation model.

 

F-15


 

 

Table of Contents

 

STANLEY FURNITURE COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

6.       Stock Based Compensation (continued)

 

The application of this valuation model involves assumptions that are judgmental and sensitive in the determination of compensation expense. No options were granted in 2016 or 2015. 

 

Stock option activity for the two years ended December 31, 2016, follows:

 

Number

of shares

Weighted-Average

Exercise Price

Weighted-Average Remaining Contractual Term

(in years)

Aggregate Intrinsic Value

(in thousands)

Outstanding at December 31, 2014

1,371,354

 

$

5.97

 

5.7

 

 

 

Forfeited

(184,798)

4.31

Expired

(20,364)

 

 

23.41

 

 

 

 

Outstanding at December 31, 2015

1,166,192

 

$

5.93

 

4.7

 

 

 

Expired

(36,610)

 

 

23.88

 

 

 

 

Outstanding at December 31, 2016

1,129,582

 

$

5.35

 

3.8

 

$

-

Exercisable at December 31, 2016

1,129,582

 

$

5.35

 

3.8

 

$

-

 

 

There were no stock options exercised in 2016 and 2015.

              

Restricted Stock             

The restricted stock awards are accounted for as “non-vested equity shares” until the awards vest or are forfeited. In general, restricted stock awards for employees are time vested or performance vested and for non-employee directors vest at the end of their current term on the Board. The fair value of each share of restricted stock is the market price of our stock on the grant date. The fair value of each time vested award is amortized into compensation expense on a straight-line basis between the award date and the vesting date. Performance based awards are amortized into compensation expense based on the probability of meeting the performance criteria. In 2016 and 2015, 221,745 and 140,442 of restricted stock awards vested and were released, respectively. 

 

The following table summarizes information about restricted stock awards for the two years ended December 31, 2016:

 

Weighted-Average

Grant Date

 Fair Value

Number

of shares

Outstanding at December 31, 2014

544,248

 

$

3.74

Forfeited

(97,549)

$

3.45

Vested

(140,442)

 

$

3.29

Granted

228,676

$

2.86

 

 

Outstanding at December 31, 2015

534,933

$

3.53

Vested

(221,745)

 

$

4.01

Granted

230,836

$

2.52

 

 

 

Outstanding at December 31, 2016

544,024

$

2.89

 

 

F-16


 

Table of Contents

 

STANLEY FURNITURE COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

6.        Stock Based Compensation (continued)

 

As of December 31, 2016, there was $379,000 of total unrecognized compensation cost related to non-vested restricted stock awards, which is expected to be recognized over a weighted-average remaining vesting period of 2.4 years.

 

7.     Employee Benefits Plans

 

Defined Contribution Plan

 

We maintain a defined contribution plan covering substantially all of our employees and make discretionary matching and profit sharing contributions. The total plan cost, including employer contributions, was $16,000 in 2016 and $34,000 in 2015.  Employer contributions were suspended to the plan beginning in 2015.

 

Deferred Compensation Plan

 

Effective January 1986, we established an unfunded, nonqualified deferred compensation plan for select key executives (the “Plan”). The Plan allowed participants to defer a portion of their compensation and, upon retirement, receive an annual payment for life with a minimum of 15 payments.  The Plan was frozen to new participants in 1991 and there are no active employees in the plan. The Plan is accounted for in accordance with ASC 715, Pension Plans, which results in an accrued liability based on future benefit payments owed to each participant under the Plan, utilizing mortality assumptions and a high quality corporate bond discount rate.

 

Corporate-owned life insurance policies were purchased as a potential funding source for this Plan.  The Company had the ability to borrow against these policies or cash them in at any time. The balance sheet reflected a cash surrender value asset of $22.3 million (net of $5.5 million in loans and accrued interest) at December 31, 2015.  Interest was paid on the borrowings at a rate of 13.13%, offset by a fixed rate of return of 12.63% on the borrowed portion of the cash surrender value of these policies, resulting in a net borrowing cost of 0.50%.  The fixed return on the non-borrowed cash surrender value of these policies is 4%.  In the first quarter of 2016, we liquidated the corporate-owned life insurance policies with cash surrender value of $28.1 million.  We received $22.4 million in proceeds, net of outstanding loans and accrued interest.  The decision to liquidate was made after continued review of the financial stability of Genworth Life Insurance Company, the issuer of the policies. 

 

The growth in the cash surrender value of these policies, net of related premiums and plan administrative costs, is included in operating income.  Interest charges for policy loans are included in interest expenses below operating income. The growth in cash surrender value of these policies is not taxable unless the policies are cashed in, while the interest paid is deductible for tax purposes. The liquidation of these policies in 2016 created approximately $24.0 million in taxable income which was offset by net operating loss carryforwards.  

 

The impact of the deferred compensation plan and corporate owned life insurance policies impact on net income is as follows (in thousands):

 

2016

2015

Growth in cash surrender value of corporate-owned

    life insurance policies

$

301

 

$

1,701

Deferred compensation plan expenses

 

352

 

506

Operating income impact

 

(51)

 

 

1,195

Interest expense on loans against corporate-owned

    life insurance polices

 

109

 

948

Net income impact

$

(160)

 

$

247

 

F-17


 

Table of Contents

 

STANLEY FURNITURE COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

7.     Employee Benefits Plans (continued)

 

The financial status of the deferred compensation plan based on actuarially valued benefits at December 31 follows (in thousands):

 

2016

2015

Change in benefit obligation:

 

 

 

 

 

Beginning benefit obligation

$

4,749

$

5,412

Interest cost

 

160

 

 

182

Actuarial loss (gain)

210

(395)

Benefits paid

 

(450)

 

 

(450)

Ending benefit obligation

$

4,669

$

4,749

Change in plan assets:

 

 

 

Beginning fair value of plan assets

-

-

Employer contributions

 

450

 

 

450

Benefits paid

 

(450)

 

(450)

Ending fair value of plan assets

 

-

 

 

-

Funded status

$

(4,669)

$

(4,749)

 

Amount recognized in the consolidated balance sheet (in thousands):

 

2016

2015

Current liabilities

$

(450)

 

$

(448)

Noncurrent liabilities

 

(4,219)

 

(4,301)

Total

$

(4,669)

 

$

(4,749)

 

Amount recognized in accumulated other comprehensive (loss) income (in thousands):

 

2016

 2015

Net loss

$

1,752

 

$

1,614

 

Components of net periodic benefit cost and other amounts recognized in other comprehensive (loss) income (in thousands):

 

2016

 2015

Net periodic benefit cost:

 

 

 

 

 

Interest cost

$

160

$

182

Amortization of net loss

 

72

 

 

93

Net periodic benefit cost

$

232

$

275

Other changes in plan assets and benefit obligations

    recognized in other comprehensive (loss) income:

 

 

 

Net loss (gain)

$

210

$

(395)

Amortization of net loss

 

(72)

 

 

(93)

Total recognized in other comprehensive (loss) income

 

138

 

(488)

Total recognized in net periodic benefit cost and other

    comprehensive (loss) income

$

370

 

$

(213)

 

Approximately $84,000 in accumulated other comprehensive income (loss) is expected to be recognized as components of net periodic benefit cost during 2017.

 

F-18

 


 

Table of Contents

 

STANLEY FURNITURE COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

7.     Employee Benefits Plans (continued)

 

The assumptions used to determine the plan’s financial status and postretirement benefit cost:

 

2016

2015

Discount rate for funded status

3.50%

 

3.55%

Discount rate for benefit cost

3.55%

3.50%

 

Estimated future benefit payments are as follows (in thousands):

 

2017

$

450

2018

402

2019

 

391

2020

381

2021

 

364

2022 - 2026

1,582

Estimated contributions for 2017

$

450

 

Supplemental retirement plan and other postretirement benefits

 

Benefits under the supplemental retirement ceased to accrue after 1995.  Our postretirement health care benefits were terminated for current employees effective January 1, 2010. Prior to this termination, we provided health care benefits to eligible retired employees between the ages of 55 and 65 and provide life insurance benefits to eligible retired employees from age 55 until death.

 

The financial status of the plans at December 31 follows (in thousands): 

 

Supplemental Retirement

Plan

Other Postretirement

Benefits

2016

2015

2016

2015

Change in benefit obligation:

 

 

 

 

 

 

 

 

 

 

 

Beginning benefit obligation

$

1,952

$

2,129

$

827

$

932

Interest cost

 

68

 

 

72

 

 

23

 

 

26

Plan participants’ contributions

-

-

46

50

Actuarial (gain) loss

 

14

 

 

(93)

 

 

(51)

 

 

(9)

Benefits paid

 

(155)

 

(156)

 

(135)

 

(172)

Ending benefit obligation

$

1,879

 

$

1,952

 

$

710

 

$

827

Change in plan assets:

Beginning fair value of plan assets

 

-

 

 

-

 

 

-

 

 

-

Employer contributions

155

156

89

122

Plan participants’ contributions

 

-

 

 

-

 

 

46

 

 

50

Benefits paid

 

(155)

 

(156)

 

(135)

 

(172)

Ending fair value of plan assets

 

-

 

 

-

 

 

-

 

 

-

Funded status

$

(1,879)

$

(1,952)

$

(710)

$

(827)

 

Amount recognized in the consolidated balance sheet (in thousands):

 

Supplemental Retirement

Plan

Other Postretirement

Benefits

2016

2015

2016

2015

Current liabilities

$

(155)

 

$

(155)

 

$

(88)

 

$

(92)

Noncurrent liabilities

 

(1,724)

 

(1,797)

 

(622)

 

(735)

Total

$

(1,879)

 

$

(1,952)

 

$

(710)

 

$

(827)

 

F-19


 

Table of Contents

 

STANLEY FURNITURE COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

7.     Employee Benefits Plans (continued)

 

Amount recognized in accumulated other comprehensive (loss) income (in thousands):

 

Supplemental Retirement

Plan

Other Postretirement

Benefits

2016

2015

2016

2015

Net loss (gain)

$

686

 

$

704

 

$

(182)

 

$

(149)

 

Components of net periodic benefit cost and other amounts recognized in other comprehensive (loss) income (in thousands):

 

Supplemental Retirement

Plan

Other Postretirement

Benefits

2016

2015

2016

2015

Net periodic benefit cost:

 

 

 

 

 

 

 

 

 

 

 

Interest cost

$

68

$

72

$

23

$

26

Amortization of net loss (gain)

 

32

 

 

36

 

 

(17)

 

 

(13)

Amortization of prior service cost

 

-

 

-

 

-

 

(92)

Net periodic benefit cost (income)

$

100

 

$

108

 

$

6

 

$

(79)

Other changes in plan assets and benefit obligations

    recognized in other comprehensive income (loss):

 

 

 

 

 

 

 

Net loss (gain)

$

14

$

(93)

$

(51)

$

(9)

Amortization of net (loss) gain

 

(32)

 

 

(36)

 

 

17

 

 

13

Amortization of prior service cost

 

-

 

-

 

-

 

92

Total recognized in other comprehensive

    (loss) income

$

(18)

 

$

(129)

 

$

(34)

 

$

96

Total recognized in net periodic benefit cost

    and other comprehensive (loss) income

$

82

$

(21)

$

(28)

$

17

 

The amounts in accumulated other comprehensive (loss) income that are expected to be recognized as components of net periodic benefit cost during 2017 are as follows (in thousands):

 

 

Supplemental Retirement Plan

 

Other Postretirement Benefits

Net loss (gain)

$

33

 

$

(16)

 

F-20


 

Table of Contents

 

STANLEY FURNITURE COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

7.     Employee Benefits Plans (continued)

 

The assumptions used to determine the plan’s financial status and postretirement benefit cost:

 

Supplemental Retirement

Plan

Other Postretirement

Benefits

2016

2015

2016

2015

Discount rate for funded status

 

3.55%

 

3.65%

 

 

3.20%

 

 

3.20%

Discount rate for benefit cost

3.65%

3.50%

3.20%

3.10%

Health care cost assumed trend rate

    for next year

 

 

 

 

 

 

 

6.00%

 

 

6.50%

Rate that the cost trend rate gradually

    declines to

5.50%

5.50%

Year that the rate reaches the rate it is

    assumed to remain at

 

 

 

 

 

 

 

2018

2018

 

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, 2016 by approximately $50 and the annual postretirement benefit cost by approximately $2.

 

Estimated future benefit payments are as follows (in thousands):

 

Supplemental Retirement

Plan

Other Postretirement Benefits

Estimated net future benefit payments:

 

 

 

 

 

2017

$

155

$

88

2018

 

152

 

 

80

2019

148

76

2020

 

145

 

 

72

2021

141

67

2022 - 2026

 

645

 

 

259

Estimated contributions for 2017

$

155

$

88

 

The accrued liabilities relating to these plans are included in accrued salaries, wages and benefits and in long-term liabilities. 

 

8.         Discontinued Operations

 

During the second quarter of 2014, we concluded that revenue on our Young America product line remained below the level needed to reach profitability and that the time frame needed to assure sustainable profitability was longer than we felt was economically justified. Therefore, we made the decision to cease manufacturing operations at our Robbinsville, North Carolina facility and sell the related assets of this facility. Manufacturing operations were ceased in the third quarter of 2014 and as a result this product line was reflected as a discontinued operation pursuant to the provisions of Accounting Standards Update No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (ASU 2014-08) for all periods presented.  

 

F-21


 

 

Table of Contents

 

STANLEY FURNITURE COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

8.         Discontinued Operations (continued)

 

Loss from discontinued operations, net of taxes, comprised the following (in thousands):

 

2016

2015

Net sales

$

-

 

$

553

Cost of sales

-

772

Selling, general and administrative expenses

 

-

 

 

(144)

Other income

 

-

 

64

Loss from discontinued operations before income taxes

 

-

 

 

(11)

Income tax (benefit) expense

 

-

 

-

Loss from discontinued operations, net of taxes

$

-

 

$

(11)

 

Loss from discontinued operations included write-down of inventories and other assets, severance and other termination costs and operating losses related to final manufacturing production.

 

9.     Income for Continued Dumping and Subsidy Offset Act (CDSOA)

 

The CDSOA provides for distribution of monies collected by U.S. Customs and Border Protection (Customs) for imports covered by antidumping duty orders entering the United States through September 30, 2007 to qualified domestic producers.  In 2016 and 2015, we received $1.1 million and $5.3 million, respectively, in distributions of funds collected on antidumping duty orders entering the United States prior to September 2007. The distribution amount in 2015 included $4.9 million of distributions for 2012, 2013 and 2014 that were withheld by Customs until pending ligation had been exhausted. 

 

10.     Commitments and Contingencies

 

Our leased facilities include warehouse and distribution space, showroom and office space and certain technology equipment.  These leases have varying terms up to ten years. Rental expenses charged to operations were $3.0 million and $2.9 million in 2016 and 2015, respectively. 

 

At December 31, 2016, the future minimum lease payments for our current operating leases were as follows (in thousands):

 

 

Total

2017

$

1,280

2018

1,374

2019

 

1,420

2020

1,308

2021

 

1,339

Thereafter

1,275

Total minimum lease payments

$

7,996

 

 

We currently have letters of credit to cover estimated exposures, most notably with workman’s compensation claims.  This agreement requires us to maintain a compensating balance with the issuer for the amounts outstanding. We currently have letters of credit outstanding in the amount of $663,000.  The compensating balance amount is reflected as restricted cash on the consolidated balance sheet.

 

In the normal course of business, we are involved in claims and lawsuits, none of which currently, in management’s opinion, will have a material adverse effect on our Consolidated Financial Statements.

 

F-22


 

Table of Contents

 

STANLEY FURNITURE COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 

11.     Quarterly Results of Operations (Unaudited)

 

(in thousands, except per share data)

2016 Quarters:

First

Second

Third

Fourth

Net Sales

$

11,683

 

$

12,053

 

$

11,036

 

$

9,802

Gross profit

2,541

2,062

1,835

1,976

Net loss

$

(1,485)

 

$

(1,392)

 

$

(2,080)

 

$

(301)(1)

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(.10)

$

(.10)

$

(.15)

$

(.02)

Diluted

$

(.10)

 

$

(.10)

 

$

(.15)

 

$

(.02)

2015 Quarters:

First

Second

Third

Fourth

Net Sales

$

14,672

 

$

15,133

 

$

13,760

 

$

13,799

Gross profit

2,983

3,839

3,410

3,453

Net income from continuing operations

 

2,773(1)

 

 

1,268(1)

 

 

391

 

 

919(1)

Net (loss) income from discontinued operations

(118)

35

74

(2)

Net income

$

2,655(1)

 

$

1,303(1)

 

$

465

 

$

917(1)

Basic earnings per share (2):

Net income from continuing operations

$

.20

 

$

.09

 

$

.03

 

$

.06

Net (loss) income from discontinued operations

(.01)

-

  -

  -

Net income

$

.19

 

$

.09

 

$

.03

 

$

.06

Diluted earnings per share (2):

Net income from continuing operations

$

.19

 

$

.09

 

$

.03

 

$

.06

Net (loss) income from discontinued operations

(.01)

  -

  -

  -

Net income

$

.18

 

$

.09

 

$

.03

 

$

.06

 

 

(1)    Includes proceeds received from the Continued Dumping and Subsidy Offset Act, net of taxes, of $1.1 million in fourth quarter of 2016, $3.8 million in the first quarter of 2015, $1.1 million in the second quarter of 2015 and $407,000 in the fourth quarter of 2015.

(2)    The sum of individual quarterly net income per share may not agree to the total for the year due to each period’s computation being based on the weighted average number of common shares outstanding during each period.

 

F-23


 

Table of Contents

 

 

STANLEY FURNITURE COMPANY, INC.

SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS

For each of the Two Years in the Period Ended December 31, 2016

(in thousands)

 

Column A

 

Column B

Column C

Column D

Column E

Descriptions

 

Balance at

Beginning

of Period

Charged

(Credited)

to Costs &

Expenses

Deductions

Balance at

End

of Period

 

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

Doubtful receivables

 

$

267

$

91

$

241(a)

$

117

Discounts, returns, and allowances

 

 

137

 

 

18(b)

 

 

-

 

 

155

 

$

404

$

109

$

241

$

272

Valuation allowance for deferred tax assets

 

$

19,194

 

$

-

 

$

6,606

 

$

12,588

 

2015

 

 

 

 

 

 

 

 

Doubtful receivables

 

$

189

$

93

$

15(a)

$

267

Discounts, returns, and allowances

 

 

186

 

 

(49)(b)

 

 

-

 

 

137

 

$

375

$

44

$

15

$

404

Valuation allowance for deferred tax assets

 

$

21,724

 

$

-

 

$

2,530

 

$

19,194

                                                           

 

(a)  Uncollectible receivables written-off, net of recoveries.

(b)  Represents net increase (decrease) in the reserve.

 

 

 

 

 

 

 

 

 

 

 

 

 

S-1