Item 1. Business
General
The Company is a leading designer and manufacturer of residential wood furniture exclusively targeted at the upper-medium price range. The Company offers diversified product lines across all major style and product categories within this price range. Its product depth and extensive style selections make the Company a complete wood furniture resource for retailers in its price range and allow the Company to respond more quickly to shifting consumer preferences. The Company has established a broad distribution network that includes independent furniture stores, department stores, and national and regional furniture chains. To produce its products and support its broad distribution network, the Company has developed efficient and flexible manufacturing processes that it believes are unique in the furniture industry. The Company emphasizes continuous improvement in its manufacturing processes to enable it to continue providing competitive advantages to its customers, such as quick delivery, reduced inventory investment, high quality, and value.
Products and Styles
The Company's product lines cover all major design categories, and include collections (dining room, bedroom, tables and entertainment units), youth bedroom (Young AmericaTM) and home office furniture. The Company believes that the diversity of its product lines enables it to anticipate and respond quickly to changing consumer preferences and provides retailers a complete wood furniture resource in the upper-medium price range. The Company intends to continue developing its product styles with particular emphasis on home office and youth bedroom. The Company believes that its products represent good value and that the quality and style of its furniture compare favorably with more premium-priced products.
The Company provides products in a variety of woods, veneers, and finishes. The number of styles by product line currently marketed by the Company is set forth in the following table:
Number of Styles Collections: Dining room..................................................... 18 Bedroom......................................................... 22 Tables.......................................................... 15 Entertainment units............................................. 9 Youth bedroom (Young America(TM)).................................. 15 Home office........................................................ 7
These product lines cover all major design categories including European traditional, contemporary/transitional, American traditional, and country/casual designs.
The Company designs and develops new product styles each year to replace discontinued items or styles and, if desired, to expand product lines. The Company's product design process begins with marketing personnel identifying customer needs and conceptualizing product ideas, which generally consist of a group of related furniture pieces. A variety of sketches are produced, usually by Company designers, from which prototype furniture pieces are built. The Company's engineering department then prepares the prototype for actual full-scale production. The Company consults with its marketing personnel, sales representatives, and selected customers throughout this process and introduces its new product styles at the fall and spring international furniture markets.
Distribution
The Company has developed a broad domestic and international customer base and sells its furniture through approximately 70 independent sales representatives to independent furniture retailers, department stores and regional chain stores. Representative customers include Homelife, Rooms To Go, J.C. Penney, Furnitureland South, Baer's, Breuners Home Furnishings, Robb & Stucky, Nebraska Furniture Mart, Jordan's and Wickes. The Company believes this broad network reduces its exposure to regional recessions, and allows it to capitalize on emerging channels of distribution. The Company offers tailored marketing programs to address each channel of distribution.
The general marketing practice followed in the furniture industry is to exhibit products at international and regional furniture markets. In the spring and fall of each year, an eight-day furniture market is held in High Point, North Carolina, which is attended by most buyers and is regarded by the industry as the international market. The Company utilizes approximately 60,000 square feet of showroom space at the High Point market to introduce new products, increase sales of its existing products, and test ideas for future products.
The Company has sold to approximately 3,500 customers during 1999, and approximately 6% of the Company's sales in 1999 were to international customers. No single customer accounted for more than ten percent of the Company's sales in 1999. No material part of the Company's business is dependent upon a single customer, the loss of which would have a material effect on the business of the Company. The loss of several of the Company's major customers could have a material impact on the business of the Company.
Manufacturing
The Company's manufacturing operations complement its product and distribution strategy by emphasizing continuous improvement in quality and customer responsiveness while reducing costs. The Company's manufacturing processes produce smaller, more frequent and cost-effective runs. The Company focuses on identifying and eliminating manufacturing bottlenecks and waste, employing statistical process control and, in turn, adjusting manufacturing schedules on a daily basis, using cellular manufacturing in the production of components, and improving its relationships with suppliers by establishing primary supplier relationships. In addition, a key element of the Company's manufacturing processes is to involve all Company personnel, from hourly associates to management, in the improvement of the manufacturing processes by encouraging and responding to ideas to improve quality and to reduce manufacturing lead times.
The Company operates manufacturing facilities in North Carolina and Virginia consisting of an aggregate of more than 3.6 million square feet. The Company considers its present equipment to be generally modern, adequate and well maintained.
The Company schedules production of its various styles based upon actual and anticipated orders. The Company's manufacturing processes enable it to fill orders through manufacturing rather than inventory. As a result, the Company shipped customer orders within 25 days on average during 1999 with average finished goods inventory turns of 8.1. Since the Company ships customer orders on average in about three weeks, management believes that the size of its backlog is not necessarily indicative of its long-term operations. The Company's backlog of unshipped orders was $42.4 million at December 31, 1999 and $36.6 million at December 31, 1998.
Raw Materials
The principal materials used by the Company in manufacturing its products include lumber, veneers, plywood, particle board, hardware, glue, finishing materials, glass products, laminates, fabrics and metals. The Company uses a variety of species of lumber, including cherry, oak, ash, poplar, pine, maple, and mahogany. The Company's five largest suppliers accounted for approximately 15% of its purchases in 1999. The Company believes that its sources of supply for these materials are adequate and that it is not dependent on any one supplier.
Competition
The Company is the fourteenth largest furniture manufacturer in North America based on 1998 sales, according to Furniture/Today, a trade publication. The furniture industry is highly competitive and includes a large number of foreign and domestic manufacturers, none of which dominates the market. The markets in which the Company competes include a large number of relatively small manufacturers; however, certain competitors of the Company have substantially greater sales volumes and financial resources than the Company. Competitive factors in the upper-medium price range include style, price, quality, delivery, design, service, and durability. The Company believes that its manufacturing processes, its long-standing customer relationships and customer responsiveness, its consistent support of existing diverse product lines that are high quality and good value, and its experienced management are competitive advantages.
Associates
At December 31, 1999, the Company employed approximately 3,100 associates. None of the Company's associates is represented by a labor union. The Company considers its relations with its associates to be good.
Patents and Trademarks
The trade names of the Company represent many years of continued business, and the Company believes such names are well recognized and associated with quality in the furniture industry. The Company owns a number of patents, trademarks, and licenses, none of which is considered to be material to the Company.
Governmental Regulations
The Company is subject to federal, state, and local laws and regulations in the areas of safety, health, and environmental pollution controls. Compliance with these laws and regulations has not in the past had any material effect on the Company's earnings, capital expenditures, or competitive position; however, the effect of such compliance in the future cannot be predicted. Management believes that the Company is in material compliance with applicable federal, state, and local environmental regulations.
Forward-Looking Statements
Certain statements made in this Annual Report on Form 10-K are not based on historical facts, but are forward-looking statements. These statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. These statements reflect the Company's reasonable judgment with respect to future events and are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such risks and uncertainties include the cyclical nature of the furniture industry, fluctuations in the price for lumber which is the most significant raw material used by the Company, competition in the furniture industry, capital costs, delays in planned expansions and general economic conditions.
Item 2.
Item 2. Properties
Set forth below is certain information with respect to the Company's principal properties. The Company believes that all these properties are well maintained and in good condition. All Company plants are equipped with automatic sprinkler systems and modern fire protection equipment, which management believes are adequate. All facilities set forth below are active and operational. The Company believes its manufacturing facilities are being efficiently utilized and each facility is focused on specific product lines to optimize efficiency. The Company estimates that its facilities are presently operating near capacity, principally on a one-shift basis. The Martinsville, VA facility is expected to begin production in early 2000 and is anticipated to add approximately $50-$60 million in additional sales capacity when in full production in two to three years.
Item 3.
Item 3. Legal Proceedings
On July 9, 1999, the United States Environmental Protection Agency served the Company with an administrative complaint citing the alleged failure of a July 1998 compliance test of one boiler at the Stanleytown, Virginia facility and seeking a civil fine in the amount of $175,000. The Company intends to vigorously contest the complaint and in August 1999 filed its answer seeking an elimination of the civil fine. The Company believes that the cost related to the complaint will not have a material adverse effect on the Company's financial condition or results of operations.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Executive Officers of the Registrant
The Company's executive officers and their ages as of January 1, 2000 as follows:
Albert L. Prillaman has been President and Chief Executive Officer of the Company since December 1985 and Chairman of the Board of Directors since September 1988. Prior thereto, Mr. Prillaman served as a Vice President of the Company and President of the Stanley Furniture division of the Company's predecessor since 1983, and in various executive and other capacities with the Stanley Furniture division of the predecessors of the Company since 1969. Mr. Prillaman is a director of American Woodmark Corporation.
John W. Johnson has been Senior Vice President-Manufacturing since December 1998. He was Vice President of Manufacturing from November 1984 until December 1998. Prior to that time, Mr. Johnson held various management positions related to manufacturing since his employment by the Company in 1966.
Douglas I. Payne has been Senior Vice President-Finance and Administration since December 1996. He was Vice President of Finance and Treasurer of the Company from September 1993 to December 1996. Prior to that time, Mr. Payne held various financial management positions since his employment by the Company in 1983. Mr. Payne has been Secretary of the Company since 1988.
William A. Sibbick has been Senior Vice President-Sales since December 1997. He was Vice President-Product Development and Merchandising-Dining Room and Occasional from December 1996 to December 1997. He was Vice President - Product Development and Merchandising from April 1995 until December 1996. Prior to that time, Mr. Sibbick held various management positions related to product development since his employment by the Company in 1989.
Kelly S. Cain has been Senior Vice President-Product Development and Merchandising since December 1997. He was Vice President-Product Development and Merchandising for bedroom product lines from December 1996 to December 1997. He was Vice President-Sales National Accounts from April 1993 to December 1996. Prior to that time, Mr. Cain held various management positions in sales and marketing since his employment by the Company in 1985.
Robert A. Sitler, Jr. has been Vice President-Human Resources since December 1998. He was a plant manager from December 1996 to December 1998 and a plant superintendent from August 1995 to December 1996. Prior to that time, he held various management positions in manufacturing and credit since his employment by the Company in 1985.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock is quoted on The Nasdaq Stock Market ("Nasdaq") under the symbol STLY. The table below sets forth the high and low sales prices per share, for the periods indicated, as reported by Nasdaq, adjusted to reflect a two-for-one stock split, distributed in the form of a stock dividend on May 15, 1998.
As of January 24, 2000, there were approximately 2,500 beneficial stockholders. To date the Company has retained all earnings to finance the growth and development of its business. However, the Company will continue to evaluate its dividend policy, and any future payments will depend upon the financial condition, capital requirements, and earnings of the Company, as well as other factors that the Board of Directors may deem relevant. The Company's ability to pay dividends is restricted under certain loan covenants. See Note 3 of the Notes to Financial Statements.
Item 6.
Item 6. Selected Financial Data
(1) In 1995, the Company recognized a pretax credit of $1.1 million after it was released from a lease obligation at a previously closed manufacturing facility. Also included is a pretax charge for a severance accrual.
(2) Amounts have been retroactively adjusted to reflect the two-for-one stock split, distributed in the form of a stock dividend, on May 15, 1998.
(3) The Company purchased 226,750, 315,000 and 2,326,402 shares of its common stock for a total consideration of $4.7 million, $5.6 million and $25.3 million in 1999, 1998 and 1997, respectively. In 1998, the Company issued 103,400 shares to the Stanley Retirement Plan.
(4) No dividends have been paid on the Company's common stock during any of the years presented.
(5) In 1999, the Company spent $10 million on expansion projects at existing facilities and $15 million to purchase and equip a new facility. In 1995, the Company spent $10 million to purchase two previously leased manufacturing facilities.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Selected Financial Data and the Financial Statements and Notes thereto contained elsewhere herein.
Results of Operations
The following table sets forth the percentage relationship to net sales of certain items included in the Statements of Income:
1999 Compared to 1998
Net sales increased $17.3 million, or 7.0%, for 1999 compared to 1998. The Company ceased its upholstery operations in the second half of 1998. Excluding upholstered product sales in 1998, wood furniture sales increased 9.1% for 1999. The increase was due to higher unit volume and to a lesser extent higher average selling prices. Capacity constraints limited shipments during 1999.
Gross profit margin for 1999 increased to 25.7% from 24.4% for 1998. The increase resulted primarily from improved operating efficiencies and the favorable impact in 1999 from the phase out of upholstered products in the prior year.
Selling, general and administrative expenses as a percentage of net sales were 12.7% and 13.1% for 1999 and 1998, respectively. The lower percentage in 1999 was due principally to higher net sales. Expenditures in 1999 were higher due principally to selling expenses directly attributable to increased sales. However, the majority of the increase was offset by the elimination of expenditures related to upholstered products.
As a result of the above, operating income increased to $34.3 million, or 13.0% of net sales, from $27.9 million, or 11.3% of net sales, in 1998.
Interest expense for 1999 decreased due to lower average debt levels.
The Company's effective income tax rate declined to 36.9% for 1999 from 38.0% in 1998, due to state income tax credits related to expansion projects.
1998 Compared to 1997
Net sales increased $35.5 million, or 16.7%, for 1998 compared to 1997. The increase was due primarily to higher unit volume.
Gross profit margin for 1998 decreased to 24.4% from 24.7% for 1997. The decrease resulted primarily from higher raw material costs, principally lumber, partially offset by improved operating efficiencies.
Selling, general and administrative expenses as a percentage of net sales were 13.1% and 14.1% for 1998 and 1997, respectively. The lower percentage in 1998 was due principally to higher net sales. The majority of the increased expenditures in 1998 were selling expenses directly attributable to the sales increase.
During the second half of 1998, the Company ceased its upholstery operations. Upholstered products accounted for less than 3.0% of net sales and resulted in a pretax operating loss of approximately $1 million in both 1998 and 1997.
As a result of the above, operating income increased to $27.9 million, or 11.3% of net sales, from $22.5 million, or 10.6% of net sales, in 1997.
Interest expense for 1998 increased due to higher average debt levels resulting from the Company's repurchases of its common stock in 1997 and 1998.
The Company's effective income tax rate was 38% for both 1998 and 1997.
Financial Condition, Liquidity and Capital Resources
The Company generated cash from operations of $27.8 million in 1999 compared to $25.0 million in 1998 and $8.3 million in 1997. The increase in 1999 compared to 1998 was due primarily to increased sales. The increase in 1998 compared to 1997 was due primarily to increased sales and to a lesser extent, lower tax payments. The Company used the cash generated from operations in 1999, 1998 and 1997 to fund capital expenditures, reduce borrowings and repurchase its common stock.
Net cash used by investing activities was $23.0 million in 1999 compared to $6.5 million and $4.2 million in 1998 and 1997, respectively. The 1999 increase was due principally to increased capital expenditures related to capacity expansion projects. Capital expenditures for 1999 aggregated $25.6 million, reflecting $22.9 million of cash expenditures and $2.7 million in accounts payable. Approximately $10 million was used to expand production capability at existing facilities to add $30-$35 million of increased sales capacity on an annualized basis for the Company's bedroom and Young America(TM) youth bedroom products. This new capacity enabled the Company to increase sales 13% in the fourth quarter of 1999 compared to the prior year quarter. Approximately $15 million was used to purchase and equip a facility dedicated to the production of home office furniture. This facility is expected to begin operation in the first quarter of 2000 and should provide $50-$60 million of sales capacity on an annualized basis when in full production in two to three years. The remaining expenditures in 1999 and the expenditures in 1998 and 1997 were primarily for plant and equipment and other assets in the normal course of business. Capital expenditures in 2000 are anticipated to be approximately $6-$7 million.
Net cash used by financing activities was $7.9 million, $12.5 million and $11.5 million in 1999, 1998 and 1997, respectively. In 1999, the purchase of common stock and the reduction in borrowings were financed from operations, cash on hand and the proceeds from the exercise of stock options. In 1998, the purchase of common stock and the reduction in borrowings were financed by cash generated from operations and the proceeds from the exercise of stock options. In 1997, the purchase of common stock was financed by the private placement of debt, the revolving credit facility and cash generated from operations.
During 1999, the Company's Board of Directors increased the authorization to repurchase shares of its common stock to $20 million. Consequently, the Company may, from time to time, either directly or through agents, repurchase its common stock in the open market, through negotiated purchases or otherwise, at prices and on terms satisfactory to the Company. Since October 1998, the Company has utilized $10.3 million to purchase a total of 541,750 shares of its common stock at an average price of $18.94 per share, including the purchase of 226,750 shares at an average price of $20.76 per share in 1999. Depending on market prices and other conditions relevant to the Company, such purchases may be discontinued at any time.
At December 31, 1999, long-term debt, including current maturities, was $38.4 million. Approximately $24.0 million of additional borrowing capacity was available under a revolving credit facility. Also, the Company had cash on hand of $3.6 million. Annual debt service requirements are $5.2 million in 2000, $6.7 million in 2001, $6.8 million in 2002, $6.9 million in 2003, and $7.0 million in 2004. The Company believes that its financial resources are adequate to support its capital needs and debt service requirements.
Year 2000
The conversion from calendar year 1999 to calendar year 2000 occurred without any disruption to the Company's critical business systems. Since 1996, the Company has been upgrading its information systems with Year 2000 (Y2K) compliant software and hardware. These actions have minimized Y2K related capital costs and expenses, which is estimated at less than $1.0 million. The Company will continue to monitor Y2K related exposures both internally and with its suppliers, customers and other business partners. Such monitoring will be ongoing and encompassed in normal operations and associated costs are not expected to be significant.
Item 7A.
Item 7A.Quantitative and Qualitative Disclosures about Market Risks
Not applicable.
Item 8.
Item 8. Financial Statements and Supplementary Data
The financial statements and schedule listed in Items 14(a)(1) and (a)(2) hereof are incorporated herein by reference and are filed as part of this report.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
In accordance with general instruction G(3) of Form 10-K, the information called for by Items 10, 11, 12, and 13 of Part III is incorporated by reference to the Registrant's definitive Proxy Statement for its Annual Meeting of Stockholders scheduled for April 19, 2000, except for information concerning the executive officers of the Registrant which is included in Part I of this report under the caption "Executive Officers of the Registrant."
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K
(a) Documents filed as a part of this Report:
(1) The following financial statements are included in this report on Form 10-K:
Report of Independent Accountants
Balance Sheets as of December 31, 1999 and 1998
Statements of Income for each of the three years in the period ended December 31, 1999
Statements of Changes in Stockholders' Equity for each of the three years in the period ended December 31, 1999
Statements of Cash Flows for each of the three years in the period ended December 31, 1999
Notes to Financial Statements
(2) Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts for each of the three years in the period ended December 31, 1999
(b) The following reports on Form 8-K were filed by the Registrant during the last quarter of the period covered by this report:
None.
(c) Exhibits:
3.1 The Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant's Form 10-K (Commission File No. 0-19938) for the year ended December 31, 1998).
3.2 The By-laws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-1, No. 33-7300).
3.3 Amendment adopted March 21, 1988 to the By-laws of the Registrant (incorporated by reference to Exhibit 3.3 to the Registrant's Form 10-K (Commission File No. 0-14938) for the year ended December 31, 1987).
3.4 Amendments adopted February 8, 1993 to the By-laws of the Registrant (incorporated by reference to Exhibit 3.4 to the Registrant's Registration Statement on Form S-1 No. 33-57432).
4.1 The Certificate of Incorporation and By-laws of the Registrant as currently in effect (incorporated by reference to Exhibits 3.1 through 3.4 hereto).
4.2 Note Agreement dated February 15, 1994 between the Registrant and the Prudential Insurance Company of America (Incorporated by reference to Exhibit 4.6 to the Registrant's Form 10-K (Commission File No. 0-14938) for the year ended December 31, 1993).
4.3 Letter Amendment, dated October 14, 1996, to Note Agreements, dated February 15, 1994 and June 29, 1995, between the Registrant and The Prudential Insurance Company of America (incorporated by reference to Exhibit 4.1 to the Registrant's Form 10-Q (Commission File No. 0-14938) for the quarter ended September 29, 1996).
4.4 Letter Amendment, dated June 16, 1997, to Note Agreements, dated February 15, 1994 and June 29, 1995, between the Registrant and The Prudential Insurance Company of America (incorporated by reference to Exhibit 4.1 to the Registrant's Statement on Form 8-K (Commission File No. 0-14938) filed July 9, 1997).
4.5 Note Purchase and Private Shelf Agreement, dated as of June 29, 1995, among the Company, The Prudential Insurance Company of America and the affiliates of Prudential who become Purchasers as defined therein (incorporated by reference to Exhibit 4.1 to the Registrant's Form 8-K (Commission File No. 0-14938) filed December 2, 1997).
4.6 Amendment, dated as of May 10, 1999, to Note Agreements, dated February 15, 1994 and June 29, 1995, between the Registrant and The Prudential Insurance Company of America (incorporated by reference to Exhibit 4.1 to the Registrant's Form 10-Q (Commission File No. 0-14938) for the quarter ended June 26, 1999).
Pursuant to Regulation S-K, Item 601(b)(4)(iii), instruments evidencing long term debt less than 10% of the Registrant's total assets have been omitted and will be furnished to the Securities and Exchange Commission upon request.
10.1 Employment Agreement made as of January 1, 1991 between Albert L. Prillaman and the Company (incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-K (Commission File No. 0-14938) for the year ended December 31, 1991).(2)
10.2 Lease dated February 23, 1987 between Stanley Interiors Corporation and Southern Furniture Exposition Building, Inc. d/b/a Southern Furniture Market Center (incorporated by reference to Exhibit 10.10 to the Registrant's Form 10-K (Commission File No. 0-14938) for the year ended December 31, 1987).
10.3 Lease dated June 30, 1987 between A. Allan McDonald, Virginia Cary McDonald, C. R. McDonald, Dorothy V. McDonald, and Lillian S. McDonald, as lessor, and Stanley Interiors Corporation, as lessee (incorporated by reference to Exhibit 10.14 to the Registrant's Form 10-K (Commission File No. 0-14938) for the year ended December 31, 1987).
10.4 The Stanley Retirement Plan, as restated effective January 1, 1989, adopted April 20, 1995 (incorporated by reference to Exhibit 10.4 to the Registrant's Form 10-K (Commission File No. 0-14938) for the year ended December 31, 1995).(2)
10.5 Amendment No. 1, The Stanley Retirement Plan, effective December 31, 1995, adopted December 15, 1995 (incorporated by reference to Exhibit 10.5 to the Registrant's Form 10-K (Commission File No. 0-14938) for the year ended December 31, 1995).(2)
10.6 Supplemental Retirement Plan of Stanley Furniture Company, Inc., as restated effective January 1, 1993. (incorporated by reference to Exhibit 10.8 to the Registrant's Form 10-K (Commission File No. 0-14938) for the year ended December 31, 1993).(2)
10.7 First Amendment to Supplemental Retirement Plan of Stanley Furniture Company, Inc., effective December 31, 1995, adopted December 15, 1995 (incorporated by reference to Exhibit 10.7 to the Registrant's Form 10-K (Commission File No. 0-14938) for the year ended December 31, 1995).(2)
10.8 Stanley Interiors Corporation Deferred Compensation Capital Enhancement Plan, effective January 1, 1986, as amended and restated effective August 1, 1987 (incorporated by reference to Exhibit 10.12 to the Registrant's Registration Statement on Form S-1(Commission File No. 0-14938), No. 33-7300).(2)
10.9 Split Dollar Insurance Agreement dated as of March 21, 1991 between Albert L. Prillaman and the Registrant (incorporated by reference to Exhibit 10.43 to the Registrant's Form 10-K (Commission File No. 0-14938) for the year ended December 31, 1991).(2)
10.10 Second Amended and Restated Revolving Credit Facility and Term Loan Agreement dated February 15, 1994 (the "Second Amended and Restated Credit Facility") between the Registrant, National Canada Finance Corp., and the National Bank of Canada (incorporated by reference to Exhibit 10.17 to Registrant's Form 10-K (Commission File No. 0-14938) for the year ended December 31, 1994).
10.11 First Amendment to Second Amended and Restated Credit Facility dated as of August 21, 1995 (incorporated by reference to Exhibit 10.14 to Registrant's Form 10-K (Commission File No. 0-14938) for the year ended December 31, 1995).
10.12 1992 Stock Option Plan (incorporated by reference to Registrant's Registration Statement on Form S-8 No. 33-58396).(2)
10.13 1994 Stock Option Plan. (incorporated by reference to Exhibit 10.18 to the Registrant's Form 10-K (Commission File No. 0-14938) for the year ended December 31, 1994).(2)
10.14 1994 Executive Loan Plan. (incorporated by reference to Exhibit 10.19 to the Registrant's Form 10-K (Commission File No. 0-14938) for the year ended December 31, 1994).(2)
10.15 Employment agreement dated as of June 1, 1996, between Douglas I. Payne and the Registrant (incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q (Commission File No. 0-14938) for the quarter ended June 30, 1996).(2)
10.16 Amendment No. 1, dated as of October 1, 1996, to the Employment Agreement, dated as of January 1, 1991, between the Registrant and Albert L. Prillaman (incorporated by reference to Exhibit 10.4 to the Registrant's Form 10-Q (Commission File No. 0-14938) for the quarter ended September 29, 1996).(2)
10.17 Assignment and Transfer Agreement, dated as of October 8, 1996, between National Canada Finance Corp. and National Bank of Canada relating to the Second Amended and Restated Revolving Credit Facility (incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q (Commission File No. 0-14938) for the quarter ended September 29, 1996).
10.18 Second Amendment, dated as of October 14, 1996, to the Second Amended and Restated Revolving Credit Facility (incorporated by reference to Exhibit 10.2 to the Registrant's Form 10-Q (Commission File No. 0-14938) for the quarter ended September 29, 1996).
10.19 Third Amendment, dated as of June 24, 1997, to the Second Amended and Restated Revolving Credit Facility and Term Loan Agreement dated February 15, 1994 between the Registrant, National Canada Finance Corp., and the National Bank of Canada (incorporated by reference to Exhibit 99.4 to the Registrant's Form 8-K (Commission File No. 0-14938) filed July 9, 1997).
10.20 Fourth Amendment, dated February 24, 1998, to the Second Amended and Restated Revolving Credit Facility and Term Loan Agreement dated February 15, 1994 between the Registrant, National Canada Finance Corp., and the National Bank of Canada (incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q (Commission File No. 0-14938) for the quarter ended March 28, 1998).
10.21 Fifth Amendment, dated as of March 10, 1999, to the Second Amended and Restated Revolving Credit Facility and Term Loan Agreement dated February 15, 1994 among the Registrant, National Canada Finance Corp., and the National Bank of Canada (incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q (Commission File No. 0-14938) for the quarter ended March 27, 1999).
10.22 Employment Agreement dated as of April 1, 1999 between John W. Johnson and the Registrant (incorporated by reference to Exhibit 10.2 to the Registrant's Form 10-Q (Commission File No. 0-14938) for the quarter ended March 27, 1999).(2)
10.23 Employment Agreement dated as of April 1, 1999 between William A. Sibbick, Jr. and the Registrant (incorporated by reference to Exhibit 10.3 to the Registrant's Form 10-Q (Commission File No. 0-14938) for the quarter ended March 27, 1999).(2)
10.24 Employment Agreement dated as of April 1, 1999 between Kelly S. Cain and the Registrant (incorporated by reference to Exhibit 10.4 to the Registrant's Form 10-Q (Commission File No. 0-14938) for the quarter ended March 27, 1999).(2)
21 Listing of Subsidiaries:
Charter Stanley Foreign Sales Corporation, a United States Virgin Islands Corporation.
23 Consent of PricewaterhouseCoopers LLP(1)
27 Financial Data Schedule.(1)
- ------------------------------------ (1) Filed herewith (2) Management contract or compensatory plan
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
STANLEY FURNITURE COMPANY, INC.
February 4, 2000 By: /s/Albert L. Prillaman Albert L. Prillaman Chairman, President, and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/Albert L. Prillaman Chairman, President, and Chief February 4, 2000 (Albert L. Prillaman) Executive Officer, and Director (Principal Executive Officer)
/s/Douglas I. Payne Senior Vice President - Finance February 4, 2000 (Douglas I. Payne) and Administration, Treasurer and Secretary (Principal Financial and Accounting Officer)
/s/Robert G. Culp, III Director February 4, 2000 (Robert G. Culp, III)
/s/David V. Harkins Director February 4, 2000 (David V. Harkins)
/s/Edward J. Mack Director February 4, 2000 (Edward J. Mack)
/s/Thomas L. Millner Director February 4, 2000 (Thomas L. Millner)
/s/T. Scott McIlhenny, Jr. Director February 4, 2000 (T.Scott McIlhenny, Jr.)
STANLEY FURNITURE COMPANY, INC. ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Financial Statements Page
Report of Independent Accountants....................................
Balance Sheets as of December 31, 1999 and 1998......................
Statements of Income for each of the three years in the period ended December 31, 1999............................................
Statements of Changes in Stockholders' Equity for each of the three years in the period ended December 31, 1999..................
Statements of Cash Flows for each of the three years in the period ended December 31, 1999............................................
Notes to Financial Statements........................................
Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts for each of the three years in the period ended December 31, 1999.................. S-1
Report of Independent Accountants
To the Board of Directors and Stockholders of Stanley Furniture Company, Inc.
In our opinion, the financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Stanley Furniture Company, Inc. at December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Richmond, Virginia January 24, 2000
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
STANLEY FURNITURE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Organization and Basis of Presentation
Stanley Furniture Company, Inc. (the "Company") is a leading designer and manufacturer of wood furniture exclusively targeted at the upper-medium price range of the residential market.
The Company operates in one business segment. Substantially all revenues result from the sale of residential furniture products. Substantially all of the Company's trade accounts receivable are due from retailers in this market, which consists of a large number of entities with a broad geographical dispersion.
Revenue Recognition
Revenue is recognized upon shipment of product.
Inventories
Inventories are valued at the lower of cost or market. Cost for all inventories is determined using the first-in, first-out (FIFO) method.
Property, Plant and Equipment
Depreciation of property, plant and equipment is computed using the straight-line method based upon the estimated useful lives. Gains and losses related to dispositions and retirements are included in income. Maintenance and repairs are charged to income as incurred; renewals and betterments are capitalized.
Capitalized Software Cost
The Company amortizes certain purchased computer software costs using the straight-line method over the economic lives of the related products not to exceed five years. Unamortized cost at December 31, 1999 and 1998 was $815,000 and $831,000, respectively.
Goodwill and Long-lived Assets
Goodwill is being amortized on a straight-line basis over 40 years. The Company continually evaluates the potential impairment of long-lived assets, including goodwill, on the basis of whether the carrying value is fully recoverable from projected, undiscounted net cash flows.
Income Taxes
Deferred income taxes are determined based on the difference between the financial statement and income tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Deferred tax expense represents the change in the deferred tax asset/liability balance. Income tax credits are reported as a reduction of income tax expense in the year in which the credits are generated.
Fair Value of Financial Instruments
The fair value of the Company's long-term debt is estimated using discounted cash flow analysis based on the incremental borrowing rates currently available to the Company for loans with similar terms and maturities. At December 31, 1999, the fair value approximated the carrying amount. The fair value of trade receivables, trade payables and letters of credit approximate the carrying amount because of the short maturity of these instruments.
STANLEY FURNITURE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. Summary of Significant Accounting Policies (continued)
Pension Plans
The Company's funding policy is to contribute to all qualified plans annually an amount equal to the normal cost and a portion of the unfunded liability, but not to exceed the maximum amount that can be deducted for federal income tax purposes.
Earnings per Common Share
Basic earnings per share is computed based on the average number of common shares outstanding. Diluted earnings per share reflects the increase in average common shares outstanding that would result from the assumed exercise of outstanding stock options, calculated using the treasury stock method.
Stock Options
The Company applies Accounting Principles Board Opinion No. 25 in accounting for stock options and discloses the fair value of options granted as permitted by Statement of Financial Accounting Standards No. 123.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Changes in such estimates may affect amounts reported in future periods.
2. Property, Plant and Equipment
Capital expenditures for 1999 aggregated $25.6 million, reflecting $22.9 million of cash expenditures and $2.7 million in accounts payable.
STANLEY FURNITURE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. Long-Term Debt
The Company has a revolving credit facility which provides for borrowings of up to $25.0 million through August 2000, automatically renewable thereafter for one year periods unless terminated by either party. Interest under the facility is payable monthly at prime (8.5% on December 31, 1999) or, at the Company's option, the reserve adjusted LIBOR plus .75% per annum (6.75% on December 31, 1999). The Company utilizes letters of credit to collateralize certain insurance policies and inventory purchases. Outstanding letters of credit at December 31, 1999 were $1.0 million. At December 31, 1999, $24.0 million of additional borrowings were available under the revolving credit facility.
The above loan agreements require the Company to maintain certain financial covenants. The Company's ability to pay dividends with respect to the common stock is restricted to $25.0 million plus 50% of the Company's consolidated net earnings, adjusted for net cash proceeds received by the Company from the sale of its stock and the amount of payments for redemption, purchase or other acquisition of its capital stock, subsequent to January 1, 1999. At December 31, 1999, these covenants limit additional borrowings to $59 million and limit funds available to pay dividends and repurchase the Company's common stock to $31 million.
Annual debt service requirements are $5.2 million in 2000, $6.7 million in 2001, $6.8 million in 2002, $6.9 million in 2003 and $7.0 million in 2004.
4. Income Taxes
The provision for income taxes consists of (in thousands):
STANLEY FURNITURE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. Income Taxes (continued)
A reconciliation of the difference between the federal statutory income tax rate and the effective income tax rate follows:
The income tax effects of temporary differences that comprise deferred tax assets and liabilities at December 31 follow (in thousands):
5. Stockholders' Equity
During 1999, the Company's Board of Directors increased the authorization to repurchase its common stock to $20 million. Since October 1998, the Company has utilized $10.3 million to purchase 541,750 shares of its common stock at an average price of $18.94 per share, including the purchase of 226,750 shares at an average price of $20.76 in 1999.
In 1998, the Company contributed 103,400 shares of its common stock, with a fair value of $1.9 million, to the Stanley Retirement Plan.
The Company effected a two-for-one stock split, distributed in the form of a stock dividend on May 15, 1998, to stockholders of record on May 1, 1998. All related amounts have been retroactively adjusted to reflect the stock split.
STANLEY FURNITURE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. Stockholders' Equity (continued)
In addition to its common stock, the Company's authorized capital includes 1,000,000 shares of "blank check" preferred stock. None was outstanding during the three years ended December 31, 1999. The Board of Directors is authorized to issue such stock in series and to fix the designation, powers, preferences, rights, limitations and restrictions with respect to any series of such shares. Such "blank check" preferred stock may rank prior to common stock as to dividend rights, liquidation preferences or both, may have full or limited voting rights and may be convertible into shares of common stock.
Basic and diluted earnings per share are calculated using the following share data (in thousands):
6. Employee Stock Plans
The Company's stock option plans provide for the granting of stock options up to an aggregate of 1,400,000 shares of common stock to key employees. The exercise price may not be less than the fair market value of the Company's common stock on the grant date. Granted options vest 20% annually.
At December 31, 1999 and 1998, options to purchase 727,256 and 930,878 shares, were exercisable with a weighted-average exercise price of approximately $5.00. At December 31, 1999, no shares were available for grant. Activity for the three years ended December 31, 1999 follows:
STANLEY FURNITURE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. Employee Stock Plans (continued)
Options outstanding at December 31, 1999, include 683,116 shares with exercise prices ranging from $4.25 to $6.06 and a weighted-average remaining contractual life of approximately 5 years. The remaining options have exercise prices ranging from $8.19 to $19.13 with a weighted-average remaining contractual life of approximately 8 years.
The estimated per share weighted-average fair value of stock options granted during 1999, 1998, and 1997 was $12.73, $11.78 and $7.25, respectively, on the date of grant. A risk-free interest rate of 6.5%, 4.7% and 5.4% for 1999, 1998, and 1997, respectively, and a 50% volatility rate with an expected life of 10 years was assumed in estimating the fair value.
The following table summarizes the pro forma effects assuming compensation cost for such awards had been recorded based upon the estimated fair value (in thousands, except per share data):
In 1994, the Company entered into a contractual agreement to issue 100,000 shares of common stock to the chief executive officer at $5.00 per share (the market price on the date of the agreement) in exchange for a non-recourse 7.6% note receivable. The principal amount plus accrued interest was forgiven over time, subject to the executive's continued employment. The contractual agreement was completed in 1998 and 100,000 shares were issued to the chief executive officer. Compensation expense was $271,000 and $285,000 for 1998 and 1997, respectively.
7. Employee Benefit Plans
Defined Contribution Plan
The Company maintains a defined contribution plan covering substantially all of its employees. Discretionary matching and profit sharing contributions were $1.5 million in both 1999 and 1998, and $1.2 million in 1997.
STANLEY FURNITURE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. Employee Benefit Plans (continued)
Pension Plans
Benefits do not accrue under the Company's pension plans after 1995. The financial status of the plans at December 31 follows (in thousands):
At December 31, 1999, the Stanley Retirement Plan assets included Company stock with a fair value of $1.9 million.
Components of net periodic pension cost follow (in thousands):
STANLEY FURNITURE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. Employee Benefit Plans (continued)
The assumptions used as of December 31 to determine the plans' financial status and pension cost were:
Postretirement Benefits Other Than Pensions
The Company provides health care benefits to eligible retired employees between the ages of 55 and 65 and provides life insurance benefits to eligible retired employees from age 55 until death. The plan's financial status at December 31 follows (in thousands):
Components of net periodic postretirement benefit cost were (in thousands):
STANLEY FURNITURE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. Employee Benefit Plans (continued)
The weighted-average discount rates used in determining the actuarial present value of the projected benefit obligation were 8.00%, 6.65% and 7.00% for 1999, 1998 and 1997, respectively. The rate of increase in future health care benefit cost used in determining the obligation for 1999 was 8% gradually decreasing to 5.5% beginning in 2004, and for 1998 and 1997 was 9% gradually decreasing to 5.5% beginning in 2004.
An increase or decrease in the assumed health care cost trend rate of one percentage point in each future year would affect the accumulated postretirement benefit obligation at December 31, 1999, by approximately $75,000 and the annual postretirement benefit cost by approximately $12,000.
Deferred Compensation
The Company has a deferred compensation plan, funded with life insurance policies, which permits certain management employees to defer portions of their compensation and earn a fixed rate of return. The accrued liabilities relating to this plan of $1.4 million at December 31, 1999 and 1998, are included in accrued salaries, wages and benefits and other long-term liabilities. The cash surrender value, net of policy loans, is included in other assets.
8. Leases
The Company leases showroom space and certain other equipment. Rental expenses charged to operations were $1.5 million, $1.2 million, and $1.1 million in 1999, 1998 and 1997, respectively. Future minimum lease payments, net of subleases, are approximately as follows: 2000 - $959,000; 2001 - $859,000; 2002 - $645,000; and 2003 - $503,000.
STANLEY FURNITURE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. Supplemental Cash Flow Information
10. Quarterly Results of Operations (Unaudited)
STANLEY FURNITURE COMPANY, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For each of the Three Years in the Period Ended December 31, 1999 (In thousands)
- ------------------------------------ (a) Uncollectible receivables written off, net of recoveries. (b) Represents net increase (decrease) in the reserve.
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