10-K 1 0001.txt YEAR END 2000 REPORT 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, 2000 Commission file number 0-14938 STANLEY FURNITURE COMPANY, INC. (Exact name of Registrant as specified in its Charter) Delaware 54-1272589 ------------------------------- --------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1641 Fairystone Park Highway, Stanleytown, VA 24168 (Address of principal executive offices, Zip Code) Registrant's telephone number, including area code: (540) 627-2000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.02 per share (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes (x) No ( ) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[ ] Aggregate market value of the voting stock held by non-affiliates of the Registrant based on the closing price on January 31, 2001: $153 million Indicate the number of shares outstanding of each of the Registrant's classes of common stock as of January 31, 2001: Common Stock, par value $.02 per share 6,596,436 -------------------------------------- ---------------- (Class of Common Stock) Number of Shares Documents incorporated by reference: Portions of the Registrant's Proxy Statement for its Annual Meeting of Stockholders scheduled for April 25, 2001 are incorporated by reference into Part III. TABLE OF CONTENTS Part I Page Item 1 Business........................................................ 3 Item 2 Properties...................................................... 6 Item 3 Legal Proceedings............................................... 6 Item 4 Submission of Matters to a Vote of Security Holders............. 6 Part II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters......................................................... 8 Item 6 Selected Financial Data......................................... 9 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................... 10 Item 7A Quantitative and Qualitative Disclosures about Market Risks..... 12 Item 8 Financial Statements and Supplementary Data..................... 13 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................ 13 Part III Items 10 through 13....................................................... 13 Part IV Item 14 Exhibits, Financial Statement Schedule and Reports on Form 8-K.. 13 Signatures .............................................................. 18 Index to Financial Statements and Schedule................................ F-1 Stanley Furniture Company, Inc. PART I Item 1. Business General The Company is a leading designer and manufacturer of residential wood furniture exclusively targeted at the upper-medium price range. The Company offers diversified product lines across all major style and product categories within this price range. Its product depth and extensive style selections make the Company a complete wood furniture resource for retailers in its price range and allow the Company to respond more quickly to shifting consumer preferences. The Company has established a broad distribution network that includes independent furniture stores, department stores, and national and regional furniture chains. To produce its products and support its broad distribution network, the Company has developed efficient and flexible manufacturing processes that it believes are unique in the furniture industry. The Company emphasizes continuous improvement in its manufacturing processes to enable it to continue providing competitive advantages to its customers, such as quick delivery, reduced inventory investment, high quality, and value. Products and Styles The Company's product lines cover all major design categories, and include 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..................................................... 17 Bedroom......................................................... 17 Tables.......................................................... 12 Entertainment units............................................. 9 Youth bedroom (Young America(TM))................................ 14 Home office...................................................... 8 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, Furnitureland South, Breuners Home Furnishings, Jordan's, Robb & Stucky, Nebraska Furniture Mart 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 3,200 customers during 2000, and approximately 6% of the Company's sales in 2000 were to international customers. No single customer accounted for more than ten percent of the Company's sales in 2000. 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 24 days on average during 2000 with average finished goods inventory turns of 7.6. 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. During December 2000, the Company shipped customer orders in 17 days on average compared to 30 days in December 1999. As a result, the backlog of unshipped orders was $15.1 million at December 31, 2000 compared to $28.6 million at December 31, 1999. Raw Materials The principal materials used by the Company in manufacturing its products include lumber, veneers, plywood, particle board, hardware, glue, finishing materials, glass products, laminates, fabrics and metals. The Company uses a variety of species of lumber, including cherry, oak, ash, poplar, pine and maple. The Company's five largest suppliers accounted for approximately 16% of its purchases in 2000. 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 1999 sales, according to Furniture/Today, a trade publication. The furniture industry is highly competitive and includes a large number of foreign and domestic manufacturers, none of which dominates the market. In addition, competition has increased from foreign manufacturers in countries such as China with lower production costs. The markets in which the Company competes include a large number of relatively small manufacturers; however, certain competitors of the Company have substantially greater sales volumes and financial resources than the Company. Competitive factors in the upper-medium price range include style, price, quality, delivery, design, service, and durability. The Company believes that its manufacturing processes, its 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, 2000, the Company employed approximately 3,350 associates. None of the Company's associates is represented by a labor union. The Company considers its relations with its associates to be good. Trademarks The trade names of the Company represent many years of continued business, and the Company believes such names are well recognized and associated with quality in the furniture industry. The Company owns a number of trademarks, none of which is considered to be material to the Company. Governmental Regulations The Company is subject to federal, state, and local laws and regulations in the areas of safety, health, and environmental pollution controls. Compliance with these laws and regulations has not in the past had any material effect on the Company's earnings, capital expenditures, or competitive position; however, the effect of such compliance in the future cannot be predicted. Management believes that the Company is in material compliance with applicable federal, state, and local safety, health and environmental regulations. Forward-Looking Statements Certain statements made in this Annual Report on Form 10-K are not based on historical facts, but are forward-looking statements. These statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. These statements reflect the Company's reasonable judgment with respect to future events and are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such risks and uncertainties include the cyclical nature of the furniture industry, fluctuations in the price for lumber which is the most significant raw material used by the Company, competition in the furniture industry, capital costs and general economic conditions. Item 2. Properties Set forth below is certain information with respect to the Company's principal properties. The Company believes that all these properties are well maintained and in good condition. 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, excluding the Martinsville, Virginia factory, are presently operating at 90% capacity, principally on a one-shift basis. The Martinsville, Virginia factory began production in early 2000 and is operating at 50-60% of its anticipated annual sales capacity of $50-60 million.
Approximate Owned Facility Size or Location Primary Use (Square Feet) Leased -------- ----------- ------------- ------ Stanleytown, VA Manufacturing 1,721,000 Owned and Corporate Headquarters Martinsville, VA Manufacturing 300,000 Owned West End, NC Manufacturing 470,000 Owned(1) Lexington, NC Manufacturing 635,000 Owned Robbinsville, NC Manufacturing 540,000 Owned High Point, NC Showroom 63,000 Leased(2) ------------------------------------ (1) This plant leases its lumber yard; lease expires May 31, 2007. (2) Lease expires October 31, 2004.
Item 3. Legal Proceedings None. Item 4. Submission of Matters to a Vote of Security Holders None. Executive Officers of the Registrant The Company's executive officers and their ages as of January 1, 2001 are as follows:
Name Age Position Albert L. Prillaman........... 55 Chairman, President and Chief Executive Officer John W. Johnson ............ 56 Senior Vice President-Manufacturing Douglas I. Payne ............ 42 Senior Vice President - Finance and Administration, and Secretary William A. Sibbick............ 44 Senior Vice President -Sales Kelly S. Cain ............... 46 Senior Vice President - Product Development and Merchandising
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 to that time, 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. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters --------------------------------------------------------------------- The Company's common stock is quoted on The Nasdaq Stock Market ("Nasdaq") under the symbol STLY. The table below sets forth the high and low sales prices per share, for the periods indicated, as reported by Nasdaq.
High Low 2000 First Quarter............. $20.25 $15.13 Second Quarter............ 24.00 18.88 Third Quarter............. 28.50 21.25 Fourth Quarter............ 25.88 20.19 1999 First Quarter............. $22.63 $16.50 Second Quarter............ 23.63 19.00 Third Quarter............. 24.50 18.75 Fourth Quarter............ 22.25 17.00
As of January 31, 2001, 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. Selected Financial Data
Years Ended December 31, 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (in thousands, except per share data) Income Statement Data: Net sales.................................. $283,092 $264,717 $247,371 $211,905 $201,905 Cost of sales.............................. 214,499 196,631 186,931 159,453 153,332 -------- -------- -------- -------- -------- Gross profit............................. 68,593 68,086 60,440 52,452 48,573 Selling, general and administrative expenses................................. 33,656 33,796 32,496 29,949 30,403 -------- -------- -------- -------- -------- Operating income........................... 34,937 34,290 27,944 22,503 18,170 Other expense (income), net ............... (82) 388 411 276 616 Interest expense........................... 4,003 3,478 4,164 3,538 3,344 -------- -------- -------- -------- -------- Income from continuing operations before income taxes.................... 31,016 30,424 23,369 18,689 14,210 Income taxes............................... 11,476 11,211 8,886 7,102 5,470 -------- -------- -------- -------- -------- Income from continuing operations........ $ 19,540 $ 19,213 $ 14,483 $ 11,587 $ 8,740 ======== ======== ======== ======== ======== Basic Earnings Per Share:(1) Income from continuing operations.......... $ 2.76 $ 2.70 $ 2.07 $ 1.38 $ .92 ======== ======== ======== ======== ======== Weighted average shares(2)................. 7,076 7,119 7,008 8,394 9,444 ======== ======== ======== ======== ======== Diluted Earnings Per Share:(1) Income from continuing operations.......... $ 2.63 $ 2.47 $ 1.82 $ 1.25 $ .88 ======== ======== ======== ======== ======== Weighted average shares(2)................. 7,429 7,770 7,963 9,278 9,890 ======== ======== ======== ======== ======== Balance Sheet and Other Data: Cash....................................... $ 1,825 $ 3,597 $ 6,791 $ 756 $ 8,126 Inventories................................ 54,423 43,580 46,514 45,730 40,239 Working capital............................ 53,759 38,531 44,408 41,440 46,225 Total assets............................... 179,206 170,522 154,374 143,225 141,510 Long-term debt including current maturities (2) .................. 52,169 38,404 43,539 52,577 39,350 Stockholders' equity (2)(3)................ 79,477 79,573 62,368 48,247 61,617 Capital expenditures(4).................... 6,068 25,566 6,680 4,076 3,599 (1) Amounts have been retroactively adjusted to reflect a two-for-one stock split, distributed in the form of a stock dividend, on May 15, 1998. (2) The Company purchased 869,400, 226,750, 315,000 and 2,326,402 shares of its common stock for a total consideration of $19.8 million, $4.7 million, $5.6 million and $25.3 million in 2000, 1999, 1998 and 1997, respectively. In 1998, the Company issued 103,400 shares to the Stanley Retirement Plan. (3) No dividends have been paid on the Company's common stock during any of the years presented. (4) In 1999, the Company spent $10 million on expansion projects at existing facilities and $15 million to purchase and equip a new facility.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the Selected Financial Data and the Financial Statements and Notes thereto contained elsewhere herein. Results of Operations The following table sets forth the percentage relationship to net sales of certain items included in the Statements of Income:
For the Years Ended December 31, ---------------------------------- 2000 1999 1998 ---- ---- ---- Net sales............................... 100.0% 100.0% 100.0% Cost of sales........................... 75.8 74.3 75.6 ----- ----- ----- Gross profit.......................... 24.2 25.7 24.4 Selling, general and administrative expenses.............................. 11.9 12.7 13.1 ----- ----- ----- Operating income..................... 12.3 13.0 11.3 Other expense (income), net.............. (.1) .2 .1 Interest expense......................... 1.4 1.3 1.7 ----- ----- ----- Income before income taxes............. 11.0 11.5 9.5 Income taxes............................. 4.1 4.2 3.6 ----- ----- ----- Net income............................. 6.9% 7.3% 5.9% ===== ===== =====
2000 Compared to 1999 Net sales increased $18.4 million, or 6.9%, for 2000 compared to 1999. The increase was due to higher unit volume in the Company's Young AmericaTM youth bedroom and home office product categories, and to a lesser extent higher average selling prices. Due to the softening U.S. economy, the Company experienced a 5.2% decline in net sales for the fourth quarter of 2000 compared to an exceptionally strong prior year quarter. The Company anticipates the current economic slowdown to continue through the first half of 2001 and; therefore, expects any sales growth to be modest to slightly below comparable prior year periods. Capacity constraints limited shipments during 1999. As a result, the Company completed expansion projects during 1999 to increase production in response to the growing demand for its bedroom and Young America(TM) youth bedroom products. During the first quarter of 2000, the Company commenced operations at its new manufacturing facility in response to the growing demand for home office furniture. The Company experienced consistent improvement in operating performance at the new facility as production levels were increased throughout 2000 and expects continued improvement in 2001. Gross profit margin for 2000 decreased to 24.2% from 25.7% for 1999. The decrease resulted primarily from start-up expenses at the new factory along with operating inefficiencies created by a change in product mix at several other factories as product was moved to the new facility, higher raw material cost and increased labor cost. Selling, general and administrative expenses as a percentage of net sales decreased to 11.9% in 2000 from 12.7% for 1999. The lower percentage in 2000 was due principally to higher net sales. Expenditures in 2000 were slightly lower due primarily to reduced selling expenses. As a result, operating income increased to $34.9 million, from $34.3 million in 1999. However, due to the above factors, operating income as a percentage of net sales declined to 12.3% from 13.0% in 1999. Interest expense for 2000 increased due to higher average debt levels resulting from the Company's purchase of its stock and increased working capital levels. The Company's effective income tax rate was 37.0% and 36.9% for 2000 and 1999, respectively. 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. Financial Condition, Liquidity and Capital Resources The Company generated cash from operations of $11.8 million in 2000 compared to $27.8 million in 1999 and $25.0 million in 1998. The decrease in 2000 compared to 1999 was attributable to increased inventory levels and higher tax payments. The increase in 1999 compared to 1998 was due primarily to increased sales. The Company used the cash generated from operations in 2000, 1999 and 1998 to fund capital expenditures and repurchase its common stock. Net cash used by investing activities was $8.7 million in 2000 compared to $23.0 million and $6.5 million in 1999 and 1998, respectively. Net cash used for capital expenditures in 2000 was $8.8 million, reflecting $2.7 million of prior year capital expenditures included in accounts payable at December 31, 1999 and $6.1 million of capital expenditures in 2000. In 1999 capital expenditures were primarily for capacity expansion projects. Approximately $10 million was used to expand production capability for the Company's bedroom and Young America(TM) youth bedroom products and approximately $15 million was used to purchase and equip a facility dedicated to the production of home office furniture. This dedicated facility began operation in the first quarter of 2000. The expenditures in 2000, the remaining expenditures in 1999 and the expenditures in 1998 were primarily for plant and equipment and other assets in the normal course of business. Capital expenditures in 2001 are anticipated to be approximately $6-$7 million. Net cash used by financing activities was $4.9 million, $7.9 million and $12.5 million in 2000, 1999 and 1998, respectively. In 2000, cash from operations and borrowings under the revolving credit facility provided cash for the purchase and retirement of the Company's common stock, senior debt payments and capital expenditures. 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. The Company used $19.8 million of cash to purchase 869,400 shares of its stock on the open market at an average price of $22.72 in 2000. For the three years ending December 31, 2000, the Company has used $30.0 million of cash to purchase 1.4 million shares of its stock on the open market at an average price of $21.27. At December 31, 2000, approximately $10 million remains authorized by the Company's Board of Directors to repurchase shares of the Company's common stock. Consequently, the Company may, from time to time, either directly or through agents, repurchase its common stock in the open market, through negotiated purchases or otherwise, at prices and on terms satisfactory to the Company. Depending on market prices and other conditions relevant to the Company, such purchases may be discontinued at any time. At December 31, 2000, long-term debt, including current maturities, was $52.2 million. In March 2000, the revolving credit facility was amended to increase available borrowings from $25.0 million to $35.0 million. Approximately $14.4 million of additional borrowing capacity was available under the revolving credit facility at December 31, 2000. Annual debt service requirements are $6.7 million in 2001, $6.8 million in 2002, $6.9 million in 2003, $7.0 million in 2004 and $2.8 million in 2005. The Company believes that its financial resources are adequate to support its capital needs and debt service requirements. Recent Accounting Pronouncements In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"), which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. SAB 101 was adopted in the fourth quarter of 2000 and did not have a material impact on the Company's financial statements. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). In June 2000, the FASB issued Statement of Financial Accounting Standards No. 138 ("SFAS 138"), an amendment of SFAS 133. Both provide guidance on accounting for derivatives and hedging activities. At December 31, 2000, the Company had no derivative or hedging activities, and any future activity is not anticipated to have a material impact on the Company's financial statements. Item 7A.Quantitative and Qualitative Disclosures about Market Risks Because the Company's obligation under its Revolving Credit Facility bears interest at a variable rate, the Company is sensitive to changes in prevailing interest rates. A one-percentage point fluctuation in market interest rates would not have had a material impact on earnings during the 2000 fiscal year. Item 8. Financial Statements and Supplementary Data The financial statements and schedule listed in Items 14(a)(1) and (a)(2) hereof are incorporated herein by reference and are filed as part of this report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III In accordance with general instruction G(3) of Form 10-K, the information called for by Items 10, 11, 12, and 13 of Part III is incorporated by reference to the Registrant's definitive Proxy Statement for its Annual Meeting of Stockholders scheduled for April 25, 2001, except for information concerning the executive officers of the Registrant which is included in Part I of this report under the caption "Executive Officers of the Registrant." PART IV Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K -------------------------------------------------------------- (a) Documents filed as a part of this Report: (1) The following financial statements are included in this report on Form 10-K: Report of Independent Accountants Balance Sheets as of December 31, 2000 and 1999 Statements of Income for each of the three years in the period ended December 31, 2000 Statements of Changes in Stockholders' Equity for each of the three years in the period ended December 31, 2000 Statements of Cash Flows for each of the three years in the period ended December 31, 2000 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, 2000 (b) The following reports on Form 8-K were filed by the Registrant during the last quarter of the period covered by this report: A report on Form 8-K was filed on December 13, 2000, to announce the Company's Board of Directors' authorization to increase the Company's stock repurchase program to $14.6 million and to comment on the Registrant's fourth quarter and 2001 outlook. (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) 10.25 Sixth Amendment, dated March 30, 2000, to the Second Amended and Restated Revolving Credit Facility and Term Loan Agreement dated February 15, 1994, among the Registrant, 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 April 1, 2001). 10.26 Seventh Amendment, dated as of March 31, 2000, to the Second Amended and Restated Revolving Credit Facility and Term Loan Agreement dated February 15, 1994, among the Registrant, National Bank of Canada (incorporated by reference to Exhibit 10.2 to the Registrant's Form 10-Q (Commission File No. 0-14938) for the quarter ended April 1, 2000). 10.27 2000 Incentive Compensation Plan (incorporate by reference to Exhibit A to the Registrant's Proxy Statement (Commission File No. 0-14938) for the special meeting of stockholders held on August 24, 2000).(2) 10.28 Amendment No. 2 to The Stanley Furniture Company, Inc. 1992 Stock Option Plan dated as of July 1, 2000 (incorporated by reference to Exhibit 10.2 to the Registrant's Form 10-Q (Commission File No. 0-14938)for the quarter ended September 1, 2000).(2) 10.29 Amendment No. 1 to The Stanley Furniture Company, Inc. 1994 Stock Option Plan dated as of July 1, 2000 (incorporated by reference to Exhibit 10.3 to the Registrant's Form 10-Q (Commission File No. 0-14938)for the quarter ended September 1, 2000).(2) 21 Listing of Subsidiaries: Charter Stanley Foreign Sales Corporation, a United States Virgin Islands Corporation. 23 Consent of PricewaterhouseCoopers LLP(1) ------------------------------------ (1) Filed herewith (2) Management contract or compensatory plan SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. STANLEY FURNITURE COMPANY, INC. February 5, 2001 By: /s/Albert L. Prillaman ------------------------------- Albert L. Prillaman Chairman, President, and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date /s/Albert L. Prillaman Chairman, President, and Chief February 5, 2001 -------------------------- Executive Officer, and Director (Albert L. Prillaman) (Principal Executive Officer) /s/Douglas I. Payne Senior Vice President - Finance February 5, 2001 -------------------------- and Administration and Secretary (Douglas I. Payne) (Principal Financial and Accounting Officer) /s/Robert G. Culp, III Director February 5, 2001 -------------------------- (Robert G. Culp, III) /s/David V. Harkins Director February 5, 2001 -------------------------- (David V. Harkins) /s/Edward J. Mack Director February 5, 2001 -------------------------- (Edward J. Mack) /s/Thomas L. Millner Director February 5, 2001 -------------------------- (Thomas L. Millner) /s/T. Scott McIlhenny, Jr. Director February 5, 2001 -------------------------- (T.Scott McIlhenny, Jr.) STANLEY FURNITURE COMPANY, INC. ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000 INDEX TO FINANCIAL STATEMENTS AND SCHEDULE Financial Statements Page Report of Independent Accountants.................................... F-2 Balance Sheets as of December 31, 2000 and 1999...................... F-3 Statements of Income for each of the three years in the period ended December 31, 2000............................................ F-4 Statements of Changes in Stockholders' Equity for each of the three years in the period ended December 31, 2000.................. F-5 Statements of Cash Flows for each of the three years in the period ended December 31, 2000............................................ F-6 Notes to Financial Statements........................................ F-7 Financial Statement Schedule Schedule II - Valuation and Qualifying Accounts for each of the three years in the period ended December 31, 2000.................. 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, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. 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 of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Richmond, Virginia January 22, 2001 STANLEY FURNITURE COMPANY, INC. BALANCE SHEETS (in thousands, except share data)
December 31, ------------------------- 2000 1999 -------- -------- ASSETS Current assets: Cash .......................................................... $ 1,825 $ 3,597 Accounts receivable, less allowances of $2,230 and $2,050...... 33,224 32,133 Inventories: Finished goods............................................... 30,521 22,393 Work-in-process.............................................. 9,507 8,432 Raw materials................................................ 14,395 12,755 -------- -------- Total inventories.......................................... 54,423 43,580 Prepaid expenses and other current assets...................... 568 1,011 Deferred income taxes.......................................... 2,514 2,463 -------- -------- Total current assets......................................... 92,554 82,784 Property, plant and equipment, net............................... 70,455 72,100 Goodwill, less accumulated amortization of $4,032 and $3,696..... 9,408 9,744 Other assets..................................................... 6,789 5,894 -------- -------- Total assets................................................. $179,206 $170,522 ======== ======== LIABILITIES Current liabilities: Current maturities of long-term debt........................... $ 6,714 $ 5,236 Accounts payable............................................... 19,507 25,836 Accrued salaries, wages and benefits........................... 10,779 10,864 Other accrued expenses......................................... 1,795 2,317 -------- -------- Total current liabilities.................................... 38,795 44,253 Long-term debt, exclusive of current maturities.................. 45,455 33,168 Deferred income taxes............................................ 10,860 11,072 Other long-term liabilities...................................... 4,619 2,456 -------- -------- Total liabilities.............................................. 99,729 90,949 -------- -------- STOCKHOLDERS' EQUITY Common stock, $.02 par value, 10,000,000 shares authorized, 6,596,436 and 7,113,655 shares issued and outstanding......... 132 142 Capital in excess of par value................................... 18,160 35,064 Retained earnings................................................ 63,907 44,367 Stock option loans............................................... (2,722) -------- -------- Total stockholders' equity..................................... 79,477 79,573 -------- -------- Total liabilities and stockholders' equity.................. $179,206 $170,522 ======== ========
The accompanying notes are an integral part of the financial statements. STANLEY FURNITURE COMPANY, INC. STATEMENTS OF INCOME (in thousands, except per share data)
For the Years Ended December 31, ------------------------------------------- 2000 1999 1998 -------- -------- -------- Net sales........................................ $283,092 $264,717 $247,371 Cost of sales.................................... 214,499 196,631 186,931 -------- -------- -------- Gross profit................................... 68,593 68,086 60,440 Selling, general and administrative expenses..... 33,656 33,796 32,496 -------- -------- -------- Operating income............................... 34,937 34,290 27,944 Other expense (income), net...................... (82) 388 411 Interest expense................................. 4,003 3,478 4,164 -------- -------- -------- Income before income taxes..................... 31,016 30,424 23,369 Income taxes..................................... 11,476 11,211 8,886 -------- -------- -------- Net income..................................... $ 19,540 $ 19,213 $ 14,483 ======== ======== ======== Earnings per share: Basic.......................................... $ 2.76 $ 2.70 $ 2.07 ======== ======== ======== Diluted........................................ $ 2.63 $ 2.47 $ 1.82 ======== ======== ======== Weighted average shares outstanding: Basic........................................... 7,076 7,119 7,008 ======== ======== ======== Diluted......................................... 7,429 7,770 7,963 ======== ======== ========
The accompanying notes are an integral part of the financial statements. STANLEY FURNITURE COMPANY, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For each of the three years in the period ended December 31, 2000 (in thousands)
Common Stock Capital in Stock -------------------- Excess of Retained Option Shares Amount Par Value Earnings Loans ------ ------ --------- -------- ------ Balance at January 1, 1998................ 6,866 $137 $37,439 $10,671 Purchase and retirement of stock.......... (315) (6) (5,547) Issuance of stock to the Stanley Retirement Plan......................... 103 2 1,872 Compensation expense and stock issuance related to the executive loan plan...... 100 2 131 Exercise of stock options................. 316 6 3,178 Net income................................ 14,483 ----- ---- ------- ------- ------ Balance at December 31, 1998............ 7,070 141 37,073 25,154 Purchase and retirement of stock.......... (227) (4) (4,704) Exercise of stock options................. 271 5 2,695 Net income................................ 19,213 ----- ---- ------- ------- ------- Balance at December 31, 1999............ 7,114 142 35,064 44,367 Purchase and retirement of stock.......... (870) (17) (19,739) Exercise of stock options................. 352 7 2,835 $(3,078) Stock option loan payments................ 356 Net income................................ 19,540 ----- ---- ------- ------- ------- Balance at December 31, 2000............ 6,596 $132 $18,160 $63,907 $(2,722) ===== ==== ======= ======= ========
The accompanying notes are an integral part of the financial statements. STANLEY FURNITURE COMPANY, INC. STATEMENTS OF CASH FLOWS (in thousands)
For the Years Ended December 31, ------------------------------------------- 2000 1999 1998 ---- ---- ---- Cash flows from operating activities: Cash received from customers.................. $281,949 $261,566 $245,492 Cash paid to suppliers and employees.......... (255,058) (220,642) (209,030) Interest paid................................. (4,013) (3,527) (4,228) Income taxes paid, net........................ (11,033) (9,620) (7,211) -------- -------- -------- Net cash provided by operating activities... 11,845 27,777 25,023 -------- -------- -------- Cash flows from investing activities: Capital expenditures.......................... (8,768) (22,866) (6,680) Other, net.................................... 42 (157) 191 -------- -------- -------- Net cash used by investing activities....... (8,726) (23,023) (6,489) -------- -------- -------- Cash flows from financing activities: Purchase and retirement of common stock....... (19,754) (4,708) (5,553) Repayment of senior notes..................... (5,236) (5,135) (5,086) Proceeds from (repayment of) revolving credit facility, net........................ 19,001 (3,952) Proceeds from exercise of stock options....... 459 1,299 1,556 Other, net.................................... 639 596 536 -------- -------- -------- Net cash used by financing activities....... (4,891) (7,948) (12,499) -------- -------- -------- Net increase (decrease) in cash................. (1,772) (3,194) 6,035 Cash at beginning of year....................... 3,597 6,791 756 -------- -------- -------- Cash at end of year........................... $ 1,825 $ 3,597 $ 6,791 ======== ======== ========
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 at which time risks and rewards of ownership transfer to the buyer. Inventories Inventories are valued at the lower of cost or market. Cost for all inventories is determined using the first-in, first-out (FIFO) method. Property, Plant and Equipment Depreciation of property, plant and equipment is computed using the straight-line method based upon the estimated useful lives. Gains and losses related to dispositions and retirements are included in income. Maintenance and repairs are charged to income as incurred; renewals and betterments are capitalized. Capitalized Software Cost The Company amortizes certain purchased computer software costs using the straight-line method over the economic lives of the related products not to exceed five years. Unamortized cost at December 31, 2000 and 1999 was $579,000 and $815,000, 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. STANLEY FURNITURE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. Summary of Significant Accounting Policies (continued) Fair Value of Financial Instruments The fair value of the Company's long-term debt is estimated using discounted cash flow analysis based on the incremental borrowing rates currently available to the Company for loans with similar terms and maturities. At December 31, 2000, the fair value approximated the carrying amount. The fair value of trade receivables, trade payables and letters of credit approximate the carrying amount because of the short maturity of these instruments. Pension Plans The Company's funding policy is to contribute to all qualified plans annually an amount equal to the normal cost and a portion of the unfunded liability, but not to exceed the maximum amount that can be deducted for federal income tax purposes. Earnings per Common Share Basic earnings per share is computed based on the average number of common shares outstanding. Diluted earnings per share reflects the increase in average common shares outstanding that would result from the assumed exercise of outstanding stock options, calculated using the treasury stock method. Stock Options The Company applies Accounting Principles Board Opinion No. 25 in accounting for stock options and discloses the fair value of options granted as permitted by Statement of Financial Accounting Standards No. 123. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Changes in such estimates may affect amounts reported in future periods. 2. Property, Plant and Equipment
Depreciable lives (in thousands) (in years) 2000 1999 -------- ---- ---- Land and buildings......................... 20 to 50 $ 41,445 $35,871 Machinery and equipment.................... 5 to 12 75,869 62,120 Office furniture and equipment............. 3 to 10 1,829 1,732 Construction in progress................... 610 15,528 -------- ------- Property, plant and equipment, at cost... 119,753 115,251 Less accumulated depreciation.............. 49,298 43,151 -------- ------- Property, plant and equipment, net....... $ 70,455 $72,100 ======== =======
STANLEY FURNITURE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. Long-Term Debt (in thousands)
2000 1999 ---- ---- 7.28% Senior notes due March 15, 2004.................. $17,143 $21,429 7.57% Senior note due June 30, 2005.................... 6,025 6,975 7.43% Senior notes due November 18, 2007............... 10,000 10,000 Revolving credit facility.............................. 19,001 ------- ------- Total................................................ 52,169 38,404 Less current maturities................................ 6,714 5,236 ------- ------- Long-term debt, exclusive of current maturities...... $45,455 $33,168 ======= =======
In March 2000, the Revolving Credit Facility was amended to increase available borrowings from $25 million to $35 million through August 2002, automatically renewable thereafter for one year periods unless terminated by either party. Interest under the facility is payable monthly at prime (9.5% on December 29, 2000) or, at the Company's option, the reserve adjusted LIBOR plus .75% per annum (6.56% on December 29, 2000). The Company utilizes letters of credit to collateralize certain insurance policies and inventory purchases. Outstanding letters of credit at December 31, 2000 were $1.6 million. At December 31, 2000, $14.4 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, 2000, these covenants limit funds available to pay dividends and repurchase the Company's common stock to $21.9 million. Annual debt service requirements are $6.7 million in 2001, $6.8 million in 2002, $6.9 million in 2003, $7.0 million in 2004 and $2.8 million in 2005. 4. Income Taxes The provision for income taxes consists of (in thousands):
2000 1999 1998 ---- ---- ---- Current: Federal................................... $10,623 $10,435 $8,558 State..................................... 1,116 881 1,292 ------- ------- ------ Total current........................... 11,739 11,316 9,850 ------- ------- ------ Deferred: Federal................................... (233) (93) (852) State..................................... (30) (12) (112) ------- ------- ------ Total deferred.......................... (263) (105) (964) ------- ------- ------ Income taxes.......................... $11,476 $11,211 $8,886 ======= ======= ======
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:
2000 1999 1998 ---- ---- ---- Federal statutory rate...................... 35.0% 35.0% 35.0% State taxes, net of federal benefit......... 2.3 2.4 3.3 Goodwill.................................... .4 .4 .5 Life insurance.............................. (.6) (.5) (.6) Tax savings from foreign sales corporation............................... (.3) (.3) (.2) Other, net.................................. .2 (.1) ----- ---- ---- Effective income tax rate................. 37.0% 36.9% 38.0% ==== ==== ====
The income tax effects of temporary differences that comprise deferred tax assets and liabilities at December 31 follow (in thousands):
2000 1999 ---- ---- Current deferred tax assets (liabilities): Accounts receivable.................................. $ 568 $ 497 Inventory............................................ (23) 48 Employee benefits.................................... 1,944 1,903 Other accrued expenses............................... 25 15 ------- ------- Net current deferred tax asset..................... $ 2,514 $ 2,463 ======= ======= Noncurrent deferred tax liabilities: Property, plant and equipment........................ $ 9,570 $10,201 Employee benefits.................................... 1,290 871 ------- ------- Net noncurrent deferred tax liability.............. $10,860 $11,072 ======= =======
5. Stockholders' Equity The Company used $19.8 million of cash to purchase 869,400 shares of its stock on the open market at an average price of $22.72 in 2000. For the three years ending December 31, 2000, the Company has used $30.0 million of cash to purchase 1.4 million shares of its common stock on the open market at an average price of $21.27. At December 31, 2000, approximately $10.0 million remains of the Board of Directors authorization to repurchase shares of the Company's common stock. 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, 2000. 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):
2000 1999 1998 ---- ---- ---- Weighted average shares outstanding for basic calculation.................... 7,076 7,119 7,008 Effect of stock options...................... 353 651 955 ----- ----- ----- Weighted average shares outstanding for diluted calculation............. 7,429 7,770 7,963 ===== ===== =====
6. Employee Stock Plans The Company's stock option plans provide for the granting of stock options up to an aggregate of 2,400,000 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, 2000, 605,002 shares were available for grant. Activity for the three years ended December 31, 2000 follows:
Number Weighted-Average of shares Exercise Price --------- ---------------- Outstanding at January 1, 1998....................... 1,343,670 $ 4.95 Lapsed............................................. (36,400) 7.43 Exercised.......................................... (316,392) 4.95 Granted............................................ 43,000 17.75 --------- Outstanding at December 31, 1998..................... 1,033,878 5.47 Lapsed............................................. (5,000) 5.73 Exercised.......................................... (270,762) 4.80 Granted............................................ 5,700 19.13 --------- Outstanding at December 31, 1999..................... 763,816 5.82 Lapsed............................................. (5,000) 18.75 Exercised.......................................... (352,352) 4.98 Granted............................................ 400,000 24.88 --------- Outstanding at December 31, 2000..................... 806,464 $15.56 =========
STANLEY FURNITURE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. Employee Stock Plans (continued) Summarized information regarding stock options outstanding and exercisable at December 31, 2000 follows:
Outstanding Exercisable ------------------------------- ------------------- Range of Average Average Average Exercise Price Shares Life Price Shares Price -------------- ------- ------ ----- ------- ----- Up to $7 330,764 4.6 $ 4.7 330,764 $ 4.7 $7 to $10 32,000 6.0 8.5 32,000 8.5 $10 to $20 43,700 7.8 17.7 27,280 17.5 $20 to $30 400,000 10.0 24.9 92,000 25.0 ------- ---- ----- ------- ----- 806,464 7.5 $15.6 482,044 $ 9.5 ======= ==== ===== ======= =====
The estimated per share weighted-average fair value of stock options granted during 2000, 1999 and 1998 was $15.86, $12.73 and $11.78, respectively, on the date of grant. A risk-free interest rate of 5.0%, 6.5% and 4.7% for 2000, 1999 and 1998, respectively, and a 50% volatility rate with an expected life of 10 years was assumed in estimating the fair value for all three years. 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):
2000 1999 1998 ------------------- -------------------- ------------------- As Pro As Pro As Pro Reported Forma Reported Forma Reported Forma Net income.......................... $19,540 $18,661 $19,213 $18,902 $14,483 $14,175 Basic earnings per share............ 2.76 2.64 2.70 2.65 2.07 2.02 Diluted earnings per share.......... 2.63 2.52 2.47 2.44 1.82 1.79
During 2000, the Company loaned, in a non-cash transaction, an officer/director $2.6 million to purchase 330,420 shares of the Company's common stock. This recourse note, is collaterized by the common stock purchased and is payable on April 19, 2005, including accrued interest at 6.71% per annum. STANLEY FURNITURE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. Employee Benefit Plans Defined Contribution Plan The Company maintains a defined contribution plan covering substantially all of its employees and makes discretionary matching and profit sharing contributions. The total plan cost, including employer contributions, was $1.6 million in 2000 and $1.5 million in both 1999 and 1998. 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):
2000 1999 --------------------------- ------------------------ Stanley Supple- Stanley Supple- Retirement mental Retirement mental Plan Plan Plan Plan ------- ------- ------- ------- Change in benefit obligation: Beginning benefit obligation............... $14,539 $ 1,396 $17,963 $ 1,444 Interest cost.............................. 1,131 101 1,177 97 Actuarial loss (gain)...................... 588 86 (3,019) (111) Benefits paid.............................. (2,358) (42) (2,740) (34) Settlement cost............................ 507 1,158 ------- ------- ------- ------- Ending benefit obligation.............. 14,407 1,541 14,539 1,396 ------- ------- ------- ------- Change in plan assets: Beginning fair value of plan assets........ 18,065 19,028 Actual return on plan assets............... 851 1,777 Employer contributions..................... 42 34 Benefits paid.............................. (2,358) (42) (2,740) (34) ------- ------- ------- ------- Ending fair value of plan assets....... 16,558 18,065 ------- ------- ------- ------- Funded status.............................. 2,151 (1,541) 3,526 (1,396) Unrecognized loss (gain)...................... 3,480 (25) 2,450 (111) ------- ------- ------- ------- Prepaid (accrued) pension costs........... $ 5,631 $(1,566) $ 5,976 $(1,507) ======= ======= ======= =======
At December 31, 2000, and 1999, the Stanley Retirement Plan assets included Company stock with a fair value of $1.7 million and $1.9 million, respectively. Components of net periodic pension cost follow (in thousands):
2000 1999 1998 ---- ---- ---- Interest cost.......................... $1,231 $1,274 $1,279 Expected return on plan assets......... (1,334) (1,411) (1,290) Net amortization and deferral.......... 57 333 435 ------ ------ ------ Net periodic benefit cost........... (46) 196 424 Settlement expense..................... 492 409 376 ------ ------ ------ Total expense....................... $ 446 $ 605 $ 800 ====== ====== ======
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:
2000 1999 1998 ---- ---- ---- Discount rate for funded status............. 7.60% 8.00% 6.65% Discount rate for pension cost.............. 8.00% 6.65% 7.00% Return on assets............................ 7.50% 7.50% 7.50%
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):
2000 1999 ------- ------- Change in benefit obligation: Beginning benefit obligation......................... $ 2,911 $ 3,568 Service cost......................................... 51 45 Interest cost........................................ 234 212 Actuarial (gain) loss................................ 436 (552) Plan participants' contributions..................... 156 125 Benefits paid........................................ (636) (487) ------- ------- Ending benefit obligation........................ 3,152 2,911 ------- ------- Change in plan assets: Beginning fair value of plan assets.................. Employer contributions............................... 480 362 Plan participants' contributions..................... 156 125 Benefits paid........................................ (636) (487) ------- ------- Ending fair value of plan assets................. ------- ------- Funded status.......................................... (3,152) (2,911) Unrecognized net loss.................................. 898 487 Unrecognized transition obligation..................... 1,564 1,694 ------- ------- Accrued benefit cost................................. $ (690) $ (730) ======= =======
Components of net periodic postretirement benefit cost were (in thousands):
2000 1999 1998 ---- ---- ---- Service cost.................................... $ 51 $ 45 $ 44 Interest cost................................... 234 212 239 Amortization of transition obligation........... 130 130 130 Amortization and deferral....................... 25 32 41 ---- ---- ---- Net periodic postretirement benefit cost.. $440 $419 $454 ==== ==== ====
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 7.60%, 8.00% and 6.65% for 2000, 1999 and 1998, respectively. The rate of increase in future health care benefit cost used in determining the obligation for 2000 was 7.5% gradually decreasing to 5.5% beginning in 2004, for 1999 was 8% gradually decreasing to 5.5% beginning in 2004 and for 1998 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, 2000, by approximately $80,000 and the annual postretirement benefit cost by approximately $13,000. Deferred Compensation The Company has a deferred compensation plan, funded with life insurance policies, which permits certain management employees to defer portions of their compensation and earn a fixed rate of return. The accrued liabilities relating to this plan of $1.5 million and $1.4 million at December 31, 2000 and 1999, respectively, 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 $1.6 million, $1.5 million and $1.2 million in 2000, 1999 and 1998, respectively. Future minimum lease payments are approximately as follows: 2001 - $970,000; 2002 - $743,000; 2003 - $536,000; and 2004 - $476,000. STANLEY FURNITURE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 9. Supplemental Cash Flow Information (in thousands)
2000 1999 1998 ---- ---- ---- Net income............................................ $19,540 $19,213 $14,483 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation....................................... 7,546 5,801 5,328 Amortization....................................... 595 546 447 Deferred income taxes.............................. (263) (105) (964) Other, net......................................... 86 140 555 Changes in assets and liabilities: Accounts receivable.............................. (1,091) (2,992) (1,714) Inventories...................................... (10,842) 2,933 (784) Prepaid expenses and other current assets........ (1,852) (201) 315 Accounts payable................................. (3,629) 1,299 3,673 Accrued salaries, wages and benefits............. (999) (1,075) 2,125 Other accrued expenses........................... 564 1,710 1,760 Other assets..................................... 27 40 36 Other long-term liabilities...................... 2,163 468 (237) ------- ------- -------- Net cash provided by operating activities...... $11,845 $27,777 $ 25,023 ======= ======= ========
10. Quarterly Results of Operations (Unaudited)
(in thousands, except per share data) 2000 Quarters: First Second Third Fourth ----- ------ ----- ------ Net sales............................ $70,973 $72,118 $71,440 $68,561 Gross profit......................... 17,350 17,808 17,492 15,943 Net income........................... 5,049 5,111 5,065 4,313 Net income per share: Basic............................. $ .71 $ .70 $ .71 $ .64 Diluted........................... .66 .67 .68 .61 (in thousands, except per share data) 1999 Quarters: First Second Third Fourth ----- ------ ----- ------ Net sales............................ $63,661 $63,384 $65,319 $72,353 Gross profit......................... 16,046 16,444 17,116 18,480 Net income........................... 4,188 4,395 4,957 5,674 Net income per share: Basic............................. $ .59 $ .62 $ .69 $ .80 Diluted........................... .54 .56 .64 .74
----------------------------------- STANLEY FURNITURE COMPANY, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For each of the Three Years in the Period Ended December 31, 2000 (In thousands)
Column A Column B Column C Column D Column E -------------------------------------------------------------------------------- Charged Balance at (Credited) Balance Beginning to Costs & at End of Descriptions of Period Expenses Deductions Period 2000 Doubtful receivables.... $1,177 $549 $449(a) $1,277 Discounts, returns, and allowances........ 873 80(b) 953 ------ ---- ---- ------ $2,050 $629 $449 $2,230 ====== ==== ==== ====== 1999 Doubtful receivables.... $1,163 $270 $256(a) $1,177 Discounts, returns, and allowances........ 743 130(b) 873 ------ ---- ---- ------ $1,906 $400 $256 $2,050 ====== ==== ==== ====== 1998 Doubtful receivables.... $1,116 $435 388(a) $1,163 Discounts, returns, and allowances........ 779 (36)(b) 743 ------ ---- ---- ------ $1,895 $399 $388 $1,906 ====== ==== ==== ======
------------------------------------ (a) Uncollectible receivables written off, net of recoveries. (b) Represents net increase (decrease) in the reserve. S-1