-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ItFFgrEcMv0fy5ll2I/d2edEYdQxz1y3rd2mgtzXIJ1iaPRovj4wm75dyt9YjYYF YGRXiZW3TON+EClmOvaOpQ== 0000797465-99-000002.txt : 19990208 0000797465-99-000002.hdr.sgml : 19990208 ACCESSION NUMBER: 0000797465-99-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990205 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STANLEY FURNITURE CO INC/ CENTRAL INDEX KEY: 0000797465 STANDARD INDUSTRIAL CLASSIFICATION: WOOD HOUSEHOLD FURNITURE, (NO UPHOLSTERED) [2511] IRS NUMBER: 541272589 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-14938 FILM NUMBER: 99522665 BUSINESS ADDRESS: STREET 1: 1641 FAIRYSTONE PK HWY CITY: STANLEYTOWN STATE: VA ZIP: 24168 BUSINESS PHONE: 5406272000 MAIL ADDRESS: STREET 1: 1641 FAIRYSTONE PARK HGWY CITY: STANLEYTOWN STATE: VA ZIP: 24168 FORMER COMPANY: FORMER CONFORMED NAME: STANLEY INTERIORS CORP DATE OF NAME CHANGE: 19920703 10-K 1 YEAR END 1998 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, 1998 Commission file number 0-14938 STANLEY FURNITURE COMPANY, INC. (Exact name of Registrant as specified in its Charter) Delaware 54-1272589 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1641 Fairystone Park Highway, Stanleytown, VA 24168 (Address of principal executive offices, Zip Code) Registrant's telephone number, including area code: (540) 627-2000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.02 per share (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes (x) No ( ) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[ ] Aggregate market value of the voting stock held by non-affiliates of the Registrant based on the closing price on January 21, 1999: $142 million Indicate the number of shares outstanding of each of the Registrant's classes of common stock as of January 29, 1999: Common Stock, par value $.02 per share 7,069,715 (Class of Common Stock) Number of Shares Documents incorporated by reference: Portions of the Registrant's Proxy Statement for its Annual Meeting of Stockholders scheduled for April 29, 1999 are incorporated by reference into Part III. TABLE OF CONTENTS Part I Page Item 1 Business............................................... 3 Item 2 Properties............................................. 6 Item 3 Legal Proceedings...................................... 6 Item 4 Submission of Matters to a Vote of Security Holders.... 6 Part II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters................................................ 8 Item 6 Selected Financial Data................................ 9 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations.................................. 10 Item 8 Financial Statements and Supplementary Data............ 13 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................... 13 Part III Items 10 through 13............................................. 13 Part IV Item 14 Exhibits, Financial Statement Schedule and Reports on Form 8-K............................................ 13 Signatures .................................................... 17 Index to Financial Statements and Schedule...................... F-1 Stanley Furniture Company, Inc. PART I Item 1. Business General The Company is a leading designer and manufacturer of residential wood furniture exclusively targeted at the upper-medium price range. The Company offers diversified product lines across all major style and product categories within this price range. Its product depth and extensive style selections make the Company a complete wood furniture resource for retailers in its price range and allow the Company to respond more quickly to shifting consumer preferences. The Company has established a broad distribution network that includes independent furniture stores, department stores, and national and regional furniture chains. To produce its products and support its broad distribution network, the Company has developed efficient and flexible manufacturing processes that it believes are unique in the furniture industry. The Company emphasizes continuous improvement in its manufacturing processes to enable it to continue providing competitive advantages to its customers, such as quick delivery, reduced inventory investment, high quality, and value. Products and Styles The Company's product lines cover all major design categories, and include bedroom, dining room, youth bedroom (Young AmericaTM), living room tables, entertainment centers and home office. The Company believes that the diversity of its product lines enables it to anticipate and respond quickly to changing consumer preferences and provides retailers a complete wood furniture resource in the upper-medium price range. The Company intends to continue expanding its product styles with particular emphasis on home office and youth bedroom. The Company believes that its products represent good value and that the quality and style of its furniture compare favorably with more premium-priced products. The Company provides products in a variety of woods, veneers, and finishes. The number of styles by product line currently marketed by the Company is set forth in the following table: Number of Styles ---------------- Bedroom.......................................................... 26 Dining room...................................................... 19 Youth bedroom (Young America(TM))................................ 19 Occasional: Living room tables........................................... 16 Entertainment centers........................................ 10 Home office.................................................. 6 These product lines cover all major design categories including European traditional, contemporary/transitional, American traditional, and country/casual designs. The Company phased out of its upholstered product line during 1998, which represented approximately two percent of sales in 1998. The Company designs and develops new product styles each year to replace discontinued items or styles and, if desired, to expand product lines. The Company's product design process begins with marketing personnel identifying customer needs and conceptualizing product ideas, which generally consist of a group of related furniture pieces. A variety of sketches are produced, usually by Company designers, from which prototype furniture pieces are built. The Company's engineering department then prepares the prototype for actual full-scale production. The Company consults with its marketing personnel, sales representatives, and selected customers throughout this process and introduces its new product styles at the fall and spring international furniture markets. Distribution The Company has developed a broad domestic and international customer base and sells its furniture through approximately 70 independent sales representatives to independent furniture retailers and national and regional chain stores. Representative customers include Sears Homelife, J.C. Penney, Rhodes, Rooms To Go, Baer's, Breuners Home Furnishings, Robb & Stucky, Nebraska Furniture Mart, Furnitureland South, Jordan's and Wickes. The Company believes this broad network reduces its exposure to regional recessions, and allows it to capitalize on emerging channels of distribution. The Company offers tailored marketing programs to address each channel of distribution. The general marketing practice followed in the furniture industry is to exhibit products at international and regional furniture markets. In the spring and fall of each year, a nine-day furniture market is held in High Point, North Carolina, which is attended by most buyers and is regarded by the industry as the international market. The Company utilizes approximately 60,000 square feet of showroom space at the High Point market to introduce new products, increase sales of its existing products, and test ideas for future products. The Company has sold to over 3,500 customers during 1998, and approximately 6% of the Company's sales in 1998 were to international customers. No single customer accounted for more than ten percent of the Company's sales in 1998. No material part of the Company's business is dependent upon a single customer, the loss of which would have a material effect on the business of the Company. The loss of several of the Company's major customers could have a material impact on the business of the Company. Manufacturing The Company's manufacturing operations complement its product and distribution strategy by emphasizing continuous improvement in quality and customer responsiveness while reducing costs. The Company's manufacturing processes produce smaller, more frequent and cost-effective runs. The Company focuses on identifying and eliminating manufacturing bottlenecks and waste, employing statistical process control and, in turn, adjusting manufacturing schedules on a daily basis, using cellular manufacturing in the production of components, and improving its relationships with suppliers by establishing primary supplier relationships. In addition, a key element of the Company's manufacturing processes is to involve all Company personnel, from hourly associates to management, in the improvement of the manufacturing processes by encouraging and responding to ideas to improve quality and to reduce manufacturing lead times. The Company operates manufacturing facilities in North Carolina and Virginia consisting of an aggregate of more than three million square feet. The Company considers its present equipment to be generally modern, adequate and well maintained. The Company schedules production of its various styles based upon actual and anticipated orders. The Company's manufacturing processes enable it to fill orders through manufacturing rather than inventory. As a result, the Company shipped customer orders within 22 days on average during 1998 with average finished goods inventory turns of 7.8. Since the Company ships customer orders on average in about three weeks, management believes that the size of its backlog is not necessarily indicative of its long-term operations. The Company's backlog of unshipped orders was $36.6 million at December 31, 1998 and $34.9 million at December 31, 1997. Raw Materials The principal materials used by the Company in manufacturing its products include lumber, veneers, plywood, particle board, hardware, glue, finishing materials, glass products, laminates, fabrics and metals. The Company uses a variety of species of lumber, including cherry, oak, ash, poplar, pine, maple, and mahogany. The Company's five largest suppliers accounted for approximately 17% of its purchases in 1998. The Company believes that its sources of supply for these materials are adequate and that it is not dependent on any one supplier. Competition The Company is the fifteenth largest furniture manufacturer in North America based on 1997 sales, according to Furniture/Today, a trade publication. The furniture industry is highly competitive and includes a large number of foreign and domestic manufacturers, none of which dominates the market. The markets in which the Company competes include a large number of relatively small manufacturers; however, certain competitors of the Company have substantially greater sales volumes and financial resources than the Company. Competitive factors in the upper-medium price range include style, price, quality, delivery, design, service, and durability. The Company believes that its manufacturing processes, its long-standing customer relationships and customer responsiveness, its consistent support of existing diverse product lines that are high quality and good value, and its experienced management are competitive advantages. Associates At December 31, 1998, the Company employed approximately 2,875 associates. None of the Company's associates is represented by a labor union. The Company considers its relations with its associates to be good. Patents and Trademarks The trade names of the Company represent many years of continued business, and the Company believes such names are well recognized and associated with quality in the furniture industry. The Company owns a number of patents, trademarks, and licenses, none of which is considered to be material to the Company. Governmental Regulations The Company is subject to federal, state, and local laws and regulations in the areas of safety, health, and environmental pollution controls. Compliance with these laws and regulations has not in the past had any material effect on the Company's earnings, capital expenditures, or competitive position; however, the effect of such compliance in the future cannot be predicted. Management believes that the Company is in material compliance with applicable federal, state, and local environmental regulations. Regulations issued in December 1995 under the Clean Air Act Amendments of 1990 as part of the National Emission Standards for Hazardous Air Pollutants program and negotiated into the Furniture Maximum Achievable Control Technology Standard, require the Company to reformulate certain furniture finishes and institute process and administrative changes to reduce emissions of hazardous air pollutants. The Company believes it is in compliance with these regulations by its use of compliant coatings and by training its associates in work practice standards. The Company cannot at this time estimate the future impact of these standards on the Company's operations and capital expenditure requirements. Forward-Looking Statements Certain statements made in this Annual Report on Form 10-K are not based on historical facts, but are forward-looking statements. These statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. These statements reflect the Company's reasonable judgment with respect to future events and are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such risks and uncertainties include the cyclical nature of the furniture industry, fluctuations in the price for lumber which is the most significant raw material used by the Company, competition in the furniture industry, capital costs and general economic conditions. Item 2. Properties Set forth below is certain information with respect to the Company's principal properties. The Company believes that all these properties are well maintained and in good condition. The Company believes its manufacturing facilities are being efficiently utilized and each facility is focused on specific product lines to optimize efficiency. The Company estimates that its facilities are presently operating near capacity, principally on a one-shift basis. All Company plants are equipped with automatic sprinkler systems and modern fire protection equipment, which management believes are adequate. All facilities set forth below are active and operational. Approximate Owned Facility Size or Location Primary Use (Square Feet) Leased Stanleytown, VA Manufacturing 1,660,000 Owned and Corporate Headquarters 61,000 Owned West End, NC Manufacturing 470,000 Owned(1) Lexington, NC Manufacturing 635,000 Owned Robbinsville, NC Manufacturing 540,000 Owned High Point, NC Showroom 80,000 Leased(2) - ------------------------------------ (1) This plant leases its lumber yard; lease expires May 31, 2007. (2) Lease expires October 31, 1999. Approximately 17,500 square feet is subleased.
Item 3. Legal Proceedings None. Item 4. Submission of Matters to a Vote of Security Holders None. Executive Officers of the Registrant The Company's executive officers and their ages as of January 1, 1999 are as follows: Name Age Position Albert L. Prillaman.............. 53 Chairman, President and Chief Executive Officer John W. Johnson.................. 54 Senior Vice President - Manufacturing Douglas I. Payne ............... 40 Senior Vice President - Finance and Administration, Treasurer and Secretary William A. Sibbick............... 42 Senior Vice President - Sales Kelly S. Cain .................. 44 Senior Vice President - Product Development and Merchandising Robert A. Sitler, Jr............. 38 Vice President - Human Resources
Albert L. Prillaman has been President and Chief Executive Officer of the Company since December 1985 and Chairman of the Board of Directors since September 1988. Prior thereto, Mr. Prillaman served as a Vice President of the Company and President of the Stanley Furniture division of the Company's predecessor since 1983, and in various executive and other capacities with the Stanley Furniture division of the predecessors of the Company since 1969. Mr. Prillaman is a director of Main Street BankGroup Incorporated. John W. Johnson was elected Senior Vice President-Manufacturing in December 1998. He was Vice President of Manufacturing from November 1984 until December 1998. Prior to that time, Mr. Johnson held various management positions related to manufacturing since his employment by the Company in 1966. Douglas I. Payne has been Senior Vice President-Finance and Administration since December 1996. He was Vice President of Finance and Treasurer of the Company from September 1993 to December 1996. He was Vice President-Treasurer of the Company from December 1989 to September 1993. Prior to that time, Mr. Payne held various financial management positions since his employment by the Company in 1983. Mr. Payne has been Secretary of the Company since 1988. William A. Sibbick has been Senior Vice President-Sales since December 1997. He was Vice President-Product Development and Merchandising-Dining Room and Occasional from December 1996 to December 1997. He was Vice President Product Development and Merchandising from April 1995 until December 1996. He was Vice President - Product Development from June 1993 until April 1995. He was Vice President-Senior Product Manager of the Stanley Furniture division from January 1992 until June 1993. Prior to that time, Mr. Sibbick was Vice President-Product Manager since his employment by the Company in 1989. Kelly S. Cain has been Senior Vice President-Product Development and Merchandising since December 1997. He was Vice President-Product Development and Merchandising for bedroom product lines from December 1996 to December 1997. Prior to that time, Mr. Cain held various management positions in sales and marketing since his employment by the Company in 1985. Robert A. Sitler, Jr. was elected Vice President-Human Resources in December 1998. Prior thereto, he held various management positions in manufacturing and credit since his employment by the Company in March 1985. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company's common stock is quoted on The Nasdaq Stock Market ("Nasdaq") under the symbol STLY. The table below sets forth the high and low sales prices per share, for the periods indicated, as reported by Nasdaq, adjusted to reflect a two-for-one stock split, distributed in the form of a stock dividend on May 15, 1998. High Low 1998 First Quarter.................... $20.13 $13.50 Second Quarter................... 27.50 17.88 Third Quarter.................... 27.50 16.50 Fourth Quarter................... 19.75 10.38 1997 First Quarter.................... $13.00 $ 9.13 Second Quarter................... 11.75 8.50 Third Quarter.................... 14.88 11.38 Fourth Quarter................... 14.50 11.38
As of January 13, 1999, there were approximately 2,200 beneficial stockholders. To-date, the Company has retained all earnings to finance the growth and development of its business. However, the Company will continue to evaluate its dividend policy, and any future payments will depend upon the financial condition, capital requirements, and earnings of the Company, as well as other factors that the Board of Directors may deem relevant. The Company's ability to pay dividends is restricted under certain loan coventants. See Note 3 of the Notes to Financial Statements. Item 6. Selected Financial Data
Years Ended December 31, 1998 1997 1996 1995 1994 (in thousands, except per share data) Income Statement Data: Net sales.................................. $247,371 $211,905 $201,905 $174,179 $184,342 Cost of sales.............................. 186,931 159,453 153,332 137,621 148,453 ----------- ----------- ----------- ----------- ----------- Gross profit............................. 60,440 52,452 48,573 36,558 35,889 Selling, general and admin- istrative expenses....................... 32,496 29,949 30,403 26,454 26,483 Unusual items, net (1)..................... (136) ----------- ----------- ----------- ----------- ----------- Operating income......................... 27,944 22,503 18,170 10,240 9,406 Other expense, net ........................ 411 276 616 433 444 Gain on insurance settlement(2) ........... (2,379) Interest expense........................... 4,164 3,538 3,344 3,534 2,969 ----------- ----------- ----------- ----------- ----------- Income from continuing operations before income taxes.................................. 23,369 18,689 14,210 6,273 8,372 Income taxes............................... 8,886 7,102 5,470 2,384 3,256 ----------- ----------- ----------- ----------- ----------- Income from continuing operations............................. $ 14,483 $ 11,587 $ 8,740 $ 3,889 $ 5,116 =========== =========== =========== =========== =========== Basic Earnings Per Share:(3) Income from continuing operations.............................. $ 2.07 $ 1.38 $ .92 $ .41 $ .54 =========== =========== =========== =========== =========== Weighted average shares(4)................. 7,008 8,394 9,444 9,454 9,450 =========== =========== =========== =========== =========== Diluted Earnings Per Share:(3) Income from continuing operations(2)........................... $ 1.82 $ 1.25 $ .88 $ .41 $ .54 =========== =========== =========== =========== =========== Weighted average shares(4)................. 7,963 9,278 9,890 9,454 9,488 =========== =========== =========== =========== =========== Balance Sheet Data: Cash....................................... $ 6,791 $ 756 $ 8,126 $ 298 $ 301 Inventories................................ 46,514 45,730 40,239 40,167 39,905 Working capital............................ 44,408 41,440 46,225 42,422 42,912 Total assets............................... 154,374 143,225 141,510 134,551 124,519 Long-term debt including current maturities (4) .................. 43,539 52,577 39,350 41,067 33,395 Stockholders' equity (4)(5)................ 62,368 48,247 61,617 54,739 50,830
(1) In 1995, the Company recognized a pretax credit of $1.1 million after it was released from a lease obligation at a previously closed manufacturing facility. Also included is a pretax charge for a severance accrual. (2) In 1994, the Company recorded a pretax gain of $2.4 million as part of the final insurance settlement due to a fire in 1993. Income from continuing operations before the insurance related gain was $3.7 million, or $.39 per diluted share. (3) Amounts have been retroactively adjusted to reflect the two-for-one stock split, distributed in the form of a stock dividend, on May 15, 1998. (4) In 1998, the Company purchased 315,000 shares of its common stock for a total consideration of $5.6 million and issued 103,400 shares to the Stanley Retirement Plan. In 1997, the Company purchased 2,326,402 shares of its common stock for a total consideration of $25.3 million. See Note 5 of the Notes to Financial Statements. (5) No dividends have been paid on the Company's common stock during any of the years presented. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the Selected Financial Data and the Financial Statements and Notes thereto contained elsewhere herein. Results of Operations The following table sets forth the percentage relationship to net sales of certain items included in the Statements of Income:
For the Years Ended December 31, 1998 1997 1996 ----- ----- ----- Net sales......................... 100.0% 100.0% 100.0% Cost of sales..................... 75.6 75.3 75.9 ----- ----- ----- Gross profit........ ........... 24.4 24.7 24.1 Selling, general and administrative expenses........................ 13.1 14.1 15.1 ----- ----- ----- Operating income............. 11.3 10.6 9.0 Other expenses, net............... .1 .1 .3 Interest expense.................. 1.7 1.6 1.7 ------ ------ ------ Income from continuing operations before income taxes........... 9.5 8.9 7.0 Income taxes...................... 3.6 3.4 2.7 ------ ------ ------ Income from continuing operations 5.9% 5.5% 4.3% ====== ====== ======
1998 Compared to 1997 Net sales increased $35.5 million, or 16.7%, for 1998 compared to 1997. The increase was due primarily to higher unit volume. Gross profit margin for 1998 decreased to 24.4% from 24.7% for 1997. The decrease resulted primarily from higher raw material costs, principally lumber, partially offset by improved operating efficiencies. Selling, general and administrative expenses as a percentage of net sales were 13.1% and 14.1% for 1998 and 1997, respectively. The lower percentage in 1998 was due principally to higher net sales. The majority of the increased expenditures in 1998 were selling expenses directly attributable to the sales increase. During the second half of 1998, the Company phased out of its upholstery operations. Upholstered products accounted for less than 3.0% of net sales and resulted in a pretax operating loss of approximately $1 million in each of the past three years. As a result of the above, operating income increased to $27.9 million, or 11.3% of net sales, from $22.5 million, or 10.6% of net sales, in 1997. Interest expense for 1998 increased due to higher average debt levels resulting from the Company's repurchases of its common stock in 1997 and 1998. The Company's effective income tax rate was 38% for both 1998 and 1997. 1997 Compared to 1996 Net sales increased $10.0 million, or 5.0%, for 1997 compared to 1996. The increase was due primarily to higher average selling prices and to a lesser extent higher unit volume. Gross profit margin for 1997 increased to 24.7% from 24.1% for 1996. The higher gross profit margin in 1997 was due primarily to lower raw material costs as a percentage of net sales and improved operating efficiencies. However, gross profit margin declined from 25.2% for the first half of 1997 to 24.4% for the second half of 1997, due primarily to increased lumber cost. Selling, general and administrative expenses as a percentage of net sales were 14.1% and 15.1% for 1997 and 1996, respectively. These expenses were lower in 1997 due primarily to lower selling expenses and a reduced provision for bad debts. As a result of the above, operating income for 1997 increased to $22.5 million, or 10.6% of net sales, from $18.2 million, or 9.0% of net sales, in 1996. Interest expense for 1997 increased due to higher debt levels resulting from the Company's June and November 1997 repurchases of its common stock. Including the December 1996 purchase of 300,000 shares, the Company acquired a total of 2,626,402 shares of its common stock for a total consideration of $27.6 million. The Company's effective income tax rate was 38.0% and 38.5% for 1997 and 1996, respectively. Financial Condition, Liquidity and Capital Resources The Company generated cash from operations of $25.0 million in 1998 compared to $8.3 million in 1997. The increase was due primarily to increased sales and to a lesser extent, lower tax payments. The Company generated cash from operations of $15.3 million in 1996. The decrease in cash generated from operations in 1997 compared to 1996 was due primarily to higher payments to suppliers and employees, due to increased production, and higher tax payments. The Company used the cash generated from operations in 1998, 1997 and 1996 to fund capital expenditures, reduce borrowings and repurchase its common stock. Net cash used by investing activities was $6.5 million in 1998 compared to $4.2 million and $4.0 million in 1997 and 1996, respectively. Expenditures were primarily for plant and equipment and other assets in the normal course of business. Capital expenditures in 1999 are anticipated to be approximately $14 million. Approximately $10 million of capital spending in 1999 will be used to expand existing facilities to add approximately $30-$35 million of increased sales capacity on an annualized basis. Net cash used by financing activities was $12.5 million, $11.5 million and $3.5 million in 1998, 1997 and 1996, respectively. In 1998 and 1996, the purchase of common stock and the reduction in borrowings were financed by cash generated from operations. In 1997, the purchase of common stock was financed by the private placement of debt, the revolving credit facility and cash generated from operations. Also, in 1998 and 1997, the Company received proceeds from the exercise of stock options. In October 1998, the Company's Board of Directors authorized the use of up to $10.0 million to repurchase shares of its common stock. Consequently, the Company may, from time to time, either directly or through agents, repurchase its common stock in the open market through negotiated purchases or otherwise, at prices and on terms satisfactory to the Company. The Company utilized $5.6 million of the authorized $10.0 million to purchase a total of 315,000 shares during 1998. Depending on market prices and other conditions relevant to the Company, such purchases may be discontinued at any time. In November 1997, the Company issued $10.0 million of 7.43% senior notes due 2007 in a private placement of debt. The proceeds were used to purchase 826,402 shares of its common stock from the ML-Lee Acquisition Fund, L.P. and certain of its affiliates. At December 31, 1998, long-term debt including current maturities was $43.5 million. Approximately $24.0 million of additional borrowing capacity was available under a revolving credit facility. Also, the Company had cash on hand of $6.8 million. Annual debt service requirements are $5.1 million in 1999, $5.2 million in 2000, $6.7 million in 2001, $6.8 million in 2002, and $6.9 million in 2003. The Company believes that its financial resources are adequate to support its capital needs and debt service requirements. Year 2000 In early 1998, the Company initiated a cross-functional team to identify and address internal hardware, software and equipment compliance issues arising from the many challenges posed by the Year 2000. Key financial information and operational systems, including equipment with embedded microprocessors, have been inventoried and assessed. Detailed plans are in place for system modifications or replacements, and a compliance plan for equipment with embedded technology has been developed and is currently being implemented. Since 1996, the Company has been upgrading its information systems technology, with Year 2000 compliant software, to support its sales, manufacturing and administrative functions. The cost of information and operational systems upgrades is estimated at less than $1.0 million. Computers and peripheral devices are approximately seventy-five percent compliant at this point. Final compliance and testing for both information and operational systems is scheduled for completion by mid-1999. The estimated cost to complete Year 2000 compliance is less than $100,000. In addition, the Company is communicating with key customers, suppliers, financial institutions and others with whom it does business to determine Year 2000 compliance and is currently assessing the potential impact on operations if third parties are not successful in converting their systems in a timely manner. The Company believes it is taking reasonable steps to prevent major interruptions in its business, resulting from the Year 2000 compliance issue. However, if the Company or its key suppliers do not complete enhancements in a timely manner or if their remedial efforts are not successful, the Year 2000 compliance issue may have a material adverse impact on the operations of the Company. Contingency plans are currently being developed to minimize the impact of any such interruptions, such as, backup procedures, identification of alternate suppliers and/or increasing inventory safety stocks, and such plans are expected to be in place by the end of 1999. Item 8. Financial Statements and Supplementary Data The financial statements and schedule listed in Items 14(a)(1) and (a)(2) hereof are incorporated herein by reference and are filed as part of this report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III In accordance with general instruction G(3) of Form 10-K, the information called for by Items 10, 11, 12, and 13 of Part III is incorporated by reference to the Registrant's definitive Proxy Statement for its Annual Meeting of Stockholders scheduled for April 29, 1999, except for information concerning the executive officers of the Registrant which is included in Part I of this report under the caption "Executive Officers of the Registrant." PART IV Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K (a) Documents filed as a part of this Report: (1) The following financial statements are included in this report on Form 10-K: Report of Independent Accountants Balance Sheets as of December 31, 1998 and 1997 Statements of Income for each of the three years in the period ended December 31, 1998 Statements of Changes in Stockholders' Equity for each of the three years in the period ended December 31, 1998 Statements of Cash Flows for each of the three years in the period ended December 31, 1998 Notes to Financial Statements (2) Financial Statement Schedule: Schedule II - Valuation of Qualifying Accounts for each of the three years in the period ended December 31, 1998 (b) The following reports on Form 8-K were filed by the Registrant during the last quarter of the period covered by this report: None. (c) Exhibits: 3.1 The Restated Certificate of Incorporation of the Registrant.(1) 3.2 The By-laws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-1, No. 33-7300). 3.3 Amendment adopted March 21, 1988 to the By-laws of the Registrant (incorporated by reference to Exhibit 3.3 to the Registrant's Form 10-K (Commission File No. 0-14938) for the year ended December 31, 1987). 3.4 Amendments adopted February 8, 1993 to the By-laws of the Registrant (incorporated by reference to Exhibit 3.4 to the Registrant's Registration Statement on Form S-1 No. 33-57432). 4.1 The Certificate of Incorporation and By-laws of the Registrant as currently in effect (incorporated by reference to Exhibits 3.1 through 3.4 hereto). 4.2 Note Agreement dated February 15, 1994 between the Registrant and the Prudential Insurance Company of America. (Incorporated by reference to Exhibit 4.6 to the Registrant's Form 10-K (Commission File No. 0-14938) for the year ended December 31, 1993). 4.3 Letter Amendment, dated October 14, 1996, to Note Agreements, dated February 15, 1994 and June 29, 1995, between the Registrant and The Prudential Insurance Company of America (incorporated by reference to Exhibit 4.1 to the Registrant's Form 10-Q (Commission File No. 0-14938) for the quarter ended September 29, 1996). 4.4 Letter Amendment, dated June 16, 1997, to Note Agreements, dated February 15, 1994 and June 29, 1995, between the Registrant and The Prudential Insurance Company of America (incorporated by reference to Exhibit 4.1 to the Registrant's Statement on Form 8-K (Commission File No. 0-14938) filed July 9, 1997). 4.5 Note Purchase and Private Shelf Agreement, dated as of June 29, 1995, among the Company, The Prudential Insurance Company of America and the affiliates of Prudential who become Purchasers as defined therein (incorporated by reference to Exhibit 4.1 to the Registrant's Form 8-K (Commission File No. 0-14938) filed December 2, 1997). Pursuant to Regulation S-K, Item 601(b)(4)(iii), instruments evidencing long term debt less than 10% of the Registrant's total assets have been omitted and will be furnished to the Securities and Exchange Commission upon request. 10.1 Employment Agreement made as of January 1, 1991 between Albert L. Prillaman and the Company (incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-K (Commission File No. 0-14938) for the year ended December 31, 1991).(2) 10.2 Lease dated February 23, 1987 between Stanley Interiors Corporation and Southern Furniture Exposition Building, Inc. d/b/a Southern Furniture Market Center (incorporated by reference to Exhibit 10.10 to the Registrant's Form 10-K (Commission File No. 0-14938) for the year ended December 31, 1987). 10.3 Lease dated June 30, 1987 between A. Allan McDonald, Virginia Cary McDonald, C. R. McDonald, Dorothy V. McDonald, and Lillian S. McDonald, as lessor, and Stanley Interiors Corporation, as lessee (incorporated by reference to Exhibit 10.14 to the Registrant's Form 10-K (Commission File No. 0-14938) for the year ended December 31, 1987). 10.4 The Stanley Retirement Plan, as restated effective January 1, 1989, adopted April 20, 1995 (incorporated by reference to Exhibit 10.4 to the Registrant's Form 10-K (Commission File No. 0-14938) for the year ended December 31, 1995).(2) 10.5 Amendment No. 1, The Stanley Retirement Plan, effective December 31, 1995, adopted December 15, 1995 (incorporated by reference to Exhibit 10.5 to the Registrant's Form 10-K (Commission File No. 0-14938) for the year ended December 31, 1995).(2) 10.6 Supplemental Retirement Plan of Stanley Furniture Company, Inc., as restated effective January 1, 1993.(incorporated by reference to Exhibit 10.8 to the Registrant's Form 10-K (Commission File No. 0-14938) for the year ended December 31, 1993).(2) 10.7 First Amendment to Supplemental Retirement Plan of Stanley Furniture Company, Inc., effective December 31, 1995, adopted December 15, 1995 (incorporated by reference to Exhibit 10.7 to the Registrant's Form 10-K (Commission File No. 0-14938) for the year ended December 31, 1995).(2) 10.8 Stanley Interiors Corporation Deferred Compensation Capital Enhancement Plan, effective January 1, 1986, as amended and restated effective August 1, 1987 (incorporated by reference to Exhibit 10.12 to the Registrant's Registration Statement on Form S-1(Commission File No. 0-14938), No. 33-7300).(2) 10.9 Split Dollar Insurance Agreement dated as of March 21, 1991 between Albert L. Prillaman and the Registrant (incorporated by reference to Exhibit 10.43 to the Registrant's Form 10-K (Commission File No. 0-14938) for the year ended December 31, 1991).(2) 10.10 Second Amended and Restated Revolving Credit Facility and Term Loan Agreement dated February 15, 1994 (the "Second Amended and Restated Credit Facility") between the Registrant, National Canada Finance Corp., and the National Bank of Canada (incorporated by reference to Exhibit 10.17 to Registrant's Form 10-K (Commission File No. 0-14938) for the year ended December 31, 1994). 10.11 First Amendment to Second Amended and Restated Credit Facility dated as of August 21, 1995 (incorporated by reference to Exhibit 10.14 to Registrant's Form 10-K (Commission File No. 0-14938) for the year ended December 31, 1995). 10.12 1992 Stock Option Plan (incorporated by reference to Registrant's Registration Statement on Form S-8 No.33-58396).(2) 10.13 1994 Stock Option Plan. (incorporated by reference to Exhibit 10.18 to the Registrant's Form 10-K (Commission File No. 0-14938) for the year ended December 31, 1994).(2) 10.14 1994 Executive Loan Plan. (incorporated by reference to Exhibit 10.19 to the Registrant's Form 10-K (Commission File No.0-14938) for the year ended December 31, 1994).(2) 10.15 Employment agreement dated as of June 1, 1996, between Douglas I. Payne and the Registrant (incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q (Commission File No. 0-14938) for the quarter ended June 30, 1996).(2) 10.16 Amendment No. 1, dated as of October 1, 1996, to the Employment Agreement, dated as of January 1, 1991, between the Registrant and Albert L. Prillaman (incorporated by reference to Exhibit 10.4 to the Registrant's Form 10-Q (Commission File No. 0-14938) for the quarter ended September 29, 1996). 10.17 Assignment and Transfer Agreement, dated as of October 8, 1996, between National Canada Finance Corp. and National Bank of Canada relating to the Second Amended and Restated Revolving Credit Facility (incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q (Commission File No. 0-14938) for the quarter ended September 29, 1996). 10.18 Second Amendment, dated as of October 14, 1996, to the Second Amended and Restated Revolving Credit Facility (incorporated by reference to Exhibit 10.2 to the Registrant's Form 10-Q (Commission File No. 0-14938) for the quarter ended September 29, 1996). 10.19 Stock Purchase Agreement, dated as of June 27, 1997 among the Registrant and the Selling Stockholders named therein (incorporated by reference to Exhibit 99.1 to the Registrant's Form 8-K (Commission File No. 0-14938) filed July 9, 1997). 10.20 Stock Purchase Agreement, dated as of November 11, 1997 among the Registrant and the Selling Stockholders named therein (incorporated by reference to Exhibit 99.2 to the Registrant's Form 8-K (Commission File No. 0-14938) filed December 2, 1997). 10.21 Third Amendment, dated as of June 24, 1997, to the Second Amended and Restated Revolving Credit Facility and Term Loan Agreement dated February 15, 1994 between the Registrant, National Canada Finance Corp., and the National Bank of Canada (incorporated by reference to Exhibit 99.4 to the Registrant's Form 8-K (Commission File No. 0-14938) filed July 9, 1997). 10.22 Fourth Amendment, dated February 24, 1998, to the Second Amended and Restated Revolving Credit Facility and Term Loan Agreement dated February 15, 1994 between the Registrant, National Canada Finance Corp., and the National Bank of Canada (incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q (Commission File No. 0-14938) for the quarter ended March 28, 1998. 21 Listing of Subsidiaries: Charter Stanley Foreign Sales Corporation, a United States Virgin Islands Corporation. 23 Consent of PricewaterhouseCoopers LLP(1) 27 Financial Data Schedule.(1) - ------------------------------------ (1) Filed herewith (2) Management contract or compensatory plan SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. STANLEY FURNITURE COMPANY, INC. February 5, 1999 By: /s/Albert L. Prillaman Albert L. Prillaman Chairman, President, and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date /s/Albert L. Prillaman Chairman, President, and Chief February 5, 1999 (Albert L. Prillaman) Executive Officer, and Director (Principal Executive Officer) /s/Douglas I. Payne Senior Vice President - Finance February 5, 1999 (Douglas I. Payne) and Administration, Treasurer and Secretary (Principal Financial and Accounting Officer) /s/David V. Harkins Director February 5, 1999 (David V. Harkins) /s/Edward J. Mack Director February 5, 1999 (Edward J. Mack) /s/Thomas L. Millner Director February 5, 1999 (Thomas L. Millner) /s/T. Scott McIlhenny, Jr. Director February 5, 1999 (T.Scott McIlhenny, Jr.) STANLEY FURNITURE COMPANY, INC. ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 INDEX TO FINANCIAL STATEMENTS AND SCHEDULE Financial Statements Page Report of Independent Accountants.................................... F-2 Balance Sheets as of December 31, 1998 and 1997...................... F-3 Statements of Income for each of the three years in the period ended December 31, 1998............................................ F-4 Statements of Changes in Stockholders' Equity for each of the three years in the period ended December 31, 1998.................. F-5 Statements of Cash Flows for each of the three years in the period ended December 31, 1998............................................ F-6 Notes to Financial Statements........................................ F-7 Financial Statement Schedule Schedule II - Valuation and Qualifying Accounts for each of the three years in the period ended December 31, 1998.................. S-1 Report of Independent Accountants To The Board of Directors and Stockholders of Stanley Furniture Company, Inc. In our opinion, the accompanying balance sheets and the related statements of income, changes in stockholders' equity and cash flows present fairly, in all material respects, the financial position of Stanley Furniture Company, Inc. as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule listed on page F-1 of Form 10-K presents fairly, in all material respects, the information set forth therein when read in conjunction with the related financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Richmond, Virginia January 22, 1999 STANLEY FURNITURE COMPANY, INC. BALANCE SHEETS (in thousands, except share data) December 31,
1998 1997 ----------- ----------- ASSETS Current assets: Cash ......................................................................... $ 6,791 $ 756 Accounts receivable, less allowances of $1,906 and $1,895..................... 29,141 27,427 Inventories: Finished goods.............................................................. 22,853 21,220 Work-in-process............................................................. 7,495 6,997 Raw materials............................................................... 16,166 17,513 ----------- ----------- Total inventories......................................................... 46,514 45,730 Prepaid expenses and other current assets..................................... 903 1,571 Deferred income taxes......................................................... 1,980 770 ----------- ----------- Total current assets......................................................... 85,329 76,254 Property, plant and equipment, net.............................................. 52,474 51,714 Goodwill, less accumulated amortization of $3,360 and $3,024.................... 10,080 10,416 Other assets.................................................................... 6,491 4,841 ----------- ----------- Total assets................................................................ $ 154,374 $ 143,225 =========== =========== LIABILITIES Current liabilities: Current maturities of long-term debt.......................................... $ 5,136 $ 5,086 Accounts payable.............................................................. 21,837 18,164 Accrued salaries, wages and benefits.......................................... 11,939 9,687 Other accrued expenses........................................................ 2,009 1,877 ----------- ----------- Total current liabilities................................................... 40,921 34,814 Long-term debt, exclusive of current maturities................................. 38,403 47,491 Deferred income taxes........................................................... 10,694 10,448 Other long-term liabilities..................................................... 1,988 2,225 ----------- ----------- Total liabilities............................................................. 92,006 94,978 ----------- ----------- STOCKHOLDERS' EQUITY Common stock, $.02 par value, 10,000,000 shares authorized, 7,069,715 and 6,865,518 shares issued and outstanding........................ 141 137 Capital in excess of par value.................................................. 37,073 37,439 Retained earnings............................................................... 25,154 10,671 ----------- ----------- Total stockholders' equity.................................................... 62,368 48,247 ----------- ----------- Total liabilities and stockholders' equity................................. $ 154,374 $ 143,225 =========== ===========
The accompanying notes are an integral part of the financial statements. STANLEY FURNITURE COMPANY, INC. STATEMENTS OF INCOME (in thousands, except per share data)
For the Years Ended December 31, -------------------------------------------- 1998 1997 1996 --------- --------- --------- Net sales..................... $247,371 $211,905 $201,905 Cost of sales................. 186,931 159,453 153,332 --------- --------- --------- Gross profit................. 60,440 52,452 48,573 Selling, general and administrative expenses....... 32,496 29,949 30,403 ---------- ---------- ---------- Operating income............. 27,944 22,503 18,170 Other expense, net............. 411 276 616 Interest expense............... 4,164 3,538 3,344 ---------- ---------- ---------- Income from continuing operations before income taxes........ 23,369 18,689 14,210 Income taxes................... 8,886 7,102 5,470 ---------- ---------- ---------- Income from continuing operations.................... 14,483 11,587 8,740 Gain from discontinued operations, net of taxes...... 246 ---------- ---------- ---------- Net income................. $ 14,483 $ 11,587 $ 8,986 ========== ========== ========== Basic earnings per share: Continuing operations....... $ 2.07 $ 1.38 $ .92 Discontinued operations..... .03 ---------- ---------- ---------- Net income................ $ 2.07 $ 1.38 $ .95 ========== ========== ========== Weighted average shares outstanding................ 7,008 8,394 9,444 ========== ========== ========== Diluted earnings per share: Continuing operations....... $ 1.82 $ 1.25 $ .88 Discontinued operations..... .03 ---------- ---------- ---------- Net income.................. $ 1.82 $ 1.25 $ .91 ========== ========== ========== Weighted average shares outstanding................ 7,963 9,278 9,890 ========== ========== ==========
The accompanying notes are an integral part of the financial statements. STANLEY FURNITURE COMPANY, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For each of the three years in the period ended December 31, 1998 (in thousands)
Capital In Retained Common Stock Excess of Earnings Shares Amount Par Value (Deficit) ------- ------ -------- --------- Balance at January 1, 1996.................................... 9,454 $189 $64,452 $ (9,902) Purchase and retirement of stock.............................. (300) (6) (2,262) Compensation expense for executive loan plan, net............. 133 Other......................................................... 4 27 Net income.................................................... 8,986 ------- ------ -------- --------- Balance at December 31, 1996................................ 9,158 183 62,350 (916) Purchase and retirement of stock.............................. (2,326) (46) (25,283) Compensation expense for executive loan plan, net............. 133 Exercise of stock options..................................... 34 239 Net income.................................................... 11,587 ------- ------ -------- --------- Balance at December 31, 1997................................ 6,866 137 37,439 10,671 Purchase and retirement of stock.............................. (315) (6) (5,547) Issuance of stock to the Stanley Retirement Plan............................................. 103 2 1,872 Compensation expense and stock issuance related to the executive loan plan.................................. 100 2 131 Exercise of stock options..................................... 316 6 3,178 Net income.................................................... 14,483 ------- ------ -------- --------- Balance at December 31, 1998................................ 7,070 $141 $37,073 $25,154 ======= ====== ======== =========
The accompanying notes are an integral part of the financial statements. STANLEY FURNITURE COMPANY, INC. STATEMENTS OF CASH FLOWS (in thousands)
For the Years Ended December 31, --------------------------------------------- 1998 1997 1996 ----------- ---------- ---------- Cash flows from operating activities: Cash received from customers.............................. $245,492 $207,590 $200,793 Cash paid to suppliers and employees...................... (209,030) (187,346) (176,739) Interest paid............................................. (4,228) (3,403) (3,483) Income taxes paid, net.................................... (7,211) (8,529) (5,259) ----------- ---------- ---------- Net cash provided by operating activities............... 25,023 8,312 15,312 ----------- ---------- ---------- Cash flows from investing activities: Capital expenditures...................................... (6,680) (4,076) (3,599) Purchase of other assets.................................. (106) (143) (370) Proceeds from sale of assets.............................. 297 13 ----------- ---------- ---------- Net cash used by investing activities................... (6,489) (4,219) (3,956) ----------- ---------- ---------- Cash flows from financing activities: Purchase and retirement of common stock................... (5,553) (25,329) (2,268) Issuance of senior notes.................................. 10,000 Repayment of senior notes................................. (5,086) (725) (650) Proceeds from (repayment of) revolving credit facility, net.................................... (3,952) 3,952 (914) Proceeds from exercise of stock options................... 1,556 160 Other, net................................................ 536 479 304 ----------- ---------- ---------- Net cash used by financing activities................... (12,499) (11,463) (3,528) ----------- ---------- ---------- Net increase (decrease) in cash............................. 6,035 (7,370) 7,828 Cash at beginning of year................................... 756 8,126 298 ----------- ---------- ---------- Cash at end of year....................................... $ 6,791 $ 756 $ 8,126 =========== ========== ==========
The accompanying notes are an integral part of the financial statements. STANLEY FURNITURE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Organization and Basis of Presentation Stanley Furniture Company, Inc. (the "Company") is a leading designer and manufacturer of wood furniture exclusively targeted at the upper-medium price range of the residential market. The Company operates predominantly in one business segment. Substantially all revenues result from the sale of residential furniture products. Substantially all of the Company's trade accounts receivable are due from retailers in this market, which consists of a large number of entities with a broad geographical dispersion. Inventories Inventories are valued at the lower of cost or market. Cost for all inventories is determined using the first-in, first-out (FIFO) method. Property, Plant and Equipment Depreciation of property, plant and equipment is computed using the straight-line method based upon the estimated useful lives. Gains and losses related to dispositions and retirements are included in income. Maintenance and repairs are charged to income as incurred; renewals and betterments are capitalized. Capitalized Software Cost The Company amortizes certain purchased computer software costs using the straight-line method over the economic lives of the related products not to exceed five years. Unamortized cost at December 31, 1998 and 1997 was $831,000 and $838,000, respectively. Goodwill and Long-lived Assets Goodwill is being amortized on a straight-line basis over 40 years. The Company continually evaluates the potential impairment of long-lived assets, including goodwill, on the basis of whether the carrying value is fully recoverable from projected, undiscounted net cash flows. Income Taxes Deferred income taxes are determined based on the difference between the financial statement and income tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Deferred tax expense represents the change in the deferred tax asset/liability balance. Income tax credits are reported as a reduction of income tax expense in the year in which the credits are generated. Fair Value of Financial Instruments The fair value of the Company's long-term debt is estimated using discounted cash flow analysis based on the incremental borrowing rates currently available to the Company for loans with similar terms and maturities. At December 31, 1998, the fair value approximated the carrying amount. The fair value of trade receivables, trade payables and letters of credit approximate the carrying amount because of the short maturity of these instruments. STANLEY FURNITURE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. Summary of Significant Accounting Policies (continued) Pension Plans The Company's funding policy is to contribute to all qualified plans annually an amount equal to the normal cost and a portion of the unfunded liability, but not to exceed the maximum amount that can be deducted for federal income tax purposes. Earnings per Common Share Basic earnings per share is computed based on the average number of common shares outstanding. Diluted earnings per share reflects the increase in average common shares outstanding that would result from the assumed exercise of outstanding stock options, calculated using the treasury stock method. Stock Options The Company applies Accounting Principles Board Opinion No. 25 in accounting for stock options and discloses the fair value of options granted as permitted by Statement of Financial Accounting Standards No. 123. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Changes in such estimates may affect amounts reported in future periods. 2. Property, Plant and Equipment
Depreciable lives (in thousands) (in years) 1998 1997 ----------- -------- -------- Land and buildings.................................... 20 to 50 $34,699 $33,941 Machinery and equipment............................... 5 to 12 51,728 48,180 Office furniture and equipment........................ 3 to 10 1,772 1,836 Construction in progress.............................. 1,876 588 -------- -------- Property, plant and equipment, at cost.............. 90,075 84,545 Less accumulated depreciation......................... 37,601 32,831 -------- -------- Property, plant and equipment, net.................... $52,474 $51,714 ======== ========
STANLEY FURNITURE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. Long-Term Debt
(in thousands) 1998 1997 -------- -------- 7.28% Senior notes due March 15, 2004............................... $25,714 $30,000 7.57% Senior note due June 30, 2005................................. 7,825 8,625 7.43% Senior notes due November 18, 2007............................ 10,000 10,000 Revolving credit facility........................................... 3,952 -------- -------- Total............................................................. 43,539 52,577 Less current maturities............................................. 5,136 5,086 -------- -------- Long-term debt, exclusive of current maturities................... $38,403 $47,491 ======== ========
The revolving credit facility provides for borrowings of up to $25.0 million through June 2000, automatically renewable thereafter for one year periods unless terminated by either party. Interest under the facility is payable monthly at prime (7.75% on December 31, 1998) or, at the Company's option, the reserve adjusted LIBOR plus 1.0% per annum (6.07% on December 31, 1998). The Company utilizes letters of credit to collateralize certain insurance policies and inventory purchases. Outstanding letters of credit at December 31, 1998 were $1.0 million. At December 31, 1998, $24.0 million of additional borrowings were available under the revolving credit facility. The above loan agreements require the Company to maintain certain financial covenants. The Company's ability to pay dividends with respect to the common stock is restricted to $25.0 million plus 50% of the Company's consolidated net earnings, adjusted for net cash proceeds received by the Company from the sale of its stock and the amount of payments for redemption, purchase or other acquisition of its capital stock, subsequent to January 1, 1997. At December 31, 1998, these covenants limit additional borrowings to $32.7 million and limit funds available to pay dividends and repurchase the Company's common stock to $8.9 million. Annual debt service requirements are $5.1 million in 1999, $5.2 million in 2000, $6.7 million in 2001, $6.8 million in 2002 and $6.9 million in 2003. 4. Income Taxes The provision for income taxes on income from continuing operations consists of (in thousands):
1998 1997 1996 ------ ------ ------ Current: Federal............... $8,558 $6,454 $5,217 State................. 1,292 757 952 ------ ------ ------ Total current....... 9,850 7,211 6,169 ------ ------ ------ Deferred: Federal............... (852) (96) (567) State................. (112) (13) (132) ------ ------ ------ Total deferred...... (964) (109) (699) ------ ------ ------ Income taxes...... $8,886 $7,102 $5,470 ====== ====== ======
STANLEY FURNITURE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. Income Taxes (continued) A reconciliation of the difference between the federal statutory income tax rate and the effective income tax rate on income from continuing operations follows: 1998 1997 1996 ----- ----- ----- Federal statutory rate...................... 35.0% 35.0% 35.0% State taxes, net of federal benefit......... 3.3 2.6 3.8 Goodwill.................................... .5 .6 .8 Life insurance.............................. (.6) (.7) (.7) Tax savings from foreign sales corporation............................... (.2) (.5) (1.4) Other, net.................................. 1.0 1.0 ----- ----- ----- Effective income tax rate................. 38.0% 38.0% 38.5% ===== ===== =====
The income tax effects of temporary differences that comprise deferred tax assets and liabilities at December 31 follow (in thousands): 1998 1997 --------- --------- Current deferred tax assets (liabilities): Accounts receivable......................................... $ 444 $ (180) Inventory................................................... 141 (18) Employee benefits........................................... 1,452 901 Other accrued expenses...................................... (57) 67 --------- --------- Net current deferred tax asset............................ $ 1,980 $ 770 ========= ========= Noncurrent deferred tax liabilities: Property, plant and equipment............................... $ 9,681 $ 10,236 Employee benefits........................................... 1,013 212 --------- --------- Net noncurrent deferred tax liability..................... $ 10,694 $ 10,448 ========= =========
5. Stockholders' Equity The Company effected a two-for-one stock split, distributed in the form of a stock dividend on May 15, 1998, to stockholders of record on May 1, 1998. All related amounts have been retroactively adjusted to reflect the stock split. In 1998, the Company contributed 103,400 shares of its common stock, with a fair value of $1.9 million, to the Stanley Retirement Plan. During 1998, the Company's Board of Directors authorized the use of up to $10 million to repurchase its common stock. The Company purchased 315,000 shares for approximately $5.6 million in 1998. STANLEY FURNITURE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. Stockholders' Equity (continued) In 1997, the Company completed two transactions for the purchase of its common stock owned by the ML-Lee Acquisition Fund, L.P. and certain of its affiliates (the "Lee Fund"). In June 1997, 1.5 million shares were purchased for an aggregate purchase price of $15.0 million and in November 1997, 826,402 shares were purchased for an aggregate purchase price of $10.3 million. Assuming the shares were repurchased at the beginning of the year and financed entirely by borrowings under the revolving credit facility at an assumed rate of 7.25%, the pro forma diluted earnings per share would have been $1.39 for 1997. During 1996, a secondary offering of 2,000,000 shares of the Company's common stock owned by the Lee Fund was completed. In connection with the offering, the Company incurred approximately $325,000 of expenses. The Company also purchased 300,000 shares of its common stock, which were subject to the over-allotment option from the secondary offering, for an aggregate consideration of $2.3 million. In addition to its common stock, the Company's authorized capital includes 1,000,000 shares of "blank check" preferred stock. None was outstanding during the three years ended December 31, 1998. The Board of Directors is authorized to issue such stock in series and to fix the designation, powers, preferences, rights, limitations and restrictions with respect to any series of such shares. Such "blank check" preferred stock may rank prior to common stock as to dividend rights, liquidation preferences or both, may have full or limited voting rights and may be convertible into shares of common stock. Basic and diluted earnings per share are calculated using the following share data (in thousands): 1998 1997 1996 ----- ----- ----- Weighted average shares outstanding for basic calculation.................... 7,008 8,394 9,444 Add: Effect of stock options................ 955 884 446 ----- ----- ----- Weighted average shares outstanding, adjusted for diluted calculation.... 7,963 9,278 9,890 ===== ===== =====
6. Employee Stock Plans During 1994, the Company entered into a contractual agreement to issue 100,000 shares of common stock to the chief executive officer at $5.00 per share (the market price on the date of the agreement) in exchange for a non-recourse 7.6% note receivable. One tenth of the principal amount plus accrued interest was due each December 31 until 1998 and the remaining principal was due January 2, 1999. The Company agreed to forgive the accrued interest plus one tenth of the initial principal amount each December 31, if the executive remained employed by the Company. During 1996, the Company agreed to forgive the outstanding loan balance over the remaining three years, subject to the executive's continued employment. Compensation expense was $271,000, $285,000 and $308,000 for 1998, 1997 and 1996, respectively. At December 31, 1998, the contractual agreement was completed and 100,000 shares were issued to the chief executive officer. STANLEY FURNITURE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. Employee Stock Plans (continued) The Company's stock option plans provide for the granting of stock options up to an aggregate of 1,400,000 shares of common stock to key employees. The exercise price may not be less than the fair market value of the Company's common stock on the grant date. Granted options vest 20% annually. At December 31, 1998 and 1997, options to purchase 930,878 and 992,376 shares, were exercisable with a weighted-average exercise price of approximately $5.00. At December 31, 1998, 702 shares were available for grant. Activity for the three years ended December 31, 1998 follows: Number Weighted-Average of shares Exercise Price ---------- ---------------- Outstanding at January 1, 1996............................ 1,355,906 $ 4.80 Lapsed.................................................. (30,432) 4.90 Exercised............................................... (5,000) 4.88 Granted................................................. 40,000 7.39 ---------- Outstanding at December 31, 1996.......................... 1,360,474 4.87 Lapsed.................................................. (18,000) 4.59 Exercised............................................... (33,804) 4.74 Granted................................................. 35,000 10.06 ---------- Outstanding at December 31, 1997.......................... 1,343,670 4.95 Lapsed.................................................. (36,400) 7.43 Exercised............................................... (316,392) 4.95 Granted................................................. 43,000 17.75 ---------- Outstanding at December 31, 1998.......................... 1,033,878 $ 5.47 ==========
Options outstanding at December 31, 1998, include 953,878 shares with an exercise price ranging from $4.25 to $6.06 and a weighted-average remaining contractual life of approximately 6 years. The remaining options have an exercise price ranging from $8.19 to $18.75 with a weighted-average remaining contractual life of approximately 9 years. The estimated per share weighted-average fair value of stock options granted during 1998, 1997, and 1996 was $11.78, $7.25 and $4.00 respectively, on the date of grant. A risk-free interest rate of 4.7%, 5.4% and 6.8% for 1998, 1997, and 1996 respectively, and a 50% volatility rate with an expected life of 10 years was assumed in estimating the fair value. STANLEY FURNITURE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. Stock Options (continued) The following table summarizes the pro forma effects assuming compensation cost for such awards had been recorded based upon the estimated fair value (in thousands, except per share data): 1998 1997 1996 -------------------- -------------------- -------------------- As Pro As Pro As Pro Reported Forma Reported Forma Reported Forma -------- ------- -------- ------- -------- ------ Net income.......................... $14,483 $14,175 $11,587 $11,326 $8,986 $8,754 Basic earnings per share............ 2.07 2.02 1.38 1.35 .95 .93 Diluted earnings per share.......... 1.82 1.79 1.25 1.23 .91 .90
7 Employee Benefit Plans Defined Contribution Plan The Company maintains a defined contribution plan covering substantially all of its employees. Discretionary matching and profit sharing contributions for 1998, 1997 and 1996 totaled $1.5 million, $1.2 million and $856,000, respectively. Pension Plans Benefits did not accrue under the Company's pension plans after 1995. The financial status of the plans at December 31 follows (in thousands): 1998 1997 ---------------------------- ---------------------------- Stanley Supple- Stanley Supple- Retirement mental Retirement mental Plan Plan Plan Plan ---------- ------- ---------- -------- Change in benefit obligation: Beginning benefit obligation............... $17,146 $ 1,210 $15,970 $ 990 Interest cost.............................. 1,188 91 1,200 79 Actuarial loss............................. 924 160 1,472 157 Benefits paid.............................. (1,582) (17) (1,496) (16) Settlement cost............................ 287 ---------- ------- ---------- -------- Ending benefit obligation.............. 17,963 1,444 17,146 1,210 ---------- ------- ---------- -------- Change in plan assets: Beginning fair value of plan assets........ 17,170 16,116 Actual return on plan assets............... 1,201 1,726 Employer contributions..................... 2,239 824 Benefits paid.............................. (1,582) (1,496) ---------- ------- ---------- -------- Ending fair value of plan assets....... 19,028 17,170 ---------- ------- ---------- -------- Funded status................................. 1,065 (1,444) 24 (1,210) Unrecognized loss (gain)...................... 5,420 4,776 (5) ---------- ------- ---------- -------- Prepaid (accrued) pension costs........... $ 6,485 $(1,444) $ 4,800 $(1,215) ========== ======= ========== ========
STANLEY FURNITURE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. Employee Benefit Plans (continued) At December 31, 1998, the Stanley Retirement Plan assets included Company stock with a fair value of $1.9 million. These shares were contributed during 1998.
Components of net periodic pension cost follow (in thousands): 1998 1997 1996 -------- -------- -------- Interest cost.......................... $ 1,279 $ 1,279 $ 1,295 Expected return on plan assets......... (1,290) (1,216) (1,228) Net amortization and deferral.......... 435 179 555 -------- -------- -------- Net periodic benefit cost........... 424 242 622 Settlement expense..................... 376 -------- -------- -------- Total expense....................... $ 800 $ 242 $ 622 ======== ======== ========
The assumptions used as of December 31 to determine the plans' financial status and pension cost were: 1998 1997 1996 ---- ---- ---- Discount rate for funded status............. 6.65% 7.00% 7.75% Discount rate for pension cost.............. 7.00% 7.75% 7.67% Return on assets............................ 7.50% 7.50% 7.50%
STANLEY FURNITURE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. Employee Benefit Plans (continued) Postretirement Benefits Other Than Pensions The Company provides health care benefits to eligible retired employees between the ages of 55 and 65 and provides life insurance benefits to eligible retired employees from age 55 until death. The plan's financial status at December 31 follows (in thousands): 1998 1997 -------- -------- Change in benefit obligation: Beginning benefit obligation................................ $3,641 $3,603 Service cost................................................ 44 36 Interest cost............................................... 239 261 Actuarial gain.............................................. 93 183 Plan participants' contributions............................ 105 112 Benefits paid............................................... (554) (554) -------- -------- Ending benefit obligation............................... 3,568 3,641 -------- -------- Change in plan assets: Beginning fair value of plan assets......................... Employer contributions...................................... 449 442 Plan participants' contributions............................ 105 112 Benefits paid............................................... (554) (554) -------- -------- Ending fair value of plan assets........................ Funded status................................................. (3,568) (3,641) Unrecognized net loss......................................... 946 895 Unrecognized transition obligation............................ 1,824 1,954 -------- -------- Accrued benefit cost........................................ $ (798) $ (792) ======== ========
Components of net periodic postretirement benefit cost were (in thousands): 1998 1997 1996 ------ ------ ------ Service cost............................................ $ 44 $ 36 $ 35 Interest cost........................................... 239 261 274 Amortization of transition obligation................... 130 131 130 Amortization and deferral............................... 41 29 33 ------ ------ ------ Net periodic postretirement benefit cost.......... $ 454 $ 457 $ 472 ====== ====== ======
STANLEY FURNITURE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. Employee Benefit Plans (continued) The weighted-average discount rates used in determining the actuarial present value of the projected benefit obligation were 6.65%, 7.00% and 7.75% for 1998, 1997 and 1996, respectively. The rate of increase in future health care benefit cost used in determining the obligation for 1998 and 1997 was 9% gradually decreasing to 5.5% beginning in 2004, and for 1996 it was 10% gradually decreasing to 5.5% beginning in 2003. An increase or decrease in the assumed health care cost trend rate of one percentage point in each future year would affect the accumulated postretirement benefit obligation at December 31, 1998, by approximately $100,000 and the annual postretirement benefit cost by approximately $13,000. Deferred Compensation The Company has a deferred compensation plan, funded with life insurance policies, which permits certain management employees to defer portions of their compensation and earn a fixed rate of return. The accrued liabilities relating to this plan of $1.4 million at December 31, 1998 and 1997, are included in accrued salaries, wages and benefits and other long-term liabilities. The cash surrender value, net of policy loans, is included in other assets. 8. Leases The Company leases showroom space and certain other equipment. Rental expenses charged to operations were $1.2 million, $1.1 million, and $970,000 in 1998, 1997 and 1996, respectively. Future minimum lease payments, net of subleases, are approximately as follows: 1999 - $1.2 million; 2000 - $234,000; 2001 - $142,000; and thereafter - $68,000. 9. Discontinued Operations In 1996, the Company was released from a lease obligation resulting from the purchase and concurrent resale of certain facilities at a former division, which ceased operations in 1994. Accordingly, the Company recorded an after tax gain of $246,000, or $.03 per share, as a partial reversal of a previous accrual, representing the final adjustment for the cost of the closure. 10. Related Party Transactions During 1996 and 1997, the Company completed three purchases of its common stock from the Lee Fund totaling 2.6 million shares for a total consideration of $27.6 million. The Lee Fund sold to public investors its remaining ownership in January 1998. The Company maintained a management agreement with an affiliate of the Lee Fund which was terminated in November 1997. Fees paid pursuant to this agreement amounted to $125,000 in 1997 and $241,000 in 1996. STANLEY FURNITURE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 11. Supplemental Cash Flow Information (in thousands) 1998 1997 1996 ------- ------- ------- Net income............................................ $14,483 $11,587 $ 8,986 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation....................................... 5,328 5,000 4,774 Amortization....................................... 447 432 426 Other, net......................................... 555 340 463 Loss on disposal of fabric division................ (246) Changes in assets and liabilities: Accounts receivable.............................. (1,714) (4,331) (364) Inventories...................................... (784) (5,491) (72) Prepaid expenses and other current assets........ 315 (2,180) (1,347) Accounts payable................................. 3,673 3,534 993 Accrued salaries, wages and benefits............. 2,125 (27) 2,965 Other accrued expenses........................... 1,760 (713) (479) Deferred income taxes............................ (964) (109) (134) Other assets..................................... 36 32 29 Other long-term liabilities...................... (237) 238 (682) ------- ------- ------- Net cash provided by operating activities...... $25,023 $ 8,312 $15,312 ======= ======= =======
12. Quarterly Results of Operations (Unaudited) (in thousands, except per share data) 1998 Quarters: First Second Third Fourth ----- ------ ----- ------ Net sales............................ $57,691 $61,863 $63,832 $63,985 Gross profit......................... 14,145 15,273 15,383 15,639 Net income........................... 3,270 3,580 3,706 3,927 Net income per share: Basic............................. $ .48 $ .51 $ .52 $ .56 Diluted........................... .41 .45 .46 .50 1997 Quarters: Net sales............................ $49,631 $49,469 $54,270 $58,534 Gross profit......................... 12,461 12,488 13,288 14,214 Net income........................... 2,772 2,756 2,935 3,125 Net income per share: Basic............................. $ .30 $ .30 $ .38 $ .42 Diluted........................... .28 .28 .34 .38
STANLEY FURNITURE COMPANY, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For each of the Three Years in the Period Ended December 31, 1998 (In thousands)
Column A Column B Column C Column D Column E - -------------------------------------------------------------------------------- Charged Balance at (Credited) Balance Beginning to Costs & at End of Descriptions of Period Expenses Deductions Period 1998 Doubtful receivables.. $1,116 $435 $388(a) $1,163 Discounts, returns, and allowances...... 779 (36)(b) 743 ------ ---- ---- ------ $1,895 $399 $388 $1,906 ====== ==== ==== ====== 1997 Doubtful receivables.. $1,332 $ 20 $236(a) $1,116 Discounts, returns, and allowances....... 613 166(b) 779 ------ ---- ---- ------ $1,945 $186 $236 $1,895 ====== ==== ==== ====== 1996 Doubtful receivables.. $ 600 $860 $128(a) $1,332 Discounts, returns, and allowances....... 557 56(b) 613 ------ ---- ---- ------ $1,157 $916 $128 $1,945 ====== ==== ==== ======
- ------------------------------------ (a) Uncollectible receivables written off, net of recoveries. (b) Represents net decrease in the reserve. S-1 EX-3.1 2 RESTATED CERTIFICATE OF INCORPORATION RESTATED CERTIFICATE OF INCORPORATION OF STANLEY FURNITURE COMPANY, INC. Stanley Furniture Company, Inc. (the "Corporation"), a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows: 1. The name of the Corporation is Stanley Furniture Company, Inc. The Corporation was originally incorporated under the name Charter Stanley, Inc. and its original Certificate of Incorporation was filed with the Secretary of State on January 31, 1984. 2. This Restated Certificate of Incorporation only restates and integrates and does not further amend the provisions of the Certificate of Incorporation of this Corporation as heretofore amended or supplemented and there is no discrepancy between those provisions and the provisions of this Restated Certificate of Incorporation. 3. The text of the Certificate of Incorporation as heretofore amended or supplemented is hereby restated without further amendments or changes to read as herein set forth in full: FIRST: The name of the Corporation is Stanley Furniture Company, Inc. SECOND: The registered office of the corporation is located at 1013 Centre Road, Wilmington, Delaware 19805 (County of New Castle). The name of its registered agent at that address is The Prentice-Hall Corporation System, Inc. 5 THIRD: The purpose of the corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of the State of Delaware. Without limiting in any manner the scope and generality of the foregoing, it is hereby provided that the corporation shall have the power to do all and everything necessary, suitable and proper for the accomplishment of any of the purposes or the attainment of any of the objects or the furtherance of any of the powers of which a corporation may be organized under the General Corporation Law of the State of Delaware, either alone or in association with other corporations, firms or individuals, and to do every other act or acts, thing or things incidental or appurtenant to or growing out of or connected with the corporation's business or powers or any part or parts thereof, provided the same be not inconsistent with said General Corporation Law; and it shall have the power to conduct and carry on its business, or any part thereof, and to have one or more offices, and to exercise any or all of its corporate powers and rights, in the State of Delaware, and in the various other states, territories, colonies and dependencies of the United States, in the District of Columbia, and in all or any foreign countries. FOURTH: The total number of shares of all classes of capital stock which this Corporation is authorized to issue is 11,000,000 shares which are divided into two classes as follows: Ten Million (10,000,000) shares of Common Stock, $.02 par value per share; and One Million (1,000,000) shares of Blank Check Preferred Stock, $.01 par value per share. The Board of Directors is authorized, subject to limitations prescribed by law and the provisions of this Article FOURTH, to provide for the issuance of the shares of Blank Check Preferred Stock in series, and by filing a certificate pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences, and rights of the shares of each such series and the qualifications, limitations, or restrictions thereof. The authority of the Board with respect to each series shall include, but not be limited to, determination of the following: (1) The number of shares constituting that series and the distinctive designation of that series; (2) The dividend rate on the shares of that series, whether dividends shall be cumulative, and, if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of that series; (3) Whether that series shall have voting rights, in addition to the voting rights provided by law, and, if so, the terms of such voting rights; (4) Whether that series shall have conversion privileges, and, if so, the terms and conditions of such conversion, including provision for adjustment of the conversion rate in such events as the Board of Directors shall determine; (5) Whether or not the shares of that series shall be redeemable, and, if so, the terms and conditions of such redemption, including the date or date upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; (6) Whether that series shall have a sinking fund for the redemption or purchase of shares of that series, and, if so, the terms and amount of such sinking fund; (7) The rights of the shares of that series in the event of voluntary or involuntary liquidation, dissolution, or winding up of the Corporation, and the relative rights of priority, if any, of payment of shares of that series; and (8) Any other relative rights, preferences, and limitations of that series. FIFTH: The following provisions are inserted for the management of the business and for the conduct of the affairs of the corporation, and for further definition, limitation and regulation of the powers of the corporation and its directors and stockholders. 1. The number of directors of the Corporation shall be fixed from time to time exclusively by the Board of Directors pursuant to a resolution adopted by the Board of Directors. Election of directors need not be by ballot unless the by-laws so provide. Commencing with the 1994 Annual Meeting of Stockholders, the Board of Directors shall be divided into three classes, denominated as Class I, Class II and Class III, each as nearly equal in number to the other two as possible. At the 1994 Annual Meeting of Stockholders, directors of Class I shall be elected to hold office for a term expiring at the 1995 Annual Meeting of Stockholders; directors of Class II shall be elected to hold office for a term expiring at the 1996 Annual Meeting of Stockholders; and directors of Class III shall be elected to hold office for a term expiring at the 1997 Annual Meeting of Stockholders. At each Annual Meeting of Stockholders after 1994, the successors to the class of directors whose terms shall then expire shall be identified as being of the same class of directors they succeed and shall be elected to hold office for a term expiring at the third succeeding Annual Meeting of Stockholders. When the number of directors is changed, any newly-created directorships or any decrease in directorship shall be so apportioned among the classes by the Board of Directors as to make all classes as nearly equal in number as possible. Directors need not be stockholders. 2. The Board of Directors shall have the power without the assent or vote of the stockholders: (1) To make, alter, amend, change, add or repeal the by-laws of the corporation; to fix and vary the amount to be reserved for any proper purpose; to authorize and cause to be executed mortgages and liens upon all or any part of the property of the corporation; to determine the use and disposition of any surplus or net profits; and to declare dividends; to fix the record date and the date for the payment of any dividends; and (2) To determine from time to time whether and to what extent, and at what times and places, and under what conditions and regulations, the accounts and books of the corporation (other than the stock ledger) or any of them, shall be open to the inspection of the stockholders. 1. The directors in their discretion may submit any contract or act for approval or ratification by the written consent of the stockholders, or at any annual meeting of the stockholders or at any special meeting of the stockholders called for the purpose of considering any such act or contract, and any contract or act that shall be approved or ratified by the written consent or vote of the holders of a majority of the stock of the corporation (which in the case of a meeting is represented in person or by proxy at such meeting, provided a lawful quorum of stockholders be there represented in person or by proxy) shall be as valid and as binding upon the corporation and upon all the stockholders as though it had been approved or ratified by every stockholder of the corporation, whether or not the contract or act would otherwise be open to legal attack because of the directors' interest, or for any other reason. 2. In addition to the powers and authorities hereinbefore or by statute expressly conferred upon them, the directors are hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the corporation; subject, nevertheless, to the provisions of the statutes of Delaware, of this certificate, and to any by-laws from time to time made by the stockholders; provided, however, that no by-laws so made shall invalidate any prior act of the directors which would have been valid if such by-laws had not been made. 3. No director of the Corporation shall be liable to the Corporation or its stockholders for monetary damages for any breach of fiduciary duty as a director occurring on or after July 1, 1986, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. 4. Any action required to be taken at any annual or special meeting of stockholders of the Corporation, or any action which may be taken at an annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by all the stockholders entitled to vote thereon. SIXTH: The corporation shall, to the full extent permitted by Section 145 of the General Corporation Law of the State of Delaware, as amended from time to time, indemnify all persons whom it may indemnify pursuant thereto. SEVENTH: Whenever a compromise or arrangement is proposed between the corporation and its creditors or any class of them and/or between the corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of the corporation or any creditor or stockholders thereof or on the application of any receiver or receivers appointed for the corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for the corporation under the provisions of Section 279 of Title 8 of the Delaware Code, order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the corporation, as the case may be, agree to any compromise or arrangement and the said reorganization of the corporation as a consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of the corporation, as the case may be, and also on the corporation. EIGHTH: The corporation reserves the right to amend, alter, change or repeal any provision contained in this certificate of incorporation in the manner now or hereafter prescribed by law, and all rights and powers conferred herein on stockholders, directors and officers are subject to this reserved power. 4. This Restated Certificate of Incorporation was duly adopted by the Board of Directors in accordance with Section 245 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, Stanley Furniture Company, Inc. has caused this Certificate to be signed by Albert L. Prillaman, its President, this 27th day of January, 1999. STANLEY FURNITURE COMPANY, INC. By: s/Albert L. Prillaman Albert L. Prillaman President EX-23 3 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23 Consent of Independent Accountants We consent to the incorporation by reference in the registration statements of Stanley Furniture Company, Inc. on Form S-8 (File Nos. 33-58396, 33-67218, 33-58797 and 33-56721) of our report dated January 22, 1999, on our audits of the financial statements and financial statement schedule of Stanley Furniture Company, Inc. as of December 31, 1998 and 1997, and for each of the three years in the period ended December 31, 1998, which report is included in this Annual Report on Form 10-K. PricewaterhouseCoopers LLP Richmond, Virginia February 5, 1999 EX-27 4 FDS --
5 1000 YEAR DEC-31-1998 DEC-31-1998 6,791 0 29,141 1,906 46,514 85,329 90,075 37,601 154,374 40,921 0 0 0 141 62,227 154,374 247,371 247,371 186,931 219,427 411 435 4,164 23,369 8,886 14,483 0 0 0 14,483 2.07 1.82
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