UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-Q

(Mark One)

        X         Quarterly report pursuant to Section 13 or 15(d) of the
     -------      Securities Exchange Act of 1934

For the quarterly period ended June 30,September 29, 2001 or
                               -------------------------------

                  Transition report pursuant to Section 13 or 15(d) of the
     -------      Securities Exchange Act of 1934

For the transition period from            to           .
                               ----------    ----------

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 No.)

            1641 Fairystone Park Highway, Stanleytown, Virginia 24168
            ---------------------------------------------------------
               (Address of principal executive offices, Zip Code)


                                 (540) 627-2000
                   -------------------------------------------------------
              (Registrant's telephone number, including area code)


             -------------------------------------------------------
              (Former name, former address and former fiscal year,
                          if changed since last report)

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 the number of shares outstanding of each of the issuer's classes of
common stock as of July 13,October 12, 2001.

               Class                                          Number

Common Stock, par value $.02 per share                      6,629,4386,579,788 Shares

                          PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS
STANLEY FURNITURE COMPANY, INC. BALANCE SHEETS (in thousands, except share data) (unaudited) June 30,September 29, December 31, 2001 2000 -------- ------------------ ASSETS Current assets: Cash.........................................................Cash............................................................... $ 9291,948 $ 1,825 Accounts receivable, less allowances of $2,330$2,366 and $2,230.... 25,565$2,230.......... 31,174 33,224 Inventories: Finished goods............................................. 36,074goods................................................... 35,923 30,521 Work-in-process............................................ 9,478Work-in-process.................................................. 8,558 9,507 Raw materials.............................................. 13,256materials.................................................... 10,769 14,395 -------- -------- Total inventories 58,80855,250 54,423 Prepaid expenses and other current assets.................... 2,962assets.......................... 1,285 568 Deferred income taxes........................................taxes.............................................. 2,514 2,514 -------- -------- Total current assets....................................... 90,778assets............................................. 92,171 92,554 Property, plant and equipment, net............................... 70,051net..................................... 69,919 70,455 Goodwill, less accumulated amortization of $4,200$4,284 and $4,032..... 9,240$4,032........... 9,156 9,408 Other assets..................................................... 6,574assets........................................................... 6,377 6,789 -------- -------- $176,643$177,623 $179,206 ======== ======== LIABILITIES Current liabilities: Current maturities of long-term debt.........................debt............................... $ 6,839 $ 6,714 Accounts payable............................................. 15,696payable................................................... 16,586 19,507 Accrued salaries, wages and benefits......................... 8,786benefits............................... 10,028 10,779 Other accrued expenses....................................... 1,933expenses............................................. 2,466 1,795 -------- -------- Total current liabilities.................................. 33,254liabilities........................................ 35,919 38,795 Long-term debt, exclusive of current maturities.................. 43,947maturities........................ 40,043 45,455 Deferred income taxes............................................taxes.................................................. 10,651 10,860 Other long-term liabilities...................................... 4,598liabilities............................................ 4,584 4,619 -------- -------- Total liabilities............................................ 92,450liabilities.................................................. 91,197 99,729 -------- -------- STOCKHOLDERS' EQUITY Common stock, $.02 par value, 10,000,000 shares authorized, 6,619,4386,579,788 and 6,596,436 shares issued and outstanding.......... 133outstanding.................. 132 132 Capital in excess of par value................................... 17,952value......................................... 16,951 18,160 Retained earnings ............................................... 68,809..................................................... 72,044 63,907 Stock option loans...............................................loans..................................................... (2,701) (2,722) -------- -------- Total stockholders' equity................................... 84,193equity......................................... 86,426 79,477 -------- -------- $176,643$177,623 $179,206 ======== ========
The accompanying notes are an integral part of the financial statements.
STANLEY FURNITURE COMPANY, INC. STATEMENTS OF INCOME (unaudited) (in thousands, except per share data) Three Months SixNine Months Ended Ended -------------------- --------------------- June--------------------- September September September September 29, 2001 30, July 1, June2000 29, 2001 30, July 1, 2001 2000 2001 2000 ------- --------------- -------- -------- -------- Net sales............................................ $52,856 $72,118 $117,965 $143,091sales.................................................. $60,007 $71,440 $177,972 $214,531 Cost of sales........................................ 40,604 54,310 90,439 107,933sales.............................................. 46,195 53,948 136,635 161,881 ------- ------- -------- -------- Gross profit..................................... 12,252 17,808 27,526 35,158profit........................................... 13,812 17,492 41,337 52,650 Selling, general and administrative expenses......... 7,102 8,623 14,936 16,988expenses............... 7,856 8,429 22,791 25,417 Unusual charge (Note 5).............................. 2,800.................................... 2,800 ------- ------- -------- -------- Operating income................................. 2,350 9,185 9,790 18,170income....................................... 5,956 9,063 15,746 27,233 Other expense (income), net.......................... 25 9 17 (16)net................................ 6 (38) 24 (55) Interest expense..................................... 1,016 994 2,085 1,926expense........................................... 1,010 999 3,095 2,925 ------- ------- -------- -------- Income before income taxes....................... 1,309 8,182 7,688 16,260taxes............................. 4,940 8,102 12,627 24,363 Income taxes......................................... 474 3,071 2,786 6,100taxes............................................... 1,704 3,037 4,490 9,137 ------- ------- -------- -------- Net income.......................................income............................................. $ 8353,236 $ 5,1115,065 $ 4,9028,137 $ 10,16015,226 ======= ======= ======== ======== Earnings per share: Basic............................................Basic.................................................. $ .13.49 $ .70.71 $ .741.23 $ 1.412.12 ======= ======= ======== ======== Diluted..........................................Diluted................................................ $ .12.47 $ .67.68 $ .711.18 $ 1.332.02 ======= ======= ======== ======== Weighted average shares outstanding: Basic............................................ 6,607 7,346Basic.................................................. 6,615 7,130 6,611 7,2307,178 ======= ======= ======== ======== Diluted.......................................... 6,957 7,643 6,929 7,624Diluted................................................ 6,884 7,434 6,914 7,549 ======= ======= ======== ========
The accompanying notes are an integral part of the financial statements.
STANLEY FURNITURE COMPANY, INC. STATEMENTS OF CASH FLOWS (unaudited) (in thousands) SixNine Months Ended --------------------------- JuneSeptember September 29, 2001 30, July 1, 2001 2000 --------- --------- Cash flows from operating activities: Cash received from customers.....................................customers........................................... $ 122,897177,346 $ 139,236208,546 Cash paid to suppliers and employees............................. (112,865) (131,007)employees................................... (159,382) (189,832) Interest paid.................................................... (2,411) (2,277)paid.......................................................... (3,033) (3,092) Income taxes paid, net........................................... (4,915) (5,754)net................................................. (4,927) (9,154) --------- --------- Net cash provided by operating activities.................... 2,706 198activities.......................... 10,004 6,468 --------- --------- Cash flows from investing activities: Capital expenditures............................................. (2,515) (6,137) --------- --------- Net cash used by investing activities........................ (2,515) (6,137)expenditures................................................... (3,883) (7,723) --------- --------- Cash flows from financing activities: Issuance of senior notes.........................................notes............................................... 10,000 Proceeds from (repayment of) revolving credit facility, net...... (6,097) 10,000net............ (10,001) 17,000 Repayment of senior notes........................................notes.............................................. (5,286) (5,236) Purchase and retirement of common stock.......................... (873) (2,002)stock................................ (1,973) (12,823) Proceeds from exercised stock options............................ 450 264options.................................. 543 343 Proceeds from insurance policy loans.............................loans................................... 719 639 --------- --------- Net cash provided (used)used by financing activities................. (1,087) 3,665activities.................................. (5,998) (77) --------- --------- Net decreaseincrease (decrease) in cash............................................. (896) (2,274)cash........................................ 123 (1,332) Cash at beginning of period......................................period............................................ 1,825 3,597 --------- --------- Cash at end of period........................................period.............................................. $ 9291,948 $ 1,3232,265 ========= ========= Reconciliation of net income to net cash provided by operating activities: Net income.......................................................income............................................................. $ 4,9028,137 $ 10,16015,226 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................................ 3,175 3,944amortization...................................... 4,815 6,061 Unusual charge...............................................charge..................................................... 2,800 Deferred income taxes........................................taxes.............................................. (209) Loss on sale of assets.......................................assets............................................. 28 54 Changes in assets and liabilities: Accounts receivable...................................... 4,859 (3,865) Inventories.............................................. (4,385) (10,788)receivable............................................ (750) (6,080) Inventories.................................................... (827) (9,425) Prepaid expenses and other current assets................ (2,683) (985)assets...................... (1,050) (1,185) Accounts payable......................................... (3,811) 678payable............................................... (2,921) (556) Accrued salaries, wages and benefits..................... (1,993) 197benefits........................... (751) 1,593 Other accrued expenses................................... 377 1,104expenses......................................... 913 914 Other assets and long-term liabilities................... (354) (301)liabilities......................... (181) (134) --------- --------- Net cash provided by operating activities........................activities.............................. $ 2,70610,004 $ 1986,468 ========= =========
The accompanying notes are an integral part of the financial statements. STANLEY FURNITURE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (In thousands) 1. Preparation of Interim Financial Statements The financial statements of Stanley Furniture Company, Inc. (referred to as "Stanley" or the "Company") have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"). In the opinion of management, these statements include all adjustments necessary for a fair presentation of the results of all interim periods reported herein. All such adjustments are of a normal recurring nature. Certain information and footnote disclosures prepared in accordance with generally accepted accounting principles have been either condensed or omitted pursuant to SEC rules and regulations. However, management believes that the disclosures made are adequate for a fair presentation of results of operations and financial position. Operating results for the interim periods reported herein may not be indicative of the results expected for the year. It is suggested that these financial statements be read in conjunction with the financial statements and accompanying notes included in Stanley's latest Annual Report on Form 10-K.
2. Property, Plant and Equipment (Unaudited) June 30,September December 31, 29, 2001 2000 -------- -------- Land and buildings...............................buildings.................................. $ 41,44542,216 $ 41,445 Machinery and equipment.......................... 77,286equipment............................. 78,980 75,869 Office fixtures and equipment....................equipment....................... 1,829 1,829 Construction in progress......................... 1,615progress............................ 516 610 -------- -------- Property, plant and equipment, at cost....... 122,175cost.......... 123,541 119,753 Less accumulated depreciation.................... 52,124depreciation....................... 53,622 49,298 -------- -------- $ 70,05169,919 $ 70,455 ======== ========
3. Long-Term Debt (Unaudited) June 30,September December 31, 29, 2001 2000 -------- ----------------- 7.28% senior notes due March 15, 2004...............2004................... $12,857 $17,143 7.57% senior note due June 30, 2005.................2005..................... 5,025 6,025 7.43% senior notes due November 18, 2007............2007................ 10,000 10,000 6.94% senior notes due May 3, 2011..................2011...................... 10,000 Revolving credit facility........................... 12,904facility............................... 9,000 19,001 ------- ------- Total....................................... 50,786Total........................................... 46,882 52,169 Less current maturities.........................maturities............................. 6,839 6,714 ------- ------- $43,947$40,043 $45,455 ======= =======
4. Stock Option Plan The Company maintains a stock option plan under which holders of certain exercisable stock options may obtain interest-bearing loans from the Company to facilitate their exercise of stock options. Such loans are evidenced by promissory notes and are collateralized by the shares of stock. As of June 30,September 29, 2001, approximately $2.7 million in stock option loans are outstanding. 5. Unusual Charge In the second quarter, the Company recorded an unusual charge net of taxes of $1.8 million ($2.8 million pre-tax) or $.26 per diluted share to write-off the entire receivable due from Homelife, the Company's largest customer. On July 16, 2001, Homelife has announced closure of its stores and filed for protection under Chapter 11 of the Federal Bankruptcy Code. Historically, sales to Homelife have accounted for approximately 7% of total sales. 6. Earnings Per Common Share Basic earnings per common share are based upon the weighted average shares outstanding. Outstanding stock options are treated as common stock equivalents for purposes of computing diluted earnings per share. Basic and diluted earnings per share are calculated using the following share data (unaudited):
Three Months SixNine Months Ended Ended ------------------- ------------------ June--------------------- -------------------- September September September September 29, 2001 30, July 1, June2000 29, 2001 30, July 1, 2001 2000 2001 2000 ------ ------ ------ -------------- -------- -------- -------- Weighted average shares outstanding for basic calculation................... 6,607 7,346calculation...................... 6,615 7,130 6,611 7,2307,178 Add: Effect of stock options............... 350 297 318 394options.................. 269 304 303 371 ----- ----- ----- ----------- Weighted average shares outstanding, adjusted for diluted calculation.... 6,957 7,643 6,929 7,624calculation....... 6,884 7,434 6,914 7,549 ===== ===== ===== =====
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations The following table sets forth the percentage relationship to net sales of certain items included in the Statements of Income:
Three Months SixNine Months Ended Ended ----------------- ------------------ June------------------- -------------------- September September September September 29, 2001 30, July 1, June2000 29, 2001 30, July 1, 2001 2000 2001 2000 ------ ------ ------ -------------- -------- -------- -------- Net sales............................sales............................. 100.0% 100.0% 100.0% 100.0% Cost of sales........................sales......................... 77.0 75.5 76.8 75.3 76.7 75.475.5 ----- ----- ----- ----- Gross profit.......................profit........................ 23.0 24.5 23.2 24.7 23.3 24.624.5 Selling, general and administrative expenses........................... 13.4 12.0 12.7 11.9expenses............................ 13.1 11.8 12.8 11.8 Unusual charge....................... 5.3 2.4charge........................ 1.6 ----- ----- ----- ----- Operating income................ 4.4income.................... 9.9 12.7 8.38.8 12.7 Interest expense..................... 1.9expense...................... 1.7 1.4 1.8 1.31.7 1.4 ----- ----- ----- ----- Income before income taxes......... 2.5 11.3 6.5taxes.......... 8.2 11.4 7.1 11.4 Income taxes......................... .9 4.2 2.4taxes.......................... 2.8 4.3 2.5 4.3 ----- ----- ----- ----- Net income......................... 1.6%income............................ 5.4% 7.1% 4.2%4.6% 7.1% ===== ===== ===== =====
Net sales decreased $19.3$11.4 million, or 26.7%16.0%, for the three month period ended June 30,September 29, 2001 from the comparable 2000 period. For the sixnine month period, net sales decreased $25.1$36.6 million, or 17.6%17.0%, from the comparable 2000 period. The decrease was due primarily to lower unit volume in the Company's collections offering (bedroom, dining room, tables and entertainment units). Net sales forAn unusual charge of $2.8 million pre-tax was recorded in the second quarter were also impacted by reduced shipmentsof 2001 to write-off the receivable due from the Company's former largest customer Homelife, which has historically accounted for about 7% of total sales. Homelife has announced closure of its stores andthat filed for protection under Chapter 11 of the Federal Bankruptcy Code and accordinglyhas pursued a complete liquidation of its assets. The elimination of shipments to this customer, which historically accounted for about 7% of total sales, reduced net sales for both the Company recorded an unusual charge before taxes of $2.8 million to write-off the entire receivable due from Homelife.three and nine month periods ended September 29, 2001. The Company expects thirda slight improvement in sales comparisons for the fourth quarter of 2001, resulting in a sales to decline on a percentage basis in the mid-teensmid to upper single digits compared to the thirdfourth quarter of 2000. In response to order trends the Company reduced production during 2001 through selective downtime at its facilities. As a result, inventory levels increased only slightly fromtotal inventories approximate year end levels due to normal seasonal trends.and declined $3.6 million from the second quarter of 2001. The Company will continue to monitor order trends to manage inventory levels until business conditions improve. Gross profit margin for the three and sixnine month periods of 2001 decreased to 23.2%23.0% and 23.3%23.2%, respectively, from 24.7% and 24.6%24.5% for each of the comparable 2000 periods. The decrease resulted primarily from lower sales and production in the three and sixnine month periods of 2001. Start-up costs associated with the new home office factory, which began production in March 2000, reduced gross profit in the prior year periods. Improved performance from this facility partially offset the impact of lower sales and production levels in the three and sixnine month periods of 2001. Selling, general and administrative expenses, excluding anthe second quarter unusual charge, for the three and sixnine month periods of 2001 as a percentage of net sales increased to 13.4%13.1% and 12.7%12.8%, respectively, from 12.0% and 11.9%11.8% for each of the comparable 2000 periods. These percentages were higher due principally to lower net sales. Selling, general and administrative expenditures declined $1.5 million$573,000 and $2.1$2.6 million, respectively, in the three and sixnine month periods of 2001 primarily as a result of lower selling expenses directly attributable to the decrease in sales. As a result of the above, operating income, excluding the second quarter unusual charge, as a percentage of net sales was 9.7%9.9% and 10.7%10.4%, respectively, for the three and sixnine month periods of 2001, compared to 12.7% for each of the comparable 2000 periods. Interest expense for the 2001 three and sixnine month periods increased due primarily toapproximated prior year periods as higher average debt levels were offset by lower average interest rates. The Company's effective income tax rate was 36.2%35.6% for the 2001 sixnine month period and 37.0% for total year 2000. The lower tax rate for 2001 is a result of increased state tax credits. Financial Condition, Liquidity and Capital Resources Cash generated from operations was $2.7increased to $10.0 million in the first sixnine months of 2001 compared to $198,000$6.5 million in the 2000 period.period due primarily to lower tax payments resulting from lower taxable income levels. Working capital increased $3.8only $2.5 million in the 2001 period compared to an increase of $13.7$15.6 million in the comparable 2000 period. Net cash used by investing activities was $2.5$3.9 million in the 2001 period compared to $6.1$7.7 million in the 2000 period. Cash requirements were higher in the 2000 period due to capital expenditures related to a new manufacturing facility. Included in the 2000 capital expenditures on the Statements of Cash Flows was $2.7 million of 1999 capital purchases included in accounts payable at December 31, 1999 and $3.4$5.0 million of capital purchases in the 2000 period. These purchases were primarily for plant and equipment and other assets in the normal course of business. Capital expenditures in 2001 are anticipated to be approximately $5-$6$4.5 million. Net cash used by financing activities was $1.1$6.0 million in the 2001 period compared to cash provided by financing activities of $3.7 million$77,000 in the 2000 period. In the 2001 period, cash from operations and proceeds from the issuance of $10.0 million in senior notes provided cash for reduction of borrowings under the revolving credit facility, senior debt payments, capital expenditures and purchase and retirement of the Company's common stock. In the 2000 period, cash from operations and borrowings under the revolving credit facility provided cash for senior debt payments, capital expenditures and the purchase and retirement of the Company's common stock.stock, capital expenditures and senior debt payments. During the sixnine months ended June 30,September 29, 2001, the Company purchased 36,00086,000 shares of its stock on the open market at an average price of $24.25.$22.94. At June 30,September 29, 2001, approximately $9.0$8.0 million remains authorized by the Company's Board of Directors to repurchase shares of the Company's common stock. In April 2001, the Company issued $10.0 million of 6.94% senior notes due in 2011. At June 30,September 29, 2001, long-term debt including current maturities was $50.8$46.9 million. Debt service requirements are $1.4 million in 2001, $6.8 million in 2002, $6.9 million in 2003, $7.0 million in 2004 and $4.3 million in 2005. As of June 30,September 29, 2001, approximately $21.0$24.7 million of additional borrowings were available under the Company's revolving credit facility. The Company believes that its financial resources are adequate to support its capital needs and debt service requirements. Recently Issued Statements of Financial Accounting Standards Recently the Financial Accounting Standards Board issued SFAS No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets", which are required to be adopted by the Company at the beginning of 2002. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations subsequent to June 30, 2000. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. The Company believes the effect of SFAS No. 142 will be to increase earnings per share by approximately $.03 for fiscal 2002. Forward-Looking Statements Certain statements made in this report are not based on historical facts, but are forward-looking statements. These statements can be identified by the use of forward-looking terminology such as "believes," "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, credit exposure to customers in the current economic climate, competition in the furniture industry, capital costs, and general economic conditions. Any forward looking statement speaks only as of the date of this filing, and the Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new developments or otherwise. ITEM 3. Quantitative and Qualitative Disclosures about Market Risk Because the Company's obligation under its Revolving Credit Facility bears interest at a variable rate, the Company is sensitive to changes in prevailing interest rates. A one-percentage point fluctuation in market interest rates would not have a material impact on earnings during the first sixnine months of 2001. PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- (a) The annual meeting of the Company's stockholders was held on April 25, 2001. (c)(i) The stockholders of the Company elected two directors for a three-year term expiring at the Annual Meeting of Stockholders to be held in 2004. The election was approved by the following vote:
For Withheld Edward J. Mack 5,885,552 30,107 Thomas L. Millner 5,886,107 29,552
Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 3.1 By-laws of10.1 Option Agreement, dated April 30, 2001, between the Registrant as amended. (1) Exhibit 4.1 Private Shelf Agreement dated as of September 9, 1999, as amended as of April 26, 2001, among the Company, The Prudential Insurance Company of America and the affiliates of Prudential who become Purchasers as defined therein. (1) Exhibit 10.1 Employment Agreement made as of April 9, 2001 between Jeffrey R. Scheffer and the Registrant.Scheffer. (1)(2) (b) Reports on Form 8-K A report on Form 8K was filed on June 12, 2001, to comment on the Registrant's outlook for the second quarter and full year 2001. -None --------------------------- (1) Filed herewith. (2) Management contract. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized. STANLEY FURNITURE COMPANY, INC. Date: July 17,October 16, 2001 By: /s/ Douglas I. Payne -------------------------------------------------------------- Douglas I. Payne Executive V.P. - Finance & Administration and Secretary (Principal Financial and Accounting Officer)