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 SeptemberMarch 28, 19971998 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 OctoberApril 10, 1997.1998.

          Class                                               Number
          -----                                               ------

Common Stock, par value $.02 per share                    3,845,9443,440,757 Shares








                          PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS
STANLEY FURNITURE COMPANY, INC. BALANCE SHEETS (In thousands, except share data)
(Unaudited) SeptemberMarch 28, December 31, ASSETS 1998 1997 1996 ASSETS----------- ------------- Current assets: Cash........................................... $ 1,2991,717 $ 8,126756 Accounts receivable, less allowances of $1,928$1,943 and $1,945 respectively............... 30,308 23,096$1,895......................... 31,295 27,427 Inventories: Finished goods............................... 23,879 20,95321,984 21,220 Work-in-process.............................. 7,031 6,1427,124 6,997 Raw materials................................ 14,958 13,144 45,868 40,23919,334 17,513 -------- -------- 48,442 45,730 Prepaid expenses and other current assets...... 995 486653 1,571 Deferred income taxes.......................... 1,634 1,886770 770 -------- -------- Total current assets....................... 80,104 73,833assets......................... 82,877 76,254 -------- -------- Property, plant and equipment, at cost........... 81,837 80,73785,557 84,545 Less accumulated depreciation.................. 31,578 28,024 50,259 52,71334,138 32,831 -------- -------- 51,419 51,714 Goodwill, less accumulated amortization of $2,940$3,108 and $2,688.............................. 10,500 10,752$3,024..................................... 10,332 10,416 Other assets..................................... 4,207 4,212 $145,070 $141,5104,729 4,841 -------- -------- $149,357 $143,225 ======== ======== LIABILITIES Current liabilities: Current maturities of long-term debt........... $ 5,086 $ 7255,086 Accounts payable............................... 16,315 14,63019,040 18,164 Accrued salaries, wages and benefits........... 9,856 9,5849,673 9,687 Other accrued expenses......................... 1,985 2,6692,955 1,877 -------- -------- Total current liabilities.................... 33,242 27,60836,754 34,814 Long-term debt, exclusive of current maturities.. 43,736 38,62548,303 47,491 Deferred income taxes............................ 10,786 11,67310,448 10,448 Other long-term liabilities...................... 1,987 1,9872,225 2,225 -------- -------- Total liabilities.............................. 89,751 79,89397,730 94,978 -------- -------- STOCKHOLDERS' EQUITY Common stock, $.02 par value, 10,000,000 shares authorized, 3,845,9443,440,757 and 4,579,0423,432,759 shares issued and outstanding......................... 76 9168 68 Capital in excess of par value................... 47,696 62,44237,618 37,508 Retained earnings (deficit)...................... 7,547 (916)earnings................................ 13,941 10,671 -------- -------- Total stockholders' equity..................... 55,319 61,617 $145,070 $141,51051,627 48,247 -------- -------- $149,357 $143,225 ======== ========
The accompanying notes are an integral part of the financial statements. 2 STANLEY FURNITURE COMPANY, INC. STATEMENTS OF INCOME (Unaudited) (In thousands, except per share data)
Three Months Nine Months Ended Ended September September September September--------------------- March 28, March 30, 1998 1997 29, 1996 28, 1997 29, 1996-------- --------- Net sales.......................... $54,270 $52,550 $153,370 $148,023sales............................ $ 57,691 $ 49,631 Cost of sales...................... 40,982 39,772 115,133 113,389sales........................ 43,546 37,170 -------- -------- Gross profit................... 13,288 12,778 38,237 34,634profit..................... 14,145 12,461 Selling, general and administrative expenses......................... 7,501 7,619 21,828 21,973expenses........................... 7,752 7,127 -------- -------- Operating income............... 5,787 5,159 16,409 12,661income................... 6,393 5,334 Other expense, net................. 94 90 227 485net................... 34 69 Interest expense................... 992 852 2,493 2,569expense..................... 1,084 756 -------- ------- Income from continuing operations before income taxes............ 4,701 4,217 13,689 9,607taxes....... 5,275 4,509 Income taxes....................... 1,766 1,602 5,227 3,706 Income from continuing operations 2,935 2,615 8,462 5,901 Gain from discontinued operations, net of taxes..................... 246 246taxes......................... 2,005 1,737 -------- ------- Net income.........................income........................ $ 2,9353,270 $ 2,861 $ 8,462 $ 6,147 Primary earnings2,772 ======== ======= Earnings per share: Continuing operations............ $ .68 $ .53 $ 1.77 $ 1.22 Discontinued operations.......... .05 .05 Net income.................... $ .68 $ .58 $ 1.77 $ 1.27Basic............................. .95 .60 Diluted........................... .83 .55 Weighted average number of shares.. 4,315 4,954 4,794 4,848 Fully diluted earnings per share: Continuing operations............ $ .68 $ .52 $ 1.75 $ 1.17 Discontinued operations.......... .05 .05 Net income.................... $ .68 $ .57 $ 1.75 $ 1.22 Weighted average number of shares.. 4,315 5,051 4,839 5,052shares outstanding: Basic............................. 3,437 4,584 Diluted........................... 3,949 5,011
The accompanying notes are an integral part of the financial statements. 3 STANLEY FURNITURE COMPANY, INC. STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Nine
Three Months Ended September September---------------------- March 28, March 30, 1998 1997 29, 1996--------- --------- Cash flows from operating activities: Cash received from customers....................customers....................... $53,836 $ 146,302 $141,88746,323 Cash paid to suppliers and employees............ (137,431) (127,917)employees............... (51,503) (45,667) Interest paid................................... (2,880) (3,169)paid...................................... (1,183) (1,038) Income taxes paid, net.......................... (6,461) (3,409)net............................. (37) (736) ------- -------- Net cash provided (used) provided by operating activities.................................. (470) 7,392activities..................................... 1,113 (1,118) ------- -------- Cash flows from investing activities: Capital expenditures............................ (1,369) (2,706)expenditures............................... (1,012) (270) Purchase of other assets........................ (100) (181) Proceeds from sale of assets.................... 12assets........................... (24) (65) ------- -------- Net cash used by investing activities......... (1,469) (2,875)activities............ (1,036) (335) ------- -------- Cash flows from financing activities: Purchase and retirement of common stock......... (15,000) Proceeds from (repayment of) revolving credit facility, net.......................... 10,197 (914)net....... 5,098 Repayment of senior note........................ (725) (650)Senior Notes.......................... (4,286) Proceeds from insurance policy loans............ 480 430 Proceeds from exercise ofexercised stock options......... 160 24options.............. 72 75 ------- -------- Net cash usedprovided by financing activities......... (4,888) (1,110)activities........ 884 75 ------- -------- Net increase (decrease) increase in cash................. (6,827) 3,407cash.................... 961 (1,378) Cash at beginning of year.......................year.......................... 756 8,126 298------- -------- Cash at end of quarter..........................quarter............................. $ 1,2991,717 $ 3,705 Supplemental6,748 ======= ======== Reconciliation of net income to net cash flow information:provided (used) by operating activities: Net income......................................income......................................... $ 8,4623,270 $ 6,1472,772 Adjustments to reconcile net income to net cash provided (used) provided by operating activities: Depreciation and amortization............... 4,070 3,865 Loss on sale of assets...................... 76 265 Other....................................... (246)amortization.................. 1,416 1,350 Changes in assets and liabilities: Accounts receivable....................... (7,212) (5,441) Inventories............................... (5,629) 1,362receivable.......................... (3,868) (3,268) Inventories.................................. (2,712) (3,300) Prepaid expenses and other current assets. (873) (1,101)assets, net................................ 914 8 Accounts payable.......................... 1,685 539payable............................. 876 984 Accrued salaries, wages and benefits...... 272 2,183benefits......... (14) (477) Other accrued expenses.................... (605) 41 Deferred income taxes..................... (635) 114expenses....................... 1,116 859 Other assets.............................. (81) (69)assets................................. 115 97 Other long-term liabilities............... (267)liabilities.................. (143) ------- -------- Net cash provided (used) provided by operating activities....................................activities... $ (470)1,113 $ 7,392(1,118) ======= ========
The accompanying notes are an integral part of the financial statements. 4 STANLEY FURNITURE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (In thousands, except share and per share data)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. 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) SeptemberMarch 28, December 31, 1998 1997 1996---------- ------------ Land and buildings............. $33,802 $33,694buildings.............. $34,150 $33,941 Machinery and equipment........ 45,643 45,120equipment......... 49,057 48,180 Office fixtures and equipment.. 1,825 1,794equipment... 1,836 1,836 Construction in progress....... 567 129 $81,837 $80,737progress........ 514 588 ------- ------- $85,557 $84,545 ======= ======= 3. Long-Term Debt (Unaudited) SeptemberMarch 28, December 31, 1998 1997 1996--------- ------------ 7.28% senior notes due March 15, 2004..................... $30,0002004...................... $25,714 $30,000 7.57% senior note due June 30, 2005.........................2005...................... 8,625 9,3508,625 7.43% senior notes due November 18, 2007...................... 10,000 10,000 Revolving credit facility...... 10,197facility....... 9,050 3,952 ------- ------- Total 48,822 39,35053,389 52,577 Less current maturities........maturities......... 5,086 725 $43,736 $38,6255,086 ------- ------- $48,303 $47,491 ======= ======= 5 STANLEY FURNITURE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (In thousands, except4. Earnings Per Common Share and Stock Split Basic earnings per common share and per share data) 4. Common Stock Repurchase On June 30, 1997,are based upon the Company purchased 750,000weighted average shares of itsoutstanding. Outstanding stock options are treated as common stock equivalents for an aggregate purchase pricepurposes of $15 million which was funded from available cash and borrowings under its revolving credit facility. The shares were purchased from the ML-Lee Acquisition Fund, L.P. and its affiliates. Assuming the shares were repurchased on January 2, 1997 and financed entirely by borrowings under the revolving credit facility at an assumed interest rate of 7.25%, the pro forma fullycomputing diluted earnings per share would have been $1.86, forand represent the nine month period ended September 28, 1997. 5. New Accounting Standarddifference between basic and diluted weighted average shares outstanding. In February 1997,April 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 128, "Earnings Per Share" effective for financial statements issued for periods ending after December 15, 1997.Directors approved a two-for-one stock split, to be effected in the form of a stock dividend, payable to stockholders of record on May 1, 1998. In connection with the stock dividend, approximately $69,000 will be transferred to common stock from capital in excess of par value in the second quarter of 1998. The new standard specifies the computation, presentation and disclosure requirements for earnings per share for entities with publicly held common stock. Since early adoption of the standard is prohibited, the followingunaudited pro forma earnings per share, amounts computed usinggiving retroactive effect to the new standard are presented below. Three Months Ended Nine Months Ended September September September September 28, 1997 29, 1996 28, 1997 29, 1996 Basic earnings per share: Continuing operations... $.76 $.56 $1.94 $1.25 Discontinued operations. .05 .05 Net income............ $.76 $.61 $1.94 $1.30 Diluted earnings per share: Continuing operations... $.68 $.53 $1.77 $1.22 Discontinued operations. .05 .05 Net income............ $.68 $.58 $1.77 $1.27
stock split were as follows: Three Months Ended -------------------------- March 28, March 30, 1998 1997 ----------- --------- Earnings per share: Basic.................... $ .48 $ .30 Diluted.................. $ .41 $ .28 Weighted average shares outstanding: Basic.................... 6,874 9,168 Diluted.................. 7,898 10,022 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Net sales increased $1.7$8.1 million, or 3.3%16.2%, for the three month period ended SeptemberMarch 28, 19971998, from the comparable 1996 period. For the nine month period, net sales increased $5.3 million, or 3.6%, from the comparable 19961997 period. The increase was due primarily to higher average selling prices.unit volume. Gross profit margin for the three and nine month periodsperiod of 1997 increased1998 decreased to 24.5% and 24.9%, respectively, from 24.3% and 23.4%25.1% for the comparable 1996 periods. Gross profit margin for the third quarter approximates the comparable prior year quarter.1997 period. The decrease resulted from higher gross profit margin for the nine month period of 1997 was due primarily to lower raw material (primarily lumber) costs, as a percentage of net sales andpartially offset by improved operating efficiencies. However, gross profit margin declined from 25.2% for the first half of 1997 to 24.5% for the third quarter of 1997, due primarily to rising lumber cost, and management expects this trend to continue in the fourth quarter and into 1998. Selling, general and administrative expenses for the three and nine month periods of 1997 as a percentage of net sales decreased to 13.8% and 14.2%, respectively, from 14.5% and 14.8%13.4% for the comparable 1996 periods. These expenses were lower1998 period from 14.4% in the comparable 1997 periods,period. The lower percentage was due primarilyprincipally to a higher provision for bad debtsnet sales in the prior year periods.1998 period. The majority of the $625,000 increase in 1998 was selling expenses directly attributable to the sales increase. 6 As a result of the above, operating income for the three and nine month periods of 1997 increased to $5.8$6.4 million, or 11.1% of net sales, from $5.3 million, or 10.7% of net sales, and $16.4 million, or 10.7% of net sales, respectively, from $5.2 million, or 9.8% of net sales, and $12.7 million, or 8.6% of net sales, forin the comparable 1996 periods.1997 period. Interest expense for the 1997 three month period ended March 28, 1998, increased due to higher average debt levels resulting from the Company's June and November 1997 repurchase of 750,000 sharesrepurchases of its common stock. For the 1997 nine month period, interest expense decreased due primarily to lower net borrowing levels. The Company's effective income tax rate was 38.2% and 38.6%38.0% for the nine1998 three month periods of 1997period and 1996, respectively.total year 1997. Financial Condition, Liquidity and Capital Resources At SeptemberMarch 28, 1997,1998, long-term debt including current maturities was $48.8$53.4 million. On June 30, 1997, the Company purchased 750,000 shares of its common stock for an aggregate purchase price of $15 million which was funded from available cash and borrowings under its revolving credit facility. Debt service requirements for the next five years are $5.1 million$800,000 in 1998, $15.3$14.2 million in 1999, $5.2 million in 2000, $5.3$6.7 million in 2001, and $5.4$6.8 million in 2002. As of SeptemberMarch 28, 1997,1998, approximately $13.0$9.7 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. The Company usedgenerated cash from operations of $482,000$1.1 million in the 1998 first quarter compared to cash used from operations of $1.1 million in the 1997 period. Cash in the 1998 period comparedwas used to cash generated from operations of $7.4 million during the 1996 period.fund capital expenditures. Cash was required in the 1997 period to fund higher payments to suppliers and employees due to increased production. Cash was also required forproduction levels and higher tax payments resulting from higher taxable income in 1997. The cash generated by operations in 1996 was used to fund capital expenditures and reduce borrowings.payments. Net cash used by investing activities was $1.5$1.0 million in the 19971998 period compared to $2.9 million$335,000 in the 19961997 period. Expenditures in each year were primarily for plant and equipment and other assets in the normal course of business. Net cash usedprovided by financing activities was $4.9 million and $1.1 million$884,000 in the 1998 period compared to $75,000 in the 1997 and 1996 period, respectively.period. In the 19971998 period, cash and borrowings under the revolving credit facility were used to finance the stock repurchase discussed above. Discontinued Operations In 1996, the Company was released from a lease obligation at its former Norman's of Salisbury division. Accordingly, in the third quarter of 1996, the Company recorded an after tax gain of $246,000, or $.05 per share, related to the partial reversal of a 1994 accrual.provided cash for senior debt payments. 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.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 7 actual results to differ materially from those in the forward-lookingforward- 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. New Accounting Standard In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 128, "Earnings Per Share" effective for financial statements issued for periods ending after December 15, 1997. The new standard specifies the computation, presentation and disclosure requirements for earnings per share for entities with publicly held common stock. Since early adoption of the standard is prohibited, the following pro forma earnings per share amounts computed using the new standard are presented below. Three Months Ended Nine Months Ended September September September September 28, 1997 29, 1996 28, 1997 29, 1996 Basic earnings per share: Continuing operations... $.76 $.56 $1.94 $1.25 Discontinued operations. .05 .05 Net income............ $.76 $.61 $1.94 $1.30 Diluted earnings per share: Continuing operations... $.68 $.53 $1.77 $1.22 Discontinued operations. .05 .05 Net income............ $.68 $.58 $1.77 $1.27
PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 10.1 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.* Exhibit 11. Schedule of Computation of Earnings Per Share.* Exhibit 27. Financial Data Schedule.* (b) Reports on Form 8-K A report on Form 8-K was filed on July 9, 1997, to disclose the repurchase of 750,000 shares of the Company's common stock from the ML-Lee Acquisition Fund, L.P. and its affiliates.None. * Filed herewith. 8 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: OctoberApril 14, 19971998 By: /s/ Douglas I. Payne ------------------------- Douglas I. Payne Sr. Vice PresidentV.P. - Finance &and Administration, Secretary and Treasurer (Principal Financial and Accounting Officer) 9