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 September 25, 1999 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 October 4, 1999. Class Number Common Stock, par value $.02 per share 7,093,930 Shares PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS STANLEY FURNITURE COMPANY, INC. BALANCE SHEETS (In thousands, except share data) (Unaudited) September December 25, 1999 31, 1998 ___________ _________ ASSETS Current assets: Cash.................................................................... $ 3,295 $ 6,791 Accounts receivable, less allowances of $2,314 and $1,906............... 35,262 29,141 Inventories: Finished goods........................................................ 22,898 22,853 Work-in-process....................................................... 8,063 7,495 Raw materials......................................................... 11,310 16,166 ___________ _________ 42,271 46,514 Prepaid expenses and other current assets............................... 1,023 903 Deferred income taxes................................................... 2,429 1,980 ___________ _________ Total current assets.................................................. 84,280 85,329 Property, plant and equipment, net........................................ 63,651 52,474 Goodwill, less accumulated amortization of $3,612 and $3,360.............. 9,828 10,080 Other assets.............................................................. 6,090 6,491 ___________ _________ $ 163,849 $ 154,374 =========== ========= LIABILITIES Current liabilities: Current maturities of long-term debt.................................... $ 5,236 $ 5,136 Accounts payable........................................................ 23,061 21,837 Accrued salaries, wages and benefits.................................... 12,756 11,939 Other accrued expenses.................................................. 2,225 2,009 ___________ _________ Total current liabilities............................................. 43,278 40,921 Long-term debt, exclusive of current maturities........................... 33,168 38,403 Deferred income taxes..................................................... 11,550 10,694 Other long-term liabilities............................................... 1,988 1,988 ___________ _________ Total liabilities....................................................... 89,984 92,006 ___________ _________ STOCKHOLDERS' EQUITY Common stock, $.02 par value, 10,000,000 shares authorized, 7,093,930 and 7,069,715 shares issued and outstanding................... 142 141 Capital in excess of par value............................................ 35,029 37,073 Retained earnings ........................................................ 38,694 25,154 ___________ _________ Total stockholders' equity.............................................. 73,865 62,368 ___________ _________ $ 163,849 $ 154,374 =========== ========= 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 Nine Months Ended Ended September September September September 25, 1999 26, 1998 25, 1999 26, 1998 _________ _________ _________ _________ Net sales................................................. $65,319 $63,832 $192,364 $183,386 Cost of sales............................................. 48,203 48,449 142,758 138,585 _________ _________ _________ _________ Gross profit............................................ 17,116 15,383 49,606 44,801 Selling, general and administrative expenses.............. 8,400 8,209 25,051 24,310 _________ _________ _________ _________ Operating income........................................ 8,716 7,174 24,555 20,491 Other expense, net........................................ 28 159 335 242 Interest expense.......................................... 872 1,035 2,619 3,221 _________ _________ _________ _________ Income before income taxes.............................. 7,816 5,980 21,601 17,028 Income taxes.............................................. 2,859 2,274 8,061 6,472 _________ _________ _________ _________ Net income.............................................. $ 4,957 $ 3,706 $ 13,540 $ 10,556 ========= ========= ========= ========= Earnings per share: Basic................................................... $ .69 $ .52 $ 1.90 $ 1.51 Diluted................................................. $ .64 $ .46 $ 1.74 $ 1.32 Weighted average shares outstanding: Basic................................................... 7,141 7,144 7,125 7,005 Diluted................................................. 7,762 8,063 7,804 8,003 The accompanying notes are an integral part of the financial statements. STANLEY FURNITURE COMPANY, INC. STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Nine Months Ended September September 25, 1999 26, 1998 _________ _________ Cash flows from operating activities: Cash received from customers........................................... $ 186,058 $ 173,838 Cash paid to suppliers and employees................................... (156,502) (155,948) Interest paid.......................................................... (2,915) (3,545) Income taxes paid, net................................................. (6,667) (5,530) _________ _________ Net cash provided by operating activities............................ 19,974 8,815 _________ _________ Cash flows from investing activities: Capital expenditures................................................... (15,475) (4,000) Other, net............................................................. (157) (13) _________ _________ Net cash used by investing activities................................ (15,632) (4,013) _________ _________ Cash flows from financing activities: Purchase and retirement of common stock................................ (4,438) Repayment of revolving credit facility................................. (950) Repayment of Senior Notes.............................................. (5,135) (5,086) Proceeds from insurance policy loans................................... 596 536 Proceeds from exercised stock options.................................. 1,139 1,518 _________ _________ Net cash used by financing activities................................ (7,838) (3,982) _________ _________ Net increase (decrease) in cash........................................ (3,496) 820 Cash at beginning of year.............................................. 6,791 756 _________ _________ Cash at end of period................................................ $ 3,295 $ 1,576 ========= ========= Reconciliation of net income to net cash provided by operating activities: Net income............................................................. $ 13,540 $ 10,556 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................................ 4,566 4,315 Other, net........................................................... 131 132 Changes in assets and liabilities: Accounts receivable................................................ (6,121) (9,251) Inventories........................................................ 4,243 534 Prepaid expenses and other current assets.......................... (187) (483) Accounts payable................................................... 1,224 637 Accrued salaries, wages and benefits............................... 817 1,046 Other accrued expenses............................................. 1,466 1,970 Deferred income taxes.............................................. 407 (549) Other assets....................................................... (112) (92) _________ _________ Net cash provided by operating activities.............................. $ 19,974 $ 8,815 ========= ========= The accompanying notes are an integral part of the financial statements. STANLEY FURNITURE COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (In thousands, except share and per share data) 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) September December 25, 1999 31, 1998 _________ ________ Land and buildings.................................... $ 34,981 $ 34,699 Machinery and equipment............................... 60,979 51,728 Office fixtures and equipment......................... 1,772 1,772 Construction in progress.............................. 7,524 1,876 _________ ________ Property, plant and equipment, at cost............ 105,256 90,075 Less accumulated depreciation......................... 41,605 37,601 _________ ________ $ 63,651 $ 52,474 ========= ======== 3. Long-Term Debt (Unaudited) September December 25, 1999 31,1998 _________ ________ 7.28% senior notes due March 15, 2004................. $ 21,429 $ 25,714 7.57% senior note due June 30, 2005................... 6,975 7,825 7.43% senior notes due November 18, 2007.............. 10,000 10,000 _________ ________ Total............................................... 38,404 43,539 Less current maturities............................... 5,236 5,136 _________ ________ $ 33,168 $ 38,403 ========= ======== 4. 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 Nine Months Ended Ended September September September September 25, 1999 26, 1998 25, 1999 26, 1998 _________ _________ _________ _________ Weighted average shares outstanding for basic calculation...................... 7,141 7,144 7,125 7,005 Add: Effect of stock options.................. 621 919 679 998 _________ _________ _________ _________ Weighted average shares outstanding, adjusted for diluted calculation....... 7,762 8,063 7,804 8,003 ========= ========= ========= ========= Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Net sales increased $1.5 million, or 2.3%, for the three month period ended September 25, 1999 from the comparable 1998 period. For the nine month period, net sales increased $9.0 million, or 4.9%, from the comparable 1998 period. The Company closed its upholstery operations in the second half of 1998. Excluding upholstery sales for the three and nine month periods of 1998, wood furniture sales increased 4.1% and 7.6% in the 1999 periods, respectively. The increase was due to higher unit volume and to a lesser extent higher average selling prices. Shipments in the 1999 periods were limited by capacity constraints. Gross profit margins for the three and nine month periods of 1999 increased to 26.2% and 25.8%, respectively, from 24.1% and 24.4% for the comparable 1998 periods. The increase resulted primarily from stable raw material cost and improved operating efficiencies. These comparisons were also favorably impacted by the phase out of upholstered products. Selling, general and administrative expenses as a percentage of net sales for the three and nine month periods of 1999 were 12.9% and 13.0%, respectively, compared to 12.9% and 13.3% for the comparable 1998 periods. The lower year-to-date percentage in 1999 was due principally to higher net sales. Expenditures in 1999 were higher due principally to selling expenses directly attributable to increased sales. However, the majority of the increase was offset by the elimination of expenditures related to upholstered products, which were phased out in the second half of 1998. As a result of the above, operating income as a percentage of net sales for the three and nine month periods of 1999 increased to 13.3% and 12.8%, respectively, from 11.2% of net sales for both the comparable periods. Interest expense for the 1999 three and nine month periods decreased due to lower average debt levels. The Company's effective income tax rate declined to 37.3% for the 1999 nine month period from 38.0% in 1998, due to lower state tax expense. Financial Condition, Liquidity and Capital Resources Cash generated from operations increased to $20.0 million in the 1999 period compared to $8.8 million in the 1998 period, due primarily to increased sales. The cash generated in the 1999 period was used to fund capital expenditures, reduce borrowings and repurchase the Company's common stock. Net cash used by investing activities increased to $15.6 million in the 1999 period from $4.0 million in the 1998 period, due principally to increased capital expenditures. The 1999 increase in capital expenditures is primarily for capacity expansion projects. The Company estimates the total cost of these projects to be approximately $25 million, of which a majority is expected to be incurred in 1999. Approximately $10 million is being used to expand production capability at existing facilities to add $30-$35 million of increased sales capacity on an annualized basis. This new capacity is currently being phased in and will allow the Company to increase production for its bedroom and Young AmericaTM youth bedroom products. Approximately $15 million is being used to purchase and equip a facility dedicated to the production of home office furniture. This facility is expected to begin operation early next year and should provide $50-$60 million of sales capacity on an annualized basis when in full production in two to three years. Including expenditures related to the expansion projects, capital expenditures in 1999 are anticipated to be approximately $26 million. The remaining expenditures in the current period and the expenditures in the 1998 period were primarily for plant and equipment and other assets in the normal course of business. Net cash used by financing activities was $7.8 million in the 1999 period compared to $4.0 million in the 1998 period. In the 1999 period, the purchase of common stock and reduction in borrowings were financed by cash generated from operations and proceeds from the exercise of stock options. In the 1998 period, cash generated from operations and proceeds from the exercise of stock options were used to reduce borrowings. In October 1998, the Company's Board of Directors authorized the use of up to $10 million to repurchase shares of its common stock. In August 1999, the Company's Board of Directors increased the authorization to $20 million. Consequently, the Company may, from time to time, either directly or through agents, repurchase its common stock in the open market through negotiated purchases or otherwise, at prices and on terms satisfactory to the Company. The Company has utilized $10 million to purchase 526,750 shares of its common stock at an average price of $18.97 per share, including the purchase of 211,750 shares at an average price of $20.96 per share during the nine month period ended September 25, 1999. Depending on market prices and other conditions relevant to the Company, such purchases may be discontinued at any time. At September 25, 1999, long-term debt including current maturities was $38.4 million and approximately $24.0 million of additional borrowings were available under the Company's revolving credit facility. Debt service requirements are $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, debt service requirements and stock repurchase programs. Year 2000 The Company continues to actively address the business issues associated with the expected impact of the Year 2000 ("Y2K") on information technology systems and non-information technology systems, including equipment with embedded microprocessors, both internally and in relation to the Company's external customers and suppliers. Factors involved in assessing such business issues include the evaluation and testing of the Company's systems; evaluation, upgrading and certifying of automated plant machinery and equipment; and assessing the compliance strategies of significant customers and vendors and monitoring the status of their strategies. The Company created a cross-functional Y2K team for the purpose of directing the Company's compliance efforts and identifying and addressing the impact of noncompliance on information technology systems and non-information technology systems. An inventory of all the Company's equipment containing date sensitive embedded technology has been completed. All equipment has been either tested and/or certified to be Y2K compliant. However, additional testing will continue for the balance of the year. Since 1996, the Company has been upgrading its information systems technology with Y2K compliant software to support its sales, manufacturing and administrative functions. At the present time, the Company believes it has completed all of the necessary internal software and hardware implementation required for Y2K compliance. The Company does not believe any material exposures or contingencies exist with respect to its internal information systems. The Company has requested assurances from its major suppliers and business partners that they will be Y2K compliant so that there will be no disruption of their products or services as the new century begins. The Company has assessed the risk of each of its significant suppliers and business partners to determine the possible impact of their noncompliance, if that should occur. Although the Company is presently not aware of any material exposures or contingencies related to the Y2K compliance efforts of its significant vendors and business partners, if a significant vendor or business partner should be noncompliant there can be no assurance such an event will not have a material adverse effect on the Company's financial position, results of operations and cash flows. The Company believes the actions it is taking (including the continued monitoring of third-party compliance and the development of appropriate contingency plans) will minimize these risks and believes it is taking responsible steps to prevent any major disruptions. The Company believes the actions it has taken since 1996 with regard to Y2K issues have minimized Y2K related capital costs and expenses incurred to date (estimated at less than $1.0 million). Substantially all costs have been incurred. 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, competition in the furniture industry, capital costs, delays in construction or obtaining necessary permits for planned expansions, and general economic conditions. PART II. OTHER INFORMATION Item 1. Legal Proceedings On July 9, 1999, the United States Environmental Protection Agency served the Company with an administrative complaint citing the alleged failure of a July 1998 compliance test of one boiler at the Stanleytown, Virginia facility and seeking a civil fine in the amount of $175,000. The Company intends to vigorously contest the complaint and in August 1999 filed its answer seeking an elimination of the civil fine. The Company believes that the cost related to the complaint will not have a material adverse effect on the Company's financial condition or results of operations. Item 5. Other Information In July 1999, the number of directors constituting the Company's Board of Directors was increased to six and Robert G. Culp, III was elected a director with a term expiring at the 2002 Annual Meeting of Stockholders. Mr. Culp is Chairman of the Board and Chief Executive Officer and a director of Culp, Inc., a manufacturer and marketer of furniture upholstery fabrics and mattress fabrics. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 27.1 Financial Data Schedule for the quarter ended September 25, 1999.* (b) Reports on Form 8-K A report on Form 8-K was filed on August 30, 1999 to announce the Company's Board of Directors' authorization to use an additional $10 million to repurchase the Company's common stock. _____________________ * Filed herewith. 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: October 12, 1999 By:/s/Douglas I. Payne ______________________________________ Douglas I. Payne Sr. V.P. - Finance and Administration, Secretary and Treasurer (Principal Financial and Accounting Officer)