UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington , D.C. 20549

 

SCHEDULE 14A

 

Proxy Statement Pursuant to Section 14(a) of the Securities

Exchange Act of 1934

 

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Stanley Furniture Company, Inc.

(Name of Registrant as Specified In Its Charter)

 

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Stanley Furniture Company, Inc.

200 North Hamilton Street, No. 200

High Point, North Carolina 27260

 

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

To be held May 25, 2017

 

NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Stanley Furniture Company, Inc. will be held at our office, 200 North Hamilton Street, High Point, North Carolina, on Thursday, May 25, 2017, at 11:00 A.M., for the following purposes:

 

(1)                To elect two directors to each serve a three-year term on our board of directors;

(2)                To consider and act on an advisory vote regarding the approval of compensation paid to certain executive officers;

(3)                To consider and act on an advisory vote regarding the frequency of stockholder approval of the compensation paid to certain executive officers; and

(4)                To approve the Rights Agreement designed to protect against a possible limitation on our ability to use our net operating loss carryforwards;

(5)                To approve the material terms of the performance goals under the Stanley Furniture Company, Inc. 2012 Incentive Compensation Plan;  

(6)                To transact such other business as may properly be brought before the meeting or any adjournment thereof.

 

The stockholders of record of our common stock at the close of business on April 7, 2017 are entitled to notice of and to vote at this Annual Meeting or any adjournment thereof.

 

Even if you plan to attend the meeting in person, we request that you mark, date, sign and return your proxy as soon as possible so that your shares may be certain of being represented and voted at the meeting. You may also vote by phone or on the Internet by following the instructions on the proxy card.  Any proxy given by a stockholder may be revoked by that stockholder at any time prior to the voting of the proxy.

 

By Order of the Board of Directors,

 

 

Anita W. Wimmer

Secretary

 

 

April 13, 2017

 

 

 

Stanley Furniture Company, Inc.

200 North Hamilton Street, No. 200

High Point, North Carolina 27260

 

PROXY STATEMENT

 

ANNUAL MEETING OF STOCKHOLDERS

May 25, 2017

 

 

The enclosed proxy is solicited by and on behalf of the board of directors of Stanley Furniture Company, Inc. for use at the Annual Meeting of Stockholders to be held on Thursday, May 25, 2017, at 11:00 A.M., at our office, 200 North Hamilton Street, High Point, North Carolina, and any adjournment thereof. The matters to be considered and acted upon at this meeting are described in the foregoing notice of the meeting and this proxy statement. This proxy statement and the related form of proxy are being made available on or about April 13, 2017 to all holders of record of our common stock on April 7, 2017.  Shares of our common stock represented in person or by proxy will be voted as hereinafter described or as otherwise specified by the stockholder.  Any proxy given by a stockholder may be revoked by such stockholder at any time prior to the voting of the proxy by delivering a written notice to our Secretary, executing and delivering a later-dated proxy or attending the meeting and voting in person.

We will bear the cost of preparing, assembling and mailing the proxy, this proxy statement, and other material enclosed, and all clerical and other expenses of solicitations. In addition to the solicitation of proxies by use of the mails, our directors, officers and employees may solicit proxies by telephone, telegram, e-mail, personal interview or other means. We will also request brokerage houses and other custodians, nominees and fiduciaries to forward soliciting material to the beneficial owners of our common stock held of record by those parties and will reimburse those parties for their expenses in forwarding soliciting material.

 

VOTING RIGHTS

 

On April 7, 2017, there were 14,670,063 shares of our common stock outstanding and entitled to vote.  Each share entitles the holder thereof to one vote.

 

ELECTION OF DIRECTORS

 

Our board of directors presently consists of seven directors who are divided into three classes with staggered terms. The terms of Messrs. T. Scott McIlhenny, Jr., Jeffrey S. Gilliam and Steven A. Hale II expire at the time of the 2017 Annual Meeting of Stockholders. We propose the reelection of Messrs. Gilliam and Hale for three-year terms expiring at the time of the 2020 Annual Meeting.   Mr. McIlhenny will retire from our board when his current term expires at the time of the 2017 Annual Meeting. Upon the expiration of Mr. McIlhenny’s current term as a director, the size of the board will be reduced from seven directors to six. 

 

The shares represented by proxies will be voted as specified by the stockholder. If the stockholder does not specify a choice, the shares will be voted in favor of the election of the nominees listed on the proxy card, except that in the event the nominees should not continue to be available for election, the proxies will be voted for the election of such other persons as our board of directors may recommend. As of the date of this proxy statement, our board of directors has no reason to believe that the nominees named below will be unable or unwilling to serve.

 

Our board and corporate governance and nominating committee in considering its recommendation of the nominees for election at the 2017 Annual Meeting, as well as in making its previous recommendation of our other directors, focused primarily on the information discussed in each of the director’s individual biographies set forth below.  In particular, with regard to Messrs. Gilliam and Haley, our board and corporate governance and nominating committee considered their strong background in the manufacturing sector, which for Mr. Haley includes prior experience in furniture manufacturing.  With respect to Mr. Gilliam, our board and corporate governance and nominating committee considered his financial experience as a chief financial officer. With respect to Mr. Hale, our board and corporate governance and nominating committee considered his experience with asset management and his firm’s position as holder of approximately 10% of our outstanding common stock.  With respect to Mr. Lapey, our board and corporate governance and nominating committee considered his experience with the equity markets and experience with the housing and furniture markets through his service in various capacities at Third Avenue Management and as an equity analyst focusing on housing and furniture.  With respect to Mr. Putnam, our board and corporate governance and nominating committee considered his experience with investment in small publicly traded companies and his firm’s position as holder of approximately 5% of our outstanding common stock.  Our board and corporate governance and nominating committee also considered the many years of experience with our company represented by Mr. Glenn Prillaman, our president and chief executive officer.

 

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Mr. Hale was elected to our board of directors pursuant to the terms of an agreement dated January 30, 2017 with Hale Partnership Fund, LP, and related parties, a stockholder group that owns approximately 10.2% of our outstanding common stock and which had nominated two candidates for election to our board of directors at the 2017 Annual Meeting.  Under this agreement, the stockholder group withdrew its nominations and agreed, among other things, to vote in favor of the election of Messrs. Gilliam and Hale as directors at the 2017 Annual Meeting. 

 

Mr. Putnam was elected to our board of directors pursuant to the terms of an agreement dated January 7, 2016 with Hale Partnership Fund, LP, Talanta Fund, L.P., and related parties which had nominated two candidates for election to our board of directors at the 2016 Annual Meeting.  Under this agreement, these parties withdrew their nominations and agreed, among other things, to vote in favor of the election of Messrs. Prillaman and Putnam as directors at the 2016 Annual Meeting. 

 

            Mr. Gilliam was elected to our board of directors in February 2015 pursuant to an agreement dated February 12, 2015 with Hale Partnership Fund, LP, Talanta Fund, L.P. and related parties which had nominated two candidates for election to our board of directors at the 2015 Annual Meeting.  Under this agreement, these parties withdrew their nominations and agreed, among other things, to vote in favor of the election of Messrs. Haley and Lapey as directors at the 2015 Annual Meeting.

 

Nominee for Election for Three-Year Term Ending 2020

 

Steven A. Hale II , 33, is the founder of Hale Partnership Capital Management, LLC, an asset management firm that serves as the investment manager to certain privately held investment partnerships.  Mr. Hale has held his position since 2010.  From 2007 to 2010, prior to founding Hale Partnership Capital Management, LLC, Mr. Hale was an associate director with Babson Capital Management, LLC, an asset management firm, where he had responsibility for coverage of distressed debt investments across a variety of industries.  From 2005 to 2007, Mr. Hale was a leveraged finance analyst with Banc of America Securities. 

 

Jeffrey S. Gilliam , 59, has been a director since February 2015 and his present term will end in 2017.  Mr. Gilliam has served as managing member of Willow Oak Advisory Group, LLC, a provider of business advisory services since January 2016. Mr. Gilliam was a director of the Finley Group, a corporate advisory firm, from August 2012 until January 2016.  Mr. Gilliam was employed by Toter, Incorporated (a division of Wastequip, LLC), a manufacturer of automated cart systems,  as President from October 2008 until August 2012, and as Vice President Finance (Chief Financial Officer) from June 2002 until October 2008.

 

Directors Whose Terms Do Not Expire this Year

 

Glenn Prillaman , 46, has been a director since February 2010.  Mr. Glenn Prillaman has been President and Chief Executive Officer since February 2010 and was President and Chief Operating Officer from August 2009 until February 2010. He was Executive Vice President — Marketing and Sales from September 2008 until August 2009. He held the position of Senior Vice President — Marketing and Sales since September 2006 and was our Senior Vice President — Marketing/Sales — Young America ® from August 2003 to September 2006. Mr. Prillaman held various management positions in product development from June 1999 to August 2003. Prior to this Mr. Prillaman represented the company as a sales agent from 1993 to 1996.

 

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             Justyn R. Putnam , 36, has been a director since January 2016. Mr. Putnam is the Managing Member of the Talanta Investment Group, LLC, an asset management firm focusing investment on smaller publicly traded companies and utilizing intense fundamental research and a long-term investment horizon.  Mr. Putnam has held this position since 2009.  Prior to joining Talanta Investment Group, Mr. Putnam was employed by GAMCO Investors, Inc. as a research analyst specializing in public company valuation from 2006 to 2009.  From 2002 to 2005, Mr. Putnam was founder and CEO of Putnam Construction Corporation, a North Carolina real estate development company.

 

            Michael P. Haley, 66, has been a director since April 2003 and served as chairman of board of directors from January 2011 until October 2015.  His present term will end in 2018.  Mr. Haley served as an advisor to Fenway Partners, LLC, a private equity investment firm, from April 2006 and as managing director of its affiliate, Fenway Resources, from March 2008, respectively, until June 2015.  Mr. Haley held the position of president and CEO of MW Manufacturers Inc., a subsidiary of Ply Gem Industries, a producer of window, door and siding products for the residential construction industry, from June 2001 until January 2005 and served as its chairman from January 2005 until June 2005.  From May 1994 to May 2001, Mr. Haley was President of American of Martinsville, a manufacturer of commercial contract furniture and a subsidiary of LADD Furniture, Inc.  During this time, he also served as executive vice president of LADD Furniture, Inc.  From 1988 to 1994, Mr. Haley was president of Loewenstein Furniture Group.  Mr. Haley is also a director of LifePoint Hospitals, Inc., American National Bankshares, Inc. and Ply Gem Holdings, Inc. 

 

            John D. “Ian” Lapey , 50, has been a director since October 2014 and has served as chairman of the board since October 2015.  His present term will end in 2018.  Mr. Lapey has been a Research Analyst and Partner at Moerus Capital Management LLC since November 2016. Previously he has served as President of LongCap Investment Management LLC, a registered investment adviser, from August 2015 until October 2016 and portfolio manager of the LongCap Value Fund from November 2015 until July 2016.  Mr. Lapey was a private investor from June 2014 until August 2015 and previously was a portfolio manager and investment committee member with Third Avenue Management, LLC, a value-driven investment firm, until June 2014.  Prior to joining Third Avenue Management, LLC in 2001, Mr. Lapey served as an equity analyst focusing on housing and furniture with Credit Suisse First Boston from 1998 until 2001 and Salomon Brothers from 1997 until 1998.

 

CORPORATE GOVERNANCE

 

Board and Board Committee Information

 

            Our board of directors has determined that all directors are “independent directors” as that term is defined in the listing standards of The NASDAQ Stock Market, with the exception of Mr. Prillaman who serves as our President and Chief Executive Officer. 

 

The full board of directors met 25 times during 2016.  Each incumbent director attended at least 75% of the total 2016 board meetings and committee meetings held during periods that he was a member of the board or such committees.  Our board of directors has adopted a policy that all directors should attend the Annual Meeting of Stockholders.  All directors, other than Mr. Hale who joined the board in January 2017, attended the 2016 Annual Meeting of Stockholders. 

 

Our board of directors currently has three standing committees: an audit committee, a compensation and benefits committee and a corporate governance and nominating committee.  Each of these committees has a written charter, current copies of which can be found at our website, www.stanleyfurniture.com.   

 

Audit Committee . The audit committee presently consists of Messrs. Gilliam, Haley, Lapey, McIlhenny and Putnam.  Our board has determined that all of the members of the audit committee meet the current independence and experience requirements contained in the listing standards of The NASDAQ Stock Market.  Our board has also determined that Messrs. Gilliam, Haley, Lapey and Putnam are “audit committee financial experts” as that term is defined in regulations promulgated by the Securities and Exchange Commission.  The primary purpose of the audit committee is to assist our board in fulfilling its responsibilities to oversee management’s conduct of our financial reporting process, including internal control over financial reporting.  The audit committee also serves as direct liaison with our independent public accountants and is responsible for the selection or discharge of our accountants. The audit committee met six times during 2016.

 

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Compensation and Benefits Committee . The compensation and benefits committee, presently consisting of Messrs. McIlhenny, Gilliam, Hale, Haley, Lapey and Putnam, establishes salaries of executive officers and incentive compensation for our officers and employees. The compensation and benefits committee has not delegated its authority to any other person. The compensation and benefits committee administers our 2000 Incentive Compensation Plan, 2008 Incentive Compensation Plan, 2012 Incentive Compensation Plan and has authority under the 2012 Incentive Compensation Plan to select employees to receive incentive awards and to determine for each employee the nature of the incentive award and the terms and conditions of each incentive award. The compensation and benefits committee has the same responsibilities with regard to incentive awards for non-employee directors.  All of the members of the compensation and benefits committee are “independent directors” as that term is defined in the listing standards of The NASDAQ Stock Market. The compensation and benefits committee met six times during 2016.

 

Corporate Governance and Nominating Committee . The corporate governance and nominating committee, presently consisting of Messrs. Haley, Hale, Gilliam, Lapey, McIlhenny and Putnam, makes recommendations of nominations for directors and considers any stockholder nominations for director made in accordance with our bylaws. The corporate governance and nominating committee is also responsible for recommending corporate governance policies and for making recommendations on director compensation.  All of the members of the corporate governance and nominating committee are “independent directors” as that term is defined in the listing standards of The NASDAQ Stock Market. The corporate governance and nominating committee met three times during 2016.

 

The corporate governance and nominating committee does not have a formal policy with respect to diversity; however, our corporate governance and nominating committee, as well as our board, in recommending director nominees seeks a board composed of individuals who represent a mix of backgrounds, skills and experience in order to enhance the board’s deliberations and discussions.

 

Board Leadership Structure

 

            Our board does not have a policy on whether or not the roles of chief executive officer and chairman of the board should be separate and, if they are to be separate, whether the chairman of the board should be selected from the non-employee directors or be an employee.  Our board believes that it should be free to make a choice from time to time in any manner that is in the best interests of our company and stockholders.  Our current chairman is an independent, non-employee director.  The board believes that, at the current time, this structure is best for the company as it allows our chief executive officer to focus on the company's strategy, business and operations, while enabling our chairman to assist with board matters and serve as a liaison between the board and the company's management.   The board also believes that this leadership structure aids in the board's oversight of risk and strengthens risk management.

 

Risk Management

 

            Our board has an active role, as a whole and also through its committees, in overseeing management of our risks. We undertake at least annually a risk assessment to identify and evaluate risks and to develop plans to manage them effectively.  This assessment is reviewed with the audit committee.  Our board and audit committee also regularly review information regarding our strategy, financial position and operations, as well as risks associated with each.  In addition, the compensation and benefits committee is responsible for oversight of potential risks related to compensation programs and policies.

 

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Director Compensation

 

Our board of directors approved the following policy for 2016 compensation of non-employee directors:

 

(i)     each non-employee director, other than the Chairman of the Board, received annual cash compensation in the amount of $30,000,

(ii)    each non-employee director, other than the chairman of the board, received an annual stock grant to acquire a number of shares with a fair value of $15,000 which a director may elect to receive as restricted stock or non-qualified stock options in such proportions as the director may designate  (the annual grant is made as of the Annual Meeting of Stockholders with restricted stock vesting upon completion of the director’s then current term and options having a seven-year term and vesting after one year), and

(iii) the chairman of the board received annual cash compensation in the amount of $35,000 and an annual stock grant to acquire a number of shares with a fair value of $20,000 (the annual grant is made as of the Annual Meeting of Stockholders and is otherwise on the same terms as the annual stock grant for the other non-employee directors).

Each non-employee director elected to receive the 2016 stock grant in the form of restricted stock.  The corporate governance and nominating committee reviews director compensation annually and, as part of that process, typically has for review publicly available director compensation information for other comparable companies in the furniture industry.  In addition, the corporate governance and nominating committee periodically reviews director compensation and benefits with the compensation consultant for the committee.  Our board of directors approves director compensation.  Pursuant to the agreement under which he was elected to our board, Mr. Hale has agreed to serve as a director without compensation. 

 

The following table sets forth information concerning the compensation of directors for the year ended December 31, 2016.   Mr. Dascoli’s term ended at the 2016 Annual Meeting of Stockholders.

 

DIRECTOR COMPENSATION

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2016

Stock
Awards ($)

  (1)  

Name

Fees
Earned or
 Paid in  
Cash ($) 

Total ($)

D. PAUL DASCOLI

11,452

 

0

 

11,452

JEFFREY S. GILLIAM

30,000

15,000

45,000

MICHAEL P. HALEY

30,000

 

15,000

 

45,000

JOHN D. LAPEY

35,000

20,000

55,000

T. SCOTT MCILHENNY, JR.

30,000

 

15,000

 

45,000

JUSTYN R. PUTNAM

29,516

15,000

44,516

_______________

(1)   The number of stock options (shares) and restricted shares outstanding at December 31, 2016 for each of our directors in the above table is as follows:

 

Stock

Options

Restricted

Shares

D. Paul Dascoli

10,306

 

--

Jeffery S. Gilliam

--

11,081

Michael P. Haley

44,371

 

12,743

John D. Lapey

--

13,113

T. Scott McIlhenny, Jr.

39,218

 

21,872

Justyn R. Putnam

--

 

6,098

 

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Nominations for Director

 

Our bylaws provide that a stockholder entitled to vote in the election of directors may nominate one or more persons for election as a director only if advance written notice is given. Written notice of such stockholder’s intent to make such nomination must be received by our Secretary or deposited in the U.S. mail, postage prepaid, to our Secretary not later than 120 days in advance of the anniversary date of our proxy statement for the previous year’s Annual Meeting. Any stockholder wishing to nominate one or more persons as director must submit the following information in writing:

 

(i)      the name and address of the stockholder who intends to make the nomination;

(ii)     a representation that the stockholder is a stockholder of record entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice;

(iii)   a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which any nomination is to be made by the stockholder;

(iv)   such other information regarding each nominee as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission, had the nominee been nominated by our board of directors; and

(v)     the consent of each proposed nominee to serve as one of our directors if so elected.

The chairman of the meeting may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedure.

 

By requiring advance notice of stockholder nominations, this bylaw affords the corporate governance and nominating committee and our board of directors the opportunity to consider the qualifications of the proposed nominees and, to the extent deemed necessary or desirable by the board, to inform stockholders about these qualifications. The bylaw does not give our board of directors any power to approve or disapprove a stockholder’s nomination for election of directors. However, it may have the effect of precluding a contest for the election if its procedures are not followed, and therefore may discourage or deter a stockholder from conducting a solicitation of proxies to elect the stockholder’s own slate of directors.

 

Stockholder Communications

 

Our board welcomes communications from stockholders and has adopted a procedure for receiving and addressing them.  Stockholders may send written communications to the entire board or to individual directors by addressing them to Corporate Secretary, Stanley Furniture Company, 200 North Hamilton Street, No. 200 High Point, North Carolina 27260.

 

Review of Transactions with Related Persons

 

            Under our code of conduct and audit committee charter, the audit committee must approve any transaction involving related persons which requires disclosure in our proxy statement under applicable rules of the Securities and Exchange Commission.  Under the audit committee charter, the audit committee is responsible for reviewing these transactions and has the power to approve or disapprove these transactions.  There were no such transactions in 2015 or 2016. 

 

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SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

 

The Securities Exchange Act of 1934 requires our executive officers and directors, and any persons owning more than 10% of our common stock, to file certain reports of ownership and changes in ownership with the Securities and Exchange Commission. Based solely on our review of the copies of the Forms 3, 4 and 5 we have received, and written representations from certain reporting persons that no Forms 5 were required to be filed by those persons, we believe that all executive officers, directors and 10% stockholders complied with these filing requirements.

 

EXECUTIVE COMPENSATION

 

Executive Compensation Program  

 

We intend for our straight-forward executive compensation program to provide appropriate compensation that is closely tied to our financial results. The program has only three major components: salary, annual bonus and equity awards. The program provides executives with a significant opportunity for variable compensation dependent on our performance. The compensation program’s overall objective is to enable us to attract and retain the services of highly-skilled executives who can perform multiple roles on our lean management team. The program seeks to enhance our performance and value to stockholders by aligning closely the financial interests of our executives with those of our stockholders.

 

Our executive compensation program is administered by the compensation and benefits committee of our board of directors.

 

Salary .  Mr. Prillaman’s 2016 salary was $255,000 and Mr. Wimmer’s 2016 salary was $150,000, representing an increase from their reduced 2015 salaries of $240,000 and $144,000, respectively, effective April 1, 2015.  From January 1, 2015 until March 31, 2015, the 2015 salary for Mr. Prillaman was maintained at the same level as in effect since the end of 2010, and the 2015 salary for Ms. Wimmer was maintained at the same level as set in August 2014 when she became our principal financial officer. On April 6, 2015, the compensation and benefits committee approved a 25% reduction in the 2015 base salary of Mr. Prillaman (reducing base salary from $320,000 to $240,000) and a 20% reduction in the 2015 base salary for Ms. Wimmer (reducing base salary from $180,000 to $144,000), in each case effective April 1, 2015 .

 

Annual Bonus. The 2016 bonus plan was established based on net income as the sole performance measure. For purposes of the 2016 bonus plan, net income excludes from income amounts we receive under the Continued Dumping and Subsidy Offset Act in connection with the case involving wooden bedroom furniture imported from China and the financial effects of restructuring operations. Each executive’s bonus target is set at a percentage of the executive’s base salary.  An executive is eligible to earn his or her bonus target if the company achieves its net income goal for the year (referred to as achieving the “plan”). A smaller bonus is paid for net income performance between a threshold net income goal and the plan.  A larger bonus (up to a pre-established maximum) is paid for performance in excess of plan. No bonus is paid if the Company’s net income for the year fails to meet the threshold goal. For 2016, Mr. Prillaman and Ms. Wimmer had a plan bonus of 65% and 22.8% of their respective salaries and a maximum bonus of 150% and 53% of their respective salaries. Mr. Prillaman and Ms. Wimmer did not receive a bonus under the 2016 bonus plan as the threshold was not met.  The compensation and benefits committee may provide for discretionary bonuses outside of the annual bonus plan, but did not award any discretionary bonuses for fiscal 2016 and has awarded discretionary bonuses only once since bonuses were last paid under the annual bonus plan in 2005.

 

Long-Term Incentives . In January 2015 and January 2016, the compensation and benefits committee awarded performance-vested restricted stock to the named executive officers, with the number of shares subject to each award determined by dividing a percentage of each named executive officer’s base salary by the closing price per share on the grant date.

 

2015 Awards . For the awards made in January 2015, the percentage of base salary was 88% for Mr. Prillaman and 15% for Ms. Wimmer.  One third of the restricted stock vests if the company’s annual earnings per share (EPS) for either 2015 or 2016 exceed a certain amount. An additional one third of the restricted stock vests if EPS exceeds a higher amount in either 2016 or 2017, and the final one third vests if EPS exceeds a still higher amount in either 2017 or 2018. Any portion of the restricted stock that has not vested based on achievement of the annual EPS goals described above may still vest following the end of 2018 if total combined EPS for 2015 through 2018 equal or exceeds the sum of the annual EPS goals for 2015/2016, 2016/2017 and 2017/2018, and if total combined EPS for 2017 and 2018 exceeds a specified amount.  In addition, the restricted stock vests upon a named executive officer’s termination of employment due to death or disability or upon the occurrence of a change of control of the company. Dividends are paid on the restricted stock only if and to the extent the underlying shares become vested. The annual EPS goal for 2015 and 2016 was not achieved for 2015 or 2016.

 

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2016 Awards.  For the awards made In January 2016, the percentage of base salary was 110% for Mr. Prillaman and 15% for Ms. Wimmer.  One third of the restricted stock vests if the company’s annual earnings per share (EPS) for either 2016 or 2017 exceed a certain amount. An additional one third of the restricted stock vests if EPS exceeds a higher amount in either 2017 or 2018, and the final one third vests if EPS exceeds a still higher amount in either 2018 or 2019. Any portion of the restricted stock that has not vested based on achievement of the annual EPS goals described above may still vest following the end of 2019 if total combined EPS for 2016 through 2019 equal or exceeds the sum of the annual EPS goals for 2016/2017, 2017/2018 and 2018/2019, and if total combined EPS for 2018 and 2019 exceeds a specified amount.  In addition, the restricted stock vests upon a named executive officer’s termination of employment due to death or disability or upon the occurrence of a change of control of the company. Dividends are paid on the restricted stock only if and to the extent the underlying shares become vested. The annual EPS goal for 2016 and 2017 was not achieved for 2016.

 

We target an average annual “burn rate” of no more than 3.5% over a three-year period for awards under our equity plans.  We define “burn rate” as the number of shares subject to equity awards issued in a year as a percentage of our weighted average shares outstanding.  The 2016 equity awards for executives and key employees with the regular grants to directors in 2016 produced an annualized burn rate of approximately 1.6%.

 

Summary Compensation Table

 

The following table sets forth compensation received by Glenn Prillaman, our President and Chief Executive Officer (principal executive officer) and Anita Wimmer, our Vice President – Finance/Corporate Controller (principal financial officer since August 11, 2014) (collectively, the “Named Executive Officers”), for the years ended December 31, 2016 and 2015. 

 

Summary Compensation Table

 

Salary

($)

Stock 
Awards

($)(1)

Option 
Awards

 ($)  

Non-Equity 
Incentive Plan 
Compensation

All Other

Compensation 
($)

Total

($)

Name and Principal Position

Year     

Bonus
($)

GLENN PRILLAMAN,

2016

 

255,000

 

—

 

281,601

 

—

 

—

 

—

 

536,601

President and Chief Executive Officer

2015

260,003

—

278,626

—

—

—

538,629

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ANITA WIMMER,

2016

150,000

      —

22,501

—

—

—

172,501

Vice President –

 Finance/Corporate Controller

2015

 

153,000

 

      —

 

26,715

 

—

 

—

 

—

 

179,715

___________                  

(1)     The stock awards for 2016 and 2015 are valued under the assumptions contained in Note 5 to our Consolidated Financial Statements included in our annual report on Form 10-K for the fiscal year ended December 31, 2016.

 

8

 

 

Outstanding Equity Awards at Fiscal Year-End Table

 

The following table sets forth information concerning the year-end number and value of unexercised options, restricted stock that has not vested and equity incentive plan awards for each of the Named Executive Officers.

 

OUTSTANDING EQUITY AWARDS

AT DECEMBER 31, 2016 FISCAL YEAR-END

 

Option Awards

 

Stock Awards

Number of  

Securities Underlying

Unexercised

Options (#)

Exercisable

Number of 

Securities Underlying

Unexercised

Options(#)

 Unexercisable

Number of

Shares of Stock

That Have Not

 Vested (#)

Market Value 

of Shares of

Stock That Have

Not Vested ($)(2)

Equity Incentive

Plan Awards:

Number of Unearned

Shares That Have

Not Vested (#)

Equity Incentive

Plan Awards:

Market Value of

Unearned Shares

That Have

Not Vested ($)(2)

Option Exercise

Price ($)

Option Expiration

 Date

Name

  

  

  

  

  

  

  

GLENN PRILLAMAN,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

President and Chief Executive Officer

30,000

10.77

12/04/2017

62,827 (1)

56,557

  99,155 (3)

89,259

 

50,000

 

 

 

9.22

 

09/24/2018

 

 

 

107,893 (4)

 

97,125

100,000

8.64

04/16/2019

 

200,000

 

 

 

3.20

 

12/09/2020

 

 

 

 

 

 

 

 

89,833

3.07

12/08/2021

 

107,865

 

 

4.45

 

12/19/2022

 

 

 

 

 

 

 

 

ANITA WIMMER,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vice President – Finance/Corporate Controller

3,000

10.77

12/04/2017

5,530 (1)

 

4,978

9,507 (3)

8,558

 

10,000

 

 

 

9.22

 

09/24/2018

 

 

 

8,621 (4)

 

7,761

20,000

8.64

04/16/2019

 

50,000

 

 

 

3.20

 

12/09/2020

 

 

 

 

 

 

 

 

12,867

3.07

12/08/2021

 

9,270

 

 

4.45

 

12/19/2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

___________

(1)     Represents the time-vested portion of the 2014 restricted stock awards, which constituted 50% of the total award for each named executive officer.
The time-vested restricted stock will cliff vest on the fourth anniversary of the grant date, i.e. January 14, 2018.

(2)     Based on the closing price per share of the company’s stock of $0.90 on December 31, 2016.

(3)     Represents the 2015 restricted stock awards, which will vest as described on page 7 of this proxy statement.

(4)     Represents the 2016 restricted stock awards, which will vest as described on page 8 of this proxy statement.

 

 

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Retirement Plans

 

            Our named executive officers participate in the company’s 401(k) plan on the same basis as our employees generally. We do not maintain any supplemental retirement plans or other similar executive retirement programs for our named executive officers.

 

Change of Control Arrangements  

 

Mr. Prillaman

 

We have a change in control protection agreement with Mr. Prillaman.  During the two years after a change in control (as defined in this change in control protection agreement), Mr. Prillaman is entitled to receive severance pay if his employment is terminated other than for cause (as defined in this change in control protection agreement) or if he terminates his employment for good reason which generally is defined to exist if:

 

(i) there is a material reduction in his base salary,

 

(ii) his authority, duties or responsibilities are materially reduced,

 

(iii) he is required to report to a corporate officer or employee instead of reporting directly to our board of directors or our ultimate parent following a change in control,

 

(iv) his place of employment is relocated further than 50 miles from his current place of employment, or

 

(v) any other action or inaction that constitutes a material breach by us or our successor of the change in control protection agreement.

 

In the event Mr. Prillaman’s employment is terminated in the circumstances described in the preceding sentence, he is entitled to receive the following severance payments:

 

(i) three times base salary paid in a lump sum at termination,

 

(ii) three times the average bonus paid over the last two prior fiscal years paid in a lump sum at termination,

 

(iii) a pro rata annual bonus for the year of termination, based on our actual results, payable when the bonus is otherwise payable, and

 

(iv) vesting in the outstanding stock awards that would have vested in the next three years.

 

If the total payments to Mr. Prillaman in connection with a change in control exceed the threshold at which such payments would become subject to the excise tax under Section 4999 of the Internal Revenue Code, then the payments under the change in control protection agreement are reduced until the total payments are below such threshold, unless the total payments without such reduction and after paying the Section 4999 excise tax would exceed such reduced amount.

 

The change in control protection agreement extends automatically for additional one-year terms at the beginning of each year unless either party to the change in control protection agreement gives notice on or before October 1 of any year that the agreement will not be extended.

 

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Anita W. Wimmer

 

We also have a change in control protection agreement with Ms. Wimmer.  During the two years after a change in control (as defined in the change in control protection agreement), Ms. Wimmer is entitled to receive severance pay if her employment is terminated other than for cause (as defined in the change in control protection agreement) or if she terminates her employment for good reason which generally is defined to exist if:

 

(i)  there is a material reduction in her base salary,

 

(ii)  her authority, duties or responsibilities are materially reduced,

 

(iii)  she is required to report to a corporate officer or employee instead of reporting directly to the chief executive officer,

 

(iv)  her place of employment is relocated further than 50 miles from her current place of employment, or

 

(v)  any other action or inaction that constitutes a material breach by us or our successor of the change in control protection agreement.

 

In the event Ms. Wimmer’s employment is terminated in the circumstances described in the preceding sentence, she is entitled to receive the following severance payments:

 

(i)  two times base salary paid in a lump sum at termination,

 

(ii)  two times the average bonus paid over the last two prior fiscal years paid in a lump sum at termination,

 

(iii)  a pro rata annual bonus for the year of termination, based on our actual results, payable when the bonus is otherwise payable, and

 

(iv)  vesting in the outstanding stock awards that would have vested in the next two years.

 

                 If the total payments to Ms. Wimmer in connection with a change in control exceed the threshold at which such payments would become subject to the excise tax under Section 4999 of the Internal Revenue Code, then the payments under the change in control protection agreement are reduced until the total payments are below such threshold, unless the total payments without such reduction and after paying the Section 4999 excise tax would exceed such reduced amount.

 

The change in control protection agreement extends automatically for additional one-year terms at the beginning of each year unless either party to the change in control protection agreement gives notice on or before October 1 of any year that the agreement will not be extended.

The estimated payments that would be provided upon termination under the various scenarios described above are quantified in the following table, assuming termination of employment took place on December 31, 2016 and without regard to any potential reduction to avoid taxes under Section 4999 of the Internal Revenue Code as described above.

Termination Other

Than For Cause After

Change in Control;

Termination for Good Reason

After Change in Control($)

Name

Glenn Prillaman

 

765,000

Anita W. Wimmer

300,000

Mr. Prillaman and Ms. Wimmer have received option grants and restricted stock grants under our 2012 Incentive Compensation Plan that have not yet vested. On a change of control, or on death or disability, all outstanding option grants and all unvested stock grants would become fully vested.  See “Outstanding Equity Awards at Fiscal Year End Table” for a summary of outstanding option grants at December 31, 2016.

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ADVISORY VOTE ON EXECUTIVE COMPENSATION (SAY-ON-PAY)

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act requires us to periodically seek a non-binding advisory vote from our stockholders to approve the compensation as disclosed under “Executive Compensation”, including tabular disclosures and narrative sections accompanying the tabular disclosures in this proxy statement. Since the required vote is advisory, the result of the vote is not binding upon the board of directors.

 

Our board of directors has adopted a policy for an annual “say-on-pay” advisory vote.  In accordance with this policy, stockholders are asked to approve the following advisory resolution at the 2017 Annual Meeting:

 

“RESOLVED, that the stockholders approve, on an advisory basis, the compensation awarded by the company to the named executive officers, as disclosed under “Executive Compensation”, including the tabular disclosures and other narrative executive compensation disclosures in the proxy statement for the 2017 Annual Meeting of Stockholders as required by the rules of the Securities and Exchange Commission.”

 

Our compensation and benefits committee and our board of directors has created a compensation program designed to obtain and retain the services of highly-skilled executives who can perform multiple roles in our lean management team and to provide incentives linked to achievement of important financial goals and our stock price in order to enhance our performance and value to stockholders by aligning closely the financial interests of our executives with those of our stockholders.

 

Our board of directors urges stockholders to read the “Executive Compensation Program” beginning on page 7 of this proxy statement, which describes our executive compensation policies, as well as the Summary Compensation Table and other related compensation tables and narrative, appearing on pages 8 through 11, which provide detailed information on the compensation of our named executive officers. The board of directors and the compensation and benefits committee believe that our executive compensation program is effective in achieving our goals and that the compensation of our named executive officers reported in this proxy statement reflects and supports these compensation policies.

 

Effect of Proposal

 

The say-on-pay resolution is non-binding. The approval or disapproval of this proposal by stockholders will not require the board of directors or the compensation and benefits committee to take any action regarding the company’s executive compensation practices. The final decision on the compensation and benefits of our named executive officers and on whether, and if so, how, to address stockholder approval or disapproval remains with the board of directors and the compensation and benefits committee.

 

Our board of directors believes that the compensation and benefits committee is in the best position to consider the extensive information and factors necessary to make independent, objective, and competitive compensation recommendations and decisions that are in the best interest of the company and its stockholders.

 

Our board of directors values the opinions of the company’s stockholders as expressed through their votes and other communications. Although the resolution is non-binding, the board of directors will carefully consider the outcome of the advisory vote on executive compensation and those opinions when making future compensation decisions.  The shares represented by proxy will be voted as specified by the stockholder.  If a stockholder does not specify a choice, the shares will be voted in favor of the advisory resolution approving the compensation paid to certain executive officers.

 

Our board of directors believes that approval of the compensation paid to certain officers is in the best interest of all stockholders and, accordingly, unanimously recommends a vote “ FOR ” approval of the compensation paid to certain executive officers.

 

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ADVISORY VOTE ON THE FREQUENCY OF SAY-ON-PAY VOTES (SAY-ON-FREQUENCY)

Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, at least once every six years we are required to submit for stockholder vote a non-binding resolution to determine whether the advisory stockholder vote on executive compensation described above will occur every one, two, or three years.

After careful consideration, our board of directors has determined that holding an annual advisory vote on executive compensation is the most appropriate policy for our company at this time, and recommends that stockholders vote for future advisory votes on executive compensation to occur every ONE year. Our board of directors believes an annual advisory vote is appropriate because the compensation and benefits committee evaluates and approves incentive compensation of our named executive officers on an annual basis. Additionally, an annual advisory vote promotes corporate transparency, and gives stockholders the opportunity to provide frequent direct input on compensation matters.

The proxy card provides stockholders with four choices (every one, two, or three years, or abstain). Stockholders are not voting to approve or disapprove the board’s recommendation.

Effect of Proposal

The frequency vote is non-binding. Stockholder approval of a one, two, or three-year frequency vote will not require us to implement an advisory vote on executive compensation every one, two, or three years. The final decision on the frequency of the advisory vote on executive compensation remains with the board of directors and/or its committees.

The board of directors values the opinions of our stockholders as expressed through their votes and other communications. Although the resolution is non-binding, our board of directors and our compensation and benefits committee will carefully consider the outcome of the frequency vote and other communications from stockholders when making future decisions regarding the frequency of say-on-pay votes. If a stockholder does not specify a choice, the shares will be voted in favor of an advisory vote approving the compensation paid to certain executive officers every year.

 

       Our board of directors believes that an advisory vote each year on the compensation paid to certain officers is in the best interest of all stockholders and, accordingly, unanimously recommends a vote “ FOR ” a frequency of one year.

 

13

 

 

APPROVAL OF THE STANLEY FURNITURE COMPANY, INC.

RIGHTS AGREEMENT

 

 

            On December 5, 2016, we entered into a Rights Agreement in an effort to protect against a possible limitation on our ability to use our net operating loss carryforwards (“NOLs”).  As of December 31, 2016, we had federal NOLs of approximately $20.6 million.  Our board of directors unanimously recommends that stockholders vote “ FOR ” approval of the Rights Agreement.

 

Background and Reasons for the Proposal

 

            Our board of directors approved the Rights Agreement in an effort to protect against a possible limitation on our ability to use our NOLs.  Our federal NOLs totaled approximately $20.6 million as of December 31, 2016.  We may utilize these NOLs in certain circumstances to offset future U.S. taxable income and reduce its U.S. federal income tax liability, which may arise even if we incur an accounting loss in a given period for reporting purposes. 

 

Our ability to utilize our NOLs, however, could be substantially limited if an “ownership change,” as defined under Section 382 of the Internal Revenue Code (“Code”), occurred.  In general, an ownership change would occur if and when the percentage of ownership of our common stock, by one or more “5-percent shareholders” (as defined under Code Section 382) has increased by more than 50 percentage points over their lowest ownership percentage at any time during the prior three years (calculated on a rolling basis).  These provisions can be triggered not only by merger and acquisition activity but by trading as well.  The Rights Agreement is designed to deter trading that would result in an ownership change that could lead to the loss of the NOLs and a resulting reduction in our company’s value.  

 

In connection with the approving the Rights Agreement, our board authorized and declared a dividend of one preferred stock purchase right (a “Right”) for each outstanding share of our common stock to stockholders of record as of the close of business on December 15, 2016.  In general, the Rights will work to impose a significant penalty upon any person or group which becomes the beneficial owner of 4.9% or more of our outstanding common stock or upon any 4.9% or greater holder which becomes the beneficial owner of an additional 1% or more of our outstanding common stock.  There is no guarantee, however, that the Rights Agreement will prevent us from experiencing an ownership change and, therefore, having a limitation on its ability to utilize our NOLs.

 

Description of the Rights Agreement

 

            The following description of the Rights Agreement is qualified in its entirety by reference to the text of the Rights Agreement, which was filed as Exhibit 4.1 to our Current Report on Form 8-K filed with the SEC on December 6, 2016, and amended by Amendment No. 1 thereto dated as of January 30, 2016, which was filed as Exhibit 4.1 to our Current Report on Form 8-K filed with the SEC on January 31, 2016, each of which is available on the SEC’s web site (www.sec.gov) and our web site (www.stanleyfurniture.com).  Please read the Rights Agreement and Amendment No. 1 thereto in their entirety as the discussion below is only a summary. 

 

The Rights. Until the Separation Time (as defined below), each Right will be evidenced by either the registration of the associated share of our common stock on our stock transfer books or the certificate for the associated share of our common stock and may only be transferred with the associated share of our common stock.  Following the Separation Time, separate certificates evidencing the Rights will be delivered to holders of record of our common stock as of the Separation Time and the Rights may be transferred independent of our common stock.

 

Holders’ Rights as Stockholders .  The holders of Rights will, solely by reason of their ownership of Rights, have no rights as stockholders of our company, including, without limitation, the right to vote or to receive dividends.

 

Exercisability of the Rights .  The Rights are not exercisable until the close of business on the earlier of (i) the tenth business day (subject to adjustment by our board) after the date on which any person commences a tender or exchange offer that, if consummated, would result in such person becoming an Acquiring Person (as defined in the Rights Agreement) (provided that if any tender or exchange offer is cancelled, terminated or otherwise withdrawn prior to the close of business on the tenth business day following its commencement without the purchase of any shares of our common stock, such offer shall be deemed, for these purposes, to never have been made) and (ii) the next business day after the first date of public announcement by us or by an Acquiring Person that a person has become an Acquiring Person (such date being the “Stock Acquisition Announcement Date” and the close of business on the earlier of (i) or (ii) being the “Separation Time”).  On or after the Separation Time and prior to the Expiration Time (as defined below), the Rights will be exercisable and each Right will entitle the holder thereof to purchase from us for $8.00 (the “Exercise Price”) one one-thousandth of a share of our Series A Participating Preferred Stock, par value $0.01 per share (the “Preferred Stock”).

 

14

 

 

Flip-In Event.  In the event that a person becomes an Acquiring Person, each Right, other than those beneficially owned by the Acquiring Person which shall become null and void, will as of such date (the “Flip-in Date”) constitute the right to purchase from us for the Exercise Price shares of our common stock having an aggregate Market Price (as defined in the Rights Agreement) equal to twice the Exercise Price. 

 

Terms of the Preferred Stock .  The terms of the Preferred Stock issuable upon exercise of the Rights are designed so that each one one-thousandth of a share of Preferred Stock is the economic and voting equivalent of one whole share of our common stock.  In addition, the Preferred Stock has certain minimum dividend and liquidation rights, which are set out in the form of Certificate of Designation of Series A Participating Preferred Stock attached as Exhibit B to the Rights Agreement.

 

Exchange .  Our board may, at its option, at any time after a Flip-in Date and prior to the time that an Acquiring Person becomes the beneficial owner of more than 50% of the outstanding shares of our common stock, elect to exchange all (but not less than all) of the then outstanding Rights (other than Rights beneficially owned by the Acquiring Person or any affiliate thereof, which Rights shall become void) for shares of our common stock at an exchange ratio of one share of our common stock per Right, appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the Separation Time (the “Exchange Ratio”).  Immediately upon such action by our board (the “Exchange Time”), the right to exercise the Rights will terminate and each Right will thereafter represent only the right to receive a number of shares of our common stock equal to the Exchange Ratio.

 

Substitution .  Whenever we shall become obligated, as described in the preceding paragraphs, to issue shares of our common stock upon exercise of or in exchange for Rights, we, at our option, may substitute therefor shares of Preferred Stock, at a ratio of one one-thousandth of a share of Preferred Stock for each share of our common stock so issuable, or, subject to certain conditions, other debt or equity securities.

 

Exempt Persons .  Any person desiring to engage in an acquisition of our common stock that, if consummated, might cause such person to become an Acquiring Person may request that our board exempt such acquisition from the provisions of the Rights Agreement such that the person would not be deemed to be an Acquiring Person.  Our board may grant any such request if it determines, in its sole discretion, that the acquisition (i) does not (x) create a significant risk of material adverse tax consequences to us or (y) constitute an event of default under our credit facility or (ii) is otherwise in our best interest.  In connection with the agreement pursuant to which Steven A. Hale II was elected to our board, our board amended the Rights Agreement to permit Hale Partnership Fund, L.P. and related parties to purchase up to an additional 8% of our outstanding common stock without becoming an Acquiring Person provided that such purchases are made in compliance with our insider trading policy and applicable securities laws.  Our board has also granted an exemption from the provisions of the Rights Agreement to (i) the Talanta Fund, L.P. to purchase up to an additional 5% of our outstanding common stock and (ii) John D. “Ian” Lapey to purchase up to an additional 3% of our common stock, in each case provided that such purchases are in compliance with our insider trading policy and applicable securities laws.  Justyn R. Putnam, one of our directors, is the managing member of the general partner of Talanta Fund, L.P.  Mr. Lapey is Chairman of our board of directors.  Solas Capital Management, LLC (“Solas”) has also submitted an exemption request to our board requesting an exemption from the provisions of the Rights Agreement to purchase an additional 16.9% of our common stock.  Solas currently owns approximately 16.9% of our common stock.  In response to this exemption request, our board has granted Solas an exemption to purchase up to an additional 8% of our common stock (which if acquired by Solas would not cause Solas to ​exceed the 25% ownership level triggering  an event of default under our credit facility).  Our board has also authorized management to pursue a waiver of the ownership event of default under our credit facility in order to permit the granting of the full exemption requested by Solas in the event that an updated analysis of changes in our stock ownership also indicates that the additional requested acquisition by Solas would not create a significant risk of material adverse tax consequences to us. 

 

15

 

 

Redemption .  Our board may, at its option and at any time prior to a Flip-in Date, redeem all (but not less than all) of the then outstanding rights at a price of $0.0001 per Right (the “Redemption Price”).  Immediately upon the action of our board electing to redeem the Rights, and without any further action or notice, the right to exercise the Rights will terminate and each Right will thereafter represent only the right to receive the Redemption Price in cash or securities for each Right so held.

 

Anti-Dilution Adjustments .  The Exercise Price and the number of Rights outstanding, or in certain circumstances the securities purchasable upon exercise of the Rights, are subject to adjustment from time to time to prevent dilution in the event of a stock dividend on, or a subdivision or a combination into a smaller number of shares of, our common stock, or the issuance or distribution of any securities or assets in respect of, in lieu of or in exchange for our common stock.

 

Supplements and Amendments .   The Rights Agreement may be supplemented or amended without the approval of holders of the Rights at any time and in any respect prior to the Flip-in Date.  Subsequent to the Flip-in Date, the Rights Agreement may only be supplemented or amended in certain limited circumstances as specified in the Rights Agreement.

 

Expiration .  The Rights and the Rights Agreement will expire on the earliest of (i) the Exchange Time, (ii) the date on which the Rights are redeemed as described above, (iii) the close of business on the day after our 2017 Annual Meeting of Stockholders unless our stockholders approve the Rights Agreement, (iv) the close of business on December 5, 2019, and (iv) the time at which our board determines, in its sole discretion, that the NOLs are utilized in all material respects or no longer available in any material respect under Section 382 of the Code or any applicable state law or that an ownership change under Section 382 of the Code would not adversely impact in any material respect the time period in which we could use the NOLs, or materially impair the amount of the NOLs that could be used by us in any particular time period, for applicable tax purposes (in any such case, the “Expiration Time”).

 

Certain Considerations Related to the Rights Agreement

 

            Our board of directors believes that attempting to protect our NOLs as is in our company’s and our stockholders’ best interests.  However, we cannot eliminate the possibility that an ownership change will occur even if the Rights Agreement is approved.  Please consider the items below when making your decision. 

 

Future Use of the NOLs is Uncertain.  Our use of the NOLs depends on our ability to generate taxable income in the future.  There can be no assurance that we will have taxable income in any applicable period, or if we do, that we will have NOLs in an amount equal to our taxable income.

 

Potential Challenge to the NOLs.  The IRS has not audited or otherwise validated the amount of our NOLs.  The IRS could challenge the amount of our NOLs, which could limit our ability to use our NOLs to reduce future taxable income.  In addition, the complexity of Code Section 382’s provisions and the limited knowledge any public company has about the ownership of its publicly traded stock make it difficult to determine whether an ownership change has occurred.  Therefore, we cannot assure you that the IRS will not claim that we experienced an ownership change and attempt to reduce or eliminate the benefit of our NOLS even if the Rights Agreement is in place. 

 

Potential Effects on Liquidity.  The Rights Agreement will restrict a stockholder’s ability to acquire, directly or indirectly, additional shares of our common stock in excess of the specified limitations.  Further, a stockholder’s ability to dispose of our common stock may be limited by reducing the class of potential acquirers for such shares.  In addition, a stockholder’s ownership of our common stock may become subject to the restrictions of the Rights Agreement upon actions taken by persons related to, or affiliated with, such stockholder.

 

16

 

 

Potential Anti-Takeover Impact.  The reason our board approved the Rights Agreement is to protect our ability to use our NOLs.  The Rights Agreement is not intended to prevent a takeover of our company.  Because our board can redeem the Rights, the Rights should not interfere with a merger or other business combination approved by our board.  However, the Rights Agreement could be deemed to have an anti-takeover effect because, among other things, it will restrict the ability of a person, entity or group to accumulate more than a 4.9% of our common stock and the ability of persons, entities or groups now owning more than 4.9% of our common stock to acquire additional shares of our common stock without the approval of our board.  Consequently, the Rights Agreement may discourage or make more difficult, a merger, tender offer, proxy contest or assumption of control by a substantial holder of our securities. 

 

APPROVAL OF THE MATERIAL TERMS OF THE PERFORMANCE GOALS UNDER THE STANLEY FURNITURE COMPANY, INC.   2012 INCENTIVE COMPENSATION PLAN

 

We are seeking your approval of the material terms of the performance goals under the Stanley Furniture Company, Inc. 2012 Incentive Compensation Plan (the “Plan”), as required by Section 162(m) of the Internal Revenue Code of 1986, as amended (“Section 162(m)”).

 

Section 162(m) generally imposes a $1 million federal income tax deduction limit on annual compensation that we pay to our Chief Executive Officer and certain other executive officers, unless the compensation qualifies for an exemption. One such exemption is the “performance-based compensation” exemption, which generally exempts compensation that is earned based on the achievement of objective performance goals and which meets certain other requirements. One such requirement is that the material terms of the performance goals under which the performance-based compensation may be paid must be approved by our stockholders every five years. The last approval by our stockholders of the material terms of the performance goals under the Plan occurred in 2012.     

 

We are not making any amendments or modifications to the Plan at this time. We are asking you to re-approve the same material terms of the performance goals under the Plan that our stockholders previously approved at our 2012 annual meeting of stockholders. The material terms of the performance goals under the Plan that we are seeking your approval of are:

 

·          the employees eligible to receive compensation (all present and future employees of Stanley Furniture);

·          a description of the business criteria on which the performance goals are based (see list of business criteria under Types of Awards—Performance Grants below); and

·          the maximum amount of compensation that could be paid to any covered employee (200,000 shares per year for awards denominated in stock or $2,000,000 per year for awards denominated in cash).

 

            If you approve this proposal, it will allow us to continue to be able to grant awards under the Plan that are exempt from the deduction limit under Section 162(m). If you do not approve this proposal, it will not affect our ability to continue to grant awards under the Plan; however, any future awards we granted under the Plan would be subject to the deduction limit under Section 162(m).

 

This summary is qualified in its entirety by reference to the Plan, which is attached to this proxy statement as Appendix A.

 

Our board of directors believes that approval of the material terms of the performance goals under the Plan is in the best interest of all stockholders and, accordingly, unanimously recommends a vote “ FOR ” approval of the material terms of the performance goals under the Plan.

 

17

 

 

Eligibility and Administration

All present and future employees of Stanley Furniture, directors who are not employees and service providers other than employees or directors are eligible to receive awards under the Plan. We estimate that we have approximately 70 employees, six non-employee directors and approximately 60 other service providers who may be eligible for incentive awards.

The Plan will be administered by the compensation and benefits committee of our board of directors with respect to awards to our employees and other service providers (other than non-employee directors) and by the full board of directors, excluding any members of the board who are employees, with respect to awards for non-employee directors. The committee or the board, as the case may be, has the power and complete discretion to select service providers to receive awards and to determine for each service provider the nature of the award and the terms and conditions of each award.

Amount of Stock Available for Awards

Under the Plan, 1.6 million shares of our common stock have been reserved for issuance. In addition, shares of our common stock that are available for issuance (i.e., not previously issued and not subject to outstanding awards) under the Stanley Furniture Company, Inc. 2008 Incentive Compensation Plan (the “Prior Plan”) as of the effective date of the Plan, as well as any shares subject to outstanding awards under the Prior Plan that expire, are forfeited, or otherwise terminate unexercised on or after the effective date of the Plan, may be subject to new awards under the Plan. The Prior Plan terminated upon stockholder approval of the Plan (although outstanding awards previously granted under the Prior Plan have continued in effect in accordance with their terms). As of March 21, 2017, approximately 292,291 shares have been issued under the Plan, approximately 538,297 shares are subject to currently outstanding awards under the Plan and approximately 1.5 million shares remain available for issuance (not subject to any currently outstanding award) under the Plan.

Shares issued under the Plan as or in settlement of restricted stock, performance grants, performance shares, RSUs or director shares will count against the share reserve as 1.75 shares for every share that is issued. Shares issued under option or SAR awards will count against the share reserve as one share for every share that is issued. If an award under the Plan is cancelled, terminates or lapses unexercised, any unissued shares allocable to that award may be subjected to a new award under the Plan. Shares used to pay the exercise price of options or applicable withholding taxes under outstanding awards under the Plan or the Prior Plan may not be reused under the Plan. The maximum number of shares that can be issued under the Plan to any employee who is a “covered employee” for purposes of Internal Revenue Code Section 162(m) in any calendar year is 200,000, and the maximum annual cash payment that can be made to any such employee in any calendar year is $2,000,000.

Types of Awards

All service providers may receive shares of restricted stock, restricted stock units, stock options and stock appreciation rights under the Plan. In addition, service providers other than non-employee directors may receive performance grants or performance shares under the Plan, and service providers who are non-employee directors may receive director shares under the Plan.

 

 

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Performance Grants : Performance grants are cash-denominated awards that are subject to the achievement of pre-established performance goals and are administered to qualify as “performance-based compensation” for purposes of Section 162(m). Performance grants may only be granted to employees who are (or may become) “covered employees” for purposes of Section 162(m). Performance goals use objective and quantifiable performance criteria. The permissible performance measures are cash flow; cost reduction (or limits on cost increases); debt to capitalization; debt to equity; earnings; earnings before interest and taxes, earnings before interest, taxes, depreciation and amortization; earnings per share; income from operations; income from operations to capital spending; free cash flow; net income; net sales; price per share of our common stock; return on assets; return on capital employed; return on equity; return on investment; return on sales; sales volume; total return to shareholders; returns and allowances; or cost of total quality. Performance criteria may be measured with respect to our performance, any related company, any subsidiary, division, business unit thereof, or any individual, on an operating or GAAP basis where applicable, including or excluding nonrecurring or extraordinary items where applicable, or relative to a defined peer group of companies or an index or, where applicable, on a per-share basis.

 

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Performance Shares : Performance shares are awards denominated in shares or units of our common stock that are subject to the attainment of performance goals established by the committee, and which may be subject to additional service-based vesting after the end of the performance period. Performance shares may not be granted to non-employee directors. Performance shares may be paid or settled in shares of our common stock or the fair market value thereof in cash. The minimum performance period for any performance share award is one year (subject to accelerated vesting in the committee's discretion on death, disability, retirement or the occurrence of a change in control).

 

 

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Restricted Stock : Restricted stock awards are shares of our common stock issued subject to service-based and/or performance-based restrictions on vesting and transferability. For service providers other than non-employee directors, the minimum vesting period for service-based restricted stock awards is three years and the minimum vesting period for performance-based restricted stock is one year, subject to accelerated vesting in the committee’s discretion on death, disability, retirement, or the occurrence of a change in control. Dividends paid on unvested restricted stock awards are either reinvested in additional shares of restricted stock (subject to the same underlying vesting conditions) or otherwise withheld until the restricted shares vest.