3.         Income taxes

During the first sixnine months of 2016, we utilized $21.7expect to use approximately $19.7 million of our $40.1 million net operating loss carry-forwards against taxable income resulting primarily from our surrender of corporate-owned life insurance policies.  The premiums paid and the growth in surrender value of these policies were excludable from taxable income over the life of these policies when held until death of the covered lives, but this growth, net of premiums paid, became taxable when we surrendered the policies.  The aggregate impact of the surrender of these policies in the first sixnine months of this year was $24.0 million in taxable income.  The income tax expense associated with the surrender of the corporate-owned life insurance policies was largely recognized in full during the first quarter as that is when the surrender was complete. Therefore, thepolicies were surrendered. The income tax benefitexpense recognized during the current three month period was the result of normal operating losses incurred duringadditional alternative minimum tax liability associated with the period. These will ultimately offset the income recognized in the first three months, which will lower the impactsurrender of the federal alternative minimum taxcorporate-owned life insurance policies and state income taxes.  The income tax expense recognized during the current sixnine month period was the result of federal alternative minimum tax and, to a lesser extent, the impact of surrendering these policies have on state income taxes.  During the first sixnine months of 2016, we reduced our valuation allowance against deferred tax assets from $19.2 million to $11.7$12.6 million at July 2,October 1, 2016, as a result of the use of a portion of our net operating loss carry-forwards.

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STANLEY FURNITURE COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(unaudited)

3.          Income taxes (continued)

We maintain a valuation allowance against deferred tax assets that currently exceed our deferred tax liabilities.  The primary assets covered by this valuation allowance are net operating loss carry-forwards. The valuation allowance was calculated in accordance with the provisions of ASC 740, Income Taxes, which requires an assessment of both positive and negative evidence when measuring the need for a valuation allowance.  Our results over the most recent three-year period were heavily affected by our business restructuring activities. Our cumulative loss, excluding income from the Continued Dumping and Subsidy Offset Act, in the most recent three-year period, in our view, represented sufficient negative evidence to require a valuation allowance under the provisions of ASC 740, Income Taxes. We intend to maintain a valuation allowance until sufficient positive evidence exists to support its reversal, resulting in no deferred tax asset balance being recognized. Should we determine that we will not be able to realize all or part of our deferred tax asset in the future, an adjustment to the deferred tax asset will be charged to income in the period such determination is made.

Our effective tax rates for the current three and sixnine month periods were 3.3%negative 6.1% and negative 24.3%16.0%, respectively, driven by the impact of the alternative minimum tax and state related taxes on the surrender of corporate owned life insurance policies.  The effective tax rates in the prior year three and sixnine month periods were 1.1%a benefit of 1.8% and 2.0%an expense of 1.6%, respectively, also driven by the impact of the alternative minimum tax limiting the ability to offset the income received from the Continued Dumping and Subsidy Offset Act during those periods.  The major reconciling items between our effective income tax rate and the federal statutory rate are the change in our valuation allowance and the cash surrender value on life insurance policies.

4.         Employee Benefit Plans

Components of other postretirement benefit cost (in thousands):

5.         Stockholders’ Equity

Basic earnings per common share are based upon the weighted average shares outstanding.  Outstanding stock options and restricted stock are treated as potential common stock for purposes of computing diluted earnings per share.  Basic and diluted earnings per share are calculated using the following share data (in thousands):

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STANLEY FURNITURE COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(unaudited)

5.         Stockholders’ Equity (continued)

In the three and sixnine month periods ended July 2,October 1, 2016, the dilutive effect of stock options is not recognized since we had a net loss.  Approximately 1.2 million shares in the three and sixnine month periods of 2016 were issuable upon the exercise of stock options.  These were not included in the diluted per share calculation because they were anti-dilutive.  Also, 638,000 shares in 2016 of restricted stock were not included because they were anti-dilutive.  In the three and sixnine month periods ended June 27,September 26, 2015, approximately 1.4 million stock options were excluded from the diluted per share calculation as they would be anti-dilutive.

A reconciliation of the activity in stockholders’ equity accounts for the quarterfirst nine months ended July 2,October 1, 2016 is as follows (in thousands):

6.         Income from Continued Dumping and Subsidy Offset Act (CDSOA)

We did not receive any CDSOA distributions in the 2016 three and sixnine month periods.  In the prior year three and sixnine month periods,period, we recorded income of $1.1 million and $4.9 million respectively, from CDSOA distributions previously withheld by U.S. Customs and Border Protection pending resolution of non-supporting producers’ claims seeking to share in these distributions.     

7.         Discontinued Operations

During the second quarter of 2014, we concluded that revenue on our Young America product line remained below the level needed to reach profitability and that the time frame needed to assure sustainable profitability was longer than we felt was economically justified.  Therefore, we made the decision to cease manufacturing operations at our Robbinsville, North Carolina facility and sell the related assets of this facility.  Manufacturing operations were ceased in the third quarter of 2014 and as a result this product line was reflected as a discontinued operation pursuant to the provisions of Accounting Standards Update No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (ASU 2014-08) for all periods presented.

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STANLEY FURNITURE COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(unaudited)

7.         Discontinued Operations (continued)

Loss from discontinued operations, net of taxes, comprised the following (in thousands):

Loss from discontinued operations included write-down of inventories and other assets, severance and other termination costs and operating losses related to final manufacturing production.

8.         Corporate-owned Life Insurance Policies

In January 2016, we made the decision to liquidate two of our twenty-seven corporate-owned life insurance policies with cash surrender value of $2.6 million.  We used $2.5 million of the proceeds to pay down outstanding loans and accrued interest on corporate-owned life insurance policies, lowering our outstanding loan levels to $3.1 million.  In March 2016, we made the decision to liquidate the remaining twenty-five life insurance policies with cash surrender value of $25.6 million.  We received $22.4 million in proceeds on March 28, 2016, comprised of the cash surrender value net of $3.2 million in remaining outstanding loans and accrued interest.  The decision to liquidate was made after continued review of the financial stability of Genworth Life Insurance Company, the issuer of the policies.

99.Subsequent Events

Subsequent to quarter end, we entered into a revolving credit facility with Wells Fargo Bank, National Association that provides for maximum borrowings of $4.0 million and matures October 2018. The facility is secured by our accounts receivable, inventory and certain other assets. The facility contains covenants requiring us to maintain a minimum fixed charge coverage ratio of 1.1 times with an initial compliance date at December 31, 2017.

As previously announced, the Board of Directors planned to declare an additional special dividend of $0.25 per share once we secured a revolving credit facility sufficient to fund fluctuations in working capital.  As a result of our securing the credit facility, the Board has declared a special dividend of $0.25 per share payable on November 18, 2016 to shareholders of record as of the close of business on November 11, 2016.

ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

The following table sets forth the percentage relationship to net sales of certain items included in the Consolidated Statements of Operations:

Net sales of $12.1$11.0 million for the three month period ended July 2,October 1, 2016, decreased $3.1$2.7 million, or 20.4%19.8%, compared to the comparable 2015 period.   For the sixnine month period ended July 2,October 1, 2016, net sales decreased $6.1$8.8 million, or 20.4%20.2%, from the comparable 2015 period.  The decrease in both periods was due to lower unit volume and lower average selling prices.  Lower unit volume was primarily a result of delays in shipping new product introduced in 2015 as the production ramp up of the new factory in Vietnam dedicated solely to our new product has taken longer than originally anticipated.  The initial orders of 2015 introductions are shipping and should be on retail floors during the third quarter and begin to generate orders on retail floors in the second half of this year.near term.  Lower average selling prices are the result of aggressive discounting to move older discontinued product and also on inline product to achieve additional floor space to fuel future sales.sales and generate cash while we prepare for sales from newer product.

Gross profit for the current three month period decreased to $2.1$1.8 million, or 17.1%16.6% of net sales, from $3.8$3.4 million, or 25.4%24.8% of net sales, for the comparable three months of 2015.  Gross profit for the current sixnine month period decreased to $4.6$6.4 million, or 19.4%18.5% of net sales, from $6.8$10.2 million, or 22.9%23.5% of net sales, for the comparable sixnine months of 2015.  The decrease in gross profit and gross margin in both the three and sixnine month periods was driven by lower sales volume, higher sales discounting and higher quality costs from our existing vendor base.costs.  Partially offsetting the impact of these items in the three and sixnine month periods was lower ocean freight costs and, to a lesser extent, lower operation support costs.  The prior year three and sixnine month periods contained higher freight costs resulting from West Coast port issues.

Selling, general and administrative expenses for the three and sixnine month periods of 2016 were $3.5$3.8 million and $6.8$10.6 million, or 29.1%34.5% and 28.7%30.5% of net sales, respectively, compared to $3.5$2.8 million and $7.1$9.9 million, or 22.8%20.5% and 23.8%22.8% of net sales, in the comparable 2015 periods.  Expenditures forFor the current three month period, were flatthese expenses increased due to higher advertising and showroom costs, the comparable prior year period and slightly lower in the current six month period compared to last year. Spending reductions in both periods were driven by lower sales commissions and marketing costs, and lower equity compensation expenses on performance awards. In addition, trade showroom related costs are down as the prior year periods included the preparation of our showroom for the launch of the new product line.  Partially offsetting these lower expenditures were increased legal and professional costs and higher benefit costs as we liquidated our corporate owned life insurance policies in late March of this year eliminating any growthdecline in cash surrender value fromgrowth of corporate-owned life insurance policies due to the surrendering of these policies.policies in the first quarter of 2016 and higher legal and professional expenses related to the engagement of Stephens Inc. to assist with an ongoing review of strategic and capital allocation opportunities.  Higher expenses in the nine month period were primarily due to the decline in cash surrender value growth of corporate-owned life insurance policies as we continued to pay down policy loans throughout 2015 and then the surrendering of these polices in the first quarter of this year.  The decline in cash surrender value growth of corporate-owned life insurance policies, net of expenses was $347,000$379,000 in the current three month period and $541,000$920,000 during the sixnine month period.  Approximately 60% of this growth was in selling, general and administrative expenses and the remaining 40% was in cost of goods sold.  The elimination of this growth will beis partially offset by the elimination of interest expense going forward.expense.  The higher selling, general and administrative percentages in the current year are due to higher expenditures and lower sales impairing absorption for fixed cost components of expenses.costs.

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As a result, operating losslosses as a percentage of net sales was 12.0%were 17.9% for the current three month period and 9.3%12.0% for the current sixnine month period compared to income of 2.6%4.3% in the prior year three month period and a loss of 0.9%0.7% in the prior year sixnine month period.

During the prior year three and sixnine month periodsperiod we recorded income of $1.1 million and $4.9 million respectively, from the receipt of funds under the Continued Dumping and Subsidy Offset Act (CDSOA).  No proceeds were received in the current three and sixnine month periods.

Interest (income) expense for the three and sixnine month periods of 2016 decreased $210,000$222,000 and $431,000,$653,000, respectively, from the comparable 2015 periods.  Interest expense is composed of interest on loans against cash surrender value of insurance policies used to fund our legacy deferred compensation plan.  The decrease in expense is due to paying down these outstanding loans with excess cash starting in late 2015 and eventually paying them off when we liquidated our corporate-owned life insurance policies in the first quarter of 2016.   

Our effective tax rates for the current three and sixnine month periods were 3.3%negative 6.1% and negative 24.3%16.0%, respectively.  As indicated above, we surrendered our corporate-owned life insurance policies during the first quarter of 2016, which resulted in taxable income for the period.  The premiums paid and the growth in surrender value of these policies were excludable from taxable income over the life of these polices when held until death of the covered lives, but this growth, net of premiums paid, became taxable when we surrendered the policies.  The aggregate impact of the surrender of these policies in the first quarter of this year was $24.0 million in taxable income.  The income tax expense associated with the surrender of the corporate-owned life insurance policies was largely recognized in full during the first quarter as that is when the surrender was complete. Therefore, thepolicies were surrendered. The income tax benefitexpense recognized during the current three month period was the result of normal operating losses incurred duringadditional alternative minimum tax liability associated with the period. These will ultimately offset the income recognized in the first three months, which will lower the impactsurrender of the federal alternative minimum taxcorporate-owned life insurance policies and state income taxes.  The income tax expense recognized during the current sixnine month period was the result of federal alternative minimum tax and, to a lesser extent, the impact of surrendering these policies have on state income taxes.  The effective tax rates in the prior year three and sixnine month periods were 1.1%a benefit of 1.8% and 2.0%an expense of 1.6%, respectively, alsorespectively.  The income tax expense in the prior year nine month period was driven by the impact of the alternative minimum tax limiting the ability to offset the income received from the Continued Dumping and Subsidy Offset Act during those periods.the period.  The major reconciling items between our effective income tax rate and the federal statutory rate are the change in our valuation allowance and the cash surrender value on life insurance policies.

Financial Condition, Liquidity and Capital Resources

Sources of liquidity include cash on hand and cash generated from operations. While we believe that our business strategy will be successful, we cannot predict with certainty the ultimate impact on our revenues, operating costs and cash flow from operations.  We expect cash on hand and borrowings under the revolving credit facility to be adequate for ongoing operational and capital expenditures forover the foreseeable future.next twelve months.  At July 2,October 1, 2016, we had $26.7$7.3 million in cash and $663,000 in restricted cash.

Working capital, excluding cash and restricted cash, decreased to $19.3 million at July 2,October 1, 2016 from $21.2 million on December 31, 2015.  The decrease was primarily the result of a decrease in accounts receivable as a result of our lower sales volumes, an increase in other accrued expenses driven by accrued taxes and a decrease in prepaid and other assets, partially offset byassets.  Partially offsetting these factors was an increase in accrued taxesinventories and a slight increasedecrease in inventories.accounts payable.

Cash used by operations was $1.4$3.2 million in the current sixnine months of 2016 compared to cash generated from operations of $1.9$2.5 million in the comparable prior year period.  The cash generation in 2015 was the result of receiving $4.9 million on CDSOA proceeds during the period. Excluding these proceeds, lessthe cash use was used by operations duringapproximately $700,000 higher in the first sixcurrent nine months of 2016 due to the increase in operating losses tied to lower sales volumes and product discounting and from higher tax payments on the taxable income from the surrender of our corporate-owned life insurance policies, partially offset by lower freight costs and lower interest payments on loans against corporate owned life insurance policies.

Cash generated from investing activities in the first sixnine months of 2016 was due to $28.1 million in proceeds from the surrender of corporate-owned life insurance policies.  Cash provided by investing activities was $527,000 in the prior year sixnine months with the release of restricted cash.

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Net cash used by financing activities in the current sixnine months of 2016 was $6.5$24.1 million compared to $4.3 million in the comparable sixnine months of 2015.  During the current year we used $17.6 million for a special dividend, $5.5 million to pay off the remaining outstanding life insurance policy loans in conjunction with our decision to surrender these corporate-owned life insurance policies and $1.0 million for the repurchase and retirement of 400,000 shares of our common stock.  In the first sixnine months of 2015 we used $4.3 million to pay-down life insurance policy loans.

Subsequent to quarter end, we entered into a revolving credit facility with Wells Fargo Bank, National Association that provides for maximum borrowings of $4.0 million and matures October 2018. The facility is secured by our accounts receivable, inventory and certain other assets. The facility contains covenants requiring us to maintain a minimum fixed charge coverage ratio of 1.1 times with an initial compliance date at December 31, 2017. As previously announced, the Board of Directors planned to declare an additional special dividend of $0.25 per share once we secured a revolving credit facility sufficient to fund fluctuations in working capital.  As a result of our securing the credit facility, the Board has declared a special dividend of $0.25 per share payable on November 18, 2016 to shareholders of record as of the close of business on November 11, 2016.

Continued Dumping and Subsidy Offset Act (“CDSOA”)

The CDSOA provides for distribution of monies collected by U.S. Customs and Border Protection (“Customs”) for imports covered by antidumping duty orders entering the United States through September 30, 2007 to eligible domestic producers that supported a successful antidumping petition (“Supporting Producers”) for wooden bedroom furniture imported from China. Antidumping duties for merchandise entering the U.S. after September 30, 2007 have remained with the U.S. Treasury.

Certain manufacturers who did not support the antidumping petition (“Non-Supporting Producers”) filed actions in the United States Court of International Trade, challenging the CDSOA’s “support requirement” and seeking to share in the distributions.  As a result, Customs held back a portion of those distributions (the “Holdback”) pending resolution of the Non-Supporting Producers’ claims. The Court of International Trade dismissed all of the actions of the Non-Supporting Producers, who appealed to the United States Court of Appeals for the Federal Circuit.  Customs advised that it expected to distribute the Holdback to the Supporting Producers after March 9, 2012. The Non-Supporting Producers sought injunctions first from the Court of International Trade and, when those efforts were unsuccessful, from the Federal Circuit directing Customs to retain the Holdback until the Non-Supporting Producers’ appeals were resolved.

On March 5, 2012, the Federal Circuit denied the motions for injunction, “without prejudicing the ultimate disposition of these cases.”  As a result, we received a CDSOA distribution of $39.9 million in April 2012. On August 19, 2013, the Federal Circuit issued a decision affirming the dismissal of the claims of two of the four Non-Supporting Producers. On January 3, 2014, the Federal Circuit denied those Non-Supporting Producers’ petitions for rehearing en banc. On May 2, 2014, these Non-Supporting Producers filed a petition for writ of certiorari, seeking review by the United States Supreme Court. On October 6, 2014, the Supreme Court denied two of three of the Non-Supporting Producers’ petitions for certiorari review, and on December 15, 2014, the Supreme Court denied the third petition for review.  Accordingly, Customs should not seek or be entitled to obtain a return of our CDSOA distribution received in April 2012.

In November 2012, December 2013, and November 2014 Customs disclosed that it withheld $3.0 million, $6.4 million, and $5.7 million respectively in each of those years, in funds related to the antidumping duty order on wooden bedroom furniture from China that was otherwise available for distribution until the amounts at issue in the pending litigation had been resolved. In March 2015, following the conclusion of all appeals, Customs began distributing the withheld funds to the Supporting Producers.  Our allocated share of the distributed 2012, 2013, and 2014 withheld funds totaled $4.9 million, which we received during late March and early April 2015. 

In November 2014, Customs also announced that 2014 and 2015 CDSOA distributions were subject to sequestration under the Budget Control Act at the rate of 7.2 percent and 7.3 percent, respectively. On March 17, 2015, however, the government concluded that the amounts sequestered during Fiscal Year 2014 and Fiscal Year 2015 would become available in the subsequent fiscal year. Our share of the 2014 sequestered funds, totaling $147,000, was received in April 2015 and no funds were sequestered in 2015. 

In November 2015, Customs distributed $1.2 million in collected duties that were available for distribution in 2015.  Our portion of this distribution was $412,000, representing 33.6% of the balance available for distribution.  As of April 30, 2016, Customs preliminarily reported that approximately $3.2 million is potentially available for distribution under the CDSOA during the fourth quarter of calendar year 2016 to eligible domestic manufacturers in connection with the case involving bedroom furniture imported from China.  The final amounts available for distribution may be higher or lower than the preliminary amounts reported due to liquidations, reliquidations, protests, and other events affecting entries that may take place before the end of the government’s fiscal year.  Assuming our percentage allocation in 2016 is the same as it was for the 2015 distribution (approximately 33.6% of the funds distributed) and the $3.2 million collected by the government as of April 30, 2016 does not change, we could receive approximately $1.1 million in CDSOA funds in the fourth quarter of 2016.

Due to the uncertainty of the administrative processes, we cannot provide assurances as to future amounts of additional CDSOA funds that ultimately will be received, if any, and we cannot predict when we may receive any additional CDSOA funds.   

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New Accounting Pronouncements

In February 2016, the FASB issued its final lease accounting standard, FASB Accounting Standard Codification ("ASC"), Leases (Topic 842, Leases842) (“ASU 2016-02”), which requires lessees to reflect most leases on their balance sheet as assets and obligations. The effective date for the standard is for fiscal years beginning after December 15, 2018. Early adoption is permitted. We are evaluating the effect that ASC 842ASU 2016-02 will have on our consolidated financial statements and related disclosures. The standard is to be applied under the modified retrospective method, with elective reliefs, which requires application of the new guidance for all periods presented.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09).The2016-09”).  The amendments in ASU 2016-09 simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows.  The effective date for the standard for public entities is for fiscal years beginning after December 15, 2016. Early adoption is permitted. We are evaluating the effect that ASU 2016-09 will have on our consolidated financial statements and related disclosures.

In August 2016, FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230).  The guidance is intended to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows.  The effective date for the standard for public entities is for fiscal years beginning after December 15, 2017.  Early adoption is permitted, provided all amendments are adopted in the same period.  The guidance requires application using a retrospective transition method.  We do not anticipate ASU 2016-15 to have a material impact to our consolidated financial statements.

Critical Accounting Policies

There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, included in our 2015 Annual Report on Form 10-K.

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,” “estimates,” “expects,” “may,” “will,” “should,” “could”, or “anticipates,” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy.  These statements reflect our 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 disruptions from transitioning  to and using a single contract manufacturer for substantially all of our products including those arising in the event the manufacturer is not able to manufacture as anticipated in terms of cost, quality or timeliness or in the event we lost this relationship, disruptions in foreign sourcing including those arising from supply or distribution disruptions or those arising from changes in political, economic and social conditions, as well as laws and regulations, in countries from which we source products, international trade policies of the United States and countries from which we source products, the inability to raise prices in response to inflation and increasing costs, lower sales due to worsening of current economic conditions, the cyclical nature of the furniture industry, business failures or loss of large customers, failure to anticipate or respond to changes in consumer tastes, fashions and perceived values in a timely manner, competition in the furniture industry, environmental, health, and safety compliance costs, and failure or interruption of our information technology infrastructure.  Any forward-looking statement speaks only as of the date of this filing and we undertake no obligation to update or revise any forward-looking statements, whether as a result of new developments or otherwise.

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ITEM 3.  Quantitative and Qualitative Disclosures about Market Risk

None of our foreign sales or purchases are denominated in foreign currency and we do not have any foreign currency hedging transactions.  While our foreign purchases are denominated in U.S. dollars, a relative decline in the value of the U.S. dollar could result in an increase in the cost of our products obtained from offshore sourcing and reduce our earnings or increase our losses, unless we are able to increase our prices for these items to reflect any such increased cost.

ITEM 4.  Controls and Procedures

(a)   Evaluation of disclosure controls and procedures.  Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act).  Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

(b)   Changes in internal controls over financial reporting.  There were no changes in our internal control over financial reporting that occurred during the secondthird quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Part II. OTHER INFORMATION

ITEM 5. Other Information

On July 22,October 25, 2016, the Company and Glenn Prillaman, President and Chief Executive Officer of the Company entered into a secured $6 million revolving credit facility (the “Credit Facility”) with Wells Fargo Bank, National Association (the “Lender”) with an employment agreement.excess availability requirement of $2 million resulting in maximum borrowings of $4.0 million under the facility, subject to borrowing base eligibility requirements.   The Credit Facility matures in October 2018 and is secured by the Company’s accounts receivable, inventory and certain other assets pursuant to a Security Agreement (the “Security Agreement”) among the Company, Stanley Furniture Company 2.0, LLC, a Virginia limited liability company (“Stanley 2.0”) and the Lender. Borrowings under the Credit Facility bear interest at a variable per annum rate equal to the daily three month London Bank Interbank Offered Rate plus 3.5%. 

            Mr. Prillaman’s employment agreement provides for a base salary of at least $255,000 per year with upward adjustments asThe Credit Facility contains certain customary warranties, representations and affirmative and negative covenants, including covenants that, among other things limits the Board of Directorsability of the Company deems appropriate and its subsidiaries to incur certain types of debt or liens, pay dividends except for the additional $0.25 per share special dividend declared October 25, 2016, enter into mergers and consolidations or use proceeds of borrowing for other than permitted uses. The Credit Facility also include a potential target annual bonus of 100% of his base salary.

Ifcovenant requiring the Company terminates Mr. Prillaman’s employmentto maintain a minimum fixed charge ratio of not less than 1.10 to 1.0 with an initial compliance date at December 31, 2017.

The Credit Facility contains customary events of default for cause (assimilar financing transactions, including (a) failure to make payments when due, (b) default in compliance with covenants in the Credit Facility or material contracts, (c) insolvency of the Company or Stanley 2.0, (d) the existence or occurrence of a Material Adverse Change as defined in his employment agreement), he is entitled to no further benefitsthe Credit Facility, or payments under his employment agreement other(e) if a person or group acquires more than accrued benefits consisting of (i) any unpaid salary earned or accrued through the date of termination, (ii) any accrued but unused paid time off, (iii) any reimbursement for business expenses owed to Mr. Prillaman by the Company, and (iv) any other previously unpaid payments to which Mr. Prillaman may be entitled through the date of termination under the terms of any applicable employee benefit plan (including COBRA, disability or death benefit plans)25% of the Company. 

If (i) the Company terminates Mr. Prillaman’s employment without cause, (ii) Mr.  Prillaman terminates employment for good reason or (iii) Mr. Prillaman terminates his employment without good reason and the Company elects to make severance payments in order to have the non-competition restriction and the interference restrictionsvoting power of the employment agreement effective, then Mr. Prillaman is entitled to receive accrued benefits and severance payments for 12 months following the date of termination consisting of monthly payments equal to one-twelfthoutstanding voting stock of the sum of

(i)             Mr. Prillaman’s salary in effect at the date of termination, plus

(ii)            an amount equal to the highest of the annual bonuses paid to Mr. Prillaman for the two fiscal years preceding the fiscal year in which his employment terminates.

Good reason generally exists if:

(i)             there is a 10% or more 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 the Company’s 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 the Company.          

InCompany; however, the event of Mr. Prillaman’s death or disability, his employment agreement provides that he entitled to no further payments under the employment agreement other than accrued benefits.  He or his estate is also entitled to a bonus payment equal to the bonus which would otherwise have been payable for the full year prorated for the number of days he was employed during that year.

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The term of Mr. Prillaman’s employment agreement is initially through December 31, 2017 and thereafter extends automatically for additional one-year terms at the end of each year unless either party to the agreement gives notice on or before November 1 of any year that the agreementdefault in clause (e) will not be extended. In the event of such notice, employment terminates as of December 31 of the year in which such notice is given.  

 Mr. Prillaman’s employment agreement provides that, during his employment and, in the event he receives severance payments, during the 12 month period following employment with the Company, he will not compete against the Company and will not make disparaging comments about the Company or otherwise take certain actions that interfere with the Company’s businessarise if the Company electsprovides written notice to make the severance payments as described above.  Mr. Prillaman’s employment agreement also provides that he will not solicitLender within two business days after the Company employeesbecomes aware of such acquisition or an SEC filing is made with respect to such acquisition and, within 10 days after such notice, such person or group passes background checks required by the Lender and the Lender, in its sole discretion, consents to such acquisition. Upon the occurrence and during the 12 month period following employment withcontinuation of an event of default, the Company.Lender may declare amounts due under the Credit Facility immediately due and payable.

Mr. Prillaman’s employment agreement provides that if he is or becomes entitled to severance payments or benefits upon termination pursuant to his change in control protection agreement withThe Company’s subsidiary, Stanley 2.0, has unconditionally guaranteed the obligations of the Company heunder the Credit Facility.

The foregoing description of the Credit Facility and the Security Agreement is not entitledqualified in its entirety by reference to the payments or benefits underCredit Facility and the provisions of his employment agreement in connection with termination without cause or resignation for good reason.Security Agreement filed as Exhibit 10.1 and Exhibit 10.2, respectively, to this Quarterly Report on Form 10-Q and are hereby incorporated by reference.

ITEM 6. Exhibits