SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended August 29, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ____ to ____
Commission file number 0-4173
DMI FURNITURE, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 41-0678467
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(State of incorporation) (IRS employer ID number)
One Oxmoor Place, 101 Bullitt Lane, Louisville, Kentucky 40222
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(Address of principal executive offices)
Registrant's telephone number with area code: (502) 426-4351
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.10 PAR VALUE
-----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
------ -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [ ]
Total pages - 91
Page 1
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $10,200,000 as of August 29, 1998.
Indicate the number of shares outstanding of each of the Registrant's classes
of Common Stock as of the last practicable date.
Class Outstanding at August 29, 1998
- ----- ------------------------------
Common Stock, Par Value $.10 per Share 3,892,013
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Annual Meeting of
Stockholders on February 3, 1999 are incorporated by reference into Part
III. Part I.
Page 2
Item 1. BUSINESS
The information set forth in "Item 1. Business," in "Item 8.
Management's Discussion and Analysis of Financial Condition and Results of
Operations," and in the other portions of this report includes
forward-looking statements about the Corporation and its business. For this
purpose, the use of words such as "believes," "anticipates," "plans,"
"expects," and similar expressions are intended to identify forward-looking
statements. Factors that realistically could cause results to differ
materially from those projected in the forward-looking statements include the
cyclical and seasonal nature of the furniture market; the availability and
cost of raw materials and labor; availability, terms and deployment of
capital; events that disrupt the flow of goods from off-shore manufacturing
sources; merchandising decisions by one or more of the Company's major
customers that adversely affect their purchases of the Company's furniture
products; changes in fashion or tastes; general conditions in the economy or
capital markets; demographic changes; competition; and other factors
identified in "Item 1. Business," in "Item 8. Management's Discussion and
Analysis of Financial Condition and Results of Operations," and in other
portions of this report.
(a) GENERAL DEVELOPMENT OF BUSINESS.
The operations of the Company during the past three years consisted of
the manufacture, import, and sale of low and medium-priced bedroom furniture,
accent furniture, home and office desk furniture, conference tables, and
chairs.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
The Company's continuing operations as shown in its Selected Financial
Data (See Item 6) for the five years ended August 29, 1998, consist of one
industry segment -- the manufacture, import, and sale of furniture.
(c) NARRATIVE DESCRIPTION OF THE BUSINESS.
The Company manufactures, imports, and sells low and medium-priced
bedroom furniture, dining furniture, occasional and accent furniture, home
office and commercial office furniture, conference tables, and chairs.
The Company's furniture products are marketed throughout the United
States, Puerto Rico, Canada, Mexico, Caribbean, and Saudi Arabia, principally
to furniture retailers. Export sales totaled approximately 2% of the
Company's sales in fiscal 1998. Approximately 14% of the Company's sales are
accounted for by sale to wholesale distributors. The Company's sales are made
through independent, commissioned sales representatives, as well as sales and
marketing personnel employed by the Company. The Company maintains a showroom
for furniture markets in High Point, North Carolina. The Company also
participates in the annual NeoCon commercial office furniture tradeshow in
Chicago, Illinois.
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The raw materials which are essential to the manufacture of furniture
are wood, board products, fabric, finishing materials, hardware and glass.
There are a number of sources of supply for wood, board products and fabric.
Approximately 41% of these materials are purchased from independent
suppliers, and the balance of these materials are obtained by the Company by
cutting and hauling wood from purchased stands of timber and further
processing it in the Company's saw mill and dimension plant, by cutting
various types of board and drawer body parts, and manufacturing high pressure
laminated tops for its office furniture. If, for any reason, the Company's
existing sources of supply for any of its raw materials became unable to
service the Company, the Company believes its furniture manufacturing
operations would not be adversely affected because there are adequate
alternate sources of supply. Loss of any one or several sources of supply
would not have a material adverse effect on the Company as ample alternative
sources exist.
The Company owns or uses the following trademarks in
connection with its furniture products, which trademarks are due to expire
on the dates indicated below:
Expiration
Trademark Product Date
--------- ------- ----------
TOP GUARD All DMI products 2002
Wood Classics
Furniture Company Office Furniture 2006
Carolina Desk Company All DMI products 2008
DMI All DMI products 2009
DMI Furniture, Inc. All DMI products 2009
Wood Manor All DMI products 2007
DMI Trading Company All DMI products Pending
Cyber City Furniture Warehouse All DMI products 2007
Carolina Classics Office
Furniture Company All DMI products Pending
Wynwood All DMI products Pending
Homestyles All DMI products Pending
It is not common in the furniture industry to obtain a patent for a
furniture design. If a particular design of a furniture manufacturer is well
accepted in the marketplace, it is common for other manufacturers to imitate
the same design without recourse by the furniture manufacturer who initially
introduced the design. The Company often engages independent designers to
work in conjunction with its own personnel in designing furniture products.
The Company's sales have historically not been subject to material
seasonal fluctuations. However, as the Company's seasonal promotions of
imported furniture increase, the sales may be more subject to quarterly
fluctuations. See Note 10 to the consolidated financial statements.
It is the furniture industry's and the Company's practice to grant
extended payment terms from time to time to promote sales of products. From
time to time, the Company extends payment terms by 30 to 60 days in an
attempt to stimulate sales of its products. The frequency of the special
payment terms depends upon general business conditions, but generally
extended terms are offered only once or twice per year and then only on
certain products. These special payment terms have not had, nor are they
expected to have in the future, any material impact on
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the Company's liquidity.
The Company's six largest customers accounted for approximately 51% of
the Company's total sales in fiscal 1998. One customer, Sam's Club division
of Wal-Mart Stores, Inc., accounted for more than 10% of the Company's total
net sales for fiscal 1998. The loss of more than one of these customers at
the same time or one of the largest six could have a materially adverse
effect on the business of the Company. As of August 29, 1998, one customer
accounted for approximately 23% of total accounts receivable. The Company's
customers include large furniture chain store retailers, wholesale clubs,
catalog retailers, and independent distributors, as well as numerous smaller
retailers.
The furniture industry is extremely competitive. The Company competes
in the national market for low and medium-priced furniture. Due to the
fragmented nature of the furniture manufacturing industry and the
unavailability of complete financial reports for all its competitors, the
Company is unable to accurately state its rank in the industry. There are,
however, a large number of furniture manufacturers with substantially greater
sales and greater economic resources than the Company, a number of which are
subsidiaries or divisions of large national companies. The principal methods
of competition in the furniture industry are design, pricing, sales force,
customer service, and manufacturing location.
The Company believes it is a leading producer and marketer of popular
priced "promotional" bedroom furniture, home office furniture, and wood
office furniture.
The Company employs approximately 441 employees, of whom approximately
156 are covered by collective bargaining contracts. One contract covering 77
employees expires during fiscal 1999. The Company presently does not
anticipate a strike or work stoppage at any of its facilities. However, it
cannot be assumed that labor difficulties will not be encountered in the
future.
Item 2. PROPERTIES.
The Company's principal offices are located in 10,336 square feet of
leased office space in Louisville, Kentucky.
The Company owns three operating furniture manufacturing plants located
in: Huntingburg, Indiana (78,910 square feet, and 100,000 square feet); and
Ferdinand, Indiana (117,823 square feet); a saw mill and a dimension parts
plant located in Ferdinand, Indiana; and a fabrication plant in Huntingburg,
Indiana (98,000 square feet).
In addition, the Company owns a 235,000 square foot warehouse
located in Huntingburg, Indiana.
The Company completed construction during fiscal 1998 of a 100,000
square foot warehouse in Huntingburg, Indiana on its existing property. The
main purpose of this new building is warehousing and distribution of the
Company's various product lines.
The Company closed its Gettysburg, Pennsylvania manufacturing plant and
warehouse
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during fiscal 1996. See Note 12 to the financial statements for additional
information.
All of the Company's properties are encumbered by mortgages held by its
bank. See Note 2 to the consolidated financial statements.
The productive capacity and extent of utilization of each of the
Company's manufacturing facilities for the fiscal year ended August 29, 1998
are set forth in the table below. "Productive capacity" is defined for this
purpose as gross sales dollars produced both for outside sales and internal
integration, working fifty hours per week on a single shift with the existing
number of employees and no material investments in machinery and equipment or
change in product mix. The Company has on occasion operated more than one
shift at one of its plants and may add shifts to other plants in the future
to increase capacity.
Fiscal 1998
Facility Capacity Production %Utilized
- -------- -------- ---------- ---------
(dollars in thousands)
Ferdinand, Ind. Plant $16,058 $11,671 73%
Huntingburg, Ind. 5th St. Plant 22,612 16,831 74%
Huntingburg, Ind. Chestnut
Street Plant 18,780 15,723 84%
Huntingburg, Ind. Fabricator 9,105 8,277 91%
Ferdinand, Ind. Sawmill/
Dimension Plant 7,349 7,018 96%
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$73,904 $59,520 81%
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Item 3. LEGAL PROCEEDINGS.
The Company is currently subject to claims under federal and state
environmental laws based on allegations that the Company had hazardous
substances disposed of at three waste disposal sites. After depositing
$57,000 in a trust fund under the terms of a tentative settlement of claims
arising from one site and paying its portion of preliminary investigation and
remediation costs at the other two sites, the Company retains a reserve of
approximately $42,000 against potential environmental liabilities. Due to
the limited nature of the Company's involvement in these environmental
proceedings, the availability of certain defenses, and the involvement of
many other parties with substantial financial resources in the proceedings,
the Company does not anticipate, based on currently available information,
that potential environmental liabilities arising from these proceedings are
likely to exceed the amount of the Company's reserve by an amount that would
have a material effect on the Company's financial condition, results of
operations or cash flows. Expenses for the year to date were not material.
The Company is also a defendant in various lawsuits arising in the
normal course of business, including two other environmental matters. In
management's opinion, these lawsuits are not material to the results of
operations or financial position of the Company, or are adequately covered
by insurance.
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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the fourth quarter of the fiscal year
which required a vote of security holders.
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Part II.
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS.
(a) Price Range of Common Stock
The Company's Common Stock is traded in the over-the-counter market and
is quoted on NASDAQ under the trading symbol DMIF. The following table sets
forth the high and low bid quotations, as reported by NASDAQ for the
Company's Common Stock, for each fiscal quarter indicated. The quotations
represent prices between dealers, do not include commissions, mark-ups or
mark-downs and may not represent actual transactions.
High Bid Low Bid
Price Price Price
----- ----- -----
1st Quarter of 1997 $ 2.25 $ 1.56
2nd Quarter of 1997 $ 3.31 $ 2.13
3rd Quarter of 1997 $ 3.00 $ 2.38
4th Quarter of 1997 $ 3.31 $ 2.44
1st Quarter of 1998 $ 3.25 $ 2.63
2nd Quarter of 1998 $ 3.00 $ 2.63
3rd Quarter of 1998 $ 3.75 $ 2.50
4th Quarter of 1998 $ 3.63 $ 2.82
(b) Approximate Number of Equity Security Holders
Title of Class- Common Stock, $.10 Par Value
Approximate Number of Stockholders as of August 29, 1998 - 1,594
(c) Dividend History
No dividends have been paid on the Registrant's Common Stock since its
issuance on November 11, 1977.
(d) Dividend Policy
Payment of dividends will be within the discretion of the Company's
Board of Directors and will depend, among other factors, on earnings, capital
requirements and the operating and financial condition of the Company. At
the present time, the Company's anticipated capital requirements are such
that it intends to follow a policy of retaining earnings in order to finance
the development of its business and the retirement of its debt. In addition,
the Company's present financing agreement with Bank One, Indiana, N.A.
prohibits the payment of dividends on common stock without the written
consent of the bank. See Notes 2 and 5 to the consolidated financial
statements.
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ITEM 6
DMI FURNITURE, INC.
SELECTED FINANCIAL DATA
Year Ended
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August 29, August 30, August 31, September 2, August 27,
1998 1997 1996 1995 1994
---------- ---------- ---------- ------------ ------------
(Amounts in thousands except per share amounts)
Net sales $64,727 $56,434 $56,563 $67,773 $60,932
Net income from continuing operations 1,975 2,416 376(4) 804 1,101(3)
Diluted earnings per common share $.07(5) $.40 $.07(4) $.14 $.19
Total assets $41,329 $35,551 $31,178 $38,512 $40,041
Long-term debt and capital
lease obligations 22,917 14,857 13,661 21,037 20,352
Notes to selected financial data:
Note 1 -- This summary should be read in conjunction with the related
financial statements and notes.
Note 2 -- Diluted earnings per common share are based on the weighted average
number of common and common equivalent shares outstanding during the
period.
Note 3 -- Does not include $1,795,000 credit or $.31 per share for change in
accounting principle, and $(50,000) or ($.01) per share charge for
extraordinary item.
Note 4 -- Includes plant closing reserve which reduced net income and
earnings per common share by approximately $538,000 and $.09 per
share respectively.
Note 5 -- Includes charge from preferred stock redemption of $1,666,000 which
impacted diluted earnings per common share by approximately $.40.
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company has a $26,800,000 credit agreement with Bank One,
Indianapolis, N.A. comprised of a $5,300,000 term loan, a $1,500,000 term
loan, and a maximum revolving master note loan commitment of $20,000,000
(outstanding balance $11,833,000 as of August 29, 1998). On August 29, 1998,
the Company had $4,675,000 additional borrowings available under the formula
for calculating its available borrowings. See Note 2 to the consolidated
financial statements.
Demands for funds relate to payments for raw materials and other
operating costs, resale merchandise, debt obligations, and capital
expenditures. The Company's ability to generate cash adequate to meet short
and long-term needs results from the collection of accounts receivable and
from its ability to borrow funds. The Company's days of sales outstanding of
accounts receivable averaged 53 days for fiscal 1998 and 52 days for fiscal
1997. Inventory turnover was 3.5 in fiscal 1998 and 3.9 in fiscal 1997.
The decrease in turnover was primarily a result of initial inventory build-up
of the Company's new product lines. The Company believes it will be able to
generate enough cash in fiscal 1998 from operations to make scheduled
payments on its long term debt.
On August 28, 1998 the Company retired its Series C Preferred Stock. Of
the 1,995,050 Series C shares outstanding, 1,557,593 shares were redeemed for
$3.00 per share by the Company as stated in its Certificate of Incorporation,
and 437,457 Series C shares were converted into 722,762 common shares at the
option of the holders. The redeeming shareholders were paid a final dividend
of $75,319 on the date of redemption. The redemption of the 1,557,593 Series
C shares resulted in a $1,666,000 charge to income applicable to common stock
because the $3.00 redemption price exceeded the par value of the Series C
stock of $2.00, and the Company recognized approximately $109,000 in
transaction costs. The redemption was funded through term bank debt and
cash. This transaction will result in a substantial anti-dilutive effect on
earnings per common share in future periods.
Key elements of the Consolidated Statement of Cash Flows (in thousands):
1998 1997 1996
---- ---- ----
Net cash provided (used) by operating activities $(1,211) $ 23 $8,504
Cash provided (used) in investing activities (2,234) (858) 140
------- ----- ------
Net cash flows from operating and investing activities (3,445) (835) 8,644
Cash provided (used) by financing activities 4,025 1,251 (8,616)
------- ----- ------
Net change in cash and cash equivalents $ 580 $ 416 $ 28
------- ----- ------
------- ----- ------
During fiscal 1998, the Company used cash flows for operations of
$1,211,000 primarily to finance finished goods inventories for its new
divisions and new commercial office groups as well as to finance increased
accounts receivables from substantially increased sales. During fiscal 1997,
the Company provided cash flows from operations of $23,000 from net income of
$2.4 million offset primarily by funds used to finance inventories of
expanding office and home office furniture lines as well as to finance
seasonal inventories of wood at the Sawmill to
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minimize spot purchase premiums during the fall and winter months. In
addition, cash was used to finance accounts receivable resulting from the
sales increase during the fourth quarter. During fiscal 1996 , the Company
provided cash flows from operating activities of $8,504,000. This positive
cash flow was due primarily to the success of the Company's asset
consolidation plan and particularly the inventory reduction as well as the
reduction in accounts receivable.
Cash flows of $2,234,000 were used for investing activities during
fiscal 1998 primarily to build the new warehousing and distribution facility
as well as to finish a capital project at the Company's sawmill and dimension
plant. Investing activities used $858,000 during fiscal 1997 primarily to
finance capital expenditures, in particular the building addition at the
Dimension Plant to accommodate the lumber yield optimization equipment, to
finance the sales automation hardware and software, and to finance ongoing
plant modernization. Funds used for these expenditures were partially offset
by $193,000 in proceeds from the sale of certain environmental permits.
Investing activities provided $140,000 in fiscal 1996 through the sale of
certain idle assets in Gettysburg, Pennsylvania as well as the final payments
on an Alabama idle property sold several years ago.
Net cash flows from financing activities of $4,025,000 for fiscal 1998
were used to finance the previously mentioned current assets and capital
expenditures as well as to retire the Series C Preferred Stock. Financing
activities during fiscal 1997 of $1,251,000 were provided primarily by the
revolving line of credit. Financing activities during fiscal 1996 of
$8,616,000 were primarily used to pay down debt with funds generated by
operations and investing activities previously described.
The Company does not believe any events are probable which would
materially change its present liquidity position, which is adequate to
satisfy known demands for funds for operations and to pay bank and other debt.
The Company's fiscal 1999 budget for capital expenditures is
approximately $350,000. The Company anticipates that its 1999 internal cash
flow and additional borrowings available under its credit agreement will be
sufficient to pay for these expenditures.
The Company is currently subject to claims under federal and state
environmental laws based on allegations that the Company had hazardous
substances disposed of at three waste disposal sites. After depositing
$57,000 in a trust fund under the terms of a tentative settlement of claims
arising from one site and paying its portion of preliminary investigation and
remediation costs at the other two sites, the Company presently retains a
reserve of approximately $42,000 against potential environmental liabilities.
Due to the limited nature of the Company's involvement in these
environmental proceedings, the availability of certain defenses, and the
involvement of many other parties with substantial financial resources in the
proceedings, the Company does not anticipate, based on currently available
information, that potential environmental liabilities arising from these
proceedings are likely to exceed the amount of the Company's reserve by an
amount that would have a material effect on the Company's financial
condition, results of operations or cash flows. Expenses for the year to
date were not material. See "Item 3. Legal Proceedings" and Note 4 of Notes
to Consolidated Financial Statements.
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The Company does not believe any events are probable which would
materially change its present liquidity position, which is adequate to
satisfy known demands for funds for operations and to pay bank and other
debt.
The Company has received certifications or representations from the
vendors of its critical hardware, system software, and application software
that those products are Year 2000 ready. The Company employs IBM AS400
hardware, IBM OS400 operating system, and MAPICS manufacturing and production
information control system for the large majority of its system needs all of
which was subject to the above mentioned certifications. The Company has
tested this hardware and software and found its Year 2000 readiness to be as
certified. The Company has not incurred any material costs in its Year 2000
readiness plans nor does it anticipate any material costs in the future. The
Company has received representations or certifications from its largest
suppliers representing that they are Year 2000 compliant. In the event that
any of the Company's larger suppliers are not Year 2000 compliant, the
Company believes that it has alternative sources for its raw material needs.
The Company has received representations from customers representing
approximately 50% of its annual sales that those customers are Year 2000
compliant. The Company has received representation from its primary
depository and lender bank that they are Year 2000 compliant. Contingency
plans will be developed during fiscal 1999 for third parties that the Company
believes have significant Year 2000 operational risks. Even given best
efforts and execution of the aforementioned planning and testing, disruptions
and unexpected business problems may occur as a result of the Year 2000
issue.
RESULTS OF OPERATIONS
Net sales for fiscal 1998 increased by $8,293,000 or approximately 15%
over fiscal 1997. This increase was primarily volume driven and was the
result of increased home office sales and sales by the Company's new Wynwood
division. The sales changes were as follows: Home office, Wynwood, and other
residential furniture sales excluding promotional bedroom increased by
approximately 65%; promotional bedroom sales decreased by approximately 9%;
and commercial office sales were approximately the same as the previous year.
Net sales for fiscal 1997 increased by $871,000 or 2% over those of fiscal
1996. This increase was the result of increased commercial and home office
furniture sales offset by lower bedroom furniture sales. The sales change
was as follows: office furniture sales increased by 13%; Home office and
other residential furniture sales excluding bedroom increased by 2%; and
bedroom sales decreased by 11% due to weak retail demand for budget-priced
bedroom furniture.
As a percentage of sales, cost of sales was 77.7% of sales for fiscal
1998, 76.6% of sales for fiscal 1997, and 80.9% of sales for fiscal 1996.
The increase in cost of sales as a percentage of sales in fiscal 1998 was
primarily a result of lower utilization of the Company's production
facilities and a lower margin product sales mix. The decrease in cost of
sales as a percentage of sales in fiscal 1997 from fiscal 1996 was the result
of the Company's asset consolidation program initiated in fiscal 1996 and in
particular the consolidation of the Gettysburg operations into existing
Indiana operations, thus significantly lowering the Company's overhead. Also
contributing to the improvement was the increased production and favorable
sales mix towards higher margin products, as well as significant improvement
in the Company's two internal supplier plant operations.
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As a percentage of sales, selling, general and administrative expenses
were 15.9% of sales for fiscal 1998, 15.3% of sales for fiscal 1997, and
14.1% of sales for fiscal 1996. The slight increase in fiscal 1998 was
primarily due to the sales and marketing related expenses of the Company's
new Wynwood and Homestyles divisions. The increase in fiscal 1997 was
primarily due to higher sales and marketing expenses, customer service
expenses, information system expenses, and general administrative expenses.
The Company permanently closed its Gettysburg, Pennsylvania
manufacturing plant and warehouse facilities and consolidated the production
and distribution activities of those operations into its Huntingburg, Indiana
facilities during the second quarter of fiscal 1996. The Company recorded a
pre-tax charge of approximately $995,000 in the first quarter of fiscal 1996
related to this closing. During the fourth quarter of fiscal 1996 the Company
sold the Gettysburg, Pennsylvania manufacturing plant and realized gross
proceeds of approximately $375,000. Based upon this transaction
approximately $127,000 of the book provision related to the initial recording
of property, plant and equipment at net realizable value was not needed. The
net plant closing charge included in the consolidated statements of income
was $868,000 for fiscal 1996. Consolidation of production and warehousing
into the Indiana facilities resulted in lower manufacturing and warehousing
overhead and plant administrative costs. During the first quarter of fiscal
1997 the Company sold the Gettysburg, Pennsylvania warehouse and realized
gross proceeds of approximately $130,000. Based upon this transaction
approximately $118,000 of the book provision related to the initial recording
of property, plant and equipment was not needed.
Net interest expense increased to $1,060,000 in fiscal 1998 from
$1,005,000 in fiscal 1997 primarily due to higher loan balances to support
the increased accounts receivable and inventory balances. Net interest
expense decreased in fiscal 1997 to $1,005,000 from $1,324,000 in fiscal 1996
because of lower average debt balances as well as lower borrowing rates.
Gain On Disposal Of Property, Plant and Equipment - During fiscal 1997
the Company sold certain State of Pennsylvania environmental permits for
approximately $192,000 which had no carrying value. During fiscal 1996, the
Company sold an idle Gettysburg, Pennsylvania manufacturing plant and house
and recorded a total gain of approximately $44,000 and also received final
payment on a note from the sale of an idle manufacturing plant in Alabama
over five years ago and recorded an approximate gain of $26,000 on the final
payment.
EFFECTS OF INFLATION
Inflation affects the Company's business principally in the form of cost
increases for material and wages. Management has attempted to cover
increased costs by increasing sales prices to the extent permitted by
competition. Historically, the Company has not been able to raise sales
prices enough so as to offset all increased costs during all past years. The
Company believes that its competitors also have not been able to raise their
prices so as to offset all increased costs and therefore does not feel that
the Company has incurred any material adverse effect on its competitive
position. The Company believes that it has been able to minimize the effects
of general inflation in the past by improving its manufacturing and
purchasing efficiency and increasing its employee productivity. There can be
no assurance that inflation will not have a material effect on the Company's
business in the future.
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QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's primary market risk exposure with regard to financial
instruments is to changes in interest rates. Historically, the Company has
not used derivative financial instrumental to manage exposure to market risk
associated with interest rate movements. At August 29, 1998, a hypothetical
100 basis points increase in short term interest rates would result in a
reduction of approximately $229,000 in annual pretax earnings. This estimate
assumes no change in the volume or composition of debt at August 29, 1998.
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DMI FURNITURE, INC.
FORM 10-K
ITEMS 8, 14(a) 1 AND 2 AND 14(d)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
The following consolidated financial statements of the registrant required to
be included in Item 8 are listed below:
Page
Consolidated Financial Statements:
Report of Independent Public Accountants F-1
Consolidated Balance Sheets as of August 29, 1998 and
August 30, 1997 F-2, F-3
Consolidated Statements of Income for the years ended
August 29, 1998, August 30, 1997 and
August 31, 1996 F-4
Consolidated Statements of Stockholders' Equity for
the years ended August 29, 1998, August 30, 1997,
and August 31, 1996 F-5
Consolidated Statements of Cash Flows for the years
ended August 29, 1998, August 30, 1997,
and August 31, 1996 F-6, F-7
Notes to Consolidated Financial Statements F-8 - F-20
The following financial statement schedule of the registrant is included in
Item 14(d):
Page
----
II----Valuation and Qualifying Accounts S-1
Schedules other than those mentioned above are omitted because the conditions
requiring their filing do not exist or because the required information is
presented in the consolidated financial statements, including the notes thereto.
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To DMI Furniture, Inc.:
We have audited the accompanying consolidated balance sheets of DMI
Furniture, Inc. (a Delaware corporation) and subsidiary as of August 29, 1998
and August 30, 1997 and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended August 29, 1998. These consolidated financial statements and the
schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of DMI
Furniture, Inc. and subsidiary as of August 29, 1998 and August 30, 1997, and
the results of their operations and their cash flows for each of the three
years in the period ended August 29, 1998 in conformity with generally
accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the Index To
Consolidated Financial Statements and Schedules is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not a
required part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in our audits of the basic
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
October 16, 1998
Louisville, Kentucky
F-1
Page 16
DMI FURNITURE, INC.
CONSOLIDATED BALANCE SHEETS
August 29, 1998 and August 30, 1997
ASSETS 1998 1997
-------- ------ ------
Current assets:
Cash $1,092,531 $512,367
Restricted cash - 1,080,196
Accounts receivable, less allowance for
doubtful accounts of $150,000 in 1998
and $141,000 in 1997 (Note 11) 10,251,735 9,148,551
Inventories (Note 9) 16,296,457 12,261,761
Other current assets 340,599 363,041
Current portion of deferred income taxes (Note 8) 934,837 792,160
----------- -----------
Total current assets 28,916,159 24,158,076
----------- -----------
Property, plant and equipment, at cost:
Land 753,572 753,572
Buildings and improvements 9,680,651 8,019,589
Machinery and equipment 11,054,830 10,829,509
Leasehold improvements 970,414 656,849
Construction in progress - 176,982
----------- -----------
22,459,467 20,436,501
Less accumulated depreciation 10,522,344 9,479,220
----------- -----------
Net property, plant and equipment 11,937,123 10,957,281
----------- -----------
Other assets:
Intangible pension asset 332,312 296,166
Other 143,744 139,865
----------- -----------
Total other assets 476,056 436,031
----------- -----------
Total assets $41,329,338 $35,551,388
----------- -----------
----------- -----------
See accompanying notes.
F-2
Page 17
DMI FURNITURE, INC.
CONSOLIDATED BALANCE SHEETS
August 29, 1998 and August 30, 1997
(continued)
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
- ------------------------------------ ------ ------
Current liabilities:
Trade accounts payable $3,521,191 $2,890,459
Accrued liabilities (Note 9) 3,128,259 2,719,176
Accrued dividends on preferred stock (Note 5) - 399,010
Long-term debt due within one year (Note 2) 1,524,113 2,011,860
----------- -----------
Total current liabilities 8,173,563 8,020,505
----------- -----------
Long-term liabilities:
Long-term debt (Note 2) 21,392,911 12,845,587
Accrued pension costs (Note 7) 807,100 600,748
Deferred compensation (Note 7) 272,810 321,079
Deferred income tax (Note 8) 425,857 502,471
----------- -----------
Total long-term liabilities 22,898,678 14,269,885
----------- -----------
Commitments and contingencies (Notes 3 & 4)
Stockholders' equity: (Notes 5 & 6)
Series C convertible preferred stock, $2 par value, 1,995,050
shares outstanding in 1997, none outstanding in 1998 - 3,990,100
Common stock, $.10 par value, 9,600,000 shares
authorized, 3,892,013 shares outstanding
(3,152,483 in 1997) 389,201 315,248
Additional paid-in capital 16,183,216 15,341,172
Retained deficit (6,052,538) (6,385,522)
Minimum pension liability (262,782) -
----------- -----------
Total stockholders' equity 10,257,097 13,260,998
----------- -----------
Total liabilities and stockholders' equity $41,329,338 $35,551,388
----------- -----------
----------- -----------
See accompanying notes.
F-3
Page 18
DMI FURNITURE, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended
------------------------------------------
August 29, August 30, August 31,
1998 1997 1996
------------ ------------ ------------
Net sales (Note 11) $64,727,154 $56,434,443 $55,562,751
Cost of sales 50,291,032 43,257,757 44,948,772
------------ ------------ ------------
14,436,122 13,176,686 10,613,979
Selling, general and
administrative expenses 10,278,848 8,616,732 7,843,052
Plant closing reserve (Note 12) - (118,912) 868,000
Other income (expense):
Interest expense (1,140,800) (1,062,556) (1,335,956)
Interest income 81,304 58,354 12,314
Gain on disposal of property,
plant and equipment 9,378 195,642 74,685
Other 24,088 8,544 (45,127)
------------ ------------ ------------
(1,026,030) (800,016) (1,294,084)
------------ ------------ ------------
Income before provision for income taxes 3,131,244 3,878,850 608,843
Provision for income taxes (Note 8) (1,156,312) (1,463,025) (233,176)
------------ ------------ ------------
Net income $1,974,932 $2,415,825 $375,667
Net income applicable to common stock (Note 5) $308,550 $2,016,815 $375,667
Earnings per common share (Notes 1, 5, and 15):
Basic $0.09 $0.65 $0.13
Diluted $0.07 $0.40 $0.07
See accompanying notes.
F-4
Page 19
DMI FURNITURE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Three years ended August 29, 1998
Series C Number of Number of
Convertible Series C Common Additional Retained Minimum
Preferred Shares Common Shares Paid-In Earnings Pension
Stock Outstanding Stock Outstanding Capital (Deficit) Liability
------------ ------------ ---------- ----------- ------------- ------------ -------------
BALANCES AT SEPTEMBER 2, 1995 $4,040,000 2,020,000 $297,003 2,970,026 $15,106,984 ($8,762,883) ($24,000)
Net income - - - - - 375,667 -
Dividends on preferred stock - - - - - (15,121) -
Minimum pension liability - - - - - - -
Conversion of stock (49,900) (24,950) 4,900 49,000 45,000 - -
Issuance of common stock - - 3,228 32,286 33,095 - -
---------- --------- -------- --------- ----------- ------------ ---------
BALANCES AT AUGUST 31, 1996 $3,990,100 1,995,050 $305,131 3,051,312 $15,185,079 ($8,402,337) ($24,000)
Net income - - - - - 2,415,825 -
Dividends on preferred stock - - - - - (399,010) -
Minimum pension liability - - - - - - 24,000
Issuance of common stock - - 10,117 101,171 156,093 - -
---------- --------- -------- --------- ----------- ------------ ---------
BALANCES AT AUGUST 30, 1997 $3,990,100 1,995,050 $315,248 3,152,483 $15,341,172 ($6,385,522) $0
Net income - - - - - 1,974,932 -
Redemption of preferred stock (3,115,186) (1,557,593) - - - (1,666,382) -
Conversion of preferred stock (874,914) (437,457) 72,276 722,762 802,638 - -
Dividends on preferred stock - - - - - 24,434 -
Minimum pension liability - - - - - - (262,782)
Issuance of common stock - - 1,677 16,768 39,406 - -
---------- --------- -------- --------- ----------- ------------ ---------
BALANCES AT AUGUST 29, 1998 - - $389,201 3,892,013 $16,183,216 ($6,052,538) ($262,782)
---------- --------- -------- --------- ----------- ------------ ---------
---------- --------- -------- --------- ----------- ------------ ---------
Total
-------------
BALANCES AT SEPTEMBER 2, 1995 $10,657,104
Net income 375,667
Dividends on preferred stock (15,121)
Minimum pension liability -
Conversion of stock -
Issuance of common stock 36,323
-----------
BALANCES AT AUGUST 31, 1996 $11,053,973
Net income 2,415,825
Dividends on preferred stock (399,010)
Minimum pension liability 24,000
Issuance of common stock 166,210
-----------
BALANCES AT AUGUST 30, 1997 $13,260,998
Net income 1,974,932
Redemption of preferred stock (4,781,568)
Conversion of preferred stock 0
Dividends on preferred stock 24,434
Minimum pension liability (262,782)
Issuance of common stock 41,083
-----------
BALANCES AT AUGUST 29, 1998 $10,257,097
-----------
-----------
See accompanying notes.
F-5
Page 20
DMI FURNITURE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended
----------------------------------------
August 29, August 30, August 31,
1998 1997 1996
---------- ---------- ----------
Cash flows from operating activities:
Net income $1,974,932 $2,415,825 $375,667
Adjustments to reconcile net income to
net cash provided (used) by
operating activities:
Depreciation and amortization 1,244,108 1,009,736 1,022,938
Amortization of loan closing costs 22,130 35,243 43,690
(Gain) loss on disposal of property,
plant and equipment 9,378 (195,642) (73,535)
Deferred income tax (219,291) 378,146 186,165
Changes in assets and liabilities:
Accounts receivable (1,103,184) (1,689,751) 3,179,702
Inventories (4,034,696) (2,408,560) 3,411,342
Other assets (3,567) 94,408 152,990
Trade accounts payable 630,732 (274,362) 30,196
Accrued pension costs (92,576) (107,910) 89,255
Deferred compensation (48,269) (55,411) (57,713)
Accrued liabilities 409,083 821,724 143,734
---------- ---------- ----------
Total adjustments (3,186,152) (2,392,379) 8,128,764
---------- ---------- ----------
Net cash provided (used) by operating activities (1,211,220) 23,446 8,504,431
---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures (2,292,252) (1,072,115) (537,959)
Payments received on notes receivable - - 135,750
Proceeds from the disposal of property,
plant and equipment 58,924 213,783 541,974
---------- ---------- ----------
Net cash provided (used) by investing activities (2,233,328) (858,332) 139,765
---------- ---------- ----------
See accompanying notes.
F-6
Page 21
DMI FURNITURE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
Years Ended
-----------------------------------------
August 29, August 30, August 31,
1998 1997 1996
----------- ----------- -----------
Cash flows from financing activities:
Borrowings from line-of-credit 24,671,660 23,000,000 15,898,000
Payments on line-of-credit (21,157,860) (20,650,000) (21,950,000)
Additions to long-term debt 5,726,584 - 50,380
Payments of long-term debt (1,180,807) (1,153,971) (1,374,366)
Restricted cash 1,080,196 (18,659) (835,830)
Cash dividends on preferred stock (374,576) - (404,537)
Proceeds from stock options exercised 41,083 73,337 -
Retirement of preferred stock (4,781,568) - -
---------- ---------- ----------
Net cash provided (used) by financing
activities 4,024,712 1,250,707 (8,616,353)
---------- ---------- ----------
Increase in cash 580,164 415,821 27,843
Cash, beginning of year 512,367 96,546 68,703
---------- ---------- ----------
Cash, end of year $1,092,531 $512,367 $96,546
---------- ---------- ----------
---------- ---------- ----------
Cash paid for:
Interest (net of amounts capitalized) $1,013,539 $1,069,502 $1,368,703
---------- ---------- ----------
---------- ---------- ----------
Income taxes $1,164,290 $701,597 $85,863
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes.
F-7
Page 22
DMI FURNITURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY - The consolidated financial statements include DMI
Furniture, Inc. and its wholly owned subsidiary, DMI Management, Inc. (DMI or
Company). All significant inter-company accounts and transactions have been
eliminated. DMI Furniture, Inc. operates in one industry - the Company
manufactures, imports, and sells low to medium priced residential furniture,
commercial and home office furniture, desks, accent furniture, and tables and
chairs. Its principal distribution channels are multi-market furniture
retailers, distributors, independent retailers, catalogers, and warehouse
clubs located primarily throughout the United States. The Company's fiscal
year consists of a fifty-two week period ending on the last Saturday in
August. Approximately every seven years the Company's fiscal year consists
of fifty-three weeks. The fiscal years presented in this report all consist
of fifty-two weeks.
INVENTORIES - Inventories are valued at the lower of cost (first-in,
first-out method) or market.
DEPRECIATION - Depreciation is provided on the basis of estimated useful
lives of the property, plant and equipment, using the straight-line method.
The useful lives of property, plant and equipment are as follows: Building
and leasehold improvements, 8-35 years; and machinery and equipment, 3-13
years.
INCOME TAXES - The Company recognizes deferred tax assets and liabilities
based upon the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method,
deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are
expected to reverse. (See Note 8 for additional information).
EARNINGS PER COMMON SHARE - Earnings per common share are based on the
weighted average number of common and common equivalent shares outstanding
during the period (1998- 4,214,781; 1997 - 6,006,353; 1996 - 5,704,628),
and assumes the conversion of the Series C Preferred Stock into common stock.
(See Note 15 for additional information)
CONSOLIDATED STATEMENTS OF CASH FLOWS - For purposes of the Consolidated
Statements of Cash Flows the Company considers all highly liquid debt
instruments with an initial maturity of three months or less at the date of
purchase to be cash equivalents.
ADVERTISING - The Company expenses advertising-type costs as incurred.
Advertising expense was approximately $1,211,000, $857,000 and $578,000 in
fiscal 1998, 1997 and 1996 respectively.
ACCOUNTING ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.
F-8
Page 23
LONG-LIVED ASSETS - In March 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" (SFAS No. 121). This standard establishes accounting standards for
evaluating the potential impairment of long-lived assets, certain identifiable
intangibles and goodwill. The Company adopted the provisions of SFAS No. 121 in
the first quarter of fiscal 1997 and the application of the standard has not
resulted in an impairment loss.
REVENUE RECOGNITION - The Company recognizes sales of its products when the
products are shipped to customers.
2. LONG-TERM DEBT
Long-term debt consists of the following:
1998 1997
Economic Development Revenue
Bonds; payable in twelve equal monthly
payments beginning in fiscal 2002;
weekly adjustable coupon interest rate
(3.6% on 8/29/98) and payable monthly. $2,230,000 $2,545,000
Economic Development Revenue
Bonds; payable in twelve equal monthly
payments beginning in fiscal 2003;
weekly adjustable coupon interest rate
(3.6% on 8/29/98) and payable monthly. 2,020,000 2,275,000
Term note payable to bank; due in
45 monthly principal installments of
$116,666.67 through 5/31/02;
interest at prime+.25% (8.5%)
or LIBOR+2.5% (7.5%). 5,300,000 0
Term note payable to bank; due in
60 monthly principal installments of
$8,333.33 and final payment of $1 million
on 8/31/03; interest at prime+.25%
(8.5%) or LIBOR+2.5% (7.5%). 1,500,000 0
Term note payable to bank; due
in monthly principal installments of
$33,333; interest at prime (8.5%)
or LIBOR+1.75% (7.625%). 0 1,645,445
$20,000,000 revolving master note
payable to bank; interest at prime+.25%
(8.5%) or LIBOR+2.5% (7.50%);
expires December, 2000. 11,833,419 8,319,619
Capital leases on equipment; payable
quarterly through March, 2000;
interest at various rates. 33,605 72,383
----------- -----------
22,917,024 14,857,447
Less portion due within one year 1,524,113 2,011,860
----------- -----------
$21,392,911 $12,845,587
----------- -----------
----------- -----------
F-9
Page 24
With respect to the term notes and revolving loan above, the Company has
the option of borrowing based on prime rate + .25% or London Interbank
Offered Rate (LIBOR) + 2.50%. As of August 29, 1998, $11 million of the
revolver note balance and $3 million of the term loan were LIBOR priced.
Substantially all assets are pledged to collateralize long-term debt.
On August 29, 1998, the Company had $4,675,000 additional borrowings
available under the formula for calculating its available borrowings.
With respect to the Economic Development Revenue Bonds (Bonds), the
Company has the option to establish the Bonds' interest rate form (variable
or fixed interest rate). When the Bonds are in the variable rate form, or at
the end of a fixed interest rate period, the Bondholders reserve the right to
demand payment on the Bonds. In the event that any of the Bondholders
exercise their rights, a remarketing agent is responsible for remarketing the
Bonds on a best efforts basis for not less than the outstanding principal and
accrued interest. In the event the Bonds are not able to be remarketed the
lender is committed to providing financing for up to 372 days. The letters
of credit expire in 1999 unless earlier extended by the bank. As a result of
these bank commitments, the Bonds are classified as long-term debt in the
accompanying balance sheet.
The aggregate maturities of long-term debt and capital leases for the
next five fiscal years and thereafter are as follows:
1999 $1,524,113
2000 1,509,485
2001 13,333,419
2002 1,571,666
2003 2,295,001
Thereafter 2,683,340
-----------
$22,917,024
-----------
The Company's bank financing agreement contains restrictive covenants
that require the Company, among other things, to maintain a fixed charge
ratio, tangible net worth, and ratio of total funded debt to EBITDA, all as
defined in the bank financing agreement. The financing agreement further
restricts the Company from, among other things, without prior written
consent, redeeming or purchasing any of its outstanding capital stock;
acquiring, merging or consolidating with any other business; paying
dividends; and, acquiring capital assets in excess of the annual
depreciation.
3. LEASE COMMITMENTS
The Company leases certain of its facilities and equipment under operating
leases. The leases generally require the Company to pay taxes, insurance,
maintenance and utilities. Some of the leases contain renewal options.
F-10
Page 25
Future minimum lease payments at August 29, 1998 under these leases are as
follows:
1999 $684,416
2000 480,504
2001 269,824
2002 214,678
2003 7,966
----------
Total minimum payments $1,657,388
----------
----------
Rent expense under operating leases charged to operations during fiscal
years 1998, 1997 and 1996 was $784,525, $593,949 and $747,412, respectively.
4. COMMITMENTS AND CONTINGENCIES
The Company is currently subject to claims under federal and state
environmental laws based on allegations that the Company had hazardous
substances disposed of at three waste disposal sites. After depositing
$57,000 in a trust fund under the terms of a tentative settlement of claims
arising from one site and paying its portion of preliminary investigation and
remediation costs at the other two sites, the Company retains a reserve of
approximately $42,000 against potential environmental liabilities. Due to
the limited nature of the Company's involvement in these environmental
proceedings, the availability of certain defenses, and the involvement of
many other parties with substantial financial resources in the proceedings,
the Company does not anticipate, based on currently available information,
that potential environmental liabilities arising from these proceedings are
likely to exceed the amount of the Company's reserve by an amount that would
have a material effect on the Company's financial condition, results of
operations or cash flows. Expenses for the three years presented were not
material.
The Company has entered into individual employment agreements with
certain of its officers which expire at various times through August 31,
2000. Certain of these agreements provide for lump sum payments in the event
employment is terminated as a result of a change in ownership of the Company
as defined in the agreements.
5. CONVERTIBLE PREFERRED STOCK
On August 28, 1998 the Company retired its Series C Preferred Stock. Of
the 1,995,050 Series C shares outstanding, 1,557,593 shares were redeemed for
$3.00 per share by the Company as stated in its Certificate of Incorporation,
and 437,457 Series C shares were converted into 722,762 common shares at the
option of the holders. The redeeming shareholders were paid a final dividend
of $75,319 on the date of redemption. The redemption of the 1,557,593 Series
C shares caused a $1,666,000 charge to income applicable to common stock
because the $3.00 redemption price exceeded the par value of the Series C
stock of $2.00, and the Company recognized approximately $109,000 in
transaction costs. The redemption was funded through term bank debt and cash.
There were $399,010 of preferred dividends accrued in fiscal 1997 of which
$374,576 were paid in fiscal 1998.
F-11
Page 26
6. STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued To Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options.
Under APB 25, because the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant,
no compensation expense is recognized.
Had compensation cost for all option grants to employees and directors
been determined consistent with FASB Statement No. 123, the Company's net
income and earnings per share would have affected as follows. Because the
method of accounting required by SFAS No. 123 has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost
may not be representative of that to be expected in future years.
1998 1997 1996
---------- ---------- --------
Net income: As reported $1,975,000 $2,416,000 $376,000
Proforma 1,907,000 2,386,000 369,000
Diluted earnings per common share:
As reported $.07 (1) $.40 $.07
Proforma .06 (1) .40 .06
(1) Net income applicable to common stock was used to compute fiscal 1998
diluted earnings per common share. See Note 5 for additional information.
Stock options granted prior to February 22, 1994 were granted pursuant
to the Amended Employee Incentive Stock Option Plan approved by stockholders
February, 1989. In February, 1994 the stockholders approved the 1993 Long
Term Incentive Stock Plan For Employees under which the Company is authorized
to issue options to selected key employees to acquire a maximum of 600,000
shares of its common stock in addition to option shares outstanding at the
time of its adoption. The option price cannot be less than 100% of the fair
market value of the stock at date of grant for Incentive Stock Options (or
110% for a 10% beneficial owner), and not less than 50% of the fair market
value at date of grant for Non-Qualified Stock Options. Options vest at the
cumulative rate of 33%, 67%, and 100% on the first three anniversaries of the
date of grant and expire ten years from date of grant. A summary of the
option transactions during the three years ended August 29, 1998 follows:
F-12
Page 27
1998 1997 1996
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Options Exercise Options Exercise Options Exercise
(000) Price (000) Price (000) Price
------- -------- ------- -------- ------- --------
Outstanding-beginning
of year 707 $1.80 655 $1.66 606 $1.66
Granted 100 2.88 85 2.77 97 1.63
Exercised (2) 1.38 (33) 1.38 - -
Expired - - - - (48) 1.57
--- --- ---
Outstanding-end of
year 805 $1.92 707 $1.80 655 $1.66
--- --- ---
Exercisable at end of
year 616 $1.71 557 $1.68 559 $1.66
Weighted-average fair
value of options granted
during the year $1.64 $1.66 $ .89
Exercise prices for options outstanding as of August 29, 1998 ranged from
$1.38 to $3.00. The weighted-average remaining contractual life of those
options is 6.1 years.
Included in the above are non-qualified options for 180,000 shares of
common stock for $1.38 to $2.50 per share to certain employees/directors
which have a total option price of approximately $390,000. The options are
immediately exercisable for up to ten years after the date of grant.
The Company has a stock option plan under which the Company is authorized
to issue options to non-employee directors to acquire a maximum of 160,000
shares of its common stock for options granted prior to March 15, 1998. A
new plan was adopted effective March 15, 1998 authorizing the Company to
issue options to non-employee directors to acquire a maximum of 100,000
shares of its common stock. The option price is the closing bid price for
shares on NASDAQ on the date of grant. Options vest at the cumulative rate
of 50% and 100% on the first two anniversaries of the date of grant and
expire ten years from date of grant. A summary of the option transactions
during the three years ended August 29, 1998 follows:
1998 1997 1996
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Options Exercise Options Exercise Options Exercise
(000) Price (000) Price (000) Price
------- --------- ------- -------- ------- --------
Outstanding-beginning
of year 52 $2.15 90 $2.15 87 $2.17
Granted 6 2.81 21 2.81 3 1.56
Exercised (3) 1.98 (14) 1.98 - -
Expired - 2.25 (45) 2.25 - -
----- --- --
Outstanding-end of
year 55 $2.38 52 $2.38 90 $2.15
----- --- --
----- --- --
Exercisable at end of
year 39 $2.12 30 $2.12 85 $2.19
Weighted-average fair
value of options granted
during the year $1.73 $1.70 $ .94
F-13
Page 28
Exercise prices for options outstanding as of August 29, 1998 ranged from
$1.19 to $3.50. The weighted-average remaining contractual life of those
options is 6.3 years.
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in fiscal 1998, 1997, and 1996: expected volatility
of 41.7 percent; risk-free interest rate of 4.62 percent; expected lives for
options of 10 years; and expected dividend yield of 0 percent based on the
Company's history of no dividend payments on common stock.
7. PENSION PLANS
The Company has a defined benefit pension plan which covers substantially
all hourly employees. Pension costs charged to operations were approximately
$116,000 in fiscal 1998, $142,000 in fiscal 1997, and $169,000 in fiscal 1996.
Retirement benefits are based on years of credited service multiplied by a
dollar amount negotiated under collective bargaining agreements. The Company's
policy is to fund normal costs and amortization of prior service costs at a
level which is equal to or greater than the minimum required under ERISA.
Net pension costs for the defined benefit plan in fiscal 1998, fiscal 1997
and fiscal 1996 was computed as follows:
1998 1997 1996
---- ---- ----
Service cost-benefits
earned $59,554 $56,352 $ 70,598
Interest cost on projected
benefit obligation 205,198 197,872 191,020
Actual return on plan assets (172,984) (135,773) (126,034)
Amortization of transition
obligation 9,907 9,907 13,686
Amortization of unrecognized
prior service cost 13,990 13,990 19,327
-------- -------- --------
Net pension expense $115,665 $142,348 $168,597
-------- -------- --------
The funded status of the defined benefit plan at August 29, 1998 and August
30, 1997 is shown below:
F-14
Page 29
Actuarial present value of
accumulated plan benefits:
1998 1997
------ ------
Vested $(3,020,550) $(2,481,792)
Non-vested (53,109) (99,171)
----------- -----------
Accumulated/projected benefit
obligation (3,073,659) (2,580,963)
Plan assets at fair market
value 2,266,559 1,980,215
----------- -----------
Projected benefit obligation
in excess of plan assets (807,100) (600,748)
Unrecognized transition
liability 118,878 128,785
Unrecognized net (gain)/loss 398,154 (60,073)
Unrecognized prior service cost 213,434 227,454
Adjustment required to
recognize minimum liability (730,466) (296,166)
----------- -----------
Accrued pension liability $ (807,100) $ (600,748)
----------- -----------
The projected benefit obligation for service rendered was determined
using an assumed discount rate of 7.25% and an assumed rate of return on plan
assets of 8.25%. The assets of the plan are invested in equity and fixed
income securities.
The Company has a defined contribution 401(k) type retirement plan for
salaried personnel and one for hourly personnel. Costs charged to
operations in fiscal 1998, fiscal 1997 and fiscal 1996 for the salaried plan
were $62,600, $68,800 and $57,000, respectively. Costs charged to operations
in fiscal 1998 and fiscal 1997 for the hourly plan were $89,100 and $69,900.
The Company had a non-qualified deferred compensation plan that was
terminated for all non-retired executive participants during fiscal 1989.
The present value of future payments under the plan accrued at August 29,
1998 and August 30, 1997 is approximately $273,000 and $321,000,
respectively. Plan costs charged to operations were approximately $29,000 in
fiscal 1998, $35,000 in fiscal 1997, and approximately $40,000 in fiscal 1996.
F-15
Page 30
8. Income taxes
The tax effect of each temporary timing difference and carryforward that
gives rise to significant deferred tax assets and deferred tax liabilities as
of August 29, 1998 and August 30, 1997 are as follows (in thousands):
1998 1997
----- ------
Accumulated tax depreciation of property and equipment
in excess of accumulated book depreciation and other
related items $(595) $(617)
Various accruals and reserves 885 722
Inventory 175 131
Other 44 53
----- ------
Net deferred tax asset $509 $289
----- ------
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax asset will not be realized. Management
believes the existing net deductible temporary differences will reverse
during the periods in which the Company generates net taxable income. Based
on this belief and the Company's historical and current pre-tax earnings as
well as its expectations for the future, management believes it is more
likely than not that the Company will realize its deferred tax assets. As a
result, no valuation allowance was required as of August 29, 1998 and August
30, 1997. Further, except for the effects of the reversal of net deductible
temporary differences, the Company is not currently aware of any factors that
would cause significant differences between taxable income and pre-tax book
income in future years.
Income tax expense consisted of the following (in thousands):
Twelve Months Ended
Aug. 29, Aug. 30, Aug. 31,
1998 1997 1996
-------- -------- --------
Currently payable $1,376 $1,085 $47
Deferred (220) 378 186
-------- -------- --------
Total $1,156 $1,463 $233
-------- -------- --------
-------- -------- --------
The deferred tax provision for the twelve months ended August 29, 1998
and August 30, 1997, and August 31, 1996 consisted of the following (in
thousands):
1998 1997 1996
------ ------ ------
Utilization of net operating loss carryforwards $ - $130 $13
Utilization of AMT credit carryforwards - 187 -
Excess tax over book depreciation (22) 32 76
Other (198) 29 97
------ ------ ------
$(220) $ 378 $186
------ ------ ------
------ ------ ------
F-16
Page 31
The provision for income taxes differs from that computed at the federal
statutory corporate tax rate as follows (in thousands):
Twelve Months Ended
Aug.29, Aug. 30, Aug. 31,
1998 1997 1996
------ ------- --------
Tax at 34% statutory
rate $1,073 $1,319 $207
State income taxes,
net of federal
benefit 83 144 26
------ ------- --------
Income Taxes $1,156 $1,463 $233
------ ------- --------
------ ------- --------
9. OTHER INFORMATION
Inventories - Inventories are summarized below:
1998 1997
----------- ----------
Finished goods $10,898,000 $6,789,000
Work in process 512,000 514,000
Raw material 4,886,000 4,959,000
----------- ----------
$16,296,000 $12,262,000
----------- ----------
Accrued liabilities - Accrued liabilities are summarized below:
1998 1997
----------- ----------
Property, payroll and
other taxes $1,032,776 $1,028,533
Payroll, bonuses and
commissions 1,750,909 1,439,146
Interest 122,836 76,879
Other 222,008 174,618
----------- ----------
$3,128,259 $2,719,176
----------- ----------
----------- ----------
F-17
Page 32
10. QUARTERLY FINANCIAL DATA
Quarterly financial data (unaudited - in thousands of dollars except per
share amounts)
First Second Third Fourth
Fiscal 1998 Quarter Quarter Quarter Quarter Year
- ----------- ------- ------- ------- ------- -------
Net sales $17,439 $12,785 $16,008 $18,495 $64,727
Gross profit 4,135 2,629 3,757 3,915 14,436
Net income 810 116 549 500 1,975
Diluted earnings per
common share (1) $.13 $.02 $.09 $(.25) $.07
First Second Third Fourth
Fiscal 1997 Quarter Quarter Quarter Quarter Year
- ----------- ------- ------- ------- ------- -------
Net sales $15,789 $13,867 $12,530 $14,248 $56,434
Gross profit 3,778 3,057 3,191 3,151 13,177
Net income (loss) 861 435 570 550 2,416
Diluted earnings per
common share (1) $.15 $.07 $.09 $.09 $.40
(1) Diluted earnings per common share was calculated by dividing net income by
the weighted average number of common and common equivalent shares
outstanding during the period. (Except in the fourth quarter of fiscal 1998
in which the loss on redemption of preferred stock was deducted from net
income in the computation). (See Notes 1,5, and 15). Diluted earnings per
share are computed independently for each of the quarters presented.
Therefore, the sum of the quarterly per common share information may not
equal the annual diluted earnings per common share.
11. Major customers
The Company's six largest customers accounted for approximately 51% of
the Company's total sales in fiscal 1998. One customer, Sam's Club division
of Wal-Mart Stores, Inc., accounted for more than 10% of the Company's total
net sales for fiscal 1998. Six customers accounted for 42% of sales in fiscal
1997 and four customers accounted for 34% of sales in fiscal 1996, one of
which accounted for approximately 13% of sales. The loss of more than one of
these customers at the same time or one of the largest six could have a
material effect on the business of the Company. As of August 29, 1998, one
customer accounted for approximately 23% of total accounts receivable. The
Company's customers include large furniture chain store retailers, wholesale
clubs, catalog retailers, and independent distributors, as well as numerous
smaller retailers.
F-18
Page 33
12. PLANT CLOSING
The Company permanently closed its Gettysburg, Pennsylvania
manufacturing plant and warehouse facilities and consolidated the production
and distribution activities of those operations into its Huntingburg,
Indiana facilities during the second quarter of fiscal 1996. Consolidation
of production and warehousing into the Indiana facilities resulted in lower
manufacturing and warehousing overhead and plant administrative costs. The
Company recorded a pre-tax charge of approximately $995,000 in the first
quarter of fiscal 1996 related to this closing. The charge included book
provisions of approximately: $160,000 related to the recording of property,
plant, and equipment at net realizable value; $100,000 for recording certain
inventory items at net realizable value; $145,000 for a pension curtailment
loss; $125,000 for severance pay; and approximately $465,000 for costs to be
incurred after operations cease associated with the closing as well as
expected future occupancy related costs. The severance pay accrual related
to the termination of certain salaried and support staff personnel. None of
the above referenced costs related to the relocation or consolidation of
production into the Company's Huntingburg, Indiana facility. During the
fourth quarter of fiscal 1996 the Company sold the Gettysburg, Pennsylvania
manufacturing plant and realized gross proceeds of approximately $375,000.
Based upon this transaction approximately $127,000 of the book provision
related to the initial recording of property, plant and equipment at net
realizable value was not needed. The net plant closing charge included in
the consolidated statements of income was $868,000 for fiscal 1996. As of
August 29, 1998 the only Gettysburg related asset carried is a parcel of
unimproved land at cost of $10,000 and there are no Gettysburg plant closing
related liabilities. During fiscal 1997 it was determined that the remaining
$119,000 of the book provision related to the initial recording of property,
plant and equipment at net realizable value was not needed.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The book values of cash and cash equivalents, trade receivable and trade
payables are considered to be representative of their respective fair values
because of the immediate or short-term maturities of these financial
instruments. The fair value of the Company's debt instruments approximated
the book value because a substantial portion of the underlying instruments
are variable rate notes which reprice frequently.
14. SOURCE AND SUPPLY OF LABOR
Approximately 156 of the Company's 441 employees are covered by 2
collective bargaining agreements. One contract with the union representing
77 employees is due to expire in fiscal 1999.
15. EARNINGS PER COMMON SHARE
In March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No.
128"). This standard modifies disclosure requirements for companies required
to report earnings per share ("EPS") to include presentations of Basic EPS
(which includes no dilution of common stock equivalents) and, if applicable,
Diluted EPS (which reflects the potential dilution of common stock
equivalents).
F-19
Page 34
The standard was effective for the Company with the completion of its fiscal
1998 second quarter.
(Thousands except per share amounts)
1998 1997 1996
-------- ------- -------
Net income $ 1,975 $ 2,416 $ 376
Less: preferred stock dividends - (399) -
Less: loss on preferred redemption (1) (1,666) - -
------- ------- -------
Net income applicable to common stock $ 309 $ 2,017 $ 376
------- ------- -------
------- ------- -------
Average common shares outstanding 3,261 3,114 2,999
Common stock equivalents-dilutive
options and convertible preferred
stock 954 2,892 2,706
------- ------- -------
Average shares of common stock
and equivalents outstanding 4,215 6,006 5,705
------- ------- -------
------- ------- -------
Basic earnings per share $ .09 $ .65 $ .13
------- ------- -------
(Net income applicable to common stock
divided by average common shares
outstanding)
Diluted earnings per share (2) $ .07 $ .40 $ .07
------- ------- -------
(Net income divided by average shares
of common stock and equivalents
outstanding)
(1) On August 28, 1998 the Company redeemed its Series C Preferred Stock which
caused a $1,666,000 charge to net income applicable to common stock. See
Note 5 for more information.
(2) For fiscal 1998, the loss on redemption of preferred stock is deducted from
net income in computing diluted earnings per share because not deducting it
would be anti-dilutive.
F-20
Page 35
Item 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES.
None.
II-8
Page 36
Part III.
Items 10, 11, 12 and 13.
The information called for by this part (Items 10, 11, 12 and 13) is
incorporated by reference from the Company's definitive proxy statement to be
filed with the Securities and Exchange Commission not later than December 28,
1998.
III-1
Page 37
Part IV.
Item 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON
FORM 8-K.
The financial statements required by Sections 14(a) 1 and 2 and
14(d) are included under Item 8.
The exhibits required by Item 14(a) 3 are listed on the index to
Exhibits.
Schedules required by Item 14(d) follow the signature pages.
Item 14(b). REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the fiscal
quarter ended August 29, 1998. The Company filed a report
pursuant to Item 5 on Form 8-K dated August 31, 1998 relating to
the retirement of its Series C Preferred Stock.
IV-1
Page 38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, hereunto duly authorized.
DATED: October 27, 1998 DMI FURNITURE, INC.
By:/S/Donald D. Dreher
------------------------
President, Chairman of the Board and Chief
Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Vice President, Finance,
Chief Financial Officer
and Principal Accounting
/S/Joseph G. Hill Officer and Director October 27, 1998
- ---------------------
Joseph G. Hill
/S/Joseph L. Ponce Director October 27, 1998
- ---------------------
Joseph L. Ponce
/S/Thomas M. Levine. Director October 27, 1998
- ---------------------
Thomas M. Levine
/S/David Martin Director October 27, 1998
- ---------------------
David Martin
President, Chief
Executive Officer, Chairman
/S/Donald D. Dreher of the Board and Director October 27, 1998
- ---------------------
Donald D. Dreher
IV-2
Page 39
DMI FURNITURE, INC.
SCHEDULE II
Additions
Balance at Charged Balance
Beginning to Costs at End
Description of period and Expenses Deductions (A) of Period
Allowance for Doubtful Accounts:
Year ended August 31, 1996 $132,177 $ 82,913 $105,099 $109,991
-------- -------- -------- --------
Year ended August 30, 1997 $109,991 $125,200 $ 93,778 $141,413
-------- -------- -------- --------
Year ended August 29, 1998 $141,413 $ 96,992 $ 88,529 $149,876
-------- -------- -------- --------
(A) Charge-offs net of recoveries.
S-1
Page 40
Item 14(a)3. EXHIBITS
10-K
Page No.
*********** (3)(a) Restated Certificate of Incorporation
* (b) Bylaws
*********** (4)(a) Restated Certificate of Incorporation
* (b) Bylaws
******* (10)(a) 1988 Stock Option Plan for Employees
********* (b) Non-employee Director Stock Option Program
********** (c) Form of Indemnification Agreement
********** (d) Amendment of Employment Agreement and Officer
Severance Agreement dated as of May 19, 1988
between Joseph G. Hill and DMI Furniture, Inc.
(e) First Amendment to Amended and Restated Credit
Agreement between DMI Furniture, Inc. and Bank
One, Indiana, National Association dated July
2, 1998. E1 -E17
(f) Extension and Renewal of Employment Agreement
as of October 9, 1997 between DMI Furniture,
Inc. and Donald D. Dreher. E18-E24
(g) Second Amendment to Amended and Restated
Credit Agreement between DMI Furniture, Inc.
and Bank One, Indiana, National Association
dated August 27, 1998. E25-E38
********** (h) Amendment of Employment Agreement and Officer
Severance Agreement dated as of May 19, 1988
between Donald D. Dreher and DMI Furniture,
Inc.
** (i) Amended and Restated Credit Agreement between
Bank One, Indianapolis, National Association,
and DMI Furniture, Inc. dated October 3, 1997.
******** (j) Loan Agreement between City of Huntingburg,
Indiana and DMI Furniture, Inc. dated June 1,
1994.
********* (k) 1993 Long Term Incentive Stock Plan for
Employees
********* (l) Stock Compensation and Deferral Plan for
Outside Directors.
********* (m) Loan Agreement between City of Huntingburg,
Indiana and DMI Furniture, Inc. dated as of
October 1, 1993.
(n) Extension and Renewal of Employment Agreement
as of October 9, 1997 between DMI Furniture,
Inc. and Joseph G. Hill. E39-E45
***** (o) 1998 Stock Option Plan For Independent
Directors
Page 41
(21) List of subsidiaries E-46
(23) Consent of Arthur Andersen LLP to
incorporation of audit report into
S-8 registration statements. E-47
(27) Financial Data Schedule E-48
(99) Undertakings E-49
- -------------------------------------------------------------------------------
* Incorporated by reference to annual report on Form 10-K for
the fiscal year ended August 27, 1994
** Incorporated by reference to report on Form 10-Q for the
fiscal quarter ended November 29, 1997
***** Incorporated by reference to Proxy Statement dated February
20, 1998.
****** Incorporated by reference to Exhibit 10 to report on Form 10-Q
for the second quarter of fiscal year ended August 28, 1993.
******* Incorporated by reference to Registration Number 33-64188
******** Incorporated by reference to Form 10-Q for the fiscal quarter
ended May 28, 1994.
********* Incorporated by reference to Form 10-Q for the fiscal quarter
ended February 26, 1994.
********** Incorporated by reference to Form 10-K for the fiscal year
ended August 28, 1993.
*********** Incorporated by reference to Form 10-K for the fiscal year
ended August 31,1996
Page 42