<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 31, 1996
[ ] 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
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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 ofincorporation) (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
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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. [ ]
(Cover page 1 of 2 pages)
TOTAL PAGES - 115
<PAGE>
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $4,883,123 as of August 31, 1996.
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 31, 1996
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Common Stock, Par Value $.10 per Share 3,051,312
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Annual Meeting of
Stockholders on December 20, 1996 are incorporated by reference into Part III.
Page 2
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Part I.
Item 1. BUSINESS
(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 31, 1996, 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, accent furniture, home and office desk 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 3% of the Company's
sales in fiscal 1996. Approximately 14% of the Company's sales are accounted for
by sale to wholesale distributors. The Company's sales are made principally
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 attends
the annual NeoCon commercial office furniture tradeshow.
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
46% 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's 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.
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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
DMI Trading Company 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 the Company's liquidity.
The Company's six largest customers accounted for approximately 34% of the
Company's total sales in fiscal 1996. 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 31, 1996, one
customer accounted for approximately 10% 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 Company's backlog of orders at August 31, 1996 and September 2, 1995
was $12,635,000 and $9,864,000, respectively. The increase in the backlog from
1995 is primarily due to increased demand for the Company's office furniture.
The entire backlog of orders at August 31, 1996 is expected to be filled by
November 30, 1996.
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.
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The Company believes it is the largest manufacturer and marketer of
assembled home desks in the United States and is a leading producer of popular
priced, "promotional" bedroom furniture and popular priced wood office
furniture.
The Company employs approximately 425 employees, of whom approximately 156
are covered by collective bargaining contracts. 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 closed its Gettysburg, Pennsylvania manufacturing plant and
warehouse 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.
I-3 Page 5
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The productive capacity and extent of utilization of each of the Company's
manufacturing facilities for the fiscal year ended August 31, 1996 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 1996
Facility(1) Capacity Production %Utilized
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(dollars in thousands)
Ferdinand, Ind. Plant $14,000 $10,500 75%
Huntingburg, Ind. 5th St. Plant 20,100 15,700 78%
Huntingburg, Ind. Chestnut
Street Plant 20,700 16,700 81%
Huntingburg, Ind. Fabricator 9,200 8,900 97%
Ferdinand, Ind. Sawmill/
Dimension Plant 7,300 5,900 81%
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$71,300 $57,700 81%
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(1) Gettysburg, Pennsylvania plant omitted as it was permanently closed during
fiscal 1996.
Item 3. LEGAL PROCEEDINGS.
The Company has been identified as a potentially responsible party ("PRP")
by the Environmental Protection Agency ("EPA") or state agencies, or has had
claims asserted against it by other parties, in proceedings relating to six
waste disposal facilities which may be subject to remedial action under
Superfund or similar state statutes, including the action described in the
following paragraph. These proceedings are based on allegations that the Company
had hazardous substances disposed of at these sites. At each site, many other
parties have been named as PRPs or identified as potentially responsible for
remediation, and the group of PRPs undertaking remediation includes many
companies, including "Fortune 500" companies, believed to have substantial
financial resources. The Company has paid a portion of the costs of preliminary
investigation and remediation at three sites, and has agreed to settle claims
against it made by PRPs at two sites. With respect to these sites, the total
amount paid by the Company to date or subject to possible settlement is
approximately $39,000. The Company has recorded a reserve of approximately
$126,000 against potential environmental liabilities, including potential
liabilities in connection with the site described below. The ultimate costs of
the Company's environmental liabilities cannot be estimated with certainty,
primarily due to several uncertain factors at one of the sites subject to legal
proceedings. These factors principally are the level of contamination, the
selection of remedial methods, the stage of investigation at the site, and the
determination of the Company's liability in proportion to owner/operators of the
site and other responsible parties. Due to the limited nature of the Company's
involvement in these 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 Note 4 to the consolidated financial statements.
I-4 Page 6
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In 1988, the Company was named out of over one thousand customers at the
Keystone Sanitation Company landfill (the "Keystone Site") in Union Township,
Pennsylvania, as one of 31 PRPs potentially responsible for remediation of this
site. After the Company provided the EPA with information concerning the nature
of the substances allegedly contributed by the Company, which the Company
believes did not include the principal hazardous substances of concern at the
site identified in the remedial investigation, the EPA did not name the Company
in an Administrative Order issued on June 28, 1991, requiring twelve other PRPs
to undertake remedial action at the Keystone Site. On September 27, 1993, the
United States filed a lawsuit in federal court for the Middle District of
Pennsylvania against eleven PRPs, who are challenging the EPA's proposal for
remedial action at the Keystone Site, which was estimated to cost $9,156,950.
The parties have estimated that total site costs will be $17 million. On August
11, 1994, the Company was named, along with over 250 PRPs, as a third-party
defendant by the original PRP defendants. Based on a court-directed production
of information, the Company was assessed a preliminary allocation of liability
among generators of waste of approximately 1.35% by a consultant. The Company
has not paid any amount toward the cost of investigation or remediation at the
Keystone site. The Company is participating with other third-party defendants in
settlement negotiations and in filing a fourth-party complaint joining over 500
additional parties in the litigation. The Company believes it has a reasonable
basis upon which to dispute, and has disputed, both the volume of material
attributed to it, and the allegation that material contributed by the Company
requires any remediation. The Company believes it is likely that a significant
share of the liability will be assigned to the former owners and operators who
have considerable assets. In addition, the federal court has held that a
national waste management company that acquired the Keystone business is liable
as a successor to the former owners and operators.
The Company is a defendant in various lawsuits arising in the normal course
of business including the environmental matters noted above, and which in
management's opinion, are not material to the results of operations or financial
position of the Company, or are adequately covered by insurance.
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.
I-5 Page 7
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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
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1st Quarter of 1995 $ 2.06 $ 1.50
2nd Quarter of 1995 $ 1.88 $ 1.50
3rd Quarter of 1995 $ 1.88 $ 1.50
4th Quarter of 1995 $ 1.56 $ 1.13
1st Quarter of 1996 $ 1.25 $ 1.06
2nd Quarter of 1996 $ 1.69 $ 1.13
3rd Quarter of 1996 $ 2.00 $ 1.13
4th Quarter of 1996 $ 2.00 $ 1.38
(b) Approximate Number of Equity Security Holders
Title of Class- Common Stock, $.10 Par Value
Approximate Number of Stockholders as of August 31, 1996 - 1,689
(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. The Company's Series
C Preferred Stock agreement restricts payment of cash dividends on the common
stock to 10% of the Company's net income for the immediately preceding fiscal
year, after deduction of dividends paid in that year on the Series C Preferred
Stock. In addition, the Company's present financing agreement with Bank One,
Indianapolis, 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.
II-1 Page 8
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ITEM 6.
DMI FURNITURE, INC.
SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
Year Ended
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August 31, September 2, August 27, August 28, August 29,
1996 1995 1994 1993 1992
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(Amounts in thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
Net sales $55,563 $67,773 $60,932 $50,719 $48,018
Net income from continuing operations 376 804 (3) 1,101 1,627 917
Earnings per common share $.07 $.14 $.19 $.29 $.16
---- ---- ---- ---- ----
---- ---- ---- ---- ----
Total assets $31,178 $38,512 $40,041 $29,443 $26,679
Long-term debt and capital
lease obligations 13,661 21,037 20,352 14,395 13,097
</TABLE>
Notes to selected financial data:
Note 1 - This summary should be read in conjunction with the related financial
statements and notes.
Note 2 - 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 for change in accounting
principle, and, $(50,000) or $(.01) charge for extraordinary item.
II-2 Page 9
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information set forth in "Management's Discussion and Analysis of
Financial Condition and results of Operations" below and in "Business" includes
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act, and is subject to the safe harbor
created by those sections. 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;
changes in fashion or tastes; general conditions in the economy and capital
markets; demographic changes; competition; and other factors identified in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and in "Business" and in the Company's filings with the Securities
and Exchange Commission.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company has a $17,500,000 credit agreement with Bank One, Indianapolis,
N.A. comprised of a $4,000,000 five-year term loan (outstanding balance
$2,169,000 as of August 31, 1996) and a maximum revolving master note loan
commitment of $13,500,000 (outstanding balance $5,969,619 as of August 31,
1996). On August 31, 1996, the Company had $1,666,000 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, preferred stock dividends, 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 50 days for fiscal 1996, which is a decrease from
the 53 days for fiscal 1995. The Company believes it will be able to generate
enough cash in fiscal 1997 from operations to make scheduled payments on its
long term debt.
Key elements of the Consolidated Statement of Cash Flows (in thousands):
1996 1995 1994
---- ---- ----
Net cash provided (used) by operating activities $8,504 $207 (1,002)
Cash provided (used) in investing activities 140 (642) (4,200)
--- ----- -------
Net cash flows from operating and investing
activities 8,644 (435) (5,202)
Cash provided (used) by financing activities (8,616) 302 5,362
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Net change in cash and cash equivalents $28 $(133) $160
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During fiscal 1996 , the Company provided cash flows from operating
activities of $8,504,000 compared to cash flows provided of $207,000 the
previous year. This improvement is 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. Investing activities provided $140,000 in
fiscal 1996 compared to funds used of $642,000 the previous year. The fiscal
1996 investing funds were provided through the sale of certain idle assets in
Gettysburg, Pennsylvania as well the final payments on an Alabama idle property
sold several years ago. The fiscal 1995 expenditures were primarily for ongoing
plant modernization and in fiscal 1994 expenditures were primarily on its new
warehouse/distribution facility
II-3 Page 10
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and the purchase and equipping of the new fabrication plant. Funds used for
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. Financing activities in fiscal 1994 provided $5,362,000 in cash
primarily from the Company's $3.4 million Economic Development Revenue Bond used
for the expansion mentioned above.
During the third quarter of fiscal 1994, the Company called its 1989
Economic Development Revenue Bond for redemption and refinancing into lower
interest rate bonds. This refunding was completed in June, 1994 and resulted in
substantial interest savings for the Company since that date.
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 1997 budget for capital expenditures is approximately
$523,000. These proposed expenditures are principally to upgrade and modernize
the Company's manufacturing facilities. The Company anticipates that its 1997
internal cash flow and additional borrowings available under its credit
agreement will be sufficient to pay for these expenditures. Inventory turnover
was 3.9 in fiscal 1996 and 4.0 in fiscal 1995. This slight decrease was the
result of lower sales for fiscal 1996.
The Company has been identified as a potentially responsible party ("PRP")
by the Environmental Protection Agency ("EPA") or state agencies, or has had
claims asserted against it by other parties, in proceedings relating to six
waste disposal facilities which may be subject to remedial action under
Superfund or similar state statutes. These proceedings are based on allegations
that the Company had hazardous substances disposed of at these sites. At each
site, many other parties have been named as PRPs or identified as potentially
responsible for remediation, and the group of PRPs undertaking remediation
includes many companies, including "Fortune 500" companies, believed to have
substantial financial resources. The Company has paid a portion of the costs of
preliminary investigation and remediation at three sites, and has agreed to
settle claims against it made by PRPs at two sites. With respect to these sites,
the total amount paid by the Company to date or subject to possible settlement
is approximately $39,000. The Company has recorded a reserve of approximately
$126,000 against potential environmental liabilities. The ultimate costs of the
Company's environmental liabilities cannot be estimated with certainty,
primarily due to several uncertain factors at one of the sites subject to legal
proceedings. These factors principally are the level of contamination, the
selection of remedial methods, the stage of investigation at the site, and the
determination of the Company's liability in proportion to owner/operators of the
site and other responsible parties. Due to the limited nature of the Company's
involvement in these 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.
II-4 Page 11
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RESULTS OF OPERATIONS
Net sales for fiscal 1996 decreased by $12,210,000 or 18% from those of
fiscal 1995. This decrease is primarily a result of a soft residential furniture
retail environment and also because fiscal 1995 included 53 weeks. The sales
change was as follows: office furniture sales increased by 8%; bedroom sales
decreased by 19%; and residential desks and accent furniture sales decreased by
38%. Net sales for fiscal 1995 increased by $6,841,000 or 11% over those of
fiscal 1994. This increase is primarily unit sales increases as follows: office
furniture sales increased by 4%; residential desks and accent furniture sales
increased by 53%; and bedroom furniture sales decreased by 9%. Sales of lumber
and wood parts to outside trade customers by the Company's Sawmill/Dimension
Plant increased 13% over fiscal 1994. The increase in 1995 was the result of the
Company's continued growth with multi-market furniture chains, wholesale clubs,
distributors, catalogers, and the success of the Company's residential desk and
accent furniture import program.
As a percentage of sales, cost of sales was 80.9% of sales for fiscal 1996.
As a percentage of sales, cost of sales was 82.6% of sales for fiscal 1995 and
81.4% for fiscal 1994. The decrease in cost of sales as a percentage of sales in
fiscal 1996 was the result of the Company's asset consolidation program
initiated in the first quarter 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. The increase in cost of sales as a percentage of sales in fiscal
1995 was the result of higher lumber and other wood material costs partially
offset by selling price increases established in the fourth quarter of fiscal
1994 and the second quarter of fiscal 1995, and a lower margin product and
customer sales mix. (See Effects Of Inflation below.)
As a percentage of sales, selling, general and administrative expenses were
14.1% of sales for fiscal 1996, 12.6% of sales for fiscal 1995, and 13.7% of
sales for fiscal 1994. The increase in fiscal 1996 was primarily the result of
the sales decrease exceeding the rate at which these expenses decreased most of
which are of a semi-fixed nature. The substantial decrease in fiscal 1995 was
primarily the result of sales growth materially exceeding the rate at which
these expenses increased most of which are of a semi-fixed nature.
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 and that are 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 relate 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. Net current
assets and liabilities
II-5 Page 12
<PAGE>
associated with the Gettysburg, Pennsylvania facilities as of August 31, 1996
are immaterial to the financial position of the Company. The carrying amount of
net long-term assets to be disposed of as of August 31, 1996 are approximately
$95,000 and management's expectations are that such assets should be disposed of
within the next 6 months. All severance related payments have been made as of
August 31, 1996. Amounts included in accrued liabilities associated with the
plant closing as of August 31, 1996 total approximately $108,000.
Interest expense decreased in fiscal 1996 to $1,335,956 from $1,913,231 in
fiscal 1995 because of the pay down of debt with the positive cash flow provided
from success of the Company's asset consolidation program and from operations,
and to a lesser extent a reduction in the interest rate spread charged by the
Company's bank. Interest expense increased in fiscal 1995 to $1,913,231 from
$1,298,790 in fiscal 1994 due to higher prime interest rate as well as higher
average loan balances for working capital to support the growth of the Company.
Gain On Disposal Of Property, Plant and Equipment - 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.
Provision For Income Taxes - The Company's effective book tax rate
increased from approximately 8% in fiscal 1993 to 37% in fiscal 1994 and to 38%
in fiscal 1995 and 38% in fiscal 1996. This increase in the effective book tax
rate is primarily due to the adoption of SFAS 109 in the first quarter of fiscal
1994. The Company realized a $1,795,000 credit in the first quarter of fiscal
1994 as a result of this change in accounting principle. See Note 8 to the
consolidated financial statements for more information.
Extraordinary Item - During the third quarter of fiscal 1994, the Company
called $2,940,000 of its 1989 Economic Development Revenue Bonds for redemption
and refinancing into lower interest rate bonds. The actual redemption and
refinancing took place on June 15, 1994. The Company wrote off the call premium
and unamortized costs on the 1989 bonds totaling approximately $72,000 ($50,000
net of related tax benefits) during the third fiscal quarter. The loss has been
reflected as an extraordinary item in the consolidated statements of income for
fiscal 1994. The new bonds provided an initial interest rate approximately three
hundred basis points lower than the 1989 issue.
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. During
fiscal 1995 and 1994 there were substantial increases in the prices of lumber
and other wood materials and this adversely affected the Company's results in
fiscal 1995 and 1994. The Company increased its selling prices during this
period to partially offset these increased costs. 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.
II-6 Page 13
<PAGE>
During fiscal 1994 the Company opened a fabrication facility to supply
certain high volume materials and components to its plants that had previously
been purchased from outside suppliers. This facility has lowered the cost of
those materials from prices paid to outside suppliers thus helping to offset
some of the inflation it has experienced during recent years.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
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 plans to adopt the provisions of SFAS No.
121 in the first quarter of fiscal 1997 and does not expect that adoption will
have a material impact on its financial position or results of operations.
ACCOUNTING FOR STOCK BASED COMPENSATION - Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation" (SFAS No.123),
issued in October 1995 and effective for fiscal years beginning after December
15, 1995, encourages, but does not require, a fair value based method of
accounting for employee stock options or similar equity instruments. It also
allows an entity to elect to continue to measure compensation cost under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"), but requires pro forma disclosures of net income and
earnings per share as if the fair value based method of accounting had been
applied. The Company expects to adopt Statement No. 123 in fiscal 1997. While
the Company is still evaluating Statement No. 123, it currently expects to elect
to continue to measure compensation cost under APB No. 25 and comply with the
pro forma disclosure requirements.
II-7 Page 14
<PAGE>
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 31, 1996 and
September 2, 1995 F-2, F-3
Consolidated Statements of Income for the years ended
August 31, 1996, September 2, 1995 and
August 27, 1994 F-4
Consolidated Statements of Stockholders' Equity for
the years ended August 31, 1996, September 2, 1995,
and August 27, 1994 F-5
Consolidated Statements of Cash Flows for the years
ended August 31, 1996, September 2, 1995,
and August 27, 1994 F-6, F-7
Notes to Consolidated Financial Statements F-8--F-19
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.
II-8 Page 15
<PAGE>
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 31, 1996 and September
2, 1995 and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended August 31, 1996.
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 and schedule 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 31, 1996 and September 2, 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended August 31, 1996 in conformity with generally accepted accounting
principles.
As explained in Note 1 to the financial statements, effective August 29, 1993,
the Company changed its method of accounting for income taxes.
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 11, 1996
Louisville, Kentucky
F-1 Page 16
<PAGE>
DMI FURNITURE, INC.
CONSOLIDATED BALANCE SHEETS
as of
August 31, 1996 and September 2, 1995
ASSETS 1996 1995
- ------ ---- ----
(Note 2)
Current assets:
Cash $96,546 $68,703
Restricted cash (Note 4) 1,061,537 225,707
Accounts receivable, less allowance for
doubtful accounts of $110,000 in 1996
and $132,000 in 1995 7,458,800 10,748,438
Inventories (Note 9) 9,853,201 13,264,543
Other current assets 259,270 338,332
Current portion of deferred income taxes (Note 8) 781,973 925,000
---------- ----------
Total current assets 19,511,327 25,570,723
---------- ----------
Property, plant and equipment, at cost:
Land 753,572 811,936
Buildings and improvements 7,598,223 8,632,172
Machinery and equipment 10,784,515 11,475,888
Leasehold improvements 620,308 610,006
Construction in progress 0 43,667
---------- ----------
19,756,618 21,573,669
Less accumulated depreciation 8,843,575 9,552,954
---------- ----------
Net property, plant and equipment 10,913,043 12,020,715
---------- ----------
Other assets:
Intangible pension asset 380,106 558,095
Other 373,287 362,466
---------- ----------
Total other assets 753,393 920,561
---------- ----------
Total assets $31,177,763 $38,511,999
---------- ----------
---------- ----------
See accompanying notes.
F-2 Page 17
<PAGE>
DMI FURNITURE, INC.
CONSOLIDATED BALANCE SHEETS
as of
August 31, 1996 and September 2, 1995
(continued)
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
- ------------------------------------ ---- ----
Current liabilities:
Trade accounts payable $3,164,821 $3,134,625
Accrued liabilities (Note 9) 1,990,325 1,882,915
Accrued dividends on preferred stock (Note 5) 0 389,416
Long-term debt due within one year (Note 2) 2,029,904 1,006,755
--------- ---------
Total current liabilities 7,185,050 6,413,711
--------- ---------
Long-term liabilities:
Long-term debt (Note 2) 11,631,514 20,030,649
Accrued pension costs (Note 7) 816,598 905,332
Deferred compensation (Note 7) 376,490 434,203
Deferred income tax (Note 8) 114,138 71,000
--------- ---------
Total long-term liabilities 12,938,740 21,441,184
---------- ----------
Commitments and contingencies (Notes 3 & 4)
Stockholders' equity: (Notes 5 & 6)
Series C convertible preferred stock, $2 par
value, 1,995,050 (2,020,000 in 1995) shares
authorized and outstanding, (liquidation
preference of $2 per share plus unpaid dividends) 3,990,100 4,040,000
Common stock, $.10 par value, 9,600,000 shares
authorized, 3,051,312 shares outstanding
(2,970,026 in 1995) 305,131 297,003
Additional paid-in capital 15,185,079 15,106,984
Retained deficit (8,402,337) (8,762,883)
Minimum pension liability (24,000) (24,000)
------- -------
Total stockholders' equity 11,053,973 10,657,104
---------- ----------
Total liabilities and stockholders' equity $31,177,763 $38,511,999
----------- -----------
----------- -----------
See accompanying notes.
F-3 Page 18
<PAGE>
DMI FURNITURE, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended
----------------------------------------------------
August 31, September 2, August 27,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales (Note 11) $55,562,751 $67,773,444 $60,932,235
Cost of sales 44,948,772 56,013,705 49,615,124
---------- ---------- ----------
10,613,979 11,759,739 11,317,111
---------- ---------- ----------
Selling, general and
administrative expenses 7,843,052 8,571,849 8,330,929
Plant closing reserve (Note 12) 868,000 - -
Other income (expense):
Interest expense (1,335,956) (1,913,231) (1,298,790)
Interest income 12,314 16,878 18,632
Gain on disposal of property,
plant and equipment 74,685 2,040 16,922
Other (45,127) (3,720) 20,411
------ ----- ------
(1,294,084) (1,898,033) (1,242,825)
---------- ---------- ----------
Income before provision for income
taxes, cumulative effect of a change in
accounting principle and extraordinary item 608,843 1,289,857 1,743,357
Provision for income taxes (Note 8) (233,176) (485,380) (642,313)
---------- ---------- ----------
Income before cumulative effect of a change
in accounting principle and extraordinary item 375,667 804,477 1,101,044
Cumulative effect of a change in
accounting for income taxes (Note 8) - - 1,795,000
---------- ---------- ----------
Income before extraordinary item 375,667 804,477 2,896,044
Extraordinary item--extinguishment of debt
net of $22,000 tax benefit - - (50,000)
---------- ---------- ----------
Net income $375,667 $804,477 $2,846,044
---------- ---------- ----------
---------- ---------- ----------
Income per share before cumulative
effect of a change in accounting
principle and extraordinary item $.07 $.14 $.19
Cumulative effect per share of a
change in accounting for income taxes - - .31
Extraordinary item - - (.01)
---- ---- ----
Earnings per common share (Note 1) $ .07 $ .14 $ .49
---- ---- ----
---- ---- ----
</TABLE>
See accompanying notes.
F-4 Page 19
<PAGE>
DMI FURNITURE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Three years ended August 31, 1996
<TABLE>
<CAPTION>
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 Total
----- ----------- ----- ----------- ------- --------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT AUGUST 28, 1993 $4,040,000 2,020,000 $293,226 2,932,264 $14,861,010 ($11,720,988) - $7,473,248
Net income - - - - - 2,846,044 - 2,846,044
Dividends on preferred stock - - - - - (404,000) - (404,000)
Minimum pension liability - - - - - - ($46,506) (46,506)
Stock options - - - - 95,416 - - 95,416
Issuance of common stock - - 3,016 30,162 49,909 - - 52,925
---------- ---------- ----- ------ ------ --------- --------- ------
BALANCES AT AUGUST 27, 1994 $4,040,000 2,020,000 $296,242 2,962,426 $15,006,335 ($9,278,944) ($46,506) $10,017,127
Net income - - - - - 804,477 - 804,477
Dividends on preferred stock - - - - - (288,416) - (288,416)
Minimum pension liability - - - - - - $22,506 22,506
Stock options - - - - 87,760 - - 87,760
Issuance of common stock - - 761 7,600 12,889 - - 13,650
---------- ---------- ----- ------ ------ --------- --------- ------
BALANCES AT September 2, 1995 $4,040,000 2,020,000 $297,003 2,970,026 $15,106,984 ($8,762,883) ($24,000) $10,657,104
Net income - - - - - 375,667 - 375,667
Dividends on preferred stock - - - - - (15,121) - (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 - - 36,323
---------- ---------- ----- ------ ------ --------- --------- ------
BALANCES AT August 31, 1996 $3,990,100 1,995,050 $305,131 3,051,312 $15,185,079 ($8,402,337) ($24,000) $11,053,973
---------- ---------- -------- --------- ----------- ------------ --------- -----------
---------- ---------- -------- --------- ----------- ------------ --------- -----------
</TABLE>
See accompanying notes.
F-5 Page 20
<PAGE>
DMI FURNITURE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
--------------------------------------------
August 31, September 2, August 27,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $375,667 $804,477 $2,846,044
Adjustments to reconcile net income to
net cash provided (used) by
operating activities:
Depreciation and amortization 1,022,938 1,003,802 812,319
Amortization of loan closing costs 43,690 43,690 34,399
Gain on disposal of property,
plant and equipment (73,535) (2,040) (16,922)
Deferred income tax 186,165 416,000 (1,270,000)
Pension costs 89,255 (66,305) 8,244
Deferred compensation (57,713) (99,706) (79,963)
Changes in assets and liabilities:
Accounts receivable 3,179,702 (767,923) (2,407,439)
Inventories 3,411,342 1,327,674 (2,837,556)
Other assets 152,991 29,672 (152,583)
Trade accounts payable 30,196 (2,258,972) 2,072,284
Accrued liabilities 143,734 (223,036) (10,875)
------- --------- --------
Total adjustments 8,128,765 (597,144) (3,848,092)
--------- --------- -----------
Net cash provided (used) by
operating activities 8,504,432 207,333 (1,002,048)
--------- ------- -----------
Cash flows from investing activities:
Capital expenditures (537,959) (655,304) (4,233,651)
Payments received on notes receivable 135,750 10,708 16,777
Proceeds from the disposal of property,
plant and equipment 541,974 2,500 17,125
------- ----- ------
Net cash provided (used) by investing activities 139,765 (642,096) (4,199,749)
------- --------- -----------
</TABLE>
See accompanying notes.
F-6 Page 21
<PAGE>
DMI FURNITURE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
Years Ended
----------------------------------------
August 31, September 2, August 27,
1996 1995 1994
---- ---- ----
Cash flows from financing activities:
Borrowings from line-of-credit 15,898,000 26,172,000 25,150,000
Payments on line-of-credit (21,950,000) (24,600,000) (21,950,000)
Additions to long-term debt 50,380 72,497 6,360,000
Payment of bonds from new issue - - (2,940,000)
Payments of long-term debt (1,374,366) (958,746) (663,337)
Restricted cash (835,830) 18,293 (244,000)
Cash dividends on preferred stock (404,537) (404,000) (404,000)
Proceeds from stock options exercised - 1,650 52,925
--------- --------- ---------
Net cash provided (used) by
financing activities (8,616,353) 301,694 5,361,588
----------- ------- ---------
Increase (decrease) in cash 27,844 (133,069) 159,791
Cash, beginning of year 68,703 201,772 41,981
------ ------- ------
Cash, end of year $96,547 $68,703 $201,772
------- ------- --------
Cash paid for:
Interest $1,368,703 $1,865,102 $1,334,961
---------- ---------- ----------
Income taxes $85,863 $76,432 $145,596
------- ------- --------
See accompanying notes.
F-7 Page 22
<PAGE>
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 bedroom furniture, commercial and home office
furniture, desks, accent furniture, and tables and chairs. It's principal
distribution channels are multi-market furniture retailers, distributors,
independent retailers, catalogers, and warehouse clubs located primarily
throughout the United States.
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 - Effective August 29, 1993, the Company adopted Statement of
Financial Accounting Standard No. 109, ACCOUNTING FOR INCOME TAXES ("SFAS 109").
SFAS 109 requires recognition of deferred tax assets and liabilities for 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. In
accordance with this statement, the Company recognized deferred tax assets
reflecting the benefit expected to be realized from the utilization of net
operating loss carryforwards ("NOLs"), alternative minimum tax credits
carryforwards, and deductible temporary differences. (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 (1996- 5,713,277; 1995- 5,707,832; 1994 - 5,791,235), and
assumes the conversion of the Series C Preferred Stock into common stock.
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 $578,000 and $573,000 in fiscal 1996 and
1995.
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.
F-8 Page 23
<PAGE>
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 plans to adopt the provisions of SFAS No. 121 in the
first quarter of fiscal 1997 and does not expect that adoption will have a
material impact on its financial position or results of operations.
ACCOUNTING FOR STOCK BASED COMPENSATION - Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation" (SFAS No.123),
issued in October 1995 and effective for fiscal years beginning after December
15, 1995, encourages, but does not require, a fair value based method of
accounting for employee stock options or similar equity instruments. It also
allows an entity to elect to continue to measure compensation cost under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"), but requires pro forma disclosures of net income and
earnings per share as if the fair value based method of accounting had been
applied. The Company expects to adopt Statement No. 123 in fiscal 1997. While
the Company is still evaluating Statement No. 123, it currently expects to elect
to continue to measure compensation cost under APB No. 25 and comply with the
pro forma disclosure requirements.
2. LONG-TERM DEBT
Long-term debt consists of the following:
1996 1995
---- ----
Economic Development Revenue
Bonds; payable in annual increasing
maturities ($305,000 in 1997) and a final
maturity on October 1, 2003 of $415,000;
weekly adjustable coupon interest rate
(3.73% on 8/31/96) and payable monthly. $2,850,000 $3,140,000
Economic Development Revenue
Bonds; payable in annual increasing
maturities ($240,000 in 1997) and a final
maturity on June 1, 2004 of $405,000;
weekly adjustable coupon interest rate
(3.73% on 8/31/96) and payable monthly. 2,515,000 2,735,000
Term note payable to bank; due
in monthly principal installments of
$33,333 and one final installment
of $2,133,334 in November, 1997;
interest at prime plus .75%.
(9% at August 31, 1996) 2,169,341 2,933,337
$13,500,000 revolving master note
payable to bank; interest at prime plus
.5%; expires November, 1997.
(8.75% at August 31, 1996) 5,969,619 12,021,619
Capital leases on equipment; payable
quarterly through December, 1998;
interest at various rates. 157,458 207,448
----------- -----------
13,661,418 21,037,404
Less portion due within one year 2,029,904 1,006,755
----------- -----------
$11,631,514 $20,030,649
----------- -----------
----------- -----------
F-9 Page 24
<PAGE>
Substantially all assets are pledged to collateralize long-term debt. On
August 31, 1996, the Company had $1,666,000 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:
1997 $2,029,904
1998 7,352,526
1999 625,530
2000 653,458
2001 685,000
Thereafter 2,315,000
---------
$13,661,418
-----------
-----------
The Company's bank financing agreement contains restrictive covenants that
require the Company, among other things, to maintain a certain current ratio,
fixed charge ratio, tangible net worth, and ratio of total debt to tangible net
worth 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
(except for dividends on preferred stock); and, acquiring capital assets in
excess of a specific amount.
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.
Future minimum lease payments at August 31, 1996 under these leases are as
follows:
1997 $481,697
1998 373,699
1999 298,624
2000 137,731
2001 13,759
---------
Total minimum payments $1,305,510
----------
----------
Rent expense under operating leases charged to operations during fiscal
years 1996, 1995 and 1994 was $747,412, $815,273 and $760,794, respectively.
F-10 Page 25
<PAGE>
4. COMMITMENTS AND CONTINGENCIES
The Company has been identified as a potentially responsible party ("PRP")
by the Environmental Protection Agency ("EPA") or state agencies, or has had
claims asserted against it by other parties, in proceedings relating to six
waste disposal facilities which may be subject to remedial action under
Superfund or similar state statutes. These proceedings are based on allegations
that the Company had hazardous substances disposed of at these sites. At each
site, many other parties have been named as PRPs or identified as potentially
responsible for remediation, and the group of PRPs undertaking remediation
includes many companies, including "Fortune 500" companies, believed to have
substantial financial resources. The Company has paid a portion of the costs of
preliminary investigation and remediation at three sites, and has agreed to
settle claims against it made by PRPs at two sites. With respect to these sites,
the total amount paid by the Company to date or subject to possible settlement
is approximately $39,000. The Company has established a reserve reflecting its
estimate of probable environmental liabilities in connection with the
proceedings based on presently available information provided by steering
committees of participants or regulatory authorities with respect to each site.
As of August 31, 1996 the Company has accrued approximately $126,000 for these
potential environmental liabilities. The ultimate costs of the Company's
environmental liabilities cannot be estimated with certainty, primarily due to
several uncertain factors at one of the sites subject to legal proceedings.
These factors principally are the level of contamination, the selection of
remedial methods, the stage of investigation at the site, and the determination
of the Company's liability in proportion to owner/operators of the site and
other responsible parties. Due to the limited nature of the Company's
involvement in these 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 during fiscal 1996 were not
material. See Management's Discussion and Analysis of Financial Condition and
Results of Operations beginning on page II-3.
The Company has entered into individual employment agreements with certain
of its officers which expire at various times through December 31, 1998. 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. The Company has funded $1,000,000 in escrow agreements to provide
for partial funding of any payments that may be required under the agreements.
The Company had letters of credit outstanding totaling $1,521,000 at August
31, 1996, and $1,408,000 at September 2, 1995. These letters of credit were
issued for the purchase of inventory from foreign sources.
5. CONVERTIBLE PREFERRED STOCK
Annual dividends on each share of Series C will be the lower of (i) twenty
cents or (ii) the Company's net income in excess of $500,000 for the previous
fiscal year divided by the number of shares of Series C outstanding on the last
day of the previous fiscal year. The liquidation value of the Series C is the
sum of $2.00 per share plus any unpaid dividends on such share. The Company is
not required to redeem the Series C. If it is redeemed, however, the redemption
price is $3.00 per share. The Company has the right to negotiate a redemption
price other than the prices stated above with willing Series C
F-11 Page 26
<PAGE>
stockholders. For any future conversion of the Series C into the Company's
common stock, the purchase price to be paid for the common stock is fixed at
$1.63 per share of common stock for approximately 87% of the outstanding Series
C, and $1.00 per share of common stock for the remaining shares.
Holders of Series C will have the right, upon request by holders of ten
percent of the Series C, to elect a majority of the Board of Directors upon the
accumulation of dividends in arrears of at least $269,500 or if the Company
fails to earn annual net income of at least $769,500, or the occurrence of an
event of noncompliance. A majority of the Series C stockholders must be present
at the special meeting to constitute a quorum. Holders of a majority of the
Series C have waived their right to elect a majority of the directors during
fiscal 1997 as a result of the Company's failure to earn at least $769,500 in
net income during fiscal 1996.
The Company's Certificate of Incorporation restricts payment of cash
dividends on the common stock to 10% of the Company's net income for the
immediately preceding fiscal year, after deduction of dividends paid in that
year on the Series C preferred stock.
In liquidation, the Series C shares are entitled to receive their
liquidation value before a distribution to common stockholders.
6. STOCK OPTIONS
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 31, 1996 follows:
F-12 Page 27
<PAGE>
Option Price
------------
Shares Per Share Total
-------- ----------- -----
Options outstanding
at August 28, 1993 267,560 $1.375-$2.625 $480,395
Granted in 1994 170,377 $1.69 287,937
Exercised in 1994 (17,162) $1.375-$2.625 (24,550)
Granted in 1995 186,724 $1.405 262,347
Exercised in 1995 (1,200) $1.375 (1,650)
Granted in 1996 96,500 $1.625 156,813
Expired in 1996 (47,500) $1.375-$2.625 (74,688)
--------- ---------
Options outstanding
at August 31, 1996 655,299 $1.375-$2.625 $1,086,604
--------- -----------
--------- -----------
Options exercisable
at August 28, 1993 178,560 $1.375-$1.625 $246,770
Became exercisable
in 1994 199,947 $1.69-$2.625 365,033
Exercised in 1994 (17,162) $1.375-$2.625 (24,550)
Became exercisable
in 1995 216,984 $1.405-$2.625 341,780
Exercised in 1995 (1,200) $1.375 (1,650)
Became exercisable
in 1996 29,370 $2.625 77,096
Expired in 1996 (47,500) $1.375-$2.625 (74,688)
-------- --------
Options exercisable
at August 31, 1996 558,999 $1.375-$2.625 $929,791
--------- ---------
--------- ---------
In addition to the above, the Company has granted 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. 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 31, 1996 follows:
F-13 Page 28
<PAGE>
Option Price
------------
Shares Per Share Total
------ --------- -----
Options outstanding at
August 28, 1993 92,000 $1.19-$2.875 $196,885
Options granted in 1994 4,000 $3.50 14,000
Exercised in 1994 (13,000) $1.50-$2.625 (28,375)
Granted in 1995 4,000 $1.625 6,500
Granted in 1996 3,000 $1.5625 4,688
------ --------
Options outstanding at
August 31, 1996 90,000 $1.19-$3.50 $193,698
------ ---------
------ ---------
Options exercisable
at August 28, 1993 86,000 $1.19-$2.625 $182,635
Became exercisable
in 1994 4,000 $1.375-$2.875 8,500
Exercised in 1994 (13,000) $1.50-$2.625 (28,375)
Became exercisable in 1995 4,000 $2.875-$3.50 12,750
Became exercisable in 1996 4,000 $1.625-$3.50 10,250
------ -------
Options exercisable
at August 31, 1996 85,000 $1.19-$3.50 $185,760
------ --------
------ --------
7. PENSION PLANS
The Company has a defined benefit pension plan which covers substantially
all hourly employees. Pension costs charged to operations were approximately
$169,000 in fiscal 1996, $180,000 in fiscal 1995, and $170,000 in fiscal 1994.
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 1996, fiscal 1995
and fiscal 1994 was computed as follows:
1996 1995 1994
---- ---- ----
Service cost-benefits
earned $70,598 $71,090 $67,106
Interest cost on projected
benefit obligation 191,020 180,937 170,178
Actual return on plan assets (126,034) (105,366) (31,487)
Amortization of transition
obligation 13,686 13,686 13,686
Amortization of unrecognized
prior service cost 19,327 19,327 16,505
Net deferred asset gain(loss) - - (65,601)
------- ------- -------
Net pension expense $168,597 $179,674 $170,387
-------- -------- --------
-------- -------- --------
F-14 Page 29
<PAGE>
The funded status of the defined benefit plan at August 31, 1996 and
September 2, 1995 is shown below:
Actuarial present value of
accumulated plan benefits:
1996 1995
---- ----
Vested $(2,366,236) $(2,323,918)
Non-vested (37,459) (58,710)
----------- -----------
Accumulated/projected benefit obligation (2,403,695) (2,382,628)
Plan assets at fair market value 1,587,097 1,477,296
----------- -----------
Projected benefit obligation
in excess of plan assets (816,598) (905,332)
Unrecognized transition liability 138,692 205,285
Unrecognized net (gain)/loss (55,257) 37,976
Unrecognized prior service cost 241,414 352,834
Adjustment required to
recognize minimum liability (324,849) (596,095)
----------- -----------
Accrued pension liability $(816,598) $(905,332)
----------- -----------
----------- -----------
The projected benefit obligation for service rendered was determined using
an assumed discount rate of 8.25% 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 which
covers substantially all salaried employees. Costs charged to operations in
fiscal 1996, fiscal 1995 and fiscal 1994 were $57,000, $65,400 and $63,700,
respectively.
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 31, 1996 and
September 2, 1995 is $376,490 and $434,203, respectively. Plan costs charged to
operations were approximately $40,000 in fiscal 1996, $27,000 in fiscal 1995,
and approximately $37,000 in fiscal 1994.
8. INCOME TAXES
In adopting SFAS No. 109, as of August 29, 1993, the Company recorded
approximately $1,931,000 of deferred tax assets and $136,000 of deferred tax
liabilities, resulting in a net deferred tax asset of $1,795,000. Such amount
has been reflected in the Consolidated Statements of Income as the cumulative
effect of an accounting change.
F-15 Page 30
<PAGE>
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 31, 1996 and September 2, 1995 are as follows (in thousands):
1996 1995
---- ----
Net operating loss carryforwards $130 $143
Alternative minimum tax credit carryforward 187 187
Accumulated tax depreciation of property and
equipment in excess of accumulated book
depreciation and other related items (435) (359)
Various accruals and reserves 788 716
Inventory 106 142
Other (109) 25
---- ----
Net deferred tax asset $667 $854
---- ----
---- ----
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 including the benefits of the
NOLs before they begin to expire. As a result, no valuation allowance was
required as of August 31, 1996 and September 2, 1995. 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. 31 Sept. 2, Aug. 27,
1996 1995 1994
---- ---- ----
Currently payable $47 $55 $68
Deferred 186 430 574
---- ---- ----
Total $233 $485 $642
---- ---- ----
---- ---- ----
The deferred tax provision for the twelve months ended August 31, 1996 and
September 2, 1995, and August 27, 1994 consisted of the following (in
thousands):
1996 1995 1994
---- ---- ----
Utilization of net operating loss carryforwards $13 $209 $441
Excess tax over book depreciation 76 138 85
Other 97 83 48
---- ---- ----
$186 $430 $574
---- ---- ----
---- ---- ----
F-16 Page 31
<PAGE>
The provision for income taxes differs from that computed at the federal
statutory corporate tax rate as follows (in thousands):
Twelve Months Ended
Aug. 31 Sept. 2, Aug. 27,
1996 1995 1994
---- ---- ----
Tax at 34% statutory rate $207 $438 $593
State income taxes, net of
federal benefit 26 47 49
---- ---- ----
Income Taxes $233 $485 $642
---- ---- ----
---- ---- ----
At August 31, 1996, the Company had the following NOLs available for income
tax purposes (in thousands):
Expiration
Date Amount
---------- ------
2002 $255
2004 10
2006 120
----
$385
----
----
The Company has alternative minimum tax credit carryforwards at August 31,
1996 of approximately $187,000 which have an unlimited carryforward period.
9. OTHER INFORMATION
Inventories - Inventories are summarized below:
1996 1995
---- ----
Finished product $4,794,000 $7,115,000
Work in process 521,000 785,000
Raw material 4,538,000 5,365,000
---------- -----------
$9,853,000 $13,265,000
---------- -----------
---------- -----------
Accrued liabilities - Accrued liabilities are summarized below:
1996 1995
---- ----
Property, payroll and other taxes $563,669 $457,936
Payroll, bonuses and commissions 858,492 958,265
Interest 83,825 128,886
Other 499,882 337,828
---------- ----------
$2,005,868 $1,882,915
---------- ----------
---------- ----------
F-17 Page 32
<PAGE>
10. QUARTERLY FINANCIAL DATA
Quarterly financial data (unaudited - in thousands of dollars except per
share amounts)
FISCAL 1996
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- -------
Net sales $17,729 $12,502 $12,397 $12,935 $55,563
Gross profit 3,223 2,024 2,490 2,877 10,614
Net income (loss) (184) (151) 205 506 376
Income (loss) per
common share (1) $(.06) $(.05) $.04 $.09 $.07
FISCAL 1995
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- -------
Net sales $18,723 $17,451 $14,775 $16,824 $67,773
Gross profit 3,566 2,942 2,529 2,723 11,760
Net income 538 153 19 94 804
Income per common
share (1) $.09 $.03 - $.02 $.14
(1) Income 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 when net loss in period common equivalent shares are
omitted) (See Note 1).
11. MAJOR CUSTOMERS
The Company's six largest customers accounted for approximately 34% of the
Company's total sales in fiscal 1996. Four customers accounted for 34% of sales
for the year ended September 2, 1995, 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 31, 1996, one customer accounted for approximately 10% 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.
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
F-18 Page 33
<PAGE>
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. This 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 and that are 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 relate to the relocation or consolidation of production into
the Company's Huntingburg, Indiana facility.
Net current assets and liabilities associated with the Gettysburg,
Pennsylvania facilities as of August 31, 1996 are immaterial to the financial
position of the Company. The carrying amount of net long-term assets to be
disposed of as of August 31, 1996 are approximately $95,000 and management's
expectations are that such assets should be disposed of within the next 6
months. All severance related payments have been made as of August 31, 1996.
Amounts included in accrued liabilities associated with the plant closing as of
August 31, 1996 total approximately $108,000.
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. The Company
recorded a gain on disposition of this manufacturing plant totaling
approximately $44,000 which is included in other income (expense) on the
accompanying consolidated statements of income.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The book values of cash and cash equivalents, trade receivables 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 425 employees are covered by 2
collective bargaining agreements. Neither of the contracts with the union
representing the Company's labor force are due to expire prior to April 1998.
F-19 Page 34
<PAGE>
Item 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
None.
II-9 Page 35
<PAGE>
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 27,
1996.
III-1 Page 36
<PAGE>
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
None.
OTHER MATTERS
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the forgoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or a controlling person of the
registrant in the successful defense of any action, suit, or proceeding) is
asserted by such director, officer, or controlling persons in connection with
the securities being registered, the registrant will, unless in the opinion of
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
IV-1 Page 37
<PAGE>
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 18, 1996 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 18, 1996
- -------------------------
Joseph G. Hill
/S/Thomas M. Levine Director October 18, 1996
- -------------------------
Thomas M. Levine
/S/Alexander N. Rubin, Jr. Director October 18, 1996
- -------------------------
Alexander N. Rubin, Jr.
/S/Joseph L. Ponce Director October 18, 1996
- -------------------------
Joseph L. Ponce
President, Chief
Executive Officer, Chairman
/S/Donald D. Dreher of the Board and Director October 18, 1996
- -------------------------
Donald D. Dreher
IV-2
<PAGE>
DMI FURNITURE, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
Balance at Charged Balance
Beginning to Costs at End
Description of period and Expenses Deductions (A) of Period
----------- ---------- ------------ -------------- ---------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Year ended August 27, 1994 $141,409 $24,409 $64,649 $101,169
-------- -------- -------- --------
-------- -------- -------- --------
Year ended September 2, 1995 $101,169 $237,004 $205,996 $132,177
-------- -------- -------- --------
-------- -------- -------- --------
Year ended August 31, 1996 $132,177 $82,913 $105,099 $109,991
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
(A) Charge-offs net of recoveries.
S-1 Page 39
<PAGE>
Item 14(a)3. EXHIBITS
10-K
No. Page No.
------ --------
(3)(a) Restated Certificate of Incorporation E1 - E38
* (b) Bylaws
(4)(a) Restated Certificate of Incorporation E1 - E38
* (b) Bylaws
******* (10)(a) 1988 Stock Option Plan for Employees
********* (b) Nonemployee 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 Bank One, Indianapolis, N.A.
and DMI Furniture, Inc. dated October, 1994
**** (f) Extension and Renewal of Employment Agreement
as of January 1, 1996 between DMI Furniture,
Inc. and Donald D. Dreher.
****** (g) Credit Agreement with Bank One,
Indianapolis, N.A. dated December 4, 1993.
********** (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 June 9, 1994.
******** (l) Loan Agreement between City of Huntingburg,
Indiana and DMI Furniture, Inc. dated June 1,
1994.
********* (j) 1993 Long Term Incentive Stock Plan for
Employees
********* (k) Stock Compensation and Deferral Plan for
Outside Directors.
** (n) Second Amendment To Amended And Restated Credit
Agreement between Bank One, Indianapolis, N.A.
and DMI Furniture, Inc. dated January, 1995.
** (o) Third Amendment To Amended And Restated Credit
Agreement between Bank One, Indianapolis, N.A.
and DMI Furniture, Inc. dated March, 1995.
** (p) Fourth Amendment To Amended And Restated Credit
Agreement between Bank One, Indianapolis, N.A.
and DMI Furniture, Inc. dated September 20,
1995.
(q) Fifth Amendment To Amended And Restated Credit E39 - E42
Agreement between Bank One, Indianapolis, N.A.
and DMI Furniture, Inc. dated November 1, 1995.
Page 40
<PAGE>
(r) Sixth Amendment To Amended And Restated Credit E43 - E46
Agreement between Bank One, Indianapolis, N.A.
and DMI Furniture, Inc. dated January 11, 1996.
(s) Seventh Amendment To Amended And Restated Credit E47 - E53
Agreement between Bank One, Indianapolis, N.A.
and DMI Furniture, Inc. dated July 17, 1996.
********* (t) Loan Agreement between City of Huntingburg,
Indiana and DMI Furniture, Inc. dated as of
October 1, 1993.
(u) Escrow Agreements between DMI Furniture, Inc., E54 - E63
Bank One, Indianapolis, N.A., The Fifth Third
Bank of Kentucky, and Donald D. Dreher and
Joseph G. Hill.
(v) Extension and Renewal of Employment Agreement E64 - E70
as of September 11, 1996 between DMI Furniture,
Inc. and Joseph G. Hill.
(11) Statement re: Computations of earnings
per share E71
(21) List of subsidiaries E72
(23) Consent of Arthur Andersen LLP to incorporation E73
of audit report into S-8 registration.
(27) Financial Data Schedule E74
- --------------------------------------------------------------------------------
* Incorporated by reference to annual report on Form 10-K
for the fiscal year ended August 27, 1994
** Incorporated by reference to annual report on Form 10-K
for the fiscal year ended August 31, 1996
*** Incorporated by reference to annual report on Form 10-Q
for the fiscal quarter ended March 4, 1995
**** Incorporated by reference to Form 8-K dated April 22, 1996.
***** Incorporated by reference to annual report on Form 10-K
for the fiscal year ended August 29, 1992
****** 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.
<PAGE>
As filed with Delaware Secretary on 6/19/96
CERTIFICATE OF CORRECTION TO
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF DMI FURNITURE, INC.
DMI Furniture, Inc., a corporation organized and existing under the General
Corporation Law of the State of Delaware ("DGCL"), does hereby certify:
1. The name of the corporation is DMI Furniture, Inc (the "Corporation").
2. An Amended and Restated Certificate of Incorporation (the "Certificate")
was filed by the Secretary of State of Delaware on March 23, 1995 and requires
correction as permitted by Section 103 of the DGCL.
3. The Certificate erroneously includes language in Article FOURTH, Part I,
Section 3C that was not adopted by the Corporation.
4. The Certificate is corrected so that Article FOURTH, Part I, Section 3C
of the Certificate, as corrected, reads as follows:
3C. REDEMPTION AT THE CORPORATION'S OPTION. The Corporation may from
time to time redeem all or any portion of the Shares then outstanding
at an amount for each Share to be redeemed. If the Corporation redeems
fewer than all of the Shares then outstanding pursuant of this
paragraph 3C, the Corporation shall effect such redemption pro rata
among all holders of Shares. The number of Shares to be redeemed from
each holder thereof in any redemption pursuant to this paragraph 3C
shall be determined by multiplying the total number of Shares to be
redeemed times a fraction, the numerator of which shall be the total
number of shares then held by such holder and the denominator of which
shall be the total number of Shares then outstanding, provided that
the Corporation shall not be required to redeem any fractional shares
and redeem from such holders only the whole number of shares resulting
from such calculation.
E-1 Page 42
<PAGE>
IN WITNESS WHEREOF, DMI Furniture, Inc. has caused its Chairman and Secretary
to sign and attest this Certificate this 13th day of June, 1996.
DMI FURNITURE, INC.
By: /s/ Donald D. Dreher
Donald D. Dreher
Chairman of the Board,
President and
Chief Executive Officer
ATTEST:
/s/ Joseph G. Hill
Joseph G. Hill, Secretary
E-2 Page 43
<PAGE>
As filed with the Delaware Secretary of State on 3/23/95.
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
DMI FURNITURE, INC.
Pursuant to Sections 242 and 245 of the General Corporation Law of the State of
Delaware, DMI Furniture, Inc. (the "Corporation"), a Delaware corporation,
hereby certifies as follows:
1. The Corporation's present name is "DMI Furniture, Inc." The Corporation
was originally incorporated under the name "Dolmad Corporation." The
Corporation's original certificate of incorporation was filed with the Secretary
of State of the State of Delaware on January 29, 1969.
2. The Corporation's Certificate of Incorporation is hereby amended:
(a) to eliminate the 21,698 authorized shares of Series A Preferred
Stock par value $20 per share; and
(b) to delete all references to the Corporation's old Series A
Preferred Stock.
3. The amendments described in the preceding paragraph 2 (the "Amendments")
shall be effected by amending Article FOURTH of the Corporation's Certificate of
Incorporation to read in its entirety as set forth in paragraph 5 below.
4. The Corporation's Amended and Restated Certificate of Incorporation
restates and integrates all of the provisions of its Certificate of
Incorporation that are now in effect as a result of having previously been filed
with the Secretary of State.
E-3 Page 44
<PAGE>
5. The Certificate of Incorporation, amended as described in the preceding
paragraphs 2, 3 and 4, shall read in its entirety as follows:
FIRST: The name of the Corporation is DMI Furniture, Inc.
SECOND: The address of its registered office in the State of Delaware is
1209 Orange Street, in the City of Wilmington, County of New Castle. The name of
its registered agent at such address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
FOURTH:
(a) The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 13,620,000 shares, consisting of
2,020,000 shares of Series C Preferred Stock, par value $2 per share (herein
called the "Series C Preferred Stock"); 2,000,000 shares of Series D Preferred
Stock, par value $10 per share (herein called the "Series D Preferred Stock");
and 9,600,000 shares of Common Stock, par value $0.10 per share (herein called
the "Common Stock"). Except as otherwise provided in this Article FOURTH,
including, without limitation, part I hereof, all shares of Preferred Stock of
any class or series shall rank PARI PASSU with respect to each other, and senior
with respect to the Common Stock. All cross-references in each part of this
Article FOURTH refer to other paragraphs in such part unless otherwise
indicated.
(b) The following is a statement of the designations and the powers,
preferences and rights, and the qualifications, limitations or restrictions
thereof, in respect of each class of stock of the Corporation:
I
SERIES C PREFERRED STOCK
1. DIVIDENDS.
1A. GENERAL DIVIDEND OBLIGATION. When and as declared by the board of
directors of the Corporation, the Corporation shall pay to the holders of the
Series C Preferred Stock, out of the assets of the Corporation available for the
payment of dividends under the General Corporation Law of the State of Delaware,
dividends at the times and in the amounts provided for in this paragraph 1,
provided that the Series C Preferred Stock shall be
E-4 Page 45
<PAGE>
entitled to the dividend preferences set forth in paragraph 1E of this part I.
Anything herein to the contrary notwithstanding, the declaration of such
dividends shall be in the sole discretion of the board of directors and they
shall have no obligation to declare such dividends, but, in the event such
dividends are not paid as and when required under paragraph 1C of this part I,
the holders of the Series C Preferred Stock shall have and retain all the rights
and remedies herein contained arising from the failure to pay such dividends as
and when due.
1B. CALCULATION OF DIVIDENDS. Dividends on each share of Series C
Preferred Stock (each of which is referred to in this part as a "Share") shall
be calculated cumulatively (but shall not compound) on a daily basis at the rate
and in the manner prescribed herein from and including the date of issuance of
such Share to and including the date on which the Redemption Price of such Share
shall have been paid, whether or not such dividends shall have been declared and
whether or not there shall be (at the time such dividends are calculated or
become payable or at any other time) profits, surplus or other funds of the
Corporation legally available for the payment of dividends. For purposes of this
paragraph 1B and paragraph 1C, the date on which the shares of Series B
Preferred Stock are converted into shares of Series C Preferred Stock shall be
deemed to be their "date of issuance" regardless of the number of times transfer
of such Shares shall be made on the stock records maintained by or for the
Corporation and regardless of the number of certificates which may be issued to
evidence such Shares (whether by reason of transfer of such Shares or for any
other reason).
1C. DIVIDEND RATE. Dividends shall be calculated cumulatively on a
daily basis on each Share beginning September 1, 1986. During each fiscal year
of the Corporation, beginning with the fiscal year ending August 31, 1987, the
annual dividend rate for each Share shall be the lower of (i) twenty cents
($.20) or (ii) the Corporation's Consolidated Net Income (as defined below) in
excess of $500,000 for the Corporation's next preceding fiscal year divided by
the number of Shares outstanding on the last day of that next preceding fiscal
year. Dividends shall be payable on the first day of December, 1986, in the case
of dividends to that date and the first day of each March, June, September and
December thereafter (or if such day is not a Business Day, the immediately
preceding Business Day) (the term "Dividend Reference Date" shall mean December
1, 1986, and each of such payment dates thereafter). To the extent not paid, all
dividends which have been calculated on each Share then outstanding during the
period from and including the preceding Dividend Reference Date (or from and
including the original date of issuance of the Series C Preferred Stock in the
case of the initial Dividend Reference Date) shall be added to the Liquidation
Value of such Share and shall remain a part thereof until (but only until) such
dividends are paid. For the purposes of this part I, "Consolidated Net Income"
of the Corporation shall
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mean the consolidated net income of the Corporation and its subsidiaries as set
forth in the financial statements included in its Annual Report to Stockholders
which shall also contain the report of the Corporation's independent certified
public accountants respecting those financial statements, and which shall be
conclusively binding upon the Corporation and all stockholders.
1D. DISTRIBUTION OF PARTIAL DIVIDEND PAYMENTS. If at any time the
Corporation shall pay less than the total amount of dividends then calculated on
the Series C Preferred Stock, such payment shall be distributed among the
holders of the Series C Preferred Stock so that an equal amount shall be paid
with respect to each outstanding Share.
1E. Priority. The Series C Preferred Stock shall rank senior to the
Common Stock in respect of dividend payments to the extent provided in this
paragraph 1E. So long as any Series C Preferred Stock shall remain outstanding,
no Junior Securities shall be acquired or redeemed by the Corporation or any
Subsidiary, nor shall any dividend be declared or paid, nor shall any distri-
bution be made, upon any Junior Securities by the Corporation; PROVIDED that, so
long as no Event of Noncompliance (including without limitation the failure to
pay dividends as contemplated by paragraph 5A(i)(a) of this part I) or Potential
Event of Noncompliance shall have occurred and be continuing, the Corporation
(a) may pay dividends and make distributions on Junior Securities if the same
are exclusively shares of Common Stock and, in addition, (b) may pay cash
dividends on any Junior Securities in an aggregate amount during any year not
greater than ten per cent (10%) of Consolidated Net Income for its prior fiscal
year as defined in paragraph 1C of this part I, from which Consolidated Net
Income shall first be deducted all dividends paid or required to be paid
(whether or not paid) on the Series C Preferred Stock.
2. LIQUIDATION. Upon any liquidation (complete or partial), dissolution or
winding up of the Corporation, whether voluntary or involuntary, the holders of
the Series C Preferred Stock shall be entitled, before any distribution or
payment is made upon any Junior Securities of the Corporation, to be paid out of
the assets of the Corporation available for distribution to its stockholders
(whether from capital, surplus or earnings) an amount in cash equal to the
aggregate Liquidation Value of all Shares outstanding, and the holders of the
Series C Preferred Stock shall not be entitled to any further payment. If upon
such liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, the assets of the Corporation to be distributed among
the holders of the Series C Preferred Stock shall be insufficient to permit
payment to the holders of Series C Preferred Stock of the amount which they are
entitled to be paid as aforesaid, then assets of the Corporation shall be
distributed to the holders of the Series C Preferred Stock ratably based upon
the aggregate Liquidation Value of the Shares held by them. Upon any such
liquidation, dissolution
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or winding up of the Corporation, after the holders of the Series C Preferred
Stock shall have been paid in full the amounts to which they shall be entitled,
the remaining assets of the Corporation may be distributed to the holders of
Junior Securities of the Corporation. Written notice of such liquidation,
dissolution or winding up, stating a payment date, the amount of the payment and
the place where the amounts distributable shall be payable, shall be mailed by
certified or registered mail, return receipt requested, not less than sixty days
prior to the payment date stated therein, to each record holder of any Share at
the address for such record holder shown on the Corporation's records. Neither
the consolidation nor merger of the Corporation into or with any other
corporation or corporations, nor the sale or transfer by the Corporation of all
or any part of its assets, nor the reduction of the capital stock of the
Corporation, shall be deemed to be a liquidation, dissolution or winding up of
the Corporation within the meaning of any of the provisions of this paragraph 2.
3. REDEMPTIONS.
3A. REDEMPTION PRICE. For each Share which is to be redeemed by the
Corporation at any time and for any reason in a redemption pursuant to this
paragraph 3, the Corporation shall be obligated on the Redemption Date,
regardless of whether the Corporation shall be able or legally permitted to
make such payment on the Redemption Date, to pay to the holder thereof (upon
surrender by each holder at the Corporation's principal office of the
certificate representing such Share duly endorsed in blank or accompanied by an
appropriate form of assignment) the amount set forth below (the "Redemption
Price" for such share), or such lesser amount per Share that the Corporation and
the holder(s) of the Shares to be redeemed may agree upon.
Redemption Date Redemption Price
--------------- ----------------
Before 9-1-90 $2.50
On or after 9-1-90 and $2.75
before 9-1-91
On or after 9-1-91 $3.00
Provided, that nothing herein shall be construed to require any actual payment
before such can be made without contravening applicable law.
3B. REDEEMED OR OTHERWISE ACQUIRED SHARES NOT TO BE REISSUED. Any
Shares redeemed pursuant to this paragraph 3 or otherwise acquired by the
Corporation in any manner whatsoever shall not under any circumstances be
reissued, sold or transferred by the Corporation.
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3C. REDEMPTION AT THE CORPORATION'S OPTION. The Corporation may from
time to time redeem all or any portion of the Shares then outstanding at an
amount for each Share to be redeemed either (i) equal to the Redemption Price or
(ii) greater than the Redemption Price but less than the Lowest Common Stock
Equivalent Value per Share. Lowest Common Stock Equivalent Value per Share shall
equal the par value of the Shares (i) divided by the highest Purchase Price of
the Common Stock of any holder of Shares for purposes of the conversion rights
set forth in paragraph 15 (which may be set forth in a contract between the
Corporation and such holder) and (ii) multiplied by the Average Price of the
Common Stock. Average Price of the Common Stock shall mean the average of the
closing bid or sales prices (as the case may be) for the Common Stock quoted on
the NASDAQ System on each of the ten trading days before the date of the notice
of redemption required by paragraph 3D. If the Corporation redeems fewer than
all of the Shares then outstanding pursuant to this paragraph 3C, the
Corporation shall effect such redemption pro rata among all holders of Shares.
The number of Shares to be redeemed from each holder thereof in any redemption
pursuant to this paragraph 3C shall be determined by multiplying the total
number of Shares to be redeemed times a fraction, the numerator of which shall
be the total number of shares then held by such holder and the denominator of
which shall be the total number of Shares then outstanding, provided that the
Corporation shall not be required to redeem any fractional shares and redeem
from such holders only the whole number of shares resulting from such
calculation.
3D. NOTICE OF REDEMPTION AT THE CORPORATION'S OPTION. The Corporation
shall mail notice of any redemption pursuant to paragraph 3C by certified or
registered mail, return receipt requested, to each holder of record of Shares at
the address for such holder shown on the Corporation's records, not more than
sixty nor less than thirty days before the date on which such redemption is to
be made. The notice shall also specify the number of Shares and the certificate
numbers thereof which are to be redeemed. Upon mailing any notice of redemption
pursuant to this paragraph 3D, the Corporation shall become obligated to redeem
at the time of redemption specified therein all Shares therein specified. If
fewer than all the Shares represented by any certificate are redeemed, a new
certificate representing the unredeemed Shares shall be issued to the holder
thereof without cost to such holder.
3E. REDEMPTION OTHER THAN AT THE REDEMPTION PRICE. The Corporation may
from time to time redeem all or any portion of the Shares then outstanding, at
an amount less than the Redemption Price, from holders who accept an offer to
redeem their Shares made by the Corporation pursuant to this paragraph 3E.
(a) To effect any redemption pursuant to this paragraph 3E, the
Corporation shall mail a written offer to redeem Shares by certified or
registered mail, return receipt requested,
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to each holder of Shares, at the address for such holder shown on the
Corporation's records, not more than ninety nor less than sixty days before the
date on which such redemption is to be made. The offer shall specify the
aggregate number of Shares proposed to be redeemed, and the amount per Share to
be paid for the Shares to be redeemed, and the time and place of redemption.
(b) Each holder of Shares may then deliver to the Secretary of
the Corporation, not later than thirty days before the time of redemption
specified in the Corporation's offer to redeem, a written notice designating the
number of whole Shares that such holder (a "Redeeming Holder") wishes the
Corporation to redeem. The number of Shares that the Corporation shall redeem
from each Redeeming Holder shall be determined as follows:
FIRST STEP: Determine with respect to each Redeeming Holder
the smaller of
(a) The number of Shares the Redeeming Holder has designated as
Shares he wishes the Corporation to redeem, and
(b) A/B x C
Where:
A is the number of Shares owned by the Redeeming Holder making the
designation;
B is the number of Shares owned by all the Redeeming Holders who make
designations; and
C is the number of Shares the Corporation proposes to redeem.
SECOND STEP: If the number of Shares the Corporation proposes to redeem
exceeds the aggregate number of Shares determined for all Redeeming Holders in
the First Step, the excess shall be allocated (proportionately according to
their ownership of Shares) among the Redeeming Holders for whom the First Step
produced fewer shares than they wished the Corporation to redeem, but in the
allocation no Redeeming Holder shall be allocated a number of Shares greater
than the number necessary to produce for him in the Third Step the number of
Shares that he designated as Shares he wished the Corporation to redeem.
Third Step: The number of Shares each Redeeming Holder is entitled to
have the Corporation redeem shall be determined by combining with respect to
each Redeeming Holder the number of Shares determined in the First Step and the
number of Shares allocated in the Second Step and then rounding that sum to the
nearest whole number.
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(c) The Corporation shall mail notice of any redemption pursuant
to this paragraph 3E by certified or registered mail, return receipt requested,
to each Redeeming Holder not less than fifteen days before the date on which the
redemption is to be made. The notice shall specify the number of Shares to be
redeemed. Upon mailing any notice of redemption pursuant to this paragraph 3E,
the Corporation shall become obligated to redeem at the time of redemption
specified therein all Shares therein specified. If fewer than all the Shares
represented by any certificate are redeemed, a new certificate representing the
unredeemed Shares shall be issued to the Redeeming Holder thereof without cost
to such Redeeming Holder.
3F. DIVIDENDS AFTER REDEMPTION DATE. No Share shall be entitled to any
dividends calculated after its Redemption Date, and on such Redemption Date all
rights of the holder of such Share as a stockholder of the Corporation by reason
of the ownership of such Share, shall cease, except the right to receive the
Redemption Price of such Share upon presentation and surrender of the
certificate representing such Share, and such Share shall not after such
Redemption Date be deemed to be outstanding.
3G. OTHER REDEMPTIONS OR ACQUISITIONS. The Corporation shall neither
redeem nor otherwise acquire any Series C Preferred Stock except as expressly
authorized in this part I.
3H. CALCULATED DIVIDENDS MUST BE PAID PRIOR TO ANY REDEMPTION. The
Corporation must pay all dividends calculated on the Series C Preferred Stock
through the Redemption Date at the time of redemption thereof, or shall not
redeem any such shares.
4. ELECTION OF DIRECTORS.
(i) At each annual meeting of the stockholders of the Corporation, the
holders of Series C Preferred Stock, voting as a single class, shall be entitled
to elect the greatest integral number of directors that does not exceed
one-fifth (1/5) of the total number of directors, or two directors, whichever is
greater, and the number of members constituting the board of directors shall be
increased by such number, and the remaining members of the board of directors
shall (subject to the right of holders of any class or series of stock or other
securities of the Corporation other than the Series C Preferred Stock to elect
directors upon the happening of an event, such as a default in the payment of
dividends) be elected by the holders of the securities of the Corporation
entitled at the time to vote for the election of directors.
(ii) The directors elected by the holders of the Series C Preferred
Stock may be removed only by the vote of the holders of record of the majority
of Shares at a meeting of the Stockholders or of the holders of Shares called
for that purpose in the manner set forth in paragraph 5B(iii). Any vacancy in
the office of any of
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such directors may be filled by designation to the Corporation in writing by the
remaining director or directors then in office elected by the holders of the
Series C Preferred Stock pursuant to this paragraph 4, or, if not so filled
within thirty days after the vacancy occurs, by the holders of the Series C
Preferred Stock at any meeting, annual or special, for the election of directors
held thereafter. A special meeting of the holders of shares of Series C
Preferred Stock may be called for the purpose of filling any such vacancy in the
manner set forth in paragraph 5B(iii). In the case of removal of any such
director, the vacancy may be filled at the same meeting at which such removal
was voted.
5. EVENTS OF NONCOMPLIANCE.
5A. DEFINITION.
(i) An Event of Noncompliance shall be deemed to have occurred
if:
(a) the Corporation fails for any reason to pay on any
Dividend Reference Date the full amount of dividends then calculated on the
Shares but unpaid;
(b) the Corporation fails for any reason to redeem on any
date specified in any notice of redemption mailed pursuant to paragraph 3E all
of the Shares specified in such notice to be redeemed on such date;
(c) the Corporation otherwise fails to perform or observe
any other covenant or agreement set forth in this part I or in any Warrant;
(d) the Corporation or any Subsidiary mate- rially fails to
perform or observe any term, provision, covenant or agreement set forth in the
Purchase Agreement;
(e) any representation or warranty in writing furnished by
the Corporation, any Subsidiary or any Person to any holder of Series C
Preferred Stock is (or proves to have been) false or misleading in any material
respect on the date made or furnished;
(f) the Corporation or any Subsidiary makes an assignment
for the benefit of creditors or admits in writing its inability to pay its debts
generally as they become due; or an order, judgment or decree is entered
adjudicating the Corporation or any Subsidiary bankrupt or insolvent; or any
order for relief with respect to the Corporation or any Subsidiary is entered
under the Bankruptcy Act; or the Corporation or any Subsidiary petitions or
applies to any tribunal for the appointment of a trustee, receiver or liquidator
of the Corporation or any Subsidiary, or of any substantial part of the assets
of the Corporation or any
E-11 Page 52
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Subsidiary, or commences any proceedings (other than proceedings for the
voluntary liquidation and dissolution of a Subsidiary) relating to the
Corporation or any Subsidiary under any bankruptcy, reorganization, arrangement,
insolvency, readjustment of debt, dissolution or liquidation law of any
jurisdiction, whether now or hereafter in effect; or any such petition or
application is filed, or any such proceedings are commenced against the
Corporation or any Subsidiary and the Corporation or any such Subsidiary by any
act indicates its approval thereof, consent thereto or acquiescence therein, or
an order, judgment or decree is entered appointing any such trustee, receiver or
liquidator, or approving the petition in any such proceedings, and such order,
judgment or decree remains unstayed and in effect for more than sixty days; or
any involuntary case is commenced under the Bankruptcy Code with respect to the
Corporation or any Subsidiary and is not dismissed within sixty days; or any
order, judgment or decree is entered in any proceedings against the Corporation
or any Subsidiary decreeing the dissolution of the Corporation or such
Subsidiary and such order, judgment or decree remains unstayed and in effect for
more than sixty days; or any order, judgment or decree is entered in any
proceedings against the Corporation or any Subsidiary decreeing a split-up of
the Corporation or such Subsidiary and such order, judgment or decree remains
unstayed and in effect for more than sixty days;
(g) the Corporation or any Subsidiary defaults in any
payment of principal of or interest on any obligation for money borrowed or
received (or any obligation under conditional sale or other title retention
agreement or any obligation issued or assumed as full or partial payment for
property whether or not secured by purchase money mortgage or any obligation
under notes payable or drafts accepted representing extensions of credit) beyond
any period of grace provided with respect thereto, or defaults in the
performance of any other agreement, term or condition contained in any agreement
under which any such obligation is created (or if any other default under any
such agreement shall occur and be continuing) if the effect of such default is
to cause, or to permit the holder or holders of such obligation (or a trustee on
behalf of such holder or holders) to cause, such obligation to become due prior
to its stated maturity; or
(h) a final judgment in an amount in excess of one
million dollars ($1,000,000) is rendered against the Corpo- ration or any
Subsidiary and, within sixty days after entry thereof, such judgment is not
discharged or execution thereof stayed pending appeal, or within sixty days
after the expiration of any such stay, such judgment is not discharged.
(ii) The existence or continuation of any Event of Noncompliance
shall be irrespective of whether such event or the underlying facts shall have
come about voluntarily or involuntarily
E-12 Page 53
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or shall be beyond the Corporation's or any Subsidiary's control or shall have
come about or been effected by operation of law or pursuant to or in compliance
with any judgment, decree or order of any court or any order, rule or regulation
of any administrative or governmental body or because of paragraph 3I of this
part I.
(iii) The term "Potential Event of Noncompliance" means
the occurrence of any event which with the passage of time or the giving of
notice or both would become an Event of Noncompliance.
5B. CONSEQUENCES OF CERTAIN EVENTS.
(i) If and whenever (a) the Corporation shall have failed to earn
Consolidated Net Income of at least $769,500 for the preceding fiscal year, or
accrued dividends on the Series C Preferred Stock amounting to $269,500 or more
at any time shall not have been paid, or (b) any Event of Noncompliance other
than the failure to pay dividends on the Series C Preferred Stock shall occur,
then the holders of the Series C Preferred Stock until divested of such right as
hereinafter provided, shall be entitled, voting as a single class to elect a
majority of the members of the board of directors (which shall include the
directors elected as provided in paragraph 4), and each Share shall be entitled
to one vote. In the event that the holders of Series C Preferred Stock shall
become so entitled to elect a majority of the members of the board of directors,
a special meeting for the election of such directors (the "Special Meeting")
shall be called in the manner set forth in paragraph 5B(iii), and the holders of
the Series C Preferred Stock, voting as a single class, shall elect such
majority of the members of the board of directors, and the remaining members of
the board of directors shall (subject to the right of holders of any class or
series of stock or other securities of the Corporation other than the Series C
Preferred Stock to elect directors upon the happening of an event, such as a
default in the payment of dividends) be elected by the holders of the securities
of the Corporation entitled at the time to vote for the election of directors.
Thereafter, at each annual meeting of the stockholders of the Corporation, until
divested as hereinafter provided of their right to elect a majority of the
members of the board of directors, the holders of the Series C Preferred Stock,
voting as a single class, shall elect a majority of the members of the board of
directors, and the remaining members of the board of directors shall (subject to
the right of holders of any class or series of stock or other securities of the
Corporation other than the Series C Preferred Stock to elect directors upon the
happening of an event, such as a default in the payment of dividends) be elected
by the holders of the securities of the Corporation entitled at the time to
vote for the election of directors.
(ii) The directors (other than those elected as provided in
paragraph 4) elected by the holders of the Series C Preferred
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Stock voting as a single class pursuant to the aforesaid right or designated
pursuant to the provisions of this paragraph shall automatically cease to serve
as such whenever (a) if the Corporation's failure to earn Consolidated Net
Income of $769,500 for a preceding fiscal year or the non-payment of dividends
on the Series C Preferred Stock entitled the Series C Preferred Stock to elect a
majority of the board of directors, when the Corporation shall have earned
Consolidated Net Income of at least $769,500 for a subsequent fiscal year, and
the unpaid accrued dividends on the Series C Preferred Stock shall be less than
$269,500, or (b) if an Event of Noncompliance other than the failure to pay
dividends on the Series C Preferred Stock entitled the Series C Preferred Stock
to elect a majority of the board of directors, when all Events of Noncompliance,
except the nonpayment of dividends, are cured. Any such directors may otherwise
be removed only by the vote of the holders of record of the majority of Shares
at a meeting of the stockholders or of the holders of Shares called for that
purpose. Any vacancy in the office of any of such directors may be filled by
designation to the Corporation in writing by the remaining directors then in
office who were elected by the holders of the Series C Preferred Stock pursuant
to this paragraph 5B, or, if not so filled within thirty days after the vacancy
occurs, by the holders of the Series C Preferred Stock at any meeting, annual or
special, for the election of directors held thereafter. A special meeting of the
holders of shares of Series C Preferred Stock may be called for the purpose of
filling any such vacancy. In the case of removal of any such director, the
vacancy may be filled at the same meeting at which such removal was voted.
(iii) At any time when such special voting power shall have vested in
the holders of the Series C Preferred Stock as provided in paragraph 5B, and at
other times as provided in paragraph 4, a proper officer of the Corporation
shall, upon the written request of the holders of record of at least ten percent
(10%) of the Series C Preferred Stock, addressed to the Secretary of the
Corporation, call a Special Meeting of the holders of the Series C Preferred
Stock and the Common Stock for the purpose of electing the directors necessary
to constitute a majority of the board of directors in the manner provided by
paragraph 5B(iv). The Special Meeting shall be held at the earliest practicable
date at the principal office of the Corporation in the State of Delaware, as
shall be designated by such officer and specified in the notice of the Special
Meeting. If the Special Meeting shall not be called by the proper officers of
the Corporation within twenty days after personal service of said written
request upon the Secretary of the Corporation or within twenty days after
mailing the same within the United States of America, by registered mail
addressed to the Secretary of the Corporation at its principal office, then the
holders of record of at least ten percent (10%) of the Series C Preferred Stock
then outstanding may designate in writing one of their number to call the
Special Meeting at the expense of the Corporation; and the Special Meeting may
be called by such person
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so designated upon the notice required for annual meetings of stockholders and
shall be held at the principal office of the Corporation in the State of
Delaware. Any holder of Series C Preferred Stock so designated shall have access
to the stock books of the Corporation for the purpose of causing a Special
Meeting of stockholders to be called pursuant to these provisions.
Notwithstanding the provisions of this paragraph, no Special Meeting shall be
called or held during the period within ninety days immediately preceding the
date fixed for the next annual meeting of stockholders.
(iv) Upon the calling of the Special Meeting as provided in
paragraph 5B(iii), vacancies shall be created on the Corporation's board of
directors in accordance with the Corporation's bylaws. If the Corporation's
bylaws do not provide for such vacancies, all directors elected by holders of
the Corporation's securities other than Series C Preferred Stock shall cease to
serve except those directors specifically reelected at the Special Meeting in
accordance with this paragraph 5B(iv). At the Special Meeting, (a) holders of
Series C Preferred Stock shall elect the number of directors which, together
with the directors elected as provided in paragraph 4 constitutes a majority of
the Corporation's directors, and (b) remaining members of the board of directors
shall (subject to the right of holders of any class or series or other
securities of the Corporation other than the Series C Preferred Stock to elect
directors upon the happening of an event, such as default in the payment of
dividends) be elected by the holders of the securities of the Corporation
entitled at the time to vote for the election of directors. If for any reason
the remaining members of the board of directors are not elected at the Special
Meeting, the directors elected by Series C Preferred Stock may fill any
remaining vacancies on the board of directors.
(v) If any Event of Noncompliance shall exist, each holder of any
Shares shall have, in addition to the rights expressly provided in this
paragraph 5B, any other rights which such holder may have been afforded under
any contract or agreement at any time and any other rights which such holder may
have under applicable law, but no such right shall include the right to cause
redemption of the Series C Preferred Stock when it is prohibited by paragraph 3I
of this part I.
6. RESTRICTIONS.
(a) So long as any Series C Preferred Stock shall be outstanding, the
Corporation shall not create any class or series of stock ranking, as to parity,
payment of dividends or as to liquidation preference, prior to, or equal to, the
Series C Preferred Stock.
(b) So long as any Series C Preferred Stock shall remain outstanding,
the Corporation shall not, except with the prior
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written consent or the affirmative vote of the holders of record of at least
eighty percent of the then outstanding shares of Series C Preferred Stock, (i)
amend, alter or repeal this part I, (ii) otherwise amend, alter or repeal the
certificate of incorporation or its by-laws, or file any directors'
resolutions pursuant to the General Corporation Law of the State of Delaware,
adversely affecting any of the powers, preferences and special rights set forth
in this part I, or (iii) be a party to or enter into any agreement which would
prohibit or in any way restrict the Corporation from declaring or paying
dividends on, or redeeming, the Series C Preferred Stock, or performing any
other obligation to the holders of the Series C Preferred Stock imposed on the
Corpora- tion by this part I, or permit any Subsidiary to be a party to or to
enter into any agreement which would by its terms prohibit or in any way
restrict such Subsidiary from declaring or paying dividends to the Corporation
(directly, or indirectly through one or more other Subsidiaries) or the
Corporation from declaring or paying dividends on, or redeeming the Series C
Preferred Stock, or performing any other obligation to the holders of the Series
C Preferred Stock imposed on the Corporation by this part I.
7. VOTING RIGHTS. Except as otherwise provided by law, or as otherwise
provided in this part I of Article FOURTH, Shares shall entitle the holders
thereof to no voting rights.
8. CLOSING OF BOOKS. The Corporation will not close its books against the
transfer of any Share.
9. REGISTRATION OF TRANSFER. The Corporation shall keep at its principal
office (or such other place as the Corporation reasonably designates) a register
for the registration of Shares. Upon the surrender of any certificate
representing Series C Preferred Stock at such place, the Corporation shall, at
the request of the registered holder of such certificate, execute and deliver a
new certificate or certificates in exchange therefor representing in the
aggregate the number of Shares represented by the surrendered certificate (and
the Corporation forthwith shall cancel such surrendered certificate), subject to
the requirements of applicable securities laws. Each such new certificate shall
be registered in such name and shall represent such number of Shares as shall be
requested by the holder of the surrendered certificate and shall be
substantially identical in form to the surrendered certificate; and dividends
shall be calculated cumulatively on a daily basis on the Shares represented by
such new certificate from the date to which dividends have been fully paid on
the Shares represented by the surrendered certificate at the rate and in the
manner applicable to such surrendered certificate. The issuance of new
certificates shall be made without charge to the holders of the surrendered
certificates for any issuance tax in respect thereof or other cost incurred by
the Corporation in connection with such issuance; provided that the Corporation
shall not be required to pay any tax which may be payable in respect of any
transfer
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involved in the issuance and delivery of any certificate in a name other than
that of the holder of the surrendered certificate.
10. REPLACEMENT.
(i) Upon receipt of evidence reasonably satisfactory to the
Corporation (an affidavit of the registered holder, without bond, shall be
satisfactory) of the ownership and the loss, theft, destruction or mutilation of
any certificate evidencing one or more Shares and, in the case of any such loss,
theft or destruction, upon receipt of indemnity reasonably satisfactory to the
Corporation (provided that if the registered holder is an institution, its own
agreement of indemnity shall be satisfactory), or, in the case of any such
mutilation, upon surrender of such certificate, the Corporation shall (at its
expense) execute and deliver in lieu of such certificate a new certificate of
like kind representing the number of Shares represented by such lost, stolen,
destroyed or mutilated certificate and dated the date of such lost, stolen,
destroyed or mutilated certificate, on which dividends shall be calculated
cumulatively on a daily basis from the date to which dividends have been fully
paid on such lost, stolen, destroyed or mutilated certificate at the rate and in
the manner applicable to such certificate.
(ii) The term "outstanding" when used in this part I with reference to
Shares as of any particular time shall not include any Shares represented by any
certificate in lieu of which a new certificate has been executed and delivered
by the Corporation in accordance with paragraph 9 or this paragraph 10, but
shall include only those Shares represented by such new certificate.
11. DEFINITIONS. The following terms shall have the following meanings,
which meanings shall be equally applicable to the singular and plural forms of
such terms:
(i) "Business Day" means any day which is not a Saturday or a Sunday
or a bank holiday in New York, New York.
(ii) "Junior Security" means any equity security of any kind which the
Corporation or any Subsidiary shall at any time issue or be authorized to issue
other than the Series C Preferred Stock.
(iii) "Liquidation Value" of any Share as of any particu- lar date
shall be equal to the sum of two dollars ($2.00), plus any unpaid dividends on
such Share added to the Liquidation Value of such Share on any Dividend
Reference Date pursuant to paragraph 1C of this part I and not thereafter paid;
and, in the event of any liquidation, dissolution or winding up of the
Corporation, unpaid dividends on such Share shall be added to the Liquidation
Value of such Share on the payment date under paragraph 2, calculated
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cumulatively to the close of business on such payment date on a daily basis.
(iv) "Person" includes an individual, a partnership, a corporation,
a trust, a joint venture, an unincorporated organization and a government or
any department or agency thereof.
(v) "Purchase Agreement" means the Preferred Stock and Warrant
Purchase Agreement dated January 3, 1984, pursuant to which the Shares were
issued as the same shall from time to time be modified and amended.
(vi) "Redemption Date" as to any Share means the date specified in
the notice of redemption in the case of a redemption of such Share pursuant to
paragraph 3D, provided that for purposes of paragraph 3F no such date shall be a
Redemption Date unless on such date the applicable Redemption Price is actually
paid or funds as required to pay the applicable Redemption Price are set aside
by the Corporation, separate and apart from its other funds, in trust for the
pro rata benefit of holders of shares of Series C Preferred Stock to be
redeemed. Should those funds be thus set aside, then notwithstanding any failure
to surrender for cancellation any shares of Series C Preferred Stock being
redeemed, the shares represented thereby shall no longer be deemed outstanding,
the right to receive dividends thereon shall cease to accrue from and after the
Redemption Date, and all rights of the holders of such shares shall terminate
after that date save only the right of those holders to receive the redemption
price therefor without interest. Any funds thus set aside that remain unclaimed
for one year after the Redemption Date shall revert to the Corporation's general
funds, and thereafter the holders of redeemed shares shall look only to the
Corporation for payment of the redemption price although such shares shall not
be deemed outstanding.
(vii) "Subsidiary" means any corporation or other entity at least a
majority of the Voting Stock or capital or equity, however named, of which is,
at the time as of which any determination is being made, owned by the
Corporation either directly or indirectly through one or more Subsidiaries.
(viii) "Voting Stock" means any shares of stock having general voting
power in electing the board of directors (irrespective of whether or not at
the time stock of any other class or classes has or might have voting power by
reason of the happening of any contingency).
(ix) "Warrants" means the Warrants issued in conjunction with the
initial issuance of the Series B Preferred Stock.
(x) "Wholly-owned Subsidiary" means any Subsidiary all of the
Voting Stock or capital or equity, however named, of which (except directors'
qualifying shares) is, and all securities con-
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vertible into or exchangeable or exercisable for any such Voting Stock or
capital or equity of which are, and all rights (contingent or otherwise) to
subscribe for or to purchase any such capital stock or any such securities are,
at the time as of which any such determination is being made, owned by the
Corporation either directly or indirectly through one or more Wholly-owned
Subsidiaries.
12. NO SALE, LEASE OR EXCHANGE OF ASSETS, MERGER OR CONSOLIDATION, OR
CERTAIN ACQUISITIONS WITHOUT CONSENT OF HOLDERS OF SERIES C PREFERRED STOCK.
Without the prior written consent of the holders of at least 66.67 percent of
the Shares outstanding or the vote of such percentage of the holders thereof
after due and proper notice, the Corporation will not (a) sell, lease or
exchange all or substantially all of its properties or assets, whether or not in
the ordinary course of business and whether directly or through the sale or
exchange of stock of any Subsidiary or Subsidiaries, other than liquidation of a
Subsidiary existing on December 31, 1983, into the Corporation, (b) merge or
consolidate with or into any other entity other than a merger of a Wholly-owned
Subsidiary existing on December 31, 1983, into the Corporation, or (c) acquire
directly or indirectly any business, whether by purchase of assets, stock or
otherwise, (i) for a consideration, whether cash, notes, securities or
otherwise, in excess of $5,000,000, or (ii) which business has total liabilities
exceeding its shareholders equity, both determined in accordance with generally
accepted accounting principles.
13. AMENDMENT AND WAIVER. (a) No amendment, modification or waiver of any
provision of this part I (or of the percentage of Shares required to approve
such amendment, modification or waiver) shall be binding or effective without
the prior written consent or the affirmative vote of the holders of at least 80
per cent of the Shares outstanding at the time such change shall be made.
(b) No amendment, modification or waiver of any provision of this part I
shall extend to or affect any obligation not expressly amended, modified or
waived or impair any right consequent thereon. No course of dealing, and no
failure to exercise or delay in exercising any right, remedy, power or privilege
under this part I, shall operate as a waiver, amendment or modification of any
provision of this part I.
14. FULLY PAID AND NON-ASSESSABLE. The Shares of the Series C Preferred
Stock shall be fully paid and non-assessable.
15. CONVERSION.
15A. CONVERSION OPTION. Subject to the provisions for adjustment
subsequently set forth in this paragraph 15, each Share of the Series C
Preferred Stock shall be convertible at the option of the holder thereof, upon
surrender to the Corporation of the
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certificate for the Share or Shares to be converted, into fully paid and
non-assessable shares of Common Stock on the basis of treating the par value of
the converted Shares as payment for the purchase price of the Common Stock
determined in accordance with the following schedule (the "Purchase Price"):
Date Preferred Certificate Purchase Price of each Share
Surrendered for Conversion of Common Stock
- -------------------------- ----------------------------
Before 9-1-87 $2.25
On or after 9-1-87 and
before 9-1-88 2.00
On or after 9-1-88 and
before 9-1-89 1.75
On or after 9-1-89 and
before 9-1-90 1.50
On or after 9-1-90 1.00
Any Shares so surrendered for conversion shall be duly endorsed, or accompanied
by proper instrument of transfer, to the Corporation or in blank, together with
a written notice to the Corporation of the election to make such conversion and
of the name or names in which the certificate or certificates to represent
Shares of the Common Stock shall be issued. The right to convert Shares of the
Series C Preferred Stock called for redemption shall terminate at the close of
business on the date fixed for such redemption or at the close of business on
such earlier day, not earlier than the fifth day prior to the date fixed for
such redemption, as shall be determined by the board of directors. Upon
conversion of any Shares of the Series C Preferred Stock, no allowance or
adjustment shall be made for accumulated unpaid dividends on the Series C Pre-
ferred Stock or for dividends on the Common Stock issued upon such conversion.
The Corporation shall pay all taxes and other charges in respect of the issue of
shares of the Common Stock upon any such conversion; provided, however, that the
Corporation shall not be required to pay any tax which may be payable in respect
of any transfer involved in the issuance and delivery of shares of the Common
Stock in a name other than that in which the Shares of the Series C Preferred
Stock so converted were registered.
15B. ANTI-DILUTION PROVISIONS; ADJUSTMENT OF PURCHASE PRICE. The
Purchase Price shall be subject to adjustment from time to time as hereinafter
provided. Upon each adjustment of the Purchase Price, the holder of each Share
shall thereafter be entitled to acquire by conversion, at the Purchase Price
resulting from such adjustment, the number of shares of Common Stock (calculated
to the nearest whole share) obtained by multiplying the
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Purchase Price in effect immediately prior to such adjustment by the number of
shares purchasable pursuant hereto immediately prior to such adjustment and
dividing the product thereof by the Purchase Price resulting from such
adjustment.
15C. ADJUSTMENT FORMULAS FOR PURCHASE PRICE. If and whenever after the
effective date (as defined in Section (b) of Article FOURTH) the Corporation
shall issue or sell any shares of its Common Stock for a consideration per share
less than the Purchase Price in effect immediately prior to such issue or sale,
then forthwith such Purchase Price shall be reduced to a price (calculated to
the nearest $0.01) determined by dividing (1) an amount equal to the sum of (aa)
the number of shares of Common Stock outstanding immediately prior to such issue
or sale multiplied by such then existing Purchase Price, and (bb) the
consideration, if any, received and deemed received by the Corporation upon
such issue or sale, by (2) the total number of shares of Common Stock
outstanding and deemed outstanding immediately after such issue or sale. No
adjustment of the Purchase Price, however, shall be made in an amount less than
$0.01 per share, but any such lesser adjustment shall be carried forward and
shall be made at the time and together with the next subsequent adjustment which
together with any adjustments so carried forward shall amount to $0.01 per share
or more.
15D. CONSTRUCTIVE ISSUANCES OF STOCK; CONVERTIBLE SECURITIES; RIGHTS
AND OPTIONS; STOCK DIVIDENDS. For the purposes of paragraph 15C, the following
provisions (1) to (7), inclusive, shall also be applicable.
(1) In case at any time the Corporation shall in any manner grant any
rights to subscribe for or to purchase, or any options for the purchase of,
Common Stock or any stock or securities convertible into or exchangeable for
Common Stock (such convertible or exchangeable stock of securities being
herein called "Convertible Securities"), whether or not such rights or
options or the right to convert or exchange any such Convertible Securities
are immediately exercisable, and the price per share for which Common Stock
is issuable upon the exercise of such rights or options or upon conversion or
exchange of such Convertible Securities (determined by dividing (a) the total
amount, if any, received or receivable by the Corporation as consideration
for the granting of such rights or options, plus the minimum aggregate amount
of additional consideration, if any, payable to the Corporation upon the
exercise of such rights or options, plus, in the case of any such rights or
options which relate to such Convertible Securities, the minimum aggregate
amount of additional consideration, if any, payable upon the issue or sale of
such Convertible Securities and upon the conversion or exchange thereof, by
(b) the total maximum number of shares of Common Stock issuable upon the
exercise of such rights or options or upon the conversion or exchange of all
such Convertible Securities issuable upon the exercise of such rights or
options)
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shall be less than the Purchase Price in effect immediately prior to the time of
the granting of such rights or options, then the total maximum number of shares
of Common Stock issuable upon the exercise of such rights or options or upon the
conversion or exchange of the total maximum amount of such Convertible
Securities issuable upon the exercise of such rights or options shall (as of the
date of granting of such rights or options) be deemed to be outstanding and to
have been issued for such price per share. Except as provided in subdivision (3)
below no further adjustments of the Purchase Price shall be made upon the actual
issue of such Common Stock or of such Convertible Securities upon exercise of
such rights or options or upon the actual issue of such Common Stock upon
conversion or exchange of such Convertible Securities.
(2) In case at any time the Corporation shall in any manner issue or sell
any Convertible Securities, whether or not the rights to exchange or convert
thereunder are immediately exercisable, and the price per share for which Common
Stock is issuable upon such conversion or exchange (determined by dividing (a)
the total amount received or receivable by the Corporation as consideration for
the issue or sale of such Convertible Securities, plus the minimum aggregate
amount of additional consideration, if any, payable to the Corporation upon the
conversion or exchange thereof, by (b) the total maximum number of shares of
Common Stock issuable upon the conversion or exchange of all such Convertible
Securities) shall be less than the Purchase Price in effect immediately prior to
the time of such issue or sale, then the total maximum number of shares of
Common Stock issuable upon conversion or exchange of all such Convertible
Securities shall (as of the date of the issue or sale of such Convertible
Securities) be deemed to be outstanding and to have been issued for such price
per share; PROVIDED, that, except as otherwise specified in subdivision (3)
below, (x) no further adjustments of the Purchase Price shall be made upon the
actual issue of such Common Stock upon conversion or exchange of such
Convertible Securities, and (y) if any such issue or sale of such Convertible
Securities is made upon exercise of any rights to subscribe for or to purchase
or any option to purchase any such Convertible Securities for which adjustments
of the Purchase Price has been or is to be made pursuant to other provisions of
this paragraph 15D, no further adjustment of the Purchase Price shall be made by
reason of such issue or sale.
(3) If the purchase price provided for in any right or option referred to
in subdivision (1) of this paragraph 15D, or the rate at which any Convertible
Securities referred to in subdivisions (1) and (2) of this paragraph 15D are
convertible into or exchangeable for Common Stock, shall change or a different
purchase price or rate shall become effective at any time or from time to time
(other than under or by reason of provisions designed to protect against
dilution) then, upon such change becoming effective, the Purchase Price then in
effect hereunder shall forthwith be increased (but not above the prices
scheduled in paragraph 15A for each relevant
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time period) or decreased to such Purchase Price as would have obtained had the
adjustments made upon the issuance of such rights or options or Convertible
Securities been made upon the basis of (and the total consideration received
therefor) (a) the issuance of the number of shares of Common Stock theretofore
actually delivered upon the exercise of such options or rights or upon the
conversion or exchange of such Convertible Securities, (b) the issuance of all
Common Stock and all other rights, options and Convertible Securities issued
after the issuance of such rights, options or Convertible Securities, and (c)
the original issuance at the time of such change of any such options, rights and
Convertible Securities then still outstanding. On the expiration of any such
option or right or the termination of any such right to convert or exchange such
Convertible Securities, the Purchase Price then in effect hereunder shall
forthwith be increased (but not above the prices scheduled in paragraph 15A for
each relevant time period) or decreased to such Purchase Price as would have
obtained (x) had the adjustments made upon the issuance of such rights or
options or Convertible Securities been made upon the basis of the issuance of
only the number of shares of Common Stock theretofore actually delivered (and
the total consideration received therefor) upon the exercise of such rights or
options or upon the conversion or exchange of such Convertible Securities and
(y) had adjustments been made on the basis of the Purchase Price as adjusted
under the immediately preceding clause (x) for all issues or sales of Common
Stock or rights, options or Convertible Securities made after the issuance of
such rights or options or Convertible Securities. If the purchase price provided
for in any right or option referred to in subdivision (1) of this paragraph 15D,
or the rate at which any Convertible Securities referred to in subdivisions (1)
and (2) of this paragraph 15D are convertible into or exchangeable for Common
Stock, shall decrease at any time to an amount below the Purchase Price then in
effect under or by reason of provisions with respect thereto designed to protect
against dilution and the dilutive event causing such decrease is one that did
not also require an adjustment in the Purchase Price under the provisions of
this paragraph 15, then in the case of the delivery of shares of Common Stock
upon the exercise of any such right or option or upon conversion or exchange of
any such Convertible Securities, the Purchase Price then in effect hereunder
shall forthwith be decreased to such Purchase Price as would have obtained had
the adjustments made upon issuance of such right or option or Convertible
Securities been made upon the basis of the issuance of (and the total
consideration received for) the shares of Common Stock delivered as aforesaid.
(4) In case at any time the Corporation shall declare a dividend or make
any other distribution upon any stock of the Corporation payable in Common Stock
or Convertible Securities, any Common Stock or Convertible Securities, as the
case may be, issuable in payment of such dividend or distribution shall be
deemed to have been issued or sold without consideration.
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(5) In case at any time any shares of Common Stock or Con- vertible
Securities or any rights or options to purchase any such Common Stock or
Convertible Securities shall be issued or sold for cash, the consideration
received therefor shall be deemed to be the amount payable to the Corporation
therefor, without deduction therefrom of any expenses incurred or any
underwriting commissions or concessions or discounts paid or allowed by the
Corporation in connection therewith. In case any shares of Common Stock or
Convertible Securities shall be issued or sold for a consideration other than
cash, the amount of the consideration other than cash payable to the Corporation
shall be deemed to be the fair value of such consideration as reasonably
determined by the Board of Directors of the Corporation, without deduction
therefrom of any expenses incurred or any underwriting commissions or
concessions or discounts paid or allowed by the Corporation in connection
therewith. In case any shares of Common Stock or Convertible Securities or any
rights or options to purchase any such Common Stock or Convertible Securities
shall be issued in connection with any merger of another corporation into the
Corporation, the amount of consideration therefor shall be deemed to be the fair
value as reasonably determined by the Board of Directors of the Corporation of
such portion of the assets of such merged corporation as such Board shall
determine to be attributable to such Common Stock, Convertible Securities,
rights or options, as the case may be.
(6) In case at any time the Corporation shall take a record of the holders
of its Common Stock for the purpose of entitling them (a) to receive a dividend
or other distribution payable in Common Stock or in Convertible Securities, or
(b) to subscribe for or purchase Common Stock or Convertible Securities, then
such record date shall be deemed to be the date of the issue or sale of the
shares of Common Stock deemed to have been issued or sold upon the declaration
of such dividend or the making of such other distribution or the date of the
granting of such right of subscription or purchase, as the case may be.
(7) The number of shares of Common Stock outstanding at any given time
shall include shares owned or held by or for the account of the Corporation, and
the disposition of any such shares shall not be considered an issue or sale of
Common Stock for the purposes of paragraph 15C.
15E. CORPORATION TO PREVENT DILUTION. In case at any time or from time
to time conditions arise by reason of action taken by the Corporation which are
not adequately covered by the provisions of this paragraph 15, and which might
materially and adversely affect the conversion rights of the holders of the
Shares under any provision of this paragraph 15, the Board of Directors shall
appoint a firm of independent certified public accountants of recognized
standing, who may be the firm regularly retained by the Corporation, who shall
give their opinion upon the adjustment, if any, on a basis consistent with the
standards established in the
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other provisions of this paragraph 15, necessary with respect to the Purchase
Price, so as to preserve, without dilution, the exercise rights of the holders
of the Shares. Upon receipt of such opinion, the Board of Directors shall
forthwith make the adjustments described therein.
15F. EFFECT OF CERTAIN DIVIDENDS. In case at any time the Corporation
shall declare a dividend upon the Common Stock (other than a dividend payable in
Common Stock) payable otherwise than out of net earnings after taxes accumulated
from and after August 31, 1985, the Purchase Price in effect immediately prior
to the declaration of such dividend shall be reduced by an amount equal, in the
case of a dividend in cash, to the amount thereof payable per share of Common
Stock or, in the case of any other dividend, to the fair value thereof per share
of Common Stock as determined by the Board of Directors of the Corporation. Such
reductions shall take effect as of the date on which a record is taken for the
purpose of such dividend, or, if a record is not taken, the date as of which the
holders of record of Common Stock of record entitled to such dividend are to be
determined. As used in this Paragraph 15F, the term "dividend" shall mean any
distribution to the holders of Common Stock as such.
15G. STOCK SPLITS AND REVERSE SPLITS. In case at any time the
Corporation shall subdivide its outstanding shares of Common Stock into a
greater number of shares, the Purchase Price in effect immediately prior to such
subdivision shall be proportionately reduced and the number of shares of
Common Stock into which a Share is convertible immediately prior to such
subdivision shall be proportionately increased, and conversely, in case at any
time the Corporation shall combine its outstanding shares of Common Stock into a
smaller number of shares, the Purchase Price in effect immediately prior to such
combination shall be proportionately increased and the number of shares of
Common Stock into which a Share is convertible immediately prior to such
combination shall be proportionately reduced. Except as provided in this
paragraph 15G, no adjustment in the Purchase Price and no change in the number
of shares of Common Stock into which a Share is convertible shall be made
pursuant to this paragraph 15 as a result of or by reason of any such
subdivision or combination.
15H. EFFECT OF REORGANIZATION AND ASSET SALES. If any capital
reorganization or reclassification of the capital stock of the Corporation, or
consolidation or merger of the Corporation with another corporation, or the sale
of all or substantially all of its assets to another corporation, shall be
effected in such a way that holders of Common Stock shall be entitled to receive
stock, securities or assets with respect to or in exchange for Common Stock,
then as a condition of such reorganization, reclassification, consolidation,
merger or sale, lawful and adequate provision shall be made whereby each holder
of Shares shall thereafter have the right to receive, upon the terms and
conditions
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herein contained, in lieu of the shares of the Common Stock of the Corporation
immediately theretofore receivable upon conversion of such Shares, such shares
of stock, securities or assets as may be issued or payable with respect to or in
exchange for a number of outstanding shares of such Common Stock equal to the
number of shares of such stock immediately theretofore so receivable had such
reorganization, reclassification, consolidation, merger or sale not taken place,
and in any such case appropriate provision shall be made with respect to the
rights and interests of such holder to the end that the provisions hereof
(including, without limitation, provisions for adjustment of the Purchase Price
and of the number of shares issuable upon conversion) shall thereafter be
applicable, as nearly as may be, in relation to any shares of stock, securities
or assets thereafter deliverable upon the conversion of such Shares. The
Corporation shall not effect any such consolidation, merger or sale unless prior
to or simultaneously with the consummation thereof the successor corporation
(if other than the Corporation) resulting from such consolidation or merger or
the corporation purchasing such assets shall assume by written instrument
executed and mailed or delivered to each holder of Shares, the obligation to
deliver to such holder such shares of stock, securities or assets as, in
accordance with the foregoing provisions, such holder may be entitled to
receive, and containing the express assumption of such successor corporation of
the due and punctual performance and observance of each provision of this
paragraph 15 to be performed and observed by the Corporation and of all
liabilities and obligations of the Corporation under this paragraph 15.
15I. ACCOUNTANTS' CERTIFICATE. Upon each adjustment of the Purchase
Price and upon each change in the number of shares of Common Stock issuable upon
the conversion of a Share, and in the event of any change in the rights of the
holders of Shares under this paragraph 15 by reason of other events herein set
forth, then and in each such case, the Corporation will promptly obtain a
certificate of a firm of independent certified public accountants of recognized
standing selected by the Corporation's Board of Directors (who may be the
regular auditors of the Corporation), stating the adjusted Purchase Price and
the new number of shares of Common Stock issuable, or specifying the other
shares of stock, securities or assets and the amount thereof receivable as a
result of such change in rights, and setting forth in reasonable detail the
method of calculation and the facts upon which such calculation is based. The
Corporation will promptly mail a copy of such accountants' certificate to the
registered holders of all Shares. The certificate of such firm of independent
public accountants shall be conclusive evidence of the correctness of the
computation with respect to any such adjustment of the Purchase Price and any
such change in the number of such shares so issuable.
15J. The Corporation shall at all times reserve and keep available out
of its authorized but unissued Common Stock the full
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number of shares of Common Stock into which all shares of the Series C Preferred
Stock from time to time outstanding are convertible.
15K. Shares of the Series C Preferred Stock surrendered for conversion
shall not under any circumstances be reissued, sold or transferred by the
Corporation.
16. REGISTRATION RIGHTS.
16A. DEFINITIONS. For purposes of this paragraph 16 of Part I, the
following terms shall have the following meanings:
(1) "Commission" shall mean the Securities and Exchange Commission.
(2) "Holders" shall mean any holder or holders of Registrable Securities.
(3) The terms "register," "registered," and "registration" shall refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
(4) "Registrable Securities" shall mean all shares of (a) Series C
Preferred Stock which are issued and outstanding from time to time, (b) Common
Stock which were received by the holders of the Old Series B Preferred Stock as
a result of the change of the Old Series B Preferred Stock into shares of Common
Stock and of Series C Preferred Stock, and (c) Common Stock which are issued
upon conversion of shares of the Series C Preferred Stock in accordance with
paragraph 15A of this Part I.
(5) "Securities Act" shall mean the Securities Act of 1933, as amended.
B. NOTICE OF INTENTION TO TRANSFER; OPINION OF COUNSEL. Before any
transfer of Registrable Securities, the Holder of such securities shall give
written notice to the Corporation of its intention to effect such transfer
describing such intended transfer as set forth in subdivision (1) of this
paragraph 16B, and shall deliver to the Corporation an opinion of counsel for
the Corporation or an opinion, reasonably satisfactory to counsel for the
Corporation, of Eaton & Van Winkle or other counsel skilled in securities
matters (selected by such Holder and reasonably satisfactory to the
Corporation) as to the necessity or non-necessity of registration under the
Securities Act, or an interpretative letter from the Commission to the effect
that the proposed transfer may be made without registration under the
Securities Act; provided, however, that the foregoing shall not apply with
respect to any Registrable Securities as to which there is a
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registration statement in effect under the Securities Act at the time of the
proposed transfer. In the case of such opinion of counsel, the following
provisions shall apply:
(1) If in such opinion of such counsel, the proposed transfer of the
Registrable Securities may be effected without registration under the Securities
Act of the Registrable Securities, the Holder of the Registrable Securities
shall be entitled to transfer the Registrable Securities in accordance with the
intended method of disposition specified in the notice delivered by such Holder
to the Corporation.
(2) If in such opinion of such counsel the proposed transfer of the
Registrable Securities may not be effected without registration under the
Securities Act of the Registrable Securities, the Holder of the Registrable
Securities shall not be enti- tled to transfer the Registrable Securities until
completion of such registration, but, upon the written request of Holders
representing in the aggregate at least 25 percent of the Registrable
Securities then outstanding, the Corporation shall be obligated to prepare and
file and to use its best efforts to effect the registration under the Securities
Act of such Registrable Securities as requested by such Holders, all in
accordance with the following provisions of this paragraph 16; provided, that
the Corporation shall only be obligated to effect a total of one such free
registration pursuant to this subdivision (2) of this paragraph 16B.
Each Holder agrees to indemnify the Corporation against and hold it harmless
from all damages, losses, liabilities (including liability for rescission),
costs and expenses which the Corporation may incur under the Securities Act or
otherwise by reason of any misrepresentation by it of facts concerning it or any
proposed transfer of the Registrable Securities which are material with respect
to the availability of any exemption from registration under the Securities Act.
C. FREE REGISTRATION RIGHT. Whenever the Corporation shall be
required by the Holders of Registrable Securities pursuant to subdivision (2) of
paragraph 16B to effect the registration of any of the Registrable Securities,
the Corporation shall promptly give written notice of such proposed registration
to all other Holders of Registrable Securities and thereupon shall, as
expeditiously as possible, file a registration statement and use its best
efforts within 120 days after the giving of such written request (or, in the
case of a request made within 60 days prior to the end of the Corporation's then
current fiscal year, 210 days after the giving of such written request) to
effect the registration under the Securities Act of
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(1) the Registrable Securities which the Corporation has been requested to
register pursuant to subdivision (2) of paragraph 16B; and
(2) all other Registrable Securities which the Holders have, within 30 days
after the Corporation has given such written notice, requested the Corporation
to register;
all to the extent requisite to permit the disposition by the Holders of the
Registrable Securities so registered of such Registrable Securities. No other
outstanding securities of the Corporation shall be included in such registration
statement without the consent of the underwriter selected by the Holders to sell
the Registrable Securities so registered, which underwriter shall be a member
firm of the New York Stock Exchange of national standing with a net capital of
at least $10,000,000.
16D. PIGGY-BACK REGISTRATION RIGHTS. If the Corporation proposes to
register any shares of its capital stock under the Securities Act, and if the
registration statement is to be filed in a form of the Commission which can
include, or is at any time amended or changed to such a form which can include,
the Registrable Securities, the Corporation will at each such time give written
notice to all Holders of its intention to do so at least 30 days prior to the
filing of said registration statement.
(1) If the representative of the underwriters participating in the sale and
distribution of the Corporation's securities covered by said registration
statement agrees that a number of shares of Registrable Securities may be
included in the registration statement (the "Permissible Secondary Shares"), the
Corporation's notice shall afford the Holders an opportunity to elect within 30
days after receipt thereof to include in such filing their Registrable
Securities. If the aggregate number of Registrable Securities which the Holders
thereof desire to include in such filing exceeds the number of Permissible
Secondary Shares, then each such Holder shall be entitled to include that number
of Registrable Securities which bears the same ratio to the number of
Permissible Secondary Shares as the number of Registrable Securities such Holder
desires to include bears to the number of Registrable Securities all such
Holders desire to include.
(2) The Corporation agrees that it will not without the consent of the
Holders of two-thirds or more of the Registrable Securities hereafter grant to
any present or future shareholder any contractual "piggy-back" registration
rights covering in the aggregate (for all such rights granted after the
effective date (as defined in section (b) of Article FOURTH)) 125,000 shares of
Common Stock (as presently constituted), and also agrees that any Holder
entitled to include a given number of Registrable Securities in a filing as
provided in subdivision (1) of this paragraph l6D may assign or transfer such
right of inclusion to any other Holder.
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(3) The inclusion of Registrable Securities in such filing shall be upon
the condition that the Holders thereof have their shares sold through the
underwriters on the same terms and conditions as applicable to the Corporation
or other selling shareholders of the Corporation.
(4) The Corporation shall be obligated under this subdivision (4) of
paragraph l6D to afford the Holders the right to participate in each such
registration until they have had an opportunity (whether or not availed of) to
participate in at least two registrations which become effective and such
additional registrations as become effective or may be necessary to have
afforded them the opportunity to include in such registrations and sell, in the
aggregate, a number of Registrable Shares equal to three times the maximum
number of Registrable Securities at any time held by them.
16E. CONDITIONS TO REGISTRATION. The obligations of the Corporation
under this paragraph 16 are subject to the conditions that each Holder of
Registrable Shares which are to be included in any registration:
(1) Cooperates with the Corporation in preparing such registration, and
executes such agreements as may be reasonably necessary in favor of any
underwriter selected by the Corporation,
(2) Promptly supplies the Corporation with all information, documents,
representations and agreements reasonably necessary in connection with the
registration of such Holder's Registrable Securities, and
(3) Agrees in writing not to sell or transfer any Registrable Securities
not included in such registration for a period of 90 days after the effective
date of such registration statement without the underwriters' consent, but no
such Holder shall be required to make such agreement unless all other Holders of
Permissible Secondary Shares included in such registration similarly agree.
16F. OPINION OF COUNSEL AS ALTERNATIVE TO REGISTRATION. The
registration rights granted to the Holders under this paragraph 16 shall be
subject to the condition that any registration of Registrable Securities
proposed to be effected need not be effected if the Corporation shall deliver
to the Holders requesting such registration an opinion reasonably
satisfactory to such Holders and their counsel of counsel reasonably
satisfactory to such Holders to the effect that such proposed sale or
disposition for which registration was requested does not require
registration under the Securities Act. The Corporation hereby indemnifies
such Holders, and each of them, against and holds them harmless from all
damages, losses, liabilities (including liability for rescission), costs and
expenses which they may incur under the Securities Act or otherwise
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by reason of their proceeding in accordance with such opinion of counsel.
16G. CORPORATION'S REGISTRATION OBLIGATIONS. If and whenever the
Corporation is obligated by the provisions of this paragraph 16 to effect the
registration of any Registrable Securities under the Securities Act, as
expeditiously as possible the Corporation will, or will use its best efforts to,
as the case may be:
(1) Prepare and file with the Commission a registration statement with
respect to such Registrable Securities and cause such registration statement to
become and remain effective for a period of at least 90 days.
(2) Prepare and file with the Commission such amendments and supplements to
such registration statement and the prospectus used in connection therewith as
may be necessary to keep such registration statement effective until the earlier
of the sale of all Registrable Securities covered thereby or the expiration of a
period of nine months from the date it became effective, and to comply with the
provisions of the Securities Act with respect to the disposition of all
Registrable Securities covered by such registration statement. In the event that
any Registrable Securities included in a registration statement subject to, or
required by, this paragraph 16 remain unsold at the end of the period during
which the Corporation is obligated to use its best efforts to maintain the
effectiveness of such registration statement, the Corporation, if and when a
further amendment or supplement would be required to comply with Section 10 of
the Securities Act, may file a post-effective amendment to the registration
statement for the purpose of removing such Registrable Securities from
registered status.
(3) Furnish to Holders of Registrable Securities for whom such shares are
registered or are to be registered such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents, as such Holders may reasonably request
in order to facilitate the disposition of such shares.
(4) Register or qualify the Registrable Securities covered by such
registration statement under such other securities or blue sky laws of such
jurisdictions (not exceeding 10 in number for all Holders of Registrable
Securities participating in such offering and subject to the approval of any
managing underwriter involved) as the Holders for whom such Registrable
Securities are registered shall request, and do any and all other acts and
things which may be reasonably necessary or advisable to enable such Holders to
consummate the disposition in such jurisdictions of such Registrable Securities;
PROVIDED, HOWEVER, that the Corporation shall not be obligated, by reason
thereof, to qualify as a foreign
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corporation or file any general consent to service of process under the laws of
any such jurisdiction or subject itself to taxation as doing business in any
such jurisdiction.
(5) Furnish to the Holders of Registrable Securities for whom such shares
are registered or are to be registered at the time of disposition an opinion of
counsel for the Corporation acceptable to such Holders and their counsel to the
effect that a registration statement covering such shares has been filed with
the Commission under the Securities Act and has been made effective by order of
the Commission, that a prospectus complying as to form with the requirements of
the Securities Act is available for delivery, that no stop order has been issued
by the Commission suspending the effectiveness of such registration statement
and that, to the best of such counsel's knowledge, no proceedings for the
issuance of such a stop order are threatened or contemplated, and that the
shares have been registered or qualified under the securities or blue sky laws
of each state in which the Corporation has been advised by the representatives
of the underwriters that they intend to sell such shares, if a firm offering or,
if not, as the Corporation shall be required to register or qualify such shares
as contemplated in subdivision (4) of this paragraph 16G.
(6) Notify the holders of Registrable Securities for whom such Registrable
Securities are registered or are to be registered and their counsel promptly
after the Corporation shall receive notice that any registration statement,
supplement or amendment has become effective, any registration statement is
required to be amended or supplemented, or any stop order has been issued.
H. EXPENSES OF REGISTRATION. The costs and expenses (other than
underwriting discount or commission) of all registrations and qualifications
under the Securities Act, and of all other actions, which the Corporation is
required to take or effect pursuant to this paragraph 16 shall be paid by the
Corporation (including, without limitation, all registration and filing fees,
printing expenses, costs of special audits incident to or required by any such
registration, fees and disbursements of counsel for the Corporation and up to
$50,000 of fees and disbursements of one special counsel acting for the Holders
of Registrable Securities requesting any registration) except that all such
expenses in connection with any amendment or supplement to the registration
statement or the prospectus used in connection therewith required to be filed
more than ninety days after the date on which such registration statement
becomes effective under the Securities Act because any Holder has not effected
the disposition of shares covered by such registration statement shall be borne
by such Holder or Holders, in such proportions as they may agree.
I. NOTICES TO BE COMPLETE. Notices and requests delivered by Holders
to the Corporation pursuant to this paragraph 16 shall contain such information
regarding the Registrable Securities
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and the intended method of disposition thereof as reasonably shall be required
in connection with the action to be taken.
J. INDEMNITY OF CORPORATION. In the event of any registration
under the Securities Act of any Registrable Securities, the Corporation
hereby indemnifies and holds harmless each Holder disposing of such shares
and each other person, if any, who controls such Holder within the meaning of
the Securities Act and each other person (including each underwriter, and
each other person, if any who controls such underwriter) who participates in
the offering of such Registrable Securities, against any losses, claims,
damages or liabilities, joint or several, to which such Holder or controlling
person or participating person may become subject under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or
proceedings in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained, on the
effective date thereof, in any registration statement under which such
Registrable Securities were registered under the Securities Act, in any
preliminary prospectus or final prospectus contained therein, or in any
amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
and will reimburse such Holder and each such controlling person or
participating person for any legal or other expenses reasonably incurred by
such Holder or such controlling person or participating person in connection
with investigating or defending any such loss, claim, damage, liability or
proceeding; PROVIDED, that the Corporation will not be liable in any such
case to the extent that any such loss, claim, damage or liability arises out
of or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission made in such registration statement, said
preliminary or final prospectus or said amendment or supplement in reliance
upon and in conformity with written information furnished to the Corporation
by an instrument duly executed by such Holder or such controlling or
participating person, as the case may be, specifically for use in the
preparation thereof.
K. INDEMNITY OF HOLDER. In the event of any registration under the
Securities Act of any Registrable Securities, each Holder thereof hereby
severally indemnifies and holds harmless the Corporation, each other Holder
disposing of such shares (the "Indemnified Holders"), each other person, if
any, who controls such Indemnified Holders within the meaning of the
Securities Act and each other person (including each underwriter, and each
other person, if any, who controls each underwriter) who participates in the
offering of such Registrable Securities, against any losses, claims, damages
or liabilities, joint or several, to which the Corporation, such Indemnified
Holders or controlling persons or participating persons may become subject
under the Securities Act or otherwise, insofar as such losses, claims,
damages or
E-33 Page 74
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liabilities (or proceedings in respect thereof) arise out of or
based upon any untrue statement or alleged untrue statement of any material
fact contained, on the effective date thereof, in any registration statement
under which such Indemnified Holders were registered under the Securities
Act, in any preliminary prospectus or final prospectus contained therein, or
in any amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
and will reimburse the Corporation, such Indemnified Holders and each of such
controlling persons or participating persons for any legal or other expenses
reasonably incurred by the Corporation, each Indemnified Holder or such
controlling persons or participating persons in connection with investigating
or defending any such loss, claim, damage, liability or proceeding; PROVIDED,
that such Holder will be liable in any such case to the extent, and only to
the extent that such loss, claim, damage or liability arises out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in such registration statement, said preliminary or
final prospectus or said amendment or supplement in reliance upon and in
conformity with written information furnished to the Corporation in an
instrument duly executed by such Holder specifically for use in the
preparation thereof.
II
SERIES D PREFERRED STOCK
1. The Series D Preferred Stock may be issued from time to time in one or
more subseries, the shares of each subseries to have such voting powers, full or
limited, and such designations, preferences and relative, participating,
optional or other special rights and qualifications, limitations or restrictions
thereof as are stated and expressed herein or in the resolution or resolutions
providing for the issue of such subseries adopted by the Board of Directors as
hereinafter provided.
2. Authority is hereby granted to the Board of Directors of the
Corporation, subject to the provisions of this Article FOURTH and to the
limitations prescribed by law, to authorize the issue of one or more subseries
of Series D Preferred Stock and with respect to each subseries to fix by
resolution or resolutions providing for the issue of such subseries the voting
powers, full or limited, if any, of the shares of such subseries and the
designations, preferences and relative, participating, optional or other special
rights and the qualifications, limitations or restrictions thereof. The
authority of the Board of Directors with respect to each subseries shall
include, but not be limited to, the determination or fixing of the following:
(i) The designation of such subseries.
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(ii) The dividend rate of such subseries, the conditions and dates
upon which such dividends shall be payable, the relation which such dividends
shall bear to the dividends payable on any other class or classes of stock, and
whether such dividends shall be cumulative or noncumulative.
(iii) Whether the shares of such subseries shall be subject to
redemption by the Corporation and, if made subject to such redemption, the
times, prices and other terms and conditions of such redemption.
(iv) The terms and amount of any sinking fund provided for the
purchase or redemption of the shares of such subseries.
(v) Whether or not the shares of such subseries shall be
convertible into or exchangeable for shares of any other class or classes or of
any other series of any class or classes of stock of the Corporation, and, if
provision be made for conversion or exchange, the times, prices, rates,
adjustments, and other terms and conditions of such conversion or exchange.
(vi) The extent, if any, to which the holders of the shares of such
subseries shall be entitled to vote with respect to the election of directors or
otherwise.
(vii) The restrictions, if any, on the issue or reissue of any
additional Series D Preferred Stock, and subseries thereof.
(viii) The rights of the holders of the shares of such series and
subseries thereof upon the dissolution of, or upon the distribution of assets
of, the Corporation.
3. Except as otherwise required by law and except for such voting powers
with respect to the election of directors or other matters as may be stated in
the resolution or resolutions of the Board of Directors providing for the issue
of any subseries of Series D Preferred Stock, the holders of any such subseries
shall have no voting power whatsoever.
4. The Corporation may from time to time issue and dispose of any of the
authorized and unissued shares of Series D Preferred Stock for such
consideration, not less than its par value, as may be fixed from time to time by
the Board of Directors, without action by the Stockholders. The Board of
Directors may provide for payment thereof to be received by the Corporation in
cash, property or services. Any and all such shares of the Series D Preferred
Stock of the Corporation the issuance of which has been so authorized, and for
which consideration so fixed by the Board of Directors has been paid or
delivered, shall be fully paid and non-assessable.
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III
COMMON STOCK
1. DIVIDENDS. Subject to all prior rights of holders of the Corporation's
Preferred Stock of any class or series, holders of shares of Common Stock shall
be entitled to dividends when, as and if declared by the Corporation's Board of
Directors out of funds legally available therefor.
2. LIQUIDATION. Upon any liquidation, dissolution or wining up of the
Corporation, after (a) the payment to holders of Series C Preferred Stock shall
have been made as provided by paragraph 2 of part I of this Article FOURTH, and
(b) any other payments required by the provisions of this Article FOURTH to be
made to holders of securities of the Corporation ranking senior to the Common
Stock, shall have been made, the holders of Common Stock shall be entitled
equally on a share-for-share basis to receive any and all assets remaining to be
paid or distributed to stockholders of the Corporation, and holders of Preferred
Stock of any class or series shall not be entitled to shares therein.
3. VOTING. Except as otherwise provided by law or by express provision of
this Certificate of Incorporation, each share of Common Stock shall be entitled
to one vote on any matter submitted for the vote or written consent of
stockholders of the Corporation, including the election of directors.
4. FULLY PAID AND NON-ASSESSABLE. Shares of Common Stock shall be fully
paid and non-assessable.
FIFTH: The number of directors which shall constitute the whole board of
directors shall be no less than five (5) and no more than nine (9), all of whom
shall be elected by the holders of the voting stock of the Corporation.
SIXTH: The Corporation shall make, not less than once annu- ally in advance
of its annual meeting of stockholders, periodic reports to its stockholders
which shall include balance sheets and profit and loss statements of the
Corporation prepared in accordance with sound business and accounting practice.
Any such annual reports shall be certified by a firm of certified public
accountants of good standing.
SEVENTH: In furtherance and not in limitation of the powers conferred by
statute, the board of directors is expressly authorized to adopt, amend or
repeal the by-laws of the Corporation.
EIGHTH: Election of directors need not be by written ballot.
NINTH: A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages
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for breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the Corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
Delaware General Corporation Law, or (iv) for any transaction from which the
director derived an improper personal benefit. Any repeal or modification of
this paragraph by the stockholders of the Corporation shall be prospective
only, and shall not adversely affect any limitation on the personal liability of
a director of the Corporation existing at the time of such repeal or
modification.
6. In accordance with Section 228 of the General Corporation Law of the
State of Delaware and the Corporation's Certficate of Incorporation, the
Amendments were approved at the Corporation's 1995 Annual Meeting of
Stockholders by the affirmative vote of the holders of (a) more than eighty
percent (80%) of all of the issued and outstanding shares of the Corporation's
Series C Preferred Stock and (b) a majority of all of the issued and outstanding
shares of the Corporation's stock entitled to vote thereon (i.e., Common Stock
and Series C Preferred Stock).
7. This Amended and Restated Certificate of Incorporation of the
Corporation was duly adopted in accordance with the provisions of Sections 242
and 245 of the General Corporation Law of the State of Delaware.
8. This Amended and Restated Certificate of Incorporation shall be known
as the "1995 Restated Certificate of Incorporation of DMI Furniture, Inc."
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IN WITNESS WHEREOF, DMI Furniture, Inc., has caused its Chairman and its
Secretary to sign and attest this Amended and Restated Certificate of
Incorporation on March 21, 1995.
DMI FURNITURE, INC.
By /s/Donald D. Dreher
Donald D. Dreher
Chairman of the Board,
President and Chief
Executive Officer
ATTEST:
/s/Joseph G. Hill
Joseph G. Hill, Secretary
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FIFTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
DMI FURNITURE, INC., a Delaware corporation (the "Company"), and BANK ONE,
INDIANAPOLIS, NATIONAL ASSOCIATION, a national banking association (the "Bank"),
parties to an Amended and Restated Credit Agreement dated June 9, 1994, as
amended by a First Amendment to Amended and Restated Credit Agreement dated
October 11, 1994, by a Second Amendment to Amended and Restated Credit Agreement
dated January 10, 1995, by a Third Amendment to Amended and Restated Credit
Agreement dated March 10, 1995, and by a Fourth Amendment to Amended and
Restated Credit Agreement effective as of August 15, 1995 (collectively, as
amended, the "Original Agreement"), agree to amend the Original Agreement by
this Fifth Amendment to Amended and Restated Credit Agreement (this "Fifth
Amendment") as follows:
1. DEFINITIONS. Sections 2.c, 2.d, 2.e, 2.f and 2.g of the Original
Agreement are amended and restated in their entireties and a new Section 2.ddddd
is added to the Original Agreement, all to read as follows:
c. APPLICABLE CREDIT ENHANCEMENT LETTERS OF CREDIT COMMISSION RATE.
"Applicable Credit Enhancement Letters of Credit Commission Rate"
means the rate per annum at which the commission due upon each
Commission Due Date with respect to each of the Credit Enhancement
Letters of Credit will be calculated. This Rate shall be one and
one-half percent (1-1/2%) on and after the date of the Fifth
Amendment.
d. APPLICABLE DOCUMENTARY LETTER OF CREDIT COMMISSION RATE. "Applicable
Documentary Letter of Credit Commission Rate" means the rate at which
the commission due upon the issuance of a Documentary Letter of Credit
will be calculated, expressed as a percentage of the maximum amount
which may be drawn under the Documentary Letter of Credit. This Rate
shall be five-eighths of one percent (5/8%) on and after the date of
the Fifth Amendment.
e. APPLICABLE SPREAD. "Applicable Spread" means Applicable Spread I or
Applicable Spread II, as the context requires, and when used in the
plural form, refers to both of the Applicable Spreads.
f. APPLICABLE SPREAD I. "Applicable Spread I" means that number of
percentage points to be taken into account in determining the rate per
annum at which interest will accrue on the Revolving Loan and on the
Overline Loan. The Applicable Spread I shall be three-fourths of one
percent (3/4%) on and after the date of the Fifth Amendment.
g. APPLICABLE SPREAD II. "Applicable Spread II" means that number of
percentage points to be taken into account in determining the rate per
annum at which interest will accrue on the Term Loan. The Applicable
Spread II shall be one percent (1%) on and after the date of the Fifth
Amendment.
ddddd. FIFTH AMENDMENT. "Fifth Amendment" means that agreement entitled
"Fifth Amendment to Amended and Restated Credit Agreement" between the
Company and the Bank dated as of November 1, 1995.
All other terms defined in the Original Agreement and used in this Fifth
Amendment shall have their respective meanings stated in the Agreement.
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2. THE LOANS. Section 3.a(vi) of the Original Agreement is amended and
restated in its entirety to read as follows:
(vi) FACILITY FEE. In addition to interest on the Revolving Loan, the
Company shall pay to the Bank a facility fee for each partial or full
calendar quarter during which the Revolving Loan Commitment is
outstanding in a per annum amount equal to one-fourth of one percent
(1/4%) of the average daily excess of the Revolving Loan Commitment
over the sum of (A) the principal balance of the Revolving Loan plus
(B) the aggregate principal balance of all outstanding Letters of
Credit issued under the Revolving Loan. Facility fees for each
calendar quarter shall be due and payable within ten (10) days
following the Bank's submission of a statement showing the amount due.
3. REPRESENTATIONS AND WARRANTIES. To induce the Bank to enter into this
Fifth Amendment, the Company affirms that the representations and warranties
contained in the Original Agreement are correct as of the date of this Fifth
Amendment, except that (i) they shall be deemed also to refer to this Fifth
Amendment, as well as all documents named herein, and (ii) Section 5.d shall be
deemed also to refer to the most recent audited (dated September 2, 1995) and
most recent unaudited financial statements of the Company furnished to the Bank.
4. AFFIRMATIVE COVENANTS. Section 7.g of the Original Agreement is
amended in its entirety to read as follows:
(i) CURRENT RATIO. The Company shall maintain the ratio of its current
assets to its current liabilities at levels not less than those shown
in the following table during the periods indicated:
Period Current Ratio
------ -------------
at each fiscal year end 2.25 to 1.0
during each fiscal year until fiscal year end 2.00 to 1.0
(ii) TANGIBLE NET WORTH. The Company shall maintain its Tangible Net Worth
at levels not less than those shown in the following table during the
periods indicated:
Period Tangible Net Worth
------ ------------------
at fiscal year end 1995 and $ 8,500,000
until February 3, 1996
at February 3, 1996 and $ 8,650,000
until May 4, 1996
at May 4, 1996 and $ 8,750,000
until June 29, 1996
at June 29, 1996 and $ 9,000,000
until fiscal year end 1996
at fiscal year end 1996 and $ 9,500,000
until fiscal year end 1997
at fiscal year end 1997 and $10,250,000
all times thereafter
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(iii) RATIO OF DEBT TO TANGIBLE NET WORTH. The Company shall maintain the
ratio of its total liabilities to its Tangible Net Worth at levels not
greater than those show in the following table during the periods
indicated:
Period Ratio
------ -----
at September 3, 1995 and until
December 2, 1995 3.60 to 1.0
at December 2, 1995 and until
March 2, 1996 3.50 to 1.0
at March 2, 1996 and until
fiscal year end 1996 3.25 to 1.0
at fiscal year end 1996 and until
fiscal year end 1997 2.95 to 1.0
at fiscal year end 1997 and at
all times thereafter 2.60 to 1.0
For purposes of testing compliance with this covenant, the term
"liabilities" shall include the present value of all capital lease
obligations of the Company, determined as of any date the ratio is to
be tested.
(iv) FIXED CHARGE COVERAGE RATIO. For each period of four consecutive
fiscal 13-week periods ending on and after the date of the Fifth
Amendment, the Company shall maintain a fixed charge coverage ratio of
not less than 1.25 to 1.0. For purposes of this covenant, the phrase
"fixed charge coverage ratio" means the ratio of the sum of net income
(adjusted to exclude the reserve set aside for the closing of the
Company's facility in Gettysburg, Pennsylvania, occurring during
fiscal year 1996 in an amount not to exceed $995,000, which adjustment
shall be made only so long as such reserve was set aside during the
period tested) plus depreciation, amortization and interest expense
over the sum of current maturities of term debt, including current
capital lease payments, plus interest expense, plus expenditures for
fixed assets and cash used to pay income tax expenses.
5. EVENTS OF DEFAULT. The Company certifies that no Event of Default or
Unmatured Event of Default under the Original Agreement, as amended by this
Fifth Amendment, has occurred and is continuing as of the execution date of this
Fifth Amendment, except as provided in Paragraph 6 below.
6. NONCOMPLIANCE WITH ORIGINAL AGREEMENT. The Bank waives the exercise
of its remedies available under the Original Agreement for the failure of the
Company to comply with the provisions of Section 7.g(ii) of the Original
Agreement for the Company's fiscal year ended on September 2, 1995. The Bank
expects the Company to be in compliance with the financial covenants of the
Original Agreement, as amended by this Fifth Amendment, on the date of this
Fifth Amendment and at all times thereafter. This waiver shall not be construed
as a commitment on the part of the Bank to grant any similar or any other waiver
in the future.
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7. CLOSING DOCUMENTS. As conditions precedent to the effectiveness of
this Fifth Amendment, the Bank shall first receive the following
contemporaneously with the execution and delivery of this Fifth Amendment, each
duly executed, dated and in form and substance satisfactory to the Bank:
A. A certified copy of the resolutions of the Board of Directors of the
Company, authorizing the execution, performance and delivery of this
Fifth Amendment and the other documents named herein;
B. The Company's audited financial statements for its fiscal year ended
on September 2, 1995; and
C. Such other documents as are reasonably required by the Bank.
8. EFFECT OF FIFTH AMENDMENT. Except as amended in this Fifth Amendment,
all of the terms and conditions of the Original Agreement shall continue
unchanged and in full force and effect together with this Fifth Amendment.
IN WITNESS WHEREOF, the Company and the Bank, by their respective duly
authorized officers, have executed and delivered in Indiana this Fifth Amendment
to Amended and Restated Credit Agreement on this 1st day of November , 1995.
DMI FURNITURE, INC.
By: /s/Joseph G. Hill
----------------------------------
Joseph G. Hill, Chief Financial
Officer
BANK ONE, INDIANAPOLIS, NA
By: /s/D. Kelly Queisser
----------------------------------
D. Kelly Quiesser, Vice President
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SIXTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
DMI FURNITURE, INC., a Delaware corporation (the "Company"), and BANK ONE,
INDIANAPOLIS, NATIONAL ASSOCIATION, a national banking association (the "Bank"),
parties to an Amended and Restated Credit Agreement dated June 9, 1994, as
amended by a First Amendment to Amended and Restated Credit Agreement dated
October 11, 1994, by a Second Amendment to Amended and Restated Credit Agreement
dated January 10, 1995, by a Third Amendment to Amended and Restated Credit
Agreement dated March 10, 1995, by a Fourth Amendment to Amended and Restated
Credit Agreement effective as of August 15, 1995, and by a Fifth Amendment to
Amended and Restated Credit Agreement dated November 1, 1995 (collectively, as
amended, the "Original Agreement"), agree to amend the Original Agreement by
this Sixth Amendment to Amended and Restated Credit Agreement (this "Sixth
Amendment") as follows:
1. DEFINITIONS. Sections 2.f, 2.g, 2.p, and 2.kkk of the Original
Agreement are amended and restated in their entireties and a new Section 2.eeeee
is added to the Original Agreement, all to read as follows:
f. APPLICABLE SPREAD I. "Applicable Spread I" means that number of
percentage points to be taken into account in determining the rate per
annum at which interest will accrue on the Revolving Loan and on the
Overline Loan. The Applicable Spread I shall be one-half of one
percent (1/2%) on and after the date of the Fifth Amendment.
g. APPLICABLE SPREAD II. "Applicable Spread II" means that number of
percentage points to be taken into account in determining the rate per
annum at which interest will accrue on the Term Loan. The Applicable
Spread II shall be three-fourths of one percent (3/4%) on and after the
date of the Fifth Amendment.
p. BORROWING BASE. "Borrowing Base" means an amount equal to the sum of
(i) eighty percent (80%) of the adjusted book value of the Company's
accounts receivable, plus (ii) fifty percent (50%) of the book value of
the Company's finished goods inventory, plus (iii) for the period from
December 2, 1995, through March 2, 1996, the period from June 1, 1996,
through August 3, 1996, the period from November 30, 1996, through
March 1, 1997, and for the period from May 31, 1997, through August 2,
1997, $500,000.00, plus (iv) twenty-five percent (25%) of the book
value of the Company's raw materials inventory, plus (v) the Borrowing
Base Adjustment. For purposes of the preceding sentence, the phrase
"adjusted book value of the Company's accounts receivable" means the
book value of the Company's accounts receivable less any accounts which
are sixty (60) days or more past due, or which are due from an account
debtor known to the Company to be the subject of a bankruptcy or other
insolvency proceeding or known to the Company to have ceased doing
business, and less all accounts due from any account debtor if ten
percent (10%) or more of the aggregate amount of the accounts
receivable from such debtor are sixty (60) days or more past due, and
provided that any account receivable otherwise
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includable in the Borrowing Base shall be reduced, but not below zero,
by the amount of any accounts payable to the account debtor from which
such account is due.
kkk. REVOLVING LOAN MATURITY DATE. "Revolving Loan Maturity Date" means
November 30, 1997, and any subsequent date to which the Revolving Loan
Commitment may be extended by the Bank pursuant to the terms of Section
3.a(iv).
eeeee. SIXTH AMENDMENT. "Sixth Amendment" means that agreement entitled
"Sixth Amendment to Amended and Restated Credit Agreement" between the
Company and the Bank dated January 11, 1996.
All other terms defined in the Original Agreement and used in this Sixth
Amendment shall have their respective meanings stated in the Agreement.
2. THE LOANS. The first sentence of Section 3.a(ii) of the Original
Agreement is amended and restated in its entirety to read as follows:
a. (ii) METHOD OF BORROWING. The obligation of the Company to repay the
Revolving Loan shall be evidenced by a promissory note (the
"Revolving Note") of the Company in the form of EXHIBIT "A"
attached to the Sixth Amendment.
3. REPRESENTATIONS AND WARRANTIES. To induce the Bank to enter into this
Sixth Amendment, the Company affirms that the representations and warranties
contained in the Original Agreement are correct as of the date of this Sixth
Amendment, except that (i) they shall be deemed also to refer to this Sixth
Amendment, as well as all documents named herein, and (ii) Section 5.d shall be
deemed also to refer to the most recent audited (dated September 2, 1995) and
most recent unaudited financial statements of the Company furnished to the Bank.
4. AFFIRMATIVE COVENANTS. Section 7.g of the Original Agreement is
amended in its entirety to read as follows:
(i) CURRENT RATIO. The Company shall maintain the ratio of its current
assets to its current liabilities at levels not less than those shown
in the following table during the periods indicated:
PERIOD CURRENT RATIO
------ -------------
at each fiscal year end 2.25 to 1.0
during each fiscal year until fiscal year end 2.00 to 1.0
(ii) TANGIBLE NET WORTH. The Company shall maintain its Tangible Net Worth
at levels not less than those shown in the following table during the
periods indicated:
PERIOD TANGIBLE NET WORTH
------ ------------------
at fiscal year end 1995 and $ 8,650,000
until May 4, 1996
at May 4, 1996 and $ 9,000,000
until June 29, 1996
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PERIOD TANGIBLE NET WORTH
------ ------------------
at June 29, 1996 and $ 9,250,000
until fiscal year end 1996
at fiscal year end 1996 and $ 9,500,000
until fiscal year end 1997
at fiscal year end 1997 and $10,250,000
all times thereafter
(iii) RATIO OF DEBT TO TANGIBLE NET WORTH. The Company shall maintain the
ratio of its total liabilities to its Tangible Net Worth at levels not
greater than those show in the following table during the periods
indicated:
PERIOD RATIO
------ -----
at December 2, 1995 and until
March 30, 1996 3.25 to 1.0
at March 30, 1996 and until
fiscal year end 1996 2.95 to 1.0
at fiscal year end 1996 and at
all times thereafter 2.60 to 1.0
For purposes of testing compliance with this covenant, the term
"liabilities" shall include the present value of all capital lease
obligations of the Company, determined as of any date the ratio is to
be tested.
(iv) FIXED CHARGE COVERAGE RATIO. For each period of four consecutive
fiscal 13-week periods ending on and after the date of the Fifth
Amendment, the Company shall maintain a fixed charge coverage ratio of
not less than 1.25 to 1.0. For purposes of this covenant, the phrase
"fixed charge coverage ratio" means the ratio of the sum of net income
before taxes (adjusted to exclude the reserve set aside for the closing
of the Company's facility in Gettysburg, Pennsylvania, occurring during
fiscal year 1996 in an amount not to exceed $995,000, which adjustment
shall be made only so long as such reserve was set aside during the
period tested) plus depreciation, amortization and interest expense
over the sum of current maturities of term debt, including current
capital lease payments, plus interest expense plus expenditures for
fixed assets, plus cash used to pay income tax expenses.
5. EVENTS OF DEFAULT. The Company certifies that no Event of Default or
Unmatured Event of Default under the Original Agreement, as amended by this
Sixth Amendment, has occurred and is continuing as of the execution date of this
Sixth Amendment.
6. CLOSING DOCUMENTS. As conditions precedent to the effectiveness of
this Sixth Amendment, the Bank shall first receive the following
contemporaneously with the execution and delivery of this Sixth Amendment, each
duly executed, dated and in form and substance satisfactory to the Bank:
A. The Revolving Note in the form attached as EXHIBIT "A" to this Sixth
Amendment.
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B. A certified copy of the resolutions of the Board of Directors of the
Company, authorizing the execution, performance and delivery of this
Sixth Amendment and the other documents named herein; and
C. Such other documents as are reasonably required by the Bank.
7. EFFECT OF SIXTH AMENDMENT. Except as amended in this Sixth Amendment,
all of the terms and conditions of the Original Agreement shall continue
unchanged and in full force and effect together with this Sixth Amendment.
IN WITNESS WHEREOF, the Company and the Bank, by their respective duly
authorized officers, have executed and delivered in Indiana this Sixth Amendment
to Amended and Restated Credit Agreement on this 11 day of January, 1996.
DMI FURNITURE, INC.
By:/s/Joseph G. Hill
------------------------------
Joseph G. Hill, Chief Financial
Officer
BANK ONE, INDIANAPOLIS, NA
By:/s/D. Kelly Queisser
------------------------------
D. Kelly Queisser, Vice President
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<PAGE>
SEVENTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
DMI FURNITURE, INC., a Delaware corporation (the "Company"), and BANK ONE,
INDIANAPOLIS, NATIONAL ASSOCIATION, a national banking association (the "Bank"),
parties to an Amended and Restated Credit Agreement dated June 9, 1994, as
amended by a First Amendment to Amended and Restated Credit Agreement dated
October 11, 1994, by a Second Amendment to Amended and Restated Credit Agreement
dated January 10, 1995, by a Third Amendment to Amended and Restated Credit
Agreement dated March 10, 1995, by a Fourth Amendment to Amended and Restated
Credit Agreement effective as of August 15, 1995, by a Fifth Amendment to
Amended and Restated Credit Agreement dated November 1, 1995, and by a Sixth
Amendment to Amended and Restated Credit Agreement dated January 11, 1996
(collectively, as amended, the "Original Agreement"), agree to amend the
Original Agreement by this Seventh Amendment to Amended and Restated Credit
Agreement (this "Seventh Amendment") as follows:
1. DEFINITIONS. Sections 2.p and 2.q of the Original Agreement are
amended and restated in their entireties and new Sections 2.fffff, 2.ggggg,
2.hhhhh, 2.iiiii, 2.jjjjj, 2.kkkkk, and 2.lllll are added to the Original
Agreement, all to read as follows:
p. BORROWING BASE. "Borrowing Base" means an amount equal to the sum of
(i) eighty percent (80%) of the adjusted book value of the Company's
accounts receivable, excluding all accounts receivable for inventory
used in showrooms or displays for which the Company makes available
longer repayment terms than are available for other inventory of the
Company sold in the ordinary course of business, plus (ii) fifty
percent (50%) of the book value of the Company's finished goods
inventory, plus (iii) for the period from June 1, 1996, through August
3, 1996, the period from November 30, 1996, through March 1, 1997, and
for the period from May 31, 1997, through August 2, 1997, $500,000.00,
plus (iv) fifty percent (50%) of the book value of the Company's
timber, logs, rough cut lumber and full-board stock that, in the sole
discretion of the Bank, is readily marketable in its current state,
plus (v) twenty-five percent (25%) of the book value of the Company's
remaining raw materials inventory, excluding all lumber of the Company
cut or otherwise altered so as to constitute components to be
assembled into items that, when completed, will be finished goods
inventory, plus (vi) the Borrowing Base Adjustment. For purposes of
the preceding sentence, the phrase "adjusted book value of the
Company's accounts receivable" means the book value of the Company's
accounts receivable less any accounts which are sixty (60) days or
more past due, or which are due from an account debtor known to the
Company to be the subject of a bankruptcy or other insolvency
proceeding or known to the Company to have ceased doing business, and
less all accounts due from any account debtor if twenty-five percent
(25%) or more of the aggregate amount of the accounts receivable from
such debtor are sixty (60) days or more past due, and provided that
any account receivable otherwise includable in
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the Borrowing Base shall be reduced, but not below zero, by the amount
of any accounts payable to the account debtor from which such account
is due.
q. BORROWING BASE ADJUSTMENT. "Borrowing Base Adjustment" means (i) zero
at any time that any amount is deposited with the Agent under either
of the Escrow Agreements, and (ii) $125,000 at all other times.
fffff. SEVENTH AMENDMENT. "Seventh Amendment" means that agreement entitled
"Seventh Amendment to Amended and Restated Credit Agreement" between
the Company and the Bank dated July 17, 1996.
ggggg. ESCROW AGREEMENT. "Escrow Agreement" means either the Escrow
Agreement (Dreher) or the Escrow Agreement (Hill), as the context
requires, and when used in the plural form refers to both of the
Escrow Agreement.
hhhhh. ESCROW AGREEMENT (DREHER). "Escrow Agreement (Dreher)" means the
Escrow Agreement dated as of the date of the Seventh Amendment among
the Company, the Bank, Donald D. Dreher and the Agent, as it may be
amended from time to time.
iiiii. ESCROW AGREEMENT (HILL). "Escrow Agreement (Hill)" means the Escrow
Agreement dated as of the date of the Seventh Amendment among the
Company, the Bank, Joseph G. Hill and the Agent, as it may be amended
from time to time.
jjjjj. AGENT. "Agent" means Fifth Third Bank of Kentucky, Inc., a Kentucky
banking corporation acting in its capacity as the Agent under each of
the Escrow Agreements, and any successor thereto in such capacity.
kkkkk. CHANGE IN CONTROL. "Change in Control means the occurrence of any of
the following:
(i) Any "person," as such term is used in Sections 13(d) and
14(d)(2) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") (other than the Company, any trustee or other
fiduciary holding securities under an employee benefit plan of the
Company, or any corporation owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as
their ownership of stock of the Company, or any of the existing Series
C Preferred stockholders), is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly,
of securities of the Company representing 40% or more of the combined
voting power of the Company's then outstanding securities.
(ii) During any period of two consecutive years (not including
any period ending prior to the date of the Seventh Amendment),
individuals who at the beginning of such period constitute the Board
of Directors of the Company cease to constitute at least a majority
thereof. If the election or nomination for election by the Company's
stockholders of a new director (other than a director designated by a
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person who has entered into an agreement with the Company to effect a
transaction described in clause (i), (iii) or (iv) of this definition)
was approved by a vote of at least two-thirds of the directors then
still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously so
approved, that director shall not be counted for purposes of the
preceding sentence.
(iii) The stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than
(A) a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) more than
80% of the combined voting power of the voting securities of the
Company or such surviving entity outstanding immediately after such
merger or consolidation, or (B) a merger or consolidation effected to
implement a recapitalization of the Company (or similar transaction)
in which no "person" (as hereinabove defined) acquires more than 40%
of the combined voting power of the Company's then outstanding
securities.
(iv) The stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale of disposition
by the Company of all or substantially all of the Company's assets.
(v) Any other transaction which is of a nature that would be
required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A promulgated under the Exchange Act occurs.
lllll. CHANGE IN MANAGEMENT. "Change in Management" means either (i) Donald
D. Dreher is no longer the Chairman, President and Chief Executive
Officer of the Company, or (ii) Joseph G. Hill is no longer the Vice
President-Finance and Chief Financial Officer of the Company.
All other terms defined in the Original Agreement and used in this Seventh
Amendment shall have their respective meanings stated in the Agreement.
2. THE REVOLVING LOAN. Section 3.a(i) of the Original Agreement is
amended and restated in its entirety to read as follows:
a. (i) THE REVOLVING LOAN COMMITMENT -- USE OF PROCEEDS. From the date
of the Seventh Amendment and until the Revolving Loan Maturity
Date, the Bank agrees to make Advances (collectively, the
"Revolving Loan") under a revolving line of credit from time to
time to the Company of amounts not exceeding the lesser of
Thirteen Million Five Hundred Thousand and No/100 Dollars
($13,500,000.00) (the "Revolving Loan Commitment") or the
Revolving Loan Availability Amount in the aggregate at any time
outstanding, provided that all of the conditions of lending
stated in Section 9 of this Agreement as being applicable to the
Revolving Loan have been fulfilled at the time of each Advance.
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<PAGE>
Proceeds of the Revolving Loan may be used by the Company only to
fund working capital requirements, provided that the Company may
deposit an amount not to exceed $649,834.33 with the Agent for
the Escrow Agreement (Dreher) and an amount not to exceed
$350,165.67 with the Agent for the Escrow Agreement (Hill), but
only if (x) no Event of Default or Unmatured Event of Default has
occurred and is continuing at the time of the deposit, (y) no
Event of Default or Unmatured Event of Default would result from
the deposit, and (z) the Bank shall have the right to receive the
funds deposited in the Escrow Agreements (to be applied toward
the Obligations or as provided in Section 11.f) if (A) an Event
of Default (other than an Event of Default under Section 10.g of
this Agreement) occurs and is continuing, or (B) on any date
after the Bank's consent to the deposits has expired (currently
July 17, 1997) and the Bank, in its sole discretion, has decided
not to extend the expiration date of its consent.
3. REPRESENTATIONS AND WARRANTIES. To induce the Bank to enter into this
Seventh Amendment, the Company affirms that the representations and warranties
contained in the Original Agreement are correct as of the date of this Seventh
Amendment, except that (i) they shall be deemed also to refer to this Seventh
Amendment, as well as all documents named herein, and (ii) Section 5.d shall be
deemed also to refer to the most recent audited (dated September 2, 1995) and
most recent unaudited financial statements of the Company furnished to the Bank.
4. AFFIRMATIVE COVENANTS. Section 7.g of the Original Agreement is
amended and restated in its entirety to read as follows:
(i) CURRENT RATIO. The Company shall maintain the ratio of its current
assets to its current liabilities at levels not less than those shown
in the following table during the periods indicated:
Period Current Ratio
------ -------------
at each fiscal year end 2.25 to 1.0
during each fiscal year until fiscal year end 2.00 to 1.0
(ii) TANGIBLE NET WORTH. The Company shall maintain its Tangible Net Worth
at levels not less than those shown in the following table during the
periods indicated:
Period Tangible Net Worth
------ ------------------
at May 4, 1996, and $ 8,500,000
until August 31, 1996
at August 31, 1996, and $ 8,800,000
until November 30, 1996
at November 30, 1996, and $ 9,100,000
until March 1, 1997
at March 1, 1997, and $ 9,400,000
until May 31, 1997
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<PAGE>
at May 31, 1997, and $ 9,700,000
until fiscal year end 1997
at fiscal year end 1997 and $10,000,000
at all times thereafter
(iii) RATIO OF DEBT TO TANGIBLE NET WORTH. The Company shall maintain the
ratio of its total liabilities to its Tangible Net Worth at levels not
greater than those show in the following table during the periods
indicated:
Period Ratio
------ -----
at March 30, 1996 and until
fiscal year end 1996 2.95 to 1.0
at fiscal year end 1996 and at
all times thereafter 2.60 to 1.0
For purposes of testing compliance with this covenant, the term
"liabilities" shall include the present value of all capital lease
obligations of the Company, determined as of any date the ratio is to be
tested.
(iv) FIXED CHARGE COVERAGE RATIO. For each period of four consecutive
fiscal 13-week periods ending on and after March 30, 1996, the Company
shall maintain a fixed charge coverage ratio at levels not less than
those shown in the following table during the periods indicated:
End of Period Ratio
------------- -----
from March 30, 1996, and
until November 30, 1996 0.90 to 1.00
from November 30, 1996, and
until March 1, 1997 0.95 to 1.00
from March 1, 1997, and
until May 31, 1997 1.00 to 1.00
from May 31, 1997, and
until fiscal year end 1997 1.15 to 1.00
from fiscal year end 1997 and
at each quarter end thereafter 1.25 to 1.00
For purposes of this covenant, the phrase "fixed charge coverage
ratio" means the ratio of the sum of net income before taxes (adjusted
to exclude the reserve set aside for the closing of the Company's
facility in Gettysburg, Pennsylvania, occurring during fiscal year
1996 in an amount not to exceed $995,000, which adjustment shall be
made only so long as such reserve was set aside during the period
tested) plus depreciation, amortization and interest expense over the
sum of current maturities of term debt, including current capital
lease payments, plus interest expense plus expenditures for fixed
assets, plus cash used to pay income tax expenses.
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5. NEGATIVE COVENANTS. A new Section 8.n is added to the Original
Agreement to read as follows:
n. FUNDING OF ESCROW AGREEMENTS. The Company shall not deposit with the
Agent more than $649,834.33 for the Escrow Agreement (Dreher), nor
deposit with the Agent more than $350,165.67 for the Escrow Agreement
(Hill).
6. EVENTS OF DEFAULT. Section 10.g of the Original Agreement is amended
and restated in its entirety and a new Section 10.h is added to the Original
Agreement, all to read as follows:
g. CHANGE IN CONTROL PLUS CHANGE IN MANAGEMENT. If (i) a Change in
Control occurs, and (ii) a Change in Management occurs.
h. NONCOMPLIANCE WITH OTHER PROVISIONS OF THIS AGREEMENT. Failure of the
Company to comply with or perform any covenant or other provision of
this Agreement or to perform any other Obligation (which failure does
not constitute an Event of Default under any of the preceding
provisions of this Section 10) and continuance of such failure for
thirty (30) days after notice thereof to the Company from the Bank.
The Company certifies that no Event of Default or Unmatured Event of Default
under the Original Agreement, as amended by this Seventh Amendment, has occurred
and is continuing as of the execution date of this Seventh Amendment.
7. EFFECT OF EVENT OF DEFAULT. A new Section 11.f is added to the
Original Agreement to read as follows:
f. DEMAND OF FUNDS DEPOSITED PURSUANT TO ESCROW AGREEMENTS. The Bank may
notify the Agent of the Event of Default (other than an Event of
Default under Section 10.g of this Agreement) with the result that the
Agent will, as required by the Escrow Agreements, distribute to the
Bank all "Escrowed Funds" (as that term is defined in each of the
Escrow Agreements). The Bank shall be entitled, in its sole
discretion, to use all or any portion of the Escrowed Funds to repay
Obligations then outstanding in any order as the Bank in its sole
discretion determines, or to deposit all or any portion of the
Escrowed Funds in the Special Collateral Account established pursuant
to Section 11.d of this Agreement, with any funds that are deposited
into the Special Collateral Account under the authority of this
Section 11.f subject, after deposit, to the pledge and other
provisions of Section 11.d.
8. CLOSING DOCUMENTS. As conditions precedent to the effectiveness of
this Seventh Amendment, the Bank shall first receive the following
contemporaneously with the execution and delivery of this Seventh Amendment,
each duly executed, dated and in form and substance satisfactory to the Bank:
A. The Escrow Agreements;
B. A certified copy of the resolutions of the Board of Directors of the
Company, authorizing the execution, performance and delivery of this
Seventh Amendment and the other documents named herein; and
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C. Such other documents as are reasonably required by the Bank.
9. EFFECT OF SEVENTH AMENDMENT. Except as amended in this Seventh
Amendment, all of the terms and conditions of the Original Agreement shall
continue unchanged and in full force and effect together with this Seventh
Amendment.
IN WITNESS WHEREOF, the Company and the Bank, by their respective duly
authorized officers, have executed and delivered in Indiana this Seventh
Amendment to Amended and Restated Credit Agreement on this 17th day of
July, 1996.
DMI FURNITURE, INC.
By:/s/Joseph G. Hill
--------------------------------
Joseph G. Hill, Chief Financial
Officer
BANK ONE, INDIANAPOLIS, NA
By:/s/D. Kelly Queisser
----------------------------------
D. Kelly Queisser, Vice President
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ESCROW AGREEMENT
This is an Escrow Agreement (the "Agreement") dated as of July 9, 1996, by
and between DMI FURNITURE, INC., a Delaware corporation (the "Corporation");
DONALD D. DREHER, Chairman, President and Chief Executive Officer of the
Corporation ("Dreher"); BANK ONE, INDIANAPOLIS, NATIONAL ASSOCIATION, a
national banking association with its principal office in Indianapolis, Indiana
("Bank One") and THE FIFTH THIRD BANK OF KENTUCKY, INC., a Kentucky banking
corporation authorized to conduct a trust business (the "Agent") .
RECITALS
A. The Corporation considers it essential to the best interests of its
stockholders to foster the continuous employment of key management personnel.
In this connection, the Corporation's Board of Directors (the "Board")
recognizes that, as is the case with many publicly held corporations, the
possibility of a change-in-control of the Corporation may exist and that such a
possibility, due to the uncertainty and questions which it may raise among
management, may result in the departure or distraction of management personnel
to the detriment of the Corporation and its stockholders.
B. The Board has determined that appropriate steps should be taken from
time to time to reinforce and encourage the continued attention and dedication
of members of the Corporation's management to their assigned duties without
distraction in the face of potentially disturbing circumstances arising from the
possibility of a change-in-control of the Corporation, and to promote
objectivity in the face of any pending change-in-control of the Corporation.
C. Consistent with the foregoing purposes, the Corporation has entered
into an Amendment to Employment Agreement and Officer Severance Agreement (the
Severance Agreement") with Dreher, in his capacity as Chairman, President and
Chief Executive of the Corporation, providing for the payment of certain
benefits to Dreher upon the termination of his employment following a change-in-
control of the Corporation.
D. To better enable the Corporation to realize the intended benefit of
the Severance Agreement, the Board wishes to establish appropriate arrangements
to fund the payment of benefits payable to Dreher under the Severance Agreement
in the event of a change-in-control of the Corporation.
E. Bank One provides a credit facility to the Corporation, pursuant to an
Amended and Restated Credit Agreement dated June 9, 1994, between the
Corporation and Bank One, as subsequently amended (the "Credit Agreement").
The Corporation has requested that Bank One consent to the funding of the
payment of benefits payable to Dreher under the Severance Agreement in the
event of a change-in-control of the Corporation. Bank One has agreed to
consent to the Corporation's funding of the payment of benefits payable to
Dreher with moneys advanced under the Credit Agreement, for a period of 365
days, renewable thereafter with express written consent of Bank One, subject
at all times to the terms of this Agreement and to the terms of the Credit
Agreement.
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F. The Corporation has requested that the Agent serve as escrow agent
hereunder and the Agent has agreed to so serve, pursuant to the terms hereof.
AGREEMENT
1. The Agent shall act as an escrow agent for the parties in accordance
with the terms and provisions of this Agreement.
2. Upon the execution of this Agreement, the Corporation shall deposit
with the Agent an amount equal to not less than 50% of the amount of severance
compensation set forth in Section 5(a) of the Severance Agreement (the "Escrowed
Funds"). Bank One agrees that the Corporation may provide the Escrowed Funds
from moneys advanced to the Corporation under the Credit Agreement; provided,
however, that Bank One's consent to the Corporation's use of such funds is for a
period of 365 days from the date hereof, subject to extension only upon the
express written agreement of Bank One and the Corporation, and subject at all
times to the Corporation's compliance with the terms of this Agreement and the
terms of the Credit Agreement.
3. The Corporation hereby directs the Agent to invest the Escrowed Funds
in liquid investments such that the Escrowed Funds may be distributed in
accordance with paragraph 5 hereof. Such investments include short-term U.S.
government securities, repurchase agreements secured by U.S. government
securities, and/or deposits in an FDIC-insured bank, but NOT money market funds,
corporate equity or debt securities, banker's acceptances, commercial paper, or
municipal securities. This direction is a continuing investment direction
unless the Corporation, Dreher and Bank One revoke it by a written instrument
signed by all of them.
4. The Agent shall have no discretion in determining whether a
distribution of the Escrowed Funds shall be made, and the Agent shall make
distributions of the Escrowed Funds as follows:
(A) Any interest generated by the investment of the Escrowed Funds
shall be paid directly to the Corporation at not less than quarterly intervals
until the Escrowed Funds have been distributed as provided in Paragraph 4(B) or
Paragraph 4(C) hereof.
(B) If any Vice President, Secretary, Treasurer, director of the
Corporation or Dreher delivers a certificate to the Agent (with copies to all
other parties to this Agreement) stating that a "change in control" of the
Corporation has occurred within the meaning of the Severance Agreement, the
Agent promptly thereafter shall distribute the Escrowed Funds only as directed
by Dreher, following presentment by Dreher of a certificate of Dreher stating
that Dreher is entitled to payment of the Escrowed Funds under the terms of the
Severance Agreement and that Dreher demands payment of the Escrowed Funds.
(C) If, prior to a distribution of the Escrowed Funds pursuant to
Paragraph 4(B) hereof, Bank One delivers a certificate to the Agent (with
copies to all other parties to this Agreement) stating (i) that an "Event of
Default" has occurred other than an Event of Default caused by a change in
control of the Corporation and/or the distribution of the Escrowed Funds to
Dreher or (ii) Bank One's consent to the Corporation's use of moneys advanced
under the Credit Agreement
E-55
<PAGE>
to provide the Escrowed Funds pursuant to Paragraph 2 hereof has expired and has
not been extended, the Agent promptly thereafter shall distribute the Escrowed
Funds to Bank One.
(D) If no distribution of the Escrowed Funds pursuant to Paragraph
4(B) or Paragraph 4(C) hereof has occurred on or before the tenth anniversary
hereof, the Escrow Agent shall distribute the Escrowed Funds to the Corporation
on the first business day following the tenth anniversary hereof, unless the
Corporation, the Escrow Agent, Bank One and Dreher have agreed in writing to the
extension of the term of this Agreement beyond the tenth anniversary.
5. To the extent that all documents required by either Paragraph 4(B) or
4(C) have been presented to the Agent by 9 a.m. on a business day, the Agent
shall make the distributions required thereby no later than the end of the
following business day. To the extent that all documents required by either
Paragraph 4(B) or 4(C) have been presented to the Agent after 9 a.m. on a
business day, the Agent shall make the distributions required thereby no later
than the end of the second business day following the date of presentment of
documents. Distribution to Dreher pursuant to Paragraph 4(B) hereof shall be
made in a lump sum in cash unless Dreher by written notice to the Corporation
and Agent specifies distribution over a longer period. Distribution to Bank One
pursuant to Paragraph 4(C) hereof shall be made in a lump sum in cash.
6. If Dreher is entitled to distribution of the Escrowed Funds pursuant
to Paragraph 4(B) hereof and he fails to survive the time of such payment, then
the Agent is hereby ordered to distribute the Escrowed Funds to the designated
beneficiaries of Dreher upon the presentation of the materials and evidence
required by Paragraph 4(B).
7. The Corporation shall pay the Agent an annual fee for its escrow
services under this Agreement the amount of $1,000 per year. The Agent's fee
shall be deducted from interest payable on the Escrowed Funds. Termination of
this Agreement shall not relieve the Corporation of its obligation with respect
to payment of the Agent's fee.
8. The Agent may confer with counsel about any question relating to its
duties and responsibilities under this Agreement and shall not be liable for any
act or failure to act performed in good faith on the advice of counsel. The
Agent shall be protected in acting upon any certificate, statement, request,
consent, agreement, or other instrument in writing (not only as to its execution
and the validity and effectiveness of its provisions, but also as to the truth
and acceptability of any information it contains) that it in good faith believes
to be valid and to have been signed or presented by a proper person or
persons. The Agent shall not be liable or responsible for any act or failure to
act in good faith, it being expressly agreed that the Agent's liability under
this Agreement shall be limited solely to negligence or willful misconduct on
its part.
9. The Agent is not a party to, and shall not be bound by, any contract
between the Corporation and Dreher. The Agent shall act as depository only and
shall not be required to take notice of any default or pledge or warranty under
any contract between the Corporation and Dreher.
10. The Agent shall be indemnified by the Corporation for all reasonable
attorneys' fees (other than fees incurred in connection with preparation of this
Agreement), costs, damages, expenses, and liabilities that, in good faith and
without fault by the Agent, the Agent may incur in connection with the
performance of its duties under this Agreement. The indemnification provided to
Agent hereby shall survive the termination of this Agreement.
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<PAGE>
11. This Agreement shall terminate upon the earlier of (i) the completion
of the events described in paragraphs 4 and 5 hereof or (ii) the tenth
anniversary hereof, unless prior to the tenth anniversary hereof, all parties
hereto have agreed in writing to the extension of the term hereof.
12. All notices and communications under this Agreement shall be in
writing and shall be deemed given when deposited in the United States mail,
certified, return-receipt requested and postage prepaid, or upon actual receipt
thereof; provided, however, that all certificates and other communications
required to be given by paragraph 4(B) or 4(C) hereof shall additionally
be given by fax, at the telephone fax number listed below:
(i) If to the Corporation, addressed to:
DMI Furniture, Inc.
One Oxmoor Place
101 Bullitt Lane
Louisville, Kentucky 40222
Attn: Corporate Secretary
Fax: (502) 429-6285
(ii) If to the Agent, addressed to:
The Fifth Third Bank of Kentucky, Inc.
401 S. Fourth Avenue
Louisville, Kentucky 40202
Attn: Philip R. McHugh
Senior Vice President - Trust Division
Fax: (502) 562-5552
with a copy to
The Fifth Third Bank of Kentucky, Inc.
401 S. Fourth Avenue
Louisville, Kentucky 40202
Attn: Darrell Mitchell
Vice President and General Counsel
Fax: (502) 562-5513
(iii)If to Bank One, addressed to:
Bank One, Indianapolis, NA
Bank One Center/Tower, Suite 1911
111 Monument Circle
PO Box 7700
Indianapolis, IN 46277-0119
Attn: Manager, Regional Banking Department B
Fax: (317) 321-8830
(iv) If to Dreher, addressed to:
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<PAGE>
Mr. Donald Dreher
DMI Furniture, Inc.
One Oxmoor Place
101 Bullitt Lane
Louisville, Kentucky 40222
Fax: (502) 429-6285
Any party may change the designated address by giving written notice to the
other party.
13. This Agreement may only be modified, amended, or terminated by a
writing signed by all parties hereto.
14. The rights created by this Agreement shall inure to the benefit of,
and the obligations created hereby shall be binding on, the parties and their
successors and assigns.
15. This Agreement may be executed in counterparts.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement dated as of
July 9, 1996, but actually on the dates set forth below.
DMI FURNITURE, INC. DONALD D. DREHER
By:/s/Illegible By:/s/Donald D. Dreher
---------------------------- --------------------------------
Title: VP & CFO Date: 7/15/96
Secretary/Treasurer
---------------------------- --------------------------------
Date: 7/15/96
--------------------------
BANK ONE, INDIANAPOLIS, NA THE FIFTH THIRD BANK OF KENTUCKY INC.
By:/s/D. Kelly Queisser By:/s/Annamarie Illegible
---------------------------- --------------------------------
Title: Vice President Title: Assistant Vice President
---------------------------- --------------------------------
Date: 7/16/96 Date: 7/15/96
---------------------------- --------------------------------
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<PAGE>
ESCROW AGREEMENT
This is an Escrow Agreement (the "Agreement") dated as of July 9, 1996, by
and between DMI FURNITURE, INC., a Delaware corporation (the "Corporation");
JOSEPH G. HILL, Vice President of Finance and Chief Financial Officer of the
Corporation("Hill"); BANK ONE, INDIANAPOLIS, NATIONAL ASSOCIATION, a national
banking association with its principal office in Indianapolis, Indiana ("Bank
One") and THE FIFTH THIRD BANK OF KENTUCKY, INC., a Kentucky banking
corporation authorized to conduct a trust business (the "Agent") .
RECITALS
A. The Corporation considers it essential to the best interests of its
stockholders to foster the continuous employment of key management personnel.
In this connection, the Corporation's Board of Directors (the "Board")
recognizes that, as is the case with many publicly held corporations, the
possibility of a change-in-control of the Corporation may exist and that such a
possibility, due to the uncertainty and questions which it may raise among
management, may result in the departure or distraction of management personnel
to the detriment of the Corporation and its stockholders.
B. The Board has determined that appropriate steps should be taken from
time to time to reinforce and encourage the continued attention and dedication
of members of the Corporation's management to their assigned duties without
distraction in the face of potentially disturbing circumstances arising from the
possibility of a change-in-control of the Corporation, and to promote
objectivity in the face of any pending change-in-control of the Corporation.
C. Consistent with the foregoing purposes, the Corporation has entered
into an Amendment to Employment Agreement and Officer Severance Agreement (the
Severance Agreement") with Hill, in his capacity as Vice President of Finance
and Chief Financial Officer of the Corporation, providing for the payment of
certain benefits to Hill upon the termination of his employment following a
change-in-control of the Corporation.
D. To better enable the Corporation to realize the intended benefit of
the Severance Agreement, the Board wishes to establish appropriate arrangements
to fund the payment of benefits payable to Hill under the Severance Agreement in
the event of a change-in-control of the Corporation.
E. Bank One provides a credit facility to the Corporation, pursuant to an
Amended and Restated Credit Agreement dated June 9, 1994, between the
Corporation and Bank One, as subsequently amended (the "Credit Agreement").
The Corporation has requested that Bank One consent to the funding of the
payment of benefits payable to Hill under the Severance Agreement in the event
of a change-in-control of the Corporation. Bank One has agreed to consent to
the Corporation's funding of the payment of benefits payable to Hill with moneys
advanced under the Credit Agreement, for a period of 365 days, renewable
thereafter with express written consent of Bank One, subject at all times to
the terms of this Agreement and to the terms of the Credit Agreement.
E-59 Page 100
<PAGE>
F. The Corporation has requested that the Agent serve as escrow agent
hereunder and the Agent has agreed to so serve, pursuant to the terms hereof.
AGREEMENT
1. The Agent shall act as an escrow agent for the parties in accordance
with the terms and provisions of this Agreement.
2. Upon the execution of this Agreement, the Corporation shall deposit
with the Agent an amount equal to not less than 50% of the amount of severance
compensation set forth in Section 5(a)of the Severance Agreement (the "Escrowed
Funds"). Bank One agrees that the Corporation may provide the Escrowed Funds
from moneys advanced to the Corporation under the Credit Agreement; provided,
however, that Bank One's consent to the Corporation's use of such funds is for a
period of 365 days from the date hereof, subject to extension only upon the
express written agreement of Bank One and the Corporation, and subject at all
times to the Corporation's compliance with the terms of this Agreement and the
terms of the Credit Agreement.
3. The Corporation hereby directs the Agent to invest the Escrowed Funds
in liquid investments such that the Escrowed Funds may be distributed in
accordance with paragraph 5 hereof. Such investments include short-term U.S.
government securities, repurchase agreements secured by U.S. government
securities, and/or deposits in an FDIC-insured bank, but NOT money market funds,
corporate equity or debt securities, banker's acceptances, commercial paper, or
municipal securities. This direction is a continuing investment direction
unless the Corporation, Hill and Bank One revoke it by a written instrument
signed by all of them.
4. The Agent shall have no discretion in determining whether a
distribution of the Escrowed Funds shall be made, and the Agent shall make
distributions of the Escrowed Funds as follows:
(A) Any interest generated by the investment of the Escrowed Funds
shall be paid directly to the Corporation at not less than quarterly intervals
until the Escrowed Funds have been distributed as provided in Paragraph 4(B) or
Paragraph 4(C)hereof.
(B) If any Vice President, Secretary, Treasurer, director of the
Corporation or Hill delivers a certificate to the Agent (with copies to all
other parties to this Agreement) stating that a "change in control" of the
Corporation has occurred within the meaning of the Severance Agreement, the
Agent promptly thereafter shall distribute the Escrowed Funds only as directed
by Hill, following presentment by Hill of a certificate of Hill stating that
Hill is entitled to payment of the Escrowed Funds under the terms of the
Severance Agreement and that Hill demands payment of the Escrowed Funds.
(C) If, prior to a distribution of the Escrowed Funds pursuant to
Paragraph 4(B) hereof, Bank One delivers a certificate to the Agent (with
copies to all other parties to this Agreement) stating (i) that an "Event of
Default" has occurred other than an Event of Default caused by a change in
control of the Corporation and/or the distribution of the Escrowed Funds to Hill
or (ii) Bank One's consent to the Corporation's use of moneys advanced under
the Credit Agreement
E-60 Page 101
<PAGE>
to provide the Escrowed Funds pursuant to Paragraph 2 hereof has expired and has
not been extended, the Agent promptly thereafter shall distribute the Escrowed
Funds to Bank One.
(D) If no distribution of the Escrowed Funds pursuant to Paragraph
4(B) or Paragraph 4(C) hereof has occurred on or before the tenth anniversary
hereof, the Escrow Agent shall distribute the Escrowed Funds to the Corporation
on the first business day following the tenth anniversary hereof, unless the
Corporation, the Escrow Agent, Bank One and Hill have agreed in writing to the
extension of the term of this Agreement beyond the tenth anniversary.
5. To the extent that all documents required by either Paragraph 4(B) or
4(C) have been presented to the Agent by 9 a.m. on a business day, the Agent
shall make the distributions required thereby no later than the end of the
following business day. To the extent that all documents required by either
Paragraph 4(B) or 4(C) have been presented to the Agent after 9 a.m. on a
business day, the Agent shall make the distributions required thereby no later
than the end of the second business day following the date of presentment of
documents. Distribution to Hill pursuant to Paragraph 4(B) hereof shall be made
in a lump sum in cash unless Hill by written notice to the Corporation and Agent
specifies distribution over a longer period. Distribution to Bank One pursuant
to Paragraph 4(C) hereof shall be made in a lump sum in cash.
6. If Hill is entitled to distribution of the Escrowed Funds pursuant to
Paragraph 4(B) hereof and he fails to survive the time of such payment, then the
Agent is hereby ordered to distribute the Escrowed Funds to the designated
beneficiaries of Hill upon the presentation of the materials and evidence
required by Paragraph 4(B).
7. The Corporation shall pay the Agent an annual fee for its escrow
services under this Agreement the amount of $1,000 per year. The Agent's fee
shall be deducted from interest payable on the Escrowed Funds. Termination of
this Agreement shall not relieve the Corporation of its obligation with respect
to payment of the Agent's fee.
8. The Agent may confer with counsel about any question relating to its
duties and responsibilities under this Agreement and shall not be liable for any
act or failure to act performed in good faith on the advice of counsel. The
Agent shall be protected in acting upon any certificate, statement, request,
consent, agreement, or other instrument in writing (not only as to its execution
and the validity and effectiveness of its provisions, but also as to the truth
and acceptability of any information it contains) that it in good faith believes
to be valid and to have been signed or presented by a proper person or persons.
The Agent shall not be liable or responsible for any act or failure to act in
good faith, it being expressly agreed that the Agent's liability under this
Agreement shall be limited solely to negligence or willful misconduct on its
part.
9. The Agent is not a party to, and shall not be bound by, any contract
between the Corporation and Hill. The Agent shall act as depository only and
shall not be required to take notice of any default or pledge or warranty under
any contract between the Corporation and Hill.
10. The Agent shall be indemnified by the Corporation for all reasonable
attorneys' fees (other than fees incurred in connection with preparation of this
Agreement), costs, damages, expenses, and liabilities that, in good faith and
without fault by the Agent, the Agent may incur in connection with the
performance of its duties under this Agreement. The indemnification provided to
Agent hereby shall survive the termination of this Agreement.
E-61 Page 102
<PAGE>
11. This Agreement shall terminate upon the earlier of (i) the completion
of the events described in paragraphs 4 and 5 hereof or (ii) the tenth
anniversary hereof, unless prior to the tenth anniversary hereof, all parties
hereto have agreed in writing to the extension of the term hereof.
12. All notices and communications under this Agreement shall be in
writing and shall be deemed given when deposited in the United States mail,
certified, return-receipt requested and postage prepaid, or upon actual receipt
thereof; provided, however, that all certificates and other communications
required to be given by paragraph 4(B) or 4(C) hereof shall additionally be
given by fax, at the telephone fax number listed below:
(i) If to the Corporation, addressed to:
DMI Furniture, Inc.
One Oxmoor Place
101 Bullitt Lane
Louisville, Kentucky 40222
Attn: Corporate Secretary
Fax: (502) 429-6285
(ii) If to the Agent, addressed to:
The Fifth Third Bank of Kentucky, Inc.
401 S. Fourth Avenue
Louisville, Kentucky 40202
Attn: Philip R. McHugh
Senior Vice President - Trust Division
Fax: (502) 562-5552
with a copy to
The Fifth Third Bank of Kentucky, Inc.
401 S. Fourth Avenue
Louisville, Kentucky 40202
Attn: Darrell Mitchell
Vice President and General Counsel
Fax: (502) 562-5513
(iii) If to Bank One, addressed to:
Bank One, Indianapolis, NA
Bank One Center/Tower, Suite 1911
111 Monument Circle
PO Box 7700
Indianapolis, IN 46277-0119
Attn: Manager, Regional Banking Department B
Fax: (317) 321-8830
(iv) If to Hill, addressed to:
E-62 Page 103
<PAGE>
Mr. Joseph G. Hill
DMI Furniture, Inc.
One Oxmoor Place
101 Bullitt Lane
Louisville, Kentucky 40222
Fax: (502) 429-6285
Any party may change the designated address by giving written notice to the
other party.
13. This Agreement may only be modified, amended, or terminated by a
writing signed by all parties hereto.
14. The rights created by this Agreement shall inure to the benefit of,
and the obligations created hereby shall be binding on, the parties and their
successors and assigns.
15. This Agreement may be executed in counterparts.
IN WITNESS WHEREOF, the parties hereto have executed this agreement dated as of
July 9, 1996, but actually on the dates set forth below.
DMI FURNITURE, INC. JOSEPH G. HILL
By:/s/ Donald D. Dreher By:/s/ Joseph G. Hill
-------------------- --------------------
Title: President & CEO Date: 7/15/96
-------------------- --------------------
Date: 7/15/96
--------------------
BANK ONE, INDIANAPOLIS, NA THE FIFTH THIRD BANK OF KENTUCKY
INC.
By:/s/ D. Kelly Queisser By:/s/ illegible
--------------------- -------------------------
Title: Vice President Title: Assistant Vice President
-------------------- --------------------------------
Date: 7/16/96 Date: 7/15/96
-------------------- --------------------
E-63 Page 104
<PAGE>
EXTENSION AND RENEWAL OF
EMPLOYMENT AGREEMENT
THIS AGREEMENT, as of this 1st day of September, 1996 by and between DMI
FURNITURE, INC., a Delaware corporation ("DMI" or the "Corporation") and JOSEPH
G. HILL ("Employee").
WHEREAS, Employee and DMI have entered into an Employment Agreement dated
as of September 1, 1986, which has been amended from time to time and extended
and renewed for additional terms through March 31, 1997;
WHEREAS, the Employment Agreement, as amended, extended and renewed to
date, is intended to complement the terms of the Amendment to Employment
Agreement and Officer Severance Agreement dated as of May 19, 1988 between the
Employee and DMI (the "Officer Severance Agreement"), which provides for the
payment of certain benefits to Employee in certain circumstances following a
"change in control" of DMI (as defined in the Officer Severance Agreement).
WHEREAS, Employee and DMI desire to renew and extend the Employment
Agreement between them for an additional term expiring on December 31, 1998; and
NOW, THEREFORE, intending to be legally bound hereby and in consideration
of the mutual undertakings hereinafter set forth, DMI and Employee agree as
follows, effective September 1, 1996;
1. EMPLOYMENT. DMI or its successors hereby employs Employee and
Employee hereby accepts employment as Vice President-Finance and Chief
Financial Officer of DMI for a period commencing September 1, 1996 and ending
December 31, 1998.
2. DUTIES OF EMPLOYEE. Employee further agrees as follows:
(a) To perform well and faithfully all such duties as are assigned to
him by the Board of Directors or the Chief Executive Officer of DMI; and
(b) To devote the time and attention to the performance of all matters
necessary and appropriate to the discharge of the duties so assigned to him in
the operation of DMI, it being the intention of this provision to require that
Employee serve as a "full-time" employee of DMI, to devote his best efforts to
the performance of the duties required of him; and
(c) To refrain from investment or other involvement in any business
or other activity that competes with the business of DMI other than nominal
investments as a passive investor in publicly traded companies.
3. COMPENSATION. As compensation for his services pursuant to this
Agreement, Employee shall be paid as follows:
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<PAGE>
(a) SALARY. A minimum salary of $155,000 per year payable at the
rate of $6,458.33 semi-monthly during the term of this Agreement. Each year, on
the anniversary date of this Agreement, the Compensation Committee of the
Corporation's Board of Directors will review increases in the cost of living and
may negotiate upward revisions to salary with the Employee.
(b) CASH BONUS.
(i) ADJUSTED NET PRE-TAX INCOME. For each of the Corporation's
fiscal years during the term of this Agreement, Employee shall receive an
incentive bonus based on the "adjusted net pre-tax income" for said fiscal year.
For the purposes of this subsection, "adjusted net pre-tax income" shall mean
the pre-tax income as reported to the Securities and Exchange Commission on Form
10-K excluding as expenses all dividends paid by the Corporation to the holders
of any class of its preferred stock, as well as all interest paid by the
Corporation in connection with any funds borrowed for the redemption of 675,000
shares of preferred stock at $2.49 per share or $1,680,750 on August 28, 1989
and any future redemptions of preferred stock, and also excluding (i) any gains
or losses resulting from the sale, conversion or other disposition of capital
assets; (ii) accruals made in accordance with general accepted accounting
principles to recognize the costs associated with the permanent closure of an
operation and the carrying costs prior to the sale of the assets of that
operation; (iii) gain or loss resulting from non-operational litigation; and
(iv) charges or credits resulting from the adoption of a change in accounting
principle.
Employee shall receive a fractional share of the adjusted net
pre-tax income calculated as follows: X = (.0075 + .0045 (Y)) x Z, where X
equals the bonus earned, Y equals the adjusted net pre-tax income expressed in
millions of dollars rounded to three decimal places and Z equals the adjusted
net pre-tax income.
Example:
Reported income before income tax $1,525,169
Add back: Interest on borrowing for
preferred stock redemption 201,500
Deduct: Gain on sale of building (156,000)
----------
Adjusted pre-tax income $1,570,369
then:
X = (.0075 + (.0045 x 1.570)) x $1,570,369
X = (.0075 + .0071) x $1,570,369
X = .0146 x $1,570,369
X = $22,927
(ii) CASH BONUS PREMIUM. In lieu of a cash bonus plan for asset
management as provided by prior Employment Agreements between Employee and the
Corporation, Employee shall be paid a 33.33% cash premium of amounts earned
under Section 3(b)(i) of this Agreement.
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<PAGE>
(c) STOCK BONUS. For each fiscal year during the term of this
Agreement, Employee shall be eligible to earn a stock bonus as provided herein.
All stock granted pursuant to this bonus shall be granted as of the date upon
which the cash bonus earned by Employee is paid to him and shall be valued at
the bid price of the Corporation's common stock as listed by NASDAQ on the last
day of the fiscal year. To the extent feasible, stock (or other equity
securities of the Corporation) granted pursuant to this bonus shall be issued
under a plan meeting the terms and conditions of Rule 16b-3 under the Exchange
Act.
Employee shall have the option to receive a grant of shares of common stock
with a value equal to 45.45% of Employee's Cash Bonus, and Cash Bonus Premium to
a maximum Stock Bonus of 25 percent of Employee's weighted average base salary.
Employee may decline to exercise the right to receive any stock grant by so
advising the Corporation within 10 days of the date upon which he is advised of
his bonus. The grant of stock referred to herein is subject to the
Corporation's shareholders having approved the issuance of sufficient shares of
stock to permit the grant of these shares. The Corporation agrees to seek such
approval, as and to the extent, required.
(d) BONUS PAYMENTS. Any bonus under this paragraph 3 shall be paid
within one hundred thirty days of the end of the fiscal year.
For any fiscal year of DMI during which the period of Employee's
employment set forth in paragraph 1 (or any extension thereof) expires before
completion of the fiscal year, Employee shall receive a cash bonus and a stock
bonus equal to the bonuses that would have been due Employee under paragraphs
3(b) and 3(c) had Employee remained employed until the end of DMI's fiscal year
multiplied by a fraction, the numerator of which is the number of complete
calendar months during which Employee was employed during the fiscal year and
the denominator of which is 12.
4. FRINGE BENEFITS. DMI will provide Employee with fringe benefits as
follows:
(a) DMI will maintain, without contribution by Employee, life
insurance with benefits payable as designated by Employee in a face amount equal
to three times Employee's annual base salary rate hereunder; provided, however,
the face amount of life insurance benefits is not to exceed $750,000.
(b) DMI will maintain health insurance at least as comprehensive as
provided to other key and executive employees.
(c) DMI will maintain, without contribution by Employee, travel
accident insurance with benefits payable as designated by Employee in a face
amount equal to $250,000 death benefits for accidental death in the course of
travel.
(d) DMI will provide Employee with an automobile comparable to those
furnished to other key executives, or its cash equivalent of $675 per month, for
Employee's business related use.
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<PAGE>
(e) Employee shall receive reimbursement for expenses incurred by him
in connection with Medical Care for Employee, his spouse and his dependents,
provided, however, that the amount paid by DMI to Employee pursuant to this
subsection in any fiscal year during the term of this Agreement shall not exceed
$2,000. For the purpose of this subsection the term "Medical Care" means
amounts paid for the diagnosis, care, medication, treatment, or prevention of
disease, or for the purpose of affecting any structure or function of the body
(including amounts paid for accident or health insurance), or for transportation
primarily for and essential to Medical Care. Payments hereunder may be made
from time to time as requested by Employee with or without requiring proof of
the medical expenses in questions, in the discretion of the Board of Directors,
and it is not necessary that such medical expenses have already been paid by
Employee, his spouse, or his aforesaid dependents, but merely that, if not yet
paid, there exists an obligation to pay them. Premiums paid by DMI under any
group accident or health insurance policy that may be maintained by DMI covering
or for the benefit of some or all of its employees, and payments made by
insurers pursuant to said policy, shall not to any extent be regarded as
payments made pursuant to this subsection.
(f) Employee shall receive annual reimbursement for expenses incurred
by him in connection with personal or tax financial planning, not to exceed
$2,000 per year.
(g) Employee shall be entitled to participate in any benefit plan of a
type not specifically covered by this Agreement and established by DMI for key
employees during the term of Employee's employment hereunder on a basis
consistent with his age, position, responsibilities and level of compensation.
(h) Employee shall be reimbursed for his reasonable out-of-pocket
travel and business expenses, including but not limited to, membership in
private clubs for business purposes. All such club memberships will be
approved by a majority of outside members of the Board of Directors.
5. VACATION. Employee shall be entitled to a four-week vacation with pay
in each 12-month period ending August 31. A maximum of one week of annual paid
vacation shall be cumulative and will not be deemed waived if not taken during
the applicable 12 month period. Employee's paid vacation shall be pro-rated
based on the number of months he has remained employed by DMI during any fiscal
year during which this Agreement expires or is terminated.
6. OTHER BOARD OF DIRECTORS ACTION. Nothing in this Agreement shall be
deemed to prevent the Board of Directors of DMI from taking any action it may
deem, in its sole discretion, to be desirable to make the terms and conditions
of this Employment Agreement more beneficial to Employee, or to add further
benefits to his employment with DMI, provided that Employee agrees to such
changes and additions.
7. TERMINATION. This Agreement shall terminate and, except to the extent
previously accrued or as otherwise provided in the Officer Severance Agreement,
all rights and obligations of DMI and Employee under this Agreement shall be
void, upon the earliest to occur of any of the following:
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(a) Expiration of the period of employment set forth in paragraph 1,
unless the period of employment is extended by the Board of Directors, in which
event termination shall occur upon the expiration of the period of employment as
extended by the Board of Directors;
(b) Death of Employee;
(c) Mental or physical illness or disability of Employee that shall
incapacitate him, for a period of 90 successive days or for an aggregate period
of 120 days during any 12 calendar months, from fully performing the duties
assigned to him hereunder in the good faith determination of the Board of
Directors and upon written notice to Employee.
(d) If Employee (i) is found guilty of having committed against DMI
any criminal act, including criminal fraud, or (ii) is found guilty of having
committed any criminal act involving moral turpitude, or (iii) the willful and
continued failure by the Employee to substantially perform the Employee's duties
with DMI after a written demand for substantial performance is delivered to the
Employee by the Board, which demand specifically identifies the manner in which
the Board believes that the Employee has not substantially performed his duties;
or (iv) the willful engaging by the Employee in gross misconduct materially and
demonstrably injurious to the Corporation. For the purposes of this definition,
no act, or failure to act on the Employee's part shall be considered "willful"
unless done or omitted to be done by the Employee other than in good faith and
without reasonable belief that the Employee's action or omission was in the best
interests of DMI. The Employee shall not be deemed to have been terminated for
Cause (as defined in the Officer Severance Agreement) unless and until DMI has
delivered a Notice of Termination, as provided therein.
(e) Voluntary cessation by Employee of his duties and responsibilities
under this Agreement.
If DMI terminates Employee's employment other than for Cause (as defined in
the Officer Severance Agreement), and a change in control (as defined in the
Officer Severance Agreement) occurs within 9 months thereafter, then Employee
shall be entitled to all benefits provided under the Officer Severance
Agreement.
Otherwise, if Employee's employment hereunder is terminated for any other
reason than those specified in subparagraphs (a) through (e) of this paragraph
7, then DMI shall remain liable to Employee and shall pay Employee in full
settlement of DMI's obligations hereunder: (i) the full amount of the balance of
his base salary as provided in subparagraph 3(a) above, to the expiration date
of this Agreement or to such expiration date as may have been extended by action
of the Board of Directors pursuant to subparagraph 7(a), in a lump sum; plus
(ii) an amount equal to the cash bonus and the stock bonus that would have been
payable to Employee pursuant to subparagraphs 3(b) and 3(c) above had Employee
remained employed until the end of DMI's fiscal year, multiplied by a fraction,
the numerator of which is the number of complete calendar months during which
Employee was employed during the fiscal year and the denominator of which is 12.
The payments based upon the cash bonus and the stock bonus shall be paid within
130 days of the delivery to DMI of the financial statements upon which they
shall be based.
E-68
<PAGE>
8. COORDINATION WITH OFFICER SEVERANCE AGREEMENT. For the purposes of
the Officer Severance Agreement, this Agreement shall constitute a renewal and
extension of the Employment Agreement dated as of September 1, 1986 between
Employee and DMI. If any provision of this Agreement may be viewed as
conflicting with a provision of the Officer Severance Agreement, and the
provision at issue does not specifically state that it is intended to supersede
the Officer Severance Agreement, the Officer Severance Agreement shall control.
9. NON-COMPETITION. If this Agreement is terminated for any reason
specified in subparagraphs (a) through (e) of Paragraph 7, Employee shall
refrain, for a period of one year after the termination of this Agreement, from
carrying on a business that competes with a business conducted by DMI within the
geographic area described as follows:
The 50 states of the United States of America and Puerto Rico, except
for the states of Washington, Oregon, Idaho, Colorado, Wyoming, North
Dakota and South Dakota.
For the purposes of this paragraph, a business shall be deemed carried on by
Employee if carried on by a proprietorship, partnership, association or
corporation, or other business entity with which Employee is connected, except
that Employee shall not be deemed to be connected with a business competitive to
that conducted by DMI to the extent that Employee is merely a passive investor
therein or not engaged in the business operations thereof as an officer,
director, employee, agent, consultant, sales representative, or other provider
of personal services in a capacity that would enable him to use his knowledge or
DMI's trade secrets, customer lists or unique business methods to compete
against DMI. It is agreed that in the event of a breach or a threatened breach
of the foregoing, no adequate remedy exists at law to protect DMI's interests
and that DMI shall be entitled to appropriate injunctive relief. Should the
foregoing covenant be adjudged to any extent invalid by any court of competent
jurisdiction, such covenant shall be deemed modified to the extent necessary to
make if enforceable.
10. PLACE OF EMPLOYMENT. DMI agrees that the principal location at which
Employee is to render his services hereunder will continue to be Louisville,
Kentucky.
11. NOTICES. Any notice to DMI or Employee hereunder may be given by
delivering it to, or by depositing it in the United States mail, postage
pre-paid, addressed to the parties at the following addresses:
DMI:
Mr. Donald D. Dreher
DMI Furniture, Inc.
One Oxmoor Place
101 Bullitt Lane
Louisville, KY 40222
with a required copy to:
E-69
<PAGE>
Chairman, Compensation/Stock Option Committee
DMI Furniture, Inc.
One Oxmoor Place
101 Bullitt Lane
Louisville, KY 40202
EMPLOYEE
Mr. Joseph G. Hill
5506 Apache Road
Louisville, KY 40207
12. ENTIRE AGREEMENT. This Agreement and the Officer Severance Agreement
(a) contain the complete and entire understanding and agreement of DMI and
Employee respecting the subject matter hereof (b) supersede and cancel all
understandings or agreement, oral or written, respecting the employment of
Employee in connection with the business of DMI; and (c) may not be modified
except by an instrument in writing executed by DMI and Employee.
13. WAIVER OF BREACH. The waiver by either party, of a breach of any
provision of this Agreement by the other party shall not operate or be construed
as a waiver of any subsequent breach by either party.
14. ASSIGNMENT. Employee may not assign his rights or obligations under
this Agreement. The rights and obligations of DMI shall inure to the benefit of
and shall be binding upon the successors and assigns of DMI.
15. CAPTIONS. All captions and headings used herein are for convenient
reference only and do not form part of this Agreement.
IN WITNESS WHEREOF, DMI and Employee have caused this Agreement to be duly
executed and delivered on the day and first above written, but effective
September 1, 1996.
DMI FURNITURE, INC.
ATTEST: [illegible] By /s/ Donald D. Dreher
----------------------- ---------------------------
Donald D. Dreher
Chairman and President
/s/ Joseph G. Hill
------------------------------
JOSEPH G. HILL
E-70
<PAGE>
EXHIBIT 11.
DMI FURNITURE, INC.
CALCULATIONS OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
AUGUST 31, SEPTEMBER 2, AUGUST 27,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income before cumulative effect of a
change in accounting principle $375,667 $804,477 $1,101,044
Cumulative effect of a change in
accounting for income taxes - - 1,795,000
Extraordinary charge - - (50,000)
-------- -------- ----------
Net income $375,667 $804,477 $2,846,044
-------- -------- ----------
-------- -------- ----------
Average shares of common stock
and common equivalents
outstanding:
Average common shares
outstanding 2,999,189 2,970,026 2,949,548
Common stock equivalents--
dilutive options and convertible
preferred stock 2,705,439 2,737,806 2,841,687
--------- --------- ----------
Average shares of common
stock and common stock
equivalents outstanding 5,704,628 5,707,832 5,791,235
--------- --------- ----------
--------- --------- ----------
Income per share before cumulative
effect of a change in accounting
principle $.07 $.14 $.19
Cumulative effect per share of a
change in accounting for income taxes - - .31
Extraordinary charge - - (.01)
---- ---- ----
Earnings per common share $.07 $.14 $.49
---- ---- ----
---- ---- ----
</TABLE>
E-71
<PAGE>
EXHIBIT 21. LIST OF SUBSIDIARIES
DMI Management, Inc., a Kentucky corporation.
E-72
<PAGE>
EXHIBIT 23.
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report included in this Form 10-K, into the Company's previously filed
Form S-8 Registration Statements No.33-64188 and 33-85826.
ARTHUR ANDERSEN LLP
Louisville, Kentucky
October 18, 1996
E-73
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-03-1995
<PERIOD-END> AUG-31-1996
<CASH> 1,158,083
<SECURITIES> 0
<RECEIVABLES> 7,568,800
<ALLOWANCES> 110,000
<INVENTORY> 9,853,201
<CURRENT-ASSETS> 19,511,327
<PP&E> 19,756,618
<DEPRECIATION> 8,843,575
<TOTAL-ASSETS> 31,177,763
<CURRENT-LIABILITIES> 7,185,050
<BONDS> 12,938,740
305,131
0
<COMMON> 3,990,100
<OTHER-SE> 6,758,742
<TOTAL-LIABILITY-AND-EQUITY> 31,177,763
<SALES> 54,864,968
<TOTAL-REVENUES> 647,783
<CGS> 44,369,462
<TOTAL-COSTS> 44,948,772
<OTHER-EXPENSES> 7,723,094
<LOSS-PROVISION> 968,400
<INTEREST-EXPENSE> 1,323,642
<INCOME-PRETAX> 608,843
<INCOME-TAX> 233,176
<INCOME-CONTINUING> 375,667
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 375,667
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
