<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of The Securities
Exchange Act of 1934
For the fiscal quarter ended February 28, 1998
-----------------------------------------------
Commission File Number 0-4173
------------------------------
DMI FURNITURE, INC.
-------------------
(Exact name of registrant as specified in its charter)
DELAWARE 41-0678467
-------- ----------
(State of incorporation) (IRS employer ID number)
One Oxmoor Place, 101 Bullitt Lane, Louisville, Kentucky 40222
--------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number with area code: (502) 426-4351 Ext.227
-----------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes __X__ No _____
Indicate the number of shares outstanding of each of the Registrant's classes
of Common Stock as of the last practicable date:
CLASS - Common Stock, Par Value $.10 per Share
- -----
OUTSTANDING AT FEBRUARY 28, 1998 - 3,165,251
- --------------------------------
1
<PAGE>
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information Page
----
<S> <C>
Consolidated Balance Sheets - February 28, 1998
and August 30, 1997 3, 4
Consolidated Statements of Operations - Three and Six
Months Ended February 28, 1998 and March 1, 1997 5
Consolidated Statements of Cash Flows - Six Months Ended
February 28, 1998 and March 1, 1997 6, 7
Notes to Consolidated Financial Statements 8-10
Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-13
Part II. Other Information 14-15
Index to Exhibits
11. Calculations of Earnings Per Share 16
27. Financial Data Schedule 17
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
DMI FURNITURE, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
Feb. 28, Aug. 30,
ASSETS 1998 1997
- ------ ------- -------
<S> <C> <C>
Current assets:
Cash $669 $ 512
Restricted cash for debt payments 1,455 1,080
Accounts receivable - net 7,682 9,149
Inventories (Note 4) 11,744 12,262
Other current assets 402 363
Current portion of deferred income taxes (Note 2) 736 792
------- --------
Total current assets 22,688 24,158
Property, plant and equipment - at cost (Note 1) 21,773 20,436
Less accumulated depreciation 10,015 9,479
------- --------
Net property, plant and equipment 11,758 10,957
Other assets:
Intangible pension asset 296 296
Other 126 140
------- --------
422 436
------- --------
Total Assets $34,868 $35,551
------- --------
------- --------
</TABLE>
See accompanying notes.
3
<PAGE>
DMI FURNITURE, INC.
CONSOLIDATED BALANCE SHEETS
(Continued)
(Amounts in thousands)
<TABLE>
<CAPTION>
Feb. 28, Aug. 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
------- ---------
<S> <C> <C>
Current liabilities:
Trade accounts payable $3,304 $2,890
Accrued liabilities 1,823 2,719
Accrued dividends on preferred
stock (Note 6) 452 399
Long-term debt due within one year 2,041 2,012
------- ---------
Total current liabilities 7,620 8,020
Long-term liabilities:
Long-term debt 11,902 12,846
Accrued pension costs 475 601
Deferred compensation 300 321
Deferred income taxes (Note 2) 502 502
------- ---------
13,179 14,270
Stockholders' equity:
Series C convertible preferred stock, $2 par value,
1,995,050 authorized and outstanding 3,990 3,990
Common stock 316 315
Additional paid-in capital 15,375 15,341
Retained deficit (5,612) (6,385)
------- ---------
Total stockholders' equity 14,069 13,261
------- ---------
Total liabilities and stockholders' equity $34,868 $35,551
------- ---------
------- ---------
</TABLE>
See accompanying notes.
4
<PAGE>
DMI FURNITURE, INC.
STATEMENTS OF INCOME
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
Feb. 28, Mar 1, Feb. 28, Mar 1,
1998 1997 1998 1997
------- ------- -------- -------
<S> <C> <C> <C> <C>
Net sales $12,785 $13,867 $30,224 $29,656
Cost of sales 10,156 10,810 23,460 22,821
------- ------- -------- -------
Gross profit 2,629 3,057 6,764 6,835
Selling, general and
administrative expenses 2,238 2,086 4,808 4,302
Plant closing reserve (Note 7) - - - (118)
------- ------- -------- -------
Operating profit 391 971 1,956 2,651
Interest expense (net) (206) (269) (465) (561)
------- ------- -------- -------
Income before income taxes 185 702 1,491 2,090
Provision for income taxes (Note 2) (69) (267) (565) (794)
------- ------- -------- -------
Net income (Note7) $116 $435 $926 $1,296
------- ------- -------- -------
------- ------- -------- -------
Net income applicable to common stock $83 $395 $773 $1,071
------- ------- -------- -------
------- ------- -------- -------
Earnings per common share (Notes 3 & 7):
Basic $ 0.03 $ 0.13 $ 0.24 $ 0.35
------- ------- -------- -------
------- ------- -------- -------
Diluted $ 0.02 $ 0.07 $ 0.15 $ 0.22
------- ------- -------- -------
------- ------- -------- -------
</TABLE>
See accompanying notes.
5
<PAGE>
DMI FURNITURE, INC.
STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
Feb. 28, Mar. 1,
1998 1997
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (Note 7) $926 $1,296
Adjustments to reconcile net income to
net cash provided (used) by
operating activities:
Depreciation and amortization 536 507
Deferred income taxes (Note 2) 56 332
Pension costs (126) (94)
Deferred compensation (21) (40)
Changes in assets and liabilities:
Accounts receivable 1,467 170
Inventories 518 (581)
Other assets (25) 136
Trade accounts payable 414 (409)
Accrued liabilities (Note 7) (862) 387
-------- -------
Total adjustments 1,957 408
-------- -------
Net cash provided by
operating activities 2,883 1,704
-------- -------
Cash flows (used) by
investing activities:
Capital expenditures (1,337) (391)
-------- -------
Cash used by investing
activities (1,337) (391)
-------- -------
</TABLE>
See accompanying notes.
6
<PAGE>
DMI FURNITURE, INC.
STATEMENTS OF CASH FLOWS
(Continued)
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
Feb. 28, Mar. 1,
1998 1997
-------- -------
<S> <C> <C>
Cash flows provided (used) by
financing activities:
Borrowings from line of credit $10,150 $8,350
Payments on line of credit (11,504) (8,950)
Additions to long term debt 1,016 -
Payments on long term debt (577) (679)
Restricted cash (375) -
Proceeds from stock options exercised 1 46
Dividends (100) -
-------- -------
Cash used by
financing activities (1,389) (1,233)
-------- -------
Increase in cash 157 80
Cash - beginning of period 512 97
-------- -------
Cash - end of period $669 $177
-------- -------
-------- -------
Cash paid for:
Interest $509 $577
-------- -------
-------- -------
Income taxes $813 $272
-------- -------
-------- -------
</TABLE>
See accompanying notes.
7
<PAGE>
DMI FURNITURE, INC.
Notes to Consolidated Financial Statements
(1) Financial Statements and Organization
The consolidated financial statements include DMI Furniture, Inc. and
its wholly owned subsidiary, DMI Management, Inc. ("Company"). The
financial statements included herein at February 28, 1998 and for the three
and six months ended February 28, 1998 and March 1, 1997 are unaudited but
include all adjustments which are, in the opinion of management, necessary to
a fair presentation of the results of operations and financial position for
the periods covered herein. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's latest annual report on Form 10-K.
The results of operations for the interim periods are not necessarily an
indication of the results to be expected for the full 1998 fiscal year.
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
reporting period. Actual results could differ from those estimates.
The specific useful lives of property, plant, and equipment are as
follows:
Building and Leasehold Improvements 8 - 35 yrs.
Machinery and Equipment 3 - 13 yrs.
(2) Income Taxes
Income tax expense (benefit) consisted of the following (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------- ---------------------
Feb. 28, Mar. 1, Feb. 28, Mar. 1,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Current $58 $417 $509 $462
Deferred 11 (150) 56 332
---- ----- ---- ----
Total $69 $267 $565 $794
---- ----- ---- ----
---- ----- ---- ----
</TABLE>
8
<PAGE>
The provision for income taxes differs from that computed at the federal
statutory corporate tax rate as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------- --------------------
Feb. 28, Mar. 1, Feb. 28, Mar. 1,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Tax at 34% statutory rate $63 $239 $507 $711
State income taxes 6 28 58 83
--- ---- ---- ---
Income Taxes $69 $267 $565 $794
--- ---- ---- ---
--- ---- ---- ---
</TABLE>
(3) Earnings Per Common Share
In March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No.
128"). This standard modifies disclosure requirements for companies required
to report earnings per share ("EPS") to include presentations of Basic EPS
(which includes no dilution of common stock equivalents) and, if applicable,
Diluted EPS (which reflects the potential dilution of common stock
equivalents). The standard was effective for the Company with the completion
of its fiscal 1998 second quarter. See Exhibit 11 for more information.
(4) Inventories
Inventories were comprised of the following at Feb. 28, 1998 and
August 30, 1997:
<TABLE>
<CAPTION>
Feb. 28, 1998 August 30,1997
------------- --------------
<S> <C> <C>
Finished Products $5,988,000 $6,789,000
Work in Process 512,000 514,000
Raw Materials 5,244,000 4,959,000
----------- -----------
$11,744,000 $12,262,000
----------- -----------
----------- -----------
</TABLE>
(5) Other matters
The Company is currently subject to claims under federal and state
environmental laws based on allegations that the Company had hazardous
substances disposed of at three waste disposal sites. After depositing
$57,000 in a trust fund under the terms of a tentative settlement of claims
arising from one site and paying its portion of preliminary investigation and
remediation costs at the other two sites, the Company retains a reserve of
approximately $45,000 against potential environmental liabilities. Due to
the limited nature of the Company's involvement in these environmental
proceedings, the availability of certain defenses, and the involvement of
many other parties with substantial financial resources in the proceedings,
the Company does not anticipate, based on currently available information,
that potential environmental liabilities arising from these proceedings are
likely to exceed the amount of the Company's reserve by an amount that would
have a material effect on the Company's financial condition, results of
operations or cash flows. Expenses for the year to date were not material.
9
<PAGE>
(6) Dividends
The dividends on Series C Preferred Stock accrued in a fiscal year are
not payable until the following fiscal year.
(7) Plant closing
The Company permanently closed its Gettysburg, Pennsylvania manufacturing
plant and warehouse facilities and consolidated the production and distribution
activities of those operations into its Huntingburg, Indiana facilities during
the second quarter of fiscal 1996. Consolidation of production and warehousing
into the Indiana facilities resulted in lower manufacturing and warehousing
overhead and plant administrative costs. During the first quarter of fiscal
1997 the Company sold the Gettysburg, Pennsylvania warehouse and realized gross
proceeds of approximately $130,000. Based upon this transaction approximately
$118,000 of the book provision related to the initial recording of property,
plant and equipment was not needed.
(8) Long-lived assets
In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS No. 121).
This standard establishes accounting standards for evaluating the potential
impairment of long-lived assets, certain identifiable intangibles and goodwill.
The Company adopted the provisions of SFAS No. 121 in the first quarter of
fiscal 1997 and that adoption did not have a material impact on its financial
position or results of operations.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenue - Net sales for the second quarter of fiscal 1998 decreased
$1,082,000 or 8% from the second quarter of fiscal 1997. This decrease was
primarily the result of decreased sales of: promotional bedroom furniture; a
residential desks/accent furniture product line that has been discontinued;
and lumber and wood products by the Company's sawmill. This decrease was
offset somewhat by increased sales of commercial office furniture. Office
furniture sales increased 3%; sales to outside trade customers of lumber and
fabricated wood parts by the Company's sawmill/dimension parts plant
decreased 9%; and sales of the discontinued residential desks/accent
furniture product line decreased from $711,000 to $154,000. Sales of home
office and other imported furniture were unchanged for the quarter.
Net sales for the first six months of fiscal 1998 increased $568,000 or
2% from the first six months of fiscal 1997. This increase was the result of
increased sales of commercial office and home office furniture offset
somewhat by decreased sales of bedroom furniture. Office furniture sales
increased by 8%; sales of home office furniture and other residential
furniture including desks, desk chairs, wall systems, occasional tables
increased 15%, and bedroom furniture decreased by 8%.
Gross Margin - The Company's gross margin in the second quarter of fiscal
1998 was 20.6% compared to 22.0% in the second quarter of fiscal 1997.
This decrease in gross margin was primarily the result of lower production
levels and gross margins associated with the promotional bedroom furniture
line as a result of weak demand, as well as lower margins on the Company's
home office line resulting primarily from higher sales allowances on the
imported home office product line.
The Company's gross margin in the first six months of fiscal 1998 was
22.4% compared to 23.0 % in the first six months of fiscal 1997. This
decrease was primarily the result of lower production levels and gross
margins associated with the promotional bedroom furniture line as a result of
weak demand.
Selling, General and Administrative (S,G&A) Expense - For the second quarter
of fiscal 1998, S,G&A expense amounted to $2,238,000 or 17.5% of sales
compared to $2,086,000 or 15.0% of sales for the second fiscal quarter of
1997. For the first six months of fiscal 1998, S,G&A expense amounted to
$4,808,000 or 15.9% of sales compared to $4,302,000 or 14.5% of sales for
the first six months of fiscal 1997. These increases were primarily due to
sales and marketing related start-up expenses for the Company's new Wynwood
division. On September 4, 1997 the Company announced the formation of the
Wynwood division to market better quality imported wood furniture. The sales
and marketing related start-up expenses totaled approximately $220,000 and
$430,000 during the second quarter and first six months, respectively, of
fiscal 1998. These expenses had the affect of lowering basic earnings per
common share by $.04 for the second quarter and $.08 for the first six months
of fiscal 1998.
Interest Expense - For the second quarter of fiscal 1998, net interest was
$206,000 compared to $269,000 for the second quarter of fiscal 1997, or a
decrease of 23% This decrease was primarily the result of lower borrowing
rates resulting from the Company's amended credit arrangements as well as
lower rates in the financial markets.
11
<PAGE>
For the first six months of fiscal 1998, net interest was $465,000
compared to $561,000 for the first six months of fiscal 1997, or a decrease
of 29%. This decrease was the result the reasons mentioned above.
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. During
the first quarter of fiscal 1997 the Company sold the Gettysburg,
Pennsylvania warehouse and realized gross proceeds of approximately $130,000.
Based upon this transaction approximately $118,000 of the book provision
related to the initial recording of property, plant and equipment was not
needed.
Liquidity and Capital Resources - Demands for funds relate to payments
for raw materials and other operating costs, debt obligations, accrued
preferred stock dividends and capital expenditures. The Company's ability
to generate cash adequate to meet short and long term needs is dependent on
the collection of accounts receivable and from its ability to borrow funds.
The Company's days of sales outstanding of accounts receivable averaged 53
days for the first six months of fiscal 1998 and fiscal 1997. The Company's
average days of inventory on hand averaged 90 days for the first six months
of fiscal 1998 compared to 82 days for the first six months of fiscal 1997.
This increase is primarily due to the initial build-up of new office
furniture group finished goods inventory as well as increased inventory of
logs to reduce seasonal fluctuations in the cost of lumber.
Key elements of the Consolidated Statements of Cash Flows:
<TABLE>
<CAPTION>
Six Months
--------------------------
1998 1997
---- ----
<S> <C> <C>
Net cash provided by operating activities $2,883,000 $1,704,000
Cash used for investing activities (1,337,000) (391,000)
------------ -----------
Net cash flows from operating and
investing activities 1,546,000 1,313,000
Cash used by financing activities (1,389,000) (1,233,000)
------------ -----------
Net change in cash and cash equivalents $157,000 $80,000
------------ -----------
------------ -----------
</TABLE>
During the first six months of fiscal 1998 , the Company provided cash
flows from operating activities of $2,883,000 compared to cash flows provided
of $1,704,000 the previous year. The comparatively strong operating cash
flows in the current year are primarily due to a larger decrease in accounts
receivable since fiscal 1997 year end versus the previous year's decrease,
and also due to an inventory reduction in the six month period of the current
year versus an inventory increase in the six month period of the previous
year. Investing activities required $1,337,000 during the first six months of
fiscal 1998 and $391,000 during the first six months of fiscal 1997 primarily
for capital expenditures. The increased amount for the current year is a
result of the building project for the new Wynwood division. Financing
activities used $1,389,000 during the first six months of fiscal 1998
primarily in reduction of debt offset somewhat by new borrowings for the
building project previously mentioned, compared to funds used of $1,233,000
primarily in reduction of debt for the six month period of the previous year.
12
<PAGE>
The Company is currently subject to claims under federal and state
environmental laws based on allegations that the Company had hazardous
substances disposed of at three waste disposal sites. After depositing
$57,000 in a trust fund under the terms of a tentative settlement of claims
arising from one site and paying its portion of preliminary investigation and
remediation costs at the other two sites, the Company retains a reserve of
approximately $45,000 against potential environmental liabilities. Due to
the limited nature of the Company's involvement in these environmental
proceedings, the availability of certain defenses, and the involvement of
many other parties with substantial financial resources in the proceedings,
the Company does not anticipate, based on currently available information,
that potential environmental liabilities arising from these proceedings are
likely to exceed the amount of the Company's reserve by an amount that would
have a material effect on the Company's financial condition, results of
operations or cash flows. Expenses for the year to date were not material.
See "Item 3. Legal Proceedings".
The Company does not believe any events are probable which would
materially change its present liquidity position, which is adequate to
satisfy known demands for funds for operations and to pay bank and other
debt.
The Company has received certifications or representations from the
vendors of its critical hardware, system software, and application software
that those products are Year 2000 ready. The Company considers itself to be
Year 2000 systems ready in all material respects.
13
<PAGE>
PART II. OTHER INFORMATION
Item 3. Legal Proceedings
The Company is currently subject to claims under federal and state
environmental laws based on allegations that the Company had hazardous
substances disposed of at three waste disposal sites. After depositing
$57,000 in a trust fund under the terms of a tentative settlement of claims
arising from one site and paying its portion of preliminary investigation and
remediation costs at the other two sites, the Company retains a reserve of
approximately $45,000 against potential environmental liabilities. Due to
the limited nature of the Company's involvement in these environmental
proceedings, the availability of certain defenses, and the involvement of
many other parties with substantial financial resources in the proceedings,
the Company does not anticipate, based on currently available information,
that potential environmental liabilities arising from these proceedings are
likely to exceed the amount of the Company's reserve by an amount that would
have a material effect on the Company's financial condition, results of
operations or cash flows. Expenses for the year to date were not material.
The Company is also a defendant in various lawsuits arising in the
normal course of business, including two other environmental matters. In
management's opinion, these lawsuits are not material to the results of
operations or financial position of the Company, or are adequately covered
by insurance.
14
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) EXHIBITS
11. Calculations of earnings per share.
27. Financial Data Schedule
(b) REPORTS ON FORM 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DMI FURNITURE, INC.
(Registrant)
Date: April 8, 1998 /s/Joseph G. Hill
--------------------------
Joseph G. Hill
Vice President-Finance,
Chief Financial Officer,
Secretary & Treasurer
15
<PAGE>
EXHIBIT 11.
DMI FURNITURE, INC.
CALCULATIONS OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- -----------------------
Feb. 28, Mar. 1, Feb. 28, Mar. 1,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income applicable to common stock $83,000 $395,000 $773,000 $1,071,000
======= ======== ======== ==========
Net income $116,000 $435,000 $926,000 $1,296,000
======== ======== ======== ==========
Average shares of common
stock and equivalents
outstanding:
Average common shares
outstanding 3,164,584 3,106,083 3,160,495 3,081,147
Common stock equivalents--
dilutive options, warrants
and convertible preferred stock 2,918,467 2,961,871 2,919,677 2,880,870
--------- --------- --------- ---------
Average shares of common
stock and equivalents
outstanding 6,083,051 6,067,954 6,080,172 5,962,017
========= ========= ========= =========
Basic earnings per share $ 0.03 $ 0.13 $ 0.24 $ 0.35
========= ========= ========= =========
Diluted earnings per share $ 0.02 $ 0.07 $ 0.15 $ 0.22
========= ========= ========= =========
</TABLE>
See Note 3.
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-29-1997
<PERIOD-START> AUG-31-1997
<PERIOD-END> FEB-02-1998
<CASH> 2,124
<SECURITIES> 0
<RECEIVABLES> 7,893
<ALLOWANCES> 211
<INVENTORY> 11,743
<CURRENT-ASSETS> 22,688
<PP&E> 21,773
<DEPRECIATION> 10,015
<TOTAL-ASSETS> 34,868
<CURRENT-LIABILITIES> 7,612
<BONDS> 11,902
0
3,990
<COMMON> 316
<OTHER-SE> 9,763
<TOTAL-LIABILITY-AND-EQUITY> 34,868
<SALES> 30,015
<TOTAL-REVENUES> 30,224
<CGS> 23,211
<TOTAL-COSTS> 23,460
<OTHER-EXPENSES> 4,744
<LOSS-PROVISION> 64
<INTEREST-EXPENSE> 465
<INCOME-PRETAX> 1,491
<INCOME-TAX> 565
<INCOME-CONTINUING> 926
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 926
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.15
</TABLE>
