<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 May 29, 1999
-----------------------------------------
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 MAY 29, 1999 - 4,042,636
<PAGE>
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information Page
<S> <C>
Consolidated Balance Sheets - May 29, 1999
and August 29, 1998 3, 4
Consolidated Statements of Income - Three and Nine Months
Ended May 29, 1999 and May 30, 1998 5
Consolidated Statements of Cash Flows - Nine Months Ended
May 29, 1999 and May 30, 1998 6, 7
Notes to Consolidated Financial Statements 8-10
Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-14
Part II. Other Information 15
Index to Exhibits
27. Financial Data Schedule 16
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
DMI FURNITURE, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
May 29, Aug. 29,
ASSETS 1999 1998
---- ----
<S> <C> <C>
Current assets:
Cash $ 1,134 $ 1,092
Accounts receivable - net 11,371 10,252
Inventories (Note 4) 18,047 16,296
Other current assets 668 341
Current portion of deferred income taxes (Note 2) 839 935
------- --------
Total current assets 32,059 28,916
Property, plant and equipment - at cost (Note 1) 22,676 22,459
Less accumulated depreciation 11,349 10,522
------- --------
Net property, plant and equipment 11,327 11,937
Other assets 453 476
------- --------
Total Assets $43,839 $41,329
------- --------
------- --------
</TABLE>
See accompanying notes.
3
<PAGE>
DMI FURNITURE, INC.
CONSOLIDATED BALANCE SHEETS
(Continued)
(Amounts in thousands)
<TABLE>
<CAPTION>
May 29, Aug. 29,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
------- --------
<S> <C> <C>
Current liabilities:
Trade accounts payable $2,724 $3,521
Accrued liabilities 2,772 3,128
Long-term debt due within one year 1,513 1,524
------- --------
Total current liabilities 7,009 8,173
Long-term liabilities:
Long-term debt 23,250 21,393
Accrued pension costs 697 807
Deferred compensation 250 273
Deferred income taxes (Note 2) 426 426
------- --------
24,623 22,899
Stockholders' equity:
Common stock 404 389
Additional paid-in capital 16,551 16,183
Retained deficit (4,485) (6,052)
Minimum pension liability (263) (263)
------- --------
Total stockholders' equity 12,207 10,257
------- --------
Total liabilities and stockholders' equity $43,839 $41,329
------- --------
------- --------
</TABLE>
See accompanying notes.
4
<PAGE>
DMI FURNITURE, INC.
STATEMENTS OF INCOME
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ ------------------
May 29, May 30, May 29, May 30,
1999 1998 1999 1998
------- ------- ------- --------
<S> <C> <C> <C> <C>
Net sales $18,950 $16,008 $62,240 $46,232
Cost of sales 15,035 12,251 49,188 35,711
------- ------- ------- --------
Gross profit 3,915 3,757 13,052 10,521
Selling, general and
administrative expenses 3,006 2,627 9,223 7,435
------- ------- ------- --------
Operating profit 909 1,130 3,829 3,086
Interest expense (net) (411) (246) (1,305) (711)
------- ------- ------- --------
Income before income taxes 498 884 2,524 2,375
Provision for income taxes (Note 2) (189) (335) (956) (900)
------- ------- ------- --------
Net income $309 $549 $1,568 $1,475
------- ------- ------- --------
Net income applicable to common stock $309 $442 $1,568 $1,215
------- ------- ------- --------
Earnings per common share (Note 3):
Basic $0.08 $0.14 $0.39 $0.38
------- ------- ------- --------
------- ------- ------- --------
Diluted $0.07 $0.09 $0.36 $0.24
------- ------- ------- --------
------- ------- ------- --------
</TABLE>
See accompanying notes.
5
<PAGE>
DMI FURNITURE, INC.
STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
May 29, May 30,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $1,568 $1,475
Adjustments to reconcile net income to
net cash provided (used) by
operating activities:
Depreciation and amortization 933 845
Deferred income taxes (Note 2) 96 90
Pension costs (110) (160)
Deferred compensation (23) (29)
Changes in assets and liabilities:
Accounts receivable (1,119) (98)
Inventories (1,751) (2,195)
Other assets (304) (189)
Trade accounts payable (797) 70
Accrued liabilities (356) (355)
----- -----
Total adjustments (3,431) (2,021)
------- -------
Net cash used by
operating activities (1,863) (546)
------- -----
Cash flows (used) by
investing activities:
Capital expenditures (323) (1,908)
----- -------
Cash used by investing
activities (323) (1,908)
----- -------
</TABLE>
See accompanying notes.
6
<PAGE>
DMI FURNITURE, INC.
STATEMENTS OF CASH FLOWS
(Continued)
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
May 29, May 30,
1999 1998
---- ----
<S> <C> <C>
Cash flows provided (used) by financing activities:
Borrowings from line of credit 24,117 18,230
Payments on line of credit (21,250) (15,778)
Additions to long term debt - 1,490
Payments on long term debt (1,021) (746)
Restricted cash - (539)
Proceeds from stock options exercised 382 5
Dividends - (200)
------- -------
Cash provided by financing activities 2,228 2,462
Increase in cash 42 8
Cash - beginning of period 1,092 512
------- -------
Cash - end of period $ 1,134 $520
------- -------
Cash paid for:
Interest $ 1,284 $682
------- -------
Income taxes $ 1,218 $1,063
------- -------
</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 May 29, 1999 and for the three and nine months
ended May 29, 1999 and May 30, 1998 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 1999 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:
<TABLE>
<S> <C>
Building and Leasehold Improvements 8 - 35 yrs.
Machinery and Equipment 3 - 13 yrs.
</TABLE>
(2) Income Taxes
Income tax expense consisted of the following (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
May 29, May 30, May 29, May 30,
1999 1998 1999 1998
----- ---- ---- ----
<S> <C> <C> <C> <C>
Current $170 $301 $860 $810
Deferred 19 34 96 90
------ ------- ---- -------
Total $189 $335 $956 $900
------ ------- ---- ----
------ ------- ---- ----
</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 Nine Months Ended
May 29, May 30, May 29, May 30,
1999 1998 1999 1998
---- ----- ---- ----
<S> <C> <C> <C> <C>
Tax at 34% statutory rate $168 $301 $858 $808
State income taxes 21 34 98 92
---- ---- ---- ----
Income Taxes $189 $335 $956 $900
---- ---- ---- ----
---- ---- ---- ----
</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.
<TABLE>
<CAPTION>
(Thousands except per share amounts)
Three Months Ended Nine Months Ended
May 29, May 30, May 29 May 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $309 $549 $1,568 $1,475
Less: preferred stock dividends - (107) - (260)
----- ----- ------ -------
Net income applicable to common stock $309 $442 $1,568 1,215
----- ----- ------ -------
----- ----- ------ -------
Average common shares outstanding 4,041 3,167 3,973 3,163
Common stock equivalents-dilutive
options (and convertible preferred
stock for May 301998) 390 3,004 437 2,947
----- ----- ------ -------
Average shares of common stock
and equivalents outstanding 4,431 6,171 4,410 6,110
----- ----- ------ -------
----- ----- ------ -------
Basic earnings per share $.08 $.14 $.39 $.38
----- ----- ------ -------
----- ----- ------ -------
(Net income applicable to common stock
divided by average common shares
outstanding)
Diluted earnings per share $.07 $.09 $.36 $.24
----- ----- ------ -------
----- ----- ------ -------
(Net income divided by average shares
of common stock and equivalents
outstanding)
</TABLE>
9
<PAGE>
On August 28, 1998 the Company retired its Series C Preferred Stock. Of
the 1,995,050 Series C shares outstanding, 1,557,593 shares were redeemed for
$3.00 per share by the Company as stated in its Certificate of Incorporation,
and 437,457 Series C shares were converted into 722,762 common shares at the
option of the holders. The redemption was funded through term bank debt and
cash.
(4) Inventories
Inventories were comprised of the following at February 27, 1999 and
August 29, 1998:
<TABLE>
<CAPTION>
May 29, 1999 Aug. 29,1998
------------ ------------
<S> <C> <C>
Finished Products $11,913,000 $10,898,000
Work in Process 512,000 512,000
Raw Materials 5,622,000 4,886,000
----------- -----------
$18,047,000 $16,296,000
----------- -----------
----------- -----------
</TABLE>
(5) Major customers
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 four largest customers accounted for
approximately 39% and 47% of the Company's total sales for the three and nine
months periods, respectively, ended May 29, 1999. One customer, Sam's Club, a
division of Wal-Mart Stores, Inc., accounted for more than 10% of the Company's
total sales for the three and nine month periods ended May 29, 1999. The loss of
one or more of these customers at the same time could have a material adverse
effect on the business of the Company. Six customers accounted for approximately
51% of the Company's total sales in fiscal 1998. As of May 29, 1999, one
customer accounted for approximately 22% of total accounts receivable, and the
Company expects that the account receivable from this particular customer will
be collected in the normal course of business.
10
<PAGE>
FORWARD-LOOKING STATEMENTS
The information set forth in "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and in the other portions of this report
includes forward-looking statements about the Corporation and its business. For
this purpose, the use of words such as "believes," "anticipates," "plans,"
"expects," and similar expressions are intended to identify forward-looking
statements. Factors that realistically could cause results to differ materially
from those projected in the forward-looking statements include the cyclical and
seasonal nature of the furniture market; the availability and cost of raw
materials and labor; availability, terms and deployment of capital; events that
disrupt the flow of goods from off-shore manufacturing sources; merchandising
decisions by one or more of the Company's major customers that adversely affect
their purchases of the Company's furniture products; changes in fashion or
tastes that adversely affect consumer perception of the Company's furniture
products; general conditions in the capital markets or in the general economy;
demographic changes that affect consumer purchases of furniture; competition;
and other factors identified in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" below, in "Item 1. Business" of
the Company's 1998 Annual Report on Form 10-K, and in the Company's other
filings with the Securities and Exchange Commission.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenue - Net sales for the third quarter of fiscal 1999 ended May 29, 1999
increased approximately $2.9 million, or approximately 18% from the third
quarter of fiscal 1998. This increase was primarily the result of increased
sales of home office furniture, promotional bedroom furniture, sales by the
Company's Wynwood and Homestyles divisions, and increased sales to a major
customer. This increase was offset somewhat by decreased sales of commercial
office furniture. Sales of home office furniture increased approximately 9%;
sales of promotional bedroom furniture increased approximately 2%; and sales of
commercial office furniture decreased by approximately 6%. Shipments by the
Company's Wynwood and Homestyles divisions were approximately 15% of total sales
for the quarter. These divisions were not yet shipping during the same quarter
of the previous year. Although the Company expects that sales growth for
comparable periods in the future is possible, the magnitude of any sales
increases for comparable periods in the near future will likely be less than
the increases being reported for the three and nine month periods in this
report.
11
<PAGE>
Net sales for the nine months of fiscal 1999 ended May 29, 1999
increased approximately $16 million or approximately 35% from the first nine
months of fiscal 1998. This increase was primarily the result of increased sales
of home office furniture, sales by the Company's Wynwood and Homestyles
divisions, and substantially increased sales to a major customer. This increase
was offset somewhat by decreased sales of promotional priced bedroom furniture
and commercial office furniture. Sales of home office furniture increased
approximately 67%; sales of budget priced bedroom furniture decreased
approximately 5%; and sales of commercial office furniture decreased
approximately 3%.
Gross Margin - The Company's gross margin in the third quarter of fiscal 1999
was 20.7% compared to 23.5% in the third quarter of fiscal 1998. This decrease
in gross margin was primarily the result of lower production levels in the
Company's manufacturing plants due to reduced demand for the furniture
manufactured by those plants, as well as lower margin sales mix than the
previous year.
The Company's gross margin in the first nine months of fiscal 1999 was
21.0% compared to 22.8% in the same period of fiscal 1998. This decrease in
gross margin was primarily the result of the same reasons mentioned in the
previous paragraph.
Selling, General and Administrative (S,G&A) Expense - For the third quarter of
fiscal 1999, S,G&A expense amounted to $3,006,000 or 15.9% of sales compared to
$2,627,000 or 16.4% of sales for the third fiscal quarter of 1998. This decrease
as a percent of sales is primarily the result of the fixed nature of a majority
of these expenses relative to the substantial sales increase.
For the first nine months of fiscal 1999, S,G&A expense amounted to
$9,223,000 or 14.8% of sales compared to $7,435,000 or 16.1% of sales for the
same period of fiscal 1998. This decrease as a percent of sales is primarily the
result of the fixed nature of a majority of these expenses relative to the
substantial sales increase.
Operating Profit - For the third quarter of fiscal 1999, operating profit was
$909,000 or 4.8% of sales, compared to $1,130,000 or 7.1% of sales for the same
period of fiscal 1998. This decrease was the result of the decline in gross
profit margin, as a result of the reasons mentioned above.
For the first nine months of fiscal 1999, operating profit was
$3,829,000 or 6.2% of sales, compared to $3,086,000 or 6.7% of sales for the
same period of fiscal 1998. This increase was a result of the substantial sales
increase, and the lower S,G&A expenses as a percent of sales, offset somewhat by
the decline in gross profit margin.
Interest Expense - For the third quarter of fiscal 1999, net interest was
$411,000 compared to $246,000 for the third quarter of fiscal 1998. This
increase was primarily the result of borrowings to finance higher levels of
accounts receivable and inventory to support the sales growth, as well as
borrowings to redeem the preferred stock in August 1998. Financing the
redemption with debt replaced non-tax deductible dividends on the preferred
stock with tax
12
<PAGE>
deductible interest. (See Note 3) During the first quarter of fiscal 1999,
the Company implemented the use of interest rate swaps as a cash flow hedge to
effectively fix the interest rate on part of its variable rate debt. As of
May 29, 1999, $8 million of the Company's variable rate debt was subject to
interest rate swaps.
For the first nine months of fiscal 1999, net interest was $1,305,000
compared to $711,000 for the same period of fiscal 1998. The reasons for this
increase are the same as in the preceding paragraph.
Liquidity and Capital Resources - Demands for funds relate to payments
for raw materials and other operating costs, debt obligations, 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 56 days for the first nine months of fiscal 1999 and 54 days
for the same period of fiscal 1998. This increase was primarily the result of
significant amounts outstanding to a major customer that the Company expects to
collect in due course. The Company's average days of inventory on hand averaged
92 days for the first nine months of fiscal 1999 compared to 94 days for the
same period of fiscal 1998.
Key elements of the Consolidated Statements of Cash Flows:
<TABLE>
<CAPTION>
Nine Months
1999 1998
---- ----
<S> <C> <C>
Net cash used by operating activities $(1,863,000) $ (546,000)
Cash used for investing activities (323,000) (1,908,000)
--------- ---------
Net cash flows from operating and investing activities (2,186,000) (2,454,000)
Cash provided by financing activities 2,228,000 2,462,000
--------- ---------
Net change in cash and cash equivalents $ 42,000 $ 8,000
--------- ---------
--------- ---------
</TABLE>
During the first nine months of fiscal 1999, the Company used cash
flows for operating activities of $1,863,000 compared to cash flows used of
$546,000 the previous year. The increase in cash flows used was primarily to
finance the accounts receivable and inventories to support the Company's
substantial sales growth and expansion. Investing activities required $323,000
during the first nine months of fiscal 1999 and $1,908,000 during the first nine
months of fiscal 1998. The modest amount in the current year was primarily for
routine manufacturing plant improvement expenditures, and the significant amount
in the previous year was for the building project for the new Wynwood division.
Financing activities provided $2,228,000 during the first nine months of fiscal
1999 from the revolving line of credit, and financing activities provided
$2,462,000 during the same period of fiscal 1998 primarily for payments on the
revolving line of credit.
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
13
<PAGE>
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 $41,000 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 does not believe any events are probable which would
materially change its present liquidity position, which is adequate to satisfy
known demands for funds for operations and to pay bank and other debt.
The Company has received certifications or representations from the
vendors of its critical hardware, system software, and application software that
those products are Year 2000 ready. The Company employs IBM AS400 hardware, IBM
OS400 operating system, and MAPICS manufacturing and production information
control system for the large majority of its system needs, all of which was
subject to the above mentioned certifications. The Company has tested this
hardware and software and found its Year 2000 readiness to be as certified. The
Company has determined that its manufacturing machinery and equipment and
telecommunications equipment is Year 2000 compliant. The Company has not
incurred any material costs in its Year 2000 readiness plans nor does it
anticipate any material costs in the future. The Company has received
representations or certifications from its largest suppliers representing that
they are Year 2000 compliant. In the event that any of the Company's larger
suppliers are not Year 2000 compliant, the Company believes that a sufficient
number of alternative sources exist to allow the Company to meet its raw
material needs. The Company has received representations from customers
representing approximately 50% of its annual sales that those customers are Year
2000 compliant. These customers are also referenced in Note 5 as representing
51% of the Company's sales for fiscal 1998. A majority of the customers that
utilize electronic data interchange to transact business with the Company have
represented that they are or will be Year 2000 compliant. The Company has
received representations from its primary depository and lender bank that they
are Year 2000 compliant. Even given best efforts and execution of the
aforementioned planning and testing, disruptions and unexpected business
problems may occur as a result of the Year 2000 issue.
14
<PAGE>
PART II. OTHER INFORMATION
Item 3. Legal Proceedings
The Company is a defendant in various lawsuits arising in the normal
course of business, including several environmental matters. The Company
presently retains a reserve of approximately $41,000 against potential
environmental liabilities. 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.
Item 6. Exhibits and Reports on Form 8-K
(a) EXHIBITS
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: July 12, 1999 /s/Joseph G. Hill
--------------------------
Joseph G. Hill
Vice President-Finance,
Chief Financial Officer,
Secretary & Treasurer
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-28-1999
<PERIOD-START> AUG-30-1998
<PERIOD-END> MAY-29-1999
<CASH> 1134
<SECURITIES> 0
<RECEIVABLES> 11631
<ALLOWANCES> 260
<INVENTORY> 18047
<CURRENT-ASSETS> 32155
<PP&E> 22676
<DEPRECIATION> 11349
<TOTAL-ASSETS> 43935
<CURRENT-LIABILITIES> 7105
<BONDS> 23250
0
0
<COMMON> 404
<OTHER-SE> 11803
<TOTAL-LIABILITY-AND-EQUITY> 43935
<SALES> 61920
<TOTAL-REVENUES> 62240
<CGS> 48816
<TOTAL-COSTS> 49188
<OTHER-EXPENSES> 9121
<LOSS-PROVISION> 102
<INTEREST-EXPENSE> 1305
<INCOME-PRETAX> 2524
<INCOME-TAX> 956
<INCOME-CONTINUING> 1568
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1568
<EPS-BASIC> 0.39
<EPS-DILUTED> 0.36
</TABLE>
