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Previous: ARDEN GROUP INC, 10-Q, 1999-11-12 |
Next: NEWPORT CORP, 10-Q, 1999-11-12 |
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 (FEE REQUIRED)
For the fiscal year ended August 28, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission file number 0-4173
DMI FURNITURE, INC.
| DELAWARE (State of incorporation) |
41-0678467 (IRS employer ID number) |
One Oxmoor Place, 101 Bullitt Lane, Louisville, Kentucky 40222
Registrant’s telephone number with area code: (502) 426-4351
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
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the Registrant was $8,927,000 as of August 28, 1999.
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 August 28, 1999
4,042,636 |
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Annual Meeting of Stockholders on February 15, 2000 are incorporated by reference into Part III.
Part I.
Item 1. BUSINESS
Preliminary Note Regarding Forward-Looking Statements
The information set forth in "Item 1. Business," in "Item 8.
Management's Discussion and Analysis of Financial Condition and Results of
Operations," and in the other portions of this report includes forward-looking
statements about the Corporation and its business. For this purpose, the use of
words such as "believes," "anticipates," "plans," "expects," and similar
expressions are intended to identify forward-looking statements. Factors that
realistically could cause results to differ materially from those projected in
the forward-looking statements include the cyclical and seasonal nature of the
furniture market; the availability and cost of raw materials and labor;
availability, terms and deployment of capital; events that disrupt the flow of
goods from off-shore manufacturing sources; merchandising decisions by one or
more of the Company's major customers that adversely affect their purchases of
the Company's furniture products; changes in fashion or tastes; general
conditions in the economy or capital markets; demographic changes; competition;
and other factors identified in "Item 1. Business," in "Item 8. Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
in other portions of this report.
(a) General Development of Business.
--------------------------------
The operations of the Company during the past three years consisted of
the manufacture, import, and sale of low and medium-priced residential, home
office, and commercial office furniture.
(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 28, 1999, consist of one
industry segment -- the manufacture, import, and sale of furniture.
(c) Narrative Description of the Business.
--------------------------------------
The Company manufactures, imports, and sells low and medium-priced
bedroom furniture, dining furniture, occasional and accent furniture, home
office and commercial office furniture, conference tables, and chairs.
The Company's furniture products are marketed throughout the United
States, Puerto Rico, Canada, Mexico, Caribbean, and Saudi Arabia, principally to
furniture retailers. Export sales totaled approximately 3% of the Company's
sales in fiscal 1999. Approximately 10% of the Company's sales are accounted for
by sale to wholesale distributors. The Company's sales are made through
independent, commissioned sales representatives, as well as sales and marketing
personnel employed by the Company. The Company maintains showrooms for furniture
markets in High Point, North Carolina. The Company also participates in the
annual NeoCon commercial office furniture tradeshow in Chicago, Illinois.
I-1
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The raw materials which are essential to the domestic 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 42% of these materials are purchased from independent
suppliers, and the balance of these materials are obtained by the Company by
processing purchased logs and lumber through the Company's saw mill and
dimension plant, by cutting various types of board and drawer body parts, and
manufacturing high pressure laminated tops for its office furniture. If, for any
reason, the Company's existing sources of supply for any of its raw materials
became unable to service the Company, the Company believes its furniture
manufacturing operations would not be adversely affected because there are
adequate alternate sources of supply. Loss of any one or several sources of
supply would not have a material adverse effect on the Company as ample
alternative sources exist.
Approximately 50% of the Company's total sales are of imported product.
The Company sources these products from various factories in Asia and Mexico,
both through agents and direct, based primarily on Company developed designs.
The Company maintains a showroom, production office, and quality control
organization in China. An unanticipated interruption in the flow of products
from one or more of these factories could have a short-term material adverse
effect on the Company's results of operations.
The Company owns or uses the following trademarks in
connection with its furniture products, which trademarks are due to expire on
the dates indicated below:
Expiration
Trademark Product Date
--------- ------- ----
TOP GUARD All DMI products 2002
Wood Classics
Furniture Company Office Furniture 2006
Carolina Desk Company All DMI products 2008
DMI All DMI products 2009
DMI Furniture, Inc. All DMI products 2009
Wood Manor All DMI products 2007
Cyber City Furniture Warehouse All DMI products 2007
Carolina Classics Office
Furniture Company All DMI products Pending
Wynwood All DMI products 2009
Homestyles All DMI products Pending
Dolly Madison 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.
I-2
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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 49% of
the Company's total sales in fiscal 1999. One customer, Sam's Club division of
Wal-Mart Stores, Inc., accounted for more than 10% of the Company's total net
sales for fiscal 1999. The loss of one or more of these customers at the same
time could have a materially adverse effect on the business of the Company. As
of August 28, 1999, one customer accounted for approximately 25% of total
accounts receivable. The Company's customers include large furniture chain store
retailers, wholesale clubs, catalog retailers, and independent distributors, as
well as numerous smaller retailers.
The furniture industry is extremely competitive. The Company competes
in the national market for low to upper medium-priced furniture. Due to the
fragmented nature of the furniture manufacturing industry and the unavailability
of complete financial reports for all its competitors, the Company is unable to
accurately state its rank in the industry. There are, however, a large number of
furniture manufacturers with substantially greater sales and greater economic
resources than the Company, a number of which are subsidiaries or divisions of
large national companies. The principal methods of competition in the furniture
industry are design, pricing, sales force, customer service, and manufacturing
location.
The Company believes it is a leading producer and marketer of popular
priced "promotional" bedroom furniture, home office furniture, and wood office
furniture.
The Company employs approximately 443 employees, of whom approximately
189 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.
I-3
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The Company completed construction during fiscal 1998 of a 100,000
square foot warehouse in Huntingburg, Indiana on its existing property. The main
purpose of this new building is warehousing and distribution of the Company's
various product lines.
The Company has announced plans to close its Ferdinand, Indiana
furniture manufacturing plant during fiscal 2000. See Note 12 to the financial
statements for additional information.
All of the Company's properties are encumbered by mortgages held by its
bank. See Note 2 to the consolidated financial statements.
The productive capacity and extent of utilization of each of the
Company's manufacturing facilities for the fiscal year ended August 28, 1999 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 1999
Facility Capacity Production %Utilized
-------- -------- ---------- ---------
(dollars in thousands)
Ferdinand, Ind. Plant $17,942 $11,315 63%
Huntingburg, Ind. 5th St. Plant 19,990 15,059 75%
Huntingburg, Ind. Chestnut
Street Plant 20,448 15,479 76%
Huntingburg, Ind. Fabricator 9,105 7,842 86%
Ferdinand, Ind. Sawmill/
Dimension Plant 7,349 6,927 94%
------- ------- ---
$74,834 $56,622 76%
======= ======= ===
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 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-4
Page 6
Part II.
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS.
(a) Price Range of Common Stock
The Company's Common Stock is traded in the over-the-counter market and
is quoted on NASDAQ under the trading symbol DMIF. The following table sets
forth the high and low bid quotations, as reported by NASDAQ for the Company's
Common Stock, for each fiscal quarter indicated. The quotations represent prices
between dealers, do not include commissions, mark-ups or mark-downs and may not
represent actual transactions.
High Bid Low Bid
Price Price Price
----- ----- -----
1st Quarter of 1998 $ 3.25 $ 2.63
2nd Quarter of 1998 $ 3.00 $ 2.63
3rd Quarter of 1998 $ 3.75 $ 2.50
4th Quarter of 1998 $ 3.63 $ 2.82
1st Quarter of 1999 $ 3.75 $ 2.06
2nd Quarter of 1999 $ 4.88 $ 3.31
3rd Quarter of 1999 $ 4.13 $ 2.94
4th Quarter of 1999 $ 3.19 $ 2.00
(b) Approximate Number of Equity Security Holders
Title of Class- Common Stock, $.10 Par Value
Approximate Number of Stockholders as of August 28, 1999 - 1,554
(c) Dividend History
No dividends have been paid on the Registrant's Common Stock since its
issuance on November 11, 1977.
(d) Dividend Policy
Payment of dividends will be within the discretion of the Company's
Board of Directors and will depend, among other factors, on earnings, capital
requirements and the operating and financial condition of the Company. At the
present time, the Company's anticipated capital requirements are such that it
intends to follow a policy of retaining earnings in order to finance the
development of its business and the retirement of its debt. In addition, the
Company's present financing agreement with Bank One, Indiana, N.A. prohibits the
payment of dividends on common stock without the written consent of the bank.
See Notes 2 and 5 to the consolidated financial statements.
II-1
Page 7
ITEM 6.
DMI FURNITURE, INC.
SELECTED FINANCIAL DATA
----------------------------Fiscal Year Ended-------------------
August 28, August 29, August 30, August 31, September 2,
1999 1998 1997 1996 1995
----------- ---------- ---------- ---------- ------------
(Amounts in thousands except per share amounts)
Net sales $80,373 $64,727 $56,434 $55,563 $67,773
Net income from continuing operations (5) 1,088 1,975 2,416 (3) 376 804
Diluted earnings per common share (5) $0.25 (4) $0.07 $0.(3) $ 0.07 $ 0.14
Total assets $45,279 $41,329 $35,551 $31,178 $38,512
Long-term debt and capital
lease obligations 26,838 22,917 14,857 13,661 21,037
Notes to selected financial data:
Note 1 - This summary should be read in conjunction with the related
financial statements and notes.
Note 2 - Diluted earnings per common share are based on the weighted
average number of common and common equivalent shares outstanding
during the period.
Note 3 - Includes plant closing reserve which reduced net income and
earnings per common share by approximately $538,000 and $.09 per
share respectively.
Note 4 - Includes charge from preferred stock redemption of $1,666,000
which impacted diluted earnings per common share by approximately
$.40.
Note 5 - Includes plant closing reserve which reduced net income and
earnings per common share by approximately $372,000 and $.08 per
share respectively.
II-2
Page 8
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company has a $26,800,000 credit agreement with Bank One,
Indianapolis, N.A. comprised of a $5,300,000 term loan, a $1,500,000 term loan,
and a maximum revolving master note loan commitment of $20,000,000 (outstanding
balance $17,250,000 as of August 28, 1999). In addition, through February 28,
2000, to finance seasonal levels of accounts receivable and inventory, the
Company has an additional $3,000,000 commitment under the revolving master loan
note. On August 28, 1999, the Company had $2,328,000 additional borrowings
available under the formula for calculating its available borrowings. See Note 2
to the consolidated financial statements.
Demands for funds relate to payments for raw materials and other
operating costs, resale merchandise, debt obligations, and capital expenditures.
The Company's ability to generate cash adequate to meet short and long-term
needs results from the collection of accounts receivable and from its ability to
borrow funds. The Company's days of sales outstanding of accounts receivable
averaged 57 days for fiscal 1999 and 53 days for fiscal 1998. This increase was
primarily the result of general soft conditions in the commercial office
category. Inventory turnover was 3.7 in fiscal 1999 and 3.5 in fiscal 1998. The
Company believes it will be able to generate enough cash in fiscal 2000 from
operations together with available borrowings under its revolving master note to
make scheduled payments on its long term debt.
On August 28, 1998 the Company retired its Series C Preferred Stock. Of
the 1,995,050 Series C shares outstanding, 1,557,593 shares were redeemed for
$3.00 per share by the Company as stated in its Certificate of Incorporation,
and 437,457 Series C shares were converted into 722,762 common shares at the
option of the holders. The redeeming shareholders were paid a final dividend of
$75,319 on the date of redemption. The redemption of the 1,557,593 Series C
shares resulted in a $1,666,000 charge to income applicable to common stock
because the $3.00 redemption price exceeded the par value of the Series C stock
of $2.00, and the Company recognized approximately $109,000 in transaction
costs. The redemption was funded through term bank debt and cash. This
transaction resulted in a substantial anti-dilutive effect on earnings per
common share in future periods.
Key elements of the Consolidated Statement of Cash Flows (in
thousands):
1999 1998 1997
---- ---- ----
Net cash provided (used) by operating activities $(4,093) $(1,211) $ 23
Cash used in investing activities (385) (2,233) (858)
------- ------- -------
Net cash flows from operating and investing activities (4,478) (3,444) (835)
Cash provided by financing activities 4,171 4,025 1,250
------- ------- -------
Net change in cash and cash equivalents $ (307) $ 581 $ 415
======= ======= =======
During fiscal 1999 and fiscal 1998, the Company used cash flows for
operations of $4,093,000 and $1,211,000 respectively, primarily to finance
finished goods inventories for its new divisions and new commercial office
groups as well as to finance increased accounts receivables from substantially
increased sales. During fiscal 1997, the Company provided cash
II-3
Page 9
flows from operations of $23,000 from net income of $2.4 million offset
primarily by funds used to finance inventories of expanding office and home
office furniture lines as well as to finance seasonal inventories of wood at the
Sawmill to minimize spot purchase premiums during the fall and winter months. In
addition, cash was used to finance accounts receivable resulting from the sales
increase during the fourth quarter.
Cash flows of $385,000 were used for investing activities during
fiscal 1999 primarily for plant and equipment modernization expenditures. Cash
flows of $2,233,000 were used for investing activities during fiscal 1998
primarily to build the new warehousing and distribution facility as well as to
finish a capital project at the Company's sawmill and dimension plant. Investing
activities used $858,000 during fiscal 1997 primarily to finance capital
expenditures, in particular the building addition at the Dimension Plant to
accommodate the lumber yield optimization equipment, to finance the sales
automation hardware and software, and to finance ongoing plant modernization.
Funds used for these expenditures were partially offset by $193,000 in proceeds
from the sale of certain environmental permits.
Net cash flows from financing activities of $4,171,000 for fiscal 1999
were used primarily to finance the previously mentioned current assets. Net cash
flows from financing activities of $4,025,000 for fiscal 1998 were used to
finance the previously mentioned current assets and capital expenditures as well
as to retire the Series C Preferred Stock. Financing activities during fiscal
1997 of $1,250,000 were provided primarily by the revolving line of credit.
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 2000 budget for capital expenditures is
approximately $547,000. The Company anticipates that its 2000 internal cash flow
and additional borrowings available under its credit agreement will be
sufficient to pay for these expenditures.
The Company is currently subject to claims under federal and state
environmental laws based on allegations that the Company had hazardous
substances disposed of at three waste disposal sites. Due to the limited nature
of the Company's involvement in these environmental proceedings, the
availability of certain defenses, and the involvement of many other parties with
substantial financial resources in the proceedings, the Company does not
anticipate, based on currently available information, that potential
environmental liabilities arising from these proceedings are likely to exceed
the amount of the Company's reserve by an amount that would have a material
effect on the Company's financial condition, results of operations or cash
flows. Expenses for the year to date were not material. See "Item 3. Legal
Proceedings" and Note 4 of Notes to Consolidated Financial Statements.
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
II-4
Page 10
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
11 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, that are out of the control of the Company, may occur as a result of
the Year 2000 issue and could have a negative impact on the Company's operating
results, liquidity, and financial position.
RESULTS OF OPERATIONS
Net sales for fiscal 1999 increased by $15,646,000 or approximately 24%
over fiscal 1998. This increase was primarily volume driven and was the result
of increased home office sales and sales by the Company's new Wynwood and
Homestyles divisions. The sales changes were as follows: Home office increased
approximately 36%; Wynwood and Homestyles together accounted for approximately
18% of the sales increase; promotional bedroom sales decreased by approximately
8%; and commercial office sales decreased by approximately 5%. Net sales for
fiscal 1998 increased by $8,293,000 or approximately 15% over fiscal 1997. This
increase was primarily volume driven and was the result of increased home office
sales and sales by the Company's new Wynwood division. The sales changes were as
follows: Home office, Wynwood, and other residential furniture sales excluding
promotional bedroom increased by approximately 65%; promotional bedroom sales
decreased by approximately 9%; and commercial office sales were approximately
the same as the previous year.
As a percentage of sales, cost of sales was 80.2% of sales for fiscal
1999, 77.7% of sales for fiscal 1998, and 76.6% of sales for fiscal 1997. The
increases in cost of sales as a percentage of sales in fiscal 1999 and fiscal
1998 were primarily a result of lower utilization of the Company's production
facilities and a lower margin product sales mix.
As a percentage of sales, selling, general and administrative expenses
were 14.6% of sales for fiscal 1999, 15.9% of sales for fiscal 1998, and 15.3%
of sales for fiscal 1997. The decrease in fiscal 1999 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. The slight increase in fiscal 1998
was primarily due to the sales and marketing related expenses of the Company's
new
II-5
Page 11
Wynwood and Homestyles divisions.
During the fourth quarter of fiscal 1999 management committed to
permanently close its Ferdinand, Indiana furniture manufacturing plant during
fiscal 2000. This closing will reduce the underutilized manufacturing capacity
of the Company. The Company recorded a pre-tax charge of approximately $600,000
in the fourth quarter of fiscal 1999 related to this closing. The charge
included book provisions of approximately: $240,000 related to the recording of
property, plant, and equipment at net realizable value; $100,000 for recording
certain inventory items at net realizable value; $85,000 for a pension
curtailment loss; $105,000 for severance pay; and approximately $70,000 for
costs to be incurred after operations cease that are associated with the closing
as well as future occupancy related costs. The severance pay, which is called
for by company policy, is related to the termination of certain salaried and
support staff personnel. Net current assets and liabilites associated with this
plant as of August 28, 1999 are immaterial to the financial position of the
company. The carrying amount of net long-term assets to be disposed of as of
August 28, 1999 is approximately $500,000 and management's expectations are that
such assets shold be disposed of within the next twelve months.
Net interest expense increased to $1,766,000 in fiscal 1999 from
$1,060,000 in fiscal 1998 primarily due to higher loan balances to support the
increased accounts receivable and inventory balances, and to finance the
preferred stock retirement. (See Note 5) Net interest expense increased to
$1,060,000 in fiscal 1998 from $1,005,000 in fiscal 1997 primarily due to higher
loan balances to support the increased accounts receivable and inventory
balances.
Gain On Disposal Of Property, Plant and Equipment - During fiscal 1997
the Company sold certain State of Pennsylvania environmental permits for
approximately $192,000 which had no carrying value.
EFFECTS OF INFLATION
Inflation affects the Company's business principally in the form of
cost increases for material and wages. Management has attempted to cover
increased costs by increasing sales prices to the extent permitted by
competition. Historically, the Company has not been able to raise sales prices
enough so as to offset all increased costs during all past years. The Company
believes that its competitors also have not been able to raise their prices so
as to offset all increased costs and therefore does not feel that the Company
has incurred any material adverse effect on its competitive position. The
Company believes that it has been able to minimize the effects of general
inflation in the past by improving its manufacturing and purchasing efficiency
and increasing its employee productivity. There can be no assurance that
inflation will not have a material effect on the Company's business in the
future.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's primary market risk exposure with regard to financial
instruments is changes in interest rates. At August 28, 1999, a hypothetical 100
basis points increase in short term interest rates would result in a reduction
of approximately $189,000 in annual pretax earnings. This estimate assumes no
change in the volume or composition of debt at August 28, 1999. The Company has
effectively fixed the interest on approximately $8 million of its long term debt
through the use of interest rate swaps, and the above estimated earnings
reduction takes these swaps into account. The fair market value of these swaps
is immaterial. (See Note 1)
II-6
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DMI FURNITURE, INC.
FORM 10-K
ITEMS 8, 14(a) 1 AND 2 AND 14(d)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
The following consolidated financial statements of the registrant required to be
included in Item 8 are listed below:
Page
----
Consolidated Financial Statements:
Report of Independent Public Accountants F-1
Consolidated Balance Sheets as of August 28, 1999 and
August 29, 1998 F-2, F-3
Consolidated Statements of Income for the years ended
August 28, 1999, August 29, 1998 and
August 30, 1997 F-4
Consolidated Statements of Stockholders' Equity for
the years ended August 28, 1999, August 29, 1998,
and August 30, 1997 F-5
Consolidated Statements of Cash Flows for the years
ended August 28, 1999, August 29, 1998,
and August 30, 1997 F-6, F-7
Notes to Consolidated Financial Statements F-8 - F-20
The following financial statement schedule of the registrant is included in Item
14(d):
Page
----
II----Valuation and Qualifying Accounts S-1
Schedules other than those mentioned above are omitted because the conditions
requiring their filing do not exist or because the required information is
presented in the consolidated financial statements, including the notes thereto.
II-7
Page 13
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 28, 1999 and August
29, 1998 and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended August 28, 1999.
These consolidated financial statements and the schedule referred to below are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of DMI Furniture, Inc.
and subsidiary as of August 28, 1999 and August 29, 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended August 28, 1999 in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the Index To
Consolidated Financial Statements and Schedules is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not a
required part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in our audits of the basic
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
October 18, 1999
Louisville, Kentucky
F-1
Page 14
DMI FURNITURE, INC.
CONSOLIDATED BALANCE SHEETS
August 28, 1999 and August 29, 1998
(Amounts in thousands)
ASSETS 1999 1998
------ ---- ----
Current assets:
Cash $785 $1,092
Accounts receivable, less allowance for
doubtful accounts of $175,000 in 1999
and $150,000 in 1998 (Note 11) 12,686 10,252
Inventories (Note 9) 18,905 16,296
Other current assets 471 341
Current portion of deferred income taxes (Note 8) 1,103 935
------- -------
Total current assets 33,950 28,916
------- -------
Property, plant and equipment, at cost:
Land 753 753
Buildings and improvements 9,771 9,681
Machinery and equipment 11,247 11,055
Leasehold improvements 979 970
------- -------
22,750 22,459
Less accumulated depreciation 11,871 10,522
------- -------
Net property, plant and equipment 10,879 11,937
------- -------
Other assets:
Intangible pension asset 334 332
Other 116 144
------- -------
Total other assets 450 476
------- -------
Total Assets $45,279 $41,329
======= =======
See accompanying notes.
F-2
Page 15
DMI FURNITURE, INC.
CONSOLIDATED BALANCE SHEETS
August 28, 1999 and August 29, 1998
(Amounts in thousands)
(Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
------------------------------------ ---- ----
Current liabilities:
Trade accounts payable $2,527 $3,521
Accrued liabilities (Note 9) 2,665 3,128
Long-term debt due within one year (Note 2) 1,509 1,524
------ -----
Total current liabilities 6,701 8,173
------ -----
Long-term liabilities:
Long-term debt (Note 2) 25,425 21,393
Accrued pension costs (Note 7) 636 807
Deferred compensation (Note 7) 228 273
Deferred income taxes (Note 8) 549 426
------ ------
26,838 22,899
------ ------
Commitments and contingencies (Notes 3 & 4)
Stockholders' equity: (Notes 5 & 6)
Common stock, $.10 par value, 9,600,000 shares
authorized, 4,042,636 shares outstanding
(3,892,013 in 1998) 405 390
Additional paid-in capital 16,551 16,183
Retained deficit (4,965) (6,053)
Accumulated other comprehensive income (251) (263)
------- -------
Total stockholders' equity 11,740 10,257
------- -------
Total liabilities and stockholders' equity $45,279 $41,329
======== =======
See accompanying notes.
F-3
Page 16
DMI FURNITURE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands except per share amounts)
Years Ended
-----------------------------------------
August 28, August 29, August 30,
1999 1998 1997
Net sales (Note 11) $80,373 $64,727 $56,434
Cost of sales 64,476 50,291 43,257
------- ------ ------
Gross profit 15,897 14,436 13,177
Selling, general and
administrative expenses 11,727 10,279 8,617
Plant closing reserve (Note 12) 600 - (119)
Other income (expense):
Interest expense (net) (1,766) (1,060) (1,005)
Gain on disposal of property, plant and equipment 17 10 196
Other (6) 24 9
--- --- ---
(1,755) (1,026) (800)
------- ------- -------
Income before provision for income taxes 1,815 3,131 3,879
Provision for income taxes (Note 8) (727) (1,156) (1,463)
----- ------- -------
Net income $1,088 $1,975 $2,416
======= ====== ======
Net income applicable to common stock (Note 5) $1,088 $309 $2,017
======= ====== ======
Earnings per common share (Notes 1, 5, and 15)
Basic $0.27 $0.09 $0.65
====== ===== =====
Diluted $0.25 $0.07 $0.40
====== ===== =====
See accompanying notes.
F-4
Page 17
DMI FURNITURE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands)
Three years ended August 28, 1999
Series C Number of Number of (1)
Convertible Series C Common Additional Retained Minimum
Preferred Shares Common Shares Paid-In Earnings Pension
Stock Outstanding Stock Outstanding Capital (Deficit) Liability Total
----- ----------- ----- ----------- ------- --------- --------- -----
BALANCES AT AUGUST 31, 1996 $ 3,990 1,995 $ 305 3,051 $ 15,185 $ (8,402) $ (24) $ 11,054
Net income - - - - - 2,416 - 2,416
Dividends on preferred stock - - - - - (399) - (399)
Other comprehensive income - - - - - - 24 24
Issuance of common stock - - 10 101 156 - - 166
-------- -------- ------- ------ --------- --------- -------- -------
-
BALANCES AT AUGUST 30, 1997 3,990 1,995 315 3,152 15,341 (6,385) - 13,261
Net income - - - - - 1,975 - 1,975
Redemption of preferred stock (3,115) (1,558) - - - (1,667) - (4,782)
Conversion of preferred stock (875) (437) 73 723 802 - - -
Dividends on preferred stock - - - - - 24 - 24
Other comprehensive income - - - - - - (263) (263)
Issuance of common stock - - 2 17 40 - - 42
-------- -------- ------- ------ --------- --------- -------- -------
BALANCES AT AUGUST 29, 1998 - - 390 3,892 16,183 (6,053) (263) 10,257
Net income - - - - - 1,088 - 1,088
Other comprehensive income - - - - - - 12 12
Issuance of common stock - - 15 151 368 - - 383
-------- -------- ------- ------ --------- --------- -------- -------
BALANCES AT AUGUST 28, 1999 - - $ 405 4,043 $ 16,551 $ (4,965) $ (251) $ 11,740
======== ======== ======= ====== ========= ========= ========= =======
(1) This column provides information with respect to accumulated other
comprehensive income.
(2) Comprehensive Income consists of the following (in thousands):1999 -
$1,100; 1998 - $1,712; 1997 - $2,440.
See accompanying notes.
F-5
Page 18
DMI FURNITURE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Years Ended
Aug. 28, Aug. 29, Aug. 30,
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net income $1,088 $1,975 $2,416
Adjustments to reconcile net income to
net cash provided (used) by operating activities
Depreciation and amortization 1,220 1,244 1,009
Amortization of loan closing costs 24 22 35
(Gain) loss on disposal of property, plant and equipment (17) 9 (196)
Deferred income taxes (45) (219) 378
Changes in assets and liabilities:
Accounts receivable (2,434) (1,103) (1,690)
Inventories (2,609) (4,035) (2,409)
Other assets (126) (4) 95
Trade accounts payable (994) 631 (274)
Accrued liabilities 6 409 822
Accrued pension costs (161) (92) (108)
Deferred compensation (45) (48) (55)
------- ------- -------
Total adjustments (5,181) (3,186) (2,393)
------- ------- -------
Net cash provided (used) by operating activities (4,093) (1,211) 23
------- ------- -------
Cash flows used by investing activities:
Capital expenditures (404) (2,292) (1,072)
Proceeds from the disposal of property, plant and equipment 19 59 214
------- ------- -------
Net cash used by investing activities (385) (2,233) (858)
------- ------- -------
See accompanying notes.
F-6
Page 19
DMI FURNITURE, INC.
STATEMENTS OF CASH FLOWS
(Continued)
(Amounts in thousands)
Years Ended
Aug. 28, Aug. 29, Aug. 30,
1999 1998 1997
---- ---- ----
Cash flows provided by financing activities
Borrowings from line-of-credit 32,567 24,672 23,000
Payments on line-of-credit (27,150) (21,158) (20,650)
Additions to long-term debt - 5,727 -
Payments on long-term debt (1,400) (1,181) (1,154)
Restricted cash - 1,080 (19)
Cash dividends on preferred stock - (374) -
Proceeds from stock options exercised 154 41 73
Retirement of preferred stock - (4,782) -
------ ------- -----
Net cash provided by financing activities 4,171 4,025 1,250
------ ------- -----
Decrease in cash (307) 581 415
Cash - beginning of period 1,092 511 96
------ ------- -----
Cash - end of period $ 785 $ 1,092 $ 511
====== ======= =====
Cash paid for:
Interest (net of amounts capitalized) $ 1,739 $ 1,014 $ 1,070
======= ======= =======
Income taxes $ 1,044 $ 1,164 $ 702
======= ======= ======
See accompanying notes.
F-7
Page 20
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 residential, home office, and commercial office furniture. The Company
has more than one operating segment which are aggregated into one reportable
segment, in accordance with Financial Accounting Standards Board Statement No.
131, Disclosures About Segments of an Enterprise and Related Information. Its
principal distribution channels are multi-market furniture retailers,
distributors, independent retailers, catalogers, and warehouse clubs located
primarily throughout the United States. The Company's fiscal year consists of a
fifty-two week period ending on the last Saturday in August. Approximately every
seven years the Company's fiscal year consists of fifty-three weeks. The fiscal
years presented in this report all consist of fifty-two weeks.
INVENTORIES - Inventories are valued at the lower of cost (first-in,
first-out method) or market.
DEPRECIATION - Depreciation is provided on the basis of estimated useful
lives of the property, plant and equipment, using the straight-line method. The
useful lives of property, plant and equipment are as follows: Building and
leasehold improvements, 8-35 years; and machinery and equipment, 3-13 years.
INCOME TAXES - The Company recognizes deferred tax assets and liabilities
based upon the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method, deferred
tax assets and liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
(See Note 8 for additional information).
EARNINGS PER COMMON SHARE - Earnings per common share are based on the
weighted average number of common and common equivalent shares outstanding
during the period (1999 - 4,383,000; 1998 - 4,214,781; 1997 - 6,006,353), and
assumes the conversion of the Series C Preferred Stock into common stock. (See
Note 15 for additional information)
CONSOLIDATED STATEMENTS OF CASH FLOWS - For purposes of the Consolidated
Statements of Cash Flows the Company considers all highly liquid debt
instruments with an initial maturity of three months or less at the date of
purchase to be cash equivalents.
ADVERTISING - The Company expenses advertising-type costs as incurred.
Advertising expense was approximately $1,906,000, $1,211,000 and $857,000 in
fiscal 1999, 1998 and 1997 respectively.
ACCOUNTING ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that
F-8
Page 21
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
LONG-LIVED ASSETS - In March 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
(SFAS No. 121). This standard establishes accounting standards for evaluating
the potential impairment of long-lived assets, certain identifiable intangibles
and goodwill. The Company adopted the provisions of SFAS No. 121 in the first
quarter of fiscal 1997 and the application of the standard has not resulted in
an impairment loss.
REVENUE RECOGNITION - The Company recognizes sales of its products when the
products are shipped to customers.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS - In June 1998, the Financial
Accounting Standards Board issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. The Company expects to adopt the new
Statement effective September 3, 2000. The Statement will require the Company to
recognize all derivatives on the balance sheet at fair value. The Company does
not anticipate that the adoption of this Statement will have a significant
effect on its results of operations or financial position.
In 1999, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 130, "Reporting Comprehensive Income". This standard establishes
rules for the reporting of comprehensive income and its components. The
provisions of SFAS No. 130 are reflected in the Company's financial statements.
2. LONG-TERM DEBT
Long-term debt consists of the following:
1998 1999
---- ----
Economic Development Revenue Bonds; payable in twelve equal monthly payments
beginning in fiscal 2002; weekly adjustable coupon interest rate
(3.4% on 8/28/99) and payable monthly. $2,230,000 $2,230,000
Economic Development Revenue Bonds; payable in twelve equal monthly payments
beginning in fiscal 2003; weekly adjustable coupon interest rate
(3.4% on 8/28/99) and payable monthly. 2,020,000 2,020,000
Term note payable to bank; due in
45 monthly principal installments of
$116,666.67 through 5/31/02;
interest at prime+.25% (8.5%)
or LIBOR+2.5% (7.9%). 4,017,000 5,300,000
F-9
Page 22
1998 1999
---- ----
Term note payable to bank; due in 60 monthly principal installments of $8,333.33
and final payment of $1 million on 8/31/03; interest at prime+.25%
(8.5%) or LIBOR+2.5% (7.9%). 1,408,000 1,500,000
$20,000,000 revolving master note
payable to bank; interest at prime+.25%
(8.5%) or LIBOR+2.5% (7.9%);
expires December, 2000. 17,250,000 11,833,419
Capital leases on equipment; payable
quarterly through March, 2000;
interest at various rates. 9,000 33,605
--------- ---------
26,934,000 22,917,024
Less portion due within one year 1,509,000 1,524,113
--------- ---------
$25,425,000 $21,392,911
=========== ===========
With respect to the term notes and revolving loan above, the Company
has the option of borrowing based on prime rate + .25% or London Interbank
Offered Rate (LIBOR) + 2.50%. As of August 28, 1999, $16 million of the revolver
note balance and $4.8 million of the term loans were LIBOR priced.
Substantially all assets are pledged to collateralize long-term debt.
On August 28, 1999, the Company had $2,328,000 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 2000
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:
2000 $ 1,509,000
2001 18,750,000
2002 5,567,000
2003 1,108,000
2004 -
Thereafter -
--------------
$26,934,000
==============
F-10
Page 23
The Company's bank financing agreement contains restrictive covenants
that require the Company, among other things, to maintain a fixed charge ratio,
tangible net worth, and ratio of total funded debt to EBITDA, all as defined in
the bank financing agreement. The Company's failure to meet a covenant as of
August 28, 1999 was waived by and reset for future periods by the Company's
bank. The financing agreement further restricts the Company from, among other
things, without prior written consent, redeeming or purchasing any of its
outstanding capital stock; acquiring, merging or consolidating with any other
business; paying dividends; and, acquiring capital assets in excess of the
annual depreciation.
3. LEASE COMMITMENTS
The Company leases certain of its facilities and equipment under
operating leases. The leases generally require the Company to pay taxes,
insurance, maintenance and utilities. Some of the leases contain renewal
options.
Future minimum lease payments at August 28, 1999 under these leases are
as follows:
2000 $1,013,000
2001 831,000
2002 591,000
2003 115,000
2004 -
----------
Total minimum payments $2,550,000
==========
Rent expense under operating leases charged to operations during fiscal
years 1999, 1998 and 1997 was $844,000, $785,000 and $594,000, respectively.
4. COMMITMENTS AND CONTINGENCIES
The Company is currently subject to claims under federal and state
environmental laws based on allegations that the Company had hazardous
substances disposed of at three waste disposal sites. After depositing $57,000
in a trust fund under the terms of a tentative settlement of claims arising from
one site and paying its portion of preliminary investigation and remediation
costs at the other two sites, the Company retains a reserve of approximately
$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 has entered into individual employment agreements with
certain of its officers which expire at various times through August 31, 2000.
Certain of these agreements provide for lump sum payments in the event
employment is terminated as a result of a change in
F-11
Page 24
ownership of the Company as defined in the agreements.
5. CONVERTIBLE PREFERRED STOCK
On August 28, 1998 the Company retired its Series C Preferred Stock. Of
the 1,995,050 Series C shares outstanding, 1,557,593 shares were redeemed for
$3.00 per share by the Company as stated in its Certificate of Incorporation,
and 437,457 Series C shares were converted into 722,762 common shares at the
option of the holders. The redeeming shareholders were paid a final dividend of
$75,319 on the date of redemption. The redemption of the 1,557,593 Series C
shares caused a $1,666,000 charge to income applicable to common stock because
the $3.00 redemption price exceeded the par value of the Series C stock of
$2.00, and the Company recognized approximately $109,000 in transaction costs.
The redemption was funded through term bank debt and cash. There were $399,010
of preferred dividends accrued in fiscal 1997 of which $374,576 were paid in
fiscal 1998.
6. STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued To Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Had compensation cost for all option grants to employees and directors
been determined consistent with FASB Statement No. 123, the Company's net income
and earnings per share would have been affected as follows. Because the method
of accounting required by SFAS No. 123 has not been applied to options granted
prior to January 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in future years.
1999 1998 1997
---- ---- ----
Net income: As reported $1,088,000 $1,975,000 $2,416,000
Proforma 993,000 1,907,000 2,386,000
Diluted earnings per common share:
As reported $.25 $.07 (1) $.40
Proforma .23 .06 (1) .40
(1) Net income applicable to common stock was used to compute fiscal 1998
diluted earnings per common share. See Note 5 for additional information.
Stock options granted prior to February 22, 1994 were granted pursuant
to the Amended Employee Incentive Stock Option Plan approved by stockholders
February, 1989. In February, 1994 the stockholders approved the 1993 Long Term
Incentive Stock Plan For Employees under which the Company is authorized to
issue options to selected key employees to acquire a maximum of 600,000 shares
of its common stock in addition to option shares outstanding at the time of its
adoption. The option price cannot be less than 100% of the fair market value of
the
F-12
Page 25
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 28, 1999 follows:
1999 1998 1997
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Options Exercise Options Exercise Options Exercise
(000) Price (000) Price (000) Price
---- ----- ----- ------ ----- -----
Outstanding-beginning
of year 805 $1.92 707 $1.80 655 $1.66
Granted 20 3.63 100 2.88 85 2.77
Exercised (42) 1.70 (2) 1.38 (33) 1.38
Expired - - - - - -
----- ----- -----
Outstanding-end of
year 783 $1.98 805 $1.92 707 $1.80
=== ===
Exercisable at end of
year 668 $1.80 616 $1.71 557 $1.68
Weighted-average fair
value of options granted
during the year $2.18 $1.64 $1.66
Exercise prices for options outstanding as of August 28, 1999
ranged from $1.38 to $3.63. The weighted-average remaining contractual life of
those options is 4.8 years.
Included in the above are non-qualified options for 366,724 shares of
common stock for $1.38 to $2.50 per share to certain employees/directors which
have a total option price of approximately $652,000. The options are immediately
exercisable for up to ten years after the date of grant.
The Company has a stock option plan under which the Company is
authorized to issue options to non-employee directors to acquire a maximum of
160,000 shares of its common stock for options granted prior to March 15, 1998.
A new plan was adopted effective March 15, 1998 authorizing the Company to issue
options to non-employee directors to acquire a maximum of 100,000 shares of its
common stock. The option price is the closing bid price for shares on NASDAQ on
the date of grant. Options vest at the cumulative rate of 50% and 100% on the
first two anniversaries of the date of grant and expire ten years from date of
grant. A summary of the option transactions during the three years ended August
28, 1999 follows:
F-13
Page 26
1999 1998 1997
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Options Exercise Options Exercise Options Exercise
(000) Price (000) Price (000) Price
---- ----- ----- ------ ----- -----
Outstanding-beginning
of year 55 $2.38 52 $2.15 90 $2.15
Granted 3 4.00 6 2.81 21 2.81
Exercised (18) 2.53 (3) 1.98 (14) 1.98
Expired - - - 2.25 (45) 2.25
---- ---- ----
Outstanding-end of
year 40 $2.58 55 $2.38 52 $2.38
==== ==== ====
Exercisable at end of
year 34 $2.43 39 $2.12 30 $2.12
Weighted-average fair
value of options granted
during the year $2.41 $1.73 $1.70
Exercise prices for options outstanding as of August 28, 1999 ranged
from $1.19 to $4.00. The weighted-average remaining contractual life of those
options is 5.5 years.
The fair value of each option is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in fiscal 1999, 1998, and 1997: expected volatility
of 41.7 percent; risk-free interest rate of 4.62 percent; expected lives for
options of 10 years; and expected dividend yield of 0 percent based on the
Company's history of no dividend payments on common stock.
7. PENSION PLANS
The Company has a defined benefit pension plan which covers
substantially all hourly employees. Pension costs charged to operations were
approximately $142,000 in fiscal 1999, $116,000 in fiscal 1998, and $142,000 in
fiscal 1997. 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.
F-14
Page 27
Net pension costs for the defined benefit plan in fiscal 1999, fiscal
1998 and fiscal 1997 was computed as follows:
1999 1998 1997
---- ---- ----
Service cost-benefits
earned $77,211 $59,554 $56,352
Interest cost on projected
benefit obligation 220,314 205,198 197,872
Actual return on plan assets (191,850) (172,984) (135,773)
Amortization of transition
obligation 9,907 9,907 9,907
Amortization of unrecognized
prior service cost 15,326 13,990 13,990
Recognized actuarial (gain)
or loss 10,649 - -
-------- --------- --------
Net pension expense $141,557 $115,665 $142,348
======== ========= ========
The funded status of the defined benefit plan at August 28, 1999 and
August 29, 1998 is shown below:
1999 1998
---- ----
Change in benefit obligation:
Benefit obligation at beginning of year $3,073,659 $2,580,963
Service cost 77,211 59,554
Interest cost 220,314 205,198
Plan amendments 27,125 -
Benefits paid (204,313) (190,885)
Actuarial (gain) or loss 171,400 418,829
---------- ----------
Benefit obligation at end of year $3,365,596 $3,073,659
========== ==========
Change in plan assets:
Fair value of plan assets at beginning of year $2,266,559 $1,980,215
Actual return on plan assets 371,974 133,617
Employer contributions 295,000 343,612
Benefits paid (204,313) (190,885)
--------- ---------
Fair Value of plan assets at end of year $2,729,220 $2,266,559
=========== ==========
Reconciliation of funded status:
Funded status $(636,376) $(807,100)
Unrecognized actuarial (gain) or loss 378,981 398,154
Unrecognized transition (asset) or obligation 108,971 118,878
Unrecognized prior service cost 225,233 213,434
------- -------
Net amount recognized at year-end $76,809 $(76,634)
======= ==========
F-15
Page 28
1999 1998
---- ----
Amounts recognized in the statement of financial position consists of:
Accrued benefit liability $(636,376) $(807,100)
Intangible asset 334,204 332,312
Accumulated other comprehensive income 378,981 398,154
------- --------
Net amount recognized at year-end $76,809 $(76,634)
======== =========
Other comprehensive income attributable to
change in additional minimum liability recognition $(19,173) $398,154
Weighted-average assumptions as of: 8/28/99 8/29/98
------- --------
Discount rate 7.00% 7.25%
Expected long-term rate of return on plan assets 8.25% 8.25%
The Company has defined contribution 401(k) type retirement plans for
salaried and hourly personnel. Costs charged to operations in fiscal 1999,
fiscal 1998 and fiscal 1997 for these plans were approximately $160,000,
$152,000 and $139,000, 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 28, 1999 and
August 29, 1998 is approximately $228,000 and $273,000, respectively. Plan costs
charged to operations were approximately $25,000 in fiscal 1999, $29,000 in
fiscal 1998, and approximately $35,000 in fiscal 1997.
8. INCOME TAXES
The tax effect of each temporary timing difference and carryforward
that gives rise to significant deferred tax assets and deferred tax liabilities
as of August 28, 1999 and August 29, 1998 is as follows (in thousands):
1999 1998
---- ----
Accumulated tax depreciation of property and equipment
in excess of accumulated book depreciation and other
related items $(630) $(595)
Various accruals and reserves 946 885
Inventory 204 175
Other 34 44
----- -----
Net deferred tax asset $554 $509
==== =====
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
F-16
Page 29
Company will realize its deferred tax assets. As a result, no valuation
allowance was required as of August 28, 1999 and August 29, 1998. 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. 28, Aug. 29, Aug. 30,
1999 1998 1997
---- ---- ----
Currently payable $772 $1,376 $1,085
Deferred (45) (220) 378
- ------ ------ ------
Total $727 $1,156 $1,463
==== ====== ======
The deferred tax provision for the twelve months ended August 28, 1999
and August 29, 1998, and August 30, 1997 consisted of the following (in
thousands):
1999 1998 1997
---- ---- ----
Utilization of net operating loss carryforwards $ - $ - $130
Utilization of AMT credit carryforwards - - 187
Excess tax over book depreciation 38 (22) 32
Other (83) (198) 29
------ ------ -----
$(45) $(220) $378
The provision for income taxes differs from that computed at the
federal statutory corporate tax rate as follows (in thousands):
Twelve Months Ended
Aug.28, Aug. 29, Aug. 30,
1999 1998 1997
---- ---- ----
Tax at 34% statutory
rate $617 $1,073 $1,319
State income taxes,
net of federal
benefit 110 83 144
----- ------ --------
Income Taxes $727 $1,156 $1,463
9. OTHER INFORMATION
Inventories - Inventories are summarized below:
1999 1998
---- ----
Finished goods $13,415,000 $10,898,000
Work in process 525,000 512,000
Raw material 4,965,000 4,886,000
-------- ---------
$18,905,000 $16,296,000
=========== ===========
F-17
Page 30
Accrued liabilities - Accrued liabilities are summarized below:
1999 1998
---- ----
Property, payroll and
other taxes $560,000 $1,032,000
Payroll, bonuses and
commissions 1,457,000 1,751,000
Plant closing reserve 260,000 -
Interest 150,000 123,000
Other 238,000 222,000
-------- --------
$2,665,000 $3,128,000
========== ==========
10. QUARTERLY FINANCIAL DATA
Quarterly financial data (unaudited - in thousands of dollars except
per share amounts)
Fiscal 1999 First Second Third Fourth
----------- Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ----
Net sales $23,003 $20,287 $18,950 $18,133 $80,373
Gross profit 4,728 3,945 3,915 3,309 15,897
Net income 805 320 309 (2)(346) 1,088
Diluted earnings per
common share (1) $.19 $.07 $.07 ($.09) $.25
Fiscal 1998 First Second Third Fourth
----------- Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ----
Net sales $17,439 $12,785 $16,008 $18,495 $64,727
Gross profit 4,135 2,629 3,757 3,915 14,436
Net income 810 116 549 500 1,975
Diluted earnings per
common share (1) $.13 $.02 $.09 $(.25) $.07
(1) Diluted earnings per common share was calculated by dividing net income by
the weighted average number of common and common equivalent shares
outstanding during the period. (Except in the fourth quarter of fiscal 1998
in which the loss on redemption of preferred stock was deducted from net
income in the computation). (See Notes 1,5, and 15). Diluted earnings per
share are computed independently for each of the quarters presented.
Therefore, the sum of the quarterly per common share information may not
equal the annual diluted earnings per common share.
(2) See Note 12.
F-18
Page 31
11. MAJOR CUSTOMERS AND SOURCES OF SUPPLY
The Company's six largest customers accounted for approximately 49% of
the Company's total sales in fiscal 1999. One customer, Sam's Club division of
Wal-Mart Stores, Inc., accounted for more than 10% of the Company's total net
sales for fiscal 1999. . Six customers accounted for 51% of sales in fiscal 1998
and six customers accounted for 42% of sales in fiscal 1997. The loss of one or
more of these customers at the same time could have a materially adverse effect
on the business of the Company. As of August 28, 1999, one customer accounted
for approximately 25% 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.
Approximately 50% of the Company's total sales are of imported product.
The Company sources these products from various factories in Asia and Mexico,
both through agents and direct, based primarily on Company developed designs.
The Company maintains a showroom, production office, and quality control
organization in China. An unanticipated interruption in the flow of products
from one or more of these factories could have a short-term material adverse
effect on the Company's results of operations.
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. During fiscal 1997 it was
determined that the remaining $119,000 of the book provision related to the
initial recording of property, plant and equipment at net realizable value was
not needed.
During the fourth quarter of fiscal 1999 management committed to
permanently close its Ferdinand, Indiana furniture manufacturing plant during
fiscal 2000. This closing will reduce the underutilized manufacturing capacity
of the Company. The Company recorded a pre-tax charge of approximately $600,000
in the fourth quarter of fiscal 1999 related to this closing. The charge
included book provisions of approximately: $240,000 related to the recording of
property, plant, and equipment at net realizable value; $100,000 for recording
certain inventory items at net realizable value; $85,000 for a pension
curtailment loss; $105,000 for severance pay; and approximately $70,000 for
costs to be incurred after operations cease that are associated with the closing
as well as future occupancy related costs. The severance pay, which is called
for by company policy, is related to the termination of certain salaried and
support staff personnel. Net current assets and liabilities associated with this
plant as of August 28, 1999 are immaterial to the financial position of the
company. The carrying amount of net long-term assets to be disposed of as of
August 28, 1999 is approximately $500,000 and management's expectations are that
such assets should be disposed of within the next twelve months.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The book values of cash and cash equivalents, trade receivable and
trade payables are considered to be representative of their respective fair
values because of the immediate or short-term maturities of these financial
instruments. The fair value of the Company's debt instruments approximated the
book value because a substantial portion of the underlying instruments are
variable rate notes which reprice frequently. (See Note 1)
The Company as of August 28, 1999 has approximately $8 million in
interest rate swaps, which are used to reduce the risk of interest rate
movements for a portion of its long term debt.
F-19
Page 32
The market value of the swaps is immaterial.
14. SOURCE AND SUPPLY OF LABOR
The Company employs approximately 443 employees, of whom approximately
189 are covered by collective bargaining contracts.
15. EARNINGS PER COMMON SHARE
In March 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
No. 128"). This standard modifies disclosure requirements for companies required
to report earnings per share ("EPS") to include presentations of Basic EPS
(which includes no dilution of common stock equivalents) and, if applicable,
Diluted EPS (which reflects the potential dilution of common stock equivalents).
The standard was effective for the Company with the completion of its fiscal
1998 second quarter.
(Thousands except per share amounts)
1999 1998 1997
---- ---- ----
Net income $1,088 $1,975 $2,416
Less: preferred stock dividends - - (399)
Less: loss on preferred redemption (1) - (1,666) -
--------- ------- ------
Net income applicable to common stock $1,088 $309 $2,017
========= ======= ======
Average common shares outstanding 3,991 3,261 3,114
Common stock equivalents-dilutive
options and convertible preferred
stock 392 954 2,892
--------- ------ ------
Average shares of common stock
and equivalents outstanding 4,383 4,215 6,006
========= ====== ======
Basic earnings per share $.27 $.09 $.65
========= ====== ======
(Net income applicable to common stock
divided by average common shares
outstanding)
Diluted earnings per share (2) $.25 $.07 $.40
========= ====== ======
(Net income divided by average shares
of common stock and equivalents
outstanding)
(1) On August 28, 1998 the Company redeemed its Series C Preferred Stock which
caused a $1,666,000 charge to net income applicable to common stock. See
Note 5 for more information.
(2) For fiscal 1998, the loss on redemption of preferred stock is deducted from
net income in computing diluted earnings per share because not deducting it
would be anti-dilutive.
F-20
Page 33
Item 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES.
None.
II-8
Page 34
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 31,
1999.
III-1
Page 35
Part IV.
Item 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
The financial statements required by Sections 14(a) 1 and 2 and
14(d) are included under Item 8.
The exhibits required by Item 14(a) 3 are listed on the index to
Exhibits.
Schedules required by Item 14(d) follow the signature pages.
Item 14(b). REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the fiscal quarter
ended August 28, 1999
IV-1
Page 36
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: November 10, 1999 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 November 10, 1999
------------------
Joseph G. Hill
/s/Joseph L. Ponce Director November 10, 1999
------------------
Joseph L. Ponce
/s/Thomas M. Levine Director November 10, 1999
------------------
Thomas M. Levine
/s/David Martin Director November 10, 1999
------------------
David Martin
President, Chief
Executive Officer, Chairman
/s/Donald D. Dreher of the Board and Director November 10, 1999
-------------------
Donald D. Dreher
IV-2
Page 37
DMI FURNITURE, INC.
SCHEDULE II
Additions
Balance at Charged Charge-offs Balance
Beginning to Costs and Net of at End
Description of Period Expenses Recoveries of Period
----------- --------- -------- ---------- ---------
Allowance for doubtful accounts:
Year ended August 30, 1997 $ 110,000 $ 125,000 $ 94,000 $ 141,000
========== ========== ========= =========
Year ended August 29, 1998 $ 141,000 $ 97,000 $ 88,000 $ 150,000
========== ========= ========= =========
Year ended August 28, 1999 $ 150,000 $ 132,000 $ 107,000 $ 175,000
========== ========== ========== =========
Plant closing reserve
Year ended August 30, 1997 $ 868,000 $ - $ 868,000 $ -
========== ========== ========== ==========
Year ended August 29, 1998 $ - $ - $ - $ -
========== ========== ========== ==========
Year ended August 28, 1999 $ - $ 600,000 $ - $ 600,000
========== ========== ========== =========
Page 38
Item 14(a)3. EXHIBITS
10-K
Page No.
--------
*********** (3)(a) Restated Certificate of Incorporation
* (b) Bylaws
*********** (4)(a) Restated Certificate of Incorporation
* (b) Bylaws
******* (10)(a) 1988 Stock Option Plan for Employees
********* (b) Non-employee Director Stock Option
Program
********** (c) Form of Indemnification Agreement
********** (d) Amendment of Employment Agreement and
Officer Severance Agreement dated as of
May 19, 1988 between Joseph G. Hill and
DMI Furniture, Inc.
*** (e) First Amendment to Amended and Restated Credit
Agreement between DMI Furniture, Inc. and Bank One,
Indiana, National Association dated July 2, 1998.
*** (f) Extension and Renewal of Employment Agreement
as of October 9, 1997 between DMI Furniture, Inc.
and Donald D. Dreher.
*** (g) Second Amendment to Amended and Restated Credit
Agreement between DMI Furniture, Inc. and Bank One,
Indiana, National Association dated August 27, 1998.
********** (h) Amendment of Employment Agreement and
Officer Severance Agreement dated as of
May 19, 1988 between Donald D. Dreher and
DMI Furniture, Inc.
** (i) Amended and Restated Credit Agreement between
Bank One, Indianapolis, National Association, and
DMI Furniture, Inc. dated October 3, 1997.
******** (j) Loan Agreement between City of Huntingburg, Indiana
and DMI Furniture, Inc. dated June 1, 1994.
********* (k) 1993 Long Term Incentive Stock Plan for Employees
********* (l) Stock Compensation and Deferral Plan for Outside Directors.
********* (m) Loan Agreement between City of Huntingburg, Indiana and
DMI Furniture, Inc. dated as of October 1, 1993.
(n) Extension and Renewal of Employment Agreement
as of September 1, 1999 between DMI Furniture, Inc.
and Joseph G. Hill. E1-E7
***** (o) 1998 Stock Option Plan For Independent Directors
(p) Third Amendment To Amended And Restated Credit E8-E10
Agreement dated as of July, 1999 between Bank One,
Indiana N.A. and DMI Furniture, Inc.
Page 39
(q) Promissory Note Modification Agreement dated as of
July, 1999 between Bank One, Indiana N.A. and
DMI Furniture, Inc. E11-E14
(r) Fourth Amendment To Amended And Restated Credit
Agreement dated as of October, 1999 between Bank One,
Indiana N.A. and DMI Furniture, Inc. E15-E18
(21) List of subsidiaries E-19
(23) Consent of Arthur Andersen LLP to incorporation of
audit report into S-8 registration statements. E-20
(27) Financial Data Schedule E-21
(99) Undertakings E-22
--------------------------------------------------------------------------------
* Incorporated by reference to annual report on Form 10-K for the
fiscal
year ended August 27, 1994
** Incorporated by reference to report on Form 10-Q
for the fiscal quarter ended November 29, 1997
*** Incorporated by reference to Form 10-K for the fiscal year ended
August 29, 1998
***** Incorporated by reference to Proxy Statement dated February 20,
1998.
****** Incorporated by reference to Exhibit 10 to report on Form 10-Q
for the second quarter of fiscal year ended August 28, 1993.
******* Incorporated by reference to Registration Number 33-64188
******** Incorporated by reference to Form 10-Q for the fiscal quarter
ended May 28, 1994.
********* Incorporated by reference to Form 10-Q for the fiscal quarter
ended February 26, 1994.
********** Incorporated by reference to Form 10-K for the fiscal year ended
August 28, 1993.
*********** Incorporated by reference to Form 10-K for the fiscal year ended
August 31,1996
Page 40
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