<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 November 28, 1998
----------------------------------------------
Commission File Number 0-4173
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DMI FURNITURE, INC.
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(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
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(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 NOVEMBER 28, 1998 - 3,909,429
1
<PAGE>
INDEX
Part I. Financial Information Page
-----
Consolidated Balance Sheets - November 28, 1998
and August 29, 1998 3, 4
Consolidated Statements of Operations - Three Months
Ended November 28, 1998 and November 29, 1997 5
Consolidated Statements of Cash Flows - Three Months Ended
November 28, 1998 and August 29, 1998 6, 7
Notes to Consolidated Financial Statements 8 -10
Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-13
Part II. Other Information 14-15
Index to Exhibits
27. Financial Data Schedule 16
2
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PART I. FINANCIAL INFORMATION
DMI FURNITURE, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
Nov. 28, Aug. 29,
ASSETS 1998 1998
- ------ ------- -------
<S> <C> <C>
Current assets:
Cash $ 701 $ 1,092
Accounts receivable - net 15,161 10,252
Inventories (Note 4) 17,095 16,296
Other current assets 421 341
Current portion of deferred income taxes (Note 2) 881 935
------- -------
Total current assets 34,259 28,916
Property, plant and equipment - at cost (Note 1) 22,534 22,459
Less accumulated depreciation 10,839 10,522
------- -------
Net property, plant and equipment 11,695 11,937
Other assets 465 476
------- -------
Total Assets $46,419 $41,329
======= =======
</TABLE>
See accompanying notes.
3
<PAGE>
DMI FURNITURE, INC.
CONSOLIDATED BALANCE SHEETS
(Continued)
(Amounts in thousands)
<TABLE>
<CAPTION>
Nov. 28, Aug. 29,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1998
- ------------------------------------ -------- ---------
<S> <C> <C>
Current liabilities:
Trade accounts payable $ 4,096 $ 3,521
Accrued liabilities 4,001 3,128
Long-term debt due within one year 1,517 1,524
-------- --------
Total current liabilities 9,614 8,173
Long-term liabilities:
Long-term debt 24,156 21,393
Accrued pension costs 771 807
Deferred compensation 265 273
Deferred income taxes (Note 2) 426 426
-------- --------
25,618 22,899
Stockholders' equity:
Common stock 391 389
Additional paid-in capital 16,226 16,183
Retained deficit (5,167) (6,052)
Minimum pension liability (263) (263)
-------- --------
Total stockholders' equity 11,187 10,257
-------- --------
Total liabilities and stockholders' equity $ 46,419 $ 41,329
======== ========
</TABLE>
See accompanying notes.
4
<PAGE>
DMI FURNITURE, INC.
STATEMENTS OF INCOME
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
Nov. 28, Nov. 29,
1998 1997
--------- --------
<S> <C> <C>
Net sales $ 23,003 $ 17,439
Cost of sales 17,997 13,304
-------- --------
Gross profit 5,006 4,135
Selling, general and
administrative expenses 3,130 2,570
-------- --------
Operating profit 1,876 1,565
Interest expense (net) (453) (259)
-------- --------
Income before income taxes 1,423 1,306
Provision for income taxes (Note 2) (538) (496)
-------- --------
Net income $ 885 $ 810
======== ========
Net income applicable to common stock $ 885 $ 690
======== ========
Earnings per common share (Note 3):
Basic $ 0.23 $ 0.22
======== ========
Diluted $ 0.21 $ 0.13
======== ========
</TABLE>
See accompanying notes.
5
<PAGE>
DMI FURNITURE, INC.
STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
Nov. 28, Nov. 29,
1998 1997
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 885 $ 810
Adjustments to reconcile net income to
net cash provided (used) by
operating activities:
Depreciation and amortization 317 304
Deferred income taxes (Note 2) 54 45
Pension costs (36) (93)
Deferred compensation (8) (11)
Changes in assets and liabilities:
Accounts receivable (4,909) (2,500)
Inventories (799) 290
Other assets (69) (5)
Trade accounts payable 575 5
Accrued liabilities 909 382
------- -------
Total adjustments (3,966) (1,583)
------- -------
Net cash used by
operating activities (3,081) (773)
------- -------
Cash flows (used) by investing activities:
Capital expenditures (75) (854)
------- -------
Cash used by investing
activities (75) (854)
------- -------
</TABLE>
See accompanying notes.
6
<PAGE>
DMI FURNITURE, INC.
STATEMENTS OF CASH FLOWS
(Continued)
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
Nov. 28, Nov. 29,
1998 1997
---- ----
<S> <C> <C>
Cash flows provided (used) by financing activities:
Borrowings from line of credit 10,517 6,650
Payments on line of credit (7,500) (4,650)
Payments on long term debt
(261) (395)
Proceeds from stock options exercised
9 34
Dividends 0 (211)
-------- --------
Cash provided by financing activities 2,765 1,428
Decrease in cash
(391) (199)
Cash - beginning of period 1,092 512
-------- --------
Cash - end of period $ 701 $ 313
-------- --------
-------- --------
Cash paid for:
Interest $ 408 $ 234
-------- --------
-------- --------
Income taxes $ 224 $ 300
-------- --------
-------- --------
</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 November 28, 1998 and for the three
months ended November 28, 1998 and November 29, 1997 are unaudited but
include all adjustments which are, in the opinion of management, necessary to
a fair presentation of the results of operations and financial position for
the periods covered herein. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's latest annual report on Form 10-K.
The results of operations for the interim periods are not
necessarily an indication of the results to be expected for the full 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:
Building and Leasehold Improvements 8 - 35 yrs.
Machinery and Equipment 3 - 13 yrs.
(2) Income Taxes
Income tax expense (benefit) consisted of the following (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
Nov. 28, Nov. 29,
1998 1997
----- ----
<S> <C> <C>
Current $484 $451
Deferred 54 45
---- ----
Total $538 $496
---- ----
---- ----
</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
Nov. 28, Nov. 29,
1998 1997
---- ----
<S> <C> <C>
Tax at 34% statutory rate $484 $444
State income taxes 54 52
---- ----
Income Taxes $538 $496
---- ----
---- ----
</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
Nov. 28, Nov. 29,
1998 1997
---- ----
<S> <C> <C>
Net income $ 885 $ 810
Less: preferred stock dividends - (120)
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Net income applicable to common stock $ 885 $ 690
------- -------
------- -------
Average common shares outstanding 3,902 3,156
Common stock equivalents-dilutive
options (and convertible preferred
stock for Nov. 29, 1997) 414 2,921
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Average shares of common stock
and equivalents outstanding 4,316 6,077
------- -------
------- -------
Basic earnings per share $ .23 $ .22
------- -------
------- -------
(Net income applicable to common stock
divided by average common shares
outstanding)
Diluted earnings per share $ .21 $ .13
------- -------
------- -------
(Net income divided by average shares
of common stock and equivalents
outstanding)
</TABLE>
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.
9
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(4) Inventories
Inventories were comprised of the following at November 28, 1998 and
August 29, 1998:
<TABLE>
<CAPTION>
Nov. 28, 1998 Aug. 29,1998
------------- ------------
<S> <C> <C>
Finished Products $11,393,000 $10,898,000
Work in Process 502,000 512,000
Raw Materials 5,200,000 4,886,000
----------- -----------
$17,095,000 $16,296,000
----------- -----------
----------- -----------
</TABLE>
(5) Other matters
The Company is currently subject to claims under federal and state
environmental laws based on allegations that the Company had hazardous
substances disposed of at three waste disposal sites. After depositing
$57,000 in a trust fund under the terms of a tentative settlement of claims
arising from one site and paying its portion of preliminary investigation and
remediation costs at the other two sites, the Company retains a reserve of
approximately $42,000 against potential environmental liabilities. Due to the
limited nature of the Company's involvement in these environmental
proceedings, the availability of certain defenses, and the involvement of
many other parties with substantial financial resources in the proceedings,
the Company does not anticipate, based on currently available information,
that potential environmental liabilities arising from these proceedings are
likely to exceed the amount of the Company's reserve by an amount that would
have a material effect on the Company's financial condition, results of
operations or cash flows.
(6) 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 55% of the Company's total sales in the quarter
ended November 28, 1998. One customer, Sam's Club, a division of Wal-Mart
Stores, Inc., accounted for more than 10% of the Company's total net sales
for the quarter ended November 28, 1998. Six customers accounted for
approximately 51% of the Company's total sales in fiscal 1998. The loss of
more than one of these customers at the same time or one of the largest four
could have a material adverse effect on the business of the Company. As of
November 28, 1998, one customer accounted for approximately 42% of total
accounts receivable.
10
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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 first quarter of fiscal 1999 increased $5,564,000
or approximately 32% from the first quarter of fiscal 1998. This increase was
primarily the result of increased sales of home office furniture, sales by
the Company's Wynwood division, and substantially increased sales to a major
customer. This increase was offset somewhat by decreased sales of promotional
priced bedroom furniture, and to a lesser extent, decreased sales of office
furniture. Sales of home office furniture increased approximately 70%; sales
of budget priced bedroom furniture decreased approximately 13%; and sales of
commercial office furniture decreased approximately 4%.
Gross Margin - The Company's gross margin in the first quarter of fiscal 1999
was 21.8% compared to 23.7% in the first quarter of fiscal 1998. This
decrease in gross margin was primarily the result of lower production levels
and gross margins associated with the promotional bedroom furniture line due
to reduced demand, as well as lower margin sales mix than the previous year.
Selling, General and Administrative (S,G&A) Expense - For the first quarter
of fiscal 1999, S,G&A expense amounted to $3,130,000 or 13.6% of sales
compared to $2,570,000 or 14.7% of sales for the first 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.
Operating Profit - For the first quarter of fiscal 1999, operating profit was
$1,876,000 or 8.2% of sales, compared to $1,565,000 or 9.0% of sales for the
first quarter of fiscal 1998. This decrease was a result of the reasons
mentioned above for the change in gross margin, offset somewhat by the lower
selling, general and administrative expense as a percent of sales.
Interest Expense - For the first quarter of fiscal 1999, net interest was
$453,000 compared to $259,000 for the first quarter of fiscal 1998. This
increase was primarily the result of borrowings
11
<PAGE>
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. (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
November 28, 1998, $8 million of the Company's variable rate debt was subject
to interest rate swaps.
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 59 days for the first quarter of
fiscal 1999 and 56 days for the quarter of fiscal 1998. This increase was the
result of past due amounts that the Company believes will be received after
the customer concludes its internal research. (Subsequent to November 28, 1998,
a majority of these past due amounts was received by the Company). The
Company's average days of inventory on hand averaged 91 days for the first
quarter of fiscal 1999 compared to 85 days for the first quarter of fiscal
1998. This increase is primarily the result of increased finished goods for
new commercial office groups and the Wynwood division.
Key elements of the Consolidated Statements of Cash Flows:
<TABLE>
<CAPTION>
Three Months
1999 1998
---- ----
<S> <C> <C>
Net cash used by operating activities $(3,081,000) $ (773,000)
Cash used for investing activities (75,000) (854,000)
----------- -----------
Net cash flows from operating and investing activities (3,156,000) (1,627,000)
Cash provided by financing activities 2,765,000 1,428,000
----------- -----------
Net change in cash and cash equivalents $ (391,000) $ (199,000)
----------- -----------
----------- -----------
</TABLE>
During the first three months of fiscal 1999 , the Company used cash
flows for operating activities of $3,081,000 compared to cash flows used of
$773,000 for the three month period in fiscal 1998. The operating cash flows
used in the current year are higher than funds used the previous year
primarily due to the accounts receivable and inventory increases necessary to
support the significantly higher sales level in fiscal 1999. Investing
activities used approximately $75,000 during the first quarter of fiscal 1999
for routine capital expenditures, and investing activities required $854,000
during the first three months of fiscal 1998 primarily to continue
construction of the new 100,000 square foot facility in Huntingburg, Indiana
for the new Wynwood division. Financing activities provided $2,765,000 and
$1,428,000 during the first three months of fiscal 1999 and fiscal 1998
respectively, which came primarily from borrowings 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 of claims
arising from one site and paying its portion of preliminary investigation and
remediation costs at the other two sites, the Company retains a reserve of
approximately $45,000 against potential environmental liabilities. Due to the
limited nature of the Company's involvement in these environmental
proceedings, the availability of certain defenses, and the involvement of
many
12
<PAGE>
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 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. The Company has received
representation 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.
13
<PAGE>
PART II. OTHER INFORMATION
Item 3. Legal Proceedings
The Company is currently subject to claims under federal and state
environmental laws based on allegations that the Company had hazardous
substances disposed of at three waste disposal sites. After depositing
$57,000 in a trust fund under the terms of a tentative settlement of claims
arising from one site and paying its portion of preliminary investigation and
remediation costs at the other two sites, the Company presently retains a
reserve of approximately $42,000 against potential environmental liabilities.
Due to the limited nature of the Company's involvement in these environmental
proceedings, the availability of certain defenses, and the involvement of
many other parties with substantial financial resources in the proceedings,
the Company does not anticipate, based on currently available information,
that potential environmental liabilities arising from these proceedings are
likely to exceed the amount of the Company's reserve by an amount that would
have a material effect on the Company's financial condition, results of
operations or cash flows.
The Company is also a defendant in various lawsuits arising in the
normal course of business, including two other environmental matters. In
management's opinion, these lawsuits are not material to the results of
operations or financial position of the Company, or are adequately covered by
insurance.
14
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) EXHIBITS
27. Financial Data Schedule
(b) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K dated August 31, 1998
to announce it had completed the retirement of its Series C Preferred Stock.
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: January 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> 3-MOS
<FISCAL-YEAR-END> AUG-28-1999
<PERIOD-START> AUG-30-1998
<PERIOD-END> NOV-28-1998
<CASH> 701
<SECURITIES> 0
<RECEIVABLES> 15,348
<ALLOWANCES> 187
<INVENTORY> 17,095
<CURRENT-ASSETS> 34,259
<PP&E> 22,534
<DEPRECIATION> 10,839
<TOTAL-ASSETS> 46,419
<CURRENT-LIABILITIES> 9,614
<BONDS> 24,156
0
0
<COMMON> 391
<OTHER-SE> 10,796
<TOTAL-LIABILITY-AND-EQUITY> 46,419
<SALES> 22,890
<TOTAL-REVENUES> 23,003
<CGS> 17,868
<TOTAL-COSTS> 17,997
<OTHER-EXPENSES> 3,095
<LOSS-PROVISION> 35
<INTEREST-EXPENSE> 453
<INCOME-PRETAX> 1,423
<INCOME-TAX> 538
<INCOME-CONTINUING> 885
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 885
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.21
</TABLE>
