Item 1. BUSINESS.
Preliminary Note Regarding Forward-Looking Statements
The information set forth in “Item 1. Business,” in “Item 7. 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. The forward-looking statements relate to, among other things, overall business conditions during the next three months; estimates relating to the discontinuing of production of promotional bedroom and the potential for a work stoppage or slow down by dockworkers on the Pacific coast. 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 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; labor actions or other 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 decision to purchase and the dollar volume of 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 “Item 1. Business,” in “Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in other portions of this report. The forward-looking statements included in this report speak only as of the date on which they are made. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date on which such statement is made.
The Company is a marketer and importer of medium-priced bedroom furniture, dining furniture, occasional and accent furniture, and home office furniture with manufacturing sources throughout Asia and South America. In addition, the Company is a vertically integrated manufacturer, importer, and marketer of commercial office furniture with four company owned manufacturing plants in Indiana and manufacturing sources in Asia. DMI’s four marketing divisions consist of DMI Commercial Office Furniture, selling primarily commercial office furniture; DMI Desk Company, selling small office and home office furniture; WYNWOOD Furniture Company, selling bedroom, dining and occasional furniture and Home Styles, selling lifestyle furniture for the home.
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 1% of the Company’s sales in fiscal 2002. Approximately 6% of the Company’s sales are 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.
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The Company’s total sales of imported product during the three prior fiscal years were 74% for fiscal 2002, 64% for fiscal 2001 and 62% for fiscal 2000. The Company designs the majority of the furniture it purchases from foreign factories and actively participates in the production and quality control process. The Company maintains administrative offices in China and Thailand to manage the quality control, production process and other supply chain functions. The Company maintains small amounts of finished goods inventories in China at a vendor provided warehouse. An unanticipated interruption in the flow of products from one or more of the overseas factories could have a short-term material adverse effect on the Company’s results of operations.
The Company maintains insurance for all Company owned inventory until title transfers to the customer. Title transfers to the customer when all requirements of the sale are complete. The timing of the sale and transfer of ownership depends on the individual customer and is agreed to before order acceptance. The three primary points where title transfers are when product leaves one of the Company’s domestic warehouses, when product arrives at the port of entry into the United States, and when product leaves its country of origin.
The raw materials 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 61% of these materials are purchased from independent suppliers, and the balance of these materials are obtained by the Company by processing purchased lumber through the Company’s 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.
The Company’s operations as shown in its Selected Financial Data (See Item 6) and in the Statement of Operations consist of one industry segment - the manufacture, import, and sale of furniture.
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:
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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 become more subject to quarterly fluctuations. See Note 9 to the consolidated financial statements for quarterly financial data.
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 customers include large furniture chain store retailers, wholesale clubs, catalog retailers, and independent distributors, as well as numerous smaller retailers. The five largest customers accounted for approximately 30% of the Company’s total sales in fiscal 2002. One customer, Sam’s Wholesale Club, a division of Wal-Mart Stores, Inc., accounted for more than 10% of the Company’s total net sales for fiscal 2002. 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 31, 2002, one customer accounted for approximately 13% of total accounts receivable.
The furniture industry is extremely competitive. The Company competes in the national market for medium-priced furniture. Due to the fragmented nature of the furniture manufacturing industry and the unavailability of complete financial reports for all its
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competitors, the Company is unable to accurately state its rank in the industry. There are, however, a number of furniture manufacturers with substantially greater sales and greater economic resources than the Company. The principal methods of competition in the furniture industry are design, pricing, sales force, customer service, and manufacturing location.
The Company employs approximately 240 employees, of whom approximately 99 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.
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 two operating furniture-manufacturing plants located in Huntingburg, Indiana (78,910 square feet, and 100,000 square feet); a sawmill 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 two warehousing facilities totaling 335,000 square feet in Huntingburg, Indiana.
During fiscal 2000 the Company closed and sold its furniture manufacturing plant located in Ferdinand, Indiana (117,823 square feet). See Note 11 to the consolidated 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 31, 2002 are set forth in the table below. “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.
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Item 3.
Item 3. LEGAL PROCEEDINGS.
The Company is a defendant in various lawsuits arising in the normal course of business. 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.
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.
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Part II.
Item 5.
Item 5. MARKET FOR THE REGISTRANT’S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS.
As of August 31, 2002, approximately 1,259 stockholders held the Company’s common stock, its only class of outstanding securities.
Price Range of Common Stock
The Company’s Common Stock is traded in the over-the-counter market and is quoted on the NASDAQ Small Cap Market under the trading symbol DMIF. The following table sets forth the high and low bid quotations reported for each fiscal quarter indicated. The quotations represent prices between dealers, do not include commissions, mark-ups or markdowns and may not represent actual transactions.
Dividend History
The Company has not paid dividends on its common stock since it was first issued in November 1977.
Payment of dividends is 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 prohibits the payment of dividends without the written consent of the bank. See Note 2 to the consolidated financial statements.
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ITEM 6.
ITEM 6.
SELECTED FINANCIAL DATA (1)
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 charge from preferred stock redemption of $1,666,000 which impacted diluted earnings per common share by approximately $0.40.
Note 4 -
Includes plant closing reserve which reduced net income and earnings per common share by approximately $372,000 and $0.08 per share respectively.
Note 5 -
Includes a pre-tax charge of $775,000 ($481,000 after tax) relating to discontinuing production of the promotional bedroom product line. The charge reduced diluted earnings per common share by approximately $0.11 per share. The pre-tax charge consisted of $575,000 for inventory; $80,000 for anticipated bad debts and $120,000 relating to severance.
Note 6 -
Net sales for fiscal years ended August 31, 2002 and September 1, 2001 include the effects of EITF 00-10 “Accounting for Shipping and Handling Revenues and Costs”. All other years exclude the effects of the adoption of EITF 00-10 because it was impracticable to restate prior years.
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Item 7.
Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Critical Accounting Policies, Estimates and Judgments
DMI Furniture’s financial statements are prepared in accordance with accounting principles that are generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses as well as the disclosure of contingent assets and liabilities. Management evaluates its estimates and judgments including those related to revenue recognition, allowances for doubtful accounts, inventory valuation allowances, useful lives of property, plant and equipment, derivative contracts, pension benefits and income taxes. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. The Company believes that of its significant accounting policies, the following may involve a higher degree of judgment or complexity.
Revenue recognition-The Company recognizes revenue when title transfers to the customer and all requirements of the sale are complete. The timing of the sale and transfer of ownership depends on the individual customer and is agreed to before order acceptance. The three primary points where title transfers are when product leaves one of the Company’s domestic warehouses, when product arrives at the port of entry into the United States, and when product leaves its country of origin.
Allowances for doubtful accounts-The Company maintains an allowance for doubtful accounts for estimated losses that might result from its customers failing to make required payments. The Company bases its allowances on the likelihood of recovery of accounts receivable based on past experience and current collection trends. If economic or specific industry trends worsen beyond the Company’s estimates, the Company would increase its allowance for doubtful accounts by recording additional expense.
Pension benefits-The amounts recognized in the financial statements related to pension benefits are determined on an actuarial basis, the calculation of which requires many assumptions. A significant assumption used in determining the Company’s net pension cost is the expected long-term rate of return on plan assets. Based on input from the Company’s actuarial firm, the Company assumed an expected long-term rate of return on plan assets of 8.25% for fiscal 2002 and 2001. Another significant estimate that affects the Company’s pension cost is the discount rate used in the annual actuarial valuation of pension benefit. The discount rate represents the interest rate that is used to determine the present value of future cash flows required to settle the pension obligations. Based on input from the Company’s actuarial firm, the Company assumed a discount rate of 7% in fiscal 2002 and 2001.
Income taxes-The Company records deferred tax assets and liabilities using enacted tax rates for the effect of temporary differences between the book and tax basis of assets and liabilities. If enacted tax rates change, the Company would adjust its deferred tax assets and
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liabilities through the provision for income taxes. The Company evaluates the need for a valuation allowance of its deferred tax assets based on the likelihood of expected future benefits. The Company does not believe a valuation allowance is necessary; however, if the expected level of future taxable income changes or certain tax planning strategies become unavailable, the Company would record a valuation allowance through income tax expense in the period the valuation allowance is deemed necessary.
RESULTS OF OPERATIONS
Overview
The Company’s sales decreased during the fiscal year ended August 31, 2002 due to a significant shortfall in sales during the Company’s first quarter of fiscal 2002 compared to the first quarter of fiscal 2001. As discussed in the Company’s previous filings, the first quarter shortfall was the result of the timing of certain orders by a major customer and a change of focus by major retailers toward furniture products that sell at lower price points than the products sold in past years, which reduced overall sales. Total sales for the nine months ended August 31, 2002 were higher than the comparable period in fiscal 2001. The Company’s profitability increased during fiscal 2002 as compared to the prior fiscal year due to one-time charges taken in fiscal 2001, resulting from the Company’s decision to discontinue production of promotional bedroom furniture. When the effects of one-time charges are excluded, the profitability for fiscal 2002 is essentially the same as fiscal 2001.
A majority of the Company’s imported merchandise flows through Pacific coast ports of entry. The contract between the Pacific Maritime Association and the International Longshore and Warehouse Union expired on July 1, 2002. Contract negotiations between labor and management came to an impasse in early October 2002 and the ports were closed for 10 days. The Federal government sought and received a court ordered injunction to re-open the ports under the Taft Hartly Act of 1949. The injunction created an 80-day cooling off period that reopened the ports and started the flow of merchandise through the Pacific coast ports.
As a result of the port closings, there is currently an imbalance in the shipping lanes that has slowed the flow of merchandise across the Pacific Ocean. The disruption in the flow of merchandise created by the closing of the ports will adversely affect the Company’s first quarter operating performance. Due to multiple unknown variables the Company cannot quantify the negative effects on the first quarter results of operations. If current labor talks break down and a strike, work slowdown, or lockout at the Pacific coast cargo terminals were to occur, the Company could experience a further disruption in the flow of merchandise that would further affect the results of operations.
Fiscal 2002 compared to Fiscal 2001
Net sales for fiscal 2002 decreased by $5,472,000 or approximately 5% from fiscal 2001. The decline in sales for fiscal 2002 was due to lower sales at the Company’s DMI Desk and Commercial Office, partially offset by strong performances at the Company’s Wynwood and Home Styles divisions. Sales at Commercial Office decreased approximately 10% while sales at DMI Desk decreased approximately 30% when compared to fiscal 2001. The Company’s Wynwood and Home Styles divisions grew by approximately 51% and 42%, respectively, when
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compared to fiscal 2001.
The Company’s gross margin for fiscal 2002 was $17,094,000 or 16.9% of sales. The gross margin for fiscal 2001 was 17,872,000 or 16.8%. Excluding a permanent basis adjustment of $575,000 relating to discontinuing production of promotionally priced bedroom furniture, gross margin was $18,447,000 or 17.3% of sales for fiscal 2001. The decline in gross profit in fiscal 2002 was the result of lower shipment volume and lower utilization of the Company’s production facilities.
Selling, general and administrative (S,G&A) expenses were $13,661,000 or 13.5% of sales for fiscal 2002 compared to $14,173,000, or 13.3% of sales for fiscal 2001. The decrease in S,G&A expenses for the year is the result of lower commissions and royalty expense due to the lower sales volume, as well as a decrease in bad debt expense. Bad debt expense was higher during fiscal 2001 due to the bankruptcy filing of a national retailer and the establishment of a reserve for bad debts relating to discontinuing the production of promotionally priced bedroom furniture. The increase in S,G&A expenses as a percent of sales for fiscal 2002 versus fiscal 2001 was due to the lower sales volume in fiscal 2002 and the relatively fixed nature of the S,G&A expenses.
During the fourth quarter of fiscal 2001, the Company committed to discontinue production of promotional bedroom furniture during the first quarter of fiscal 2002. The Company believed the decline in aggregate demand for fully assembled promotional bedroom and excess industry capacity would prevent this product line from recovering the costs of manufacturing, including the cost of capital and did not anticipate the trend reversing. As a result, during the fourth quarter of fiscal 2001, the Company recorded a pre-tax charge of $775,000 for the expected cost of discontinuing production. The charge included book provisions of approximately $575,000 for reducing certain inventory items to net realizable value. The inventory charge represented a permanent basis reduction and was recorded as a separate component of cost of sales. An $80,000 charge for expected losses relating to un-collectible accounts receivable was charged to bad debt expense. A $120,000 charge for severance pay, which is called for under Company policy, related to the termination of certain salaried and support staff personnel.
Net interest expense declined to $1,583,000 in fiscal 2002 from $2,073,000 in fiscal 2001. The decrease in interest expense was due to reductions in the outstanding balance of the Company’s revolving line of credit as well as decreases in the prime and LIBOR interest rates during the fiscal year.
Fiscal 2001 compared to Fiscal 2000
On September 1, 2001 the Company adopted EITF 00-10 “Accounting for Shipping and Handling Revenues and Costs” for fiscal 2001. EITF 00-10 requires that all shipping and handling costs billed to customers be recorded as sales and the actual costs incurred be recorded as a component of cost of sales. Before adopting EITF 00-10, the Company netted freight revenue against freight costs. As a result of adopting EITF 00-10, net sales and cost of sales both increased by an equal amount to reflect the inclusion of shipping revenues and costs, but there was no effect on operating income, net income, earnings per share, or cash flows. The Company did not restate the results of operations for prior fiscal years, as restatement was impracticable.
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Net sales for fiscal 2001 increased approximately $1,491,000 or 1.4% over fiscal 2000 due to the adoption of EITF 00-10. The apparent increase was the result of restating only fiscal 2001 results. Before the restatement, net sales for fiscal 2001 would have been $7,700,000 or approximately 7% less than fiscal 2000. The decline in sales for fiscal 2001 was due to lower sales at DMI Desk, Commercial Office and Dolly Madison Bedroom divisions, partially offset by strong performances at the Wynwood and Home Styles divisions. Sales at Commercial Office were down approximately 10% while sales at DMI Desk and Dolly Madison Bedroom were down approximately 16% and 22% respectively, when compared to fiscal 2000. The Wynwood and Home Styles divisions each grew by approximately 20% when compared to fiscal 2000.
The Company’s gross margin for fiscal 2001 was $17,872,000 or 16.8%. The gross margin for fiscal 2000 was $20,438,000 or 19.5% of sales. The decline in gross profit and margin percent in fiscal 2001 was the result of lower shipment volume and lower utilization of the Company’s production facilities. The decrease in margin percentage was also affected by the adoption of EITF 00-10 in fiscal 2001. Excluding a permanent inventory basis adjustment of $575,000 relating to discontinuing production of promotionally priced bedroom furniture, gross margin for fiscal 2001 was $18,447,000 or 17.3% for fiscal 2001.
Selling, general and administrative (S,G&A) expenses were $14,173,000 or 13.3% of sales for fiscal 2001 compared to $14,382,000 or 13.7% of sales for fiscal 2000. The decrease in S,G&A expenses for the year was the result of lower commissions and royalty expense due to the lower sales volume, partially offset by an increase in bad debt expense. S,G&A expenses were 14.6% of sales in fiscal 2001 before the effects of the adoption of EITF 00-10.
The increase in bad debt expense for fiscal 2001 was due to the bankruptcy filing a national retailer and the establishment of a reserve for bad debts relating to discontinuing the production of promotionally priced bedroom furniture. The increase in S,G&A expenses as a percent of sales for fiscal 2001 was due to the lower sales volume and the relatively fixed nature of the S,G&A expenses.
Net interest expense declined slightly to $2,073,000 in fiscal 2001 from $2,239,000 in fiscal 2000. The decrease in interest expense was primarily due to decreases in the prime and LIBOR interest rates in the second half of fiscal 2001.
During the fourth quarter of fiscal 1999 management committed to permanently close its Ferdinand, Indiana furniture manufacturing plant during fiscal 2000. During the fourth quarter of fiscal 1999 the Company recorded a pre-tax charge of $600,000 for the expected costs of closing the plant, which was completed in May 2000. During the third quarter of fiscal 2000 the Company recognized a $166,000 gain on the sale of assets. The Company also recorded a $125,000 plant closing reserve credit in the second fiscal quarter of fiscal 2000, as plant closing costs were less than anticipated.
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FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company has a $20,471,000 credit agreement with Bank One, Indiana N.A. comprised of a $1,471,000 term loan and a maximum revolving master note loan commitment of $19,000,000 (outstanding balance $14,600,000 as of August 31, 2002). On August 31, 2002, the Company had $4,400,000 available under the formula for calculating its available borrowings. See Note 2 to the consolidated financial statements.
On October 30, 2002, the Company received a commitment from Bank One to extend the due date of the revolving master credit agreement through December 31, 2004. In addition, the Bank has agreed to restructure certain covenants contained in the revolving master note payable and to provide increased borrowing capacity.
The maximum availability under the revolving master note payable will be seasonally adjusted through December 31, 2004. The seasonal availability is reflected in the following table:
Demands for funds relate to payments for inventory 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 depends on the collection of accounts receivable and from its ability to borrow funds. The Company’s days of sales outstanding of accounts receivable averaged 63 days for fiscal 2002 and 65 days for fiscal 2001. This decrease was primarily due to management reducing extended payment terms granted to certain customers in previous periods. Inventory turnover was 4.3 in fiscal 2002 and 3.6 in fiscal 2001. The Company believes it will be able to generate sufficient cash from operations in fiscal 2003 together with available borrowings under its revolving master note to make scheduled payments on its long-term debt.
Key elements of the Consolidated Statement of Cash Flows (in thousands):
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Cash flows from operations of $3,758,000 were provided during fiscal 2002 primarily due to increased trade accounts payable and overall cash management. During fiscal 2001 lower levels of receivables and inventory contributed to the generation of $4,372,000 of cash flows from operations for the Company. During fiscal 2000 the Company used cash flows for operations of $1,476,000 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.
Cash flows of $406,000 and $552,000 were used for investing activities in fiscal 2002 and fiscal 2001, respectively, primarily for plant and equipment modernization expenditures. Cash flows provided from investing activities were $298,000 for fiscal 2000. The cash provided in fiscal 2000 was primarily a result of asset sales related to the closure of the Ferdinand, Indiana plant partially offset by new equipment purchases.
The Company used $3,700,000 and $3,980,000 of net cash flows during fiscal 2002 and 2001, respectively, to reduce overall debt levels. During fiscal 2000 net cash flows from financing activities of $1,070,000 were used primarily to finance working capital requirements.
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 2003 budget for capital expenditures is approximately $706,000. The majority of the budgeted capital expenditures for fiscal 2003 relate to the Company’s new showroom space at the High Point furniture market. The Company anticipates that its 2003 internal cash flow and additional borrowings available under its credit agreement will be sufficient to pay for these expenditures.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standard Board (FASB) issued Statement No. 141, “Business Combinations”; Statement No. 142 “Goodwill and Other Intangible Assets”; and Statement No. 143, “Accounting for Asset Retirement Obligations”. In August 2001, the FASB issued Statement No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets. In April 2002, the FASB issued Statement No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections.” In June 2002, the FASB issued Statement No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” The Company does not anticipate the adoption of these statements will have a significant effect on its results of operations or financial position.
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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 31, 2002, a hypothetical 100 basis points increase in short term interest rates would result in a reduction of approximately $59,000 in annual pretax earnings. This estimate assumes no change in the volume or composition of debt at August 31, 2002. The Company has effectively fixed the interest rates on approximately $14.4 million of its long-term debt through the use of interest rate swaps, and the above estimated earnings reduction takes these swaps into account. As of August 31, 2002 the fair market value of these swaps is approximately ($584,000). (See Note 13)
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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 SCHEDULE
The following consolidated financial statements of the registrant required to be included in Item 8
Item 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.
None.
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Part III.
Item 10.
Item 10. DIRECTORS AND EXCUTIVE OFFICERS OF THE PARTICIPANT
The information under the heading “Election of Directors” is incorporated by reference from the Company’s definitive proxy statement on Schedule 14A for its annual meeting of stockholders scheduled for December 19, 2002 (the “Proxy Statement”).
Item 11.
Item 11. EXECUTIVE COMPENSATION
The information under the heading “Executive Compensation” is incorporated by reference from the Proxy Statement.
The following table sets forth information relating to the Company’s equity compensation plan and arrangements.
(1)
1993 Long Term Incentive Stock Plan for Employees and 1988 Stock Option Plan for Employees.
(2)
1998 Stock Option Plan for Independent Directors and 1988 Non Employee Director Stock Option Program.
(3)
These stock options were issued to executive officers in lieu of stock grants that were earned under the terms of prior employment agreements. None of the Company’s current employment agreements with executive officers provide for grants of stock or stock options. The options granted under this arrangement expire at various times during the next three years.
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Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the heading “Principal Holders of Voting Securities” is incorporated by reference from the Proxy Statement.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
Item 14.
Item 14. DISCLOSURE CONTROLS AND PROCEDURES
The Company’s management has evaluated the effectiveness of the design and operation of disclosure controls and procedures within 90 days of the filing date of this annual report. Based on the results of the evaluation, the Company’s chief executive officer and its chief financial officer have concluded that these controls and procedures are effective. In addition, there were no significant changes in the Company’s internal controls or in other factors that could significantly affect the controls subsequent to the date of their evaluation.
Disclosure controls and procedures are the Company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Company, under the Exchange Act, is accumulated and communicated to the Company’s management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
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Part IV.
Item 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
Item 14(b). REPORTS ON FORM 8-K
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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 7, 2002
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.
/S/Joseph G. Hill
Joseph G. Hill
Executive Vice President,
Operations and Director
November 7, 2002
/S/Phillip J. Keller
Phillip J. Keller
Vice President, Finance,
Chief Financial Officer,
Treasurer, and Principal
Accounting Officer
November 7, 2002
/S/Thomas M. Levine.
Thomas M. Levine
Director
November 7, 2002
/S/David Martin
David Martin
Director
November 7, 2002
/S/W. Howard Armistead
W. Howard Armistead
Director
November 7, 2002
/S/Daniel H. Abramowitz
Daniel H. Abramowitz
Director
November 7, 2002
/S/Donald D. Dreher
Donald D. Dreher
President, Chief
Executive Officer, Chairman
of the Board and Director
November 7, 2002
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CERTIFICATIONS
Certification of Chief Executive Officer
I, Donald D. Dreher, certify that:
1. I have reviewed this annual report on Form 10-K of DMI Furniture, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: November 7, 2002
/s/Donald D. Dreher
President, Chief
Executive Officer, Chairman
of the Board and Director
Certification of Chief Financial Officer
I, Phillip J. Keller, certify that:
1. I have reviewed this annual report on Form 10-K of DMI Furniture, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: November 7, 2002
/s/Phillip J. Keller
Vice President, Finance,
Chief Financial Officer,
Treasurer, and Principal
Accounting Officer
DMI FURNITURE, INC.
SCHEDULE II
Item 14(a)3. EXHIBITS
*
Incorporated by reference to Registration No. 333-5246
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Incorporated by reference to Proxy Statement dated February 20, 1998.
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Incorporated by reference to Form 10-Q for the fiscal quarter ended December 1, 2001
*****
Incorporated by reference to Form 10-Q for the fiscal quarter ended November 30, 1999.
******
Incorporated by reference to Form 10-Q for the fiscal quarter ended May 27, 2000.
*******
Incorporated by reference to Form 8-K dated September 6, 2000.
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Incorporated by reference to Registration Number 33-64188
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Incorporated by reference to Form 10-K for the fiscal year ended September 2, 2000.