Item 1. BUSINESS
(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 bedroom furniture, accent furniture, home and office desk furniture, conference tables, and chairs.
(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 31, 1996, 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, accent furniture, home and office desk 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 1996. Approximately 14% of the Company's sales are accounted for by sale to wholesale distributors. The Company's sales are made principally through independent, commissioned sales representatives, as well as sales and marketing personnel employed by the Company. The Company maintains a showroom for furniture markets in High Point, North Carolina. The Company also attends the annual NeoCon commercial office furniture tradeshow.
The raw materials which are essential to the 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 46% of these materials are purchased from independent suppliers, and the balance of these materials are obtained by the Company by cutting and hauling wood from purchased stands of timber and further processing it in 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's 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.
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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 DMI Trading Company 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.
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 34% of the Company's total sales in fiscal 1996. The loss of more than one of these customers at the same time or one of the largest six could have a materially adverse effect on the business of the Company. As of August 31, 1996, one customer accounted for approximately 10% 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 Company's backlog of orders at August 31, 1996 and September 2, 1995 was $12,635,000 and $9,864,000, respectively. The increase in the backlog from 1995 is primarily due to increased demand for the Company's office furniture. The entire backlog of orders at August 31, 1996 is expected to be filled by November 30, 1996.
The furniture industry is extremely competitive. The Company competes in the national market for low and 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.
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The Company believes it is the largest manufacturer and marketer of assembled home desks in the United States and is a leading producer of popular priced, "promotional" bedroom furniture and popular priced wood office furniture.
The Company employs approximately 425 employees, of whom approximately 156 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 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.
The Company closed its Gettysburg, Pennsylvania manufacturing plant and warehouse during fiscal 1996. 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.
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The productive capacity and extent of utilization of each of the Company's manufacturing facilities for the fiscal year ended August 31, 1996 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 1996 Facility(1) Capacity Production %Utilized ----------- -------- ---------- --------- (dollars in thousands)
Ferdinand, Ind. Plant $14,000 $10,500 75% Huntingburg, Ind. 5th St. Plant 20,100 15,700 78% Huntingburg, Ind. Chestnut Street Plant 20,700 16,700 81% Huntingburg, Ind. Fabricator 9,200 8,900 97% Ferdinand, Ind. Sawmill/ Dimension Plant 7,300 5,900 81% ------- ------- ----- $71,300 $57,700 81% ------- ------- ----- ------- ------- -----
(1) Gettysburg, Pennsylvania plant omitted as it was permanently closed during fiscal 1996.
Item 3.

Item 3. LEGAL PROCEEDINGS.
The Company has been identified as a potentially responsible party ("PRP") by the Environmental Protection Agency ("EPA") or state agencies, or has had claims asserted against it by other parties, in proceedings relating to six waste disposal facilities which may be subject to remedial action under Superfund or similar state statutes, including the action described in the following paragraph. These proceedings are based on allegations that the Company had hazardous substances disposed of at these sites. At each site, many other parties have been named as PRPs or identified as potentially responsible for remediation, and the group of PRPs undertaking remediation includes many companies, including "Fortune 500" companies, believed to have substantial financial resources. The Company has paid a portion of the costs of preliminary investigation and remediation at three sites, and has agreed to settle claims against it made by PRPs at two sites. With respect to these sites, the total amount paid by the Company to date or subject to possible settlement is approximately $39,000. The Company has recorded a reserve of approximately $126,000 against potential environmental liabilities, including potential liabilities in connection with the site described below. The ultimate costs of the Company's environmental liabilities cannot be estimated with certainty, primarily due to several uncertain factors at one of the sites subject to legal proceedings. These factors principally are the level of contamination, the selection of remedial methods, the stage of investigation at the site, and the determination of the Company's liability in proportion to owner/operators of the site and other responsible parties. Due to the limited nature of the Company's involvement in these 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 Note 4 to the consolidated financial statements.
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In 1988, the Company was named out of over one thousand customers at the Keystone Sanitation Company landfill (the "Keystone Site") in Union Township, Pennsylvania, as one of 31 PRPs potentially responsible for remediation of this site. After the Company provided the EPA with information concerning the nature of the substances allegedly contributed by the Company, which the Company believes did not include the principal hazardous substances of concern at the site identified in the remedial investigation, the EPA did not name the Company in an Administrative Order issued on June 28, 1991, requiring twelve other PRPs to undertake remedial action at the Keystone Site. On September 27, 1993, the United States filed a lawsuit in federal court for the Middle District of Pennsylvania against eleven PRPs, who are challenging the EPA's proposal for remedial action at the Keystone Site, which was estimated to cost $9,156,950. The parties have estimated that total site costs will be $17 million. On August 11, 1994, the Company was named, along with over 250 PRPs, as a third-party defendant by the original PRP defendants. Based on a court-directed production of information, the Company was assessed a preliminary allocation of liability among generators of waste of approximately 1.35% by a consultant. The Company has not paid any amount toward the cost of investigation or remediation at the Keystone site. The Company is participating with other third-party defendants in settlement negotiations and in filing a fourth-party complaint joining over 500 additional parties in the litigation. The Company believes it has a reasonable basis upon which to dispute, and has disputed, both the volume of material attributed to it, and the allegation that material contributed by the Company requires any remediation. The Company believes it is likely that a significant share of the liability will be assigned to the former owners and operators who have considerable assets. In addition, the federal court has held that a national waste management company that acquired the Keystone business is liable as a successor to the former owners and operators.
The Company is a defendant in various lawsuits arising in the normal course of business including the environmental matters noted above, and which in management's opinion, 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.
(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 1995 $ 2.06 $ 1.50 2nd Quarter of 1995 $ 1.88 $ 1.50 3rd Quarter of 1995 $ 1.88 $ 1.50 4th Quarter of 1995 $ 1.56 $ 1.13 1st Quarter of 1996 $ 1.25 $ 1.06 2nd Quarter of 1996 $ 1.69 $ 1.13 3rd Quarter of 1996 $ 2.00 $ 1.13 4th Quarter of 1996 $ 2.00 $ 1.38
(b) Approximate Number of Equity Security Holders
Title of Class- Common Stock, $.10 Par Value
Approximate Number of Stockholders as of August 31, 1996 - 1,689
(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. The Company's Series C Preferred Stock agreement restricts payment of cash dividends on the common stock to 10% of the Company's net income for the immediately preceding fiscal year, after deduction of dividends paid in that year on the Series C Preferred Stock. In addition, the Company's present financing agreement with Bank One, Indianapolis, 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.
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ITEM 6.

ITEM 6.
DMI FURNITURE, INC.
SELECTED FINANCIAL DATA.
Notes to selected financial data:
Note 1 - This summary should be read in conjunction with the related financial statements and notes. Note 2 - Earnings per common share are based on the weighted average number of common and common equivalent shares outstanding during the period. Note 3 - Does not include $1,795,000 credit or $.31 for change in accounting principle, and, $(50,000) or $(.01) charge for extraordinary item.
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Item 7.

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information set forth in "Management's Discussion and Analysis of Financial Condition and results of Operations" below and in "Business" includes "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, and is subject to the safe harbor created by those sections. 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; changes in fashion or tastes; general conditions in the economy and capital markets; demographic changes; competition; and other factors identified in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in "Business" and in the Company's filings with the Securities and Exchange Commission.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company has a $17,500,000 credit agreement with Bank One, Indianapolis, N.A. comprised of a $4,000,000 five-year term loan (outstanding balance $2,169,000 as of August 31, 1996) and a maximum revolving master note loan commitment of $13,500,000 (outstanding balance $5,969,619 as of August 31, 1996). On August 31, 1996, the Company had $1,666,000 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, preferred stock dividends, 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 50 days for fiscal 1996, which is a decrease from the 53 days for fiscal 1995. The Company believes it will be able to generate enough cash in fiscal 1997 from operations to make scheduled payments on its long term debt.
Key elements of the Consolidated Statement of Cash Flows (in thousands):
1996 1995 1994 ---- ---- ----
Net cash provided (used) by operating activities $8,504 $207 (1,002) Cash provided (used) in investing activities 140 (642) (4,200) --- ----- ------- Net cash flows from operating and investing activities 8,644 (435) (5,202) Cash provided (used) by financing activities (8,616) 302 5,362 ------- --- ----- Net change in cash and cash equivalents $28 $(133) $160 ----- ------ ---- ----- ------ ----
During fiscal 1996 , the Company provided cash flows from operating activities of $8,504,000 compared to cash flows provided of $207,000 the previous year. This improvement is due primarily to the success of the Company's asset consolidation plan and particularly the inventory reduction as well as the reduction in accounts receivable. Investing activities provided $140,000 in fiscal 1996 compared to funds used of $642,000 the previous year. The fiscal 1996 investing funds were provided through the sale of certain idle assets in Gettysburg, Pennsylvania as well the final payments on an Alabama idle property sold several years ago. The fiscal 1995 expenditures were primarily for ongoing plant modernization and in fiscal 1994 expenditures were primarily on its new warehouse/distribution facility
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and the purchase and equipping of the new fabrication plant. Funds used for financing activities during fiscal 1996 of $8,616,000 were primarily used to pay down debt with funds generated by operations and investing activities previously described. Financing activities in fiscal 1994 provided $5,362,000 in cash primarily from the Company's $3.4 million Economic Development Revenue Bond used for the expansion mentioned above.
During the third quarter of fiscal 1994, the Company called its 1989 Economic Development Revenue Bond for redemption and refinancing into lower interest rate bonds. This refunding was completed in June, 1994 and resulted in substantial interest savings for the Company since that date.
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 1997 budget for capital expenditures is approximately $523,000. These proposed expenditures are principally to upgrade and modernize the Company's manufacturing facilities. The Company anticipates that its 1997 internal cash flow and additional borrowings available under its credit agreement will be sufficient to pay for these expenditures. Inventory turnover was 3.9 in fiscal 1996 and 4.0 in fiscal 1995. This slight decrease was the result of lower sales for fiscal 1996.
The Company has been identified as a potentially responsible party ("PRP") by the Environmental Protection Agency ("EPA") or state agencies, or has had claims asserted against it by other parties, in proceedings relating to six waste disposal facilities which may be subject to remedial action under Superfund or similar state statutes. These proceedings are based on allegations that the Company had hazardous substances disposed of at these sites. At each site, many other parties have been named as PRPs or identified as potentially responsible for remediation, and the group of PRPs undertaking remediation includes many companies, including "Fortune 500" companies, believed to have substantial financial resources. The Company has paid a portion of the costs of preliminary investigation and remediation at three sites, and has agreed to settle claims against it made by PRPs at two sites. With respect to these sites, the total amount paid by the Company to date or subject to possible settlement is approximately $39,000. The Company has recorded a reserve of approximately $126,000 against potential environmental liabilities. The ultimate costs of the Company's environmental liabilities cannot be estimated with certainty, primarily due to several uncertain factors at one of the sites subject to legal proceedings. These factors principally are the level of contamination, the selection of remedial methods, the stage of investigation at the site, and the determination of the Company's liability in proportion to owner/operators of the site and other responsible parties. Due to the limited nature of the Company's involvement in these 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.
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RESULTS OF OPERATIONS
Net sales for fiscal 1996 decreased by $12,210,000 or 18% from those of fiscal 1995. This decrease is primarily a result of a soft residential furniture retail environment and also because fiscal 1995 included 53 weeks. The sales change was as follows: office furniture sales increased by 8%; bedroom sales decreased by 19%; and residential desks and accent furniture sales decreased by 38%. Net sales for fiscal 1995 increased by $6,841,000 or 11% over those of fiscal 1994. This increase is primarily unit sales increases as follows: office furniture sales increased by 4%; residential desks and accent furniture sales increased by 53%; and bedroom furniture sales decreased by 9%. Sales of lumber and wood parts to outside trade customers by the Company's Sawmill/Dimension Plant increased 13% over fiscal 1994. The increase in 1995 was the result of the Company's continued growth with multi-market furniture chains, wholesale clubs, distributors, catalogers, and the success of the Company's residential desk and accent furniture import program.
As a percentage of sales, cost of sales was 80.9% of sales for fiscal 1996. As a percentage of sales, cost of sales was 82.6% of sales for fiscal 1995 and 81.4% for fiscal 1994. The decrease in cost of sales as a percentage of sales in fiscal 1996 was the result of the Company's asset consolidation program initiated in the first quarter and in particular the consolidation of the Gettysburg operations into existing Indiana operations thus significantly lowering the Company's overhead. Also contributing to the improvement was the increased production and favorable sales mix towards higher margin products, as well as significant improvement in the Company's two internal supplier plant operations. The increase in cost of sales as a percentage of sales in fiscal 1995 was the result of higher lumber and other wood material costs partially offset by selling price increases established in the fourth quarter of fiscal 1994 and the second quarter of fiscal 1995, and a lower margin product and customer sales mix. (See Effects Of Inflation below.)
As a percentage of sales, selling, general and administrative expenses were 14.1% of sales for fiscal 1996, 12.6% of sales for fiscal 1995, and 13.7% of sales for fiscal 1994. The increase in fiscal 1996 was primarily the result of the sales decrease exceeding the rate at which these expenses decreased most of which are of a semi-fixed nature. The substantial decrease in fiscal 1995 was primarily the result of sales growth materially exceeding the rate at which these expenses increased most of which are of a semi-fixed nature.
The Company permanently closed its Gettysburg, Pennsylvania manufacturing plant and warehouse facilities and consolidated the production and distribution activities of those operations into its Huntingburg, Indiana facilities during the second quarter of fiscal 1996. Consolidation of production and warehousing into the Indiana facilities resulted in lower manufacturing and warehousing overhead and plant administrative costs. The Company recorded a pre-tax charge of approximately $995,000 in the first quarter of fiscal 1996 related to this closing. The charge included book provisions of approximately: $160,000 related to the recording of property, plant, and equipment at net realizable value; $100,000 for recording certain inventory items at net realizable value; $145,000 for a pension curtailment loss; $125,000 for severance pay; and approximately $465,000 for costs to be incurred after operations cease and that are associated with the closing as well as expected future occupancy related costs. The severance pay accrual related to the termination of certain salaried and support staff personnel. None of the above referenced costs relate to the relocation or consolidation of production into the Company's Huntingburg, Indiana facility. During the fourth quarter of fiscal 1996 the Company sold the Gettysburg, Pennsylvania manufacturing plant and realized gross proceeds of approximately $375,000. Based upon this transaction approximately $127,000 of the book provision related to the initial recording of property, plant and equipment at net realizable value was not needed. The net plant closing charge included in the consolidated statements of income was $868,000 for fiscal 1996. Net current assets and liabilities
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associated with the Gettysburg, Pennsylvania facilities as of August 31, 1996 are immaterial to the financial position of the Company. The carrying amount of net long-term assets to be disposed of as of August 31, 1996 are approximately $95,000 and management's expectations are that such assets should be disposed of within the next 6 months. All severance related payments have been made as of August 31, 1996. Amounts included in accrued liabilities associated with the plant closing as of August 31, 1996 total approximately $108,000.
Interest expense decreased in fiscal 1996 to $1,335,956 from $1,913,231 in fiscal 1995 because of the pay down of debt with the positive cash flow provided from success of the Company's asset consolidation program and from operations, and to a lesser extent a reduction in the interest rate spread charged by the Company's bank. Interest expense increased in fiscal 1995 to $1,913,231 from $1,298,790 in fiscal 1994 due to higher prime interest rate as well as higher average loan balances for working capital to support the growth of the Company.
Gain On Disposal Of Property, Plant and Equipment - During fiscal 1996, the Company sold an idle Gettysburg, Pennsylvania manufacturing plant and house and recorded a total gain of approximately $44,000 and also received final payment on a note from the sale of an idle manufacturing plant in Alabama over five years ago and recorded an approximate gain of $26,000 on the final payment.
Provision For Income Taxes - The Company's effective book tax rate increased from approximately 8% in fiscal 1993 to 37% in fiscal 1994 and to 38% in fiscal 1995 and 38% in fiscal 1996. This increase in the effective book tax rate is primarily due to the adoption of SFAS 109 in the first quarter of fiscal 1994. The Company realized a $1,795,000 credit in the first quarter of fiscal 1994 as a result of this change in accounting principle. See Note 8 to the consolidated financial statements for more information.
Extraordinary Item - During the third quarter of fiscal 1994, the Company called $2,940,000 of its 1989 Economic Development Revenue Bonds for redemption and refinancing into lower interest rate bonds. The actual redemption and refinancing took place on June 15, 1994. The Company wrote off the call premium and unamortized costs on the 1989 bonds totaling approximately $72,000 ($50,000 net of related tax benefits) during the third fiscal quarter. The loss has been reflected as an extraordinary item in the consolidated statements of income for fiscal 1994. The new bonds provided an initial interest rate approximately three hundred basis points lower than the 1989 issue.
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. During fiscal 1995 and 1994 there were substantial increases in the prices of lumber and other wood materials and this adversely affected the Company's results in fiscal 1995 and 1994. The Company increased its selling prices during this period to partially offset these increased costs. 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.
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During fiscal 1994 the Company opened a fabrication facility to supply certain high volume materials and components to its plants that had previously been purchased from outside suppliers. This facility has lowered the cost of those materials from prices paid to outside suppliers thus helping to offset some of the inflation it has experienced during recent years.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
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 plans to adopt the provisions of SFAS No. 121 in the first quarter of fiscal 1997 and does not expect that adoption will have a material impact on its financial position or results of operations.
ACCOUNTING FOR STOCK BASED COMPENSATION - Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" (SFAS No.123), issued in October 1995 and effective for fiscal years beginning after December 15, 1995, encourages, but does not require, a fair value based method of accounting for employee stock options or similar equity instruments. It also allows an entity to elect to continue to measure compensation cost under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), but requires pro forma disclosures of net income and earnings per share as if the fair value based method of accounting had been applied. The Company expects to adopt Statement No. 123 in fiscal 1997. While the Company is still evaluating Statement No. 123, it currently expects to elect to continue to measure compensation cost under APB No. 25 and comply with the pro forma disclosure requirements.
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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

Item 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.
None.
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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 27, 1996.
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Part IV.
Item 14.

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
None.
OTHER MATTERS
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the forgoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or a controlling person of the registrant in the successful defense of any action, suit, or proceeding) is asserted by such director, officer, or controlling persons in connection with the securities being registered, the registrant will, unless in the opinion of counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
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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: October 18, 1996 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 October 18, 1996 - ------------------------- Joseph G. Hill
/S/Thomas M. Levine Director October 18, 1996 - ------------------------- Thomas M. Levine
/S/Alexander N. Rubin, Jr. Director October 18, 1996 - ------------------------- Alexander N. Rubin, Jr.
/S/Joseph L. Ponce Director October 18, 1996 - ------------------------- Joseph L. Ponce
President, Chief Executive Officer, Chairman /S/Donald D. Dreher of the Board and Director October 18, 1996 - ------------------------- Donald D. Dreher
IV-2
DMI FURNITURE, INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
(A) Charge-offs net of recoveries.
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Item 14(a)3. EXHIBITS
10-K No. Page No. ------ --------
(3)(a) Restated Certificate of Incorporation E1 - E38 * (b) Bylaws
(4)(a) Restated Certificate of Incorporation E1 - E38 * (b) Bylaws
******* (10)(a) 1988 Stock Option Plan for Employees ********* (b) Nonemployee 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 Bank One, Indianapolis, N.A. and DMI Furniture, Inc. dated October, 1994 **** (f) Extension and Renewal of Employment Agreement as of January 1, 1996 between DMI Furniture, Inc. and Donald D. Dreher. ****** (g) Credit Agreement with Bank One, Indianapolis, N.A. dated December 4, 1993. ********** (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 June 9, 1994. ******** (l) Loan Agreement between City of Huntingburg, Indiana and DMI Furniture, Inc. dated June 1, 1994. ********* (j) 1993 Long Term Incentive Stock Plan for Employees ********* (k) Stock Compensation and Deferral Plan for Outside Directors. ** (n) Second Amendment To Amended And Restated Credit Agreement between Bank One, Indianapolis, N.A. and DMI Furniture, Inc. dated January, 1995. ** (o) Third Amendment To Amended And Restated Credit Agreement between Bank One, Indianapolis, N.A. and DMI Furniture, Inc. dated March, 1995. ** (p) Fourth Amendment To Amended And Restated Credit Agreement between Bank One, Indianapolis, N.A. and DMI Furniture, Inc. dated September 20, 1995. (q) Fifth Amendment To Amended And Restated Credit E39 - E42 Agreement between Bank One, Indianapolis, N.A. and DMI Furniture, Inc. dated November 1, 1995.
(r) Sixth Amendment To Amended And Restated Credit E43 - E46 Agreement between Bank One, Indianapolis, N.A. and DMI Furniture, Inc. dated January 11, 1996. (s) Seventh Amendment To Amended And Restated Credit E47 - E53 Agreement between Bank One, Indianapolis, N.A. and DMI Furniture, Inc. dated July 17, 1996. ********* (t) Loan Agreement between City of Huntingburg, Indiana and DMI Furniture, Inc. dated as of October 1, 1993. (u) Escrow Agreements between DMI Furniture, Inc., E54 - E63 Bank One, Indianapolis, N.A., The Fifth Third Bank of Kentucky, and Donald D. Dreher and Joseph G. Hill. (v) Extension and Renewal of Employment Agreement E64 - E70 as of September 11, 1996 between DMI Furniture, Inc. and Joseph G. Hill.
(11) Statement re: Computations of earnings per share E71
(21) List of subsidiaries E72
(23) Consent of Arthur Andersen LLP to incorporation E73 of audit report into S-8 registration.
(27) Financial Data Schedule E74
- -------------------------------------------------------------------------------- * Incorporated by reference to annual report on Form 10-K for the fiscal year ended August 27, 1994
** Incorporated by reference to annual report on Form 10-K for the fiscal year ended August 31, 1996
*** Incorporated by reference to annual report on Form 10-Q for the fiscal quarter ended March 4, 1995
**** Incorporated by reference to Form 8-K dated April 22, 1996.
***** Incorporated by reference to annual report on Form 10-K for the fiscal year ended August 29, 1992
****** 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.