FORM 10-K
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended June 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 0-5151
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FLEXSTEEL INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 42-0442319
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. BOX 877, DUBUQUE, IOWA 52004-0877
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (319) 556-7730
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
NASDAQ
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $1.00 PAR VALUE
(Title of Class)
--------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
State the aggregate market value of the voting stock held by
non-affiliates of the registrant as of August 6, 1998 which is within 60 days
prior to the date of filing:
Common Stock, Par Value $1.00 Per Share: $48,431,030
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of August 6, 1998:
CLASS SHARES OUTSTANDING
---------------------------------- ----------------------
Common Stock, $ 1.00 Par Value 6,831,517 Shares
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF REGISTRANT'S ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR
ENDING JUNE 30, 1998 IN PARTS I, II, AND IV.
IN PART III, PORTIONS OF THE REGISTRANT'S 1998 PROXY STATEMENT, TO BE
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION WITHIN 120 DAYS OF THE
REGISTRANT'S FISCAL YEAR END.
Exhibit Index -- page 6
PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
The registrant was incorporated in 1929 and has been in the furniture
seating business ever since. For more detailed information see the registrant's
1998 Annual Report to Shareholders which is incorporated herein by reference.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The registrant's operations consist of one industry segment --
upholstered seating. For more detailed financial information see the
registrant's 1998 Annual Report to Shareholders which is incorporated herein by
reference.
The registrant's upholstered seating business has three primary areas of
application -- residential seating, recreational vehicle seating and commercial
seating. Set forth below, in tabular form, is information for the past three
fiscal years showing the registrant's sales of upholstered seating attributable
to each of the areas of application described above:
SALES FOR UPHOLSTERED SEATING APPLICATIONS
1998 1997 1996
--------------- --------------- ---------------
AMOUNT OF SALES AMOUNT OF SALES AMOUNT OF SALES
--------------- --------------- ---------------
Residential Seating............. $139,200,000 $133,600,000 $128,600,000
Recreational Vehicle Seating ... 73,900,000 64,600,000 58,200,000
Commercial Seating ............. 23,000,000 21,200,000 18,200,000
--------------- --------------- ---------------
Upholstered Seating Total ...... $236,100,000 $219,400,000 $205,000,000
=============== =============== ===============
(c) NARRATIVE DESCRIPTION OF BUSINESS
(1) (i), (ii), (vii) The registrant is engaged in one segment of
business, namely, the design, manufacture and sale of a broad line of quality
upholstered furniture for residential, commercial, and recreational vehicle
seating use. The registrant's classes of products include a variety of wood and
upholstered furniture including upholstered sofas, loveseats, chairs, reclining
and rocker-reclining chairs, swivel rockers, sofa beds and convertible bedding
units, some of which are for the home, office, motorhome, travel trailer, and
vans. Featured as a basic component in most of the upholstered furniture is a
unique drop-in-seat spring. The registrant primarily distributes its products
throughout most of the United States through the registrant's sales force to
approximately 3,000 furniture dealers, department stores, recreational vehicle
manufacturers and van converters, and hospitality and healthcare facilities. The
registrant's products are also sold to several national chains, some of which
sell on a private label basis.
(iii) Sources and availability of raw materials essential to the
business:
The registrant's furniture products utilize various species of
hardwood lumber obtained from Arkansas, Mississippi, Missouri and elsewhere. In
addition to hardwood lumber and engineered wood products, principal raw
materials utilized in the manufacturing process include bar and wire stock, high
carbon spring steel, fabrics, leather and polyurethane. While the registrant
purchases these materials from outside suppliers, it is not dependent upon any
single source of supply. The raw materials are all readily available.
2
(iv) Material patents and licenses:
The registrant owns the American and Canadian improvement patents
to its Flexsteel seat spring, as well as, patents on convertible beds and
various other recreational vehicle seating products. In addition, it holds
licenses to manufacture certain rocker-recliners. The registrant does not
consider its patents and licenses material to its business.
(v) The registrant's business is not considered seasonal.
(viii) The approximate dollar amounts of backlog of orders
believed to firm as of the end of the last fiscal year and the preceding fiscal
year are as follows:
JUNE 30, 1998 JUNE 30, 1997
------------------------ -----------------------
$26,100,000* $22,700,000
*All of this amount is expected to be filled in fiscal year ending June 30,
1999.
(ix) Competitive conditions:
The furniture industry is highly competitive. There are numerous
furniture manufactures in the United States. Although the registrant is one of
the largest manufacturers of upholstered furniture in the United States,
according to the registrant's best information it manufactures and sells less
than 4% of the upholstered furniture sold in the United States. The registrant's
principle method of meeting competition is by emphasizing its product
performance and to use its sales force.
(x) Expenditures on Research Activities:
Most items in the upholstered seating line are designed by the
registrant's own design staff. New models and designs of furniture, as well as
new fabrics, are introduced continuously. The registrant estimates that
approximately 40% of its upholstered seating line is redesigned in whole or in
part each year. In the last three fiscal years, these redesign activities
involved the following expenditures:
FISCAL YEAR ENDING EXPENDITURES
------------------------ -----------------------
June 30, 1996 $1,485,000
June 30, 1997 $1,540,000
June 30, 1998 $1,640,000
(xi) Approximately 2,300 people are employed by the registrant.
(d) FINANCIAL INFORMATION ABOUT DOMESTIC OPERATIONS
Financial information about domestic operations is set forth in the
registrant's 1998 Annual Report to Shareholders which is incorporated herein by
reference. The registrant has no foreign operations and makes minimal export
sales.
3
ITEM 2. PROPERTIES
(a) THE REGISTRANT OWNS THE FOLLOWING MANUFACTURING PLANTS:
APPROXIMATE
LOCATION SIZE (SQUARE FEET) PRINCIPAL OPERATIONS
--------------------------- ---------------------- ----------------------------------------------
Dubuque, Iowa 845,000 Upholstered Furniture- Recreational Vehicle
- Metal Working
Lancaster, Pennsylvania 216,000 Upholstered Furniture- Recreational Vehicle
Riverside, California 206,000 Upholstered Furniture- Recreational Vehicle
Harrison, Arkansas 123,000 Woodworking Plant
New Paris, Indiana 168,000 Upholstered Furniture- Recreational Vehicle
Dublin, Georgia 153,000 Upholstered Motion Furniture
Starkville, Mississippi 349,000 Upholstered Furniture- Woodworking Plant
Elkhart, Indiana 99,500 Upholstered Furniture- Vehicle
The registrant's operating plants are well suited for their
manufacturing purposes and have been updated and expanded from time to time as
conditions warrant. There is adequate production capacity to meet present market
demands.
The registrant leases showrooms for displaying its products in the
furniture marts in High Point, North Carolina and San Francisco, California.
The registrant leases one warehouse in Vancouver, Washington of
approximately 15,750 sq. feet for storing its products prior to distribution.
(b) OIL AND GAS OPERATIONS: NONE.
ITEM 3. LEGAL PROCEEDINGS
The Company has no material legal proceedings pending other than ordinary
routine litigation incidental to the business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter no matter was submitted to a vote of security
holders.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the registrant, their ages, positions (in each
case as of June 30, 1998), and the month and year they were first elected or
appointed an officer of the registrant, are as follows:
NAME (AGE) POSITION (DATE FIRST BECAME OFFICER)
- ---------------------------- --------------------------------------------------------------------------
K. B. Lauritsen (55) President/Chief Executive Officer (November 1979)
E. J. Monaghan (59) Executive Vice President/Chief Operating Officer (November 1979)
R. J. Klosterman (50) Vice President Finance/Chief Financial Officer & Secretary (June 1989)
J. R. Richardson (54) Senior Vice President of Marketing (November 1979)
T. D. Burkhart (56) Senior Vice President of Vehicle Seating (February 1984)
P. M. Crahan (50) Vice President (June 1989)
J. T. Bertsch (43) Vice President (June 1989)
Each named executive officer has held the same office of an executive or
management position with the registrant for at least five years.
4
Cautionary Statement Relevant to Forward-Looking Information for the Purpose of
"Safe Harbor" Provisions and Private Securities Litigation Reform Act of 1995
The company and its representatives may from time to time make written or
oral forward-looking statements with respect to long-term goals of the Company,
including statements contained in the Company's filings with the Securities and
Exchange Commission and in its reports to stockholders.
Statements, including those in this report, which are not historical or
current facts are "forward-looking statements" made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. There are
certain important factors that could cause results to differ materially from
those anticipated by some of the statements made herein. Investors are cautioned
that all forward-looking statements involve risk and uncertainty. Some of the
factors that could affect results are the effectiveness of new product
introductions, the product mix of our sales, the cost of raw materials, the
amount of sales generated and the profit margins thereon or volatility in the
major markets, competition and general economic conditions.
The Company specifically declines to undertake any obligation to publicly
revise any forward-looking statements that have been made to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
The NASDAQ -- National Market System, is the principal market on which
the registrant's Common Stock is being traded. The market prices for the stock
and the dividends paid per common share, for each quarterly period during the
past two years is shown in the registrant's Annual Report to Shareholders for
the Year Ended June 30, 1998, and is incorporated herein by reference.
There were approximately 2,300 holders of Common Stock of the registrant
as of June 30, 1998.
ITEM 6. SELECTED FINANCIAL DATA
This information is contained on page 6 in the registrant's Annual Report
to Shareholders for the Year Ended June 30, 1998, under the caption "Five Year
Review" and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis is contained on page 15 and page 16
in the registrant's Annual Report to Shareholders for the Year Ended June 30,
1998 and is incorporated herein by reference.
ITEM 7A. QUANTITATIVE INFORMATION ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements of the Company included in the
financial report section of the Annual Report to Shareholders for the Year Ended
June 30, 1998, are incorporated herein by reference:
PAGE(S)
-------
Balance Sheets, June 30, 1998, 1997............................................................ 8
Statements of Income and Comprehensive Income --Years Ended June 30, 1998, 1997, 1996.......... 9
Statements of Changes in Shareholders' Equity -- Years ended June 30, 1998, 1997, 1996......... 10
Statements of Cash Flows -- Years Ended June 30, 1998, 1997, 1996.............................. 11
Quarterly Financial Data -- Years Ended June 30, 1998 and 1997................................. 14
Notes to Financial Statements.................................................................. 12-14
Independent Auditors' Report................................................................... 7
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During fiscal 1998 there were no changes in or disagreements with
accountants on accounting procedures or accounting and financial disclosures.
5
PART III
ITEMS 10, 11, 12. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT, EXECUTIVE
COMPENSATION AND SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information identifying directors of the registrant, executive
compensation and beneficial ownership of registrant stock and supplementary data
is contained in the registrant's 1998 definitive Proxy Statement to be filed
with the Securities and Exchange Commission and is incorporated herein by
reference. Executive officers are identified in Part I, item 4 above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is contained under the heading "Certain Relationships
and Related Transactions" in the registrant's 1998 definitive Proxy Statement to
be filed with the Securities and Exchange Commission and is incorporated herein
by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The financial statements of the registrant included in the Annual Report
to Shareholders for the Year Ended June 30, 1998, are incorporated herein by
reference as set forth above in ITEM 8.
(2) Schedules
The following financial schedules for the years ended 1998, 1997 and 1996
are submitted herewith:
PAGE
------------
SCHEDULE VIII -- Reserves 9
Other schedules are omitted because they are not required or are not
applicable or because the required information is included in the financial
statements incorporated by reference above.
(3) Exhibit No.
3.1 Restated Article of Incorporation by reference to Exhibits
to the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 1988.
3.2 Bylaws of the Registrant incorporated by reference to
Exhibits to the Annual Report on Form 10-K for the fiscal
year ended June 30, 1994.
13 Annual Report to Shareholders for the Year Ended June 30,
1998.
99 1998 Form 11-K for Salaried Employee's Savings Plan 401(k).
23.1 Independent Auditor's Report.
22 1998 definitive Proxy Statement incorporated by reference
is to be filed with the Securities Exchange Commission on
or before December 1, 1998.
23.2 Consent of Independent Auditors.
4 Instruments defining the rights of security holders,
including indentures. The issuer has not filed, but agrees
to furnish upon request to the Commission copies of the
Mississippi Industrial Development Revenue Bond Agreeement
issued regarding the issuer's facilities in Starkville, MS.
27.1 Financial Data Schedule for the fiscal year ended June 30,
1998.
27.2 Restated Financial Data Schedules for the fiscal years
ended June 30, 1997, June 30, 1996 and the quarters ended
September 30, 1996, December 31, 1996 and March 31, 1997.
27.3 Restated Financial Data Schedules for the quarters ended
September 30, 1997, December 31, 1997 and March 31, 1998.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of the fiscal
year ended June 30, 1998.
6
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, thereunto duly authorized.
Date: September 16, 1998 FLEXSTEEL INDUSTRIES, INC.
-------------------------
By: /S/ K. B. LAURITSEN
----------------------------------
K. B. LAURITSEN
PRESIDENT, CHIEF EXECUTIVE OFFICER
and
PRINCIPAL EXECUTIVE OFFICER
By: /S/ R. J. KLOSTERMAN
----------------------------------
R. J. KLOSTERMAN
VICE PRESIDENT OF FINANCE
and
PRINCIPAL FINANCIAL OFFICER
7
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: September 16, 1998 /S/ J. B. CRAHAN
-------------------------------- ---------------------------------------
J. B. Crahan
DIRECTOR
Date: September 16, 1998 /S/ K. BRUCE LAURITSEN
-------------------------------- ---------------------------------------
K. Bruce Lauritsen
DIRECTOR
Date: September 16, 1998 /S/ EDWARD J. MONAGHAN
-------------------------------- ---------------------------------------
Edward J. Monaghan
DIRECTOR
Date: September 16, 1998 /S/ JAMES R. RICHARDSON
-------------------------------- ---------------------------------------
James R. Richardson
DIRECTOR
Date: September 16, 1998 /S/ JEFFREY T. BERTSCH
-------------------------------- ---------------------------------------
Jeffrey T. Bertsch
DIRECTOR
Date: September 16, 1998 /S/ PATRICK M. CRAHAN
-------------------------------- ---------------------------------------
Patrick M. Crahan
DIRECTOR
Date: September 16, 1998 /S/ L. BRUCE BOYLEN
-------------------------------- ---------------------------------------
L. Bruce Boylen
DIRECTOR
Date: September 16, 1998 /S/ JOHN R. EASTER
-------------------------------- ---------------------------------------
John R. Easter
DIRECTOR
Date: September 16, 1998 /S/ THOMAS E. HOLLORAN
-------------------------------- ---------------------------------------
Thomas E. Holloran
DIRECTOR
Date: September 16, 1998 /S/ ART D. RICHARDSON
-------------------------------- ---------------------------------------
Art D. Richardson
DIRECTOR
8
SCHEDULE VIII
FLEXSTEEL INDUSTRIES, INC.
RESERVES
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------------------------------------- --------------- ------------- -------------- ---------------
DEDUCTIONS
BALANCE AT ADDITIONS FROM BALANCE AT
BEGINNING OF CHARGED TO RESERVES CLOSE OF YEAR
DESCRIPTION YEAR INCOME (NOTE)
- ----------------------------------------------------- --------------- ------------- -------------- ---------------
Allowance for Doubtful Accounts:
1998................................................. $ 2,799,000 $ 943,000 $ 1,544,000 $ 2,198,000
=============== ============= ============== ===============
1997................................................. $ 2,153,000 $ 831,000 $ 185,000 $ 2,799,000
=============== ============= ============== ===============
1996................................................. $ 2,160,000 $1,246,000 $ 1,253,000 $ 2,153,000
=============== ============= ============== ===============
- --------------------
NOTE -- UNCOLLECTIBLE ACCOUNTS CHARGED AGAINST RESERVE, LESS RECOVERIES.
9
EXHIBIT 13
[PHOTO]
FLEXSTEEL
INDUSTRIES
INCORPORATED
FASHIONING OUR FUTURE
ANNUAL
REPORT
FISCAL YEAR
ENDED JUNE 30,1998
[LOGO]
FLEXSTEEL (R)
AMERICA'S SEATING SPECIALIST
FINANCIAL HIGHLIGHTS
[AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA]
Year Ended June 30, 1998 1997 1996
-------- -------- --------
Net Sales......................... $236,125 $219,427 $205,008
Income Before Taxes............... 11,527 9,473 7,052
Net Income........................ 7,602 6,048 4,502
Per Share of Common Stock
Average Shares Outstanding:
Basic........................... 6,959 7,024 7,172
Diluted......................... 7,035 7,072 7,188
Earnings:(1)
Basic........................... 1.09 0.86 0.63
Diluted......................... 1.08 0.86 0.63
Cash Dividends.................... 0.48 0.48 0.48
At June 30,:
Working Capital................... 50,549 44,357 47,376
Net Plant and Equipment........... 23,096 26,214 23,046
Total Assets...................... 104,673 99,173 95,874
Shareholders' Equity.............. 78,080 75,238 74,147
Long-Term Debt.................... 0 0 35
(1) The earnings per share amounts for 1997 and 1996 have been restated to
comply with Statement of Financial Accounting Standards No. 128, EARNINGS PER
SHARE.
- --------------------------------------------------------------------------------
NET SALES EARNINGS PER SHARE CASH DIVIDENDS PER SHARE
[BAR CHART] [BAR CHART] [BAR CHART]
BOOK VALUE PER SHARE RETURN ON COMMON EQUITY
[BAR CHART] [BAR CHART]
[LOGO]
FLEXSTEEL (R)
AMERICA'S SEATING SPECIALIST
[PHOTO]
FRONT COVER AND LEFT: THIS OUTSTANDING ROOM OF FLEXSTEEL FINE FURNITURE IS
FEATURED IN OUR FALL ADVERTISING. IT ENCAPSULATES FEATURES WIDELY POPULAR WITH
CONSUMERS IN ITS EXPANSIVE SCALING AND LOOK OF TOTAL COMFORT. IN ADDITION TO THE
HANDSOME SOFA, CHAIR, AND OTTOMAN, NOTE THE CHARISMA(R) CHAIR AND THE OCCASIONAL
TABLES, ALSO FROM FLEXSTEEL.
FASHIONING OUR FUTURE: A WORK IN PROGRESS
- -----------------------------------------
TO OUR SHAREHOLDERS
[PHOTO]
JACK B. CRAHAN
CHAIRMAN OF THE BOARD
[PHOTO]
K. BRUCE LAURITSEN
PRESIDENT & CHIEF EXECUTIVE OFFICER
Even a more-than-century-old company is always a work in progress. Well into
our own second century, Flexsteel has this year taken fresh strides, readying
the company for an exciting new century, in an economy increasingly
technological and global.
Sales for the fiscal year ended June 30, 1998, were $236,125,000, an
all-time high and an increase of 8% over revenues of $219,427,000 in the
previous fiscal year. Net earnings were $7,602,000 or $1.09 per share (basic),
an increase of 26% over earnings of $6,048,000 or $.86 per share (basic),
recorded a year earlier.
While this solid achievement in a fiercely competitive marketplace is
gratifying, we must continue to improve our return on investment. We also
continue to scrutinize our overall operations in an effort to eliminate
unprofitable products and as well as operations that do not contribute to
increased shareholder value.
RESIDENTIAL FURNITURE
Sales in the residential furniture segment of our business rose 4%, mostly
due to increased market penetration among independent dealers. Increased housing
starts, increased sales of existing homes, a very high employment rate, and low
inflation are all major contributors to improved sales of home furnishing, but
we can expect pricing pressures to persist as manufacturers compete aggressively
for shrinking display area.
Flexsteel's two programs for dealers - the Gallery Program and Comfort
Seating Showrooms - continue their sustained growth, thanks to the success of
recent introductions at the High Point and San Francisco markets. Noteworthy
have been our Casual Classic introductions which typify the direction of growth
in this market - toward fashionable and extremely comfortable styles. Our Casual
Classic Collection meets these criteria, with the personality and
distinctiveness to lift the spirits of any room.
Our Timeless Traditional styles, a Flexsteel hallmark of classic beauty,
also put a high priority on comfort. Leather continues in popularity, also with
emphasis on comfort as well as style.
Our distinctive furniture deserves accessories that are equally smart and
appealing, and we provide our dealer network with tables and other accent pieces
which pair perfectly with our own fine upholstered furniture.
For the still-growing market in motion and reclining furniture, we are
adding 90,000 square feet of production space to our manufacturing facility in
Dublin, Georgia.
International sales continue to improve, even though a strong dollar and the
Asian economic crisis have not been favorable to furniture exports. Our current
emphasis is on Canadian, European, and the Mideast markets where better
opportunities now exist.
Flexsteel is dedicated to increasing the number of Comfort Seating Stores
in metropolitan markets. To that end, we have retained the services of
specialists in real estate and in retailing. These experts will help our dealers
in finding the right locations, and in building or remodeling and layout of
these new retailing stores.
ADVERTISING
We continue to increase our national advertising, this year running fourteen
four-color ads in seven consumer publications. These reach our target audience,
estimated to be over fifty-one million, of women 25-54 with household incomes of
$40,000 to $75,000.
Our dealer support is one of the best in the industry. For the many dealers
now using desk-top publishing programs, we provide CD-ROM disks with product and
lifestyle photos and suggested dealer ads.
{PHOTO]
LEATHER FURNITURE BY FLEXSTEEL IS CHOSEN FOR COMFORT AND STYLE, HERE ACCENTED
WITH LARGE NAILHEAD TRIM AND TURNED BUN FEET.
1
[PHOTO]
OUR NEWEST BUCKET SEAT WITH ELECTRIC CONTROLS, THE PATENTED ERGOFLEX ARMS,
RECLINING BACK, AND INTEGRATED SEAT BELT. FINGERTIP CONTROLS ALLOWS ADJUSTING
ERGOFLEX ARMS INDEPENDENTLY OF CHAIR'S RECLINING BACK.
Trends in television advertising for furniture emphasize upscale looks, for
which we provide our dealers with customizable video footage displaying our
products with models.
We reach millions of potential customers through our Web site; it is
continually updated to reflect the "lifestyles" look of our furniture, to
showcase new products, and to highlight new exclusive promotions or events at
Flexsteel Galleries and Comfort Seating Showrooms.
The number of hits has grown dramatically; responding via e-mail we can
reach millions of home owners directly and tell them of special promotions at
our dealers. Our Web site also carries our message to potential buyers of
contract seating or RVs that traditional Flexsteel comfort and style are also
available in those markets.
RECREATIONAL VEHICLE SEATING
Revenues in this division are at record levels, as we once again increased
our market share in seating for motor homes and travel trailers. Sales for van
conversion seating have been sluggish as the market for converted units continue
to decline. Dygert Seating, acquired in fiscal 1997, has struggled under this
restraint, and we closed our leased Watkinsville, Georgia, facility. Although
volume at Dygert Seating is off substantially, we are confident in our
management team's ability to open new markets, such as seats for wheel chairs
and motorized scooters used in the medical field, making this acquisition
financially rewarding.
We expect the van conversion business to eventually rebound, and accordingly
have developed a new, safer integrated seat and restraint system for the van
conversion market.
We continue to develop new products for the recreational marine industry and
we expect much higher revenues as we improve our market penetration. We are
fortunate to have Flexsteel's years of leadership and reputation for quality
products for the recreational automotive market.
COMMERCIAL SEATING
Sales for contract furniture continue to do extremely well; we remain
confident of our prospects in the hospitality and health care fields. We have
been limited by lack of production capacity in this labor-intensive industry. In
Starkville, Mississippi, where our principal contract facility is located, the
unemployment rate is less than 3%, and a shortage of workers has hampered our
output. While we continue to supplement our production at other manufacturing
facilities, this avenue is limited by certain design features. We do remain
confident of our ability to work out manufacturing problems, and we continue to
focus on solutions that support our growth in this field.
FRANK BERTSCH
Flexsteel this year was saddened by the passing of Frank Bertsch, grandson
of one of our founders. For many years he enriched us with his remarkable
ability to turn problems into opportunities and to keep us focused on the long
term, serving as President, Chief Executive Officer, and Chairman of the Board
of Directors. We will miss his abundant contributions, advice, and counsel.
OUTLOOK
It is our goal to remain focused on providing superior values in product and
service to your corporation's three business platforms: home furnishings,
recreational vehicle products, and contract furniture.
Given the healthy business conditions, with the highest employment rate in
many years, low inflation and strong consumer confidence, we expect to continue
to improve sales and earnings in this next fiscal year. Our financial condition
remains strong at year-end. Working capital exceeded $50,549,000, which included
cash, cash equivalents and short-term investments of $15,342,000. With no
long-term debt and shareholders' equity of $78,080,000, we have the resources to
implement our strategic plan and fund continued growth and possible
acquisitions.
During 1998, to enhance shareholders' value, we continued to repurchase
shares of common stock and completed the previously authorized buyback of
500,000 shares. We will continue this program from time to time as we feel the
stock is undervalued.
Our dividend rate, which we have paid without interruption since 1938, is
one of the highest in our industry, and we are committed to future dividend
reviews.
We appreciate the support of our shareholders, our associates, our
customers, and our suppliers, and we are working hard to achieve the value you
expect from your investment.
/s/ Jack B. Crahan
JACK B. CRAHAN
CHAIRMAN OF THE BOARD OF DIRECTORS
/s/ K. Bruce Lauritsen
K. BRUCE LAURITSEN
PRESIDENT & CHIEF EXECUTIVE OFFICER
2
FASHIONING OUR FUTURE: CREATIVITY IN DESIGN
- -------------------------------------------
Leading the Flexsteel success story across all our product lines is a design
concept reflecting today's market demands and permeating everything we do. This
concept, appropriately called "Lifestyles Design," emerged dramatically in our
residential seating, and is also reflected in hospitality and health care
seating, in motor homes, and in other recreational vehicles, including travel
trailers, light trucks, and yachts.
The lifestyle of today's smart, fashion-savvy and value-conscious consumer
emphasizes comfortable elegance. Responding to this trend, our designers are
using softer seating, relaxed styling and more drapeable fabrics to create a
winning fashionable line. This Flexsteel look fits especially well in the life
style of today's younger buyers, but is in no sense limited to them - this is
handsome seating with broad-based appeal.
And there is more Flexsteel in the cities. Our metropolitan presence is
growing through multi-store dealers and Comfort Seating Showrooms specializing
in Flexsteel. Our designers also create smart cosmopolitan looks for city
living.
Our new Roma Divani leather lines were designed in Italy, and feature the
utmost in seating comfort, paired with exciting and upscale design. The broad
appeal of what is definitely European styling has heightened interest in
Flexsteel's fine leather furniture and led to this spring's introduction of
three additional groups at our High Point Market.
Another exciting line has emerged from our designers' use of the wood
processing capabilities of our Starkville, Mississippi, plant. They have created
an outstanding wood-framed sofa that is complemented with coordinating chairs
and occasional tables. This line, too, has sparked so much consumer interest
that we are planning more such groups including coordinated case goods.
Design is equally a key for success in the commercial, or contract, seating
market where furniture is specified by interior designers, and our Commercial
Seating division in Starkville has introduced new and contemporary designs in
chairs, sofas, and ottomans. The hospitality market is also installing recliners
in hotels and motels, where Flexsteel is more often the recliner of choice, not
only for our residential styling but also for our dependable performance.
For the Lifestyles look also in demand in motor homes, Flexsteel's Metal
Division produces recliners and dual inclining sofas with residential styling.
Our name has long been a selling feature in converted vans, and our RV designers
are providing interior packages with such features as cushions and trim. The
traveling public can now take Flexsteel wherever they go: sofas in trailers
and motor homes, or comfortable Flexsteel seating in their light trucks and in
their yachts.
Upholstered Flexsteel furniture, is lasting beauty; today it is more popular
for its fashion than ever, an outstanding success story built on, and made
possible by, a sterling reputation for quality that is over a century old, and
growing.
[PHOTOS]
TOP PHOTO: EURO DESIGN, AMERICAN COMFORT: THIS LEATHER SOFA WITH RAM'S HORN ARMS
IS A TOP SELLER.
ABOVE: THE LATEST LOOK IN RECLINERS IS UPSCALE, WITH THE LOOK OF A LOUNGE OR
CLUB CHAIR.
[PHOTO]
AT THE DUBUQUE GOLF AND COUNTRY CLUB DINING ROOM, GUESTS SIT COMFORTABLY IN OUR
HANDSOME C5338 CHAIRS.
3
FASHIONING OUR FUTURE: CREATIVITY IN MARKETING
- ----------------------------------------------
An aggressive marketing program has been the impetus for Flexsteel's
continued growth in all its market lines. In addition to traditional marketing
techniques, an expanded cross-awareness program has opened new marketing
opportunities.
For example, a residential customer may learn through the Internet that he
can find Flexsteel seating in a converted van; an interior designer who has
Flexsteel at home has added confidence if she specifies Flexsteel in a
commercial application.
Especially through Comfort Seating Showrooms, we have expanded marketing
efforts in metropolitan markets. Popular with customers, they feature open
layouts, easy traffic patterns and a very wide selection. Because he can offer a
broader product range, complemented with accessories and our imported tables,
the Comfort Seating retailer is rewarded with bigger ticket sales and improved
sales per square foot. There are now seven successful Comfort Seating Stores in
operation, with sales exceeding projections. Another six will be open by the
first of January. Our goal is to open one hundred stores within five years.
Flexsteel Galleries also continue their growth: this year we added fourteen
more of these instore Galleries, meanwhile updating existing Flexsteel Galleries
in one hundred and seventy-five stores. At the same time, Flexsteel continues
its strong support of our long-standing customer base, the independent retailer.
We expect to increase market share in motion furniture, the fastest-growing
segment of the industry. The value-conscious consumer is receptive to
Flexsteel's quality story, and we are introducing new upscale, "living-room"
styling to satisfy that market.
Imaginative approaches to marketing have opened new markets such as resort
hotels and the marine business. The greatest market for upscale motor homes is
in the generation now entering their fifties, and in the United States every
seven minutes someone reaches that age. New seating applications supplied by
Flexsteel include those for yachts, signature motor homes and light trucks, and
fold-down beds for the hospitality industry.
The greatest opportunities in the health care industry are in retirement and
assisted-living homes, where Flexsteel style and quality are especially welcome.
The United States government continues as a customer -- a typical recent
contract calls for Flexsteel to supply the upholstered furniture in the
temporary lodging facilities of nineteen Air Force bases.
Our presence on the Internet gives us valuable exposure: growing
exponentially, the Internet is predicted to reach 36 million homes by 2000, and
nearly half of its users are women. We have also expanded our presence in
consumer magazines with fourteen full-color ads to appear this year, directing
readers to our Web site and an 800 number.
A Comfort Seating Showroom dealer has remarked that his store's success was
tied to its "impressive brand name presence." In the end, one of our greatest
marketing tools is recognition of the Flexsteel name and every thing it stands
for.
[PHOTOS]
TOP PHOTO: UPSCALE MOTION FURNITURE APPEALS TO CONSUMERS, LIKE THIS HANDSOME
SECTIONAL WITH "CHAIR-AND-A-HALF" RECLINERS AT EACH END.
ABOVE: FLARED ARMS AND A SHAPED BACK DISTINGUISH THIS CHAIR DESIGNED FOR THE
NEEDS OF THE CONTRACT MARKET.
[PHOTOS]
CRUISERS YACHTS' 5000 SEDAN SPORT SLEEPS 8 AND EMPHASIZES LUXURY WITH INCLINER
SOFA, SWIVELCHAIRS AND CAPTAIN'S SEATS BY FLEXSTEEL.
Photo courtesy of Cruisers Yachts
4
FASHIONING OUR FUTURE: CREATIVITY IN TECHNOLOGY
- -----------------------------------------------
Inventive applications by our designers and engineers take advantage of the
expanding uses of technology.
Many of Flexsteel's contract and recreational vehicle clients require us to
turn around ever-more quickly on prototypes. Our new computerized pattern-making
system which incorporates a digital camera saves significant development time.
Faster completion of prototypes means cost savings, and the system greatly
simplifies the transition to production, with the digital camera helping us
produce complete documentation quickly, including bills of material and
specification books.
The Metal Division, maker of the famous Flexsteel spring, continues its
innovations with continued creative use of the synergy between our metal
expertise and our residential furniture skills. It makes metal components for
the recliners which our Contract Division sells to the health-care industry,
while our residential furniture skills are applied to such things as inclining
sofas for motor homes and travel trailers.
New products in the Metal Division include a fold-down bed for resort hotels
and, for RVs, restraint packages and dual inclining sofas with drop-down trays.
Our patented Ergo-Flex arm for motor home seats allows the independent control
of the arm's position, whether the seat is reclining or upright. We also have
under development, for high-end motor homes, integrated belt-in-seat packages,
a power footrest for passengers, and recliners with home-like residential
styling.
Flexsteel seating is also in the marine industry. We are developing new port
and starboard side lounges, power beds, and helm seats for yachts and large
power boats.
At many large dealers, Comfort Seating Stores, and most galleries, the
customer can get a Sneak Preview(TM) of her choice of fabric and frame on our
video cataloging system. We utilize more bar coding for inventory control, and
now are able to use CAD instead of paper to design plant additions, such as the
90,000 square-foot addition to the Dublin plant.
Technology helps us make the most of precious resources: when we use
hardwood laminates in frames, we not only make stronger frames, we use much
fewer trees. Yield is further increased by using CNC routers which also are more
cost-effective and give us just-in-time practicality in frame parts inventories.
Planned new CNC cutters will further automate pattern cutting.
Because historically Flexsteel has done most of its own programming, we have
kept our software up to date, anticipated our computers' responses to the year
2000, and we do not expect any problems resulting from the date change.
Flexsteel applies technology to sustain our creativity, to offer the finest
warranties in the industry, and to uphold a tradition of the finest
craftsmanship which we have been building for more than a century.
[PHOTO]
PHOTO COURTESY A&J VAN INTERIORS, VALDERS, WI
[PHOTO]
TOP PHOTO: A LUXURIOUS VAN INTERIOR WITH FLEXSTEEL BUCKET SEATS AND SLEEPER.
ABOVE: A SMARTLY-STYLED SWIVEL GLIDER WITH LAWSON ARMS AND TEE SEAT CUSHION.
[PHOTO]
A DISTINCTIVE INTERIOR STARS THE SOPHISTICATION OF OUR ROMA DIVANI LEATHER
COLLECTION WITH DRAMATIC SCROLLED ARMS. OUR UNUSUAL GLASS-TOPPED COCKTAIL TABLE
COMPLETES THE SCENE.
5
[LOGO] FLEXSTEEL INDUSTRIES, INC.
--------------------------
FIVE YEAR REVIEW
[ALL AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA]
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(2)
SUMMARY OF OPERATIONS
Net Sales ................................ $236,125 $219,427 $205,008 $208,432 $195,388
Cost of Goods Sold ....................... 185,345 173,088 161,451 164,231 151,066
Interest and Other Expense ............... 356 345 358 372 270
Interest and Other Income ................ 2,015 1,931 1,132 924 1,063
Income Before Taxes ...................... 11,527 9,473 7,052 8,111 10,092
Income Taxes ............................. 3,925 3,425 2,550 2,900 3,625
Net Income (1) (3) (4) ................... 7,602 6,048 4,502 5,211 6,787
Earnings per Common Share: (1) (3) (4) (5)
Basic ................................. 1.09 0.86 0.63 0.73 0.95
Diluted ............................... 1.08 0.86 0.63 0.72 0.94
Cash Dividends per Common Share .......... 0.48 0.48 0.48 0.48 0.48
STATISTICAL SUMMARY
Average Common Shares Outstanding:
Basic ................................. 6,959 7,024 7,172 7,178 7,140
Diluted ............................... 7,035 7,072 7,188 7,205 7,201
Book Value per Common Share .............. 11.49 10.86 10.45 10.26 9.96
Total Assets ............................. 104,673 99,173 95,874 96,271 95,088
Property, Plant and Equipment, net ....... 23,096 26,214 23,046 24,376 18,829
Capital Expenditures ..................... 2,392 5,273 3,298 9,948 5,074
Working Capital .......................... 50,549 44,357 47,376 46,272 47,787
Long-Term Debt ........................... 0 0 35 70 105
Shareholders' Equity ..................... 78,080 75,238 74,147 73,824 71,289
SELECTED RATIOS
Earnings as Percent of Sales ............. 3.2% 2.8% 2.2% 2.5% 3.5%
Current Ratio ............................ 3.1 to 1 3.1 to 1 3.5 to 1 3.4 to 1 3.3 to 1
Return on Ending Common Equity ........... 9.7% 8.0% 6.1% 7.1% 9.5%
Return on Beginning Common Equity ........ 10.1% 8.2% 6.1% 7.3% 10.0%
Average Number of Employees .............. 2,330 2,320 2,230 2,375 2,240
(1) 1994 income and per share amounts reflect cumulative effect of accounting
change as of June 30, 1994, of $320,000 (net of income taxes) or $.04 per share
income.
(2) On March 18, 1997, the Company acquired certain assets of Dygert Seating,
Inc., and the related production facilities in Elkhart, Indiana, for $6,934,000.
(3) 1997 income and per share amounts reflect a gain on the sale of the
Sweetwater, Tennessee facility of approximately $350,000 (net of income taxes)
or $.05 per share.
(4) 1998 income and per share amounts reflect a non-taxable gain from life
insurance proceeds of approximately $720,000 or $.10 per share.
(5) The earnings per share amounts for 1997, 1996, 1995 and 1994 have been
restated to comply with Statement of Financial Accounting Standards No. 128,
EARNINGS PER SHARE.
6
[LOGO] FLEXSTEEL INDUSTRIES, INC.
--------------------------
REPORTS OF AUDITORS' AND MANAGEMENT
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS OF FLEXSTEEL INDUSTRIES, INC.:
We have audited the accompanying balance sheets of Flexsteel Industries,
Inc. (the Company) as of June 30, 1998 and 1997, and the related statements of
income, comprehensive income, changes in shareholders' equity and cash flows for
each of the three years in the period ended June 30, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Flexsteel Industries, Inc.
as of June 30, 1998 and 1997, and the results of its operations and cash flows
for each of the three years in the period ended June 30, 1998 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
MINNEAPOLIS, MINNESOTA
AUGUST 6, 1998
REPORT OF MANAGEMENT
TO THE SHAREHOLDERS OF FLEXSTEEL INDUSTRIES, INC.:
Management is responsible for the financial and operating information
contained in this Annual Report, including the financial statements covered by
the report of Deloitte & Touche LLP, our independent auditors. The statements
were prepared in conformity with generally accepted accounting principles and
include amounts based on estimates and judgments of management.
The Company maintains a system of internal controls to provide reasonable
assurance that the books and records reflect the authorized transactions of the
Company. There are limits inherent in all systems of internal control because
their cost should not exceed the benefits derived. The Company believes its
system of internal controls and internal audit functions balance the
cost/benefit relationship.
The Audit & Ethics Committee of the Board of Directors, composed solely of
outside directors, annually recommends to the Board of Directors the appointment
of the independent auditors that are engaged to audit the financial statements
of the Company and to express an opinion thereon. The Audit & Ethics Committee
meets periodically with the independent auditors to review financial reports,
accounting and auditing practices and controls.
K. BRUCE LAURITSEN
PRESIDENT
CHIEF EXECUTIVE OFFICER
RONALD J. KLOSTERMAN
VICE PRESIDENT, FINANCE
CHIEF FINANCIAL OFFICER
SECRETARY
7
[LOGO] FLEXSTEEL INDUSTRIES, INC.
--------------------------
BALANCE SHEETS
JUNE 30,
---------------------------
1998 1997
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................ $ 5,464,261 $ 4,445,327
Investments .............................................. 9,877,784 5,041,154
Trade receivables - less allowance for doubtful
accounts: 1998, $2,198,000; 1997, $2,799,000 ........... 28,722,752 25,348,941
Inventories .............................................. 26,607,296 26,985,554
Deferred income taxes .................................... 2,785,000 2,620,000
Other .................................................... 632,730 806,117
------------ ------------
Total current assets ................................. 74,089,823 65,247,093
PROPERTY, PLANT AND EQUIPMENT, net ......................... 23,095,589 26,214,405
OTHER ASSETS ............................................... 7,487,729 7,711,179
------------ ------------
TOTAL .......................................... $104,673,141 $ 99,172,677
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade ................................. $ 5,792,708 $ 3,845,362
Accrued liabilities:
Payroll and related items .............................. 5,448,032 4,440,219
Insurance .............................................. 5,834,895 6,057,093
Other accruals ......................................... 4,515,177 4,237,556
Industrial revenue bonds payable ......................... 1,950,000 2,310,000
------------ ------------
Total current liabilities .......................... 23,540,812 20,890,230
DEFERRED COMPENSATION ...................................... 3,052,525 3,044,418
------------ ------------
Total liabilities .................................... 26,593,337 23,934,648
------------ ------------
SHAREHOLDERS' EQUITY:
Common stock - $1 par value; authorized 15,000,000 shares;
issued 1998, 6,794,730 shares; 1997, 6,927,310 shares .. 6,794,730 6,927,310
Retained earnings ........................................ 70,450,282 67,750,719
Unrealized investment gain ............................... 834,792 560,000
------------ ------------
Total shareholders' equity ................... 78,079,804 75,238,029
------------ ------------
TOTAL ........................... $104,673,141 $ 99,172,677
============ ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
8
[LOGO] FLEXSTEEL INDUSTRIES, INC.
--------------------------
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30,
-----------------------------------------------
1998 1997 1996
------------- ------------- -------------
NET SALES ............................................. $ 236,125,280 $ 219,426,736 $ 205,008,245
COST OF GOODS SOLD .................................... 185,345,398 173,088,406 161,450,649
------------- ------------- -------------
GROSS MARGIN .......................................... 50,779,882 46,338,330 43,557,596
SELLING, GENERAL AND ADMINISTRATIVE ................... 40,911,581 38,450,275 37,279,056
------------- ------------- -------------
OPERATING INCOME ...................................... 9,868,301 7,888,055 6,278,540
------------- ------------- -------------
OTHER:
Interest and other income ........................... 2,014,982 1,930,527 1,131,952
Interest and other expense .......................... (356,066) (345,148) (358,322)
------------- ------------- -------------
Total ............................................. 1,658,916 1,585,379 773,630
------------- ------------- -------------
INCOME BEFORE INCOME TAXES ............................ 11,527,217 9,473,434 7,052,170
PROVISION FOR INCOME TAXES ............................ 3,925,000 3,425,000 2,550,000
------------- ------------- -------------
NET INCOME ............................................ $ 7,602,217 $ 6,048,434 $ 4,502,170
============= ============= =============
AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING:
BASIC ............................................. 6,959,310 7,024,021 7,172,299
============= ============= =============
DILUTED ........................................... 7,035,158 7,071,895 7,188,075
============= ============= =============
EARNINGS PER SHARE OF COMMON STOCK:
BASIC ............................................. $ 1.09 $ 0.86 $ 0.63
============= ============= =============
DILUTED ........................................... $ 1.08 $ 0.86 $ 0.63
============= ============= =============
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED JUNE 30,
-----------------------------------------------
1998 1997 1996
------------- ------------- -------------
NET INCOME ............................................ $ 7,602,217 $ 6,048,434 $ 4,502,170
------------- ------------- -------------
OTHER COMPREHENSIVE INCOME BEFORE TAX:
Unrealized gains on securities arising during period 736,051 643,123 339,906
Less: reclassification adjustment for gains included
in net income ...................................... (313,294) (121,123) (53,906)
------------- ------------- -------------
Other comprehensive income, before tax ................ 422,757 522,000 286,000
------------- ------------- -------------
INCOME TAX (EXPENSE) BENEFIT:
Income tax expense related to securities gains
arising during period ............................... (257,618) (235,811) (119,561)
Income tax benefit related to securities
reclassification adjustment ......................... 109,653 44,411 18,961
------------- ------------- -------------
Income tax expense related to other
comprehensive income ................................ (147,965) (191,400) (100,600)
------------- ------------- -------------
OTHER COMPREHENSIVE INCOME, NET OF TAX ................ 274,792 330,600 185,400
------------- ------------- -------------
COMPREHENSIVE INCOME .................................. $ 7,877,009 $ 6,379,034 $ 4,687,570
============= ============= =============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
9
[LOGO] FLEXSTEEL INDUSTRIES, INC.
--------------------------
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
COMMON STOCK ADDITIONAL UNREALIZED
------------------------- PAID-IN RETAINED INVESTMENT
SHARES PAR VALUE CAPITAL EARNINGS GAIN (LOSS) TOTAL
--------- ------------ ------------ ------------ ------------ ------------
Balance at June 30, 1995 7,193,124 $ 7,193,124 $ 1,386,754 $ 65,199,703 $ 44,000 $ 73,823,581
Purchase of
Company Stock ....... (132,453) (132,453) (1,178,986) (1,311,439)
Issuance of
Company Stock ....... 34,373 34,373 348,864 383,237
Investment Valuation
Adjustment .......... 185,400 185,400
Cash Dividends ......... (3,435,548) (3,435,548)
Net Income ............. 4,502,170 4,502,170
--------- ------------ ------------ ------------ ------------ ------------
Balance at June 30, 1996 7,095,044 7,095,044 556,632 66,266,325 229,400 74,147,401
Purchase of
Company Stock ....... (186,345) (186,345) (722,573) (1,212,626) (2,121,544)
Issuance of
Company Stock ....... 18,611 18,611 165,941 184,552
Investment Valuation
Adjustment .......... 330,600 330,600
Cash Dividends ......... (3,351,414) (3,351,414)
Net Income ............. 6,048,434 6,048,434
--------- ------------ ------------ ------------ ------------ ------------
Balance at June 30, 1997 6,927,310 6,927,310 0 67,750,719 560,000 75,238,029
Purchase of
Company Stock ....... (176,489) (176,489) (470,508) (1,581,978) (2,228,975)
Issuance of
Company Stock ....... 43,909 43,909 470,508 514,417
Investment Valuation
Adjustment .......... 274,792 274,792
Cash Dividends ......... (3,320,676) (3,320,676)
Net Income ............. 7,602,217 7,602,217
--------- ------------ ------------ ------------ ------------ ------------
Balance at June 30, 1998 6,794,730 $ 6,794,730 $ 0 $ 70,450,282 $ 834,792 $ 78,079,804
========= ============ ============ ============ ============ ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
10
[LOGO] FLEXSTEEL INDUSTRIES, INC.
--------------------------
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
OPERATING ACTIVITIES:
Net income ..................................... $ 7,602,217 $ 6,048,434 $ 4,502,170
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation ................................ 5,400,025 5,129,246 4,619,511
(Gain) Loss on disposition of capital assets 7,106 (646,050) (83,878)
Trade receivables ........................... (3,373,811) 688,561 (1,559,124)
Inventories ................................. 378,258 637,112 (161,183)
Other current assets ........................ 173,387 256,487 112,503
Other assets ................................ 223,450 (980,666) (544,369)
Accounts payable - trade .................... 1,947,346 271,130 (1,182,759)
Accrued liabilities ......................... 1,082,712 2,244,775 809,535
Deferred compensation ....................... 8,107 74,571 29,518
Deferred income taxes ....................... (165,000) (610,000) (10,000)
------------ ------------ ------------
Net cash provided by
operating activities ........................ 13,283,797 13,113,600 6,531,924
------------ ------------ ------------
INVESTING ACTIVITIES:
Payment for purchase of business assets ..... (6,933,951)
Purchases of investments .................... (7,231,401) (1,517,439) (4,178,560)
Proceeds from sales of investments .......... 2,669,563 5,747,488 3,691,972
Proceeds from sales of capital assets ....... 104,050 1,112,201 91,818
Capital expenditures ........................ (2,392,365) (5,273,317) (3,297,623)
------------ ------------ ------------
Net cash used in investing activities .......... (6,850,153) (6,865,018) (3,692,393)
------------ ------------ ------------
FINANCING ACTIVITIES:
Repayment of borrowings ..................... (360,000) (360,000) (360,000)
Payment of dividends ($0.48 per share) ...... (3,340,152) (3,374,005) (3,452,124)
Proceeds from issuance of common stock ...... 514,417 184,552 383,237
Repurchase of common stock .................. (2,228,975) (2,121,544) (1,311,439)
------------ ------------ ------------
Net cash used in financing activities .......... (5,414,710) (5,670,997) (4,740,326)
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents 1,018,934 577,585 (1,900,795)
Cash and cash equivalents at beginning of year . 4,445,327 3,867,742 5,768,537
------------ ------------ ------------
Cash and cash equivalents at end of year ....... $ 5,464,261 $ 4,445,327 $ 3,867,742
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for
Interest .................................. $ 90,000 $ 103,000 $ 123,000
Income taxes .............................. $ 4,405,000 $ 3,640,000 $ 1,927,000
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
11
[LOGO] FLEXSTEEL INDUSTRIES, INC.
--------------------------
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS - Flexsteel Industries, Inc. (the Company)
manufactures a broad line of quality upholstered furniture for residential,
recreational vehicle and commercial seating use. Products include sofas,
love seats, chairs, reclining and rocker-reclining chairs, swivel rockers,
sofa beds, and convertible bedding units. The Company's products are sold
primarily throughout the United States and Canada, by the Company's internal
sales force and various independent representatives.
USE OF ESTIMATES - the preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
FAIR VALUE - the Company's cash, accounts receivable, accounts payable,
accrued liabilities and other liabilities are carried at amounts which
reasonably approximate their fair value due to their short-term nature. Fair
values of investments in debt and equity securities are disclosed in Note 2.
CASH EQUIVALENTS - the Company considers highly liquid investments with
original maturities of less than three months as the equivalent of cash.
INVENTORIES - are stated at the lower of cost or market. Raw steel, lumber
and wood frame parts are valued on the last-in, first-out (LIFO) method.
Other inventories are valued on the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT - is stated at cost and depreciated using the
straight-line method.
REVENUE RECOGNITION - is upon delivery of product.
INSURANCE - the Company is self-insured for health care and most worker's
compensation up to predetermined amounts above which third party insurance
applies. The Company is contingently liable to insurance carriers under its
comprehensive general, product, and vehicle liability policies, as well as
some worker's compensation, and has provided a letter of credit in the
amount of $1,491,000. Losses are accrued based upon the Company's estimates
of the aggregate liability for claims incurred using certain actuarial
assumptions followed in the insurance industry and based on Company
experience.
INCOME TAXES - deferred income taxes result from temporary differences
between the tax basis of an asset or liability and its reported amount in
the financial statements.
COMPREHENSIVE INCOME - in June 1997, the Financial Accounting Standards
Board issued Statement No. 130, REPORTING COMPREHENSIVE INCOME (SFAS 130).
SFAS 130 requires the disclosure of comprehensive income and its components
in the general-purpose financial statements. During 1998, the Company
adopted this standard, which is reflected in the accompanying Statements of
Comprehensive Income.
SEGMENT AND RELATED INFORMATION - in June 1997, the Financial Accounting
Standards Board issued Statement No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION (SFAS 131). SFAS 131 redefines how
operating segments are determined and requires disclosures of certain
financial and descriptive information about a company's operating segments.
During 1998, the Company adopted this standard. Under the "management
approach" methodology prescribed by SFAS 131, the Company operates in one
segment, seating products.
ACQUISITION - on March 18, 1997 the Company announced the acquisition of
certain assets of Dygert Seating, Inc. and the related production facilities
in Elkhart, Indiana for $6,933,951. The purchase included accounts
receivable of approximately $1,573,000, inventory of approximately
$1,540,000, and fixed and other current assets of approximately $3,821,000.
RECLASSIFICATIONS - certain prior years' amounts have been reclassified to
conform to the 1998 presentation. These reclassifications had no impact on
net income or shareholders' equity as previously reported.
2. INVESTMENTS
Debt and equity securities are included in Investments and in Other Assets,
at fair value based on quoted market prices, and are classified as available
for sale. The amortized cost and estimated market values of investments are
as follows:
June 30, 1998 June 30, 1997
--------------------------- -------------------------
Debt Equity Debt Equity
Securities Securities Securities Securities
--------------------------- -------------------------
Amortized Cost $ 10,780,529 $ 2,202,952 $ 5,505,167 $ 2,315,994
Unrealized gains
(losses) 44,668 1,277,629 (27,689) 904,344
------------ ----------- ----------- -----------
Est. Market Value $ 10,825,197 $ 3,480,581 $ 5,477,478 $ 3,220,338
============ =========== =========== ===========
As of June 30, 1998, the maturities of debt securities are $5,040,045 within
one year, $4,134,757 in one to five years, and $1,650,395 over five years.
3. INVENTORIES
Inventories valued on the LIFO method would have been approximately
$2,331,000 and $2,001,000 higher at June 30, 1998 and 1997, respectively, if
they had been valued on the FIFO method. A comparison of inventories is as
follows:
June 30,
----------------------------
1998 1997
------------ ------------
Raw materials ....................... $ 13,538,911 $ 13,529,232
Work in process and finished parts .. 7,227,558 7,689,051
Finished goods ...................... 5,840,827 5,767,271
------------ ------------
Total ............................ $ 26,607,296 $ 26,985,554
============ ============
12
4. PROPERTY, PLANT AND EQUIPMENT
June 30,
Estimated ---------------------------
Life (Years) 1998 1997
----------- ------------ ------------
Land .......................... $ 1,642,422 $ 1,642,422
Buildings and
improvements ............... 3 - 39 24,929,545 24,485,437
Machinery and
equipment .................. 3 - 10 28,655,104 28,024,677
Delivery equipment ............ 2 - 9 13,894,648 13,818,489
Furniture and fixtures ........ 3 - 5 5,307,217 5,205,537
------------ ------------
Total ...................... 74,428,936 73,176,562
Less accumulated
depreciation ............... 51,333,347 46,962,157
------------ ------------
Net ........................ $ 23,095,589 $ 26,214,405
============ ============
5. BORROWINGS
The Company is obligated for $1,950,000 for Industrial Revenue Bonds at June
30, 1998 which were issued for the financing of property, plant and
equipment. The obligations are variable rate demand bonds with a weighted
average rate for years ended June 30, 1998, 1997 and 1996 of 4.06%, 3.94%
and 4.13%, respectively, and are due in annual installments of $325,000
through 2004, if not paid earlier upon demand of the holder. The Company has
issued a letter of credit to guarantee the payment of these bonds in the
event of default. No amounts were outstanding on this letter at June 30,
1998.
6. INCOME TAXES
The total income tax provision for the years ended June 30, 1998, 1997, and
1996 was 34.0%, 36.2% and 36.2% respectively, of income before income taxes.
In 1998 the effective rate was reduced by 2.2% for nontaxable life insurance
proceeds of $720,000.
PROVISION - COMPRISED OF THE FOLLOWING:
1998 1997 1996
---------- ---------- ----------
Federal - current ....... $3,580,000 $3,528,000 $2,240,000
State - current ......... 510,000 507,000 320,000
Deferred ................ (165,000) (610,000) (10,000)
---------- ---------- ----------
Total ................ $3,925,000 $3,425,000 $2,550,000
========== ========== ==========
DEFERRED INCOME TAXES - COMPRISED OF THE FOLLOWING:
June 30, 1998 June 30, 1997
Asset (Liability) Asset (Liability)
----------------- -----------------
Asset allowances ...................... $ 805,000 $ 1,025,000
Deferred compensation ................. 1,130,000 1,126,000
Other accruals and allowances ......... 1,940,000 1,756,000
Excess of tax over book depreciation .. (1,090,000) (1,287,000)
----------- -----------
Total .............................. $ 2,785,000 $ 2,620,000
=========== ===========
7. CREDIT ARRANGEMENTS
The Company has lines of credit of $5,700,000 with banks for short-term
borrowings at the prime rate in effect at the date of the loan. On
$1,000,000 of such line, the Company is required to maintain compensating
bank balances equal to 5% of the line of credit plus 5% of any amounts
borrowed. There were no short-term bank borrowings during 1998 or 1997.
8. SHAREHOLDERS' EQUITY
The Company has authorized 60,000 shares of cumulative, $50 par value
preferred stock and 700,000 shares of undesignated, $1 par value
(subordinated) stock, none of which is outstanding.
9. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
EARNINGS PER SHARE (SFAS 128). SFAS 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of stock options. All earnings per share amounts for
all periods have been presented and, where appropriate, restated to conform
to the SFAS 128 requirements.
1998 1997 1996
---------- ---------- ----------
Basic Earnings Per Share:
Income available to common
shareowners $7,602,217 $6,048,434 $4,502,170
Weighted average shares
outstanding 6,959,310 7,024,021 7,172,299
---------- ---------- ----------
Earnings Per Share - Basic $ 1.09 $ 0.86 $ 0.63
========== ========== ==========
Diluted Earnings Per Share:
Income available to common
shareowners $7,602,217 $6,048,434 $4,502,170
---------- ---------- ----------
Weighted average shares
outstanding 6,959,310 7,024,021 7,172,299
Dilutive shares issuable in con-
nection with stock option plans 418,145 339,820 245,920
Less shares purchasable with proceeds (342,297) (291,946) 230,144)
---------- ---------- ----------
Total Shares 7,035,158 7,071,895 7,188,075
---------- ---------- ----------
Earnings Per Share - Diluted $ 1.08 $ 0.86 $ 0.63
========== ========== ==========
Options to purchase 82,360 shares of common stock at a range of $14.875 to
$15.75 were outstanding during 1998 but were not included in the computation
of the diluted earnings per share because the options' exercise price was
greater than the average market price of the common shares.
10. STOCK OPTIONS
The Company has stock option plans for key employees and directors that
provide for the granting of incentive and nonqualified stock options. Under
the plans, options are granted at an exercise price equal to the fair market
value of the underlying common stock at the date of grant, and may be
exercisable for up to 10 years. All options are exercisable when granted. At
June 30, 1998, 241,065 shares were available for future grants. The Company
applies APB Opinion 25 and related interpretations in accounting for its
stock option plans, as permitted under Financial Accounting Standards Board
Statement No. 123 ACCOUNTING FOR STOCK-BASED COMPENSATION (SFAS 123).
Accordingly, no compensation cost has been recognized for its stock option
plans. Had the compensation cost for the Company's incentive stock option
plans been determined based on the fair value at the grant dates for awards
under those plans consistent with the methodology of SFAS 123, the Company's
net income and earnings per share would have been reduced to the pro forma
amounts indicated on next page:
13
1998 1997 1996
----------- ----------- -----------
Net Income As reported $ 7,602,217 $ 6,048,434 $ 4,502,170
Pro forma 7,462,506 5,907,480 4,365,091
Earnings per share:
Basic As reported 1.09 0.86 0.63
Pro forma 1.07 0.84 0.61
Diluted As reported 1.08 0.86 0.63
Pro forma 1.06 0.84 0.61
The fair value of each option grant is estimated on the date of grant using
the Black-Sholes option-pricing model with the following weighted average
assumptions used for grants in 1998, 1997 and 1996, respectively: dividend
yield of 4.2%, 4.6% and 4.4%; expected volatility of 26.3%, 27.3% and 28.2%;
interest rates of 6.8%, 6.9% and 6.8%; and an expected life of 10 years on
all options.
A summary of the status of the Company's stock option plans as of June 30,
1998, 1997 and 1996 and the changes during the years ending on those dates
is presented below:
Shares Price Range
------- ---------------
June 30, 1995 Outstanding ..... 276,670 $10.50 - 15.75
Granted ....................... 91,950 11.25
Cancelled ..................... (26,140) 10.50 - 14.875
-------
June 30, 1996 Outstanding ..... 342,480 10.50 - 15.75
Granted ....................... 103,400 10.25 - 12.75
Exercised ..................... (6,800) 10.25 - 10.50
Cancelled ..................... (6,400) 10.50 - 14.875
-------
June 30, 1997 Outstanding ..... 432,680 10.25 - 15.75
Granted ....................... 88,775 11.44 - 12.66
Exercised ..................... (10,250) 10.25 - 12.75
Cancelled ..................... (10,700) 10.25 - 15.75
-------
June 30, 1998 Outstanding ..... 500,505 $10.25 - 15.75
=======
Significant option groups outstanding at June 30, 1998 and related
weighted-average exercise price and remaining life information follows:
Weighted-Average
----------------------
Grant Options Exercise Remaining
Date Outstanding Price Life (Years)
----------------- ----------- -------- ------------
December 12, 1991 61,210 10.500 1.4
July 6, 1993 74,360 14.875 2.9
July 28, 1994 75,560 10.500 6.0
August 16, 1995 81,950 11.250 7.1
July 30, 1996 90,050 10.250 8.1
November 7, 1997 83,375 11.438 9.3
All other 34,000 13.008 6.8
-------
Total 500,505
=======
11. PENSION AND RETIREMENT PLANS
The Company sponsors various defined contribution pension and retirement
plans which cover substantially all employees, other than employees covered
by multiemployer pension plans under collective bargaining agreements. It is
the Company's policy to fund all pension costs accrued. Total pension and
retirement plan expense was $1,373,000 in 1998, $1,352,000 in 1997 and
$1,326,000 in 1996 including $311,000 in 1998, $300,000 in 1997 and $287,000
in 1996 for the Company's matching contribution to retirement savings
plans. The Company's cost for pension plans is determined as 2% - 4% of each
covered employee's wages.
The Company's matching contribution for the retirement savings plans is 25%
- 50% of employee contributions (up to 4% of their earnings). In addition to
the above, amounts charged to pension expense and contributed to
multi-employer defined benefit pension plans administered by others under
collective bargaining agreements were $1,184,000 in 1998, $1,102,000 in 1997
and $1,135,000 in 1996.
12. MANAGEMENT INCENTIVE PLAN
The Company has an incentive plan that provides for shares of common stock
to be awarded to key employees based on a targeted rate of earnings to
common equity as established by the Board of Directors. Shares awarded to
employees are subject to the restriction of continued employment with
33 1/3% of the stock received by the employee on the award date and the
remaining shares issued after one and two years. Under the plan 35,459 and
31,053 shares were awarded, and the amounts charged to income were $406,000
and $365,000 in 1998 and 1997 respectively. No shares were awarded in 1996.
At June 30, 1998, 312,798 shares were available for future grants.
13. SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION
(UNAUDITED - in thousands of dollars, except per share amounts)
Quarters
--------------------------------------
1st 2nd 3rd 4th
------- ------- ------- -------
1998:
Net Sales ............ $55,159 $56,260 $62,090 $62,616
Gross Profit ......... 11,292 11,947 13,773 13,768
Net Income ........... 1,030 2,100(1) 2,106 2,366
Earnings Per Share:
Basic ............... 0.15 0.30 0.30 0.34
Diluted ............. 0.15 0.30 0.30 0.33
Dividends Per Share .. 0.12 0.12 0.12 0.12
* Market Price
High ................ 12 7/8 14 1/8 14 5/8 15
Low ................. 11 5/8 11 1/4 12 12
(1) Includes a non-taxable gain from life insurance proceeds of approximately
$720,000.
Quarters
--------------------------------------
1st 2nd 3rd 4th
------- ------- ------- -------
1997:
Net Sales ............ $52,019 $50,552 $56,803 $60,053
Gross Profit ......... 11,374 10,775 11,802 12,387
Net Income ........... 1,462 1,203 1,686(1) 1,697
Earnings Per Share:
Basic ............... 0.21 0.17 0.24 0.24
Diluted ............. 0.21 0.17 0.24 0.24
Dividends Per Share 0.12 0.12 0.12 0.12
* Market Price
High................. 12 13 3/4 13 5/8 12 1/2
Low.................. 10 1/4 11 1/2 10 3/4 10 1/2
(1) Includes a gain on the sale of the Sweetwater, Tennessee facility of
approximately $350,000.
* Reflects the market price as quoted by the National Association of Securities
Dealers, Inc.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
GENERAL
The following analysis of the results of operations and financial condition
of Flexsteel Industries, Inc. (the Company) should be read in conjunction with
the financial statements and related notes included elsewhere in this document.
RESULTS OF OPERATIONS
The following table has been prepared as an aid in understanding the
Company's results of operations on a comparative basis for the years ended June
30, 1998, 1997 and 1996. Amounts presented are percentages of the Company's net
sales.
For the Years Ended June 30,
----------------------------
1998 1997 1996
----- ----- -----
Net Sales 100.0% 100.0% 100.0%
Cost of goods sold 78.5 78.9 78.8
----- ----- -----
Gross margin 21.5 21.1 21.2
Selling, general &
administrative expense 17.3 17.5 18.2
----- ----- -----
Operating income 4.2 3.6 3.0
Other income, net .7 .7 .4
----- ----- -----
Income before income taxes 4.9 4.3 3.4
Income tax expense 1.7 1.5 1.2
----- ----- -----
Net income 3.2% 2.8% 2.2%
===== ===== =====
FISCAL 1998 COMPARED TO FISCAL 1997
Net sales for 1998 increased by $16,699,000 or 8% compared to 1997.
Residential sales volume increased $5,647,000 or 4%. Recreational vehicle
seating sales increased $9,293,000 or 14%. Approximately $7,026,000 of this
increase relates to the acquisition of certain assets of Dygert Seating, Inc. in
March 1997. Commercial volume increased $1,759,000 or 8%.
Gross margin increased $4,442,000 to $50,780,000 or 21.5% of sales, in 1998,
from $46,338,000 or 21.1% in 1997. The gross margin increase was due to improved
utilization of available production capacity and changes in product mix.
Selling, general and administrative expenses as a percentage of sales were
17.3% and 17.5% for 1998 and 1997, respectively. The cost percentage decrease
was due to management's control of fixed costs.
Net other income was $1,659,000 in 1998 and $1,585,000 for 1997. Each year
contains amounts which are non-recurring in nature. During the second quarter of
1998 the Company realized a non-taxable gain on the proceeds of life insurance
of $720,000. In fiscal year 1997, the Company sold its production facility in
Sweetwater, Tennessee which resulted in a gain of $550,000 before income taxes.
The effective tax rate in 1998 was 34.0% compared to 36.2% in 1997. The
lower effective income tax rate is attributable to the non-taxable gain on the
proceeds of life insurance.
The above factors resulted in 1998 fiscal year earnings of $7,602,000 or
$1.09 per share (basic) compared to $6,048,000 or $0.86 per share (basic) in
fiscal 1997, a net increase of $1,554,000 or $0.23 per share.
FISCAL 1997 COMPARED TO FISCAL 1996
Net sales for 1997 increased by $14,418,000 or 7% compared to 1996.
Residential sales volume increased $4,960,000 or 4%. Recreational vehicle
seating sales increased $6,481,000 or 11%. Approximately $6,200,000 of this
increase related to the acquisition of Dygert Seating, Inc. Commercial volume
increased by $2,977,000 or 16%.
Cost of goods sold for fiscal 1997 increased by $11,638,000 as compared to
1996 due to the volume increase. Gross margin was 21.1% and 21.2% in 1997 and
1996, respectively.
Selling, general and administrative expenses increased by $1,171,000 due
primarily to the Dygert acquisition and volume related increases in variable
expenses. Selling, general and administrative expenses, as a percentage of
sales, decreased from 18.2% in fiscal 1996 to 17.5% in fiscal 1997. This
percentage decrease reflects the Company's ability to control fixed costs in
relation to the increased volume.
Interest and other income increased by $799,000 during 1997, primarily due
to a gain of approximately $550,000 on the sale of the Sweetwater, Tennessee
facility.
The above factors resulted in 1997 fiscal year earnings of $6,048,000 or
$0.86 per share (basic) compared to $4,502,000 or $0.63 per share (basic) in
fiscal 1996, a net increase of $l,546,000 or $0.23 per share.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at June 30, 1998 is $50,549,000 which includes cash, cash
equivalents and investments of $15,342,000. Working capital increased by
$6,192,000 from the June 30, 1997 amount.
Net cash provided by operating activities was $13,284,000, $13,114,000 and
$6,532,000 in 1998, 1997 and 1996, respectively. Fluctuations in net cash
provided by operating activities are primarily the result of changes in net
income and changes in working capital accounts.
Capital expenditures were $2,392,000, $5,273,000 and $3,298,000 for 1998,
1997 and 1996, respectively. These expenditures were for manufacturing and
delivery equipment. In addition, during fiscal 1997, $6,934,000 was used to
purchase assets of Dygert Seating, Inc. Projected capital spending for fiscal
1999 is $7,500,000, with approximately $2,000,000 for expansion of our Dublin,
Georgia facility. The remainder of the projected capital expenditures will be
manufacturing and delivery equipment. The funds for projected capital
expenditures are expected to be provided by cash generated from operations and
available cash.
Financing activities utilized net cash of $5,415,000, $5,671,000 and
$4,740,000 in 1998, 1997 and 1996, respectively. During 1996, the Company's
Board of Directors approved the repurchase of up to 500,000 shares of the
Company's common stock. Under that authority the Company repurchased 176,489,
186,345 and 132,453 shares of its outstanding common stock during 1998, 1997 and
1996, respectively. The Board of Directors may consider the purchase of
additional shares of the Company's common stock from time to time based on
market valuation of the stock. It is anticipated that such a buy back would be
funded by cash generated by operations and available cash. Dividend payments
were $0.48 per share in each year.
15
The Board of Directors determines dividend levels based on the Company's ability
to pay its obligation, capital expenditure requirements and other related
factors. The Company has paid dividends on its common stock for 226 consecutive
quarters and expects to continue regular dividend payments. As of June 30, 1998
there were approximately 2,300 shareholders of the Company's outstanding common
stock.
FINANCING ARRANGEMENTS
The Company has lines of credit of $5,700,000 with banks for short-term
borrowings, which have not been utilized since 1979. The Company has outstanding
borrowings of $1,950,000 in the form of variable rate demand industrial
development revenue bonds. During fiscal 1998, the weighted average interest
rate on the industrial development revenue bonds was 4.06%.
OTHER
Year 2000 Issue - The Company has been modifying its computer information
systems to ensure the proper processing of transactions relating to the year
2000 and beyond. The Company has also reviewed its computer-dependent
manufacturing activities and necessary hardware and software changes are being
made. The Company expects its year 2000 conversion projects to be completed by
June 30, 1999. The conversion costs are not expected to be material to the
financial statements and will be accomplished using existing employees. The
Company is communicating with major suppliers to emphasize that operations must
continue without interruption through January 1, 2000. However, there can be no
assurances that systems of other companies, on which the Company's systems rely,
will be converted in a timely manner or that any failure to convert by another
company would not have an adverse effect on the Company's system.
ACCOUNTING PRONOUNCEMENTS
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, EMPLOYERS' DISCLOSURES ABOUT PENSIONS
AND OTHER POSTRETIREMENT BENEFITS, which requires additional reporting
disclosures related to employer pension plans. The provisions of this statement
will be effective for the Company beginning July 1, 1998, and are not expected
to have a material effect on its results of operations or financial position.
FORWARD-LOOKING STATEMENTS
Cautionary Statement Relevant to Forward-Looking Information for the Purpose
of "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of
1995 - The Company and its representatives may from time to time make written or
oral forward-looking statements with respect to long-term goals of the Company,
including statements contained in the Company's filings with the Securities and
Exchange Commission and in its reports to stockholders.
Statements, including those in this report, which are not historical or
current facts are "forward-looking statements" made pursuant to the safe harbor
provisions of the Private Securities, Litigation Reform Act of 1995. There are
certain important factors that could cause results to differ materially from
those anticipated by some of the statements made herein. Investors are cautioned
that all forward-looking statements involve risk and uncertainty. Some of the
factors that could affect results are the effectiveness of new product
introductions, the product mix of our sales, the cost of raw materials, the
amount of sales generated and the profit margins thereon or volatility in the
major markets, competition and general economic conditions.
The Company specifically declines to undertake any obligation to publicly
revise any forward-looking statements that have been made to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.
- --------------------------------------------------------------------------------
[PHOTO]
OUTSTANDING SOFA DESIGN FEATURES "SLEIGH-BED" ARMS; A SCROLLED-LEG COFFEE TABLE,
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16
PLANT LOCATIONS DIRECTORS AND OFFICERS NOMINATING & COMPENSATION COMMITTEE
*Flexsteel Industries, Inc. Jack B. Crahan L. Bruce Boylen, Chairman
DUBUQUE, IOWA 52001 CHAIRMAN OF THE BOARD OF DIRECTORS John R. Easter
(319) 556-7730 K. Bruce Lauritsen Thomas E. Holloran
P. M. Crahan, General Manager PRESIDENT
CHIEF EXECUTIVE OFFICER MARKETING COMMITTEE
Flexsteel Industries, Inc. DIRECTOR John R. Easter, Chairman
DUBLIN, GEORGIA 31040 Edward J. Monaghan L. Bruce Boylen
(912) 272-6911 EXECUTIVE VICE PRESIDENT Art D. Richardson
M. C. Dixon, General Manager CHIEF OPERATING OFFICER
DIRECTOR TRANSFER AGENT AND REGISTRAR
Flexsteel Industries, Inc. James R. Richardson Norwest Capital Resources
LANCASTER, PENNSYLVANIA 17604 SENIOR VICE PRESIDENT, MARKETING P. O. Box 738
(717) 392-4161 DIRECTOR South St. Paul,
T. P. Fecteau, General Manager Jeffrey T. Bertsch Minnesota 55075-0738
VICE PRESIDENT
Flexsteel Industries, Inc. DIRECTOR GENERAL COUNSEL
RIVERSIDE, CALIFORNIA 92504 L. Bruce Boylen Irving C. MacDonald
(909) 354-2440 RETIRED VICE PRESIDENT Minneapolis, Minnesota
T. D. Burkart, General Manager FLEETWOOD ENTERPRISES, INC. O'Connor and Thomas, P.C.
DIRECTOR Dubuque, Iowa
Flexsteel Industries, Inc. Patrick M. Crahan
NEW PARIS, INDIANA 46553 VICE PRESIDENT NATIONAL OVER THE COUNTER
(219) 831-4050 DIRECTOR NASDAQ Symbol - FLXS
G. H. Siemer, General Manager John R. Easter
RETIRED VICE PRESIDENT ANNUAL MEETING
Wood Products Division SEARS, ROEBUCK & COMPANY Tuesday,
HARRISON, ARKANSAS 72601 DIRECTOR December 15, 1998, 3:30 p.m.
(501) 743-1101 Thomas E. Holloran The Marquette
M. J. Feldman, General Manager PROFESSOR, GRADUATE SCHOOL OF 710 Marquette Avenue, 3rd floor
BUSINESS, UNIVERSITY OF ST. THOMAS Minneapolis, Minnesota 55402
Metal Division ST. PAUL, MINNESOTA
DUBUQUE, IOWA 52001 DIRECTOR AFFIRMATIVE ACTION POLICY
(319) 556-7730 Art D. Richardson It is the policy of Flexsteel
J. E. Gilbertson, General Manager RETIRED SENIOR VICE PRESIDENT Industries, Inc. that all employees
FLEXSTEEL INDUSTRIES, INC. and potential employees shall be
Commercial Seating Division DIRECTOR judged on the basis of
STARKVILLE, MISSISSIPPI 39760 Carolyn T. B. Bleile qualifications and ability, without
(601) 323-5481 VICE PRESIDENT regard to age, sex, race, creed,
S. P. Salmon, General Manager Thomas D. Burkart color or national origin in all
SENIOR VICE PRESIDENT, VEHICLE SEATING personnel actions. No employee or
Dygert Seating Division Kevin F. Crahan applicant for employment shall
ELKHART, INDIANA 46515 VICE PRESIDENT receive discriminatory treatment
(219) 262-4675 Keith R. Feuerhaken because of physical or mental
D. L. Dygert, General Manager VICE PRESIDENT disability in regard to any position
James E. Gilbertson for which the employee or applicant
Vancouver Distribution Center VICE PRESIDENT for employment is qualified.
VANCOUVER, WASHINGTON 98668 James M. Higgins Employment opportunities and job
(206) 696-9955 VICE PRESIDENT, COMMERCIAL SEATING advancement opportunities will be
R. Heying, Supervisor Ronald J. Klosterman provided for qualified disabled
VICE PRESIDENT, FINANCE veterans and veterans of the Vietnam
* EXECUTIVE OFFICES CHIEF FINANCIAL OFFICER era. This policy is consistent with
SECRETARY the Company's plan for 'Affirmative
Michael A. Santillo Action' in implementing the intent
PERMANENT SHOWROOMS VICE PRESIDENT and provisions of the various laws
Dubuque, Iowa relating to employment and
High Point, North Carolina EXECUTIVE COMMITTEE non-discrimination.
San Francisco, California Jack B. Crahan, Chairman
Jeffrey T. Bertsch ANNUAL REPORT ON FORM 10-K AVAILABLE
Patrick M. Crahan A copy of the Company's annual
- ------------------------- K. Bruce Lauritsen report on Form 10-K, as filed with
VISIT US ON THE INTERNET Edward J. Monaghan the Securities and Exchange
http://flexsteel.com James R. Richardson Commission, can be obtained without
- ------------------------- charge by writing to: Office of the
AUDIT & ETHICS COMMITTEE Secretary, Flexsteel Industries,
Thomas E. Holloran, Chairman Inc., P. O. Box 877, Dubuque, Iowa
John R. Easter 52004-0877.
Art D. Richardson
[LOGO] FLEXSTEEL(R)
AMERICA'S SEATING SPECIALISTS (C)1998 FLEXSTEEL INDUSTRIES, INC.
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[PHOTO]
Buyers have a wide choice of floor plans, interior color schemes, appliances,
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Standard are handsome leather-faced captain's chairs. Other furnishings include
sleepers and swivel or reclining chairs, many also with leather facings.
- --------------------------------------------------------------------------------
[LOGO] FLEXSTEEL(R)
AMERICA'S SEATING SPECIALISTS
- ------------------------------------
P.O. BOX 877 * DUBUQUE IA 52004-0877
EXHIBIT 23.1
INDEPENDENT AUDITOR'S REPORT
Flexsteel Industries, Inc.:
We have audited the financial statements of Flexsteel Industries, Inc.
(the Company) as of June 30, 1998 and 1997 and for each of the three years in
the period ended June 30, 1998, and have issued our report thereon dated August
6, 1998, such financial statements and report are included in your 1998 Annual
Report to Stockholders and are incorporated herein by reference. Our audits also
included the financial statement schedule of Flexsteel Industries, Inc., listed
in Item 14. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statement schedule based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic financial statement
taken as a whole, presents fairly in all material respects the information set
forth therein.
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
August 6, 1998
10
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
Flexsteel Industries, Inc.:
We consent to the incorporation by reference in Registration Statement
No. 33-1836 on Form S-8 as amended by Post-Effective Amendment No. 1 for the
Flexsteel Salaried Employees' Savings Plan 401(k) and in Registration Statement
No. 2-86782 on Form S-8 as amended by Post-Effective Amendment No. 3 for the
Flexsteel 1983 Stock Option Plan and in Registration Statement No. 33-26267 on
Form S-8 for the Flexsteel 1989 Stock Option Plan and in Registration Statement
No. 333-1413 on Form S-8 for the Flexsteel 1995 Stock Option Plan of our reports
dated August 6, 1998 appearing in and incorporated by reference in the Annual
Report on Form 10-K of Flexsteel Industries, Inc. for the year ended June 30,
1998.
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
September 25, 1998
11
5
12-MOS
JUN-30-1998
JUN-30-1998
5,464,261
9,877,784
30,920,752
2,198,000
26,607,296
74,089,823
74,428,936
51,333,347
104,673,141
23,540,812
0
0
0
6,794,730
71,285,074
104,673,141
236,125,280
238,140,262
185,345,398
226,613,045
40,911,581
0
356,066
11,527,217
3,925,000
7,602,217
0
0
0
7,602,217
1.09
1.08
5
12-MOS 12-MOS 3-MOS 3-MOS 3-MOS
JUN-30-1996 JUN-30-1997 JUN-30-1997 JUN-30-1997 JUN-30-1997
JUN-30-1996 JUN-30-1997 SEP-30-1996 DEC-31-1996 MAR-31-1997
3,867,742 4,445,327 3,751,064 4,128,777 2,990,130
8,940,603 5,041,154 10,161,018 9,068,155 4,785,714
26,616,981 28,147,941 28,790,144 24,804,695 31,637,651
2,152,810 2,799,000 2,229,172 2,235,324 2,430,173
26,082,857 26,985,554 25,340,868 26,944,419 26,833,169
66,097,427 65,247,093 68,266,307 65,322,034 65,924,328
67,257,656 73,176,562 69,056,742 69,582,116 72,528,758
44,211,432 46,962,157 44,968,877 45,845,796 45,966,862
95,874,164 99,172,677 99,110,029 95,918,463 99,512,075
18,721,916 20,890,230 22,127,400 18,424,614 22,011,508
35,000 0 35,000 35,000 0
7,095,044 6,927,310 7,019,507 7,024,201 6,957,435
0 0 0 0 0
0 0 0 0 0
67,052,357 68,310,719 66,953,875 67,456,901 67,527,885
95,874,164 99,172,677 99,110,029 95,918,463 99,512,075
205,008,245 219,426,736 52,019,059 50,551,568 56,803,035
206,140,197 221,357,263 52,320,429 50,886,189 57,614,464
161,450,649 173,088,406 40,644,601 39,776,718 45,000,753
199,088,027 211,883,829 49,941,980 48,912,901 54,908,932
37,279,056 38,450,275 9,297,379 9,136,183 9,908,179
0 0 0 0 0
358,322 345,148 86,967 84,895 84,349
7,052,170 9,473,434 2,291,482 1,888,393 2,621,183
2,550,000 3,425,000 830,000 685,000 935,000
4,502,170 6,048,434 1,461,482 1,203,393 1,686,183
0 0 0 0 0
0 0 0 0 0
0 0 0 0 0
4,502,170 6,048,434 1,461,482 1,203,393 1,686,183
0.63 0.86 0.21 0.17 0.24
0.63 0.86 0.21 0.17 0.24
5
3-MOS 3-MOS 3-MOS
JUN-30-1998 JUN-30-1998 JUN-30-1998
SEP-30-1997 DEC-31-1997 MAR-31-1998
4,776,116 4,395,976 3,934,552
5,164,859 7,900,556 9,495,915
31,037,015 26,220,644 33,255,660
2,308,622 2,312,371 2,174,281
25,396,685 27,430,899 26,664,677
67,100,036 67,236,709 74,188,576
74,467,182 74,363,075 74,504,062
48,146,497 49,218,373 50,350,448
101,227,076 99,265,823 105,726,637
22,246,284 18,968,697 23,858,476
0 0 0
6,958,363 6,955,174 6,964,035
0 0 0
0 0 0
68,969,711 70,280,034 71,859,208
75,928,074 99,265,823 105,726,637
55,159,124 56,260,249 62,089,586
55,405,393 57,354,389 62,383,693
43,867,490 44,312,905 48,316,681
53,704,281 54,377,037 58,993,241
9,836,791 10,064,132 10,676,560
0 0 0
86,262 87,297 84,382
1,614,850 2,890,055 3,306,070
585,000 790,000 1,200,000
1,029,850 2,100,055 2,106,070
0 0 0
0 0 0
0 0 0
1,029,850 2,100,055 2,106,070
0.15 0.30 0.30
0.15 0.30 0.30
