FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998 Commission file no. 2-27393
NOLAND COMPANY
A Virginia Corporation IRS Identification #54-0320170
80 29th Street
Newport News, Virginia 23607
Telephone: (757) 928-9000
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock $10 Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 12, 1999, was approximately $35,741,000.
3,700,876 shares of the Registrant's Common Stock were outstanding at the
close of business on March 12, 1999.
DOCUMENTS (or portions thereof) INCORPORATED BY REFERENCE
Part of
Document Form 10-K
Portions of Annual Report to Stockholders for the Parts II and IV
year ended December 31, 1998
Portions of Noland Company Proxy Statement for Parts III and IV
April 21, 1999 Annual Meeting of Stockholders
This report contains 38 pages. The exhibit index is shown on page 11 of this
10-K.
1
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PART I
Item 1 Business
(1) (a) A Virginia corporation founded in 1915, Noland Company is
a distributor of Plumbing/Heating, Air Conditioning and
Electrical/Industrial supplies, with branch facilities in
fourteen states.
While most of its sales are wholesale, the Company plays
a modest retail role through product showrooms and other
marketing efforts of certain items. It handles products
of over 2,000 vendors and sells to thousands of customers,
largely in the industrial and construction sectors of the
Southern United States. There have been no significant
changes in the Company's methods of operation during the
last five years. However, the growing demand for
computer-based, fully automated procurement systems for
MRO (maintenance, repair and operating) products is
attracting new business and widening the scope and
possibilities for potential sales growth in this market.
Noland Company owns a fifty percent interest in joint
ventures in Spain and Panama. In addition, the Company
sells air conditioning equipment to customers in several
South American countries.
(b) The Company operates in only one industry segment, the
distribution of mechanical equipment and supplies.
Markets for these products include contractors, industrial
plants, utilities and others.
(c) During the last five years, the Company has continued to
serve essentially the same markets described in Item 1 (1)
(b). Current plans call for the continuation of this
policy. The Company does not manufacture any products.
(i) Total sales of each class of similar products for the last five
years are as follows:
1998 1997 1996 1995 1994
(In thousands)
Plumbing/Heating $252,835 $250,327 $241,235 $245,407 $241,273
Air Conditioning 114,043 112,013 115,963 110,920 90,574
Electrical/Industrial 98,601 102,625 108,507 113,185 108,355
$465,479 $464,965 $465,705 $469,512 $440,202
Not all branches have all three departments. If a product department does
not exist in a particular branch, any sales of that department's products
are attributed to the department that makes the sale.
(ii) The Company continues to market new products introduced by
its suppliers/manufacturers. None will require the
investment of a material amount of the assets of the
Company.
(iii) The Company does not use or market raw materials.
(iv) The Company holds several sales franchises and has
produced a variety of copyrighted materials and systems
used in the normal conduct of its business. It is virtually
impossible to dollar-quantify their significance. None are
reflected as assets in the Company's Balance Sheet. The
Company has no patents.
(v) The business in general is seasonal to the extent of the
construction industry it supplies.
(vi) It is the practice of the Company to carry a full line of
<PAGE>
inventory items for rapid delivery to customers. At times,
advance buying is necessary to ensure the availability of
products for sale. The Company also extends credit, and
this and the necessity for an adequate supply of merchandise
ordinarily absorbs most of the Company's working capital.
(vii) The dollar amount of the Company's backlog of orders
believed to be firm was approximately $39,210,142 at
December 31, 1998 and $35,572,435 at December 31, 1997.
(viii)The portion of the Company's business with the Government
and subject to renegotiation is not considered material.
(ix) The wholesale distribution of all products in which the
Company is engaged is highly competitive. Competition
results primarily from price, service and the availability
of goods. Industry statistics indicate that Noland Company
is one of the larger companies in its field.
(x) Company-sponsored research and development activities
expenditures in 1998, 1997 and 1996 were immaterial.
(xi) The Company believes it is in compliance with Federal, State
and local provisions which have been enacted or adopted
regulating the discharge of materials into the environment.
The effects of compliance are not material with respect to
capital expenditures, earnings and competitive position of
the Company. No material capital expenditures are
anticipated for environmental control facilities during the
remainder of the current year and the succeeding year.
(xii) As of December 31, 1998, the Company employed 1,554 persons.
(d)The Company operates principally in the Southern United
States.
Item 2 Properties
The main properties of the Company consist of 106 facilities, including
warehouses, offices, showrooms, paved outside storage areas and covered
pipe storage sheds. These are located in the following states: Alabama,
Arkansas, Florida, Georgia, Kentucky, Maryland, Mississippi, North
Carolina, Pennsylvania, South Carolina, Tennessee, Texas, Virginia and
West Virginia. Thirteen are held under leases and the remaining
ninety-three are owned by the Company. The executive office of the
Company is located at 80 29th Street, Newport News, Virginia 23607.
In the opinion of management, the aforementioned facilities are suitable
for the purposes for which they are used, are adequate for the needs of
the business and are in continuous use in the day-to-day course of
operations. The Company's policy is to maintain, repair and renovate
its properties on a continuing basis, replacing older structures with
new buildings and yard facilities as the need for such replacement
arises. In addition, reference is made to Note 2 (d), page 16 of the
Annual Report to Stockholders filed as an exhibit hereto, with respect
to property excess to current needs.
Item 3 Legal Proceeding
None of material consequence.
Item 4 Submission of Matters to a Vote of Security Holders
None
<PAGE>
Additional Item
Executive Officers of the Registrant
Positions and Offices Business Experience
Name Age Held with Registrant During the Past Five Years
Lloyd U. Noland, III 55 Chairman of the Board, Chief Executive Officer
President and Director. of the Registrant.
Officer since 1981
A. P. Henderson, Jr. 55 Vice President-Finance. Chief Financial Officer
Officer since 1983 of the Registrant.
Kenneth C. King 56 Vice President-Marketing Responsible for the
and Branch Operations. Registrant's Marketing.
Officer since 1998
John E. Gullett 57 Vice President-Corporate Responsible for the
Communications. Registrant's Corporate
Officer since 1982 Communications Department.
James E. Sykes, Jr. 55 Treasurer/Secretary. Responsible for
Officer since 1982 Registrant's treasury
functions and secretarial
duties.
All executive officers were elected for a term of one year beginning May 1,
1998 and/or until their successors are elected and qualified. None of the
executive officers are related by blood, marriage or adoption. Service has been
continuous since the date elected to their present positions. There are no
arrangements or understandings between any officer and any other person
pursuant to which he was elected an officer.
PART II
Item 5 Market for the Registrant's Common Equity and Related Stockholder
Matters
The information set forth on the inside back cover of the Annual
Report to Stockholders contains information concerning the market
price of Noland Company's common stock for the past two years, the
number of holders thereof and the dividend record with respect thereto
for the past two years. This information is incorporated herein by
reference.
Item 6 Selected Financial Data
The information set forth under the caption "Ten-Year Review of
Selected Financial Data" relating to sales, net income, total assets,
long-term debt, net income per share and dividends per share for the
years 1994 through 1998 is incorporated herein by reference from pages
20 and 21 of the enclosed Noland Company Annual Report to Stockholders
for the year ended December 31, 1998.
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information set forth under the above caption is incorporated
herein by reference from pages 10 and 11 of the enclosed Noland
Company Annual Report to Stockholders for the year ended
December 31, 1998.
Item 8 Financial Statements and Supplementary Data
The following consolidated financial statements of Noland Company,
included in the Annual Report to Stockholders for the year ended
December 31, 1998, are incorporated herein by reference:
<PAGE>
Annual
Report to
Stockholders
(page)
Report of Independent Accountants 12
Consolidated Statement of Income and Retained Earnings--
Years ended December 31, 1998, 1997 and 1996 13
Consolidated Balance Sheet--December 31, 1998, 1997 and 1996 14
Consolidated Statement of Cash Flows --
Years ended December 31, 1998, 1997 and 1996 15
Notes to Consolidated Financial Statements 16-19
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None
PART III
Item 10 Directors and Executive Officers of the Registrant
Data relating to Directors is incorporated herein by reference from
pages 2 and 3 of the 1999 Noland Company Proxy Statement for the
April 21, 1999, Annual Meeting of Stockholders.
Data relating to Executive Officers is included in Part I of this
report.
Item 11 Executive Compensation
The information set forth under the caption "Compensation of Executive
Officers" on page 4 of the 1999 Noland Company Proxy Statement for the
April 21, 1999, Annual Meeting of Stockholders is incorporated herein
by reference.
Item 12 Security Ownership of Certain Beneficial Owners and Management
The information set forth under the captions "Voting Securities and
Principal Holders Thereof" and "Nominees for Director" on pages 1, 2
and 3 of the 1999 Noland Company Proxy Statement for the
April 21, 1999, Annual Meeting of Stockholders is incorporated herein
by reference.
Item 13 Certain Relationships and Related Transactions
(a) The Company has a ten-year agreement to lease an existing office
building for its corporate headquarters. The building is owned by
Basic Construction Company. Basic Construction owns 893,967 shares
of Noland Company stock. The majority of Basic Construction
Company stock is owned by The L.U. Noland 1982 Trust whose
trustees are Mr. Lloyd U. Noland, Jr.'s wife, Jane K. Noland, and
his three children: Lloyd U. Noland III, Susan C. Noland and Anne
N. Edwards. Under the terms of the lease, the Company will pay an
annual rental fee of approximately $260,000 per year. The Company
will bear the direct costs of utilities and real estate taxes. The
terms of the lease were based on an evaluation by an independent
real estate firm.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
<PAGE>
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Consolidated Financial Statements
included in PART II, Item 8 of this report:
Report of Independent Accountants
Consolidated Statement of Income and Retained
Earnings--Years Ended December 31, 1998, 1997
and 1996
Consolidated Balance Sheet--December 31,
1998, 1997 and 1996
Consolidated Statement of Cash Flows
--Years ended December 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
With the exception of the aforementioned information incorporated by
reference and the information in the 1998 Annual Report to Stockholders
on the inside back cover and pages 10, 11, 20 and 21 incorporated in
response to Items 5, 6 and 7 in this Form 10-K Annual Report, the 1998
Annual Report to Stockholders is not to be deemed "filed" as part of this
report. The individual financial statements of the registrant have not
been filed because consolidated financial statements are filed. The
registrant is an operating company and the subsidiary is wholly owned.
2. Financial Statement Schedules
Included in PART IV of this report:
For the three years ended December 31, 1998
Form 10-K Page(s)
Schedule II Valuation and Qualifying
Accounts 8
Other financial statement schedules are omitted because of the absence of
conditions under which they are required or because the required
information is given in the consolidated financial statements or notes
thereto.
Report of Independent Accountants
on Consolidated Financial Statement schedules 10
3. The exhibits are listed in the Index of Exhibits required by
Item 601 of Regulation S-K at item (c) below.
(b) Reports on Form 8-K - None
(c) The Index of Exhibits and any required Exhibits are included
beginning at page 11 of this report.
(d) Not applicable.
<PAGE>
Item 14(a)(2)
Financial Statement Schedules
<PAGE>
<TABLE>
<CAPTION>
FORM 10-K
SCHEDULE II
Noland Company and Subsidiary
Valuation and Qualifying Accounts
Column A Column B Column C Column D Column E
Additions
Balance Charged to Charged to Balance
Beginning Costs and Other at End
Description of Year Expenses Accounts Deductions(2) of Year
<S> <C> <C> <C> <C> <C>
Valuation accounts
deducted from assets
to which they apply--
doubtful accounts
receivable
December 31, 1998 $1,008,132 $571,177(1) $ - $571,177 $1,008,132
December 31, 1997 $1,008,132 $745,062(1) $ - $745,062 $1,008,132
December 31, 1996 $1,008,132 $855,577(1) $ - $855,577 $1,008,132
</TABLE>
[FN]
(1) Net of recoveries on bad debts of $757,765 for 1998, $855,090 for 1997 and
$657,609 for 1996.
(2) Represents charges for which reserve was previously provided.
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NOLAND COMPANY
March 22, 1999 By Lloyd U. Noland, III
Chairman of the Board
and President
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.
Chairman of the Board,
Lloyd U. Noland, III President and Director March 22, 1999
Lloyd U. Noland, III
Vice President-Finance,
Chief Financial Officer
Arthur P. Henderson, Jr. and Director March 22, 1999
Arthur P. Henderson, Jr.
Vice President-Marketing
and Branch Operations
Kenneth C. King and Director March 22, 1999
kenneth C. King
James E. Sykes, Jr. Treasurer/Secretary March 22, 1999
James E. Sykes, Jr.
Allen C. Goolsby, III Director March 22, 1999
Allen C. Goolsby, III
<PAGE>
PRICEWATERHOUSECOOPERS LLP
REPORT OF INDEPENDENT ACCOUNTANTS
ON CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Our report on the consolidated financial statements of Noland Company and
Subsidiary has been incorporated by reference in this Form 10-K from page 12
of the 1998 Annual Report to Stockholders of Noland Company. In connection
with our audits of such financial statements, we have also audited the related
financial statement schedule listed in Item 14 (a) 2 on page 8 of this Form
10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
PricewaterhouseCoopers LLP
Virginia Beach, Virginia
February 19, 1999
<PAGE>
EXHIBIT INDEX
Exhibit Number Exhibit Page
(2) Plan of acquisition, reorganization,
liquidation or succession Not Applicable
(3) Articles of Incorporation and Bylaws Previously Filed
(4) Instruments defining the rights of
Security holders, including indentures Not Applicable
(9) Voting trust agreement Not Applicable
(10) Restricted Stock Plan 13 - 18
(11) Statement regarding computation of per
share earnings--clearly determinable Not Applicable
(12) Statement regarding computation of
ratios Not Applicable
(13) Portions of Annual Report to
Stockholders 20 - 37
(16) Letter regarding change in a certifying
accountant Not Applicable
(18) Letter regarding change in accounting
principles Not Applicable
(21) Subsidiary of the registrant Previously Filed
(22) Published report regarding matters
submitted to vote of security holders Not Applicable
(23) Consents of experts and counsel Not Applicable
(24) Power of attorney Not Applicable
(27) Financial data schedule 38
(28) Information from reports furnished to
state insurance regulatory authorities Not Applicable
As to any security holder requesting a copy of the Form 10-K, the Company
will furnish any exhibit indicated in the above list as filed with the Form
10-K upon payment to it of its expenses in furnishing such exhibit.
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This page intentionally left blank.
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NOLAND COMPANY
RESTRICTED STOCK PLAN
Effective April 20, 1994
<PAGE>
NOLAND COMPANY
RESTRICTED STOCK PLAN
ARTICLE I
DEFINITIONS
1.01 Affiliate means any "parent corporation" or "subsidiary corporation" as
such terms are defined in Section 424 of the Code.
1.02 Agreement means a written agreement (including any amendment or
supplement thereto) between the Company and a Participant specifying the terms
and conditions of an award of Restricted Stock to such Participant.
1.03 Board means the Board of Directors of the Company.
1.04 Code means the Internal Revenue Code of 1986, and any amendments
thereto.
1.05 Committee means the Compensation Committee of the Board, which shall be
responsible for the administration of the Plan.
1.06 Common Stock means the common stock, $10.00 par value, of the Company.
1.07 Company means Noland Company.
1.08 Disability means that a Participant is permanently and totally disabled
within the meaning of Section 22(e)(3) of the Code.
1.09 Fair Market Value means, on any given date, the average of the bid and
asked prices of the Common Stock as reported on the NASDAQ over-the-counter
national reporting system of the National Association of Securities Dealers,
Inc., as reported by the National Quotation Bureau, Inc. If the Common Stock
was not traded on the NASDAQ over-the-counter national market on such date,
then the Fair Market Value is determined with reference to the next preceding
day that the Common Stock was so traded.
1.10 Holding Period means, as to any grant, the three (3) year period
beginning on the date of a grant of a Restricted Stock award, and ending as of
the close of business the day preceding the third anniversary of the date of
grant.
1.11 Participant means an employee of the Company or of an Affiliate,
including an employee who is a member of the Board, who satisfies the
requirements of Article IV and is selected by the Committee to receive a
Restricted Stock award.
1.12 Plan means the Noland Company Restricted Stock Plan.
1.13 Restricted Stock means shares of Common Stock awarded to a Participant
under Article VI. Shares of Common Stock shall cease to be Restricted Stock
when, in accordance with the terms of the applicable Agreement, they become
transferable and free of substantial risks of forfeiture.
1.14 Retirement means that a Participant has separated from service on or
after his early retirement date as set forth in a tax-qualified pension or
profit sharing plan maintained by the Company or an Affiliate and in which he
is a participant.
<PAGE>
ARTICLE II
PURPOSES
The Plan is intended to assist the Company in recruiting, retaining, and
motivating employees with ability and initiative by enabling employees to
participate in its future success and to associate more closely their
interests with those of the Company and its shareholders. The Plan will grant
Common Stock to selected senior executives whom the Company believes have the
opportunity to influence the performance of the Common Stock. As
shareholders, such individuals will have the additional incentive to take
actions and make decisions that will enhance the value of the stock to both
the Company and its shareholders. The Plan is intended to permit the award of
shares of Restricted Stock.
ARTICLE III
ADMINISTRATION
Except as provided in this Article III, the Plan shall be administered by
the Committee. The Committee shall have authority to award Restricted Stock
upon such terms (not inconsistent with the provisions of this Plan) as the
Committee may consider appropriate. Such terms may include conditions (in
addition to those contained in this Plan) on the transferability or
forfeitability of Restricted Stock. Notwithstanding any such conditions, the
Committee may, in its discretion, accelerate the time at which Restricted
Stock may become transferable or nonforfeitable in the event of death,
Disability or Retirement. In addition, the Committee shall have complete
authority to interpret all provisions of this Plan; to prescribe the form of
Agreements; to adopt, amend, and rescind rules and regulations pertaining to
the administration of the Plan; and to make all other determinations necessary
or advisable for the administration of this Plan. The express grant in the
Plan of any specific power to the Committee shall not be construed as limiting
any power or authority of the Committee. Any decision made, or action taken,
by the Committee or in connection with the administration of this Plan shall
be final and conclusive. No member of the Committee shall be liable for any
act done in good faith with respect to this Plan or any Agreement, or
Restricted Stock award. All expenses of administering this Plan shall be
borne by the Company.
The Committee, in its discretion, may delegate to one or more officers of
the Company, all or part of the Committee's authority and duties with respect
to Participants who are not subject to the reporting and other provisions of
Section 16 of the Securities Exchange Act of 1934, as in effect from time to
time. In the event of such delegation, and as to matters encompassed by the
delegation, references in the Plan to the Committee shall be interpreted as a
reference to the Committee's delegate or delegates. The Committee may revoke
or amend the terms of a delegation at any time but such action shall not
invalidate any prior actions of the Committee's delegate or delegates that
were consistent with the terms of the Plan. The Committee shall maintain a
written record of its actions.
ARTICLE IV
ELIGIBILITY
4.01 General. Any senior executive of the Company or of any Affiliate
(including any corporation that becomes an Affiliate after the adoption of
this Plan) is eligible to participate in this Plan if the Committee so deter-
mines. Any such employee may be awarded shares of Restricted Stock, but all
<PAGE>
such share awards shall be discretionary by the Committee. A Director of the
Company who is an employee of the Company or an Affiliate may be awarded
shares of Restricted Stock under this Plan. A member of the Committee may not
participate in this Plan during the time that his participation would prevent
the Committee from being "disinterested" for purposes of Securities and
Exchange Commission Rule 16b-3 as in effect from time to time.
4.02 Grants. The Committee will designate individuals to whom shares of
Restricted Stock are to be awarded and will specify the number of shares of
Common Stock subject to each award. All awards shall be discretionary and
determined from year to year. All shares of Restricted Stock shares awarded
under this Plan shall be evidenced by Agreements which shall be subject to
applicable provisions of this Plan and to such other provisions as the
Committee may adopt.
ARTICLE V
STOCK SUBJECT TO PLAN
5.01 Source of Shares. The Company shall purchase shares of its Common Stock
on the open market for purposes of making grants under the Plan.
5.02 Maximum Number of Shares. The maximum aggregate number of shares of
Common Stock that may be issued pursuant to the award of Restricted Stock
under this Plan is 50,000, subject to adjustments as provided in this Article
V and in Article VII. A maximum of 10,000 shares may be granted during any
one calendar year.
5.03 Forfeitures. Any shares of Restricted Stock that are forfeited may be
reallocated to other Restricted Stock awards to be granted under this Plan.
ARTICLE VI
RESTRICTED STOCK
6.01 Award. In accordance with the provisions of Article IV, the Committee
will designate each individual to whom an award of Restricted Stock is to be
made and will specify the number of shares of Common Stock covered by the
award.
6.02 Vesting. The Committee, on the date of the award, shall prescribe that
a Participant's rights in the Restricted Stock shall be forfeitable or
otherwise restricted. An award of Restricted Stock shall not become
transferable or begin to vest during the Holding Period. Following the end of
the Holding Period, a grant of a Restricted Stock award shall vest in annual
increments of twenty percent (20%) as of each anniversary of the date of grant
thereafter so long as the Participant continues in the employ of the Company
or an Affiliate. For example, an award made on April 20, 1994, will normally
vest twenty percent (20%) on April 20, 1997, and twenty percent (20%) each
April 20 thereafter until it is fully vested on April 20, 2001. Unless
accelerated by the Committee in the event of death, Disability or Retirement,
nonvested shares granted pursuant to a Restricted Stock award under this Plan
will be forfeited if the Participant separates from the service of the Company
or an Affiliate for any reason.
6.03 Shareholder Rights. Prior to their forfeiture in accordance with the
terms of the Agreement and while the shares are Restricted Stock, a
Participant will have all rights of a shareholder with respect to Restricted
Stock, including the right to receive dividends and vote the shares; provided,
however, that (i) a Participant may not sell, transfer, pledge, exchange,
hypothecate, or otherwise dispose of Restricted Stock, (ii) the Company shall
<PAGE>
retain custody of the certificates evidencing shares of Restricted Stock, and
(iii) the Participant will deliver to the Company a stock power, endorsed in
blank, with respect to each award of Restricted Stock. The limitations set
forth in the preceding sentence shall not apply after the shares cease to be
Restricted Stock.
ARTICLE VII
ADJUSTMENT UPON CHANGE IN COMMON STOCK
The maximum number of shares that may be issued pursuant to the award of
Restricted Stock under this Plan shall be proportionately adjusted, and the
terms of outstanding Restricted Stock awards shall be adjusted, as the
Committee shall determine to be equitably required in the event that (a) the
Company (i) effects one or more stock dividends, stock split-ups, subdivisions
or consolidations of shares or (ii) engages in a merger, consolidation,
acquisition of property or stock (within the meaning of Section 424(a) of the
Code), separation, reorganization or liquidation or (b) there occurs any other
event which, in the judgment of the Committee necessitates such action. Any
determination made under this Article VII by the Committee shall be final and
conclusive.
The issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, for cash or
property, or for labor or services, either upon direct sale or upon the
exercise of rights or warrants to subscribe therefor, or upon conversion of
shares or obligations of the Company convertible into such shares or other
securities, shall not affect, and no adjustment by reason thereof shall be
made with respect to, outstanding awards of Restricted Stock.
ARTICLE VIII
COMPLIANCE WITH LAW AND APPROVAL OF REGULATORY BODIES
No Common Stock shall be issued, no certificates for shares of Common
Stock shall be delivered, and no payment shall be made under this Plan except
in compliance with all applicable federal and state laws and regulations
(including, without limitation, withholding tax requirements) and the rules of
all domestic stock exchanges on which the Company's shares may be listed. The
Company shall have the right to rely on an opinion of its counsel as to such
compliance. Any share certificate issued to evidence Common Stock for which
shares of Restricted Stock are awarded, may bear such legends and statements
as the Committee may deem advisable to assure compliance with federal and
state laws and regulations. No Common Stock shall be issued, no certificate
for shares shall be delivered, and no payment shall be made under this Plan
until the Company has obtained such consent or approval as the Committee may
deem advisable from regulatory bodies having jurisdiction over such matters.
ARTICLE IX
GENERAL PROVISIONS
9.01 Effect on Employment. Neither the adoption of this Plan, its operation,
nor any documents describing or referring to this Plan (or any part thereof)
shall confer upon any employee any right to continue in the employ of the
Company or an Affiliate or in any way affect any right and power of the
Company or an Affiliate to terminate the employment of any employee at any
time with or without assigning a reason therefor.
<PAGE>
9.02 Unfunded Plan. The Plan, insofar as it provides for grants, shall be
unfunded, and the Company shall not be required to segregate any assets that
may at any time be represented by grants under this Plan. Any liability of
the Company to any person with respect to any grant under this Plan shall be
based solely upon any contractual obligations that may be created pursuant to
this Plan. No such obligation of the Company shall be deemed to be secured by
any pledge of, or other encumbrance on, any property of the Company.
9.03 Rules of Construction. Headings are given to the articles and sections
of this Plan solely as a convenience to facilitate reference. The reference
to any statute, regulation, or other provision of law shall be construed to
refer to any amendment to or successor of such provision of law.
9.04 Employee Status. In the event that awards of Restricted Stock may
become vested or earned only during employment or within a specified period of
time after termination of employment, the Committee may decide to what extent
leaves of absence for governmental or military service, illness, temporary
disability, or other reasons shall not be deemed interruptions of continuous
employment.
ARTICLE X
AMENDMENT
The Board may amend or terminate this Plan from time to time; provided,
however, that no amendment may become effective until shareholder approval is
obtained if (i) the amendment increases the aggregate number of shares of
Common Stock that may be issued under the Plan or (ii) the amendment changes
the class of individuals eligible to become Participants. No amendment shall,
without a Participant's consent, adversely affect any rights of such
Participant under any outstanding Restricted Stock award at the time such
amendment is made.
ARTICLE XI
DURATION OF PLAN
No shares of Restricted Stock may be granted under this Plan after April
19, 2004. Restricted Stock granted before that date shall remain valid in
accordance with its terms.
ARTICLE XII
EFFECTIVE DATE OF PLAN
Shares of Restricted Stock may be awarded under this Plan upon its
approval by shareholders holding a majority of the Company's outstanding
voting stock, voting either in person or by proxy at a duly held shareholders'
meeting.
<PAGE>
EXHIBIT 13
INDEX
Page
Management's Discussion 20-22
Report of Independent Accountants 23
Quarterly Financial Data 24
Consolidated Statement of Income 25
Consolidated Balance Sheet 26
Consolidated Statement of Cash Flows 27
Notes to Consolidated Financial Statements 28-33
Ten Year Review 34-35
Inside Back Cover 36-37
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion focuses on the consolidated results of operations,
financial condition and cash flows of Noland Company. This section should be
read in conjunction with the consolidated financial statements and notes.
Results of Operations
Sales for 1998, 1997 and 1996 were $465.5 million, $465 million and $465.7
million, respectively. The year started with a sales decline of six percent
at the end of the first quarter but recovered with a sales increase in each
subsequent quarter. The plumbing and air conditioning departments turned in
higher sales compared to a year ago, while the electrical and industrial
business declined.
Gross profit margins declined slightly to 20.1 percent in 1998, down from
20.2 percent for 1997. The gross profit margin for 1996 was 19.5 percent.
The lower profit margin caused gross profit dollars to decline $307,000 from
a year ago. 1998's gross profit margin suffered from the year-end LIFO
adjustment which increased cost of goods sold by $381,000 through a
combination of deflation in three of the four product departments and
liquidation of certain inventory layers carried at higher costs as compared
with the cost of 1998 purchases. The 1997 LIFO inventory adjustment decreased
cost of goods sold by $1,040,000, while the 1996 adjustment decreased cost of
goods sold by $207,000.
Operating expenses increased slightly over 1997, including a $2 million
increase in casualty and medical insurance cost that was offset in part by a
$1.3 million increase in pension credits. In 1997, operating expenses were
3.9 percent greater than 1996.
Operating expenses, as a percent of sales, were 18.9 percent in 1998 and
1997, and 18.1 percent in 1996.
In 1998, the lower gross profit and higher operating expenses resulted in
a 9.4 percent decline in operating profits compared to 1997. Interest expense
increased 13.9 percent to $3.5 million in 1998 from $3.1 million in 1997 due
to higher average inventories and additional long-term debt used to purchase
vehicles. The higher average inventories resulted from several new integrated
supply contracts and the implementation of a new inventory management system.
1997 interest expense was 8.9 percent more than 1996.
These declines were offset by higher non-operating income and lower income
taxes generating net income of $5.9 million compared to $5.5 million for 1997
and $5.9 million for 1996.
Liquidity and Capital Resources
The Company maintains its short and long-term liquidity through: (1) cash
flow from operations; (2) short-term financings; (3) bank line of credit
arrangements, when needed; and (4) additional long-term debt, when needed.
The primary source of liquidity in 1998 came from financing activities
including additional short- and long-term debt. Net cash provided by
operating activities was $1.9 million in 1998 compared to $17.4 million in
1997 and $7.9 million in 1996. The inventory build-up and an increase in
accounts receivable produced much of this decline. The most significant use
of cash in 1998 was for capital expenditures of $14.8 million. Over $5
million of the expenditures was for upgrading the automobile and truck fleet.
The Company's financial position remains strong with working capital of $65.3
million and a current ratio of 2.0 to 1. Management believes the Company's
<PAGE>
liquidity, working capital and capital resources are sufficient to meet the
working capital and capital expenditure needs of the foreseeable future.
At December 31, 1998, the Company was not in compliance with a loan
covenant relating to debt which the lender permanently waived. In conjunction
with granting the waiver, the Company and the lender agreed to terminate a
$10,000,000 long-term credit agreement and replace it with a $10,000,000
uncommitted credit facility. The Company anticipates having a new long-term
credit facility in place by the end of April 1999.
Outlook
In 1998, the Company expanded its use of technology and completed the
centralization of credit operations. This improved productivity through the
elimination of personnel and strengthened operations. These developments,
along with the projected completion of the new inventory management initiative
and the recent upward turn in sales, give us good reason to be optimistic
about 1999 results.
Included in this discussion and in other sections of this Report are
forward-looking statements that reflect management's current outlook for the
future. Such forward-looking statements are not guarantees of future
performance and are subject to risks and uncertainties that could cause actual
results to differ materially from those anticipated in the statements. Such
risks and uncertainties include, but are not limited to, general business
conditions, climatic conditions, competitive pricing pressures, product
availability, and successful implementation of the Company's new sales and
inventory management initiatives.
Impact of Inflation
Reported results, for the most part, reflect the impact of inflation
because of the Company's use of the LIFO (last-in,
first-out) inventory method. During inflationary periods, this method removes
artificial profits induced by inflation and presents operating results in
truer, more absolute terms.
For purposes of financial reporting, the depreciation charge to earnings
for the use of capital assets is reflected on the
straight-line basis which does not necessarily keep pace with rising
replacement costs of those assets.
Year 2000
The Company is both internally and externally dependent on computer
software that uses a two digit dating technique. In 1997, the Company
developed and implemented a plan to address significant Year 2000 deficiencies
in its internal computer hardware, software, related systems, non-information
technology systems and third-party risks.
For information technology systems all new hardware and software purchased
as part of an ongoing replacement process have been certified by the vendor as
Year 2000 compliant. The Company paid a contractor $20,000 to address
specific Year 2000 issues while all other Year 2000 work has been accomplished
by existing staff. All programs and modules have been bench tested and
migrated into production. All funds for Year 2000 costs have come from
operations. Future expenditures for Year 2000, issues which are expected to
be insignificant, will also come from operations. No information technology
projects have been postponed or cancelled as a result of the Company's efforts
to become Year 2000 compliant. In the event of internal Year 2000 failure,
the Company intends to process transactions manually until its systems are
restored.
Noland Company is dependent on other organizations such as vendors,
customers, support services, and the infrastructure that have Year 2000
<PAGE>
concerns. Year 2000 issues are also present in some products sold by Noland,
but they represent less than one percent of the Company's sales. Noland has
received and/or mailed hundreds of communications regarding Year 2000 issues.
Thus far, we have not identified any significant vendors, manufacturers,
customers, or support organizations that have advised us of Year 2000 issues
that will not be effectively addressed. It is possible that Noland has not
been advised of issues that will not be corrected and will fail. The amount
of loss imposed upon Noland, if any, will depend upon the specific issue that
fails. Most of Noland's products purchased for resale can be obtained from
alternative sources. The Company has been assured by its primary vendors that
they are successfully addressing the Year 2000 issue.
The failure of the United States postal service, federal banking system,
the country's electric power generating "grid", and similar infrastructure
losses could cause material problems for the Company's operations. The amount
of any loss would depend upon the severity and length of the disruption.
Noland Company has no reasonable way to estimate those losses, if any.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
PRICEWATERHOUSECOOPERS
PricewaterhouseCoopers LLP
To the Board of Directors and Stockholders of Noland Company:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income and retained earnings and of cash
flows present fairly, in all material respects, the financial position of
Noland Company and its subsidiary at December 31, 1998, 1997, and 1996, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing
the accounting principles used and the significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
Virginia Beach, Virginia
February 19, 1999
<PAGE>
<TABLE>
Selected Quarterly Financial Data (unaudited)
(In thousands, except per share amounts)
<CAPTION>
FirstQuarter SecondQuarter ThirdQuarter FourthQuarter Year
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 1997 1998 1997 1998 1997 1998 1997 1998 1997
Sales $103,885 $110,930 $119,919 $117,719 $124,851 $122,014 $116,824 $114,302 $465,479 $464,965
Gross Profit $ 20,551 $ 22,283 $ 23,743 $ 22,792 $ 24,385 $ 23,837 $ 24,767 $ 24,841 $ 93,446 $ 93,753
Net Income $ 656 $ 638 $ 1,640 $ 655 $ 1,587 $ 981 $ 1,987(A)$ 3,269(A)$ 5,870 $ 5,543
Basic Earnings$ .18 $ .17 $ .44 $ .18 $ .43 $ .26 $ .54(A)$ .89(A)$ 1.59 $ 1.50
Per Share
(A) The Company uses estimated gross profit rates to determine cost of goods sold during interim periods.
Year-end inventory adjustments to reflect actual inventory levels are made in the fourth quarter.
These previously undeterminable adjustments had the effect of (decreasing) increasing net income for
the fourth quarter of 1998 and 1997 by approximately $82,000 ($.02 per share) and $1,278,000 ($.35
per share), respectively. Other year-end adjustments related to estimated accruals increased fourth
quarter 1997 net income $977,000 ($.27 per share).
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
Noland Company and Subsidiary
<CAPTION>
For the years ended December 31, 1998, 1997, and 1996
(In thousands, except per share amounts) 1998 1997 1996
<S> <C> C> <C>
Sales $465,479 $464,965 $465,705
Cost of Goods Sold:
Purchases and freight in 376,133 369,900 384,626
Inventory, January 1 66,470 67,782 58,072
Inventory, December 31 (70,570) (66,470) (67,782)
Cost of Goods Sold 372,033 371,212 374,916
Gross Profit on Sales 93,446 93,753 90,789
Operating Expenses 87,927 87,659 84,383
Operating Profit 5,519 6,094 6,406
Other Income:
Cash Discounts, net 4,534 4,096 4,196
Service charges 1,251 1,195 1,512
Miscellaneous 1,385 577 371
Total Other Income 7,170 5,868 6,079
Interest Expense 3,498 3,078 2,828
Income Before Income Taxes 9,191 8,884 9,657
Income Taxes 3,321 3,341 3,794
Net Income $ 5,870 $ 5,543 $ 5,863
Retained Earnings, January 1 83,875 79,516 74,837
Cash Dividends Paid ($ .32 per share) (1,184) (1,184) (1,184)
Retained Earnings, December 31 $ 88,561 $ 83,875 $ 79,516
Basic Earnings Per Share $ 1.59 $ 1.50 $ 1.58
</TABLE>
[FN]
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
Noland Company and Subsidiary
December 31, 1998, 1997, and 1996
(In thousands) 1998 1997 1996
<S> <C> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 3,319 $ 5,674 $ 3,508
Accounts receivable 55,451 49,984 52,867
(net of allowance for doubtful accounts)
Inventory (net of reduction to LIFO) 70,570 66,470 67,782
Deferred income taxes 1,948 1,706 2,183
Prepaid expenses 299 185 389
Total Current Assets 131,587 124,019 126,729
Property and Equipment, at cost:
Land 13,127 13,384 13,026
Buildings 81,348 76,945 74,531
Equipment and fixtures 63,815 55,714 54,654
Property in excess of current needs 1,876 1,873 2,054
Total 160,166 147,916 144,265
Less accumulated depreciation 74,361 68,491 65,368
Total Property and Equipment, net 85,805 79,425 78,897
Assets Held for Resale 1,021 1,241 1,291
Prepaid Pension 14,847 12,874 12,223
Other Assets 1,068 889 745
$234,328 $218,448 $219,885
Liabilities and Stockholders' Equity
Current Liabilities
Notes payable, short-term borrowings $ 7,500 $ 5,750 $ 6,000
Current maturity of long-term debt 14,872 2,896 3,228
Book overdrafts 10,525 5,348 6,338
Accounts payable 21,890 21,030 19,199
Other accruals and liabilities 10,997 12,277 14,097
Federal and state income taxes 535 873 488
Total Current Liabilities 66,319 48,174 49,350
Long-term Debt 32,413 39,784 45,039
Deferred Income Taxes 9,122 8,807 8,544
Accrued Postretirement Benefits 1,241 916 660
Stockholders' Equity:
Capital common stock, par value, $10;
authorized, 6,000,000 shares;
issued 3,700,876 shares 37,009 37,009 37,009
Retained earnings 88,561 83,875 79,516
Total 125,570 120,884 116,525
Less unearned compensation, restricted stock 337 117 233
Stockholders' Equity 125,233 120,767 116,292
$234,328 $218,448 $219,885
</TABLE>
[FN]
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
Noland Company and Subsidiary
For the years ended December 31, 1998, 1997, and 1996
(In thousands) 1998 1997 1996
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net Income $ 5,870 $ 5,543 $ 5,863
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,092 6,305 6,686
Deferred income taxes 73 740 (89)
Provision for doubtful accounts 1,441 1,710 1,513
Gain on sale of property - (53) (4)
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable (6,908) 1,173 1,320
(Increase) decrease in inventory (4,100) 1,312 (6,051)
(Increase) decrease in prepaid expenses (114) 204 (113)
Decrease in assets held for resale 220 50 -
(Increase) decrease in other assets (258) (230) 532
Increase (decrease) in accounts payable 860 1,831 (2,151)
(Decrease) in other accruals and liabilities (1,280) (1,820) (139)
(Decrease) increase in federal and state
income taxes (338) 385 320
Increase in postretirement benefits 325 256 234
Total adjustments (3,987) 11,863 2,058
Net cash provided by operating activities 1,883 17,406 7,921
Cash Flows From Investing Activities:
Capital expenditures (14,751) (9,339) 10,890
Proceeds from sale of assets 473 2,017 858
Purchase of note receivable - - (13,091)
Collections on note receivable - - 4,136
Net cash used by investing activities (14,278) (7,322) (18,987)
Cash Flows From Financing Activities:
Increase (decrease) in book overdrafts 5,177 (990) (5,630)
Short-term borrowings 203,800 169,300 112,500
Short-term payments (202,050)(169,500)(106,500)
Long-term borrowings 7,500 12,660 7,500
Long-term repayments (2,896) (18,247) (4,565)
Dividends paid (1,184) (1,184) (1,184)
Purchase (sale) of restricted stock (307) 93 (125)
Net cash provided (used) by financing activities 10,040 (7,918) 1,996
Cash and Cash Equivalents:
(Decrease) increase during year (2,355) 2,166 (9,070)
Beginning of year $ 5,674 $ 3,508 $ 12,578
End of year 3,319 5,674 3,508
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 3,448 $ 3,104 $ 3,059
Income taxes $ 3,790 $ 2,222 $ 3,973
</TABLE>
[FN]
The accompanying notes are an integral part of the financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Noland Company and Subsidiary
1. Principal Business of the Company
Noland Company is a wholesale distributor of mechanical equipment and
supplies. These products are categorized under plumbing/heating, air
conditioning, and electrical/industrial.
Markets for these products include contractors, industrial plants,
utilities and others.
2. Summary of Significant Accounting Policies
a. Principles of Consolidation
The consolidated financial statements include the accounts of Noland
Company and its wholly owned subsidiary. All material intercompany
transactions have been eliminated.
The Company owns a fifty percent interest in two foreign joint ventures
and accounts for both entities under the equity method of accounting. The
aggregate investment in and results of operations from both joint ventures are
not material.
b. Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
c. Inventory
Inventory is stated at the lower of cost or market. The cost of
inventory has been principally determined by the last-in, first-out (LIFO)
method since 1974.
d. Property and Equipment
Property and equipment are valued at cost less accumulated depreciation.
Depreciation is computed by the straight-line method based on estimated useful
lives of 20 to 40 years for buildings and 3 to 10 years for equipment and
fixtures.
Expenditures for maintenance and repairs are charged to earnings as
incurred. Upon disposition, the cost and related accumulated depreciation are
removed and the resulting gain or loss is reflected in income for the period.
The Company reevaluates property, plant, and equipment whenever
significant events or changes occur which might impair recovery of recorded
costs. Impaired assets, if any, are written down to fair value.
Property in excess of current needs consists primarily of land held for
possible future expansion.
e. Income Taxes
A deferred tax asset or liability is recognized for the deferred tax
consequences of all temporary differences.
f. Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with
an original maturity of three months or less to be cash equivalents. Due to
the short maturity period of cash and cash equivalents, the carrying amount
approximates the fair value.
The Company has no requirements for compensating balances. The Company
maintains its cash in bank deposit accounts which, at times, may exceed
federally insured limits. The Company has not experienced any losses in such
accounts. The Company believes it is not exposed to any significant credit
<PAGE>
risk on cash and cash equivalents.
g. Extra Compensation
All employees with at least one year of service participate in one or
more of the Company's extra compensation plans which are based on earnings
before income taxes and certain adjustments. The cost of these plans was
$1,654,000 in 1998, $1,604,000 in 1997 and $1,897,000 in 1996.
h. Unearned Compensation - Restricted Stock Plan
The Company provides a restricted stock plan for corporate executives of
the Company. Under the Plan, 50,000 shares in the aggregate, limited to 10,000
shares per year, may be granted as restricted stock. Participants may not
dispose or otherwise transfer stock granted for three years from date of grant.
Restrictions lapse at the rate of 20 percent of the stock per year beginning at
the end of the third year. Upon issuance of stock under the plan, unearned
compensation equivalent to the market value at the date of grant is charged to
stockholders' equity and subsequently amortized over seven years. The number
of shares granted in 1998 and 1996 was 9,700 and 6,000, respectively. There
were no awards in 1997. The fair value of the awards in 1998 and 1996 was
$236,000 and $125,000. These amounts were reflected as unearned compensation -
restricted stock. The amount amortized to compensation expense in 1998, 1997
and 1996 was $88,000, $67,000 and $50,000, respectively. In addition, 2,000
shares were cancelled in 1997 resulting in additional expense of $48,000.
i. Earnings Per Share
Basic and diluted earnings per share are calculated on 3,700,876 shares
outstanding.
j. Professional Standards
Statements of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" is effective for periods
beginning after June 15, 1999. The Company has no derivative instruments or
hedging activities. Adoption of SFAS No. 133 is not expected to have a
material effect on the financial condition or results of operations of the
Company. Statements of Financial Accounting Standards No. 131 "Disclosures
About Segments of an Enterprise and Related Information" is effective for 1998.
The Company concluded it operates in only one segment.
3. Accounts Receivable
Accounts receivable are net of an allowance for doubtful accounts of
$1,008,000 for 1998, 1997 and 1996. Bad debt charges, net of recoveries, were
$684,000 for 1998, $855,000 for 1997 and $856,000 for 1996.
4. Inventory
Comparative year-end inventories are as follows:
(In thousands) 1998 1997 1996
Inventory, at approximate
replacement cost $103,446 $ 98,965 $101,318
Reduction to LIFO 32,876 32,495 33,536
LIFO inventory $ 70,570 $ 66,470 $ 67,782
Liquidation of certain inventory layers carried at the higher/lower costs
which prevailed in prior years as compared with the costs of 1998 and 1997
purchases had the effect of decreasing 1998 net income $150,000 ($.04 per
share) and increasing 1997 net income $393,000 ($.11 per share).
5. Notes Payable
a. Short-term Borrowings:
Amounts payable to banks at December 31, 1998, 1997 and 1996 were
$7,500,000, $5,750,000 and $6,000,000, respectively. The average interest
rate, which is based on existing Federal Funds rates, was 5.2 percent at
December 31, 1998 and 7.1 percent at December 31, 1997 and 1996. The carrying
amount of these short-term borrowings approximates fair value because of the
short maturity of the borrowings.
The Company had unused lines of credit totaling $28.2 million at December
31, 1998.
b. Long-term Debt:
<PAGE>
(In thousands) 1998 1997 1996
Promissory note, 9.60% interest payable
quarterly, $1,850,000 due annually June
1999 through 2000 with balance due June
2001. (1) $ 5,650 $ 7,500 $ 9,350
Promissory note, 6.6% interest
plus $83,333 principal payable
monthly 1999 through 2002. (1) 4,000 5,000 -
Promissory note, variable interest
payable weekly (6.12% at December
31, 1998), principal due March 30,
1999. (1) 10,000 10,000 10,000
Promissory note, variable interest
payable monthly (6.18% at December
31, 1998), principal due August
2000. (2) 15,000 7,500 15,000
Industrial revenue financings, variable
interest payable quarterly (4.11% at
December 31, 1998) with varying
maturities from 1999 to 2004. (1) (3) 12,050 12,050 13,415
Other 585 630 502
47,285 42,680 48,267
Less current maturities 14,872 2,896 3,228
$32,413 $39,784 $45,039
(1) Subject to agreements that require the Company to maintain not less than
$55,000,000 in working capital and not less than a 1.75-to-1 year-end
current ratio. Cash dividends cannot exceed 50 percent of earnings,
excluding net gains on disposition of capital assets, reckoned
accumulatively from January 1, 1986. Earnings retained since that date
not restricted under this provision amount to $14,382,000.
(2) The Company has an unsecured term revolver loan with a committed amount
of $15,000,000. The Company may pay down and reborrow within the
committed amount without penalty except for a non-usage fee if the
average usage for a 90 day period is less than 50 percent.
(3) Industrial Development Revenue Refunding Bonds are callable at the option
of the bondholders upon giving seven days notice to the Trustee. The
carrying value of these bonds is a reasonable estimate of fair value as
interest rates are based on prevailing market rates. To ensure payment
of the long-term refunding bonds the Company has caused to be delivered
to the Trustee an irrevocable, direct pay letter of credit in favor of
the Trustee in the amount of $12,486,000. The contract amount of the
letter of credit is a reasonable estimate of its fair value as the rate
is fixed over the life of the commitment. No material loss is
anticipated due to nonperformance by the counterparties to those
agreements.
At December 31, 1998, the Company was not in compliance with a loan
covenant relating to debt which the lender permanently waived. In conjunction
with the waiver, the loan converts to an uncommitted short-term credit facility
on March 30, 1999. The Company anticipates having a new long-term credit
facility in place by the end of April 1999.
The fair value of the remaining $35.2 million of long-term debt is
estimated based on the borrowing rates currently available to the Company for
loans with similar terms and average maturities. The fair value of this long-
term debt is $35.4 million for 1998.
Annual maturities of long-term debt for the five years
subsequent to December 31, 1998, are as follows: 1999, $14,872,000; 2000,
$4,398,000; 2001, $4,427,000; 2002, $1,013,000; 2003, $7,000,000.
6. Postretirement Benefits
The following tables reconcile the plan's change in benefit obligation
and show the plan's funded status at December 31, 1998, and 1997. Information
<PAGE>
for 1996 is not available.
(In thousands) 1998 1997
Change in benefit obligation
Benefit obligation at the end
of the prior year $ 4,654 $ 4,264
Service cost 50 47
Interest cost 320 318
Plan participants' contributions 68 54
Actuarial loss 114 338
Benefit payments (337) (367)
Benefit obligation at year end $ 4,869 $ 4,654
Reconciliation of funded status
Funded status $ (4,869) $ (4,654)
Unrecognized net actuarial loss 780 687
Unrecognized transition obligation 2,848 3,051
Accrued cost $ (1,241) $ (916)
The discount rate used to calculate the benefit obligation was 6.75
percent for 1998, 7.0 percent for 1997 and 7.5 percent for 1996. There are no
plan assets. Employer paid benefits are limited to a fixed reimbursement
allowance based on years of service at retirement. No health care cost trend
assumption is necessary.
The components of the provision for net periodic postretirement benefit
costs are:
(In thousands) 1998 1997
Service cost $ 50 $ 47
Interest cost $ 320 $ 318
Net amortization $ 224 $ 203
Net postretirement benefit cost $ 594 $ 568
7. Retirement Plan
The following tables reconcile the plan's change in benefit obligation
and change in plan assets and show the funded status at December 31, 1998 and
1997.
(In thousands) 1998 1997
Change in benefit obligation
Benefit obligation at the end
of the prior year $39,768 $34,466
Service cost 1,159 976
Interest cost 2,734 2,647
Actuarial loss 1,832 4,363
Benefit payments (2,590) (2,684)
Benefit obligation at year end $42,903 $39,768
Change in plan assets
Fair value of plan assets at
beginning of year $66,243 $55,069
Actual return on plan assets 13,500 13,979
Benefits paid (2,590) (2,684)
Fair value of plan assets at year end $ 77,153 $ 66,364
Reconciliation of funded status
Funded status $ 34,250 $ 26,596
Unrecognized net actuarial (gain) (19,403) (14,034)
Unrecognized prior service cost - 312
Prepaid benefit $ 14,847 $ 12,874
Weighted-average assumptions as of the end of the year were:
1998 1997
Discount rate 6.75% 7.0%
<PAGE>
Rate of compensation increase 4.0% 4.0%
Expected return on plan assets 8.25% 8.25%
The components of the credits for the net periodic pension benefit are:
(In thousands) 1998 1997
Service cost $ 1,159 $ 976
Interest cost 2,734 2,647
Expected return on plan assets (5,365) (4,446)
Amortization of prior service cost 312 359
Net Amortization of net actuarial (gain) (813) (187)
Net pension benefit $ (1,973) $ (651)
Comparable information for 1996 is not available.
8. Income Taxes
The components of income tax expense are as follows:
(In thousands) 1998 1997 1996
Federal:
Current $ 2,583 $ 2,612 $ 3,289
Deferred 247 285 (76)
State:
Current 451 369 594
Deferred 40 75 (13)
Total $ 3,321 $ 3,341 $ 3,794
The components of the net deferred tax liability are:
(In thousands) 1998 1997 1996
Current deferred (assets)
Accounts receivable $ (95) $ - $ (379)
Inventory (1,237) (1,100) (1,196)
Accrued vacation (616) (606) (608)
Total net current deferred (asset) (1,948) (1,706) (2,183)
Noncurrent deferred (assets) liabilities
Property and equipment 4,435 4,639 4,694
Pension asset 5,587 4,845 4,600
Postretirement benefit liability (467) (345) (252)
Other (433) (332) (498)
Total net non current deferred
liability 9,122 8,807 8,544
Net deferred liability $ 7,174 $ 7,101 $ 6,361
The reasons for the difference between total tax expense and the amount
computed by applying the statutory federal income tax rate to income before
income taxes are as follows:
(In thousands) 1998 1997 1996
Statutory rate applied to
pretax income $ 3,125 $ 3,021 $ 3,283
State income taxes, net
of federal tax benefit 297 244 391
Other (101) 76 120
Total tax expense $ 3,321 $ 3,341 $ 3,794
9. Lease Commitments
The Company leases some of the warehouse and office facilities used in
<PAGE>
its business. These leases have varying expiration dates and often include
renewal and purchase options. Certain leases require the Company to pay
escalations in cost over base amounts for taxes, insurance, or other operating
expenses incurred by lessor. The corporate office is leased from a related
party for an annual rent of $260,000.
Rental expense under operating leases for 1998, 1997, and 1996 was
$1,553,000, $1,694,000 and $1,036,000, respectively.
Minimum payments due for years after 1998 under noncancelable operating
leases are $1,472,000 in 1999, $1,382,000 in 2000, $1,029,000 in 2001, $912,000
in 2002 and $3,686,000 thereafter.
10. Concentration of Credit Risk
The Company sells its products to all major areas of construction and
manufacturing markets throughout the Southern United States. When the Company
grants credit, it is primarily to customers whose ability to pay is dependent
upon the construction and manufacturing industry
economics prevailing in the Southern United States; however, concentrations of
credit risk with respect to trade accounts receivable are limited due to the
large number of customers comprising the Company's customer base. The Company
performs ongoing credit
evaluations of its customers and in certain situations requires
collateral. The Company maintains allowances for potential credit losses, and
such losses have been within management's expectations.
11. Asset Acquisition
In late 1996 the Company purchased a secured note from Foothill Capital
Corporation, issued by Raub Supply Co., for $9.9 million. Additional operating
advances of $3.2 million were made through the note to Raub. Collections on the
note totaled $4.1 million. Effective December 6, 1996 the Company agreed to
accept certain operating assets of Raub, with a fair value of $7.6 million, as
partial payment on the note. The outstanding note balance of $1.4 million at
December 31, 1996 was paid in 1997. Results, using the purchase method, for
the additional locations are included in 1998 and 1997 audited results.
The following table reflects the unaudited pro forma combined results of
operations, assuming the acquisition had occurred at the beginning of 1996:
(In thousands) 1996
Net Sales $488,182
Net income $ 6,117
Basic earnings per share $ 1.65
The pro forma information does not purport to be indicative of the
results which actually would have occurred had the acquisition been in effect
during the period presented or of results which may occur in the future.
12. Contingencies
The Company is a defendant in various lawsuits arising in the normal
course of business. In the opinion of management, the outcome of these
lawsuits will not have a material adverse effect on the Company's financial
position or results of operations.
<PAGE>
<TABLE>
<CAPTION>
TEN-YEAR REVIEW OF SELECTED FINANCIAL DATA (Unaudited)
Noland Company and Subsidiary
(Dollar amounts in thousands, except per share data) 1998 1997 1996
Income Statement Data
<S> <C> <C> <C>
Sales $465,479 $464,965 $465,705
Gross Profit 93,446 93,753 90,789
Operating Expenses 87,927 87,659 84,383
Operating Profit (Loss) 5,519 6,094 6,406
Interest Expense 3,498 3,078 2,828
Interest Expense as Percent of Total Assets 1.5 1.4 1.3
Income (Loss) Before Income Taxes 9,191 8,884 9,657
Pretax Profit as Percent of Sales 2.0 1.9 2.1
Income Taxes Payable (Receivable) 3,321 3,341 3,794
Effective Tax Rate 36.1 37.6 39.3
Net Income (Loss) 5,870 5,543 5,863
Income Paid to Stockholders (Cash Dividends) 1,184 1,184 1,184
Income Reinvested 4,686 4,359 4,679
Property and Equipment Expenditures 14,751 9,339 10,890
Depreciation and Amortization 7,977 6,890 6,868
Balance Sheet Data
Stockholders' Equity 125,233 120,767 116,292
Working Capital 65,268 75,845 77,379
Current Ratio 2.0 2.6 2.6
Total Assets 234,328 218,448 219,885
Long-term Debt 32,413 39,784 45,039
Borrowed Funds 54,785 48,430 54,267
Borrowed Funds as Percent of Total Assets 23.4 22.2 24.7
Total Liabilities as Percent of Total Assets 46.6 44.7 47.1
Per Share Data*
Basic Earnings (Loss) 1.59 1.50 1.58
Cash Dividends Paid to Stockholders .32 .32 .32
Stockholders' Equity (Book Value) 33.84 32.63 31.42
Return on Average Stockholders' Equity 4.8 4.7 5.1
Stock Price Range:
Average High 27.17 24.59 21.81
Average Low 22.27 21.72 18.89
Number of Employees at December 31 1,554 1,606 1,692
Number of Branches at December 31 106 107 107
Supplemental Information
The Company elected the LIFO method of inventory valuation in 1974.
The above information (i.e., gross profit, income and taxes) is stated
on that basis.
Had the Company used the FIFO method, the results would have been:
Gross Profit 93,827 92,713 90,582
Income (Loss) Before Income Taxes 9,572 7,844 9,450
Income Taxes Payable (Receivable) 3,455 2,949 3,714
Net Income (Loss) 6,117 4,895 5,736
Net Income (Loss) Per Share 1.65 1.32 1.55
Stockholders' Equity (Book Value) Per Share 37.99 37.32 36.32
Return on Average Stockholders' Equity 4.3 3.6 4.4
</TABLE>
[FN]
*Based on 3,700,876 shares outstanding
<PAGE>
<TABLE>
1995 1994 1993 1992 1991 1990 1989
<C> <C> <C> <C> <C> <C> <C>
$469,512 $440,202 $402,941 $412,086 $384,535 $428,473 $454,629
89,087 86,166 77,306 77,265 71,000 79,982 83,328
83,389 78,259 74,692 73,227 74,355 75,641 75,413
5,698 7,907 2,614 4,038 (3,355) 4,341 7,915
3,239 2,626 2,422 3,058 3,724 4,742 5,973
1.5 1.2 1.2 1.7 2.0 2.5 3.1
8,237 10,568 5,291 6,610 (1,203) 6,377 8,468
1.8 2.4 1.3 1.6 NA 1.5 1.9
3,290 4,341 1,996 2,518 (478) 2,651 3,441
39.9 41.1 37.7 38.1 (39.7) 41.6 40.6
4,947 6,227 3,295 4,092 (725) 3,726 5,027
1,036 888 888 888 1,702 1,665 1,629
3,911 5,339 2,407 3,204 NA 2,061 3,398
9,735 10,858 7,611 6,191 7,075 10,798 9,812
6,655 6,232 6,178 6,365 6,543 6,433 6,306
111,688 107,865 102,596 100,189 96,985 99,412 97,351
71,889 65,575 65,203 65,509 64,433 70,701 76,486
2.4 2.0 2.3 2.8 2.6 2.8 2.8
213,520 217,085 201,029 185,372 189,072 192,887 195,069
41,611 36,914 38,505 40,511 42,898 44,299 48,721
45,332 53,130 47,485 46,097 54,299 56,131 60,030
21.2 24.5 23.6 24.9 28.7 29.1 30.8
47.7 50.3 48.9 46.0 48.7 48.5 50.1
1.34 1.68 .89 1.11 (.20) 1.01 1.36
.28 .24 .24 .24 .46 .45 .44
30.18 29.15 27.72 27.07 26.21 26.86 26.30
4.5 5.9 3.2 4.2 NA 3.8 5.3
21.31 20.94 18.13 16.13 14.88 19.19 24.19
18.38 17.56 15.06 13.91 12.25 15.00 22.09
1,655 1,741 1,683 1,720 1,704 1,797 1,924
99 99 93 93 92 92 94
91,187 86,404 77,318 76,541 70,888 80,429 84,486
10,337 10,806 5,303 5,886 (1,315) 6,824 9,626
4,124 4,441 2,000 2,226 (495) 2,770 3,815
6,213 6,365 3,303 3,660 (820) 4,054 5,811
1.68 1.72 .89 .99 (.22) 1.10 1.57
34.39 33.69 32.21 31.19 30.81 31.17 30.84
4.9 5.2 2.8 3.2 NA 3.5 5.2
</TABLE>
<PAGE>
Inside Back Cover Info
Shareholder and Investor Information
Corporate Information
Corporate Headquarters:
Noland Company
80 29th Street
Newport News, Virginia 23607
(757) 928-9000
Wholly Owned Subsidiary:
Noland Properties, Inc.
400 Wachovia Bank Building
2700 Washington Avenue
Newport News, Virginia 23607
(757) 247-8200
Investor Inquiries or Request for Form 10-K:
Richard L. Welborn
Assistant Vice President-Finance and Tax Administrator
80 29th Street
Newport News, Virginia 23607
(757) 928-9000
Auditors:
PricewaterhouseCoopers LLP
One Columbus Center
Suite 400
Virginia Beach, Virginia 23462
Legal Counsel:
Hunton & Williams
P.O. Box 1535
Richmond, Virginia 23212
Noland on the Internet:
For the latest financial news, career opportunities and other Company
information, visit us on the Internet at: www.noland.com
Stock Information
The Company's common stock is traded over the counter as part of NASDAQ's
National Market System (symbol: NOLD). On March 12, 1999, the approximate
number of holders of record of the Company's common stock was 2,500.
Market Prices:
The following table sets forth the reported high and low prices for the
common stock on the NASDAQ system:
High Low
1998
Qtr. 4 $28.94 $20.56
Qtr. 3 $26.00 $22.50
Qtr. 2 $26.50 $23.50
Qtr. 1 $24.50 $22.50
1997
Qtr. 4 $24.63 $22.13
Qtr. 3 $24.75 $22.75
Qtr. 2 $25.25 $20.50
Qtr. 1 $23.75 $21.50
<PAGE>
P/E Ratio:*
High Low
1998 17 14
1997 16 15
*Based on final, full-year earnings
Dividend Policy:
Noland has paid regular cash dividends for 66 consecutive years; and,
while there can be no assurance as to future dividends because they are
dependent on earnings, capital requirements and financial condition, the
Company intends to continue that policy. Dividend payments are subject to the
restrictions described in the Notes to the Consolidated Financial Statements.
Dividends Paid:
The Company paid quarterly dividends of $.08 per share in each quarter of
1998 and 1997.
Registrar:
Noland Company
Transfer Agent:
Continental Stock Transfer and Trust Company
2 Broadway
New York, New York 10004
(212) 509-4000
Annual Meeting:
April 21, 1999, 10:00 a.m.
Noland's Corporate Headquarters
Newport News, Virginia
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,319,000
<SECURITIES> 0
<RECEIVABLES> 56,459,000
<ALLOWANCES> 1,008,000
<INVENTORY> 70,570,000
<CURRENT-ASSETS> 131,587,000
<PP&E> 160,166,000
<DEPRECIATION> 74,361,000
<TOTAL-ASSETS> 234,328,000
<CURRENT-LIABILITIES> 66,319,000
<BONDS> 0
0
0
<COMMON> 37,009,000
<OTHER-SE> 88,224,000
<TOTAL-LIBILITY-AND-EQUITY> 234,328,000
<SALES> 465,479,000
<TOTAL-REVENUES> 465,479,000
<CGS> 372,033,000
<TOTAL-COSTS> 80,186,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 571,000
<INTEREST-EXPENSE> 3,498,000
<INCOME-PRETAX> 9,191,000
<INCOME-TAX> 3,321,000
<INCOME-CONTINUING> 5,870,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,870,000
<EPS-PRIMARY> 1.59
<EPS-DILUTED> 1.59
</TABLE>
