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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Year End Commission File Number
December 31, 1998 0-13646
DREW INDUSTRIES INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3250533
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
200 Mamaroneck Avenue, White Plains, N.Y. 10601
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number including Area Code: (914) 428-9098
Securities Registered pursuant to Section 12(b) of the Act: None
Securities Registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)
Check mark indicates 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|
Aggregate market value of voting stock (Common Stock, $.01 par value) held by
non-affiliates of Registrant (computed by reference to the closing price as of
March 12, 1999) was $84,138,280.
The number of shares outstanding of the Registrant's Common Stock, as of the
latest practicable date (March 12, 1999) was 11,443,457 shares of Common Stock.
Documents Incorporated by Reference
Annual Report to Stockholders for year ended December 31, 1998 is incorporated
by reference into Items 6, 7 and 8 of Part II.
Proxy Statement with respect to Annual Meeting of Stockholders to be held on May
20, 1999 is incorporated by reference into Part III.
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<PAGE>
FORWARD LOOKING STATEMENTS AND RISK FACTORS
This Form 10-K contains certain statements, including the Company's plans
regarding its operating strategy, its products and performance and its views of
industry prospects, which could be construed to be forward looking statements
within the meaning of the Securities Exchange Act of 1934. These statements
reflect the Company's current views with respect to future plans, events and
financial performance. The Company has identified certain risk factors which
could cause actual plans and results to differ substantially from those included
in the forward looking statements. These factors include pricing pressures due
to competition, raw material costs (particularly aluminum, steel, vinyl and
glass), adverse weather conditions impacting retail sales, inventory adjustments
by retailers, availability and costs of labor, and interest rates. In addition,
general economic conditions may affect the retail sale of manufactured homes and
RV's.
Item 1. BUSINESS
Introduction
Drew Industries Incorporated ("Drew" or the "Company"), through its
wholly-owned subsidiaries Kinro, Inc. ("Kinro"), Lippert Components, Inc.
("Lippert"), and Shoals Supply, Inc. ("Shoals") is a leading supplier of a
variety of products for manufactured homes and recreational vehicles. Kinro
manufactures and markets aluminum and vinyl windows for manufactured homes, and
aluminum windows and doors for recreational vehicles. Lippert manufactures and
markets steel chassis and steel chassis parts and galvanized roofing for
manufactured homes, and manufactures and markets steel chassis and steel chassis
parts for recreational vehicles. Shoals manufactures and markets new axles, and
distributes refurbished axles and new and refurbished tires, for manufactured
homes. Several of the Company's customers produce both manufactured homes and
recreational vehicles, and the Company supplies products having similar
characteristics for use in both these lines of business.
Since 1980, the Company has acquired ten manufacturers of products for
both manufactured homes and recreational vehicles, expanded its geographic
market and product lines, added manufacturing facilities, integrated
manufacturing, distribution and administrative functions, and developed new and
innovative products. As a result, the Company currently operates 34
manufacturing facilities in 16 states, and achieved consolidated sales of $331
million for 1998.
The Company was incorporated under the laws of Delaware on March 20, 1984,
and is the successor to Drew National Corporation, which was incorporated under
the laws of Delaware in 1962. The Company's principal executive and
administrative offices are located at 200 Mamaroneck Avenue, White Plains, New
York 10601; telephone number (914) 428-9098. The Common Stock of the Company is
traded on the American Stock Exchange (symbol: DW).
Recent Event
On May 14, 1998, Lippert acquired the manufactured homes steel processing
business of Coil Clip, Inc. ("Coil Clip") for cash of approximately $3.5 million
and entered into a supply agreement to purchase steel from Coil Clip. On
December 16, 1998, Lippert acquired all the remaining assets and business of
Coil Clip for cash of $6 million and a two-year $500,000 promissory note. The
acquisition of the business of Coil Clip will add approximately $12 million of
annualized sales to the Company's existing business.
Manufactured Housing Products Segment
Through its wholly-owned subsidiaries, the Company manufactures and
markets a number of components for manufactured homes, including aluminum and
vinyl windows and screens, steel chassis and steel chassis parts, galvanized
roofing, and new axles, and the Company distributes refurbished axles and new
and refurbished tires. The manufactured housing products segment represents
approximately 82% of the Company's consolidated sales. This segment also
supplies related products to other industries, representing less than 5% of
sales of this segment.
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Raw materials used by the Company in its manufactured housing products
segment, consisting of extruded aluminum and vinyl, glass, various adhesive and
insulating components, and fabricated steel (coil, sheet, galvanized and
I-beam), are available from a number of sources. Used axles and tires, which are
refurbished by the Company, are purchased from dealers of manufactured homes and
independent agents, and their availability is subject to competitive pricing.
The Company maintains an aluminum hedging program under which it purchases
future contracts on the London Metal Exchange to hedge the prices of a portion
of its anticipated requirements. The Company recently acquired the business of
Coil Clip, Inc., a steel processor, to expand its supply and reduce costs for
certain coil steel and sheet steel components used by the Company.
Operations of the Company's manufactured housing products segment consist
primarily of fabricating, welding, painting and assembling components into
finished products, and refurbishing used axles and tires. The Company's
manufactured housing products operations are conducted at 26 manufacturing and
warehouse facilities throughout the United States, strategically located in
proximity to the customers they serve. Four of these facilities also conduct
operations in the Company's recreational vehicles products segment. See Item 2.
"Properties."
The Company's manufactured housing products are sold by 19 sales personnel
working exclusively for the Company to major builders of manufactured homes such
as Clayton Homes, Oakwood Homes, Champion Enterprises, Skyline and Fleetwood
Enterprises.
The Company's manufactured housing products operations compete on the
basis of price, customer service, product quality, and reliability. Although
definitive information is not readily available, the Company believes that the
three leading suppliers of windows for manufactured homes are the Company,
Philips Industries and Care-Free Windows, and that the Company's market share
for windows and screens is approximately 40%. The Company's manufactured homes
chassis and chassis parts operations compete with several other manufactures of
chassis and chassis parts, as well as with certain builders of manufactured
homes which produce their own chassis and chassis parts. Although definitive
information is not readily available, the Company believes that its market share
for chassis and chassis parts for manufactured homes is approximately 15%. The
market for refurbished axles and tires is highly fragmented, has low entry
barriers, and is therefore highly competitive. During 1998, several new
suppliers of refurbished axles and tires entered the market. As a result of
these competitive pressures, the Company's profit margins for its axles and
tires product line declined significantly. Although definitive information is
not readily available, the Company believes that its market share for
refurbished and new axles and tires is approximately 25%.
Recreational Vehicles Products Segment
Through its wholly-owned subsidiaries, the Company manufactures and
markets a number of components for recreational vehicles, including aluminum and
vinyl windows and screens, a variety of doors, steel chassis and steel chassis
parts. The recreational vehicles products segment represents approximately 18%
of the Company's consolidated sales.
Raw materials used by the Company in its recreational vehicles products
segment, consisting of extruded aluminum and vinyl, glass, various adhesive and
insulating components, and fabricated steel (coil, sheet and I-beam), are
available from a number of sources. The Company maintains an aluminum hedging
program under which it purchases future contracts on the London Metal Exchange
to hedge the prices of a portion of its anticipated requirements.
Operations of the Company's recreational vehicles products segment consist
primarily of fabricating, welding, painting and assembling components into
finished products, and tempering glass for its own use and for sale to other
window manufacturers. The Company's recreational vehicles products operations
are conducted at 12 manufacturing and warehouse facilities throughout the United
States, strategically located in proximity to the customers they serve. Four of
these facilities also conduct operations in the Company's manufactured housing
products segment. See Item 2. "Properties."
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The Company's recreational vehicles products are sold by 5 sales personnel
working exclusively for the Company to major manufacturers of recreational
vehicles such as Fleetwood Enterprises, Thor Industries and Skyline.
The Company's recreational vehicles products operations compete on the
basis of price, customer service, product quality, and reliability. Although
definitive information is not readily available, the Company believes that there
are approximately 10 significant suppliers of windows and doors for recreational
vehicles, several of which are substantially larger than the Company. The
Company's recreational vehicles chassis and chassis parts operations compete
with several other manufactures of chassis and chassis parts, as well as with
certain manufacturers of recreational vehicles which produce their own chassis
and chassis parts. The Company's operation as a supplier of chassis and chassis
parts for recreational vehicles had only a small market share in 1997, but the
Company's market share has been increasing substantially. Although definitive
information is not readily available, the Company believes that its market share
for chassis and chassis parts for recreational vehicles is currently 8%.
Regulatory Matters
Windows produced by the Company for manufactured homes must comply with
performance and construction regulations promulgated by the United States
Housing and Urban Development Authority ("HUD") and by the American
Architectural Manufacturers Association relating to air and water infiltration,
thermal performance, emergency exit conformance, and hurricane resistance.
Windows and doors produced by the Company for the recreational vehicle industry
are regulated by The United States Department of Transportation Federal Highway
Administration ("DOT"), National Fire and Protection Agency, and the National
Electric Code governing safety glass performance, egressability, door hinge and
lock systems, egress window retention hardware, and baggage door ventilation.
Manufactured homes are built on steel chassis which are fitted with axles
and tires sufficient in number to support the weight of the home and are
transported by producers to dealers via roadway. When the home is installed at
the site, the axles and tires are usually repurchased from the homeowner and
removed by the dealer or installer. Regulations promulgated by HUD require the
axles to be inspected after each use and refurbished or, if necessary, replaced.
The Company purchases from dealers and independent agents, and repairs and
refurbishes, used axles and tires, and markets the refurbished axles and tires
to producers of manufactured homes.
In accordance with regulations promulgated by HUD, refurbished axle
assemblies distributed by the Company are refurbished in accordance with a
detailed Quality Control Program formulated by an independent inspection agency.
Compliance with the Quality Control Program is monitored by the inspection
agency on a monthly basis. All expenses of formulating the program, inspection,
and monitoring are paid for by the Company. In addition, new and refurbished
tires distributed by the Company are subject to regulations promulgated by DOT
and by HUD relating to weight tolerance, maximum speed, size, and components.
In accordance with new regulations promulgated in November 1998,
transporters of manufactured homes are utilizing tires with new specifications.
As a result, at December 31, 1998 the Company had excess inventory of tires
previously used by its customers, and the Company reduced the inventory value of
such tires. In addition, the supply of used tires with new specifications which
are available for the Company's tire refurbishing operation is temporarily
limited.
The Company's operations are also subject to certain federal, state and
local regulatory requirements relating to the use, storage, discharge and
disposal of hazardous chemicals used during their manufacturing processes.
The Company believes that it is currently operating in compliance with
applicable laws and regulations, and does not believe that the expense of
compliance with these laws and regulations, as currently in effect, will have a
material effect on the Company's capital expenditures, earnings or competitive
position.
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Employees
The approximate number of persons employed full-time by the Company and
its subsidiaries at December 31, 1998 was 2,656. The Company and its
subsidiaries believe that relations with its employees are good.
Other
In connection with the spin-off by the Company of Leslie Building
Products, Inc. ("Leslie Building Products"), now known as "LBP, Inc." ("LBP"),
and its wholly-owned subsidiary, Leslie-Locke, Inc. ("Leslie-Locke"), now known
as Prime Acquisition Corp. ("Prime"), which was effective on July 29, 1994, the
Company and LBP entered into a Shared Services Agreement. Pursuant to the Shared
Services Agreement, the Company and LBP agreed to share certain administrative
functions and employee services, such as management overview and planning, tax
preparation, financial reporting, coordination of independent audit, stockholder
relations, and regulatory matters. The Company is reimbursed by LBP for the fair
market value of such services. The Shared Services Agreement was extended to
December 31, 1999.
Item 2. PROPERTIES
The Company's manufacturing is done out of buildings that are used for
both manufacturing and warehousing. In addition, there are administrative
facilities used for corporate and administrative functions. The following is a
chart of the properties from which the Company operates:
City State Square Feet Owned Leased
---- ----- ----------- ----- ------
MH SEGMENT
Bear Creek Alabama 150,000 x
Double Springs Alabama 72,500 x
Phil Campbell Alabama 53,200 x
Ocala Florida 47,094 x
Thomasville Georgia 70,000 x
Fitzgerald Georgia 55,300 x
Americus Georgia 36,950 x
Nampa Idaho 39,500 x
Goshen Indiana 100,000 x
Goshen Indiana 58,000 x
Goshen (Frame) Indiana 57,000 x
Bristol Indiana 40,000 x
Arkansas City Kansas 7,800 x
Bossier City Louisiana 11,400 x
Whitehall New York 12,675 x
Harrisburg North Carolina 57,950 x
Liberty North Carolina 47,000 x
Rockwell North Carolina 14,000 x
Sugarcreek Ohio 14,480 x
Mc Adoo Pennsylvania 25,088 x
Dayton Tennessee 100,000 x
Maynardville Tennessee 20,000 x
Mansfield Texas 61,500 x
Alvarado Texas 49,700 x
Waco Texas 23,000 x
Lancaster Wisconsin 12,250 x
----------
1,236,387
==========
In addition a 21,600 square foot facility is under construction in Garret,
Indiana.
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City State Square Feet Owned Leased
---- ----- ----------- ----- ------
RV SEGMENT
Fontana California 108,750 x
Fitzgerald Georgia 23,700 x
Goshen (Frame) Indiana 20,000 x
Elkhart Indiana 36,600 x
Goshen Indiana 97,974 x
Crawfordsville Indiana 17,800 x
Goshen (Tempering Plant) Indiana 53,000 x
Edgerton Ohio 10,000 x
Mc Adoo Pennsylvania 8,362 x
Alvarado Texas 21,300 x
Longview Texas 58,900 x
Berkley Springs West Virginia 38,600 x
-------
494,986
=======
ADMINISTRATIVE
Alma Michigan 10,800 x
Naples Florida 4,500 x
Arlington Texas 8,464 x
Arlington Texas 900 x
White Plains New York 2,800 x
--------
27,464
========
Item 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings which, in the opinion
of Management, could have a material adverse effect on the Company or its
consolidated financial position.
See Note 10 of Notes to Consolidated Financial Statements with respect to
certain product liability claims pending against White Metal Rolling and
Stamping Corp. ("White Metal"), a subsidiary of Prime, arising in connection
with the ladder manufacturing business formerly conducted by White Metal.
Although the Company was named as a defendant in certain actions commenced in
connection with these claims, the Company has not been held responsible, and the
Company disclaims any liability for the obligations of White Metal.
See Note 10 of Notes to Consolidated Financial Statements with respect to
the filing by White Metal, on September 30, 1994, of a voluntary petition
seeking liquidation under the provisions of chapter 7 of the United States
Bankruptcy Code. On May 7, 1996, the Company and its subsidiary, Kinro, Inc.,
and LBP and its subsidiary, Prime, were served with a summons and complaint in
an adversary proceeding commenced by the chapter 7 trustee of White Metal. The
complaint, which appears to have alleged several duplicate claims, sought
damages in the aggregate amount of $10.6 million plus attorneys fees, of which
up to approximately $7.5 million of tax-related claims was sought, jointly and
severally, from the Company, Kinro, LBP and Prime. On July 14, 1998, the
Bankruptcy Court granted defendants' motion to dismiss the trustee's tax-related
claims. The Court permitted the trustee to replead the dismissed claims, but the
trustee elected not to replead. The trustee could appeal the Court's decision
dismissing these claims on termination of the proceeding.
Other than the dismissed tax-related claims, the trustee alleges that
White Metal made certain payments to the Company which were preferential and are
recoverable by White Metal, in the approximate amount of $900,000. Although
these claims were not dismissed, the Company believes that the claims are
without merit, denies liability for any such amount, and is vigorously defending
against the allegations. However, an estimate of potential loss, if any, cannot
be made at this time. The Company believes that the defense of this proceeding
will not have a material adverse impact on the Company's financial condition or
results of operations.
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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following tables set forth certain information with respect to the
Directors and Executive Officers of the Company as of December 31, 1998.
Name Position
---- --------
Leigh J. Abrams President, Chief Executive Officer and Director
(Age 56) of the Company since March 1984.
Edward W. Rose, III Chairman of the Board of Directors of the Company
(Age 57) since March 1984.
David L. Webster Director of the Company since March 1984.
(Age 63)
L. Douglas Lippert Director of the Company since November 1997.
(Age 51)
James F. Gero Director of the Company since May 1992.
(Age 53)
Gene H. Bishop Director of the Company since June 1995.
(Age 69)
Fredric M. Zinn Chief Financial Officer of the Company since
(Age 47) January 1986.
Harvey J. Kaplan Secretary and Treasurer of the Company since
(Age 64) March 1984.
LEIGH J. ABRAMS has also been President, Chief Executive Officer and a
Director of LBP since July 1994.
EDWARD W. ROSE, III, for more than the past five years, has been President
and principal stockholder of Cardinal Investment Company, Inc., an investment
firm. Mr. Rose also serves as a director of the following public companies:
Osprey Holding, Inc., previously engaged in selling computer software for
hospitals; Liberte Investors, Inc., engaged in real estate loans and
investments; and ACE Cash Express, Inc., engaged in check cashing services.
Since July 1994, Mr. Rose has also been Chairman of the Board of LBP.
DAVID L. WEBSTER, since November 1980, has been President and Chief
Executive Officer of Kinro, Inc., a subsidiary of the Company, and Chairman of
Kinro, Inc. since November 1984. Mr. Webster has also been President and Chief
Executive Officer of Shoals Supply, Inc., a subsidiary of the Company, since its
acquisition in February 1996.
L. DOUGLAS LIPPERT, since October 1997, has been President and Chief
Executive Officer of Lippert Components, Inc., a subsidiary of the Company, and
President of the predecessor of Lippert Components, Inc. since 1978. Mr. Lippert
has also been President of Coil Clip, Inc., a subsidiary of the Company, since
its acquisition in December 1998. The Board of Directors appointed Mr. Lippert
as a Director in connection with
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the acquisition of Lippert Components, Inc. in October 1997, and Mr. Lippert was
elected to his present term as a director at the Annual Meeting of Stockholders
held on May 21, 1998.
JAMES F. GERO, since March 1992, has been Chairman and Chief Executive
Officer of Sierra Technologies, Inc., a manufacturer of defense systems
technologies. From July 1987 to October 1989, Mr. Gero was Chairman and Chief
Executive Officer of Varo, Inc., a manufacturer of defense electronics, and from
1985 to 1987, Mr. Gero was President and Chief Executive Officer of Varo, Inc.
Mr. Gero also serves as a director of the following public companies: Orthofix
International, N.V.,an international supplier of orthopedic devices for bone
fixation and stimulation; and Spar Aerospace Ltd., engaged in space robotics,
communications equipment and aerospace products and services. Since July 1994,
Mr. Gero has also been a Director of LBP.
GENE H. BISHOP, from March 1975 until July 1990, was Chief Executive
Officer of MCorp, a bank holding company, and from October 1990 to November
1991, was Vice Chairman and Chief Financial Officer of Lomas Financial
Corporation, a financial services company. From November 1991 until his
retirement in October 1994, Mr. Bishop served as Chairman and Chief Executive
Officer of Life Partners Group, Inc., a life insurance holding company. Mr.
Bishop also serves as a director of the following publicly-owned companies:
Liberte Investors, Inc., engaged in real estate loans and investments; Southwest
Airlines Co., a regional airline; and Paymentech, Inc., a credit card payment
processor.
FREDRIC M. ZINN has also been Chief Financial Officer of LBP since July
1994. Mr. Zinn is a Certified Public Accountant.
HARVEY J. KAPLAN has also been Secretary and Treasurer of LBP since July
1994. Mr. Kaplan is a Certified Public Accountant.
Compliance with Section 16(a) of the Securities Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers and directors, and persons who beneficially own
more than ten percent of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and the American Stock Exchange. Officers, directors and greater than
ten-percent shareholders are required by SEC regulation to furnish the Company
with copies of all Section 16(a) forms they file.
Based on its review of the copies of such forms received by it, the
Company believes that during 1998 all such filing requirements applicable to its
officers and directors (the Company not being aware of any ten percent holder
during 1998 other than Edward W. Rose, III and L. Douglas Lippert, directors of
the Company, and FMR Corp.) were complied with.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Per Share Market Price Information
The Common Stock of the Company is traded on the American Stock Exchange
(symbol: DW). On March 12, 1999, there were 2,204 holders of record of the
Common Stock. The Company estimates that 2,000 to 4,000 additional stockholders
own shares of its Common Stock held in the name of Cede & Co. and other broker
and nominee names.
The table below sets forth, for the periods indicated, the range of high
and low closing prices per share for the Common Stock as reported by the
American Stock Exchange.
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All of the following prices have been retroactively adjusted to reflect
the two-for-one split effective March 21, 1997.
High Low
---- ---
Calendar 1998
Quarter ended March 31........ $13.38 $11.75
Quarter ended June 30......... $15.13 $12.63
Quarter ended September 30.... $15.00 $11.50
Quarter ended December 31..... $12.88 $10.13
High Low
---- ---
Calendar 1997
Quarter ended March 31........ $13.81 $10.75
Quarter ended June 30......... $13.00 $10.63
Quarter ended September 30.... $14.38 $11.75
Quarter ended December 31..... $14.13 $11.06
The closing price per share for the Common Stock on March 12, 1999, was
$12.25.
Dividend Information
The Company has not paid any cash dividends on its Common Stock. Future
dividend policy with respect to the Common Stock will be determined by the Board
of Directors of the Company in light of prevailing financial needs and earnings
of the Company and other relevant factors.
The Company's dividend policy is subject to certain restrictions contained
in its 6.95% Senior Notes and in financing agreements relating to its credit
facility.
Item 6. SELECTED FINANCIAL DATA, Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, and Item 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA, are incorporated by reference to the Company's Annual
Report to Stockholders for the year ended December 31, 1998.
Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
Part III of Form 10-K is incorporated by reference to the Company's Proxy
Statement with respect to its Annual Meeting of Stockholders to be held on May
20, 1999.
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PART IV
Item 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES and REPORTS ON FORM 8-K
(a) Documents Filed
(1) Financial Statements. The Consolidated Financial
Statements of the Company and its subsidiaries are
incorporated by reference to the Consolidated Financial
Statements and Notes to Consolidated Financial
Statements in the Company's Annual Report to
Stockholders for the year ended December 31, 1998.
(2) Schedules. Schedule II - Valuation and Qualifying
Accounts.
(3) Exhibits. See "List of Exhibits" at the end of this
report incorporated herein by reference.
(b) Reports on Form 8-K
On December 23, 1998, the Company filed a Current Report on Form 8-K
reporting the acquisition of Coil Clip, Inc.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Registrant has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DREW INDUSTRIES INCORPORATED
Date: March 24, 1999
By: /s/ Leigh J. Abrams
---------------------------
Leigh J. Abrams, President
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and dates indicated.
Each person whose signature appears below hereby authorizes Leigh J.
Abrams and Harvey J. Kaplan, or either of them, to file one or more amendments
to the Annual Report on Form 10-K which amendments may make such changes in such
Report as either of them deems appropriate, and each such person hereby appoints
Leigh J. Abrams and Harvey J. Kaplan, or either of them, as attorneys-in-fact to
execute in the name and on behalf of each such person individually, and in each
capacity stated below, such amendments to such Report.
Date Signature Title
- ---- --------- -----
March 24, 1999 By: /s/Leigh J. Abrams Director, President and
-------------------- Chief Executive Officer
(Leigh J. Abrams)
March 24, 1999 By: /s/Harvey J. Kaplan Secretary and Treasurer
--------------------
(Harvey J. Kaplan)
March 24, 1999 By: /s/Fredric M. Zinn Chief Financial Officer
--------------------
(Fredric M. Zinn)
March 24, 1999 By: /s/John F. Cupak Controller
--------------------
(John F. Cupak)
March 24, 1999 By: /s/Edward W. Rose III Director
--------------------
(Edward W. Rose, III)
March 24, 1999 By: /s/David L. Webster Director
--------------------
(David L. Webster)
March 24, 1999 By: /s/L. Douglas Lippert Director
--------------------
(L. Douglas Lippert)
March 24, 1999 By: /s/James F. Gero Director
--------------------
(James F. Gero)
March 24, 1999 By: /s/Gene H. Bishop Director
--------------------
(Gene H. Bishop)
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Report of Independent Auditors
The Board of Directors
Drew Industries Incorporated:
Under date of February 10, 1999, we reported on the consolidated balance sheets
of Drew Industries Incorporated and subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the years in the three-year period ended December 31,
1998, as contained on pages 12 through 23 in the 1998 annual report to
stockholders. These consolidated financial statements and our report thereon are
incorporated by reference in the annual report on Form 10-K for the year 1998.
In connection with our audits of the aforementioned consolidated financial
statements, we also have audited the related financial statement schedule as
listed on Item 14. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG LLP
Stamford, Connecticut
February 10, 1999
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DREW INDUSTRIES INCORPORATED AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- -------- ---------------------- -------- --------
Additions
----------------------
Balance At Charged To Charged To Balance At
Beginning Costs and Other End
Of Period Expenses Accounts Deductions Of Period
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998:
Allowance for doubtful accounts
receivable, trade $ 528 $266 $50(a) $ 154 $690
Reserve for liquidation losses -
disposal of businesses 9 (9)
Reserve for revaluation of loans 60 (60)
Reserve for notes receivable 436 (91) 345(c)
YEAR ENDED DECEMBER 31, 1997:
Allowance for doubtful accounts
receivable, trade $ 308 $(10) $231(a) $ 1(b) $528
Reserve for liquidation losses -
disposal of businesses 9 9
Reserve for revaluation of loans 361 (301) 60
Reserve for notes receivable 498 (86) (24)(c) 436
YEAR ENDED DECEMBER 31, 1996:
Allowance for doubtful accounts
receivable, trade $ 266 $ 23 $30(a) $ 11(b) $308
Reserve for liquidation losses -
disposal of businesses 9 9
Reserve for revaluation of loans 334 27 361
Reserve for notes receivable 692 (321) (127)(c) 498
</TABLE>
(a) Represents balance at date of acquisition of acquired companies.
(b) Represents accounts written-off net of recoveries.
(c) Represents write-off of uncollectible portion of notes, net of recoveries.
Page - 13 -
<PAGE>
EXHIBIT INDEX
Exhibit Sequentially
Number Description Numbered Page
- ------ ----------- -------------
3. Articles of Incorporation and By-laws.
3.1 Drew Industries Incorporated Restated
Certificate of Incorporation.
3.2 Drew Industries Incorporated By-laws, as amended.
Exhibit 3.1 is incorporated by reference to Exhibit III to the Proxy
Statement-Prospectus constituting Part I of the Drew National Corporation and
Drew Industries Incorporated Registration Statement on Form S-14 (Registration
No. 2-94693).
Exhibit 3.2 is incorporated by reference to the Exhibit bearing the same
number included in the Annual Report of Drew Industries Incorporated on Form
10-K for the fiscal year ended August 31, 1985.
10 Material Contracts.
10.27 Lease between Kinro, Inc. and Robert A. White and Larry B. White, dated
June 1, 1979, as amended.
10.39 Leases between Robert A. White, Larry B. White and Kinro, Inc. dated July
25, 1983, as amended.
10.47 Registration Agreement among Drew Industries Incorporated and the
Leslie-Locke Shareholders dated August 28, 1985.
10.66 Employment Agreement by and between Kinro, Inc. and David L. Webster,
dated March 31, 1996.
10.100 Drew Industries Incorporated Stock Option Plan.
10.134 Letter, dated April 28, 1988, from Drew Industries Incorporated to Leigh
J. Abrams confirming compensation arrangement.
10.135 Description of split-dollar life insurance plan for certain executive
officers.
10.146 Form of Plan and Agreement of Distribution between Leslie Building
Products, Inc. and Drew Industries Incorporated dated July 29, 1994.
10.147 Form of Shared Services Agreement between Leslie Building Products, Inc.
and Drew Industries Incorporated dated July 29, 1994.
10.148 Form of Tax Matters Agreement between Leslie Building Products, Inc. and
Drew Industries Incorporated dated July 29, 1994.
10.151 Asset Purchase Agreement, dated February 15, 1996, by and among Shoals
Supply, Inc., Lecil V. Thomas, and Drew Industries Incorporated.
10.152 Non-Negotiable Promissory Note, dated February 15, 1996, of Shoals
Acquisition Corp., to the order of Shoals Supply, Inc. in the principal
amount of $760,000, guaranteed by Drew Industries Incorporated.
Page - 14 -
<PAGE>
10.153 Bill of Sale, dated February 15, 1996 by and between Shoals Supply, Inc.
and Drew Industries Incorporated.
10.154 Registration Rights Agreement, dated February 15, 1996, by and among Drew
Industries Incorporated, Shoals Supply, Inc., and Lecil V. Thomas.
10.155 Consulting and Non-Competition Agreement, dated February 15, 1996, by and
between Drew Industries Incorporated and Lecil V. Thomas.
10.156 Leases, dated February 15, 1996, between Thomas Family Partnership, Ltd.
and Shoals Acquisition Corp.
10.157 Employment Bonus Agreements, dated February 15, 1996, by and between
Shoals Supply, Inc. and the employees named therein.
10.158 Assignment, dated February 15, 1996, by and among Shoals Supply, Inc.,
Lecil V. Thomas and Drew Industries Incorporated.
10.159 Stock Purchase and Pledge Agreement and Non-Negotiable Promissory Note,
dated March 7, 1997 by and between Drew Industries Incorporated and
Edward W. Rose, III.
10.160 Agreement and Plan of Merger, dated October 7, 1997, by and among Drew
Industries Incorporated, Lippert Acquisition Corp., Lippert Components,
Inc. and the shareholders of Lippert Components, Inc. named therein.
10.161 Registration Rights Agreement, dated October 7, 1997, by and among Drew
Industries Incorporated, Lippert Acquisition Corp., and certain
shareholders of Lippert Components, Inc. named therein.
10.162 Contingency Escrow Agreement, dated October 7, 1997 by and among Drew
Industries Incorporated, Lippert Acquisition Corp., The Chase Manhattan
Bank, and certain shareholders of Lippert Components, Inc. named therein.
10.163 Indemnity Escrow Agreement, dated October 7, 1997, by and among Drew
Industries Incorporated, Lippert Acquisition Corp., The Chase Manhattan
Bank, and The L. Douglas Lippert Living Trust dated June 6, 1989.
10.164 Executive Employment and Non-Competition Agreement, dated October 7,
1997, by and between Lippert Components, Inc. and L. Douglas Lippert.
10.165 Note Purchase Agreement, dated January 28, 1998, by and among Kinro, Inc,
Lippert Components, Inc. and Shoals Supply, Inc. (collectively, the "Note
Co-Issuers") and Teachers Insurance and Annuity Association of America,
ING Investment Management, Inc. as agent for Midwestern Life Insurance
Company, Security Life of Denver Insurance Company, Equitable Life
Insurance Company of Iowa and USG Annuity & Life Insurance Company
(collectively, the "Note Purchasers").
10.166 6.95% Senior Notes due January 28, 2005 in the aggregate principal amount
of $40,000,000 issued by the Note Co-Issuers to the Note Purchasers.
10.167 Pledge Agreements, dated January 28, 1998, by and between The Chase
Manhattan Bank, as trustee for the benefit of the Note Purchasers and,
separately, Registrant, Kinro, Inc., Shoals Supply, Inc., Kinro
Manufacturing.
10.168 Guarantee Agreement, dated January 28, 1998, by and among Registrant and
the Note Purchasers.
Page - 15 -
<PAGE>
10.169 Subsidiary Guaranty, dated January 28 1998, by Kinro Holding Inc., Kinro
Manufacturing, Inc., Shoals Holding, Inc., Kinro Texas Limited
Partnership, Kinro Tennessee Limited Partnership, Shoals Supply Texas
Limited Partnership and Shoals Supply Tennessee Limited Partnership
(collectively, the "Subsidiaries") in favor of the Note Purchasers.
10.170 Collateralized Trust Agreement, dated January 28, 1998, by and among the
Note Co-Issuers and the Note Purchasers.
10.171 Subordination Agreement, dated January 28, 1998, by and among
Registrant, the Note Co-Issuers, Lippert Components, Inc., the
Subsidiaries, and the Note Purchasers.
10.172 $25,000,000 Revolving Credit Facility - Credit Agreement, dated January
28 1998, by and among Kinro, Inc., Shoals Supply, Inc. and Lippert
Components, Inc. (The "Borrowers") and The Chase Manhattan Bank
("Chase") and KeyBank National Association ("KeyBank") (together, the
"Lenders").
10.173 $15,000,000 Revolving Credit Note, dated January 28, 1998, made by the
Borrowers to Chase.
10.174 $10,000,000 Revolving Credit Note, dated January 28, 1998, made by the
Borrowers to KeyBank.
10.175 Company Guarantee Agreement, dated January 28, 1998, made by Registrant
to Chase, as agent for the Lenders.
10.176 Subsidiary Guarantee Agreement, dated January 28, 1998, made by each
direct and indirect subsidiary of Registrant (other than the Borrowers)
in favor of Chase, as agent for the Lenders.
10.177 Subordination Agreement, dated January 29, 1998, made by each direct and
indirect subsidiary of Registrant and Chase, as agent for the Lenders.
10.178 Pledge and Security Agreement, dated January 28, 1998, made by
Registrant, the Borrowers, and certain indirect subsidiaries of
Registrant in favor of Chase, as collateral agent.
Exhibit 10.27 is incorporated by reference to the Exhibits bearing the
same number indicated on the Registration Statement of Drew National Corporation
on Form S-1 (Registration No. 2-72492).
Exhibit 10.39 is incorporated by reference to the Exhibit included in
the Annual Report of Drew National Corporation on Form 10-K for the fiscal year
ended August 31, 1983.
Exhibits 10.47 is incorporated by reference to the Exhibits included in
the Company's Current Report on Form 8-K dated September 6, 1985.
Exhibit 10.66 is incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
Exhibit 10.100 is incorporated by reference to Exhibit A to the Proxy
Statement of the Company dated May 10, 1995.
Exhibit 10.134 is incorporated by reference to the Exhibit bearing the
same number included in the Company's Transition Report on Form 10-K for the
period September 1, 1992 to December 31, 1993.
Exhibit 10.135 is incorporated by reference to the Exhibit bearing the
same number included in the Company's Transition Report on Form 10-K for the
period September 1, 1992 to December 31, 1993.
Page - 16 -
<PAGE>
Exhibits 10.146-10.148 are incorporated by reference to the Exhibits
bearing numbers 10.1, 10.3 and 10.4, respectively, included in Post-Effective
amendment No. 1 on Form 10/A, dated August 30, 1994, to the Registration
Statement of Leslie Building Products, Inc. on Form 10 (Registration No.
0-24094).
Exhibits 10.151 - 10.158 are incorporated by reference to the Exhibits
included in the Company's Current Report on Form 8-K dated February 29, 1996.
Exhibit 10.159 is incorporated by reference to the Exhibit bearing the
same number included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1996.
Exhibits 10.160 - 10.164 are incorporated by reference to the Exhibits
included in the Company's Current Report on Form 8-K dated October 16, 1997.
Exhibits 10.165 - 10.178 are incorporated by reference to the Exhibits
bearing the same numbers included in the Company's Annual Report on Form 10-K
for the year ended December 31, 1997.
13. 1998 Annual Report to Stockholders.
Exhibit 13 is filed herewith. _______________
21. Subsidiaries
Exhibit 21 is filed herewith. _______________
23. Consent of Independent Auditors.
Exhibit 23 is filed herewith. _______________
24. Powers of Attorney.
Powers of Attorney of persons signing this Report are included as part of
this Report.
Page - 17 -
DREW Industries Incorporated
[PHOTO OMITTED]
1998 ANNUAL REPORT
<PAGE>
COMPANY PROFILE "Drew's sales have increased nearly 400 percent over the last
five years, through acquisitions, product line extensions and geographic
expansion. During that period, our net income has grown at an average annual
compound rate of 22 percent, including an increase of 27 percent for 1998."
Drew, through its wholly-owned subsidiaries, Kinro, Lippert and Shoals, supplies
a broad line of components for manufactured homes and recreational vehicles.
Drew's manufactured housing products segment, which accounts for 82 percent of
consolidated sales, manufactures a variety of products used in the construction
of manufactured homes, including windows and screens, chassis and chassis parts,
axles, and galvanized roofing. The manufactured housing products segment also
imports new tires and refurbishes used axles and tires which are supplied to
producers of manufactured homes. The recreational vehicle products segment,
which accounts for 18 percent of consolidated net sales, manufactures a variety
of products used in the production of recreational vehicles, including windows,
doors and chassis.
Our greatest strength continues to be the dedication, skill and expertise of our
thousands of employees. Without their efforts, Drew's success over the past
years could not have been achieved.
[GRAPHIC OMITTED]
STRATEGY TO CONTINUE GROWTH AND PROFITABILITY
- Low cost producer
- "Quick response" manufacturing
- Reasonable prices
1998 - Quality products
- Superior customer service
- Product line extensions and increased market share
- Strategic acquisitions
================================================================================
In Memoriam
On September 2, 1998, Ray Romano, our audit partner from KPMG LLP, independent
auditors, died in the crash of SwissAir flight 111 in Halifax, Nova Scotia. His
guidance and his smile will be dearly missed.
================================================================================
TABLE OF CONTENTS
Financial Highlights 1 Letter to Stockholders 2 Capacity Expansion 4
Industries and Products 6 Management's Discussion and Analysis of Financial
Condition and Results of Operations 7 Selected Financial Data 11
Consolidated Statements of Income 12 Consolidated Balance Sheets 13
Consolidated Statements of Cash Flows 14 Consolidated Statements of
Stockholders' Equity 15 Notes to Consolidated Financial Statements 16
Corporate Information & Stock Information IBC
<PAGE>
Drew Industries Incorporated
FINANCIAL HIGHLIGHTS
------------------------------
(In thousands, except per share amounts) 1998 1997 1996
- --------------------------------------------------------------------------------
Net Sales $330,640 $208,365 $168,151
Net Income $ 15,217 $ 11,994 $ 12,572
Net Income Per Basic Common Share $ 1.36 $ 1.22 $ 1.18
Net Income Per Diluted Common Share $ 1.34 $ 1.19 $ 1.15
Working Capital $ 31,630 $ 24,009 $ 16,138
Stockholders' Equity $ 68,762 $ 51,953 $ 34,779
Book Value Per Common Share $ 6.06 $ 4.67 $ 3.24
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
1
<PAGE>
LETTER TO STOCKHOLDERS
[PHOTO OMITTED]
For Drew, 1998 was a year of outstanding accomplishments despite significant
challenges. Drew reported record net sales of $331 million in 1998, an increase
of 59 percent from $208 million in 1997. The sales increase resulted primarily
from acquisitions consummated during the past two years,
however, sales by currently owned operations increased
14 percent in 1998.
Earnings per share (diluted) increased 13 percent to $1.34 in 1998 from $1.19
in 1997, while net income for 1998 of $15.2 million represented a 27 percent
increase over last year's net income of $12.0 million. The acquisitions
completed in the past two years were accretive to earnings for 1998.
Drew's record results were achieved even though we experienced new competition
in our axle and tire refurbishing product line, which reduced its gross margin.
Although competition in this line of products is expected to continue throughout
1999, we anticipate that its effect will be offset by increased sales and
improved efficiencies in other product lines, enabling Drew to achieve another
year of earnings growth.
During 1998 Drew achieved the following:
o Gained market share in both its manufactured housing products
segment and recreational vehicle products segment, highlighted by a
58 percent increase in sales of manufactured housing vinyl windows,
the successful introduction of a new vinyl patio door product line
and a four-fold increase in our RV chassis business. Because of
these market share gains, Drew has been growing much faster than the
industries it serves.
o Received a significant commitment from a major manufacturer for the
purchase of our manufactured housing chassis, with shipments to
begin in mid-1999.
o Acquired the assets and business of Coil Clip, a supplier of
speciality steel and steel parts used in our operations as well as
by other manufacturers. This acquisition will help to keep our steel
costs competitive.
o Constructed three new manufacturing and warehouse facilities, to
support increased demand for our RV chassis. This expansion has been
well managed, as production efficiencies improved throughout the
year. Further expansion of capacity in this product line is planned
for 1999.
2 1998 Annual Report
<PAGE>
Drew Industries Incorporated
ACHEIVEMENT
o Completed the consolidation under budget and ahead of schedule, of
certain of our operations within the manufacturing housing segment,
by transferring all manufacturing of chassis parts to our Lippert
subsidiary and substantially all refurbishing of axles and tires to
our Shoals subsidiary. These moves helped lower production costs,
improve customer service, and eliminate duplicate operations.
o Completed the refinancing of our debt, by reducing our revolving
credit line from $65 million to $25 million, and placing $40 million
of seven-year Senior Notes at a fixed interest rate of 6.95 percent.
o Based upon our stock price relative to earnings and cash flow, our
Board of Directors determined that one of the best uses of our
available resources was to repurchase our own common stock.
Accordingly, in 1998 we repurchased approximately 176,000
outstanding shares of our common stock. An additional 102,000 shares
have been repurchased in 1999, and we are authorized to repurchase
up to 172,000 more shares in 1999.
Both industries served by Drew experienced outstanding growth in 1998. Industry
shipments of manufactured homes during 1998 increased 5 percent from 1997 to
373,000 homes, representing 23 percent of all new single family housing starts.
This is the highest level of shipments for the industry since 1973. Equally
significant is the continuing increase in the sale of multi-section manufactured
homes, which now represent over 61 percent of all manufactured homes sold. The
sale of multi-section homes, which can range from 1,600 sq. ft. to over 2,500
sq. ft., bodes well for the industry because it reflects wide recognition of the
quality and cost advantage of manufactured homes. Drew's manufactured housing
products segment represents 82 percent of consolidated sales and 85 percent of
total segment operating profit.
The RV industry experienced its best year in two decades. Sales of all RV's
reached 292,700 units, representing an increase of 15 percent over 1997.
Demographic trends continue to be favorable for this industry, as the largest
market for RV's consists of Americans over 50 years old.
Drew's sales have more than tripled over the last three years, through
acquisitions, product line extensions and geographic expansion. In 1999, we
expect to continue to increase sales and improve production efficiencies, which
should more than offset the effects of competition in our refurbished axles and
tires product line. In addition, Drew will continue to explore geographic
expansion and strategic acquisitions, and pursue managed growth in both sales
and income.
Sincerely,
/s/ Edward W. Rose, III
EDWARD W. ROSE, III
Chairman of the Board
/s/ Leigh J. Abrams
LEIGH J. ABRAMS
President and Chief Executive Officer
3
<PAGE>
CAPACITY EXPANSION
[GRAPHIC OMITTED]
KEY LOCATIONS
The Company's 34 manufacturing and warehouse facilities are concentrated in the
southeast, south central and north central United States. Our facilities are
generally located within 250 miles of our major customers in order to minimize
freight costs and delivery times. In 1999, we expect to open three new
facilities.
4 1998 Annual Report
<PAGE>
Drew Industries Incorporated
FACILITIES EXPANSION
During the past several years, Drew has met the increasing demand for its
products, particularly vinyl windows for manufactured homes and chassis for
recreational vehicles, by constructing new facilities strategically located to
meet the needs of our customers. During 1997 and 1998, new facilities to
manufacture vinyl windows were completed in Tennessee and Indiana, while RV
chassis facilities were opened in Texas, West Virginia, Indiana and Ohio.
[GRAPHIC OMITTED]
GROWTH THROUGH ACQUISITIONS
Drew has also expanded geographically and broadened its product line through
acquisitions. In late 1998, Drew acquired the assets and business of Coil Clip,
a supplier of specialty steel parts, with sales of more than $10 million.
Lippert Components, which produces a broad line of products for manufactured
homes and RV's, and which had annual sales of nearly $100 million, was acquired
in late 1997. Also acquired in 1997 were the assets and business of Pritt Tire
and Axle, a refurbisher of axles and tires used to transport manufactured homes,
with annual sales of more than $10 million. In early 1996, Drew acquired the
assets and business of Shoals Supply, Inc., which sells new and refurbished
axles and tires for manufactured homes. Shoals had annual sales of more than $55
million prior to the acquisition. These acquisitions have added to the line of
products supplied by Kinro, Inc., a Drew subsidiary for many years.
AWARDS
[PHOTO OMITTED]
- --------------------------------------------------------------------------------
Over recent years Kinro, Lippert, and Shoals have been recognized as outstanding
suppliers by a number of the leading producers of manufactured homes and
recreational vehicles. Our customer service, quick delivery time and superb
product quality have enabled us to become a leading supplier of a broad range of
products for these industries. Drew's commitment to customer service is
evidenced by the fact that our 34 facilities are typically located close to our
customers to minimize delivery times. Also, products are designed to meet the
needs of our customers, while being standardized to allow for efficient, cost
effective production. With a customer list that includes nearly all of the
largest producers of manufactured homes and recreational vehicles across the
country, we are proud that our efforts have been recognized by these awards.
5
<PAGE>
[PHOTO OMITTED]
PRODUCTS
MANUFACTURED HOUSING PRODUCTS
(82% of sales)
- - Aluminum and vinyl windows and screens
- - Chassis and chassis parts
- - Axles and tires
- - Galvanized steel roofing
RECREATIONAL VEHICLE
PRODUCTS (18% of sales)
- - Windows and doors
- - Chassis and chassis parts
INDUSTRIES
MANUFACTURED HOUSING
Drew's manufactured housing products segment accounts for 82 percent of
consolidated sales. Over the past decade, manufactured homes have become
recognized as quality, low cost housing compared to site-built homes. As a
result of the improved quality of manufactured homes, availability of financing
has greatly increased, and zoning restrictions have eased, enabling hundreds of
thousands of people to realize the dream of home ownership, which they could
otherwise not have achieved. Since 1991, industry shipments of manufactured
homes have more than doubled, reaching 373,000 homes in 1998, or nearly 23
percent of all new single-family housing starts. There are approximately 19
million people living full time in over 8 million manufactured homes across the
nation.
[GRAPHIC OMITTED]
[The following table was depicted as a pie chart in the printed material.]
Manufactured Housing Products Segment
Roofing 3%
Other 4%
Windows and Screens 33%
Axles and Tires 22%
Chassis and Parts 33%
A manufactured home is built entirely in a factory, in sections (floors) ranging
from 800-1200 square feet. In 1998 more than 61 percent of new manufactured
homes consisted of two or more sections. Each section is built on a chassis to
which axles and tires are attached for use in transporting the home to the
retail dealer and then to the homesite.
RECREATIONAL VEHICLES
Recreational vehicles enable their owners to travel economically throughout our
country with comfort and convenience. The recreational vehicle industry has also
experienced robust growth this decade, with industry shipments reaching over
292,000 RV's in 1998, an increase of nearly 80 percent since 1991. Demo graphic
trends support the continued growth of this industry, as the number of people
over 50 years old, the largest market for RV's, continues to grow.
[GRAPHIC OMITTED]
[The following table was depicted as a pie chart in the printed material.]
RV Products Segment
Other 4%
Chassis 34%
Windows and Doors 33%
[GRAPHIC OMITTED]
6 1998 Annual Report
<PAGE>
Drew Industries Incorporated
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company has two reportable operating segments, the manufactured
housing products segment (the "MH segment") and the recreational vehicle
products segment (the "RV segment"). The MH segment, which accounts for 82
percent of consolidated sales, manufactures a variety of products used in the
construction of manufactured homes, including windows and screens, chassis and
chassis parts, axles, and galvanized roofing. The MH segment also imports new
tires and refurbishes used axles and tires which it supplies to producers of
manufactured homes. The RV segment, which accounts for 18 percent of
consolidated net sales, manufactures a variety of products used in the
production of recreational vehicles, including windows, doors and chassis. The
MH segment and the RV segment primarily sell their products to the producers of
manufactured homes and recreational vehicles, respectively. Each segment also
supplies related products to other industries, but sales of these products
represent less than 5 percent of the segment's net sales.
The Company's operations are performed through its four primary operating
subsidiaries. Kinro, Inc. ("Kinro") and Lippert Components, Inc. ("Lippert")
have operations in both the MH and RV segments, while Shoals Supply, Inc.
("Shoals") and Coil Clip, Inc. ("Coil Clip") operate entirely within the MH
segment. At December 31, 1998 the Company's subsidiaries operated 34 plants in
16 states.
In May 1998 Lippert acquired the assets and business of Coil Clip related
to its supply of stamped steel parts to the manufactured housing industry, and
entered into an agreement pursuant to which Coil Clip would supply certain steel
parts to Lippert. In December 1998 Lippert acquired the remaining assets and
business of Coil Clip. Coil Clip's sales to the manufactured housing industry
were approximately $5 million annually, and its sales of related steel parts to
other industries were approximately $7 million annually.
Lippert, which was acquired by the Company on October 7, 1997, had annual
net sales of $99 million for the 12 months prior to its acquisition by the
Company, of which more than 95 percent were sales of manufactured housing
products. For such year Lippert achieved earnings before interest, goodwill
amortization and taxes, of $8.2 million, excluding shareholder compensation,
benefits and related items which did not continue subsequent to the acquisition.
These earnings were net of other nonrecurring compensation and start-up costs of
$.5 million.
On May 5, 1997 Shoals acquired the assets and business of Pritt Tire and
Axle, Inc., which had 1996 net sales of $10.7 million.
RESULTS OF OPERATIONS
Net sales and operating profit are as follows
(in thousands):
Year Ended December 31,
------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------
Net sales:
MH segment $ 271,287 $ 171,271 $ 133,774
RV segment 59,353 37,094 34,377
- -------------------------------------------------------------------------------
Total $ 330,640 $ 208,365 $ 168,151
- -------------------------------------------------------------------------------
Operating profit:
MH segment $ 28,572 $ 20,490 $ 19,650
RV segment 4,974 3,591 4,417
Amortization of
intangibles (2,442) (854) (533)
Corporate and other (2,162) (1,466) (2,544)
- -------------------------------------------------------------------------------
Total $ 28,942 $ 21,761 $ 20,990
===============================================================================
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
MH Segment
Net sales of the MH segment increased 58 percent in 1998 over 1997
primarily as a result of the Lippert acquisition on October 7, 1997. Excluding
Lippert's sales, net sales increased 16 percent largely as a result of the $13
million (58 percent) increase in sales of vinyl windows. This increase is volume
related and compared favorably with the industry which reported a 5 percent
increase in shipments of manufactured homes for 1998 over 1997. This growth was
further enhanced by the continuation of the trend towards multi-section homes.
Operating profit of the MH segment increased 39 percent in 1998 over 1997
primarily as a result of the Lippert acquisition. Excluding Lippert's results,
operating profit increased 9 percent. Operating margins in 1998 did not increase
proportionately with the increase in sales, as margins were adversely affected
by competitive pressures in the axle and tire refurbishing product line, which
is expected to continue in 1999. These competitive pressures acted to both
increase purchase costs for used axles to be refurbished and to lower the
selling prices of the refurbished axles. A decline in other raw material costs
was offset by labor cost increases.
As a result of the promulgation of new regulations in November 1998, the
Company's customers began to use tires with new specifications. During 1998,
operating results were charged approximately $.6 million to reduce the value of
tires for which there is no longer a significant demand as a result of the new
regulations. In addition, the supply of used tires with the new specifications
that are available for refurbishing has been limited, negatively impacting the
Company's sales of such tires in the last
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
two months of 1998. This supply shortage of tires for refurbishing is expected
to continue to impact sales of such tires in the first quarter of 1999.
RV Segment
Net sales of the RV segment increased 60 percent in 1998 over 1997
primarily as a result of the Lippert acquisition. However, excluding Lippert's
RV sales, 1998 net sales exceeded 1997 net sales by 29 percent, substantially
higher than the 15 percent increase in shipments reported by the RV industry. In
addition, Lippert's RV chassis business reached $13 million in 1998 compared to
less than $6 million on an annualized basis in 1997.
Operating profit increased 39 percent including Lippert's results and 10
percent excluding Lippert's results. Operating margins did not increase
proportionately with the increase in sales, as margins were reduced from 1997 as
a result of competitive price pressures, higher labor costs in parts of the
country and startup costs at Lippert's new RV chassis facilities.
Amortization of Intangibles, Corporate and Other
Amortization of intangibles increased by $1.6 million in 1998 primarily as
a result of the goodwill and other intangibles relating to the acquisition of
Lippert and Coil Clip. Corporate and other expenses increased $.7 million
primarily as a result of $.4 million losses on aluminum hedging contracts in
1998 compared to $.1 million gains on such contracts in 1997.
Year Ended December 31, 1997 Compared to
Year Ended December 31, 1996
MH Segment
Net sales for 1997 increased 28 percent over 1996. Net sales for 1997
include Lippert's net sales of $19.7 million from October 7, 1997, the date that
Lippert was acquired by the Company. Also included are Pritt's net sales of $8.2
million from May 5, 1997, the date that Pritt was acquired by the Company.
Excluding sales of operations acquired in 1997, and adjusting for the 11/2
months prior to the Shoals acquisition in 1996, the segment's net sales
increased 2 percent for the year. Such increase compares to a 3 percent
industry-wide decline in shipments of manufactured homes. The decline in
industry shipments of manufactured homes was partially offset by the continuing
growth of multi-section homes resulting in year-to-date industry floor shipments
being 1 percent ahead of the prior year.
Operating profit increased 4 percent to $20.5 million for 1997. Included
in the 1997 operating profit are the results of Lippert and Pritt since the
dates that they were acquired by the Company. Lippert's contribution to the
segment's operating profit was $1.3 million on net sales of $19.7 million for
the three months since its acquisition. Pritt's contribution to the Company's
operating profit was $.5 million on net sales of $8.2 million for the eight
months since its acquisition. Excluding the operations acquired in 1997,
operating profit decreased approximately 7 percent for 1997 because of
competitive pressures, as well as $.4 million of startup costs relating to three
new plants opened by Kinro in 1997. In addition, higher labor costs in certain
parts of the country reduced margins.
RV Segment
Net sales for the year ended December 31, 1997 increased 8 percent over
1996. Net sales for 1997 include Lippert's net sales of $1.4 million from
October 7, 1997, the date that Lippert was acquired by the Company. Excluding
net sales of operations acquired in 1997, the segment's net sales increased 4
percent for the year. Such increase compares to a 3 percent industry-wide
increase in sales of RV's.
Operating profit decreased 19 percent to $3.6 million for 1997. Included
in the 1997 operating profit are the results of Lippert since the date of
acquisition by the Company. Lippert's segment operating profit was essentially a
break-even on net sales of $1.4 million, due to startup costs of new facilities,
for the three months since its acquisition. Excluding Lippert in 1997, operating
profit decreased approximately 17 percent for 1997 because of competitive
pressures, as well as higher labor costs.
Amortization of Intangibles, Corporate and Other
Amortization of intangibles increased approximately $.3 million primarily
as a result of the amortization of the goodwill relating to the Pritt and
Lippert acquisitions. Corporate and other expenses were reduced approximately
$1.1 million largely because of (a) expenses of approximately $.6 million in
1996 relating to legal costs in connection with White Metal (see Note 10 of
Notes to Consolidated Financial Statements), (b) a $.3 million improvement in
1997 in the Company's aluminum hedging results, and (c) a $.3 million recovery
of notes receivable that were previously reserved.
Shared Services Agreement
Pursuant to a Shared Services Agreement, following the spin-off by the
Company of LBP, Inc. on July 29, 1994, the Company and LBP have shared certain
administrative functions and employee services, such as management over view and
planning, tax preparation, financial reporting, coordination of independent
audit, stockholder relations, and regulatory matters. The Company has been
reimbursed by LBP for the fair market value of such services. This Agree ment
has been extended and now expires on December 31, 1999 and may be further
extended. The Company charged fees to LBP of approximately $.5 million in each
of 1998, 1997 and 1996. These fees are included in selling, general and
administrative expenses.
8 1998 Annual Report
<PAGE>
Drew Industries Incorporated
Interest Expense, Net
Interest expense, net, increased $1.4 million in 1998 primarily as a
result of debt incurred for the $27 million cash portion of the Lippert
acquisition in October 1997.
Interest expense, net, increased to $2.5 million in 1997 from $.3 million
in 1996 primarily as a result of debt incurred for the purchase of 1.6 million
shares of treasury stock from the Company's Chairman for $20.8 million, as well
as $31.8 million for acquisitions.
New Accounting Standards
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income."
Statement 130 establishes standards for reporting and display of comprehensive
income and its components in the financial statements. The Company had no
"other" comprehensive income for the years ended December 31, 1998, 1997 and
1996.
Effective December 31, 1998, the Company adopted SFAS 131, "Disclosure
about Segments of an Enterprise and Related Information." The Company has
included footnote disclosures regarding segments for the years ended December
31, 1998, 1997 and 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Statements of Cash Flows reflect the following (in thousands):
Year Ended December 31,
---------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Net cash flows provided by
operating activities $ 17,995 $ 11,009 $ 11,927
Net cash flows (used for)
investment activities $(18,554) $(42,032) $(14,948)
Net cash flows provided by
financing activities $ 2,261 $ 30,506 $ 538
Net cash provided by operating activities, which does not include the
balance of the assets and liabilities of the acquired operations on the date of
the acquisition of such operations, primarily resulted from net income. The $6.8
million depreciation and amortization in 1998 was partially offset by changes in
working capital.
Cash flows used for investing activities in 1998 consisted of $10.4
million for the acquisition of Coil Clip and $8.5 million for capital
expenditures, including three RV chassis factories constructed by Lippert. Such
capital expenditures were primarily funded by cash flows from operations. Cash
flows used for investing activities in 1997 was primarily the $31.8 million cash
portion of the cost of the acquisitions of Lippert and Pritt and, in 1996 was
primarily the $10 million cash portion of the cost of the Shoals acquisition.
Capital expenditures for 1997 of $10.4 million include three manufactured
housing products plants for Kinro and the purchase of related equipment, as well
as two new RV products factories constructed by Lippert. Capital expenditures
for 1999 are expected to approximate $6 to $7 million. Such capital expenditures
will be funded from cash flow from operations.
Cash flows from financing activities for 1998 included increases in debt
of approximately $3 million, and $1 million from the exercise of stock options,
offset by $2 million used to acquire treasury stock. Cash flows provided by
financing activities in 1997 includes increases in debt of approximately $51
million, of which $20.8 million was used for the acquisition of treasury stock
and $31.8 million was used for acquisitions.
On January 28, 1998, the Company completed a private placement of $40
million of 6.95 percent, seven year Senior Notes. Amortization of the seven year
Senior Notes is $8 million annually beginning on January 28, 2001.
Proceeds of the Senior Notes were used to reduce borrowings under Drew's
then existing $65 million credit facility with The Chase Manhattan Bank, as
agent. Simul taneously, such credit facility was reduced to a $25 million
revolving credit facility which expires on May 15, 2002. The balance of the loan
under such facility was $12 million at December 31, 1998.
Effective July 29, 1994, the Company spun off to its stockholders LBP,
Inc. (formerly known as Leslie Building Products, Inc.) including its
subsidiary, Prime Acquisition Corp. ("Prime") (formerly known as Leslie-Locke,
Inc.), the Company's former home improvement building products segment.
On September 30, 1994, White Metal Rolling and Stamping Corp. ("White
Metal"), Prime's discontinued ladder manufacturing subsidiary, filed a voluntary
petition seeking liquidation under the provisions of chapter 7 of the United
States Bankruptcy Code. The liabilities of White Metal are all product liability
claims and related costs, resulting from its discontinued ladder manufacturing
business. While Drew was named as a defendant in certain actions commenced in
connection with these claims, Drew has not been held responsible, and Drew
disclaims any liability for the obligations of White Metal.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
On May 7, 1996, the Company and its subsidiary, Kinro, Inc., and LBP, Inc.
and its subsidiary, Prime, were served with a summons and complaint in an
adversary proceeding commenced by the chapter 7 trustee of White Metal. The
complaint, which appears to have alleged several duplicate claims, sought
damages in the aggregate amount of $10.6 million plus attorneys fees, of which
approximately $7.5 million of tax related claims was sought, jointly and
severally, from the Company, Kinro, LBP, Inc. and Prime. On July 14, 1998, the
bankruptcy court granted defendants' motion to dismiss the trustee's tax-related
claims. The court permitted the trustee to replead the dismissed claims, but the
trustee elected not to replead. The trustee could appeal the court's decision
dismissing these claims upon the termination of the proceeding.
Other than the dismissed tax-related claims, the trustee alleges that
White Metal made certain payments to the Company which were preferential and are
recoverable by White Metal, in the approximate amount of $.9 million. Although
these claims were not dismissed, the Company believes that the claims are
without merit, denies liability for any such amount, and is vigorously defending
against the allegations. However, an estimate of potential loss, if any, cannot
be made at this time. The Company believes that the defense of this proceeding
will not have a material adverse impact on the Company's financial condition or
results of operations.
INFLATION
The prices of raw materials, consisting primarily of aluminum, vinyl,
steel, glass and tires, are influenced by demand and other factors specific to
these commodities rather than being directly affected by inflationary pressures.
Prices of certain commodities have historically been volatile. In order to hedge
the impact of future prices fluctuations on a portion of its future aluminum raw
material requirements, the Company periodically purchases aluminum futures
contracts on the London Metal Exchange. At December 31, 1998, the Company had no
futures contracts outstanding.
YEAR 2000
The "Year 2000" issue is the result of computer programs being written
using two digits rather than four digits to define a specific year. Such a
computer program may recognize a date using "00" as the year 1900 rather than
the year 2000, which could result in system failures or miscalculations.
The Company has addressed this risk to the reliability and availability of
its financial, operational and administrative information systems. Unrelated to
concerns about the Year 2000 issue, the Company had decided to upgrade its
computer systems in order to enhance the information flow, capacity and
functionality of its systems. The upgrades to the computer systems should enable
the Company to achieve Year 2000 compliance. Some of the Company's manufacturing
processes are reliant on computer technology and all such significant processes
are expected to be Year 2000 compliant. The installation and testing of certain
critical systems has been completed at a cost of less than $1 million, and the
balance of the systems should be completed in the summer of 1999 at a cost of
less than $.5 million which is expected to be funded from operating cash flows.
The Company has obtained assurances from its software vendors that the new
systems will be Year 2000 compliant.
Approximately 70 percent of the Company's sales are to publicly-owned
companies which file periodic reports pursuant to the Securities Exchange Act of
1934, including all customers which represent more than 3 percent of the
consolidated net sales. The Company has reviewed the Year 2000 disclosures in
such filings and found that, while many of these companies address certain
risks, they expect to be Year 2000 compliant before the end of 1999.
While the Company believes that its internal computer systems, as well as
those of vendors who provide data processing services to the Company, will be
Year 2000 compliant, there can be no assurance that Year 2000 system failures by
the Company's vendors, customers or financial institutions will not result in
significant disruptions to the Company's operations. The Company believes,
however, that its alternative sources of supply of critical raw materials,
diverse customer list and financial resources mitigate the likelihood of a
severe adverse impact on the Company's operating results. The Company will also
consider operating strategies, such as maintaining easily accessible back-up of
critical information and adjusting inventory levels as the year 2000 approaches,
to minimize the impact of short-term disruptions caused by systems failures of
third parties.
FORWARD LOOKING STATEMENTS AND RISK FACTORS
This report contains certain statements, including the Company's plans
regarding its operating strategy, its products and performance and its views of
industry prospects, which could be construed to be forward looking statements
within the meaning of the Securities Exchange Act of 1934. These statements
reflect the Company's current views with respect to future plans, events and
financial performance.
The Company has identified certain risk factors which could cause actual
plans and results to differ substantially from those included in the forward
looking statements. These factors include pricing pressures due to competition,
raw material costs (particularly aluminum, vinyl, steel, glass, and tires),
adverse weather conditions impacting retail sales, inventory adjustments by
retailers, availability and costs of labor, and interest rates. In addition,
general economic conditions may affect the retail sale of manufactured homes and
RV's.
10 1998 Annual Report
<PAGE>
Drew Industries Incorporated
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
consolidated financial statements and related notes thereto included herein (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Data
Net sales $330,640 $208,365 $168,151 $100,084 $ 82,965
==============================================================================================
Operating profit $ 28,942 $ 21,761 $ 20,990 $ 13,289 $ 10,258
==============================================================================================
Income from continuing operations
before income taxes $ 25,052 $ 19,256 $ 20,664 $ 13,423 $ 10,245
Provision for income taxes 9,835 7,262 8,092 5,300 3,999
- ----------------------------------------------------------------------------------------------
Income from continuing operations 15,217 11,994 12,572 8,123 6,246
Discontinued operations, net (111)
- ----------------------------------------------------------------------------------------------
Net income $ 15,217 $ 11,994 $ 12,572 $ 8,123 $ 6,135
==============================================================================================
Income per basic common share:
Income from continuing operations $ 1.36 $ 1.22 $ 1.18 $ .82 $ .64
Discontinued operations, net (.01)
- ----------------------------------------------------------------------------------------------
Net income per common share (basic) $ 1.36 $ 1.22 $ 1.18 $ .82 $ .63
==============================================================================================
Income per diluted common share:
Income from continuing operations $ 1.34 $ 1.19 $ 1.15 $ .81 $ .62
Discontinued operations, net (.01)
- ----------------------------------------------------------------------------------------------
Net income per common share (diluted) $ 1.34 $ 1.19 $ 1.15 $ .81 $ .61
==============================================================================================
Financial Data
Working capital $ 31,630 $ 24,009 $ 16,138 $ 9,648 $ 6,544
Total assets $154,425 $130,349 $ 55,283 $ 29,593 $ 22,946
Long-term obligations $ 59,612 $ 56,130 $ 4,938 $ 311 $ 3,939
Stockholders' equity $ 68,762 $ 51,953 $ 34,779 $ 16,830 $ 8,599
- ----------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
------------------------------
(In thousands, except per share amounts) 1998 1997 1996
- --------------------------------------------------------------------------------
Net sales $330,640 $208,365 $168,151
Cost of sales 262,741 162,084 126,731
- --------------------------------------------------------------------------------
Gross profit 67,899 46,281 41,420
Selling, general and administrative expenses 38,957 24,520 20,430
- --------------------------------------------------------------------------------
Operating profit 28,942 21,761 20,990
Interest expense, net 3,890 2,505 326
- --------------------------------------------------------------------------------
Income before income taxes 25,052 19,256 20,664
Provision for income taxes (Note 9) 9,835 7,262 8,092
- --------------------------------------------------------------------------------
Net income $ 15,217 $ 11,994 $ 12,572
================================================================================
Income per common share (Note 11):
Net income per common share (basic) $ 1.36 $ 1.22 $ 1.18
================================================================================
Net income per common share (diluted) $ 1.34 $ 1.19 $ 1.15
================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
12 1998 Annual Report
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
(In thousands, except shares and per share amounts) 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets
Cash and short-term investments $ 2,690 $ 1,028
Accounts receivable, trade, less allowances
of $690 in 1998 and $528 in 1997 13,559 9,181
Inventories (Note 4) 35,400 29,456
Prepaid expenses and other current assets (Note 9) 6,032 6,610
- ----------------------------------------------------------------------------------------
Total current assets 57,681 46,275
Fixed assets, net (Note 5) 43,139 38,096
Goodwill, net (Note 3) 47,887 44,215
Other assets 5,718 1,763
- ----------------------------------------------------------------------------------------
Total assets $ 154,425 $ 130,349
========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable, including current maturities of long-term
indebtedness and obligations under capital leases (Note 8) $ 779 $ 643
Accounts payable, trade 8,043 6,372
Accrued expenses and other current liabilities (Note 6) 17,229 15,251
- ----------------------------------------------------------------------------------------
Total current liabilities 26,051 22,266
Long-term indebtedness (Note 8) 57,947 54,760
Other long-term liabilities (Note 9) 1,665 1,370
- ----------------------------------------------------------------------------------------
Total liabilities 85,663 78,396
- ----------------------------------------------------------------------------------------
Commitments and contingencies (Note 10)
Stockholders' equity (Note 11)
Common stock, par value $.01 per share: authorized 20,000,000
shares; issued 11,513,702 shares in 1998 and
11,363,166 shares in 1997 115 113
Paid-in capital 22,943 19,249
Retained earnings 47,808 32,591
- ----------------------------------------------------------------------------------------
70,866 51,953
Treasury stock, at cost--175,600 shares in 1998 (2,104)
- ----------------------------------------------------------------------------------------
Total stockholders' equity 68,762 51,953
Total liabilities and stockholders' equity $ 154,425 $ 130,349
========================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
13
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
(In thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 15,217 $ 11,994 $ 12,572
Adjustments to reconcile net income to
cash flows provided by operating activities:
Depreciation and amortization 6,836 2,972 1,712
Deferred taxes 50 325 (297)
Loss (gain) on disposal of fixed assets 135 (34) (37)
Changes in assets and liabilities, excluding
acquisitions of businesses:
Accounts receivable, net (3,595) 2,170 2,188
Inventories (3,743) (86) (3,284)
Prepaid expenses and other assets (392) (3,414) (74)
Accounts payable, accrued expenses and other
current liabilities 3,447 (2,918) (853)
- -----------------------------------------------------------------------------------------------
Net cash flows provided by operating activities 17,955 11,009 11,927
- -----------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (8,450) (10,377) (5,841)
Acquisitions of companies' net assets and businesses (10,449) (31,804) (9,941)
Proceeds from sales of fixed assets 345 149 834
- -----------------------------------------------------------------------------------------------
Net cash flows used for investing activities (18,554) (42,032) (14,948)
- -----------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from private placement of Senior Notes 40,000
Proceeds from Industrial Revenue Bonds 5,713
Other loans 500 1,560 5,982
Proceeds under line of credit and other borrowings 75,000 118,150 23,737
Repayments under line of credit and other borrowings (117,890) (69,050) (27,228)
Acquisition of treasury stock (2,104) (20,800) (2,800)
Exercise of stock options and other 1,042 646 847
- -----------------------------------------------------------------------------------------------
Net cash flows provided by financing activities 2,261 30,506 538
- -----------------------------------------------------------------------------------------------
Net increase (decrease) in cash 1,662 (517) (2,483)
Cash and short term investments at beginning of year 1,028 1,545 4,028
- -----------------------------------------------------------------------------------------------
Cash and short term investments at end of year $ 2,690 $ 1,028 $ 1,545
===============================================================================================
Supplemental disclosure of cash flows information:
Cash paid during the year for:
Interest on debt $ 3,072 $ 1,981 $ 285
Income taxes, net of refunds $ 10,053 $ 8,433 $ 7,986
===============================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
14 1998 Annual Report
<PAGE>
Drew Industries Incorporated
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Total
Common Treasury Paid-in Retained Stockholders'
(In thousands, except shares) Stock Stock Capital Earnings Equity
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance--December 31, 1995 $100 $ (348) $ 9,053 $ 8,025 $ 16,830
Net income 12,572 12,572
Issuance of 113,740 shares of common stock
pursuant to stock option plan 1 427 428
Income tax benefit relating to issuance of
common stock pursuant to stock option plan 249 249
Issuance of 1,089,918 shares of common stock
in connection with the acquisition of the
assets and business of Shoals Supply, Inc. 11 7,489 7,500
Purchase of 400,020 shares of treasury stock (2,800) (2,800)
- -------------------------------------------------------------------------------------------------------------
Balance--December 31, 1996 112 (3,148) 17,218 20,597 34,779
Net income 11,994 11,994
Issuance of 85,990 shares of common stock
pursuant to stock option plan 1 383 384
Income tax benefit relating to issuance of
common stock pursuant to stock option plan 267 267
Issuance of 2,154,231 shares of common stock
in connection with the acquisition of Lippert
Components, Inc., of which 230,769 shares are
subject to an earnout contingency 23,948 1,399 25,347
Purchase of 1,600,000 shares of treasury stock (20,800) (20,800)
Costs of two-for-one split of common stock (18) (18)
- -------------------------------------------------------------------------------------------------------------
Balance--December 31, 1997 113 -- 19,249 32,591 51,953
Net income 15,217 15,217
Issuance of 150,538 shares of common stock
pursuant to stock option plan 2 654 656
Income tax benefit relating to issuance of
common stock pursuant to stock option plan 386 386
Resolution of earnout contingency relating to
230,769 shares of common stock in connection
with the acquisition of the assets and business
of Lippert Components, Inc. 2,654 2,654
Purchase of 175,600 shares of treasury stock (2,104) (2,104)
- -------------------------------------------------------------------------------------------------------------
Balance--December 31, 1998 $115 $ (2,104) $ 22,943 $ 47,808 $ 68,762
=============================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Consolidated Financial Statements include the accounts of Drew
Industries Incorporated and its subsidiaries. Drew's wholly-owned active
subsidiaries are Kinro, Inc. and its subsidiaries ("Kinro"), Shoals Supply, Inc.
and its subsidiaries ("Shoals"), and Lippert Components, Inc. and its
subsidiaries ("Lippert"). Lippert's subsidiaries include Coil Clip, Inc. ("Coil
Clip") which was acquired on December 16, 1998. Drew, through its wholly-owned
subsidiaries, supplies a broad array of components for manufactured homes and
recreational vehicles. All significant intercompany balances and transactions
have been eliminated.
Manufactured products include windows, doors, chassis, chassis parts,
roofs and new and refurbished axles. The Company also distributes new and
refurbished tires. Approximately 82 percent of the Company's sales are made by
its manufactured housing products segment and 18 percent are made by its
recreational vehicles products segment. At December 31, 1998 the Company
operated 34 plants in 16 states.
Inventories
Inventories are stated at the lower of cost (using the first-in, first-out
method) or market. Cost includes material, labor and overhead; market is
replacement cost or realizable value after allowance for costs of distribution.
During the first quarter of 1997, the Company adopted the FIFO method to
value that portion of the inventories for which the LIFO method had previously
been utilized for determining cost. The FIFO method will better measure the
current value of such inventories, provide a more appropriate matching of
revenues and expenses, and conform all inventories of the Company to the same
accounting method. Additionally, the change will enhance the comparability of
the Company's financial statements by changing to the predominant method
utilized in its industry. The Company applied this change retroactively which
resulted in an increase in retained earnings of $828,000 at January 1, 1996. The
impact on net income for the year ended December 31, 1996 was a reduction of
$814,000 ($.07 per share).
The Company periodically purchases commodity futures to hedge the impact
of future price fluctuations on a portion of its aluminum raw material
requirements. Gains and losses on such futures contracts are deferred until
recognized in income as a component of cost of sales when the finished products
are sold. Cash flow from such futures contracts are included in operating
activities in the Consolidated Statements of Cash Flows.
Fixed Assets
Fixed assets are depreciated principally on a straight-line basis over the
estimated useful lives of properties and equipment. Leasehold improvements and
leased equipment are amortized over the shorter of the lives of the leases or
the underlying assets. Amortization of assets recorded under capital leases is
included in depreciation expense. Maintenance and repairs are charged to
operations as incurred; significant betterments are capitalized.
Income Taxes
The Company and its subsidiaries file a consolidated Federal income tax
return. The Company's subsidiaries generally file separate state income tax
returns on the same basis as the Federal income tax return.
New Accounting Standards
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income."
Statement 130 establishes standards for reporting and display of comprehensive
income and its components in the financial statements. The Company had no
"other" comprehensive income for the years ended December 31, 1998, 1997 and
1996.
Effective December 31, 1998, the Company adopted SFAS 131, "Disclosure
about Segments of an Enterprise and Related Information." The Company has
included footnote disclosures regarding segments for the years ended December
31, 1998, 1997 and 1996.
Goodwill
Goodwill is the excess of cost over the fair value of net tangible assets
acquired and is amortized on a straight-line basis primarily over thirty years.
The balance of goodwill of $47.9 million at December 31, 1998 primarily relates
to the acquisitions of Coil Clip on December 16, 1998, Lippert on October 7,
1997, Pritt on May 5, 1997 and Shoals on February 15, 1996.
The Company periodically reviews the value of its goodwill to determine if
an impairment has occurred. The Company measures the potential impairment of
recorded goodwill by the undiscounted value of expected future operating cash
flows in relation to its net capital investment in the subsidiary. Based on its
review, the Company does not believe that an impairment of its goodwill has
occurred.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
16 1998 Annual Report
<PAGE>
Drew Industries Incorporated
2. SEGMENT REPORTING
The Company has two reportable operating segments, the manufactured
housing products segment (the "MH segment") and the recreational vehicle
products segment (the "RV segment"). The MH segment manufactures a variety of
products used in the construction of manufactured homes, including windows and
screens, chassis and chassis parts, axles, and galvanized roofing. The MH
segment also imports new tires and refurbishes used axles and tires which it
supplies to producers of manufactured homes. The RV segment manufactures a
variety of products used in the production of recreational vehicles, including
windows, doors and chassis. The MH segment and the RV segment primarily sell
their products to the producers of manufactured homes and recreational vehicles,
respectively. Each segment also supplies related products to other industries,
but sales of these products represent less than 5 percent of the segment's net
sales. The Company has only an insignificant amount of intersegment sales.
Decisions concerning the allocation of the Company's resources are made by
the Company's key executives. This group evaluates the performance of each
segment based upon segment profit or loss, defined as income before interest,
amortization of intangibles and income taxes. Management of debt is considered a
corporate function. The accounting policies of the MH and RV segments are the
same as those described in Note 1 of Notes to Consolidated Financial Statements.
To determine the Company's reportable segments, management considered,
among other factors, the underlying long-term economic characteristics of its
operations, and the Company's management structure. The long-term growth
potential of the Company's various products are significantly dependent upon the
two industries to which the Company supplies such products. While industry
shipments of manufactured homes are dependent upon factors such as the quality
of the homes, comparative price to site-built homes, availability of financing,
and zoning restrictions, industry shipments of recreational vehicles are more
dependent upon levels of disposable income, consumer confidence and age
demographics.
Information relating to segments follows (in thousands):
<TABLE>
<CAPTION>
Segments
------------------------------------- Corporate
MH RV Total and Other Intangibles Total
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1998
Revenues from external customers(a) $ 271,287 $ 59,353 $ 330,640 $ 330,640
Segment profit (loss) 28,572 4,974 33,546 $ (2,162) $ (2,442) 28,942
Segment assets(b) 68,256 23,842 92,098 10,225 52,102 154,425
Expenditures for long-lived assets(c) 5,622 4,118 9,740 28 9,768
Depreciation and amortization 3,436 942 4,378 16 2,442 6,836
Year ended December 31, 1997
Revenues from external customers(a) $ 171,271 $ 37,094 $ 208,365 $ 208,365
Segment profit (loss) 20,490 3,591 24,081 $ (1,466) $ (854) 21,761
Segment assets(b) 60,372 16,361 76,733 8,904 44,712 130,349
Expenditures for long-lived assets(c) 23,344 6,034 29,378 18 29,396
Depreciation and amortization 1,598 504 2,102 16 854 2,972
Year ended December 31, 1996
Revenues from external customers(a) $ 133,774 $ 34,377 $ 168,151 $ 168,151
Segment profit (loss) 19,650 4,417 24,067 $ (2,544) $ (533) 20,990
Segment assets(b) 29,179 9,296 38,475 5,172 11,636 55,283
Expenditures for long-lived assets(c) 5,445 1,665 7,110 21 7,131
Depreciation and amortization 858 303 1,161 18 533 1,712
</TABLE>
(a) One customer accounted for 15 percent, 16 percent and 17 percent, of the
Company's net sales in the years ended December 31, 1998, 1997 and 1996,
respectively. Another customer accounted for 10 percent of the Company's
net sales in 1998 and 1997. Both segments had sales to each of such
customers.
(b) Segment assets include accounts receivable, inventory and fixed assets.
Corporate and other assets include cash and cash equivalents, prepaid
expenses and other current assets, and other assets, excluding intangible
assets. Intangibles include goodwill and deferred charges which are not
considered in the measurement of each segment's performance.
(c) Expenditures for long-lived assets include capital expenditures and fixed
assets purchased as part of the acquisition of companies and businesses.
Expenditures for other long-term assets are not included in the segment
since they are not considered in the measurement of each segment's
performance.
17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. ACQUISITIONS
Coil Clip, Inc.
On December 16, 1998 the Company's subsidiary, Lippert, acquired the
assets and business of Coil Clip, Inc., a fabricator of specialty steel parts,
located in Boaz, Alabama. Previously, in May 1998, Lippert acquired the
manufactured housing business of Coil Clip and entered into a supply agreement
to purchase steel from Coil Clip. It is expected that these acquisitions will
add approximately $12 million to the Company's annual sales.
The purchase price consisted of cash of approximately $3.8 million for the
May transaction and $6.5 million, including a $.5 million note, for the December
transaction.
The acquisition has been accounted for as a purchase. The aggregate
purchase price has been allocated to the underlying assets based upon their
respective estimated fair values at the date of acquisition. Intangible assets
of approximately $3.8 million are being amortized over useful lives averaging
approximately 5 years. The excess of purchase price over the fair value of the
net assets acquired ("goodwill") was approximately $2.6 million, which is being
amortized over 20 years.
Lippert Components, Inc.
On October 7, 1997, the Company acquired Lippert Components, Inc.
("Lippert") for $27 million in cash and 1,923,231 shares of Drew common stock
having a value of approximately $25.3 million. In addition, 230,769 shares were
held in escrow pending the results of an earn-out, which was achieved in October
1998. All 2,154,000 shares are restricted and are subject to a registration
rights agreement. The cash portion of the transaction was financed by Drew's
then existing credit facility.
Lippert manufactured products for the manufactured housing and
recreational vehicle industry, consisting primarily of chassis and chassis
parts, refurbished axles and tires, and galvanized roofing. The refurbishing of
axles and tires, except for the Florida operation, was transferred to Shoals,
while Shoals transferred to Lippert all of its chassis parts business.
The acquisition has been accounted for as a purchase. The aggregate
purchase price has been allocated to the underlying assets and liabilities based
upon their respective estimated fair values at the date of acquisition. The
excess of purchase price over the fair value of the net assets acquired
("goodwill") was $32.7 million, including $2.6 million recorded in 1998 as a
result of the resolution of the contingency concerning the shares subject to the
earnout, which is being amortized over 30 years.
The results of the acquired business have been included in the Company's
consolidated statements of income beginning October 7, 1997. Lippert's sales for
its fiscal year ended September 30, 1997 were $99 million, on which they
achieved earnings before interest, taxes and goodwill amortization of
approximately $8.2 million, excluding shareholder compensation, benefits and
related items which will not continue subsequent to the acquisition. These
earnings are net of other nonrecurring compensation and startup costs of
approximately $.5 million.
Pritt Tire and Axle, Inc.
On May 5, 1997 the Company's subsidiary, Shoals acquired the assets and
business of Pritt Tire and Axle, Inc. ("Pritt") of Bristol, Indiana. Pritt
refurbishes axles and tires used in the transportation of manufactured homes.
The purchase price consisted of cash of $4.4 million and a three-year
warrant to purchase 40,000 shares of the common stock of Drew at $11.00 per
share. As part of this transaction, in the third quarter of 1997, Shoals
acquired, from the former owner of Pritt, the manufacturing facility utilized by
Pritt for approximately $1 million.
The acquisition has been accounted for as a purchase. The aggregate
purchase price has been allocated to the underlying assets and liabilities based
upon their respective estimated fair values at the date of acquisition. The
excess of purchase price over the fair value of the net assets acquired
("goodwill") is $2.9 million, which is being amortized over 30 years.
The results of the acquired business have been included in the Company's
consolidated statements of income beginning May 5, 1997. Pritt had 1996 net
sales of $10.7 million.
Shoals Supply, Inc.
On February 15, 1996, the Company acquired the assets and business of
Shoals, a supplier of products used to transport manufactured homes. Shoals
manufactures new axles and chassis parts, refurbishes used axles, and
distributes new and refurbished tires. The manufacture of chassis parts has
since been transferred to Lippert, while Lippert has transferred to Shoals the
refurbishing of axles and tires, except for the Florida operation.
The consideration for the acquisition was 1,089,918 shares of common stock
of the Company having a value of $7.5 million, cash of $1.6 million and a note
for $.8 million payable over 5 years. In addition, the Company assumed $7.5
million of Shoals' bank debt and certain operating liabilities.
The acquisition has been accounted for as a purchase. The aggregate
purchase price has been allocated to the
18 1998 Annual Report
<PAGE>
Drew Industries Incorporated
underlying assets and liabilities based upon their respective estimated fair
values at the date of acquisition. The goodwill of $11.8 million is being
amortized over 30 years.
The results of the acquired business have been included in the Company's
consolidated statements of income beginning February 16, 1996. Shoals had 1996
net sales of $65 million, of which $57 million was for the 101/2 months since
Shoals was acquired by the Company.
Pro Forma Results
The following pro forma condensed consolidated results of operations for
1997 and 1996 assumes that the acquisitions of Shoals, Lippert and Pritt had
occurred at the beginning of 1996. Pro forma results of Coil Clip are not
included because its impact on 1998 earnings is not material. The unaudited pro
forma data below is not necessarily indicative of the future results of
operations of the combined operations (in thousands, except per share amounts):
Pro Forma Year End December 31,
-------------------------------
(Unaudited) 1997 1996
- --------------------------------------------------------------------------------
Net sales $288,671 $293,640
================================================================================
Net income $ 13,955 $ 17,374
================================================================================
Net income per common share:
Basic $ 1.23 $ 1.36
================================================================================
Diluted $ 1.21 $ 1.34
================================================================================
Average common shares outstanding:
Basic 11,325 12,779
================================================================================
Diluted 11,575 13,012
================================================================================
Goodwill
Goodwill of $47,887,000 at December 31, 1998, is net of accumulated
amortization of $2,806,000. Amorti zation of goodwill was $1,583,000, $765,000,
and $494,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
4. INVENTORIES
Inventories consist of the following (in thousands):
December 31,
---------------------------
1998 1997
- --------------------------------------------------------------------------------
Finished goods $10,629 $ 8,989
Work in process 2,052 1,746
Raw materials 22,719 18,721
- --------------------------------------------------------------------------------
Total $35,400 $29,456
================================================================================
5. FIXED ASSETS
Fixed assets, at cost, consist of the following
(in thousands):
December 31, Estimated
---------------------- Useful Life
1998 1997 in Years
- --------------------------------------------------------------------------------
Land $ 3,548 $ 3,252
Buildings and improvements 23,096 16,140 8 to 45
Leasehold improvements 973 779 5 to 25
Machinery and equipment 22,308 17,490 5 to 8
Automotive equipment 1,698 1,523 2 to 3
Furniture and fixtures 2,827 2,294 3 to 8
Capitalized real estate leases 925 15
Construction in progress 631 4,391
- --------------------------------------------------------------------------------
55,081 46,794
Less accumulated depreciation
and amortization 11,942 8,698
- --------------------------------------------------------------------------------
Fixed assets, net $43,139 $38,096
================================================================================
Depreciation and amortization of fixed assets
consists of (in thousands):
Year Ended December 31,
----------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Charges to cost of sales $3,459 $1,674 $ 908
Charges to selling, general
and administrative expenses 786 376 203
- --------------------------------------------------------------------------------
$4,245 $2,050 $1,111
================================================================================
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following
(in thousands):
December 31,
------------------------
1998 1997
- --------------------------------------------------------------------------------
Accrued employee compensation $ 4,815 $ 3,384
Accrued employee benefits 3,039 3,244
Accrued workmen's compensation
and other insurance 2,980 3,353
Income taxes 774 690
Accrued expenses and other 5,621 4,580
- --------------------------------------------------------------------------------
Total $17,229 $15,251
================================================================================
7. RETIREMENT AND OTHER BENEFIT PLANS
The Company has discretionary defined contribution profit sharing plans
covering substantially all eligible employees. The Company contributed $715,000,
$336,000 and $206,000 to these Plans during the years ended December 31, 1998,
1997 and 1996, respectively.
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. LONG-TERM INDEBTEDNESS
On January 28, 1998, the Company completed a private placement of $40
million of 6.95 percent, seven year Senior Notes. Proceeds of the Senior Notes
were used to reduce borrowings under Drew's then existing $65 million credit
facility with The Chase Manhattan Bank, as agent. Simul taneously, such credit
facility was reduced to a $25 million revolving credit facility which expires on
May 15, 2002.
Interest on borrowings under the new credit facility is payable at the
prime rate. In addition, the Company has the option to convert a portion of the
loan to a Eurodollar loan at 1 percent over the LIBO rate. Furthermore, the
Company is required to pay a commitment fee, accrued at the rate of 3/8 of 1
percent per annum, on the daily unused amount of the revolving line of credit.
Pursuant to both the Senior Notes and the new credit facility, the Company
is required to maintain minimum net worth and interest and fixed charge
coverages and meet certain other financial requirements. Borrowings under both
facilities are secured only by capital stock of the Company's subsidiaries.
The Company has entered into interest rate hedge agreements to effectively
convert variable rate debt to fixed rate debt in order to reduce the risk of
incurring higher interest costs due to rising interest rates. At December 31,
1998, the Company had entered into a contract that expires in May 1999 which
hedges interest related to $10 million of debt. Such contract has an effective
rate of 7.44 percent. The Company has determined that its exposure to losses on
these hedges, as a result of declines in interest rates, is not material.
Long-term indebtedness consists of the following (in thousands):
December 31,
--------------------
1998 1997
- --------------------------------------------------------------------------------
Senior Notes payable at the rate of $8,000 per annum
commencing January 28, 2001 with interest payable
semiannually at the rate of 6.95% per annum $40,000
Notes payable pursuant to a credit agreement expiring
May 15, 2002 consisting of revolving loan, not to
exceed $25,000 12,000
Notes payable pursuant to a $65,000 credit agreement $52,600
Industrial Revenue Bonds, payable in monthly install-
ments of $61 until 2008, interest at 5.8% per annum 5,464
Equipment note payable, interest at 7.25% per annum 1,560
Other 1,262 1,148
- --------------------------------------------------------------------------------
58,726 55,308
Less current portion 779 548
- --------------------------------------------------------------------------------
Total long-term indebtedness $57,947 $54,760
================================================================================
While it is not practicable to determine the fair value of the Company's
fixed rate debt, the Company believes the interest rates on similar instruments
have not changed significantly. Therefore, the book value of such debt
approximates fair value.
9. INCOME TAXES
The income tax provision (benefit) in the Consolidated Statements of
Income is as follows (in thousands):
Year Ended December 31,
------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------
Current:
Federal $ 8,747 $ 6,312 $ 6,988
State 1,038 625 1,401
Deferred:
Federal 37 200 (200)
State 13 125 (97)
- -------------------------------------------------------------------------------
Total income tax provision $ 9,835 $ 7,262 $ 8,092
================================================================================
The provision for income taxes differs from the amount computed by
applying the Federal statutory rate to income before income taxes for the
following reasons (in thousands):
Year Ended December 31,
------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------
Income tax at Federal
statutory rate $ 8,768 $ 6,740 $ 7,232
State income taxes, net of
Federal income tax benefit 683 487 861
Other 384 35 (1)
- -------------------------------------------------------------------------------
Provision for income taxes $ 9,835 $7,262 $8,092
================================================================================
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1998 and 1997 are as follows (in thousands):
December 31,
---------------------
1998 1997
- --------------------------------------------------------------------------------
Deferred tax assets:
Accounts receivable $ 230 $ 179
Inventories 706 438
Capital leases 22
Other asset valuation allowances 1,044 1,114
Employee benefits other than pensions 101 101
Vacation and holiday pay 342 268
Other accruals 2,023 2,138
- --------------------------------------------------------------------------------
Total deferred tax assets 4,446 4,260
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Fixed assets 2,585 2,368
Long-term obligations 3 16
- --------------------------------------------------------------------------------
Total deferred tax liabilities 2,588 2,384
- --------------------------------------------------------------------------------
Net deferred tax asset $1,858 $1,876
================================================================================
20 1998 Annual Report
<PAGE>
Drew Industries Incorporated
The Company concluded that it is more likely than not that the deferred
tax assets at December 31, 1998 will be realized in the ordinary course of
operations based on scheduling of deferred tax liabilities and income from
operating activities.
Net deferred income tax assets of $3,300,000 and $3,023,000 are included
in prepaid expenses and other current assets, and net deferred tax liabilities
of $1,442,000 and $1,147,000 are included in other long-term liabilities, in the
Consolidated Balance Sheets at December 31, 1998 and 1997, respectively.
10. COMMITMENTS AND CONTINGENCIES
Leases
The Company's lease commitments are primarily for real estate and
vehicles. The significant real estate leases provide for renewal options and
periodic rental adjustments to reflect price index changes and require the
Company to pay for property taxes and all other costs associated with the leased
property. Most vehicle leases provide for contingent payments based upon miles
driven and other factors.
Future minimum lease payments under operating leases at December 31, 1998
are summarized as follows (in thousands):
1999 $2,745
2000 2,499
2001 2,049
2002 1,335
2003 640
Thereafter 460
- --------------------------------------------------------------------------------
Total lease obligations $9,728
================================================================================
Rent expense was $3,636,000, $3,087,000 and $2,522,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
Other
Effective July 29, 1994, the Company spun off to its stockholders LBP,
Inc. (formerly known as Leslie Building Products, Inc.) including its
subsidiary, Prime Acquisition Corp. ("Prime"), (formerly known as Leslie-Locke,
Inc.), the Company's former home improvement building products segment.
On September 30, 1994, White Metal Rolling and Stamping Corp. ("White
Metal"), Prime's discontinued ladder manufacturing subsidiary, filed a voluntary
petition seeking liquidation under the provisions of chapter 7 of the United
States Bankruptcy Code. The liabilities of White Metal are all product liability
claims, and related costs, resulting from its discontinued ladder manufacturing
business. While Drew was named as a defendant in certain actions commenced in
connection with these claims, Drew has not been held responsible, and Drew
disclaims any liability for the obligations of White Metal.
On May 7, 1996, the Company and its subsidiary, Kinro, Inc., and LBP, Inc.
and its subsidiary, Prime, were served with a summons and complaint in an
adversary proceeding commenced by the chapter 7 trustee of White Metal. The
complaint, which appears to have alleged several duplicate claims, sought
damages in the aggregate amount of $10.6 million plus attorneys fees, of which
approximately $7.5 million of tax related claims was sought, jointly and
severally, from the Company, Kinro, LBP, and Prime. On July 14, 1998, the
bankruptcy court granted defendants' motion to dismiss the trustee's tax-related
claims. The court permitted the trustee to replead the dismissed claims, but the
trustee elected not to replead. The trustee could appeal the court's decision
dismissing these claims upon the termination of the proceeding.
Other than the dismissed tax-related claims, the trustee alleges that
White Metal made certain payments to the Company which were preferential and are
recoverable by White Metal, in the approximate amount of $900,000. Although
these claims were not dismissed, the Company believes that the claims are
without merit, denies liability for any such amount, and is vigorously defending
against the allegations. However, an estimate of potential loss, if any, cannot
be made at this time. The Company believes that the defense of this proceeding
will not have a material adverse impact on the Company's financial condition or
results of operations.
In order to hedge the impact of future price fluctuations on a portion of
its aluminum raw material requirements, the Company periodically purchases
aluminum futures contracts on the London Metal Exchange. At December 31, 1998,
the Company had no futures contracts outstanding.
The Company has employment contracts with eight of its employees which
expire on various dates through July 2002. The minimum commitments under these
contracts are $1,137,000 in 1999, $890,000 in 2000, $585,000 in 2001, and
$108,000 in 2002. In addition, an arrangement with three employees of the
Company provides for incentives to be paid, based on a percentage of profits as
defined.
11. STOCKHOLDERS' EQUITY
Stock Options and Warrants
Pursuant to the Drew Industries Incorporated Stock Option Plan (the
"Plan"), the Company may grant its directors and/or key employees options to
purchase Drew Common Stock. The Plan provides for the grant of stock options
that qualify as incentive stock options ("ISO") under Section 422 of the Code
and non-qualified stock options ("NQSOs").
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Under the Plan, the Committee determines the period for which each stock
option may be exercisable, but in no event may a stock option be exercisable
more than 10 years from the date of grant thereof. The number of shares
available under the Plan, and the exercise price of options granted under the
Plan, are subject to adjustments that may be made by the Committee to reflect
stock splits, stock dividends, recapitalization, mergers, or other major
corporate action. Under the terms of the Plan, the number of shares that each
holder of options was entitled to purchase as well as the option price was
adjusted to reflect the two-for-one stock split effective March 21, 1997.
The exercise price for options granted under the Plan shall be at least
equal to 100 percent of the fair market value of the shares subject to such
option on the date of grant. The exercise price may be paid in cash or in shares
of Drew Common Stock. Options granted under the Plan become exercisable in
annual installments as determined by the Committee.
Transactions in stock options under this plan are summarized as follows:
Number of
Option Shares Option Price
- --------------------------------------------------------------------------------
Outstanding at December 31, 1995 603,198 $ 1.24-$ 7.35
Granted 169,140 $ 6.94-$10.75
Exercised (113,740) $ 1.24-$ 4.27
Canceled (15,442) $ 3.03-$ 6.94
- --------------------------------------------------------------------------------
Outstanding at December 31, 1996 643,156
Granted 326,000 $12.13-$12.48
Exercised (85,990) $ 1.24-$ 6.94
Canceled (24,054) $ 6.94-$12.13
- --------------------------------------------------------------------------------
Outstanding at December 31, 1997 859,112
Granted 34,000 $11.79-$12.50
Exercised (150,538) $ 3.62-$12.13
Canceled (50,288) $ 6.94-$12.13
- --------------------------------------------------------------------------------
Outstanding at December 31, 1998 692,286
================================================================================
Exercisable at December 31, 1998 406,628 $ 3.67-$12.48
================================================================================
The respective number of shares available for granting options were
291,666, 275,378 and 177,324 at December 31, 1998, 1997 and 1996, respectively.
The Company adopted the disclosure-only option under SFAS No.123,
"Accounting for Stock-Based Compen sation" ("FAS 123"), as of December 31, 1996.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model. The weighted average assumptions used for
grants included no dividend yields, risk-free interest rates of 5.0 percent, 5.0
percent and 5.9 percent; assumed expected volatilities of 26.6 percent, 40.2
percent and 30.3 percent; and expected lives of 5, 5 and 5 years for 1998, 1997
and 1996, respectively.
If compensation cost for the Company's stock option plan had been
recognized in the income statement based upon the fair market method, net income
would have been reduced to the pro forma amounts indicated below:
Year Ended December 31,
----------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Net income (in thousands):
As reported $ 15,217 $ 11,994 $ 12,572
Pro forma $ 14,940 $ 11,807 $ 12,498
Earnings per share (basic)
As reported $ 1.36 $ 1.22 $ 1.18
Pro forma $ 1.34 $ 1.20 $ 1.17
Earnings per share (diluted)
As reported $ 1.34 $ 1.19 $ 1.15
Pro forma $ 1.31 $ 1.17 $ 1.14
The following table summarizes information about stock options outstanding
at December 31, 1997:
Option Average Option
Exercise Shares Remaining Shares
Price Outstanding Life (Years) Exercisable
- --------------------------------------------------------------------------------
$ 3.67 69,480 .1 69,480
$ 4.26 211,762 .3 211,762
$ 6.94 35,944 2.1 10,486
$ 7.35 10,000 2.0 10,000
$10.75 15,000 3.0 15,000
$11.79 15,000 5.0 15,000
$12.13 301,100 4.9 59,900
$12.48 15,000 4.0 15,000
$12.50 19,000 5.6 0
- --------------------------------------------------------------------------------
692,286 406,628
================================================================================
Outstanding stock options expire in five to six years from the date they
are granted; options vest over service periods that range from zero to five
years.
In connection with the acquisition of Pritt on May 5, 1997, the Company
issued a warrant to purchase 40,000 shares of its common stock at $11 per share.
The warrant expires May 5, 2000.
Treasury Stock
In 1998, the Board of Directors authorized the Company to repurchase up to
250,000 shares of the Company's common stock. During 1998, the Company purchased
175,600 shares of such stock at a cost of $2,104,000. In January 1999, the Board
of Directors authorized the Company to repurchase an additional 200,000 shares.
On February 14, 1997, the Company purchased 1.6 million shares from its
chairman for $13 per share, which was below the market price at that time. These
treasury shares were included in the shares issued in connection with the
acquisition of Lippert.
22 1998 Annual Report
<PAGE>
Drew Industries Incorporated
Weighted Average Common Shares Outstanding
The following reconciliation, which retroactively gives effect to the
stock split effective March 21, 1997, details the denominator used in the
computation of basic and diluted earnings per share:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average shares
outstanding for basic
earnings per share 11,178,588 9,845,138 10,688,552
Common stock equivalents pertaining to:
Stock options 201,724 241,678 228,056
Warrants 6,169 3,290
- ------------------------------------------------------------------------------------
Total for diluted shares 11,386,481 10,090,106 10,916,608
- ------------------------------------------------------------------------------------
</TABLE>
The numerator is constant for both the basic and diluted earnings per
share calculations.
In connection with the acquisition of Lippert on October 7, 1997, the
Company issued 230,769 shares of common stock to the sellers which were held in
escrow pending the results of an earnout. Such shares were not considered
outstanding for the calculation of weighted average common shares until October
1998 at which time the contingency was resolved.
12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Interim unaudited financial information follows (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1998(a)
Net sales $ 75,181 $ 87,325 $ 87,923 $ 80,211 $330,640
Gross profit 15,080 17,926 17,948 16,945 67,899
Net income 3,036 4,395 4,280 3,506 15,217
Net income per common share (basic) $ .27 $ .39 $ .38 $ .31 $ 1.36
Net income per common share (diluted) .27 .39 .38 .31 1.34
Year Ended December 31, 1997(a)
Net sales $ 41,628 $ 50,201 $ 50,182 $ 66,354 $208,365
Gross profit 10,163 11,082 11,088 13,948 46,281
Net income 2,946 3,081 2,939 3,028 11,994
Net income per common share (basic) $ .30 $ .34 $ .32 $ .29 $ 1.22
Net income per common share (diluted) .29 .33 .31 .28 1.19
</TABLE>
(a) Includes results of operations of Pritt, Lippert and Coil Clip since their
acquisitions by the Company.
23
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Drew Industries Incorporated:
We have audited the accompanying consolidated balance sheets of Drew
Industries Incorporated and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Drew
Industries Incorporated and subsidiaries at December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998 in conformity with generally accepted
accounting principles.
As discussed in note 1 of the consolidated financial statements, the
Company changed its method of accounting for inventories in 1997.
KPMG LLP
Stamford, Connecticut
February 10, 1999
- --------------------------------------------------------------------------------
MANAGEMENT'S RESPONSIBILITY
FOR FINANCIAL STATEMENTS
The management of the Company has prepared and is responsible for the
consolidated financial statements and related financial information included in
this report. These consolidated financial statements were prepared in accordance
with generally accepted accounting principles which are consistently applied and
appropriate in the circumstances. These consolidated financial statements
necessarily include amounts determined using management's best judgements and
estimates.
The Company maintains accounting and other control systems which provide
reasonable assurance that assets are safeguarded and that the books and records
reflect the authorized transactions of the Company. Although accounting controls
are designed to achieve this objective, it must be recognized that errors or
irregularities may occur. In addition, it is necessary to assess and consider
the relative costs and the expected benefits of the internal accounting
controls.
The Company's independent auditors, KPMG LLP, provide an independent, objective
review of the consolidated financial statements and underlying transactions.
They perform such tests and other procedures as they deem necessary to express
an opinion on the financial statements. The report of KPMG LLP accompanies the
consolidated financial statements.
/s/ Leigh J. Abrams
Leigh J. Abrams
President and Chief Executive Officer
/s/ Federic M. Zinn
Fredric M. Zinn
Chief Financial Officer
24 1998 Annual Report
<PAGE>
CORPORATE INFORMATION
DREW INDUSTRIES INCORPORATED
Board of Directors
EDWARD W. ROSE, III(a)
Chairman of the Board of Drew Industries Incorporated
President of Cardinal Investment Company
JAMES F. GERO(a)
Chairman and Chief Executive Officer of
Sierra Technologies, Inc.
GENE BISHOP(a)
Retired Bank Executive
LEIGH J. ABRAMS
President and Chief Executive Officer of
Drew Industries Incorporated
L. DOUGLAS LIPPERT
President and Chief Executive Officer of
Lippert Components, Inc. and Coil Clip, Inc.
DAVID L. WEBSTER
President and Chief Executive Officer of
Kinro, Inc. and Shoals Supply, Inc.
(a) Members of Audit Committee and Compensation Committee of the Board of
Directors
Corporate Officers
LEIGH J. ABRAMS
President and Chief Executive Officer
FREDRIC M. ZINN
Chief Financial Officer
HARVEY J. KAPLAN
Treasurer and Secretary
JOHN F. CUPAK
Controller
Form 10-K
A copy of the Annual Report on Form 10-K as filed by the Corporation with the
Securities and Exchange Commission is available upon request, without charge, by
writing to:
Treasurer
Drew Industries Incorporated
200 Mamaroneck Avenue
White Plains, NY 10601
General Counsel
Harvey F. Milman, Esq.
Gilbert Segall & Young, LLP
430 Park Avenue
New York, NY 10022-3592
Independent Certified Public Accountants
KPMG LLP
Stamford Square
3001 Summer Street
Stamford, CT 06905
Transfer Agent and Registrar
ChaseMellon Shareholder Services
85 Challenger Road
Ridgefield, NJ 07660
Executive Offices
200 Mamaroneck Avenue
White Plains, NY 10601
(914) 428-9098
Kinro, Inc.
Shoals Supply, Inc.
DAVID L. WEBSTER
President and Chief Executive Officer
Corporate Headquarters
4381 Green Oaks Boulevard West
Arlington, TX 76016
(817) 483-7791
Lippert Components, Inc.
Coil Clip, Inc.
L. DOUGLAS LIPPERT
President and Chief Executive Officer
Corporate Headquarters
2375 9th Street North
Suite 110
Naples, FL 34103
(941) 659-2005
Forward Looking Statements and Risk Factors
This report contains certain statements, including the Company's plans regarding
its operating strategy, its products and performance and its views of industry
prospects, which could be construed to be forward looking statements within the
meaning of the Securities Exchange Act of 1934. These statements reflect the
Company's current views with respect to future plans, events and financial
performance.
The Company has identified certain risk factors which could cause actual plans
and results to differ substantially from those included in the forward looking
statements. These factors include pricing pressures due to competition, raw
material costs (particularly aluminum, vinyl, steel, glass, and tires), adverse
weather conditions impacting retail sales, inventory adjustments by retailers,
availability and costs of labor, and interest rates. In addition, general
economic conditions may affect the retail sale of manu factured homes and
RV's.
MARKET PRICE RANGE
A summary of the high and low closing prices of the Company's common stock
on the American Stock Exchange is as follows:
1998 1997
- --------------------------------------------------------------------------------
High Low High Low
- --------------------------------------------------------------------------------
Quarter Ended March 31 $13.38 $11.75 $13.81 $10.75
Quarter Ended June 30 $15.13 $12.63 $13.00 $10.63
Quarter Ended September 30 $15.00 $11.50 $14.38 $11.75
Quarter Ended December 31 $12.88 $10.13 $14.13 $11.06
The closing price per share for the common stock on March 12, 1999 was
$12.25 and there were 2,204 holders of Drew Common Stock, not including
beneficial owners of shares held in broker and nominee names.
DIVIDEND INFORMATION
Drew has not paid any cash dividends on its outstanding shares of Common
Stock. On February 13, 1997, Drew declared a two-for-one stock split by means of
a 100 percent stock dividend, payable on March 21, 1997 to stockholders of
record on March 4, 1997.
Designed by Curran & Connors, Inc. / www.curran-connors.com
<PAGE>
[LOGO]
DREW INDUSTRIES INCORPORATED
200 Mamaroneck Avenue
White Plains, NY 10601
EXHIBIT 21 - Active Subsidiaries of Registrant
State of
Name Incorporation
---- -------------
Kinro, Inc. Ohio
Kinro Manufacturing, Inc. Delaware
Kinro Holding, Inc. New York
Kinro Texas Limited Partnership Texas Partnership
Kinro Tennessee Limited Partnership Tennessee Partnership
Lippert Components, Inc. Delaware
Lippert Holding, Inc. New York
Lippert Components
Manufacturing, Inc. Delaware
Lippert Components Texas
Limited Partnership Texas
Shoals Supply, Inc. Delaware
Shoals Supply Holding, Inc. New York
Shoals Supply Texas
Limited Partnership Texas Partnership
Shoals Supply Tennessee
Limited Partnership Tennessee Partnership
Coil Clip, Inc. Delaware
EXHIBIT 23
Consent of Independent Auditors
The Board of Directors
Drew Industries Incorporated
We consent to incorporation by reference in the registration statements (No.
33-88582) on Form S-8 of Drew Industries Incorporated of our report dated
February 10, 1999 relating to the consolidated balance sheets of Drew Industries
Incorporated and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1998, which report
refers to a change to the FIFO method of valuing inventory and our report dated
February 10, 1999 relating to the financial statement schedule, which reports
appear in or are incorporated by reference in the December 31, 1998, annual
report on Form 10-K of Drew Industries Incorporated.
KPMG LLP
Stamford, Connecticut
March 29, 1999
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<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,690
<SECURITIES> 0
<RECEIVABLES> 14,249
<ALLOWANCES> 690
<INVENTORY> 35,400
<CURRENT-ASSETS> 57,681
<PP&E> 55,081
<DEPRECIATION> 11,942
<TOTAL-ASSETS> 154,425
<CURRENT-LIABILITIES> 26,051
<BONDS> 0
0
0
<COMMON> 115
<OTHER-SE> 68,647
<TOTAL-LIABILITY-AND-EQUITY> 154,425
<SALES> 330,640
<TOTAL-REVENUES> 330,640
<CGS> 262,741
<TOTAL-COSTS> 301,698
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<NET-INCOME> 15,217
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