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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, 1999 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 10, 2000) was $56,890,795.
The number of shares outstanding of the Registrant's Common Stock, as of the
latest practicable date (March 10, 2000) was 11,105,854 shares of Common Stock.
Documents Incorporated by Reference
Annual Report to Stockholders for year ended December 31, 1999 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
17, 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") has two reportable
operating segments, the manufactured housing products segment (the "MH Segment")
and the recreational vehicle products segment (the "RV Segment"). Drew's
wholly-owned subsidiaries Kinro, Inc. ("Kinro") and Lippert Components, Inc.
("Lippert") have operations in both the MH Segment and the RV Segment, while
Lippert Tire & Axle, Inc. ("Lippert T&A") (formerly known as Shoals Supply,
Inc.) and Coil Clip, Inc. ("Coil Clip") operate entirely within the MH Segment.
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. Lippert T&A manufactures and
markets new axles, and distributes refurbished axles and new and refurbished
tires, for manufactured homes. Coil Clip produces coil steel and sheet steel
components, certain of which are supplied to Lippert. 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 39
manufacturing facilities in 18 states, and achieved consolidated sales of $324
million for 1999.
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).
Manufactured Housing Products Segment
The Company's subsidiaries in the MH Segment manufacture and market 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.
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The MH Segment represents approximately 76% of the Company's consolidated sales.
The MH Segment also supplies related products to other industries, representing
less than 5% of sales of this segment.
Raw materials used by the Company's MH 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.
Operations of the Company's MH Segment consist primarily of fabricating,
welding, painting and assembling components into finished products, and
refurbishing used axles and tires. The Company's MH Segment operations are
conducted at 28 manufacturing and warehouse facilities throughout the United
States, strategically located in proximity to the customers they serve. Three of
these facilities also conduct operations in the Company's RV Segment. See Item
2. "Properties."
The Company's manufactured housing products are sold by 16 sales personnel
working exclusively for the Company to major builders of manufactured homes such
as Champion Enterprises, Clayton Homes, Oakwood Homes, Fleetwood Enterprises,
and Skyline.
The Company's MH Segment competes 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, during the last quarter of 1998 and throughout
1999, 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%. In September 1999, the Company transferred management of
the tire and axle business from Kinro to Lippert because the business is more
closely related to the business of Lippert.
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 RV Segment represents approximately 24% of the Company's consolidated
sales.
Raw materials used by the Company's RV 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 RV 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.
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The Company's RV Segment operations are conducted at 14 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 MH Segment. See Item 2. "Properties."
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, Skyline and Keystone.
The Company's RV Segment 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 15%.
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.
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, 1999 was 2,521. 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 such
services. For 1999, the Company charged LBP approximately $144,000 for such
services. The Shared Services Agreement expires December 31, 2000, and is
cancellable by LBP on 60 days' notice.
Item 2. PROPERTIES
The Company's manufacturing is conducted at buildings that are used for
both manufacturing and warehousing. In addition, the Company maintains
administrative facilities used for corporate and administrative functions. The
following is a chart identifying the Company's properties:
City State Square Feet Owned Leased
---- ----- ----------- ----- ------
MH PRODUCTS SEGMENT
Bear Creek Alabama 150,000 x
Birmingham Alabama 36,000 x
Boaz Alabama 86,600 x
Double Springs Alabama 62,500 x
Phil Campbell Alabama 53,200 x
Ocala Florida 47,100 x
Thomasville Georgia 70,000 x
Fitzgerald * Georgia 55,300 x
Nampa Idaho 39,500 x
Garret Indiana 21,600 x
Goshen Indiana 100,000 x
Goshen Indiana 58,000 x
Goshen Indiana 68,000 x
Bristol Indiana 57,500 x
Arkansas City Kansas 7,800 x
Bossier City Louisiana 11,400 x
Whitehall New York 12,700 x
Harrisburg North Carolina 57,900 x
Liberty North Carolina 47,000 x
Rockwell North Carolina 14,000 x
Sugarcreek Ohio 14,500 x
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City State Square Feet Owned Leased
---- ----- ----------- ----- ------
MH PRODUCTS SEGMENT (Continued)
Mc Adoo* Pennsylvania 25,100 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 12,300 x
---------
1,362,200
=========
* These plants also produce recreational vehicle products.
City State Square Feet Owned Leased
---- ----- ----------- ----- ------
RV PRODUCTS SEGMENT
Fontana California 108,700 x
Fitzgerald * Georgia 23,700 x
Goshen Indiana 50,500 x
Elkhart Indiana 36,600 x
Goshen Indiana 98,000 x
Crawfordsville Indiana 17,800 x
Goshen Indiana 53,000 x
Omaha Nebraska 13,000 x
Edgerton Ohio 12,000 x
Pendleton Oregon 56,800 x
Mc Adoo * Pennsylvania 8,400 x
Alvarado * Texas 21,300 x
Longview Texas 58,900 x
Berkley Springs West Virginia 38,600 x
--------
597,300
========
* These plants also produce products for manufactured homes.
ADMINISTRATIVE
Alma Michigan 10,800 x
Naples Florida 4,500 x
Arlington Texas 9,400 x
White Plains New York 2,800 x
--------
27,500
========
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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. At the time the chapter 7 petition was filed, the liabilities
of White Metal were primarily product liability claims, and related costs,
resulting from its discontinued ladder manufacturing business.
On May 7, 1996, the Company and its subsidiary, Kinro, 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 "Adversary
Proceeding"). The complaint 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. Other than the dismissed tax-related
claims, the trustee alleged that White Metal made certain payments to the
defendants which were preferential and recoverable by White Metal, in the
approximate amount of $3.1 million, of which $900,000 was sought from the
Company. Pursuant to a Consent Order Settling and Compromising Claims, dated
January 27, 2000 (the "Settlement"), by and among the trustee, on behalf of
White Metal, and the Company, LBP, Prime, Kinro and Sears Roebuck & Co., Inc.
("Sears"), White Metal's largest creditor, the parties agreed to settle the
Adversary Proceeding in consideration for payment by the defendants to White
Metal's estate in the aggregate amount of $672,000, of which $186,500 was paid
by the Company. The defendants, the trustee and Sears agreed to release each
other, and their respective affiliates, and the trustee agreed not to appeal the
Bankruptcy Court's dismissal of the tax-related claims. In connection with the
Settlement, the Adversary Proceeding was terminated.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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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, 1999.
Name Position
---- --------
Leigh J. Abrams President, Chief Executive Officer and Director
(Age 57) of the Company since March 1984.
Edward W. Rose, III Chairman of the Board of Directors of the Company
(Age 58) since March 1984.
David L. Webster Director of the Company since March 1984.
(Age 64)
L. Douglas Lippert Director of the Company since November 1997.
(Age 52)
James F. Gero Director of the Company since May 1992.
(Age 54)
Gene H. Bishop Director of the Company since June 1995.
(Age 70)
Fredric M. Zinn Chief Financial Officer of the Company since
(Age 48) January 1986.
Harvey J. Kaplan Secretary and Treasurer of the Company since
(Age 65) 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.
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 and President of Lippert T&A (formerly Shoals
Supply, Inc.) a subsidiary of the Company, since September 1999.
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JAMES F. GERO, since March 1992, has been Chairman and Chief Executive
Officer of Sierra Technologies, Inc., a manufacturer of defense systems
technologies, and a director of certain of its affiliates. 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 company: Orthofix International, N.V., an
international supplier of orthopedic devices for bone fixation and stimulation.
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 1999 all such filing requirements applicable to its
officers and directors (the Company not being aware of any ten percent holder
during 1999 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(R), under the symbol DW. On March 10, 2000, there were 2,103 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.
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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.
High Low
---- ---
Calendar 1999
Quarter ended March 31........ $12.75 $11.38
Quarter ended June 30......... $13.00 $11.25
Quarter ended September 30.... $12.19 $8.75
Quarter ended December 31..... $ 9.69 $8.44
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
The closing price per share for the Common Stock on March 10, 2000, was
$7.50.
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.
Stock Repurchase
Pursuant to authorization of the Board of Directors, during 1999 the
Company repurchased 333,700 shares of its Common Stock at prices ranging from
$8.80 per share to $12.55 per share.
Item 6. SELECTED FINANCIAL DATA, and Item 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS are incorporated by
reference to the Company's Annual Report to Stockholders for the year ended
December 31, 1999.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risk in the normal course of its
operations due to its purchases of certain commodities, and its investing and
financing activities.
Certain raw materials, particularly aluminum, vinyl, steel, glass and
tires are subject to price volatility. While effective hedges for most of these
raw materials are not available, the Company periodically purchases
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<PAGE>
aluminum futures contracts to hedge the impact of future price fluctuations on a
portion of its aluminum raw material requirements. At December 31, 1999, the
Company had no futures contracts outstanding.
The Company is exposed to changes in interest rates primarily as a result
of its financing activities. At December 31, 1999, the Company had $46.3 million
of debt, all of which was fixed rate debt. Assuming a decrease of 100 basis
points in the interest rate for borrowings of a similar nature, which the
company becomes unable to capitalize on in the short-term as a result of the
structure of its fixed rate financing, future cash flows would be affected by
approximately $.5 million.
The Company also has a $25 million line of credit that is subject to a
variable interest rate. At December 31, 1999, none of this line of credit was
utilized.
In addition, the Company is exposed to changes in interest rates as a
result of temporary investments in government backed money market funds,
however, such investing activity is not material to the Company's financial
position, results of operations, or cash flow.
If the actual change in interest rates is substantially different than 100
basis points, the net impact of interest rate risk on the Company's cash flow
may be materially different than that disclosed above.
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, 1999.
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
17, 2000.
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, 1999.
(2) Schedules. Schedule II - Valuation and Qualifying
Accounts.
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(3) Exhibits. See "List of Exhibits" at the end of this
report incorporated herein by reference.
(b) Reports on Form 8-K
On October 21, 1999, the Company filed a Current Report on
Form 8-K reporting the Company's stock repurchase program.
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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 20, 2000
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 20, 2000 By: /s/ Leigh J. Abrams Director, President and
-------------------- Chief Executive Officer
(Leigh J. Abrams)
March 20, 2000 By: /s/ Harvey J. Kaplan Secretary and Treasurer
--------------------
(Harvey J. Kaplan)
March 20, 2000 By: /s/ Fredric M. Zinn Chief Financial Officer
--------------------
(Fredric M. Zinn)
March 20, 2000 By: /s/ John F. Cupak Controller
--------------------
(John F. Cupak)
March 20, 2000 By: /s/ Edward W. Rose III Director
----------------------
(Edward W. Rose, III)
March 20, 2000 By: /s/ David L. Webster Director
--------------------
(David L. Webster)
March 20, 2000 By: /s/ L. Douglas Lippert Director
----------------------
(L. Douglas Lippert)
March 20, 2000 By: /s/ James F. Gero Director
--------------------
(James F. Gero)
March 20, 2000 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 9, 2000, we reported on the consolidated balance sheets
of Drew Industries Incorporated and subsidiaries as of December 31, 1999 and
1998, 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,
1999, as contained on pages 11 through 22 in the 1999 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 1999.
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.
/s/ KPMG LLP
Stamford, Connecticut
February 9, 2000
Page - 14 -
<PAGE>
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, 1999:
Allowance for doubtful accounts
receivable, trade $ 690 $(214) $(45)(b) $521
YEAR ENDED DECEMBER 31, 1998:
Allowance for doubtful accounts
receivable, trade $ 528 $ 266 $ 50(a) $154(b) $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
</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 - 15 -
<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, as amended.
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.
Page - 16 -
<PAGE>
10.151 Asset Purchase Agreement, dated February 15, 1996, by and among Shoals
Supply, Inc., Lecil V. Thomas, and Drew Industries Incorporated.
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.
10.160 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.
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.
Page - 17 -
<PAGE>
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 - 18 -
<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, 10.155 and 10.156 are incorporated by reference to the
Exhibits included in the Company's Current Report on Form 8-K dated February 29,
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. 1999 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 - 19 -
- --------------------------------------------------------------------------------
DREW
INDUSTRIES INCORPORATED
[PHOTO OMITTED]
1 9 9 9
- --------------------------------------------------------------------------------
Annual Report
<PAGE>
DREW INDUSTRIES INCORPORATED 1999 Annual Report
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
COMPANY PROFILE
- --------------------------------------------------------------------------------
Drew is a leading supplier of a broad line of components for manufactured homes
and recreational vehicles. Components produced by Drew's manufactured housing
products segment include vinyl and aluminum windows and screens, chassis and
chassis parts, new and refurbished axles and galvanized roofing. This segment
also distributes new and refurbished tires. Drew's recreational vehicle products
segment manufactures windows, doors and chassis.
Drew has grown through increased market share, and through acquisitions. As a
result, Drew now has 39 manufacturing and warehouse facilities in 18 states,
typically located near our major customers to minimize freight and delivery
costs. In 2000, we expect to open 4 new facilities and replace several other
older facilities.
Drew's success is due to the experience and skill of our employees and their
dedication to meeting the needs of our customers. Their efforts have been
recognized by numerous supplier awards received from our customers.
Drew will continue its strategy of supplying our customers with outstanding
service and quality products at fair prices, while remaining the low cost
producer through continually upgraded production facilities and efficient
operations.
- --------------------------------------------------------------------------------
Manufactured housing products segments 76%
Recreational vehicle products segments 24%
[PHOTOS OMITTED]
TABLE OF CONTENTS
1 Selected Financial Data
2 Letter to Stockholders
4 Strength in Management
5 Manufactured Housing
6 Recreational Vehicles
7 Management's Discussion and
Analysis of Financial Condition
and Results of Operations
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
23 Independent Auditors' Report
23 Management's Responsibility for
Financial Statements
24 Per Share Market Price Range
IBC Corporate Information
<PAGE>
DREW INDUSTRIES INCORPORATED 1999 Annual Report
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CORPORATE INFORMATION
- --------------------------------------------------------------------------------
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 H. 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., Lippert Tire and
Axle, Inc. and Coil Clip, Inc.
David L. Webster
President and Chief Executive Officer of
Kinro, 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 and 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, L.L.C.
P.O. Box 3315
South Hackensack, NJ 07606-1915
Website: www.chasemellon.com
Executive Offices
200 Mamaroneck Avenue
White Plains, NY 10601
(914) 428-9098
Website: www.drewindustries.com
E-mail: [email protected]
Kinro, 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.
Lippert Tire and Axle, Inc.
Coil Clip, Inc.
L. Douglas Lippert
President and Chief Executive Officer
Corporate Headquarters
2375 Tamiami Trail North
Suite 110
Naples, FL 34103
(941) 659-2005
Designed by Curran & Connors, Inc. / www.curran-connors.com
<PAGE>
DREW INDUSTRIES INCORPORATED 1999 Annual Report 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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,
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Data
Net sales $324,455 $330,640 $208,365 $168,151 $100,084
- -------------------------------------------------------------------------------------------------------------
Operating profit $ 31,934 $ 28,942 $ 21,761 $ 20,990 $ 13,289
- -------------------------------------------------------------------------------------------------------------
Income before income taxes $ 28,566 $ 25,052 $ 19,256 $ 20,664 $ 13,423
Provision for income taxes 11,375 9,835 7,262 8,092 5,300
- -------------------------------------------------------------------------------------------------------------
Net income $ 17,191 $ 15,217 $ 11,994 $ 12,572 $ 8,123
=============================================================================================================
Income per common share:
Net income per common share (basic) $ 1.51 $ 1.36 $ 1.22 $ 1.18 $ .82
- -------------------------------------------------------------------------------------------------------------
Net income per common share (diluted) $ 1.51 $ 1.34 $ 1.19 $ 1.15 $ .81
=============================================================================================================
Financial Data
Working capital $ 28,970 $ 31,630 $ 24,009 $ 16,138 $ 9,648
Total assets $156,044 $154,425 $130,349 $ 55,283 $ 29,593
Long-term obligations $ 46,740 $ 59,612 $ 56,130 $ 4,938 $ 311
Stockholders' equity $ 84,089 $ 68,762 $ 51,953 $ 34,779 $ 16,830
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Net Sales
(dollars in millions)
[GRAPHIC OMITTED]
Net Income
(dollars in millions)
[GRAPHIC OMITTED]
Net Income Per Common Share--(diluted)
(dollars)
[GRAPHIC OMITTED]
<PAGE>
2 & 3 DREW INDUSTRIES INCORPORATED 1999 Annual Report
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LETTER TO STOCKHOLDERS
- --------------------------------------------------------------------------------
[Photo of Edward W. Rose, III]
[Photo of Leigh J. Abrams]
"We are aggressively pursuing opportunities to improve our operating results,
including expansion through product-line extensions, market share growth, and
acquisitions."
We are pleased to report another record year for Drew. During the past year, the
Company benefitted from a number of significant achievements, including:
o Record net income and earnings per share, despite 2 percent lower sales.
o Record operating cash flow. o Reduced debt to equity levels.
o The opening of four new factories.
o Increased market share in the RV industry and in certain manufactured
housing products.
o Repurchase of more than 330,000 shares of the Company's stock, resulting
in higher earnings per share.
Despite these achievements, we are disappointed with the performance of our
stock, which declined more than 20 percent during the year. We attribute this
decline to the expectation by the investment community that sales of
manufactured homes will continue to decline in 2000. The industry-wide decline
in wholesale shipments during the past nine months has been precipitated by
various factors, including excess production of homes by manufacturers and the
opening of numerous retail dealerships. These conditions resulted in intense
price competition on the retail level, leading to the failure of dealers and
causing additional unsold inventory to accumulate. In addition, the industry has
experienced a temporary tightening of credit by mortgage lenders, which has
reduced retail demand. Our customers, the producers of manufactured homes, have
responded to these conditions by closing factories and cutting back production
schedules.
Industry-wide production of manufactured homes declined from more than 370,000
homes in 1998 to 349,000 homes in 1999. Some industry experts expect production
to continue to fall, at least through the first half of 2000, with shipments for
all of 2000 totaling 300,000 to 320,000 homes. We believe that this is a
short-term "slump" and that the long-term future of the manufactured housing
industry is bright because the need for quality, low cost homes will grow.
We are extremely pleased with Drew's 1999 results, despite the decline in the
manufactured housing industry this past year. Drew was one of the few companies
in the industry which reported improved results for 1999.
Our positive results were due largely to sharply higher revenues and profits
from our rapidly growing RV segment. The RV segment achieved market share gains
in nearly every product category, including more than 80 percent sales growth by
the RV chassis line, without incurring substantial start-up costs. Throughout
the year, our operating efficiencies remained high due to the efforts of our
employees.
We are extremely confident in our operating management team, which has many
years experience in both the manufactured housing and RV industries. These
talented and dedicated executives and managers have guided the Company through
similar down turns in the past, and were able to respond to the first signals of
the slow-down by cutting costs early in the year. The positive effects of those
actions are clearly apparent in our year-end results. While our earnings in 2000
will likely decline as a result of lower industry sales of manufactured homes,
and higher raw material costs, we expect that because of continued growth of our
RV segment, continued improvements in operating efficiencies, and additional
cost control, the adverse earnings impact will be minimized.
[PHOTO OMITTED]
We anticipate that during the next several years the manufactured housing
industry will increase its share of the single family housing market from its
current market share of approximately 20 percent, as home buyers continue to
realize the significant cost advantage and high quality of a manufactured home.
In addition, the trend toward multi-section manufactured homes, which
represented 65 percent of all manufactured homes sold in 1999, and the
introduction of the two story manufactured home, should enhance the appeal of
manufactured homes to a broader segment of the population, and enable the
manufactured housing industry to continue to gain market share.
In addition, we are aggressively pursuing opportunities to improve our operating
results, including expansion through product-line extensions, market share
growth, and acquisitions. Our confidence in Drew's future is demonstrated by our
share repurchase program, and our primary goal is to continue to maximize
shareholder returns.
We thank all of our employees for their continued dedication and hard work.
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
<PAGE>
DREW INDUSTRIES INCORPORATED 1999 Annual Report 4 & 5
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STRENGTH IN MANAGEMENT
- --------------------------------------------------------------------------------
Drew's operating management at all levels is highly experienced and well
respected throughout the manufactured housing and recreational vehicle
industries. Our operating management is led by David L. Webster and L. Douglas
Lippert, who each have vast experience in both the manufactured housing and
RVindustries. Their knowledge and insight enable them to anticipate the
direction of the industries we supply, and chart a course of expansion which
enables Drew to meet the changing needs of its customers. David and Doug have
also built outstanding management teams comprised of experienced and talented
individuals, dedicated to continuing Drew's record of profitability and strong
cash flow by maintaining the most efficient and lowest cost production
techniques to produce superior quality products.
[PHOTOS OMITTED]
Drew has a long standing policy of rewarding operating management through profit
incentive programs and a stock option plan designed to align the motivation of
our employees with the goal of increasing returns to our stockholders. These
compensation programs have enabled Drew to attract and retain outstanding
managers, and encourage the entrepreneurial spirit responsible for Drew's
success.
Drew is committed to ensuring its continued success by developing individuals
who will become the outstanding managers of the future. Succession planning and
a formal management training program, through which recent college graduates
learn various aspects of the Company's business and develop leadership skills,
have been successful at building the core of the management team of Drew's
future. This has permitted Drew to grow through internal expansion, including
the opening of six new factories over the last two years.
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[Photo of David Webster]
President and CEO of Kinro, Inc.
QUESTION: How have manufactured homes changed in the last 30 years?
ANSWER: Manufactured homes have been vastly improved in quality, appearance and
durability, since the old "trailer" homes of 30 years ago. The industry has
recognized that to be successful, manufactured homes must appeal to a broader
segment of the population; from the first time home buyer to the retiree, as
well as local officials who set zoning policies. Manufactured homes today are
often more than 1600 square feet with more appealing designs, and still have a
significant cost advantage over site-built homes. For buyers seeking a lower
cost alternative, smaller, "single section" manufactured homes are still
available.
QUESTION: How have Drew's products kept pace with the changing needs of the
manufactured housing industry?
ANSWER: We have always been concerned with the quality of our products, and
sensitive to the needs of our customers. Over the years, our products have been
engineered for improved quality, and we've introduced new products, such as our
vinyl windows and vinyl patio doors, which, although more expensive than our
aluminum products, have a great appearance and enhance the thermal efficiency of
the home.
QUESTION: Industry shipments of manufactured homes have declined recently. Do
you think this will be a long-term trend?
ANSWER: The decline in shipments has been largely due to an industry-wide over
production of finished homes. This caused an excess inventory of homes and
forced our customers, the producers of the homes, to reduce production levels.
This should be a temporary problem if retail demand remains strong. We believe
that the demand for quality, affordable manufactured homes will increase in the
long-term.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MANUFACTURED HOUSING
- --------------------------------------------------------------------------------
A manufactured home is a single family residence built entirely in a factory, in
sections ranging from 800 to 1,200 square feet. In 1999 about 65% of new
manufactured homes consisted of two or more sections, compared to 49 percent in
1995. There are about 19 million people living in over 8 million manufactured
homes across the nation.
Drew's Manufactured Housing Products Segment supplies a broad line of components
to builders of manufactured homes, including aluminum and vinyl windows and
screens, chassis and chassis parts, axles and tires, and galvanized steel
roofing. Sales by this segment account for 76 percent of consolidated sales.
On average, Drew supplies about $700 of components for each manufactured home
built in the U.S., representing an aggregate market share of nearly 30 percent
in our product lines, making us an important supplier to builders of
manufactured homes.
These products are manufactured in 28 factories across the country, located near
our customers to minimize freight costs and delivery times. Customer service has
always been a key factor in the success of this business, and locating factories
near our customers enables us to quickly respond to their needs.
Industry Shipments--Manufactured Homes
(in thousands of units)
[GRAPHIC OMITTED]
<PAGE>
6 DREW INDUSTRIES INCORPORATED 1999 Annual Report
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RECREATIONAL VEHICLES
- --------------------------------------------------------------------------------
[Photo of L. Douglas Lippert]
President and CEO of Lippert Components.
- --------------------------------------------------------------------------------
QUESTION: The growth of Drew's recreational vehicle products segment has far
outpaced the growth by the RV industry. How has this growth been achieved?
ANSWER: Two years ago, Fleetwood, the largest manufacturer of towable RV's
agreed to test our RV chassis products. Since then, sales of RV chassis to
Fleetwood, as well as other industry leaders, have grown from about $2 million
to nearly $25 million in 1999. The growth in Drew's other RV products has also
exceeded industry growth, largely due to the quality of our products and our
outstanding reputation in the RV industry.
QUESTION: How has the Company met this increased demand?
ANSWER: Over the last two and a half years we've built 7 new factories located
near our new customers, because transportation costs for these products can be
significant. But the key to our success has been our management team who have
made sure these facilities were built quickly and on budget, as well as our
plant managers who have minimized start-up costs and rapidly improved operating
efficiencies at these facilities. Through our management training program, we
have been able to develop outstanding new managers to run these facilities.
QUESTION: Do you expect this growth to continue?
ANSWER: We expect sales of our RV products to continue to far outpace industry
growth over at least the next two years, as we continue to increase our market
share. In addition, since the prime buyers of RV's are those approaching fifty,
the demographic trend of the baby boomers bodes well for the industry for years
to come.
- --------------------------------------------------------------------------------
Recreational vehicles enable their owners to travel economically throughout
North America with comfort and convenience. Towable RV's represent 78 percent of
industry unit sales, while motor homes represent 22 percent.
Demographic trends continue to favor long-term growth in the RV industry, since
the number of people in their late 40's and early 50's, the largest market for
RV's, continues to grow.
[PHOTO OMITTED]
Drew's Recreational Vehicle Products Segment supplies windows and doors, and
chassis and chassis parts to producers of RV's. Sales by this segment have grown
rapidly, and now represent 24 percent of consolidated sales, up from 18 percent
in 1998. Growth in this segment is expected to continue.
Drew manufactures RV products in 14 facilities, including 5 in Indiana, a hub of
RV manufacturing. In response to rapidly increasing demand for our products,
seven new facilities were built in the last two and a half years. Five
additional factories are planned for the next 18 months.
Industry Shipments--Recreation Vehicles
(in thousands of units)
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------
<PAGE>
DREW INDUSTRIES INCORPORATED 1999 Annual Report 7
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 76
percent of consolidated sales, manufactures a variety of products used in the
construction of manufactured homes, including aluminum and vinyl 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
24 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. ("LCI") have
operations in both the MH and RV segments, while Lippert Tire and Axle, Inc.
(formerly known as Shoals Supply, Inc.) ("LTA") and Coil Clip, Inc. ("Coil
Clip") operate entirely within the MH segment. At December 31, 1999 the
Company's subsidiaries operated 39 plants in 18 states.
RESULTS OF OPERATIONS
Net sales and operating profit are as follows (in thousands):
Year Ended December 31,
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Net sales:
MH segment $ 246,509 $ 271,287 $ 171,271
RV segment 77,946 59,353 37,094
- --------------------------------------------------------------------------------
Total $ 324,455 $ 330,640 $ 208,365
- --------------------------------------------------------------------------------
Operating profit:
MH segment $ 28,330 $ 28,572 $ 20,490
RV segment 8,819 4,974 3,591
Amortization of
intangibles (2,694) (2,442) (854)
Corporate and other (2,521) (2,162) (1,466)
- --------------------------------------------------------------------------------
Total $ 31,934 $ 28,942 $ 21,761
================================================================================
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
MH Segment
Net sales of the MH segment declined 9 percent in 1999 from 1998 primarily
as a result of a decline in industry-wide shipments of manufactured homes.
Industry shipments declined 7 percent for the year after being 1 percent ahead
of last year for the first half of 1999. The Company's market share of vinyl
window sales continues to expand as sales of such windows increased more than 10
percent in 1999, while sales of axles and tires were down 25 percent primarily
as a result of competitive pressures in the refurbished products line. The
Company's customers, the producers of manufactured homes, have recently closed
factories and cut back manufacturing schedules, due to the combination of
excessive inventory of manufactured homes maintained by manufacturers and
retailers, as well as declining retail sales due to tightening of mortgage
credit and increasing repossessions. Industry experts expect that current
conditions will continue through at least the first half of 2000. The Company
believes long-term prospects for the manufactured housing industry are
favorable. The Company will continue to invest its resources in order to
increase market share for its manufactured housing products.
Despite the 9 percent decline in sales, operating profit of the MH segment
decreased less than 1 percent from last year. Gross margin percent improved, as
the adverse effect of lower sales, competitive pressures in the axle and tire
refurbishing product line and higher hourly labor costs were more than offset by
temporary declines in certain raw material costs. The improvement in gross
margin percent was partially offset by increases in selling, general and
administrative expenses as a percentage of sales, reflecting the effect of
reduced sales on fixed costs.
Margins of the manufactured housing segment for the year 2000 are expected
to be adversely affected by increases in raw material costs which began in the
fourth quarter of 1999.
RV Segment
Net sales of the RV segment increased 31 percent for 1999 compared to
1998, primarily as a result of the expansion of the Company's RV chassis product
line. The Company added two RV chassis manufacturing plants in 1999 after adding
three of such plants in 1998. In addition, sales of RV windows and doors
increased 17 percent to $34 million. The RV industry reported a 10 percent
increase in shipments in 1999.
<PAGE>
8
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
- --------------------------------------------------------------------------------
Operating profit increased 77 percent in 1999, as operating margins rose
to 11 percent in 1999 from 8 percent in 1998. The improvement in operating
margins resulted in part, from greater efficiencies at the new RV chassis
facilities opened last year, as well as temporary declines in certain raw
material costs. Production costs and operating efficiencies at the Company's
mature RV facilities also improved. The improvement in gross margin was
partially offset by increases in selling, general and administrative expenses
including incentive compensation, which is based on profits at certain of the
Company's divisions, and additional general and administrative costs at the
recently opened RV chassis facilities.
Margins of the RV segment for the year 2000 are expected to be adversely
affected by increases in certain raw material costs which began in the fourth
quarter of 1999.
Amortization of Intangibles, Corporate and Other
Amortization of intangibles increased by $.3 million in 1999, primarily as
a result of the effect in 1999 of a full year's amortization of goodwill and
other intangibles relating to the acquisition of Coil Clip, versus the partial
year of such amortization in 1998. Corporate and other expenses increased $.4
million primarily as a result of a reduction in the shared services charged to
LBP, Inc. ("LBP") as described below.
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 LCI acquisition on October 7, 1997. LCI had annual
sales of $99 million for the 12 months prior to its acquisition by the Company.
Excluding LCI'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 LCI acquisition. Excluding LCI'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. 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 were available for refurbishing was limited, negatively impacting the
Company's sales of such tires in the last two months of 1998 and early 1999.
RV Segment
Net sales of the RV segment increased 60 percent in 1998 over 1997
primarily as a result of the LCI acquisition. However, excluding LCI'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,
LCI's RV chassis business reached $13 million in 1998 compared to less than $6
million on an annualized basis in 1997. LCI constructed three RV products plants
in 1998 after adding two of such plants in 1997.
Operating profit of the RV segment increased 39 percent including LCI's
results and 10 percent excluding LCI'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 LCI'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
LCI 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.
Shared Services Agreement
Pursuant to a Shared Services Agreement, following the spin-off by the
Company of LBP on July 29, 1994, the Company and LBP have shared certain
administrative functions and employee services, such as management overview and
<PAGE>
DREW INDUSTRIES INCORPORATED 1999 Annual Report 9
planning, tax preparation, financial reporting, coordination
of independent audit, stockholder relations, and regulatory matters. The Company
has been reimbursed by LBP for such services. This Agreement has been extended
and now expires on December 31, 2000 unless further extended. The Company
charged fees to LBP of approximately $.1 million in 1999 and $.5 million in each
of 1998 and 1997. These fees are recorded as a reduction of selling, general and
administrative expenses.
Interest Expense, Net
Interest expense, net, decreased $.5 million in 1999 as cash flow from
operations, which exceeded capital expenditures and working capital needs, was
utilized to reduce debt. Interest expense, net, increased $1.4 million in 1998
primarily as a result of debt incurred for the $27 million cash portion of the
LCI acquisition in October 1997.
New Accounting Standards
Statement of Financial Accounting Standards ("SFAS") No. 133--"Accounting
for Derivative Instruments and Hedging Activities" establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that entities recognize all derivatives as either assets or liabilities and
measure the instruments at fair value. The accounting for changes in fair value
of a derivative depends upon the intended use of such derivative. SFAS No. 133
is effective for fiscal years beginning after June 15, 2000. The Company is
still evaluating the effect of SFAS No. 133 on the financial statements and
disclosure requirements.
LIQUIDITY AND CAPITAL RESOURCES
The Statements of Cash Flows reflect the following (in thousands):
Year Ended December 31,
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Net cash flows provided by
operating activities $ 29,626 $ 17,955 $ 11,009
Net cash flows (used for)
investment activities $(12,963) $(18,554) $(42,032)
Net cash flows (used for)
provided by financing
activities $(14,243) $ 2,261 $ 30,506
Net cash provided by operating activities, which does not include the
balance of the assets and liabilities on the date of the acquisition of the
operations acquired in 1998 and 1997, primarily resulted from net income.
Working capital other than cash decreased $3.3 million in 1999 in response to
the reduction in net sales. In 1998 and 1997, $4.3 million and $4.2 million,
respectively, of operating cash flow were utilized to fund increases in working
capital and other assets.
Capital expenditures of $13.4 million in 1999 include the construction of
a new manufactured housing products plant, two RV products plants, and the
initial construction costs for a new efficient facility to replace an older
facility that produces both manufactured housing and RV products. 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. 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 LCI
and Pritt Tire and Axle, Inc. Capital expenditures for 1997 of $10.4 million
include three manufactured housing products plants and the purchase of related
equipment, as well as two new RV products factories. Capital expenditures for
2000 are expected to approximate $25 million primarily to accommodate the
further expansion of the RV products segment. Such capital expenditures will be
funded by cash flow from operations as well as Industrial Development Bonds
where feasible.
Cash flows used for financing activities for 1999 included a reduction in
debt of approximately $12.4 million, and $3.9 million used to acquire treasury
stock, offset by $2.0 million from the exercise of stock options. Cash flows
from financing activities for 1998 included increases in debt of approximately
$3.3 million, and $1.0 million from the exercise of stock options, offset by
$2.1 million used to acquire treasury stock. Cash flows provided by financing
activities in 1997 included increases in debt of approximately $50.7 million, of
which $20.8 million was used for the acquisition of treasury stock and $31.8
million was used for acquisitions.
The Company has outstanding $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.
<PAGE>
10
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
- --------------------------------------------------------------------------------
The Company also has a $25 million revolving credit facility with The
Chase Manhattan Bank, as agent, which expires on May 15, 2002. Availability
under the Company's $25 million line of credit, which is unused at December 31,
1999, combined with available cash and cash flow from operations, are adequate
to finance the Company's working capital and capital expenditure requirements.
Effective July 29, 1994, the Company spun off to its stockholders LBP
(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 were primarily 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, 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 "Adversary
Proceeding"). The complaint 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. Other than the dismissed tax-related
claims, the trustee alleged that White Metal made certain payments to the
defendants which were preferential and recoverable by White Metal, in the
approximate amount of $3.1 million, of which $900,000 was sought from the
Company. Pursuant to a Consent Order Settling and Compromising Claims, dated
January 27, 2000 (the "Settlement"), by and among the trustee, on behalf of
White Metal, and the Company, LBP, Prime, Kinro and Sears Roebuck & Co., Inc.
("Sears"), White Metal's largest creditor, the parties agreed to settle the
Adversary Proceeding in consideration for payment by the defendants to White
Metal's estate in the aggregate amount of $672,000, of which $186,500 was paid
by the Company. The defendants, the trustee and Sears agreed to release each
other, and their respective affiliates, and the trustee agreed not to appeal the
Bankruptcy Court's dismissal of the tax-related claims. In connection with the
Settlement, the Adversary Proceeding was terminated.
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 price 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, 1999, the Company had no
futures contracts outstanding.
YEAR 2000
The "Year 2000" issue referred to the risk of disruptions of operations
caused by the failure of computer-controlled systems, including systems used by
third parties, to properly recognize date sensitive information when the year
changed from 1999 to 2000. During the year ended December 31, 1999, the Company
installed new software as part of an ongoing project to upgrade its financial
and management information systems. The cost of upgrading the software occurred
in the normal course of business and was not material to the results of
operations or financial condition of the Company.
The Company has not experienced any significant business disruptions due
to year 2000 issues causing processing errors in its systems, or a third party's
systems, including the period of operation after January 1, 2000.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
This report contains certain statements, including the Company's plans
regarding its operating strategy, its products, costs, 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.
<PAGE>
DREW INDUSTRIES INCORPORATED 1999 Annual Report 11
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
- --------------------------------------------------------------------------------------
(In thousands, except per share amounts) 1999 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $324,455 $330,640 $208,365
Cost of sales 249,129 262,741 162,084
- --------------------------------------------------------------------------------------
Gross profit 75,326 67,899 46,281
Selling, general and administrative expenses 43,392 38,957 24,520
- --------------------------------------------------------------------------------------
Operating profit 31,934 28,942 21,761
Interest expense, net 3,368 3,890 2,505
- --------------------------------------------------------------------------------------
Income before income taxes 28,566 25,052 19,256
Provision for income taxes (Note 9) 11,375 9,835 7,262
- --------------------------------------------------------------------------------------
Net income $ 17,191 $ 15,217 $ 11,994
======================================================================================
Income per common share (Note 11):
Net income per common share (basic) $ 1.51 $ 1.36 $ 1.22
======================================================================================
Net income per common share (diluted) $ 1.51 $ 1.34 $ 1.19
======================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
12
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
- ---------------------------------------------------------------------------------------------------------
(In thousands, except shares and per share amounts) 1999 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 5,110 $ 2,690
Accounts receivable, trade, less allowances of $521 in 1999
and $690 in 1998 11,303 13,559
Inventories (Note 4) 33,382 35,400
Prepaid expenses and other current assets (Note 9) 4,390 6,032
- ---------------------------------------------------------------------------------------------------------
Total current assets 54,185 57,681
Fixed assets, net (Note 5) 51,028 43,139
Goodwill, net (Note 3) 46,087 47,887
Other assets 4,744 5,718
- ---------------------------------------------------------------------------------------------------------
Total assets $ 156,044 $ 154,425
=========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable, including current maturities of long-term
indebtedness (Note 8) $ 1,717 $ 779
Accounts payable, trade 6,391 8,043
Accrued expenses and other current liabilities (Note 6) 17,107 17,229
- ---------------------------------------------------------------------------------------------------------
Total current liabilities 25,215 26,051
Long-term indebtedness (Note 8) 44,630 57,947
Other long-term liabilities (Note 9) 2,110 1,665
- ---------------------------------------------------------------------------------------------------------
Total liabilities 71,955 85,663
- ---------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 10)
Stockholders' equity (Note 11)
Common stock, par value $.01 per share: authorized 20,000,000 shares;
issued 11,805,754 shares in 1999 and 11,513,702 shares in 1998 118 115
Paid-in capital 24,967 22,943
Retained earnings 64,999 47,808
- ---------------------------------------------------------------------------------------------------------
90,084 70,866
Treasury stock, at cost--509,300 shares in 1999 and 175,600 shares in 1998 (5,995) (2,104)
- ---------------------------------------------------------------------------------------------------------
Total stockholders' equity 84,089 68,762
- ---------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 156,044 $ 154,425
=========================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
DREW INDUSTRIES INCORPORATED 1999 Annual Report 13
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------
(In thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 17,191 $ 15,217 $ 11,994
Adjustments to reconcile net income to cash flows provided by
operating activities:
Depreciation and amortization 8,142 6,836 2,972
Deferred taxes 1,054 50 325
(Gain) loss on disposal of fixed assets (82) 135 (34)
Changes in assets and liabilities, excluding acquisitions of businesses:
Accounts receivable, net 2,256 (3,595) 2,170
Inventories 2,018 (3,743) (86)
Prepaid expenses and other assets 799 (392) (3,414)
Accounts payable, accrued expenses and other liabilities (1,752) 3,447 (2,918)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash flows provided by operating activities 29,626 17,955 11,009
- -----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (13,384) (8,450) (10,377)
Acquisitions of companies' net assets and businesses (10,449) (31,804)
Proceeds from sales of fixed assets 421 345 149
- -----------------------------------------------------------------------------------------------------------------------------
Net cash flows used for investing activities (12,963) (18,554) (42,032)
- -----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from private placement of Senior Notes 40,000
Proceeds from Industrial Revenue Bonds 5,713
Proceeds from other notes and loans 400 500 1,560
Proceeds under line of credit and other borrowings 17,550 75,000 118,150
Repayments under line of credit and other borrowings (30,329) (117,890) (69,050)
Acquisition of treasury stock (3,891) (2,104) (20,800)
Exercise of stock options and other 2,027 1,042 646
- -----------------------------------------------------------------------------------------------------------------------------
Net cash flows (used for) provided by financing activities (14,243) 2,261 30,506
- -----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 2,420 1,662 (517)
Cash and cash equivalents at beginning of year 2,690 1,028 1,545
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 5,110 $ 2,690 $ 1,028
=============================================================================================================================
Supplemental disclosure of cash flows information:
Cash paid during the year for:
Interest on debt $ 3,421 $ 3,072 $ 1,981
Income taxes, net of refunds $ 9,058 $ 10,053 $ 8,433
=============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
14
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' 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, 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 were 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
Net income 17,191 17,191
Issuance of 292,052 shares of common stock
pursuant to stock option plan 3 1,230 1,233
Income tax benefit relating to issuance of
common stock pursuant to stock option plan 794 794
Purchase of 333,700 shares of treasury stock (3,891) (3,891)
- ---------------------------------------------------------------------------------------------------------------------------
Balance--December 31, 1999 $ 118 $ (5,995) $ 24,967 $ 64,999 $ 84,089
===========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
DREW INDUSTRIES INCORPORATED 1999 Annual Report 15
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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"), Lippert Components,
Inc. and its subsidiaries ("LCI"), and Lippert Tire and Axle, Inc. (formerly
known as Shoals Supply, Inc.) and its subsidiaries ("LTA"). 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 aluminum and vinyl windows, doors, chassis,
chassis parts, galvanized roofing and new and refurbished axles. The Company
also distributes new and refurbished tires. Approximately 76 percent of the
Company's sales are made by its manufactured housing products segment and 24
percent are made by its recreational vehicles products segment. At December 31,
1999 the Company operated 39 plants in 18 states.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less at the time of purchase to be cash equivalents.
Investments, which consist of government-backed money market funds are recorded
at cost which approximates market value.
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.
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.
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 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.
Revenue Recognition
Revenue is recognized upon shipment of goods to customers.
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.
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 aluminum and
vinyl 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.
<PAGE>
16
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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, 1999
Revenues from external customers(a) $ 246,509 $ 77,946 $ 324,455 $ 324,455
Segment operating profit (loss) 28,330 8,819 37,149 $ (2,521) $ (2,694) $ 31,934
Segment assets(b) 63,949 31,608 95,557 10,865 49,622 156,044
Expenditures for long-lived assets(c) 7,311 6,049 13,360 323 54 13,737
Depreciation and amortization 3,830 1,309 5,139 17 2,986 8,142
Year ended December 31, 1998
Revenues from external customers(a) $ 271,287 $ 59,353 $ 330,640 $ 330,640
Segment operating 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 9,740 584 10,045 20,369
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 operating 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 29,378 409 34,029 63,816
Depreciation and amortization 1,598 504 2,102 16 854 2,972
</TABLE>
a) One customer accounted for 14 percent, 15 percent and 16 percent, of the
Company's net sales in the years ended December 31, 1999, 1998 and 1997,
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) Segment 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.
<PAGE>
DREW INDUSTRIES INCORPORATED 1999 Annual Report 17
- --------------------------------------------------------------------------------
3. ACQUISITIONS
Coil Clip, Inc.
On December 16, 1998 the Company's subsidiary, LCI, acquired the assets
and business of Coil Clip, Inc. ("Coil Clip"), a fabricator of specialty steel
parts, located in Boaz, Alabama. Previously, in May 1998, LCI acquired the
manufactured housing business of Coil Clip and entered into a supply agreement
to purchase steel from Coil Clip.
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. The results of the acquired business have been included
in the Company's consolidated statements of income beginning December 16, 1998.
Lippert Components, Inc.
On October 7, 1997, the Company acquired LCI 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 earnout, 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.
LCI 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 LTA, while LTA transferred
to LCI 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
earn-out, 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.
Pritt Tire and Axle, Inc.
On May 5, 1997 the Company's subsidiary, LTA acquired the assets and
business of Pritt Tire and Axle, Inc. ("Pritt") of Bristol, Indiana. Pritt
refurbished 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, LTA 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.
Pro Forma Results
The following pro forma condensed consolidated results of operations for
1997 assumes that the acquisitions of LCI and Pritt had occurred at the
beginning of 1997. Pro forma results of Coil Clip are not included because they
are 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 Ended
December 31,
- --------------------------------------------------------------------------------
(Unaudited) 1997
- --------------------------------------------------------------------------------
Net sales $288,671
================================================================================
Net income $ 13,955
================================================================================
Net income per common share:
Basic $ 1.23
================================================================================
Diluted $ 1.21
================================================================================
Average common shares outstanding:
Basic 11,325
================================================================================
Diluted 11,575
================================================================================
<PAGE>
18
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
Goodwill
Goodwill of $46,087,000 at December 31, 1999, is net of accumulated
amortization of $4,606,000. Amortization of goodwill was $1,800,000, $1,583,000
and $765,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
4. INVENTORIES
Inventories consist of the following (in thousands):
December 31,
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
Finished goods $10,494 $10,629
Work in process 2,123 2,052
Raw materials 20,765 22,719
- --------------------------------------------------------------------------------
Total $33,382 $35,400
================================================================================
5. FIXED ASSETS
Fixed assets, at cost, consist of the following (in thousands):
December 31, Estimated
- ----------------------------------------------------------------- Useful Life
1999 1998 in Years
- --------------------------------------------------------------------------------
Land $ 4,931 $ 3,548
Buildings and improvements 29,203 23,096 8 to 45
Leasehold improvements 1,128 973 2 to 11
Machinery and equipment 25,515 22,308 3 to 10
Transportation equipment 1,849 1,698 3 to 7
Furniture and fixtures 3,137 2,827 3 to 8
Construction in progress 2,029 631
- --------------------------------------------------------------------------------
67,792 55,081
Less accumulated depreciation
and amortization 16,764 11,942
- --------------------------------------------------------------------------------
Fixed assets, net $51,028 $43,139
================================================================================
Depreciation and amortization of fixed assets consists of (in thousands):
Year Ended December 31,
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Charges to cost of sales $4,167 $3,459 $1,674
Charges to selling, general
and administrative expenses 989 786 376
- --------------------------------------------------------------------------------
Total $5,156 $4,245 $2,050
================================================================================
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following
(in thousands):
December 31,
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
Accrued employee compensation
and fringes $ 7,718 $ 7,867
Accrued insurance 2,169 2,980
Income taxes 912 774
Accrued expenses and other 6,308 5,608
- --------------------------------------------------------------------------------
Total $17,107 $17,229
================================================================================
7. RETIREMENT AND OTHER BENEFIT PLANS
The Company has discretionary defined contribution profit sharing plans
covering substantially all eligible employees. The Company contributed $784,000,
$715,000 and $336,000 to these Plans during the years ended December 31, 1999,
1998 and 1997, respectively.
8. LONG-TERM INDEBTEDNESS
Long-term indebtedness consists of the following (in thousands):
December 31,
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
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 $40,000
Notes payable pursuant to a credit
agreement expiring May 15, 2002
consisting of a revolving loan, not
to exceed $25,000; interest at
prime rate or LIBOR plus 1 percent 12,000
Industrial Revenue Bonds, payable in
monthly installments of $61 until
2008, interest at 5.8% per annum 5,038 5,464
Other 1,309 1,262
- --------------------------------------------------------------------------------
46,347 58,726
Less current portion 1,717 779
- --------------------------------------------------------------------------------
Total long-term indebtedness $44,630 $57,947
================================================================================
<PAGE>
DREW INDUSTRIES INCORPORATED 1999 Annual Report 19
- --------------------------------------------------------------------------------
Pursuant to both the Senior Notes and the $25 million 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 pays 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.
The approximate amount of maturities of long-term indebtedness (in
thousands) are: 2001--$8,523; 2002--$8,499; 2003--$8,518; 2004--$8,512;
2005--$8,206; and 2006 to 2010--$2,372.
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 in the Consolidated Statements of Income is as
follows (in thousands):
Year Ended December 31,
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Current:
Federal $ 9,031 $ 8,747 $ 6,312
State 1,290 1,038 625
Deferred:
Federal 938 37 200
State 116 13 125
- --------------------------------------------------------------------------------
Total income
tax provision $11,375 $ 9,835 $ 7,262
================================================================================
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,
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Income tax at Federal
statutory rate $ 9,998 $ 8,768 $ 6,740
State income taxes, net of
Federal income tax benefit 914 683 487
Other 463 384 35
- --------------------------------------------------------------------------------
Provision for income taxes $11,375 $ 9,835 $ 7,262
================================================================================
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1999 and 1998 are as follows (in thousands):
December 31,
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
Deferred tax assets:
Accounts receivable $ 163 $ 230
Inventories 569 706
Other asset valuation allowances 833 1,044
Employee benefits other than pensions 162 101
Vacation and holiday pay 293 342
Other accruals 1,541 2,023
- --------------------------------------------------------------------------------
Total deferred tax assets 3,561 4,446
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Fixed assets 2,756 2,585
Long-term obligations 1 3
- --------------------------------------------------------------------------------
Total deferred tax liabilities 2,757 2,588
- --------------------------------------------------------------------------------
Net deferred tax asset $ 804 $1,858
================================================================================
The Company concluded that it is more likely than not that the deferred
tax assets at December 31, 1999 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 $2,669,000 and $3,300,000 are included
in prepaid expenses and other current assets, and net deferred tax liabilities
of $1,865,000 and $1,442,000 are included in other long-term liabilities, in the
Consolidated Balance Sheets at December 31, 1999 and 1998, 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.
<PAGE>
20
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
Future minimum lease payments under operating leases at December 31, 1999
are summarized as follows (in thousands):
2000 $ 3,234
2001 2,774
2002 1,990
2003 1,210
2004 751
Thereafter 502
- --------------------------------------------------------------------------------
Total lease obligations $10,461
================================================================================
Rent expense was $3,754,000, $3,636,000 and $3,087,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
Other
Effective July 29, 1994, the Company spun off to its stockholders LBP,
Inc. ("LBP") (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 were primarily 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, 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 "Adversary
Proceeding"). The complaint 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. Other than the dismissed tax-related
claims, the trustee alleged that White Metal made certain payments to the
defendants which were preferential and recoverable by White Metal, in the
approximate amount of $3.1 million, of which $900,000 was sought from the
Company. Pursuant to a Consent Order Settling and Compromising Claims, dated
January 27, 2000 (the "Settlement"), by and among the trustee, on behalf of
White Metal, and the Company, LBP, Prime, Kinro and Sears Roebuck & Co., Inc.
("Sears"), White Metal's largest creditor, the parties agreed to settle the
Adversary Proceeding in consideration for payment by the defendants to White
Metal's estate in the aggregate amount of $672,000, of which $186,500 was paid
by the Company. The defendants, the trustee and Sears agreed to release each
other, and their respective affiliates, and the trustee agreed not to appeal the
Bankruptcy Court's dismissal of the tax-related claims. In connection with the
Settlement, the Adversary Proceeding was terminated.
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, 1999,
the Company had no futures contracts outstanding.
The Company has employment contracts with four of its employees which
expire on various dates through July 2002. The minimum commitments under these
contracts are $992,000 in 2000, $607,000 in 2001, and $119,000 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 ("ISOs") under Section 422 of the Code
and non-qualified stock options ("NQSOs"). All stock options granted to date
have been NQSOs.
Under the Plan, the Stock Option Committee ("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
<PAGE>
DREW INDUSTRIES INCORPORATED 1999 Annual Report 21
- --------------------------------------------------------------------------------
reflect stock splits, stock dividends, recapitalization, mergers, or other major
corporate action.
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, 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
Granted 556,000 $ 8.81-$11.63
Exercised (292,052) $ 3.67-$ 6.94
Canceled (13,500) $12.13-$12.50
- --------------------------------------------------------------------------------
Outstanding at
December 31, 1999 942,734 $ 6.94-$12.50
================================================================================
Exercisable at
December 31, 1999 202,326 $ 6.94-$12.50
================================================================================
The respective number of shares available for granting options were
249,166, 291,666, and 275,378 at December 31, 1999, 1998 and 1997, respectively.
The Company adopted the disclosure-only option under SFAS No.123,
"Accounting for Stock-Based Compensation" ("FAS 123"). 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 6.0 percent, 5.0 percent and 5.0
percent; assumed expected volatilities of 27.8 percent, 26.6 percent and 40.2
percent; and expected lives of 5, 5 and 5 years for 1999, 1998 and 1997,
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,
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Net income (in thousands):
As reported $17,191 $15,217 $11,994
Pro forma $16,902 $14,947 $11,808
Earnings per share (basic)
As reported $ 1.51 $ 1.36 $ 1.22
Pro forma $ 1.48 $ 1.34 $ 1.20
Earnings per share (diluted)
As reported $ 1.51 $ 1.34 $ 1.19
Pro forma $ 1.48 $ 1.31 $ 1.17
The following table summarizes information about stock options outstanding
at December 31, 1999:
Option Option
Exercise Shares Remaining Shares
Price Outstanding Life (Years) Exercisable
- --------------------------------------------------------------------------------
$ 6.94 25,134 1.1 12,486
$ 7.35 10,000 1.0 10,000
$ 8.81 353,000 5.9 0
$ 9.20 15,000 5.0 15,000
$ 9.31 150,000 5.9 0
$10.75 15,000 2.0 15,000
$11.63 38,000 5.2 0
$11.79 15,000 4.0 15,000
$12.13 292,600 3.9 117,040
$12.48 15,000 3.0 15,000
$12.50 14,000 4.6 2,800
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
Pursuant to authorizations of the Board of Directors, the Company
purchased 333,700 shares of its common stock at a cost of $3,891,000 in 1999 and
175,600 shares of such stock at a cost of $2,104,000 in 1998. At December 31,
1999 the Company was authorized to purchase up to an additional 940,700 shares
of its common stock.
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 LCI.
<PAGE>
22
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
Weighted Average Common Shares Outstanding
The following reconciliation details the denominator used in the
computation of basic and diluted earnings per share:
Year Ended December 31,
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Weighted average shares
outstanding for basic
earnings per share 11,385,400 11,178,588 9,845,138
Common stock equivalents
pertaining to:
Stock options 33,579 201,724 241,678
Warrants 931 6,169 3,290
- --------------------------------------------------------------------------------
Total for diluted shares 11,419,910 11,386,481 10,090,106
================================================================================
The numerator is constant for both the basic and diluted earnings per
share calculations.
In connection with the acquisition of LCI 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, 1999
Net sales $ 85,887 $ 89,209 $ 79,703 $ 69,656 $324,455
Gross profit 18,273 21,349 18,739 16,965 75,326
Net income 3,942 5,097 4,330 3,822 17,191
Net income per common share (basic) $ .35 $ .44 $ .38 $ .34 $ 1.51
Net income per common share (diluted) .34 .44 .38 .34 1.51
Year Ended December 31, 1998
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
</TABLE>
<PAGE>
DREW INDUSTRIES INCORPORATED 1999 Annual Report 23
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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, 1999 and 1998, 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, 1999.
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, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999 in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Stamford, Connecticut
February 9, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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/ Fredric M. Zinn
FREDRIC M. ZINN
Chief Financial Officer
<PAGE>
24
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PER SHARE MARKET PRICE RANGE
- --------------------------------------------------------------------------------
The Company's common stock is traded on the American Stock Exchange(R)
under the symbol DW. A summary of the high and low closing prices of is as
follows:
1999 1998
- --------------------------------------------------------------------------------
High Low High Low
- --------------------------------------------------------------------------------
Quarter Ended March 31 $12.75 $11.38 $13.38 $11.75
Quarter Ended June 30 $13.00 $11.25 $15.13 $12.63
Quarter Ended September 30 $12.19 $ 8.75 $15.00 $11.50
Quarter Ended December 31 $ 9.69 $ 8.44 $12.88 $10.13
The closing price per share for the common stock on March 10, 2000 was
$7.50 and there were 2,103 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.
<PAGE>
DREW
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
Lippert Tire & Axle, Inc. Delaware
Lippert Tire & Axle Holding, Inc. New York
Lippert Tire & Axle Texas
Limited Partnership Texas Partnership
Lippert Tire & Axle 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 statement (No.
33-88582) on Form S-8 of Drew Industries Incorporated of our report dated
February 9, 2000 relating to the consolidated balance sheets of Drew Industries
Incorporated and subsidiaries as of December 31, 1999 and 1998, 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, 1999, and our report
dated February 9, 2000 relating to the financial statement schedule, which
reports appear in or are incorporated by reference in the December 31, 1999,
annual report on Form 10-K of Drew Industries Incorporated.
/s/ KPMG LLP
Stamford, Connecticut
March 15, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
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<PERIOD-END> DEC-31-1999
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0
0
<COMMON> 118
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</TABLE>
