-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HXMcVBhWDXjKQQ/brHLBWxluqrsnsQ7pvuMJ18lIch3tZVCkzM7DVFLzzqa/gD2z hdkUjQ4zs7vhp65ND/v3oQ== 0001005477-99-001463.txt : 19990331 0001005477-99-001463.hdr.sgml : 19990331 ACCESSION NUMBER: 0001005477-99-001463 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DREW INDUSTRIES INCORPORATED CENTRAL INDEX KEY: 0000763744 STANDARD INDUSTRIAL CLASSIFICATION: METAL DOORS, SASH, FRAMES, MOLDING & TRIM [3442] IRS NUMBER: 133250533 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-13646 FILM NUMBER: 99577925 BUSINESS ADDRESS: STREET 1: 200 MAMARONECK AVE CITY: WHITE PLAINS STATE: NY ZIP: 10601 BUSINESS PHONE: 9144289098 MAIL ADDRESS: STREET 1: 200 MAMARONECK AVE CITY: WHITE PLAINS STATE: NY ZIP: 10601 10-K405 1 FORM 10-K405 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Year End Commission File Number December 31, 1998 0-13646 DREW INDUSTRIES INCORPORATED (Exact Name of Registrant as Specified in its Charter) Delaware 13-3250533 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 200 Mamaroneck Avenue, White Plains, N.Y. 10601 (Address of principal executive offices) (Zip Code) Registrant's Telephone Number including Area Code: (914) 428-9098 Securities Registered pursuant to Section 12(b) of the Act: None Securities Registered pursuant to Section 12(g) of the Act: Common Stock (Title of Class) Check mark indicates whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| Aggregate market value of voting stock (Common Stock, $.01 par value) held by non-affiliates of Registrant (computed by reference to the closing price as of March 12, 1999) was $84,138,280. The number of shares outstanding of the Registrant's Common Stock, as of the latest practicable date (March 12, 1999) was 11,443,457 shares of Common Stock. Documents Incorporated by Reference Annual Report to Stockholders for year ended December 31, 1998 is incorporated by reference into Items 6, 7 and 8 of Part II. Proxy Statement with respect to Annual Meeting of Stockholders to be held on May 20, 1999 is incorporated by reference into Part III. - -------------------------------------------------------------------------------- FORWARD LOOKING STATEMENTS AND RISK FACTORS This Form 10-K contains certain statements, including the Company's plans regarding its operating strategy, its products and performance and its views of industry prospects, which could be construed to be forward looking statements within the meaning of the Securities Exchange Act of 1934. These statements reflect the Company's current views with respect to future plans, events and financial performance. The Company has identified certain risk factors which could cause actual plans and results to differ substantially from those included in the forward looking statements. These factors include pricing pressures due to competition, raw material costs (particularly aluminum, steel, vinyl and glass), adverse weather conditions impacting retail sales, inventory adjustments by retailers, availability and costs of labor, and interest rates. In addition, general economic conditions may affect the retail sale of manufactured homes and RV's. Item 1. BUSINESS Introduction Drew Industries Incorporated ("Drew" or the "Company"), through its wholly-owned subsidiaries Kinro, Inc. ("Kinro"), Lippert Components, Inc. ("Lippert"), and Shoals Supply, Inc. ("Shoals") is a leading supplier of a variety of products for manufactured homes and recreational vehicles. Kinro manufactures and markets aluminum and vinyl windows for manufactured homes, and aluminum windows and doors for recreational vehicles. Lippert manufactures and markets steel chassis and steel chassis parts and galvanized roofing for manufactured homes, and manufactures and markets steel chassis and steel chassis parts for recreational vehicles. Shoals manufactures and markets new axles, and distributes refurbished axles and new and refurbished tires, for manufactured homes. Several of the Company's customers produce both manufactured homes and recreational vehicles, and the Company supplies products having similar characteristics for use in both these lines of business. Since 1980, the Company has acquired ten manufacturers of products for both manufactured homes and recreational vehicles, expanded its geographic market and product lines, added manufacturing facilities, integrated manufacturing, distribution and administrative functions, and developed new and innovative products. As a result, the Company currently operates 34 manufacturing facilities in 16 states, and achieved consolidated sales of $331 million for 1998. The Company was incorporated under the laws of Delaware on March 20, 1984, and is the successor to Drew National Corporation, which was incorporated under the laws of Delaware in 1962. The Company's principal executive and administrative offices are located at 200 Mamaroneck Avenue, White Plains, New York 10601; telephone number (914) 428-9098. The Common Stock of the Company is traded on the American Stock Exchange (symbol: DW). Recent Event On May 14, 1998, Lippert acquired the manufactured homes steel processing business of Coil Clip, Inc. ("Coil Clip") for cash of approximately $3.5 million and entered into a supply agreement to purchase steel from Coil Clip. On December 16, 1998, Lippert acquired all the remaining assets and business of Coil Clip for cash of $6 million and a two-year $500,000 promissory note. The acquisition of the business of Coil Clip will add approximately $12 million of annualized sales to the Company's existing business. Manufactured Housing Products Segment Through its wholly-owned subsidiaries, the Company manufactures and markets a number of components for manufactured homes, including aluminum and vinyl windows and screens, steel chassis and steel chassis parts, galvanized roofing, and new axles, and the Company distributes refurbished axles and new and refurbished tires. The manufactured housing products segment represents approximately 82% of the Company's consolidated sales. This segment also supplies related products to other industries, representing less than 5% of sales of this segment. Page - 2 - Raw materials used by the Company in its manufactured housing products segment, consisting of extruded aluminum and vinyl, glass, various adhesive and insulating components, and fabricated steel (coil, sheet, galvanized and I-beam), are available from a number of sources. Used axles and tires, which are refurbished by the Company, are purchased from dealers of manufactured homes and independent agents, and their availability is subject to competitive pricing. The Company maintains an aluminum hedging program under which it purchases future contracts on the London Metal Exchange to hedge the prices of a portion of its anticipated requirements. The Company recently acquired the business of Coil Clip, Inc., a steel processor, to expand its supply and reduce costs for certain coil steel and sheet steel components used by the Company. Operations of the Company's manufactured housing products segment consist primarily of fabricating, welding, painting and assembling components into finished products, and refurbishing used axles and tires. The Company's manufactured housing products operations are conducted at 26 manufacturing and warehouse facilities throughout the United States, strategically located in proximity to the customers they serve. Four of these facilities also conduct operations in the Company's recreational vehicles products segment. See Item 2. "Properties." The Company's manufactured housing products are sold by 19 sales personnel working exclusively for the Company to major builders of manufactured homes such as Clayton Homes, Oakwood Homes, Champion Enterprises, Skyline and Fleetwood Enterprises. The Company's manufactured housing products operations compete on the basis of price, customer service, product quality, and reliability. Although definitive information is not readily available, the Company believes that the three leading suppliers of windows for manufactured homes are the Company, Philips Industries and Care-Free Windows, and that the Company's market share for windows and screens is approximately 40%. The Company's manufactured homes chassis and chassis parts operations compete with several other manufactures of chassis and chassis parts, as well as with certain builders of manufactured homes which produce their own chassis and chassis parts. Although definitive information is not readily available, the Company believes that its market share for chassis and chassis parts for manufactured homes is approximately 15%. The market for refurbished axles and tires is highly fragmented, has low entry barriers, and is therefore highly competitive. During 1998, several new suppliers of refurbished axles and tires entered the market. As a result of these competitive pressures, the Company's profit margins for its axles and tires product line declined significantly. Although definitive information is not readily available, the Company believes that its market share for refurbished and new axles and tires is approximately 25%. Recreational Vehicles Products Segment Through its wholly-owned subsidiaries, the Company manufactures and markets a number of components for recreational vehicles, including aluminum and vinyl windows and screens, a variety of doors, steel chassis and steel chassis parts. The recreational vehicles products segment represents approximately 18% of the Company's consolidated sales. Raw materials used by the Company in its recreational vehicles products segment, consisting of extruded aluminum and vinyl, glass, various adhesive and insulating components, and fabricated steel (coil, sheet and I-beam), are available from a number of sources. The Company maintains an aluminum hedging program under which it purchases future contracts on the London Metal Exchange to hedge the prices of a portion of its anticipated requirements. Operations of the Company's recreational vehicles products segment consist primarily of fabricating, welding, painting and assembling components into finished products, and tempering glass for its own use and for sale to other window manufacturers. The Company's recreational vehicles products operations are conducted at 12 manufacturing and warehouse facilities throughout the United States, strategically located in proximity to the customers they serve. Four of these facilities also conduct operations in the Company's manufactured housing products segment. See Item 2. "Properties." Page - 3 - The Company's recreational vehicles products are sold by 5 sales personnel working exclusively for the Company to major manufacturers of recreational vehicles such as Fleetwood Enterprises, Thor Industries and Skyline. The Company's recreational vehicles products operations compete on the basis of price, customer service, product quality, and reliability. Although definitive information is not readily available, the Company believes that there are approximately 10 significant suppliers of windows and doors for recreational vehicles, several of which are substantially larger than the Company. The Company's recreational vehicles chassis and chassis parts operations compete with several other manufactures of chassis and chassis parts, as well as with certain manufacturers of recreational vehicles which produce their own chassis and chassis parts. The Company's operation as a supplier of chassis and chassis parts for recreational vehicles had only a small market share in 1997, but the Company's market share has been increasing substantially. Although definitive information is not readily available, the Company believes that its market share for chassis and chassis parts for recreational vehicles is currently 8%. Regulatory Matters Windows produced by the Company for manufactured homes must comply with performance and construction regulations promulgated by the United States Housing and Urban Development Authority ("HUD") and by the American Architectural Manufacturers Association relating to air and water infiltration, thermal performance, emergency exit conformance, and hurricane resistance. Windows and doors produced by the Company for the recreational vehicle industry are regulated by The United States Department of Transportation Federal Highway Administration ("DOT"), National Fire and Protection Agency, and the National Electric Code governing safety glass performance, egressability, door hinge and lock systems, egress window retention hardware, and baggage door ventilation. Manufactured homes are built on steel chassis which are fitted with axles and tires sufficient in number to support the weight of the home and are transported by producers to dealers via roadway. When the home is installed at the site, the axles and tires are usually repurchased from the homeowner and removed by the dealer or installer. Regulations promulgated by HUD require the axles to be inspected after each use and refurbished or, if necessary, replaced. The Company purchases from dealers and independent agents, and repairs and refurbishes, used axles and tires, and markets the refurbished axles and tires to producers of manufactured homes. In accordance with regulations promulgated by HUD, refurbished axle assemblies distributed by the Company are refurbished in accordance with a detailed Quality Control Program formulated by an independent inspection agency. Compliance with the Quality Control Program is monitored by the inspection agency on a monthly basis. All expenses of formulating the program, inspection, and monitoring are paid for by the Company. In addition, new and refurbished tires distributed by the Company are subject to regulations promulgated by DOT and by HUD relating to weight tolerance, maximum speed, size, and components. In accordance with new regulations promulgated in November 1998, transporters of manufactured homes are utilizing tires with new specifications. As a result, at December 31, 1998 the Company had excess inventory of tires previously used by its customers, and the Company reduced the inventory value of such tires. In addition, the supply of used tires with new specifications which are available for the Company's tire refurbishing operation is temporarily limited. The Company's operations are also subject to certain federal, state and local regulatory requirements relating to the use, storage, discharge and disposal of hazardous chemicals used during their manufacturing processes. The Company believes that it is currently operating in compliance with applicable laws and regulations, and does not believe that the expense of compliance with these laws and regulations, as currently in effect, will have a material effect on the Company's capital expenditures, earnings or competitive position. Page - 4 - Employees The approximate number of persons employed full-time by the Company and its subsidiaries at December 31, 1998 was 2,656. The Company and its subsidiaries believe that relations with its employees are good. Other In connection with the spin-off by the Company of Leslie Building Products, Inc. ("Leslie Building Products"), now known as "LBP, Inc." ("LBP"), and its wholly-owned subsidiary, Leslie-Locke, Inc. ("Leslie-Locke"), now known as Prime Acquisition Corp. ("Prime"), which was effective on July 29, 1994, the Company and LBP entered into a Shared Services Agreement. Pursuant to the Shared Services Agreement, the Company and LBP agreed to share certain administrative functions and employee services, such as management overview and planning, tax preparation, financial reporting, coordination of independent audit, stockholder relations, and regulatory matters. The Company is reimbursed by LBP for the fair market value of such services. The Shared Services Agreement was extended to December 31, 1999. Item 2. PROPERTIES The Company's manufacturing is done out of buildings that are used for both manufacturing and warehousing. In addition, there are administrative facilities used for corporate and administrative functions. The following is a chart of the properties from which the Company operates: City State Square Feet Owned Leased ---- ----- ----------- ----- ------ MH SEGMENT Bear Creek Alabama 150,000 x Double Springs Alabama 72,500 x Phil Campbell Alabama 53,200 x Ocala Florida 47,094 x Thomasville Georgia 70,000 x Fitzgerald Georgia 55,300 x Americus Georgia 36,950 x Nampa Idaho 39,500 x Goshen Indiana 100,000 x Goshen Indiana 58,000 x Goshen (Frame) Indiana 57,000 x Bristol Indiana 40,000 x Arkansas City Kansas 7,800 x Bossier City Louisiana 11,400 x Whitehall New York 12,675 x Harrisburg North Carolina 57,950 x Liberty North Carolina 47,000 x Rockwell North Carolina 14,000 x Sugarcreek Ohio 14,480 x Mc Adoo Pennsylvania 25,088 x Dayton Tennessee 100,000 x Maynardville Tennessee 20,000 x Mansfield Texas 61,500 x Alvarado Texas 49,700 x Waco Texas 23,000 x Lancaster Wisconsin 12,250 x ---------- 1,236,387 ========== In addition a 21,600 square foot facility is under construction in Garret, Indiana. Page - 5 - City State Square Feet Owned Leased ---- ----- ----------- ----- ------ RV SEGMENT Fontana California 108,750 x Fitzgerald Georgia 23,700 x Goshen (Frame) Indiana 20,000 x Elkhart Indiana 36,600 x Goshen Indiana 97,974 x Crawfordsville Indiana 17,800 x Goshen (Tempering Plant) Indiana 53,000 x Edgerton Ohio 10,000 x Mc Adoo Pennsylvania 8,362 x Alvarado Texas 21,300 x Longview Texas 58,900 x Berkley Springs West Virginia 38,600 x ------- 494,986 ======= ADMINISTRATIVE Alma Michigan 10,800 x Naples Florida 4,500 x Arlington Texas 8,464 x Arlington Texas 900 x White Plains New York 2,800 x -------- 27,464 ======== Item 3. LEGAL PROCEEDINGS The Company is not a party to any legal proceedings which, in the opinion of Management, could have a material adverse effect on the Company or its consolidated financial position. See Note 10 of Notes to Consolidated Financial Statements with respect to certain product liability claims pending against White Metal Rolling and Stamping Corp. ("White Metal"), a subsidiary of Prime, arising in connection with the ladder manufacturing business formerly conducted by White Metal. Although the Company was named as a defendant in certain actions commenced in connection with these claims, the Company has not been held responsible, and the Company disclaims any liability for the obligations of White Metal. See Note 10 of Notes to Consolidated Financial Statements with respect to the filing by White Metal, on September 30, 1994, of a voluntary petition seeking liquidation under the provisions of chapter 7 of the United States Bankruptcy Code. On May 7, 1996, the Company and its subsidiary, Kinro, Inc., and LBP and its subsidiary, Prime, were served with a summons and complaint in an adversary proceeding commenced by the chapter 7 trustee of White Metal. The complaint, which appears to have alleged several duplicate claims, sought damages in the aggregate amount of $10.6 million plus attorneys fees, of which up to approximately $7.5 million of tax-related claims was sought, jointly and severally, from the Company, Kinro, LBP and Prime. On July 14, 1998, the Bankruptcy Court granted defendants' motion to dismiss the trustee's tax-related claims. The Court permitted the trustee to replead the dismissed claims, but the trustee elected not to replead. The trustee could appeal the Court's decision dismissing these claims on termination of the proceeding. Other than the dismissed tax-related claims, the trustee alleges that White Metal made certain payments to the Company which were preferential and are recoverable by White Metal, in the approximate amount of $900,000. Although these claims were not dismissed, the Company believes that the claims are without merit, denies liability for any such amount, and is vigorously defending against the allegations. However, an estimate of potential loss, if any, cannot be made at this time. The Company believes that the defense of this proceeding will not have a material adverse impact on the Company's financial condition or results of operations. Page - 6 - Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following tables set forth certain information with respect to the Directors and Executive Officers of the Company as of December 31, 1998. Name Position ---- -------- Leigh J. Abrams President, Chief Executive Officer and Director (Age 56) of the Company since March 1984. Edward W. Rose, III Chairman of the Board of Directors of the Company (Age 57) since March 1984. David L. Webster Director of the Company since March 1984. (Age 63) L. Douglas Lippert Director of the Company since November 1997. (Age 51) James F. Gero Director of the Company since May 1992. (Age 53) Gene H. Bishop Director of the Company since June 1995. (Age 69) Fredric M. Zinn Chief Financial Officer of the Company since (Age 47) January 1986. Harvey J. Kaplan Secretary and Treasurer of the Company since (Age 64) March 1984. LEIGH J. ABRAMS has also been President, Chief Executive Officer and a Director of LBP since July 1994. EDWARD W. ROSE, III, for more than the past five years, has been President and principal stockholder of Cardinal Investment Company, Inc., an investment firm. Mr. Rose also serves as a director of the following public companies: Osprey Holding, Inc., previously engaged in selling computer software for hospitals; Liberte Investors, Inc., engaged in real estate loans and investments; and ACE Cash Express, Inc., engaged in check cashing services. Since July 1994, Mr. Rose has also been Chairman of the Board of LBP. DAVID L. WEBSTER, since November 1980, has been President and Chief Executive Officer of Kinro, Inc., a subsidiary of the Company, and Chairman of Kinro, Inc. since November 1984. Mr. Webster has also been President and Chief Executive Officer of Shoals Supply, Inc., a subsidiary of the Company, since its acquisition in February 1996. L. DOUGLAS LIPPERT, since October 1997, has been President and Chief Executive Officer of Lippert Components, Inc., a subsidiary of the Company, and President of the predecessor of Lippert Components, Inc. since 1978. Mr. Lippert has also been President of Coil Clip, Inc., a subsidiary of the Company, since its acquisition in December 1998. The Board of Directors appointed Mr. Lippert as a Director in connection with Page - 7 - the acquisition of Lippert Components, Inc. in October 1997, and Mr. Lippert was elected to his present term as a director at the Annual Meeting of Stockholders held on May 21, 1998. JAMES F. GERO, since March 1992, has been Chairman and Chief Executive Officer of Sierra Technologies, Inc., a manufacturer of defense systems technologies. From July 1987 to October 1989, Mr. Gero was Chairman and Chief Executive Officer of Varo, Inc., a manufacturer of defense electronics, and from 1985 to 1987, Mr. Gero was President and Chief Executive Officer of Varo, Inc. Mr. Gero also serves as a director of the following public companies: Orthofix International, N.V.,an international supplier of orthopedic devices for bone fixation and stimulation; and Spar Aerospace Ltd., engaged in space robotics, communications equipment and aerospace products and services. Since July 1994, Mr. Gero has also been a Director of LBP. GENE H. BISHOP, from March 1975 until July 1990, was Chief Executive Officer of MCorp, a bank holding company, and from October 1990 to November 1991, was Vice Chairman and Chief Financial Officer of Lomas Financial Corporation, a financial services company. From November 1991 until his retirement in October 1994, Mr. Bishop served as Chairman and Chief Executive Officer of Life Partners Group, Inc., a life insurance holding company. Mr. Bishop also serves as a director of the following publicly-owned companies: Liberte Investors, Inc., engaged in real estate loans and investments; Southwest Airlines Co., a regional airline; and Paymentech, Inc., a credit card payment processor. FREDRIC M. ZINN has also been Chief Financial Officer of LBP since July 1994. Mr. Zinn is a Certified Public Accountant. HARVEY J. KAPLAN has also been Secretary and Treasurer of LBP since July 1994. Mr. Kaplan is a Certified Public Accountant. Compliance with Section 16(a) of the Securities Exchange Act Section 16(a) of the Securities Exchange Act of 1934 requires the Company's executive officers and directors, and persons who beneficially own more than ten percent of the Company's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission and the American Stock Exchange. Officers, directors and greater than ten-percent shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. Based on its review of the copies of such forms received by it, the Company believes that during 1998 all such filing requirements applicable to its officers and directors (the Company not being aware of any ten percent holder during 1998 other than Edward W. Rose, III and L. Douglas Lippert, directors of the Company, and FMR Corp.) were complied with. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Per Share Market Price Information The Common Stock of the Company is traded on the American Stock Exchange (symbol: DW). On March 12, 1999, there were 2,204 holders of record of the Common Stock. The Company estimates that 2,000 to 4,000 additional stockholders own shares of its Common Stock held in the name of Cede & Co. and other broker and nominee names. The table below sets forth, for the periods indicated, the range of high and low closing prices per share for the Common Stock as reported by the American Stock Exchange. Page - 8 - All of the following prices have been retroactively adjusted to reflect the two-for-one split effective March 21, 1997. High Low ---- --- Calendar 1998 Quarter ended March 31........ $13.38 $11.75 Quarter ended June 30......... $15.13 $12.63 Quarter ended September 30.... $15.00 $11.50 Quarter ended December 31..... $12.88 $10.13 High Low ---- --- Calendar 1997 Quarter ended March 31........ $13.81 $10.75 Quarter ended June 30......... $13.00 $10.63 Quarter ended September 30.... $14.38 $11.75 Quarter ended December 31..... $14.13 $11.06 The closing price per share for the Common Stock on March 12, 1999, was $12.25. Dividend Information The Company has not paid any cash dividends on its Common Stock. Future dividend policy with respect to the Common Stock will be determined by the Board of Directors of the Company in light of prevailing financial needs and earnings of the Company and other relevant factors. The Company's dividend policy is subject to certain restrictions contained in its 6.95% Senior Notes and in financing agreements relating to its credit facility. Item 6. SELECTED FINANCIAL DATA, Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, and Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, are incorporated by reference to the Company's Annual Report to Stockholders for the year ended December 31, 1998. Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III Part III of Form 10-K is incorporated by reference to the Company's Proxy Statement with respect to its Annual Meeting of Stockholders to be held on May 20, 1999. Page - 9 - PART IV Item 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES and REPORTS ON FORM 8-K (a) Documents Filed (1) Financial Statements. The Consolidated Financial Statements of the Company and its subsidiaries are incorporated by reference to the Consolidated Financial Statements and Notes to Consolidated Financial Statements in the Company's Annual Report to Stockholders for the year ended December 31, 1998. (2) Schedules. Schedule II - Valuation and Qualifying Accounts. (3) Exhibits. See "List of Exhibits" at the end of this report incorporated herein by reference. (b) Reports on Form 8-K On December 23, 1998, the Company filed a Current Report on Form 8-K reporting the acquisition of Coil Clip, Inc. Page - 10 - SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. DREW INDUSTRIES INCORPORATED Date: March 24, 1999 By: /s/ Leigh J. Abrams --------------------------- Leigh J. Abrams, President Pursuant to the requirements of the Securities and Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and dates indicated. Each person whose signature appears below hereby authorizes Leigh J. Abrams and Harvey J. Kaplan, or either of them, to file one or more amendments to the Annual Report on Form 10-K which amendments may make such changes in such Report as either of them deems appropriate, and each such person hereby appoints Leigh J. Abrams and Harvey J. Kaplan, or either of them, as attorneys-in-fact to execute in the name and on behalf of each such person individually, and in each capacity stated below, such amendments to such Report. Date Signature Title - ---- --------- ----- March 24, 1999 By: /s/Leigh J. Abrams Director, President and -------------------- Chief Executive Officer (Leigh J. Abrams) March 24, 1999 By: /s/Harvey J. Kaplan Secretary and Treasurer -------------------- (Harvey J. Kaplan) March 24, 1999 By: /s/Fredric M. Zinn Chief Financial Officer -------------------- (Fredric M. Zinn) March 24, 1999 By: /s/John F. Cupak Controller -------------------- (John F. Cupak) March 24, 1999 By: /s/Edward W. Rose III Director -------------------- (Edward W. Rose, III) March 24, 1999 By: /s/David L. Webster Director -------------------- (David L. Webster) March 24, 1999 By: /s/L. Douglas Lippert Director -------------------- (L. Douglas Lippert) March 24, 1999 By: /s/James F. Gero Director -------------------- (James F. Gero) March 24, 1999 By: /s/Gene H. Bishop Director -------------------- (Gene H. Bishop) Page - 11 - Report of Independent Auditors The Board of Directors Drew Industries Incorporated: Under date of February 10, 1999, we reported on the consolidated balance sheets of Drew Industries Incorporated and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998, as contained on pages 12 through 23 in the 1998 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1998. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related financial statement schedule as listed on Item 14. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP Stamford, Connecticut February 10, 1999 Page - 12 - DREW INDUSTRIES INCORPORATED AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (in thousands)
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 - -------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1998: Allowance for doubtful accounts receivable, trade $ 528 $266 $50(a) $ 154 $690 Reserve for liquidation losses - disposal of businesses 9 (9) Reserve for revaluation of loans 60 (60) Reserve for notes receivable 436 (91) 345(c) YEAR ENDED DECEMBER 31, 1997: Allowance for doubtful accounts receivable, trade $ 308 $(10) $231(a) $ 1(b) $528 Reserve for liquidation losses - disposal of businesses 9 9 Reserve for revaluation of loans 361 (301) 60 Reserve for notes receivable 498 (86) (24)(c) 436 YEAR ENDED DECEMBER 31, 1996: Allowance for doubtful accounts receivable, trade $ 266 $ 23 $30(a) $ 11(b) $308 Reserve for liquidation losses - disposal of businesses 9 9 Reserve for revaluation of loans 334 27 361 Reserve for notes receivable 692 (321) (127)(c) 498
(a) Represents balance at date of acquisition of acquired companies. (b) Represents accounts written-off net of recoveries. (c) Represents write-off of uncollectible portion of notes, net of recoveries. Page - 13 - EXHIBIT INDEX Exhibit Sequentially Number Description Numbered Page - ------ ----------- ------------- 3. Articles of Incorporation and By-laws. 3.1 Drew Industries Incorporated Restated Certificate of Incorporation. 3.2 Drew Industries Incorporated By-laws, as amended. Exhibit 3.1 is incorporated by reference to Exhibit III to the Proxy Statement-Prospectus constituting Part I of the Drew National Corporation and Drew Industries Incorporated Registration Statement on Form S-14 (Registration No. 2-94693). Exhibit 3.2 is incorporated by reference to the Exhibit bearing the same number included in the Annual Report of Drew Industries Incorporated on Form 10-K for the fiscal year ended August 31, 1985. 10 Material Contracts. 10.27 Lease between Kinro, Inc. and Robert A. White and Larry B. White, dated June 1, 1979, as amended. 10.39 Leases between Robert A. White, Larry B. White and Kinro, Inc. dated July 25, 1983, as amended. 10.47 Registration Agreement among Drew Industries Incorporated and the Leslie-Locke Shareholders dated August 28, 1985. 10.66 Employment Agreement by and between Kinro, Inc. and David L. Webster, dated March 31, 1996. 10.100 Drew Industries Incorporated Stock Option Plan. 10.134 Letter, dated April 28, 1988, from Drew Industries Incorporated to Leigh J. Abrams confirming compensation arrangement. 10.135 Description of split-dollar life insurance plan for certain executive officers. 10.146 Form of Plan and Agreement of Distribution between Leslie Building Products, Inc. and Drew Industries Incorporated dated July 29, 1994. 10.147 Form of Shared Services Agreement between Leslie Building Products, Inc. and Drew Industries Incorporated dated July 29, 1994. 10.148 Form of Tax Matters Agreement between Leslie Building Products, Inc. and Drew Industries Incorporated dated July 29, 1994. 10.151 Asset Purchase Agreement, dated February 15, 1996, by and among Shoals Supply, Inc., Lecil V. Thomas, and Drew Industries Incorporated. 10.152 Non-Negotiable Promissory Note, dated February 15, 1996, of Shoals Acquisition Corp., to the order of Shoals Supply, Inc. in the principal amount of $760,000, guaranteed by Drew Industries Incorporated. Page - 14 - 10.153 Bill of Sale, dated February 15, 1996 by and between Shoals Supply, Inc. and Drew Industries Incorporated. 10.154 Registration Rights Agreement, dated February 15, 1996, by and among Drew Industries Incorporated, Shoals Supply, Inc., and Lecil V. Thomas. 10.155 Consulting and Non-Competition Agreement, dated February 15, 1996, by and between Drew Industries Incorporated and Lecil V. Thomas. 10.156 Leases, dated February 15, 1996, between Thomas Family Partnership, Ltd. and Shoals Acquisition Corp. 10.157 Employment Bonus Agreements, dated February 15, 1996, by and between Shoals Supply, Inc. and the employees named therein. 10.158 Assignment, dated February 15, 1996, by and among Shoals Supply, Inc., Lecil V. Thomas and Drew Industries Incorporated. 10.159 Stock Purchase and Pledge Agreement and Non-Negotiable Promissory Note, dated March 7, 1997 by and between Drew Industries Incorporated and Edward W. Rose, III. 10.160 Agreement and Plan of Merger, dated October 7, 1997, by and among Drew Industries Incorporated, Lippert Acquisition Corp., Lippert Components, Inc. and the shareholders of Lippert Components, Inc. named therein. 10.161 Registration Rights Agreement, dated October 7, 1997, by and among Drew Industries Incorporated, Lippert Acquisition Corp., and certain shareholders of Lippert Components, Inc. named therein. 10.162 Contingency Escrow Agreement, dated October 7, 1997 by and among Drew Industries Incorporated, Lippert Acquisition Corp., The Chase Manhattan Bank, and certain shareholders of Lippert Components, Inc. named therein. 10.163 Indemnity Escrow Agreement, dated October 7, 1997, by and among Drew Industries Incorporated, Lippert Acquisition Corp., The Chase Manhattan Bank, and The L. Douglas Lippert Living Trust dated June 6, 1989. 10.164 Executive Employment and Non-Competition Agreement, dated October 7, 1997, by and between Lippert Components, Inc. and L. Douglas Lippert. 10.165 Note Purchase Agreement, dated January 28, 1998, by and among Kinro, Inc, Lippert Components, Inc. and Shoals Supply, Inc. (collectively, the "Note Co-Issuers") and Teachers Insurance and Annuity Association of America, ING Investment Management, Inc. as agent for Midwestern Life Insurance Company, Security Life of Denver Insurance Company, Equitable Life Insurance Company of Iowa and USG Annuity & Life Insurance Company (collectively, the "Note Purchasers"). 10.166 6.95% Senior Notes due January 28, 2005 in the aggregate principal amount of $40,000,000 issued by the Note Co-Issuers to the Note Purchasers. 10.167 Pledge Agreements, dated January 28, 1998, by and between The Chase Manhattan Bank, as trustee for the benefit of the Note Purchasers and, separately, Registrant, Kinro, Inc., Shoals Supply, Inc., Kinro Manufacturing. 10.168 Guarantee Agreement, dated January 28, 1998, by and among Registrant and the Note Purchasers. Page - 15 - 10.169 Subsidiary Guaranty, dated January 28 1998, by Kinro Holding Inc., Kinro Manufacturing, Inc., Shoals Holding, Inc., Kinro Texas Limited Partnership, Kinro Tennessee Limited Partnership, Shoals Supply Texas Limited Partnership and Shoals Supply Tennessee Limited Partnership (collectively, the "Subsidiaries") in favor of the Note Purchasers. 10.170 Collateralized Trust Agreement, dated January 28, 1998, by and among the Note Co-Issuers and the Note Purchasers. 10.171 Subordination Agreement, dated January 28, 1998, by and among Registrant, the Note Co-Issuers, Lippert Components, Inc., the Subsidiaries, and the Note Purchasers. 10.172 $25,000,000 Revolving Credit Facility - Credit Agreement, dated January 28 1998, by and among Kinro, Inc., Shoals Supply, Inc. and Lippert Components, Inc. (The "Borrowers") and The Chase Manhattan Bank ("Chase") and KeyBank National Association ("KeyBank") (together, the "Lenders"). 10.173 $15,000,000 Revolving Credit Note, dated January 28, 1998, made by the Borrowers to Chase. 10.174 $10,000,000 Revolving Credit Note, dated January 28, 1998, made by the Borrowers to KeyBank. 10.175 Company Guarantee Agreement, dated January 28, 1998, made by Registrant to Chase, as agent for the Lenders. 10.176 Subsidiary Guarantee Agreement, dated January 28, 1998, made by each direct and indirect subsidiary of Registrant (other than the Borrowers) in favor of Chase, as agent for the Lenders. 10.177 Subordination Agreement, dated January 29, 1998, made by each direct and indirect subsidiary of Registrant and Chase, as agent for the Lenders. 10.178 Pledge and Security Agreement, dated January 28, 1998, made by Registrant, the Borrowers, and certain indirect subsidiaries of Registrant in favor of Chase, as collateral agent. Exhibit 10.27 is incorporated by reference to the Exhibits bearing the same number indicated on the Registration Statement of Drew National Corporation on Form S-1 (Registration No. 2-72492). Exhibit 10.39 is incorporated by reference to the Exhibit included in the Annual Report of Drew National Corporation on Form 10-K for the fiscal year ended August 31, 1983. Exhibits 10.47 is incorporated by reference to the Exhibits included in the Company's Current Report on Form 8-K dated September 6, 1985. Exhibit 10.66 is incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. Exhibit 10.100 is incorporated by reference to Exhibit A to the Proxy Statement of the Company dated May 10, 1995. Exhibit 10.134 is incorporated by reference to the Exhibit bearing the same number included in the Company's Transition Report on Form 10-K for the period September 1, 1992 to December 31, 1993. Exhibit 10.135 is incorporated by reference to the Exhibit bearing the same number included in the Company's Transition Report on Form 10-K for the period September 1, 1992 to December 31, 1993. Page - 16 - Exhibits 10.146-10.148 are incorporated by reference to the Exhibits bearing numbers 10.1, 10.3 and 10.4, respectively, included in Post-Effective amendment No. 1 on Form 10/A, dated August 30, 1994, to the Registration Statement of Leslie Building Products, Inc. on Form 10 (Registration No. 0-24094). Exhibits 10.151 - 10.158 are incorporated by reference to the Exhibits included in the Company's Current Report on Form 8-K dated February 29, 1996. Exhibit 10.159 is incorporated by reference to the Exhibit bearing the same number included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. Exhibits 10.160 - 10.164 are incorporated by reference to the Exhibits included in the Company's Current Report on Form 8-K dated October 16, 1997. Exhibits 10.165 - 10.178 are incorporated by reference to the Exhibits bearing the same numbers included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. 13. 1998 Annual Report to Stockholders. Exhibit 13 is filed herewith. _______________ 21. Subsidiaries Exhibit 21 is filed herewith. _______________ 23. Consent of Independent Auditors. Exhibit 23 is filed herewith. _______________ 24. Powers of Attorney. Powers of Attorney of persons signing this Report are included as part of this Report. Page - 17 - EX-13 2 ANNUAL REPORT DREW Industries Incorporated [PHOTO OMITTED] 1998 ANNUAL REPORT COMPANY PROFILE "Drew's sales have increased nearly 400 percent over the last five years, through acquisitions, product line extensions and geographic expansion. During that period, our net income has grown at an average annual compound rate of 22 percent, including an increase of 27 percent for 1998." Drew, through its wholly-owned subsidiaries, Kinro, Lippert and Shoals, supplies a broad line of components for manufactured homes and recreational vehicles. Drew's manufactured housing products segment, which accounts for 82 percent of consolidated sales, manufactures a variety of products used in the construction of manufactured homes, including windows and screens, chassis and chassis parts, axles, and galvanized roofing. The manufactured housing products segment also imports new tires and refurbishes used axles and tires which are supplied to producers of manufactured homes. The recreational vehicle products segment, which accounts for 18 percent of consolidated net sales, manufactures a variety of products used in the production of recreational vehicles, including windows, doors and chassis. Our greatest strength continues to be the dedication, skill and expertise of our thousands of employees. Without their efforts, Drew's success over the past years could not have been achieved. [GRAPHIC OMITTED] STRATEGY TO CONTINUE GROWTH AND PROFITABILITY - Low cost producer - "Quick response" manufacturing - Reasonable prices 1998 - Quality products - Superior customer service - Product line extensions and increased market share - Strategic acquisitions ================================================================================ In Memoriam On September 2, 1998, Ray Romano, our audit partner from KPMG LLP, independent auditors, died in the crash of SwissAir flight 111 in Halifax, Nova Scotia. His guidance and his smile will be dearly missed. ================================================================================ TABLE OF CONTENTS Financial Highlights 1 Letter to Stockholders 2 Capacity Expansion 4 Industries and Products 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Selected Financial Data 11 Consolidated Statements of Income 12 Consolidated Balance Sheets 13 Consolidated Statements of Cash Flows 14 Consolidated Statements of Stockholders' Equity 15 Notes to Consolidated Financial Statements 16 Corporate Information & Stock Information IBC Drew Industries Incorporated FINANCIAL HIGHLIGHTS ------------------------------ (In thousands, except per share amounts) 1998 1997 1996 - -------------------------------------------------------------------------------- Net Sales $330,640 $208,365 $168,151 Net Income $ 15,217 $ 11,994 $ 12,572 Net Income Per Basic Common Share $ 1.36 $ 1.22 $ 1.18 Net Income Per Diluted Common Share $ 1.34 $ 1.19 $ 1.15 Working Capital $ 31,630 $ 24,009 $ 16,138 Stockholders' Equity $ 68,762 $ 51,953 $ 34,779 Book Value Per Common Share $ 6.06 $ 4.67 $ 3.24 - -------------------------------------------------------------------------------- [GRAPHIC OMITTED] 1 LETTER TO STOCKHOLDERS [PHOTO OMITTED] For Drew, 1998 was a year of outstanding accomplishments despite significant challenges. Drew reported record net sales of $331 million in 1998, an increase of 59 percent from $208 million in 1997. The sales increase resulted primarily from acquisitions consummated during the past two years, however, sales by currently owned operations increased 14 percent in 1998. Earnings per share (diluted) increased 13 percent to $1.34 in 1998 from $1.19 in 1997, while net income for 1998 of $15.2 million represented a 27 percent increase over last year's net income of $12.0 million. The acquisitions completed in the past two years were accretive to earnings for 1998. Drew's record results were achieved even though we experienced new competition in our axle and tire refurbishing product line, which reduced its gross margin. Although competition in this line of products is expected to continue throughout 1999, we anticipate that its effect will be offset by increased sales and improved efficiencies in other product lines, enabling Drew to achieve another year of earnings growth. During 1998 Drew achieved the following: o Gained market share in both its manufactured housing products segment and recreational vehicle products segment, highlighted by a 58 percent increase in sales of manufactured housing vinyl windows, the successful introduction of a new vinyl patio door product line and a four-fold increase in our RV chassis business. Because of these market share gains, Drew has been growing much faster than the industries it serves. o Received a significant commitment from a major manufacturer for the purchase of our manufactured housing chassis, with shipments to begin in mid-1999. o Acquired the assets and business of Coil Clip, a supplier of speciality steel and steel parts used in our operations as well as by other manufacturers. This acquisition will help to keep our steel costs competitive. o Constructed three new manufacturing and warehouse facilities, to support increased demand for our RV chassis. This expansion has been well managed, as production efficiencies improved throughout the year. Further expansion of capacity in this product line is planned for 1999. 2 1998 Annual Report Drew Industries Incorporated ACHEIVEMENT o Completed the consolidation under budget and ahead of schedule, of certain of our operations within the manufacturing housing segment, by transferring all manufacturing of chassis parts to our Lippert subsidiary and substantially all refurbishing of axles and tires to our Shoals subsidiary. These moves helped lower production costs, improve customer service, and eliminate duplicate operations. o Completed the refinancing of our debt, by reducing our revolving credit line from $65 million to $25 million, and placing $40 million of seven-year Senior Notes at a fixed interest rate of 6.95 percent. o Based upon our stock price relative to earnings and cash flow, our Board of Directors determined that one of the best uses of our available resources was to repurchase our own common stock. Accordingly, in 1998 we repurchased approximately 176,000 outstanding shares of our common stock. An additional 102,000 shares have been repurchased in 1999, and we are authorized to repurchase up to 172,000 more shares in 1999. Both industries served by Drew experienced outstanding growth in 1998. Industry shipments of manufactured homes during 1998 increased 5 percent from 1997 to 373,000 homes, representing 23 percent of all new single family housing starts. This is the highest level of shipments for the industry since 1973. Equally significant is the continuing increase in the sale of multi-section manufactured homes, which now represent over 61 percent of all manufactured homes sold. The sale of multi-section homes, which can range from 1,600 sq. ft. to over 2,500 sq. ft., bodes well for the industry because it reflects wide recognition of the quality and cost advantage of manufactured homes. Drew's manufactured housing products segment represents 82 percent of consolidated sales and 85 percent of total segment operating profit. The RV industry experienced its best year in two decades. Sales of all RV's reached 292,700 units, representing an increase of 15 percent over 1997. Demographic trends continue to be favorable for this industry, as the largest market for RV's consists of Americans over 50 years old. Drew's sales have more than tripled over the last three years, through acquisitions, product line extensions and geographic expansion. In 1999, we expect to continue to increase sales and improve production efficiencies, which should more than offset the effects of competition in our refurbished axles and tires product line. In addition, Drew will continue to explore geographic expansion and strategic acquisitions, and pursue managed growth in both sales and income. Sincerely, /s/ Edward W. Rose, III EDWARD W. ROSE, III Chairman of the Board /s/ Leigh J. Abrams LEIGH J. ABRAMS President and Chief Executive Officer 3 CAPACITY EXPANSION [GRAPHIC OMITTED] KEY LOCATIONS The Company's 34 manufacturing and warehouse facilities are concentrated in the southeast, south central and north central United States. Our facilities are generally located within 250 miles of our major customers in order to minimize freight costs and delivery times. In 1999, we expect to open three new facilities. 4 1998 Annual Report Drew Industries Incorporated FACILITIES EXPANSION During the past several years, Drew has met the increasing demand for its products, particularly vinyl windows for manufactured homes and chassis for recreational vehicles, by constructing new facilities strategically located to meet the needs of our customers. During 1997 and 1998, new facilities to manufacture vinyl windows were completed in Tennessee and Indiana, while RV chassis facilities were opened in Texas, West Virginia, Indiana and Ohio. [GRAPHIC OMITTED] GROWTH THROUGH ACQUISITIONS Drew has also expanded geographically and broadened its product line through acquisitions. In late 1998, Drew acquired the assets and business of Coil Clip, a supplier of specialty steel parts, with sales of more than $10 million. Lippert Components, which produces a broad line of products for manufactured homes and RV's, and which had annual sales of nearly $100 million, was acquired in late 1997. Also acquired in 1997 were the assets and business of Pritt Tire and Axle, a refurbisher of axles and tires used to transport manufactured homes, with annual sales of more than $10 million. In early 1996, Drew acquired the assets and business of Shoals Supply, Inc., which sells new and refurbished axles and tires for manufactured homes. Shoals had annual sales of more than $55 million prior to the acquisition. These acquisitions have added to the line of products supplied by Kinro, Inc., a Drew subsidiary for many years. AWARDS [PHOTO OMITTED] - -------------------------------------------------------------------------------- Over recent years Kinro, Lippert, and Shoals have been recognized as outstanding suppliers by a number of the leading producers of manufactured homes and recreational vehicles. Our customer service, quick delivery time and superb product quality have enabled us to become a leading supplier of a broad range of products for these industries. Drew's commitment to customer service is evidenced by the fact that our 34 facilities are typically located close to our customers to minimize delivery times. Also, products are designed to meet the needs of our customers, while being standardized to allow for efficient, cost effective production. With a customer list that includes nearly all of the largest producers of manufactured homes and recreational vehicles across the country, we are proud that our efforts have been recognized by these awards. 5 [PHOTO OMITTED] PRODUCTS MANUFACTURED HOUSING PRODUCTS (82% of sales) - - Aluminum and vinyl windows and screens - - Chassis and chassis parts - - Axles and tires - - Galvanized steel roofing RECREATIONAL VEHICLE PRODUCTS (18% of sales) - - Windows and doors - - Chassis and chassis parts INDUSTRIES MANUFACTURED HOUSING Drew's manufactured housing products segment accounts for 82 percent of consolidated sales. Over the past decade, manufactured homes have become recognized as quality, low cost housing compared to site-built homes. As a result of the improved quality of manufactured homes, availability of financing has greatly increased, and zoning restrictions have eased, enabling hundreds of thousands of people to realize the dream of home ownership, which they could otherwise not have achieved. Since 1991, industry shipments of manufactured homes have more than doubled, reaching 373,000 homes in 1998, or nearly 23 percent of all new single-family housing starts. There are approximately 19 million people living full time in over 8 million manufactured homes across the nation. [GRAPHIC OMITTED] [The following table was depicted as a pie chart in the printed material.] Manufactured Housing Products Segment Roofing 3% Other 4% Windows and Screens 33% Axles and Tires 22% Chassis and Parts 33% A manufactured home is built entirely in a factory, in sections (floors) ranging from 800-1200 square feet. In 1998 more than 61 percent of new manufactured homes consisted of two or more sections. Each section is built on a chassis to which axles and tires are attached for use in transporting the home to the retail dealer and then to the homesite. RECREATIONAL VEHICLES Recreational vehicles enable their owners to travel economically throughout our country with comfort and convenience. The recreational vehicle industry has also experienced robust growth this decade, with industry shipments reaching over 292,000 RV's in 1998, an increase of nearly 80 percent since 1991. Demo graphic trends support the continued growth of this industry, as the number of people over 50 years old, the largest market for RV's, continues to grow. [GRAPHIC OMITTED] [The following table was depicted as a pie chart in the printed material.] RV Products Segment Other 4% Chassis 34% Windows and Doors 33% [GRAPHIC OMITTED] 6 1998 Annual Report Drew Industries Incorporated MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company has two reportable operating segments, the manufactured housing products segment (the "MH segment") and the recreational vehicle products segment (the "RV segment"). The MH segment, which accounts for 82 percent of consolidated sales, manufactures a variety of products used in the construction of manufactured homes, including windows and screens, chassis and chassis parts, axles, and galvanized roofing. The MH segment also imports new tires and refurbishes used axles and tires which it supplies to producers of manufactured homes. The RV segment, which accounts for 18 percent of consolidated net sales, manufactures a variety of products used in the production of recreational vehicles, including windows, doors and chassis. The MH segment and the RV segment primarily sell their products to the producers of manufactured homes and recreational vehicles, respectively. Each segment also supplies related products to other industries, but sales of these products represent less than 5 percent of the segment's net sales. The Company's operations are performed through its four primary operating subsidiaries. Kinro, Inc. ("Kinro") and Lippert Components, Inc. ("Lippert") have operations in both the MH and RV segments, while Shoals Supply, Inc. ("Shoals") and Coil Clip, Inc. ("Coil Clip") operate entirely within the MH segment. At December 31, 1998 the Company's subsidiaries operated 34 plants in 16 states. In May 1998 Lippert acquired the assets and business of Coil Clip related to its supply of stamped steel parts to the manufactured housing industry, and entered into an agreement pursuant to which Coil Clip would supply certain steel parts to Lippert. In December 1998 Lippert acquired the remaining assets and business of Coil Clip. Coil Clip's sales to the manufactured housing industry were approximately $5 million annually, and its sales of related steel parts to other industries were approximately $7 million annually. Lippert, which was acquired by the Company on October 7, 1997, had annual net sales of $99 million for the 12 months prior to its acquisition by the Company, of which more than 95 percent were sales of manufactured housing products. For such year Lippert achieved earnings before interest, goodwill amortization and taxes, of $8.2 million, excluding shareholder compensation, benefits and related items which did not continue subsequent to the acquisition. These earnings were net of other nonrecurring compensation and start-up costs of $.5 million. On May 5, 1997 Shoals acquired the assets and business of Pritt Tire and Axle, Inc., which had 1996 net sales of $10.7 million. RESULTS OF OPERATIONS Net sales and operating profit are as follows (in thousands): Year Ended December 31, ------------------------------------------ 1998 1997 1996 - ------------------------------------------------------------------------------- Net sales: MH segment $ 271,287 $ 171,271 $ 133,774 RV segment 59,353 37,094 34,377 - ------------------------------------------------------------------------------- Total $ 330,640 $ 208,365 $ 168,151 - ------------------------------------------------------------------------------- Operating profit: MH segment $ 28,572 $ 20,490 $ 19,650 RV segment 4,974 3,591 4,417 Amortization of intangibles (2,442) (854) (533) Corporate and other (2,162) (1,466) (2,544) - ------------------------------------------------------------------------------- Total $ 28,942 $ 21,761 $ 20,990 =============================================================================== Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 MH Segment Net sales of the MH segment increased 58 percent in 1998 over 1997 primarily as a result of the Lippert acquisition on October 7, 1997. Excluding Lippert's sales, net sales increased 16 percent largely as a result of the $13 million (58 percent) increase in sales of vinyl windows. This increase is volume related and compared favorably with the industry which reported a 5 percent increase in shipments of manufactured homes for 1998 over 1997. This growth was further enhanced by the continuation of the trend towards multi-section homes. Operating profit of the MH segment increased 39 percent in 1998 over 1997 primarily as a result of the Lippert acquisition. Excluding Lippert's results, operating profit increased 9 percent. Operating margins in 1998 did not increase proportionately with the increase in sales, as margins were adversely affected by competitive pressures in the axle and tire refurbishing product line, which is expected to continue in 1999. These competitive pressures acted to both increase purchase costs for used axles to be refurbished and to lower the selling prices of the refurbished axles. A decline in other raw material costs was offset by labor cost increases. As a result of the promulgation of new regulations in November 1998, the Company's customers began to use tires with new specifications. During 1998, operating results were charged approximately $.6 million to reduce the value of tires for which there is no longer a significant demand as a result of the new regulations. In addition, the supply of used tires with the new specifications that are available for refurbishing has been limited, negatively impacting the Company's sales of such tires in the last 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) two months of 1998. This supply shortage of tires for refurbishing is expected to continue to impact sales of such tires in the first quarter of 1999. RV Segment Net sales of the RV segment increased 60 percent in 1998 over 1997 primarily as a result of the Lippert acquisition. However, excluding Lippert's RV sales, 1998 net sales exceeded 1997 net sales by 29 percent, substantially higher than the 15 percent increase in shipments reported by the RV industry. In addition, Lippert's RV chassis business reached $13 million in 1998 compared to less than $6 million on an annualized basis in 1997. Operating profit increased 39 percent including Lippert's results and 10 percent excluding Lippert's results. Operating margins did not increase proportionately with the increase in sales, as margins were reduced from 1997 as a result of competitive price pressures, higher labor costs in parts of the country and startup costs at Lippert's new RV chassis facilities. Amortization of Intangibles, Corporate and Other Amortization of intangibles increased by $1.6 million in 1998 primarily as a result of the goodwill and other intangibles relating to the acquisition of Lippert and Coil Clip. Corporate and other expenses increased $.7 million primarily as a result of $.4 million losses on aluminum hedging contracts in 1998 compared to $.1 million gains on such contracts in 1997. Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 MH Segment Net sales for 1997 increased 28 percent over 1996. Net sales for 1997 include Lippert's net sales of $19.7 million from October 7, 1997, the date that Lippert was acquired by the Company. Also included are Pritt's net sales of $8.2 million from May 5, 1997, the date that Pritt was acquired by the Company. Excluding sales of operations acquired in 1997, and adjusting for the 11/2 months prior to the Shoals acquisition in 1996, the segment's net sales increased 2 percent for the year. Such increase compares to a 3 percent industry-wide decline in shipments of manufactured homes. The decline in industry shipments of manufactured homes was partially offset by the continuing growth of multi-section homes resulting in year-to-date industry floor shipments being 1 percent ahead of the prior year. Operating profit increased 4 percent to $20.5 million for 1997. Included in the 1997 operating profit are the results of Lippert and Pritt since the dates that they were acquired by the Company. Lippert's contribution to the segment's operating profit was $1.3 million on net sales of $19.7 million for the three months since its acquisition. Pritt's contribution to the Company's operating profit was $.5 million on net sales of $8.2 million for the eight months since its acquisition. Excluding the operations acquired in 1997, operating profit decreased approximately 7 percent for 1997 because of competitive pressures, as well as $.4 million of startup costs relating to three new plants opened by Kinro in 1997. In addition, higher labor costs in certain parts of the country reduced margins. RV Segment Net sales for the year ended December 31, 1997 increased 8 percent over 1996. Net sales for 1997 include Lippert's net sales of $1.4 million from October 7, 1997, the date that Lippert was acquired by the Company. Excluding net sales of operations acquired in 1997, the segment's net sales increased 4 percent for the year. Such increase compares to a 3 percent industry-wide increase in sales of RV's. Operating profit decreased 19 percent to $3.6 million for 1997. Included in the 1997 operating profit are the results of Lippert since the date of acquisition by the Company. Lippert's segment operating profit was essentially a break-even on net sales of $1.4 million, due to startup costs of new facilities, for the three months since its acquisition. Excluding Lippert in 1997, operating profit decreased approximately 17 percent for 1997 because of competitive pressures, as well as higher labor costs. Amortization of Intangibles, Corporate and Other Amortization of intangibles increased approximately $.3 million primarily as a result of the amortization of the goodwill relating to the Pritt and Lippert acquisitions. Corporate and other expenses were reduced approximately $1.1 million largely because of (a) expenses of approximately $.6 million in 1996 relating to legal costs in connection with White Metal (see Note 10 of Notes to Consolidated Financial Statements), (b) a $.3 million improvement in 1997 in the Company's aluminum hedging results, and (c) a $.3 million recovery of notes receivable that were previously reserved. Shared Services Agreement Pursuant to a Shared Services Agreement, following the spin-off by the Company of LBP, Inc. on July 29, 1994, the Company and LBP have shared certain administrative functions and employee services, such as management over view and planning, tax preparation, financial reporting, coordination of independent audit, stockholder relations, and regulatory matters. The Company has been reimbursed by LBP for the fair market value of such services. This Agree ment has been extended and now expires on December 31, 1999 and may be further extended. The Company charged fees to LBP of approximately $.5 million in each of 1998, 1997 and 1996. These fees are included in selling, general and administrative expenses. 8 1998 Annual Report Drew Industries Incorporated Interest Expense, Net Interest expense, net, increased $1.4 million in 1998 primarily as a result of debt incurred for the $27 million cash portion of the Lippert acquisition in October 1997. Interest expense, net, increased to $2.5 million in 1997 from $.3 million in 1996 primarily as a result of debt incurred for the purchase of 1.6 million shares of treasury stock from the Company's Chairman for $20.8 million, as well as $31.8 million for acquisitions. New Accounting Standards Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." Statement 130 establishes standards for reporting and display of comprehensive income and its components in the financial statements. The Company had no "other" comprehensive income for the years ended December 31, 1998, 1997 and 1996. Effective December 31, 1998, the Company adopted SFAS 131, "Disclosure about Segments of an Enterprise and Related Information." The Company has included footnote disclosures regarding segments for the years ended December 31, 1998, 1997 and 1996. LIQUIDITY AND CAPITAL RESOURCES The Statements of Cash Flows reflect the following (in thousands): Year Ended December 31, --------------------------------------- 1998 1997 1996 - -------------------------------------------------------------------------------- Net cash flows provided by operating activities $ 17,995 $ 11,009 $ 11,927 Net cash flows (used for) investment activities $(18,554) $(42,032) $(14,948) Net cash flows provided by financing activities $ 2,261 $ 30,506 $ 538 Net cash provided by operating activities, which does not include the balance of the assets and liabilities of the acquired operations on the date of the acquisition of such operations, primarily resulted from net income. The $6.8 million depreciation and amortization in 1998 was partially offset by changes in working capital. Cash flows used for investing activities in 1998 consisted of $10.4 million for the acquisition of Coil Clip and $8.5 million for capital expenditures, including three RV chassis factories constructed by Lippert. Such capital expenditures were primarily funded by cash flows from operations. Cash flows used for investing activities in 1997 was primarily the $31.8 million cash portion of the cost of the acquisitions of Lippert and Pritt and, in 1996 was primarily the $10 million cash portion of the cost of the Shoals acquisition. Capital expenditures for 1997 of $10.4 million include three manufactured housing products plants for Kinro and the purchase of related equipment, as well as two new RV products factories constructed by Lippert. Capital expenditures for 1999 are expected to approximate $6 to $7 million. Such capital expenditures will be funded from cash flow from operations. Cash flows from financing activities for 1998 included increases in debt of approximately $3 million, and $1 million from the exercise of stock options, offset by $2 million used to acquire treasury stock. Cash flows provided by financing activities in 1997 includes increases in debt of approximately $51 million, of which $20.8 million was used for the acquisition of treasury stock and $31.8 million was used for acquisitions. On January 28, 1998, the Company completed a private placement of $40 million of 6.95 percent, seven year Senior Notes. Amortization of the seven year Senior Notes is $8 million annually beginning on January 28, 2001. Proceeds of the Senior Notes were used to reduce borrowings under Drew's then existing $65 million credit facility with The Chase Manhattan Bank, as agent. Simul taneously, such credit facility was reduced to a $25 million revolving credit facility which expires on May 15, 2002. The balance of the loan under such facility was $12 million at December 31, 1998. Effective July 29, 1994, the Company spun off to its stockholders LBP, Inc. (formerly known as Leslie Building Products, Inc.) including its subsidiary, Prime Acquisition Corp. ("Prime") (formerly known as Leslie-Locke, Inc.), the Company's former home improvement building products segment. On September 30, 1994, White Metal Rolling and Stamping Corp. ("White Metal"), Prime's discontinued ladder manufacturing subsidiary, filed a voluntary petition seeking liquidation under the provisions of chapter 7 of the United States Bankruptcy Code. The liabilities of White Metal are all product liability claims and related costs, resulting from its discontinued ladder manufacturing business. While Drew was named as a defendant in certain actions commenced in connection with these claims, Drew has not been held responsible, and Drew disclaims any liability for the obligations of White Metal. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) On May 7, 1996, the Company and its subsidiary, Kinro, Inc., and LBP, Inc. and its subsidiary, Prime, were served with a summons and complaint in an adversary proceeding commenced by the chapter 7 trustee of White Metal. The complaint, which appears to have alleged several duplicate claims, sought damages in the aggregate amount of $10.6 million plus attorneys fees, of which approximately $7.5 million of tax related claims was sought, jointly and severally, from the Company, Kinro, LBP, Inc. and Prime. On July 14, 1998, the bankruptcy court granted defendants' motion to dismiss the trustee's tax-related claims. The court permitted the trustee to replead the dismissed claims, but the trustee elected not to replead. The trustee could appeal the court's decision dismissing these claims upon the termination of the proceeding. Other than the dismissed tax-related claims, the trustee alleges that White Metal made certain payments to the Company which were preferential and are recoverable by White Metal, in the approximate amount of $.9 million. Although these claims were not dismissed, the Company believes that the claims are without merit, denies liability for any such amount, and is vigorously defending against the allegations. However, an estimate of potential loss, if any, cannot be made at this time. The Company believes that the defense of this proceeding will not have a material adverse impact on the Company's financial condition or results of operations. INFLATION The prices of raw materials, consisting primarily of aluminum, vinyl, steel, glass and tires, are influenced by demand and other factors specific to these commodities rather than being directly affected by inflationary pressures. Prices of certain commodities have historically been volatile. In order to hedge the impact of future prices fluctuations on a portion of its future aluminum raw material requirements, the Company periodically purchases aluminum futures contracts on the London Metal Exchange. At December 31, 1998, the Company had no futures contracts outstanding. YEAR 2000 The "Year 2000" issue is the result of computer programs being written using two digits rather than four digits to define a specific year. Such a computer program may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in system failures or miscalculations. The Company has addressed this risk to the reliability and availability of its financial, operational and administrative information systems. Unrelated to concerns about the Year 2000 issue, the Company had decided to upgrade its computer systems in order to enhance the information flow, capacity and functionality of its systems. The upgrades to the computer systems should enable the Company to achieve Year 2000 compliance. Some of the Company's manufacturing processes are reliant on computer technology and all such significant processes are expected to be Year 2000 compliant. The installation and testing of certain critical systems has been completed at a cost of less than $1 million, and the balance of the systems should be completed in the summer of 1999 at a cost of less than $.5 million which is expected to be funded from operating cash flows. The Company has obtained assurances from its software vendors that the new systems will be Year 2000 compliant. Approximately 70 percent of the Company's sales are to publicly-owned companies which file periodic reports pursuant to the Securities Exchange Act of 1934, including all customers which represent more than 3 percent of the consolidated net sales. The Company has reviewed the Year 2000 disclosures in such filings and found that, while many of these companies address certain risks, they expect to be Year 2000 compliant before the end of 1999. While the Company believes that its internal computer systems, as well as those of vendors who provide data processing services to the Company, will be Year 2000 compliant, there can be no assurance that Year 2000 system failures by the Company's vendors, customers or financial institutions will not result in significant disruptions to the Company's operations. The Company believes, however, that its alternative sources of supply of critical raw materials, diverse customer list and financial resources mitigate the likelihood of a severe adverse impact on the Company's operating results. The Company will also consider operating strategies, such as maintaining easily accessible back-up of critical information and adjusting inventory levels as the year 2000 approaches, to minimize the impact of short-term disruptions caused by systems failures of third parties. FORWARD LOOKING STATEMENTS AND RISK FACTORS This report contains certain statements, including the Company's plans regarding its operating strategy, its products and performance and its views of industry prospects, which could be construed to be forward looking statements within the meaning of the Securities Exchange Act of 1934. These statements reflect the Company's current views with respect to future plans, events and financial performance. The Company has identified certain risk factors which could cause actual plans and results to differ substantially from those included in the forward looking statements. These factors include pricing pressures due to competition, raw material costs (particularly aluminum, vinyl, steel, glass, and tires), adverse weather conditions impacting retail sales, inventory adjustments by retailers, availability and costs of labor, and interest rates. In addition, general economic conditions may affect the retail sale of manufactured homes and RV's. 10 1998 Annual Report Drew Industries Incorporated SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with the consolidated financial statements and related notes thereto included herein (in thousands, except per share amounts):
Year Ended December 31, ---------------------------------------------------- 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------- Operating Data Net sales $330,640 $208,365 $168,151 $100,084 $ 82,965 ============================================================================================== Operating profit $ 28,942 $ 21,761 $ 20,990 $ 13,289 $ 10,258 ============================================================================================== Income from continuing operations before income taxes $ 25,052 $ 19,256 $ 20,664 $ 13,423 $ 10,245 Provision for income taxes 9,835 7,262 8,092 5,300 3,999 - ---------------------------------------------------------------------------------------------- Income from continuing operations 15,217 11,994 12,572 8,123 6,246 Discontinued operations, net (111) - ---------------------------------------------------------------------------------------------- Net income $ 15,217 $ 11,994 $ 12,572 $ 8,123 $ 6,135 ============================================================================================== Income per basic common share: Income from continuing operations $ 1.36 $ 1.22 $ 1.18 $ .82 $ .64 Discontinued operations, net (.01) - ---------------------------------------------------------------------------------------------- Net income per common share (basic) $ 1.36 $ 1.22 $ 1.18 $ .82 $ .63 ============================================================================================== Income per diluted common share: Income from continuing operations $ 1.34 $ 1.19 $ 1.15 $ .81 $ .62 Discontinued operations, net (.01) - ---------------------------------------------------------------------------------------------- Net income per common share (diluted) $ 1.34 $ 1.19 $ 1.15 $ .81 $ .61 ============================================================================================== Financial Data Working capital $ 31,630 $ 24,009 $ 16,138 $ 9,648 $ 6,544 Total assets $154,425 $130,349 $ 55,283 $ 29,593 $ 22,946 Long-term obligations $ 59,612 $ 56,130 $ 4,938 $ 311 $ 3,939 Stockholders' equity $ 68,762 $ 51,953 $ 34,779 $ 16,830 $ 8,599 - ----------------------------------------------------------------------------------------------
11 CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31, ------------------------------ (In thousands, except per share amounts) 1998 1997 1996 - -------------------------------------------------------------------------------- Net sales $330,640 $208,365 $168,151 Cost of sales 262,741 162,084 126,731 - -------------------------------------------------------------------------------- Gross profit 67,899 46,281 41,420 Selling, general and administrative expenses 38,957 24,520 20,430 - -------------------------------------------------------------------------------- Operating profit 28,942 21,761 20,990 Interest expense, net 3,890 2,505 326 - -------------------------------------------------------------------------------- Income before income taxes 25,052 19,256 20,664 Provision for income taxes (Note 9) 9,835 7,262 8,092 - -------------------------------------------------------------------------------- Net income $ 15,217 $ 11,994 $ 12,572 ================================================================================ Income per common share (Note 11): Net income per common share (basic) $ 1.36 $ 1.22 $ 1.18 ================================================================================ Net income per common share (diluted) $ 1.34 $ 1.19 $ 1.15 ================================================================================ The accompanying notes are an integral part of these consolidated financial statements. 12 1998 Annual Report CONSOLIDATED BALANCE SHEETS
December 31, ----------------------- (In thousands, except shares and per share amounts) 1998 1997 - ---------------------------------------------------------------------------------------- ASSETS Current assets Cash and short-term investments $ 2,690 $ 1,028 Accounts receivable, trade, less allowances of $690 in 1998 and $528 in 1997 13,559 9,181 Inventories (Note 4) 35,400 29,456 Prepaid expenses and other current assets (Note 9) 6,032 6,610 - ---------------------------------------------------------------------------------------- Total current assets 57,681 46,275 Fixed assets, net (Note 5) 43,139 38,096 Goodwill, net (Note 3) 47,887 44,215 Other assets 5,718 1,763 - ---------------------------------------------------------------------------------------- Total assets $ 154,425 $ 130,349 ======================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Notes payable, including current maturities of long-term indebtedness and obligations under capital leases (Note 8) $ 779 $ 643 Accounts payable, trade 8,043 6,372 Accrued expenses and other current liabilities (Note 6) 17,229 15,251 - ---------------------------------------------------------------------------------------- Total current liabilities 26,051 22,266 Long-term indebtedness (Note 8) 57,947 54,760 Other long-term liabilities (Note 9) 1,665 1,370 - ---------------------------------------------------------------------------------------- Total liabilities 85,663 78,396 - ---------------------------------------------------------------------------------------- Commitments and contingencies (Note 10) Stockholders' equity (Note 11) Common stock, par value $.01 per share: authorized 20,000,000 shares; issued 11,513,702 shares in 1998 and 11,363,166 shares in 1997 115 113 Paid-in capital 22,943 19,249 Retained earnings 47,808 32,591 - ---------------------------------------------------------------------------------------- 70,866 51,953 Treasury stock, at cost--175,600 shares in 1998 (2,104) - ---------------------------------------------------------------------------------------- Total stockholders' equity 68,762 51,953 Total liabilities and stockholders' equity $ 154,425 $ 130,349 ========================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 13 CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, ----------------------------------- (In thousands) 1998 1997 1996 - ----------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 15,217 $ 11,994 $ 12,572 Adjustments to reconcile net income to cash flows provided by operating activities: Depreciation and amortization 6,836 2,972 1,712 Deferred taxes 50 325 (297) Loss (gain) on disposal of fixed assets 135 (34) (37) Changes in assets and liabilities, excluding acquisitions of businesses: Accounts receivable, net (3,595) 2,170 2,188 Inventories (3,743) (86) (3,284) Prepaid expenses and other assets (392) (3,414) (74) Accounts payable, accrued expenses and other current liabilities 3,447 (2,918) (853) - ----------------------------------------------------------------------------------------------- Net cash flows provided by operating activities 17,955 11,009 11,927 - ----------------------------------------------------------------------------------------------- Cash flows from investing activities: Capital expenditures (8,450) (10,377) (5,841) Acquisitions of companies' net assets and businesses (10,449) (31,804) (9,941) Proceeds from sales of fixed assets 345 149 834 - ----------------------------------------------------------------------------------------------- Net cash flows used for investing activities (18,554) (42,032) (14,948) - ----------------------------------------------------------------------------------------------- Cash flows from financing activities: Proceeds from private placement of Senior Notes 40,000 Proceeds from Industrial Revenue Bonds 5,713 Other loans 500 1,560 5,982 Proceeds under line of credit and other borrowings 75,000 118,150 23,737 Repayments under line of credit and other borrowings (117,890) (69,050) (27,228) Acquisition of treasury stock (2,104) (20,800) (2,800) Exercise of stock options and other 1,042 646 847 - ----------------------------------------------------------------------------------------------- Net cash flows provided by financing activities 2,261 30,506 538 - ----------------------------------------------------------------------------------------------- Net increase (decrease) in cash 1,662 (517) (2,483) Cash and short term investments at beginning of year 1,028 1,545 4,028 - ----------------------------------------------------------------------------------------------- Cash and short term investments at end of year $ 2,690 $ 1,028 $ 1,545 =============================================================================================== Supplemental disclosure of cash flows information: Cash paid during the year for: Interest on debt $ 3,072 $ 1,981 $ 285 Income taxes, net of refunds $ 10,053 $ 8,433 $ 7,986 ===============================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 14 1998 Annual Report Drew Industries Incorporated CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
Total Common Treasury Paid-in Retained Stockholders' (In thousands, except shares) Stock Stock Capital Earnings Equity - ------------------------------------------------------------------------------------------------------------- Balance--December 31, 1995 $100 $ (348) $ 9,053 $ 8,025 $ 16,830 Net income 12,572 12,572 Issuance of 113,740 shares of common stock pursuant to stock option plan 1 427 428 Income tax benefit relating to issuance of common stock pursuant to stock option plan 249 249 Issuance of 1,089,918 shares of common stock in connection with the acquisition of the assets and business of Shoals Supply, Inc. 11 7,489 7,500 Purchase of 400,020 shares of treasury stock (2,800) (2,800) - ------------------------------------------------------------------------------------------------------------- Balance--December 31, 1996 112 (3,148) 17,218 20,597 34,779 Net income 11,994 11,994 Issuance of 85,990 shares of common stock pursuant to stock option plan 1 383 384 Income tax benefit relating to issuance of common stock pursuant to stock option plan 267 267 Issuance of 2,154,231 shares of common stock in connection with the acquisition of Lippert Components, Inc., of which 230,769 shares are subject to an earnout contingency 23,948 1,399 25,347 Purchase of 1,600,000 shares of treasury stock (20,800) (20,800) Costs of two-for-one split of common stock (18) (18) - ------------------------------------------------------------------------------------------------------------- Balance--December 31, 1997 113 -- 19,249 32,591 51,953 Net income 15,217 15,217 Issuance of 150,538 shares of common stock pursuant to stock option plan 2 654 656 Income tax benefit relating to issuance of common stock pursuant to stock option plan 386 386 Resolution of earnout contingency relating to 230,769 shares of common stock in connection with the acquisition of the assets and business of Lippert Components, Inc. 2,654 2,654 Purchase of 175,600 shares of treasury stock (2,104) (2,104) - ------------------------------------------------------------------------------------------------------------- Balance--December 31, 1998 $115 $ (2,104) $ 22,943 $ 47,808 $ 68,762 =============================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 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"), Shoals Supply, Inc. and its subsidiaries ("Shoals"), and Lippert Components, Inc. and its subsidiaries ("Lippert"). Lippert's subsidiaries include Coil Clip, Inc. ("Coil Clip") which was acquired on December 16, 1998. Drew, through its wholly-owned subsidiaries, supplies a broad array of components for manufactured homes and recreational vehicles. All significant intercompany balances and transactions have been eliminated. Manufactured products include windows, doors, chassis, chassis parts, roofs and new and refurbished axles. The Company also distributes new and refurbished tires. Approximately 82 percent of the Company's sales are made by its manufactured housing products segment and 18 percent are made by its recreational vehicles products segment. At December 31, 1998 the Company operated 34 plants in 16 states. Inventories Inventories are stated at the lower of cost (using the first-in, first-out method) or market. Cost includes material, labor and overhead; market is replacement cost or realizable value after allowance for costs of distribution. During the first quarter of 1997, the Company adopted the FIFO method to value that portion of the inventories for which the LIFO method had previously been utilized for determining cost. The FIFO method will better measure the current value of such inventories, provide a more appropriate matching of revenues and expenses, and conform all inventories of the Company to the same accounting method. Additionally, the change will enhance the comparability of the Company's financial statements by changing to the predominant method utilized in its industry. The Company applied this change retroactively which resulted in an increase in retained earnings of $828,000 at January 1, 1996. The impact on net income for the year ended December 31, 1996 was a reduction of $814,000 ($.07 per share). The Company periodically purchases commodity futures to hedge the impact of future price fluctuations on a portion of its aluminum raw material requirements. Gains and losses on such futures contracts are deferred until recognized in income as a component of cost of sales when the finished products are sold. Cash flow from such futures contracts are included in operating activities in the Consolidated Statements of Cash Flows. Fixed Assets Fixed assets are depreciated principally on a straight-line basis over the estimated useful lives of properties and equipment. Leasehold improvements and leased equipment are amortized over the shorter of the lives of the leases or the underlying assets. Amortization of assets recorded under capital leases is included in depreciation expense. Maintenance and repairs are charged to operations as incurred; significant betterments are capitalized. Income Taxes The Company and its subsidiaries file a consolidated Federal income tax return. The Company's subsidiaries generally file separate state income tax returns on the same basis as the Federal income tax return. New Accounting Standards Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." Statement 130 establishes standards for reporting and display of comprehensive income and its components in the financial statements. The Company had no "other" comprehensive income for the years ended December 31, 1998, 1997 and 1996. Effective December 31, 1998, the Company adopted SFAS 131, "Disclosure about Segments of an Enterprise and Related Information." The Company has included footnote disclosures regarding segments for the years ended December 31, 1998, 1997 and 1996. Goodwill Goodwill is the excess of cost over the fair value of net tangible assets acquired and is amortized on a straight-line basis primarily over thirty years. The balance of goodwill of $47.9 million at December 31, 1998 primarily relates to the acquisitions of Coil Clip on December 16, 1998, Lippert on October 7, 1997, Pritt on May 5, 1997 and Shoals on February 15, 1996. The Company periodically reviews the value of its goodwill to determine if an impairment has occurred. The Company measures the potential impairment of recorded goodwill by the undiscounted value of expected future operating cash flows in relation to its net capital investment in the subsidiary. Based on its review, the Company does not believe that an impairment of its goodwill has occurred. Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. 16 1998 Annual Report Drew Industries Incorporated 2. SEGMENT REPORTING The Company has two reportable operating segments, the manufactured housing products segment (the "MH segment") and the recreational vehicle products segment (the "RV segment"). The MH segment manufactures a variety of products used in the construction of manufactured homes, including windows and screens, chassis and chassis parts, axles, and galvanized roofing. The MH segment also imports new tires and refurbishes used axles and tires which it supplies to producers of manufactured homes. The RV segment manufactures a variety of products used in the production of recreational vehicles, including windows, doors and chassis. The MH segment and the RV segment primarily sell their products to the producers of manufactured homes and recreational vehicles, respectively. Each segment also supplies related products to other industries, but sales of these products represent less than 5 percent of the segment's net sales. The Company has only an insignificant amount of intersegment sales. Decisions concerning the allocation of the Company's resources are made by the Company's key executives. This group evaluates the performance of each segment based upon segment profit or loss, defined as income before interest, amortization of intangibles and income taxes. Management of debt is considered a corporate function. The accounting policies of the MH and RV segments are the same as those described in Note 1 of Notes to Consolidated Financial Statements. To determine the Company's reportable segments, management considered, among other factors, the underlying long-term economic characteristics of its operations, and the Company's management structure. The long-term growth potential of the Company's various products are significantly dependent upon the two industries to which the Company supplies such products. While industry shipments of manufactured homes are dependent upon factors such as the quality of the homes, comparative price to site-built homes, availability of financing, and zoning restrictions, industry shipments of recreational vehicles are more dependent upon levels of disposable income, consumer confidence and age demographics. Information relating to segments follows (in thousands):
Segments ------------------------------------- Corporate MH RV Total and Other Intangibles Total - ------------------------------------------------------------------------------------------------------------------------------ Year ended December 31, 1998 Revenues from external customers(a) $ 271,287 $ 59,353 $ 330,640 $ 330,640 Segment profit (loss) 28,572 4,974 33,546 $ (2,162) $ (2,442) 28,942 Segment assets(b) 68,256 23,842 92,098 10,225 52,102 154,425 Expenditures for long-lived assets(c) 5,622 4,118 9,740 28 9,768 Depreciation and amortization 3,436 942 4,378 16 2,442 6,836 Year ended December 31, 1997 Revenues from external customers(a) $ 171,271 $ 37,094 $ 208,365 $ 208,365 Segment profit (loss) 20,490 3,591 24,081 $ (1,466) $ (854) 21,761 Segment assets(b) 60,372 16,361 76,733 8,904 44,712 130,349 Expenditures for long-lived assets(c) 23,344 6,034 29,378 18 29,396 Depreciation and amortization 1,598 504 2,102 16 854 2,972 Year ended December 31, 1996 Revenues from external customers(a) $ 133,774 $ 34,377 $ 168,151 $ 168,151 Segment profit (loss) 19,650 4,417 24,067 $ (2,544) $ (533) 20,990 Segment assets(b) 29,179 9,296 38,475 5,172 11,636 55,283 Expenditures for long-lived assets(c) 5,445 1,665 7,110 21 7,131 Depreciation and amortization 858 303 1,161 18 533 1,712
(a) One customer accounted for 15 percent, 16 percent and 17 percent, of the Company's net sales in the years ended December 31, 1998, 1997 and 1996, respectively. Another customer accounted for 10 percent of the Company's net sales in 1998 and 1997. Both segments had sales to each of such customers. (b) Segment assets include accounts receivable, inventory and fixed assets. Corporate and other assets include cash and cash equivalents, prepaid expenses and other current assets, and other assets, excluding intangible assets. Intangibles include goodwill and deferred charges which are not considered in the measurement of each segment's performance. (c) Expenditures for long-lived assets include capital expenditures and fixed assets purchased as part of the acquisition of companies and businesses. Expenditures for other long-term assets are not included in the segment since they are not considered in the measurement of each segment's performance. 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 3. ACQUISITIONS Coil Clip, Inc. On December 16, 1998 the Company's subsidiary, Lippert, acquired the assets and business of Coil Clip, Inc., a fabricator of specialty steel parts, located in Boaz, Alabama. Previously, in May 1998, Lippert acquired the manufactured housing business of Coil Clip and entered into a supply agreement to purchase steel from Coil Clip. It is expected that these acquisitions will add approximately $12 million to the Company's annual sales. The purchase price consisted of cash of approximately $3.8 million for the May transaction and $6.5 million, including a $.5 million note, for the December transaction. The acquisition has been accounted for as a purchase. The aggregate purchase price has been allocated to the underlying assets based upon their respective estimated fair values at the date of acquisition. Intangible assets of approximately $3.8 million are being amortized over useful lives averaging approximately 5 years. The excess of purchase price over the fair value of the net assets acquired ("goodwill") was approximately $2.6 million, which is being amortized over 20 years. Lippert Components, Inc. On October 7, 1997, the Company acquired Lippert Components, Inc. ("Lippert") for $27 million in cash and 1,923,231 shares of Drew common stock having a value of approximately $25.3 million. In addition, 230,769 shares were held in escrow pending the results of an earn-out, which was achieved in October 1998. All 2,154,000 shares are restricted and are subject to a registration rights agreement. The cash portion of the transaction was financed by Drew's then existing credit facility. Lippert manufactured products for the manufactured housing and recreational vehicle industry, consisting primarily of chassis and chassis parts, refurbished axles and tires, and galvanized roofing. The refurbishing of axles and tires, except for the Florida operation, was transferred to Shoals, while Shoals transferred to Lippert all of its chassis parts business. The acquisition has been accounted for as a purchase. The aggregate purchase price has been allocated to the underlying assets and liabilities based upon their respective estimated fair values at the date of acquisition. The excess of purchase price over the fair value of the net assets acquired ("goodwill") was $32.7 million, including $2.6 million recorded in 1998 as a result of the resolution of the contingency concerning the shares subject to the earnout, which is being amortized over 30 years. The results of the acquired business have been included in the Company's consolidated statements of income beginning October 7, 1997. Lippert's sales for its fiscal year ended September 30, 1997 were $99 million, on which they achieved earnings before interest, taxes and goodwill amortization of approximately $8.2 million, excluding shareholder compensation, benefits and related items which will not continue subsequent to the acquisition. These earnings are net of other nonrecurring compensation and startup costs of approximately $.5 million. Pritt Tire and Axle, Inc. On May 5, 1997 the Company's subsidiary, Shoals acquired the assets and business of Pritt Tire and Axle, Inc. ("Pritt") of Bristol, Indiana. Pritt refurbishes axles and tires used in the transportation of manufactured homes. The purchase price consisted of cash of $4.4 million and a three-year warrant to purchase 40,000 shares of the common stock of Drew at $11.00 per share. As part of this transaction, in the third quarter of 1997, Shoals acquired, from the former owner of Pritt, the manufacturing facility utilized by Pritt for approximately $1 million. The acquisition has been accounted for as a purchase. The aggregate purchase price has been allocated to the underlying assets and liabilities based upon their respective estimated fair values at the date of acquisition. The excess of purchase price over the fair value of the net assets acquired ("goodwill") is $2.9 million, which is being amortized over 30 years. The results of the acquired business have been included in the Company's consolidated statements of income beginning May 5, 1997. Pritt had 1996 net sales of $10.7 million. Shoals Supply, Inc. On February 15, 1996, the Company acquired the assets and business of Shoals, a supplier of products used to transport manufactured homes. Shoals manufactures new axles and chassis parts, refurbishes used axles, and distributes new and refurbished tires. The manufacture of chassis parts has since been transferred to Lippert, while Lippert has transferred to Shoals the refurbishing of axles and tires, except for the Florida operation. The consideration for the acquisition was 1,089,918 shares of common stock of the Company having a value of $7.5 million, cash of $1.6 million and a note for $.8 million payable over 5 years. In addition, the Company assumed $7.5 million of Shoals' bank debt and certain operating liabilities. The acquisition has been accounted for as a purchase. The aggregate purchase price has been allocated to the 18 1998 Annual Report Drew Industries Incorporated underlying assets and liabilities based upon their respective estimated fair values at the date of acquisition. The goodwill of $11.8 million is being amortized over 30 years. The results of the acquired business have been included in the Company's consolidated statements of income beginning February 16, 1996. Shoals had 1996 net sales of $65 million, of which $57 million was for the 101/2 months since Shoals was acquired by the Company. Pro Forma Results The following pro forma condensed consolidated results of operations for 1997 and 1996 assumes that the acquisitions of Shoals, Lippert and Pritt had occurred at the beginning of 1996. Pro forma results of Coil Clip are not included because its impact on 1998 earnings is not material. The unaudited pro forma data below is not necessarily indicative of the future results of operations of the combined operations (in thousands, except per share amounts): Pro Forma Year End December 31, ------------------------------- (Unaudited) 1997 1996 - -------------------------------------------------------------------------------- Net sales $288,671 $293,640 ================================================================================ Net income $ 13,955 $ 17,374 ================================================================================ Net income per common share: Basic $ 1.23 $ 1.36 ================================================================================ Diluted $ 1.21 $ 1.34 ================================================================================ Average common shares outstanding: Basic 11,325 12,779 ================================================================================ Diluted 11,575 13,012 ================================================================================ Goodwill Goodwill of $47,887,000 at December 31, 1998, is net of accumulated amortization of $2,806,000. Amorti zation of goodwill was $1,583,000, $765,000, and $494,000 for the years ended December 31, 1998, 1997 and 1996, respectively. 4. INVENTORIES Inventories consist of the following (in thousands): December 31, --------------------------- 1998 1997 - -------------------------------------------------------------------------------- Finished goods $10,629 $ 8,989 Work in process 2,052 1,746 Raw materials 22,719 18,721 - -------------------------------------------------------------------------------- Total $35,400 $29,456 ================================================================================ 5. FIXED ASSETS Fixed assets, at cost, consist of the following (in thousands): December 31, Estimated ---------------------- Useful Life 1998 1997 in Years - -------------------------------------------------------------------------------- Land $ 3,548 $ 3,252 Buildings and improvements 23,096 16,140 8 to 45 Leasehold improvements 973 779 5 to 25 Machinery and equipment 22,308 17,490 5 to 8 Automotive equipment 1,698 1,523 2 to 3 Furniture and fixtures 2,827 2,294 3 to 8 Capitalized real estate leases 925 15 Construction in progress 631 4,391 - -------------------------------------------------------------------------------- 55,081 46,794 Less accumulated depreciation and amortization 11,942 8,698 - -------------------------------------------------------------------------------- Fixed assets, net $43,139 $38,096 ================================================================================ Depreciation and amortization of fixed assets consists of (in thousands): Year Ended December 31, ---------------------------------- 1998 1997 1996 - -------------------------------------------------------------------------------- Charges to cost of sales $3,459 $1,674 $ 908 Charges to selling, general and administrative expenses 786 376 203 - -------------------------------------------------------------------------------- $4,245 $2,050 $1,111 ================================================================================ 6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities consist of the following (in thousands): December 31, ------------------------ 1998 1997 - -------------------------------------------------------------------------------- Accrued employee compensation $ 4,815 $ 3,384 Accrued employee benefits 3,039 3,244 Accrued workmen's compensation and other insurance 2,980 3,353 Income taxes 774 690 Accrued expenses and other 5,621 4,580 - -------------------------------------------------------------------------------- Total $17,229 $15,251 ================================================================================ 7. RETIREMENT AND OTHER BENEFIT PLANS The Company has discretionary defined contribution profit sharing plans covering substantially all eligible employees. The Company contributed $715,000, $336,000 and $206,000 to these Plans during the years ended December 31, 1998, 1997 and 1996, respectively. 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 8. LONG-TERM INDEBTEDNESS On January 28, 1998, the Company completed a private placement of $40 million of 6.95 percent, seven year Senior Notes. Proceeds of the Senior Notes were used to reduce borrowings under Drew's then existing $65 million credit facility with The Chase Manhattan Bank, as agent. Simul taneously, such credit facility was reduced to a $25 million revolving credit facility which expires on May 15, 2002. Interest on borrowings under the new credit facility is payable at the prime rate. In addition, the Company has the option to convert a portion of the loan to a Eurodollar loan at 1 percent over the LIBO rate. Furthermore, the Company is required to pay a commitment fee, accrued at the rate of 3/8 of 1 percent per annum, on the daily unused amount of the revolving line of credit. Pursuant to both the Senior Notes and the new credit facility, the Company is required to maintain minimum net worth and interest and fixed charge coverages and meet certain other financial requirements. Borrowings under both facilities are secured only by capital stock of the Company's subsidiaries. The Company has entered into interest rate hedge agreements to effectively convert variable rate debt to fixed rate debt in order to reduce the risk of incurring higher interest costs due to rising interest rates. At December 31, 1998, the Company had entered into a contract that expires in May 1999 which hedges interest related to $10 million of debt. Such contract has an effective rate of 7.44 percent. The Company has determined that its exposure to losses on these hedges, as a result of declines in interest rates, is not material. Long-term indebtedness consists of the following (in thousands): December 31, -------------------- 1998 1997 - -------------------------------------------------------------------------------- Senior Notes payable at the rate of $8,000 per annum commencing January 28, 2001 with interest payable semiannually at the rate of 6.95% per annum $40,000 Notes payable pursuant to a credit agreement expiring May 15, 2002 consisting of revolving loan, not to exceed $25,000 12,000 Notes payable pursuant to a $65,000 credit agreement $52,600 Industrial Revenue Bonds, payable in monthly install- ments of $61 until 2008, interest at 5.8% per annum 5,464 Equipment note payable, interest at 7.25% per annum 1,560 Other 1,262 1,148 - -------------------------------------------------------------------------------- 58,726 55,308 Less current portion 779 548 - -------------------------------------------------------------------------------- Total long-term indebtedness $57,947 $54,760 ================================================================================ While it is not practicable to determine the fair value of the Company's fixed rate debt, the Company believes the interest rates on similar instruments have not changed significantly. Therefore, the book value of such debt approximates fair value. 9. INCOME TAXES The income tax provision (benefit) in the Consolidated Statements of Income is as follows (in thousands): Year Ended December 31, ------------------------------------ 1998 1997 1996 - ------------------------------------------------------------------------------- Current: Federal $ 8,747 $ 6,312 $ 6,988 State 1,038 625 1,401 Deferred: Federal 37 200 (200) State 13 125 (97) - ------------------------------------------------------------------------------- Total income tax provision $ 9,835 $ 7,262 $ 8,092 ================================================================================ The provision for income taxes differs from the amount computed by applying the Federal statutory rate to income before income taxes for the following reasons (in thousands): Year Ended December 31, ------------------------------------ 1998 1997 1996 - ------------------------------------------------------------------------------- Income tax at Federal statutory rate $ 8,768 $ 6,740 $ 7,232 State income taxes, net of Federal income tax benefit 683 487 861 Other 384 35 (1) - ------------------------------------------------------------------------------- Provision for income taxes $ 9,835 $7,262 $8,092 ================================================================================ The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1998 and 1997 are as follows (in thousands): December 31, --------------------- 1998 1997 - -------------------------------------------------------------------------------- Deferred tax assets: Accounts receivable $ 230 $ 179 Inventories 706 438 Capital leases 22 Other asset valuation allowances 1,044 1,114 Employee benefits other than pensions 101 101 Vacation and holiday pay 342 268 Other accruals 2,023 2,138 - -------------------------------------------------------------------------------- Total deferred tax assets 4,446 4,260 - -------------------------------------------------------------------------------- Deferred tax liabilities: Fixed assets 2,585 2,368 Long-term obligations 3 16 - -------------------------------------------------------------------------------- Total deferred tax liabilities 2,588 2,384 - -------------------------------------------------------------------------------- Net deferred tax asset $1,858 $1,876 ================================================================================ 20 1998 Annual Report Drew Industries Incorporated The Company concluded that it is more likely than not that the deferred tax assets at December 31, 1998 will be realized in the ordinary course of operations based on scheduling of deferred tax liabilities and income from operating activities. Net deferred income tax assets of $3,300,000 and $3,023,000 are included in prepaid expenses and other current assets, and net deferred tax liabilities of $1,442,000 and $1,147,000 are included in other long-term liabilities, in the Consolidated Balance Sheets at December 31, 1998 and 1997, respectively. 10. COMMITMENTS AND CONTINGENCIES Leases The Company's lease commitments are primarily for real estate and vehicles. The significant real estate leases provide for renewal options and periodic rental adjustments to reflect price index changes and require the Company to pay for property taxes and all other costs associated with the leased property. Most vehicle leases provide for contingent payments based upon miles driven and other factors. Future minimum lease payments under operating leases at December 31, 1998 are summarized as follows (in thousands): 1999 $2,745 2000 2,499 2001 2,049 2002 1,335 2003 640 Thereafter 460 - -------------------------------------------------------------------------------- Total lease obligations $9,728 ================================================================================ Rent expense was $3,636,000, $3,087,000 and $2,522,000 for the years ended December 31, 1998, 1997 and 1996, respectively. Other Effective July 29, 1994, the Company spun off to its stockholders LBP, Inc. (formerly known as Leslie Building Products, Inc.) including its subsidiary, Prime Acquisition Corp. ("Prime"), (formerly known as Leslie-Locke, Inc.), the Company's former home improvement building products segment. On September 30, 1994, White Metal Rolling and Stamping Corp. ("White Metal"), Prime's discontinued ladder manufacturing subsidiary, filed a voluntary petition seeking liquidation under the provisions of chapter 7 of the United States Bankruptcy Code. The liabilities of White Metal are all product liability claims, and related costs, resulting from its discontinued ladder manufacturing business. While Drew was named as a defendant in certain actions commenced in connection with these claims, Drew has not been held responsible, and Drew disclaims any liability for the obligations of White Metal. On May 7, 1996, the Company and its subsidiary, Kinro, Inc., and LBP, Inc. and its subsidiary, Prime, were served with a summons and complaint in an adversary proceeding commenced by the chapter 7 trustee of White Metal. The complaint, which appears to have alleged several duplicate claims, sought damages in the aggregate amount of $10.6 million plus attorneys fees, of which approximately $7.5 million of tax related claims was sought, jointly and severally, from the Company, Kinro, LBP, and Prime. On July 14, 1998, the bankruptcy court granted defendants' motion to dismiss the trustee's tax-related claims. The court permitted the trustee to replead the dismissed claims, but the trustee elected not to replead. The trustee could appeal the court's decision dismissing these claims upon the termination of the proceeding. Other than the dismissed tax-related claims, the trustee alleges that White Metal made certain payments to the Company which were preferential and are recoverable by White Metal, in the approximate amount of $900,000. Although these claims were not dismissed, the Company believes that the claims are without merit, denies liability for any such amount, and is vigorously defending against the allegations. However, an estimate of potential loss, if any, cannot be made at this time. The Company believes that the defense of this proceeding will not have a material adverse impact on the Company's financial condition or results of operations. In order to hedge the impact of future price fluctuations on a portion of its aluminum raw material requirements, the Company periodically purchases aluminum futures contracts on the London Metal Exchange. At December 31, 1998, the Company had no futures contracts outstanding. The Company has employment contracts with eight of its employees which expire on various dates through July 2002. The minimum commitments under these contracts are $1,137,000 in 1999, $890,000 in 2000, $585,000 in 2001, and $108,000 in 2002. In addition, an arrangement with three employees of the Company provides for incentives to be paid, based on a percentage of profits as defined. 11. STOCKHOLDERS' EQUITY Stock Options and Warrants Pursuant to the Drew Industries Incorporated Stock Option Plan (the "Plan"), the Company may grant its directors and/or key employees options to purchase Drew Common Stock. The Plan provides for the grant of stock options that qualify as incentive stock options ("ISO") under Section 422 of the Code and non-qualified stock options ("NQSOs"). 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Under the Plan, the Committee determines the period for which each stock option may be exercisable, but in no event may a stock option be exercisable more than 10 years from the date of grant thereof. The number of shares available under the Plan, and the exercise price of options granted under the Plan, are subject to adjustments that may be made by the Committee to reflect stock splits, stock dividends, recapitalization, mergers, or other major corporate action. Under the terms of the Plan, the number of shares that each holder of options was entitled to purchase as well as the option price was adjusted to reflect the two-for-one stock split effective March 21, 1997. The exercise price for options granted under the Plan shall be at least equal to 100 percent of the fair market value of the shares subject to such option on the date of grant. The exercise price may be paid in cash or in shares of Drew Common Stock. Options granted under the Plan become exercisable in annual installments as determined by the Committee. Transactions in stock options under this plan are summarized as follows: Number of Option Shares Option Price - -------------------------------------------------------------------------------- Outstanding at December 31, 1995 603,198 $ 1.24-$ 7.35 Granted 169,140 $ 6.94-$10.75 Exercised (113,740) $ 1.24-$ 4.27 Canceled (15,442) $ 3.03-$ 6.94 - -------------------------------------------------------------------------------- Outstanding at December 31, 1996 643,156 Granted 326,000 $12.13-$12.48 Exercised (85,990) $ 1.24-$ 6.94 Canceled (24,054) $ 6.94-$12.13 - -------------------------------------------------------------------------------- Outstanding at December 31, 1997 859,112 Granted 34,000 $11.79-$12.50 Exercised (150,538) $ 3.62-$12.13 Canceled (50,288) $ 6.94-$12.13 - -------------------------------------------------------------------------------- Outstanding at December 31, 1998 692,286 ================================================================================ Exercisable at December 31, 1998 406,628 $ 3.67-$12.48 ================================================================================ The respective number of shares available for granting options were 291,666, 275,378 and 177,324 at December 31, 1998, 1997 and 1996, respectively. The Company adopted the disclosure-only option under SFAS No.123, "Accounting for Stock-Based Compen sation" ("FAS 123"), as of December 31, 1996. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The weighted average assumptions used for grants included no dividend yields, risk-free interest rates of 5.0 percent, 5.0 percent and 5.9 percent; assumed expected volatilities of 26.6 percent, 40.2 percent and 30.3 percent; and expected lives of 5, 5 and 5 years for 1998, 1997 and 1996, respectively. If compensation cost for the Company's stock option plan had been recognized in the income statement based upon the fair market method, net income would have been reduced to the pro forma amounts indicated below: Year Ended December 31, ---------------------------------------- 1998 1997 1996 - -------------------------------------------------------------------------------- Net income (in thousands): As reported $ 15,217 $ 11,994 $ 12,572 Pro forma $ 14,940 $ 11,807 $ 12,498 Earnings per share (basic) As reported $ 1.36 $ 1.22 $ 1.18 Pro forma $ 1.34 $ 1.20 $ 1.17 Earnings per share (diluted) As reported $ 1.34 $ 1.19 $ 1.15 Pro forma $ 1.31 $ 1.17 $ 1.14 The following table summarizes information about stock options outstanding at December 31, 1997: Option Average Option Exercise Shares Remaining Shares Price Outstanding Life (Years) Exercisable - -------------------------------------------------------------------------------- $ 3.67 69,480 .1 69,480 $ 4.26 211,762 .3 211,762 $ 6.94 35,944 2.1 10,486 $ 7.35 10,000 2.0 10,000 $10.75 15,000 3.0 15,000 $11.79 15,000 5.0 15,000 $12.13 301,100 4.9 59,900 $12.48 15,000 4.0 15,000 $12.50 19,000 5.6 0 - -------------------------------------------------------------------------------- 692,286 406,628 ================================================================================ Outstanding stock options expire in five to six years from the date they are granted; options vest over service periods that range from zero to five years. In connection with the acquisition of Pritt on May 5, 1997, the Company issued a warrant to purchase 40,000 shares of its common stock at $11 per share. The warrant expires May 5, 2000. Treasury Stock In 1998, the Board of Directors authorized the Company to repurchase up to 250,000 shares of the Company's common stock. During 1998, the Company purchased 175,600 shares of such stock at a cost of $2,104,000. In January 1999, the Board of Directors authorized the Company to repurchase an additional 200,000 shares. On February 14, 1997, the Company purchased 1.6 million shares from its chairman for $13 per share, which was below the market price at that time. These treasury shares were included in the shares issued in connection with the acquisition of Lippert. 22 1998 Annual Report Drew Industries Incorporated Weighted Average Common Shares Outstanding The following reconciliation, which retroactively gives effect to the stock split effective March 21, 1997, details the denominator used in the computation of basic and diluted earnings per share:
Year Ended December 31, ---------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------------ Weighted average shares outstanding for basic earnings per share 11,178,588 9,845,138 10,688,552 Common stock equivalents pertaining to: Stock options 201,724 241,678 228,056 Warrants 6,169 3,290 - ------------------------------------------------------------------------------------ Total for diluted shares 11,386,481 10,090,106 10,916,608 - ------------------------------------------------------------------------------------
The numerator is constant for both the basic and diluted earnings per share calculations. In connection with the acquisition of Lippert on October 7, 1997, the Company issued 230,769 shares of common stock to the sellers which were held in escrow pending the results of an earnout. Such shares were not considered outstanding for the calculation of weighted average common shares until October 1998 at which time the contingency was resolved. 12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Interim unaudited financial information follows (in thousands, except per share amounts):
First Second Third Fourth Quarter Quarter Quarter Quarter Year - ------------------------------------------------------------------------------------------------------ Year Ended December 31, 1998(a) Net sales $ 75,181 $ 87,325 $ 87,923 $ 80,211 $330,640 Gross profit 15,080 17,926 17,948 16,945 67,899 Net income 3,036 4,395 4,280 3,506 15,217 Net income per common share (basic) $ .27 $ .39 $ .38 $ .31 $ 1.36 Net income per common share (diluted) .27 .39 .38 .31 1.34 Year Ended December 31, 1997(a) Net sales $ 41,628 $ 50,201 $ 50,182 $ 66,354 $208,365 Gross profit 10,163 11,082 11,088 13,948 46,281 Net income 2,946 3,081 2,939 3,028 11,994 Net income per common share (basic) $ .30 $ .34 $ .32 $ .29 $ 1.22 Net income per common share (diluted) .29 .33 .31 .28 1.19
(a) Includes results of operations of Pritt, Lippert and Coil Clip since their acquisitions by the Company. 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, 1998 and 1997, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Drew Industries Incorporated and subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998 in conformity with generally accepted accounting principles. As discussed in note 1 of the consolidated financial statements, the Company changed its method of accounting for inventories in 1997. KPMG LLP Stamford, Connecticut February 10, 1999 - -------------------------------------------------------------------------------- MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS The management of the Company has prepared and is responsible for the consolidated financial statements and related financial information included in this report. These consolidated financial statements were prepared in accordance with generally accepted accounting principles which are consistently applied and appropriate in the circumstances. These consolidated financial statements necessarily include amounts determined using management's best judgements and estimates. The Company maintains accounting and other control systems which provide reasonable assurance that assets are safeguarded and that the books and records reflect the authorized transactions of the Company. Although accounting controls are designed to achieve this objective, it must be recognized that errors or irregularities may occur. In addition, it is necessary to assess and consider the relative costs and the expected benefits of the internal accounting controls. The Company's independent auditors, KPMG LLP, provide an independent, objective review of the consolidated financial statements and underlying transactions. They perform such tests and other procedures as they deem necessary to express an opinion on the financial statements. The report of KPMG LLP accompanies the consolidated financial statements. /s/ Leigh J. Abrams Leigh J. Abrams President and Chief Executive Officer /s/ Federic M. Zinn Fredric M. Zinn Chief Financial Officer 24 1998 Annual Report CORPORATE INFORMATION DREW INDUSTRIES INCORPORATED Board of Directors EDWARD W. ROSE, III(a) Chairman of the Board of Drew Industries Incorporated President of Cardinal Investment Company JAMES F. GERO(a) Chairman and Chief Executive Officer of Sierra Technologies, Inc. GENE BISHOP(a) Retired Bank Executive LEIGH J. ABRAMS President and Chief Executive Officer of Drew Industries Incorporated L. DOUGLAS LIPPERT President and Chief Executive Officer of Lippert Components, Inc. and Coil Clip, Inc. DAVID L. WEBSTER President and Chief Executive Officer of Kinro, Inc. and Shoals Supply, Inc. (a) Members of Audit Committee and Compensation Committee of the Board of Directors Corporate Officers LEIGH J. ABRAMS President and Chief Executive Officer FREDRIC M. ZINN Chief Financial Officer HARVEY J. KAPLAN Treasurer and Secretary JOHN F. CUPAK Controller Form 10-K A copy of the Annual Report on Form 10-K as filed by the Corporation with the Securities and Exchange Commission is available upon request, without charge, by writing to: Treasurer Drew Industries Incorporated 200 Mamaroneck Avenue White Plains, NY 10601 General Counsel Harvey F. Milman, Esq. Gilbert Segall & Young, LLP 430 Park Avenue New York, NY 10022-3592 Independent Certified Public Accountants KPMG LLP Stamford Square 3001 Summer Street Stamford, CT 06905 Transfer Agent and Registrar ChaseMellon Shareholder Services 85 Challenger Road Ridgefield, NJ 07660 Executive Offices 200 Mamaroneck Avenue White Plains, NY 10601 (914) 428-9098 Kinro, Inc. Shoals Supply, Inc. DAVID L. WEBSTER President and Chief Executive Officer Corporate Headquarters 4381 Green Oaks Boulevard West Arlington, TX 76016 (817) 483-7791 Lippert Components, Inc. Coil Clip, Inc. L. DOUGLAS LIPPERT President and Chief Executive Officer Corporate Headquarters 2375 9th Street North Suite 110 Naples, FL 34103 (941) 659-2005 Forward Looking Statements and Risk Factors This report contains certain statements, including the Company's plans regarding its operating strategy, its products and performance and its views of industry prospects, which could be construed to be forward looking statements within the meaning of the Securities Exchange Act of 1934. These statements reflect the Company's current views with respect to future plans, events and financial performance. The Company has identified certain risk factors which could cause actual plans and results to differ substantially from those included in the forward looking statements. These factors include pricing pressures due to competition, raw material costs (particularly aluminum, vinyl, steel, glass, and tires), adverse weather conditions impacting retail sales, inventory adjustments by retailers, availability and costs of labor, and interest rates. In addition, general economic conditions may affect the retail sale of manu factured homes and RV's. MARKET PRICE RANGE A summary of the high and low closing prices of the Company's common stock on the American Stock Exchange is as follows: 1998 1997 - -------------------------------------------------------------------------------- High Low High Low - -------------------------------------------------------------------------------- Quarter Ended March 31 $13.38 $11.75 $13.81 $10.75 Quarter Ended June 30 $15.13 $12.63 $13.00 $10.63 Quarter Ended September 30 $15.00 $11.50 $14.38 $11.75 Quarter Ended December 31 $12.88 $10.13 $14.13 $11.06 The closing price per share for the common stock on March 12, 1999 was $12.25 and there were 2,204 holders of Drew Common Stock, not including beneficial owners of shares held in broker and nominee names. DIVIDEND INFORMATION Drew has not paid any cash dividends on its outstanding shares of Common Stock. On February 13, 1997, Drew declared a two-for-one stock split by means of a 100 percent stock dividend, payable on March 21, 1997 to stockholders of record on March 4, 1997. Designed by Curran & Connors, Inc. / www.curran-connors.com [LOGO] DREW INDUSTRIES INCORPORATED 200 Mamaroneck Avenue White Plains, NY 10601 EX-21 3 ACTIVE SUBSIDIARIES OF REGISTRANT EXHIBIT 21 - Active Subsidiaries of Registrant State of Name Incorporation ---- ------------- Kinro, Inc. Ohio Kinro Manufacturing, Inc. Delaware Kinro Holding, Inc. New York Kinro Texas Limited Partnership Texas Partnership Kinro Tennessee Limited Partnership Tennessee Partnership Lippert Components, Inc. Delaware Lippert Holding, Inc. New York Lippert Components Manufacturing, Inc. Delaware Lippert Components Texas Limited Partnership Texas Shoals Supply, Inc. Delaware Shoals Supply Holding, Inc. New York Shoals Supply Texas Limited Partnership Texas Partnership Shoals Supply Tennessee Limited Partnership Tennessee Partnership Coil Clip, Inc. Delaware EX-23 4 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 Consent of Independent Auditors The Board of Directors Drew Industries Incorporated We consent to incorporation by reference in the registration statements (No. 33-88582) on Form S-8 of Drew Industries Incorporated of our report dated February 10, 1999 relating to the consolidated balance sheets of Drew Industries Incorporated and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998, which report refers to a change to the FIFO method of valuing inventory and our report dated February 10, 1999 relating to the financial statement schedule, which reports appear in or are incorporated by reference in the December 31, 1998, annual report on Form 10-K of Drew Industries Incorporated. KPMG LLP Stamford, Connecticut March 29, 1999 EX-27 5 FINANCIAL DATA SCHEDULE
5 1000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 2,690 0 14,249 690 35,400 57,681 55,081 11,942 154,425 26,051 0 0 0 115 68,647 154,425 330,640 330,640 262,741 301,698 0 0 3,890 25,052 9,835 15,217 0 0 0 15,217 1.36 1.34
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