DREW
1996 ANNUAL REPORT
Quality Products for
Manufactured Homes
and RV's
[Photograph]
Windows and Doors for RV's
[Photograph]
Windows, axles, tires and chassis parts
for Manufactured Homes
[Photograph]
[MAP]
Company Profile
- --------------------------------------------------------------------------------
"Drew has committed its financial and managerial resources to maximizing
shareholder value. Our long standing policy of rewarding all levels of
management through incentives based upon operating results sparks the
entrepreneurial spirit that, we believe, is responsible for Drew's record
results and outstanding returns to shareholders."
Drew, through its subsidiaries, Kinro, Inc., and Shoals Supply, Inc., is a
nationwide supplier to the manufactured housing and recreational vehicle
("RV") industries.
Kinro is a leading producer of aluminum and vinyl windows for manufactured
homes, as well as windows and doors for RV's. Many of the producers of
manufactured homes to whom Kinro sells windows also manufacture RV's.
Kinro has ten domestic manufacturing plants in eight states, and has an
eleventh plant under construction, located in geographic areas which
provide access to its major markets.
Shoals, under the management umbrella of Kinro, is 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. Shoals operates four plants in four states.
Financial Highlights
1996 1995 1994
- --------------------------------------------------------------------------------
(In thousands, except per share amounts)
- --------------------------------------------------------------------------------
Net Sales $168,151 $100,084 $ 82,965
- --------------------------------------------------------------------------------
Income From Continuing Operations (a) $ 13,386 $ 7,822 $ 5,570
- --------------------------------------------------------------------------------
Income Per Common Share from
Continuing Operations (a),(b) $ 1.25 $ .79 $ .57
- --------------------------------------------------------------------------------
Working Capital (a) $ 16,124 $ 8,820 $ 6,017
- --------------------------------------------------------------------------------
Stockholders' Equity (a) $ 34,765 $ 16,002 $ 8,072
- --------------------------------------------------------------------------------
Book Value Per Common Share (a),(b) $ 3.24 $ 1.61 $ .82
- --------------------------------------------------------------------------------
(a) On July 29, 1994, the Company spun off to stockholders its wholly-owned
subsidiary, Leslie Building Products. The results of Leslie Building
Products prior to the Spin-off are reflected as discontinued operations in
the accompanying Consolidated Financial Statements. On the date of the
Spin-off the net assets of Leslie Building Products was $20.3 million.
Accordingly, upon the Spin-off the Company's equity was reduced by $20.3
million.
(b) Adjusted retroactively to give effect to two-for-one stock split effective
March 21, 1997.
[The following table was represented by bar graphs in the printed material.]
INCOME FROM
CONTINUING EARNINGS
NET SALES OPERATIONS PER SHARE
(MILLIONS) (MILLIONS) (DOLLARS)
---------- ---------- ----------
1994 $ 83.0 $ 5.6 $0.57
1995 $100.1 $ 7.8 $0.79
1996 $168.2 $13.4 $1.25
DREW INDUSTRIES 1
Letter to Stockholders
- --------------------------------------------------------------------------------
"Our outstanding results were attained only through the extraordinary efforts of
our dedicated employees and the entrepreneurial spirit at all levels of our
Company. With this in sight, we look optimistically to 1997."
We are pleased to report that 1996 was another outstanding year for Drew:
o Record sales of $168 million - up 68% from 1995.
o Record net income of $13.4 million - up 71% from last year.
o Record per share net income of $1.25 compared with $.79 for last year.
o Return on equity of 53%.
o The acquisition of Shoals Supply in February 1996.
o Bank debt of $3 million at December 31, 1996 despite spending cash of $13
million related to the Shoals Supply acquisition and $6 million for
capital improvements.
o A 95% increase in the price of the Company's common stock to $27.25
(pre-split) on February 26, 1997 from $14.00 at the beginning of 1996.
If this looks similar to last year's letter, it is - except the numbers
are better.
[Photograph]
[Photograph]
Shoals Supply, under the management umbrella of Kinro, is included in our
results for ten and-a-half months and performed better than anticipated. The
acquisition of Shoals helped Drew in several ways: first, Shoals has a strong
earnings capacity, second, the new products strengthen our importance as a
supplier to our customers, and third, the new products provide new sources of
growth. The axle business is highly fragmented and Kinro will introduce Shoals'
products to Kinro's wider distribution network and customer base. As Shoals'
manufacturing capacity is expanded, we look for significant growth.
Kinro had outstanding 1996 results - again. Profits and cash flow were at
record levels. Two new factories were built, providing greater capacity and
permitting the introduction of new manufacturing processes. Kinro is now
producing
[Photograph]
its own tempered glass and has expanded its vinyl window production with a
"state of the art" vinyl line.
Kinro's 11% sales growth came from both the manufactured housing and RV
divisions. Kinro continues to produce quality products at reasonable prices, and
to provide its customers with superior service. As a result, Kinro enjoys
significant market share for each of its products.
On February 13, 1997 we announced that the Company will split its stock
two-for-one effective March 21, 1997, and that the Company had acquired 800,000
pre-split Drew shares from our Chairman, Edward W. Rose III, at $26 per share,
which was below the market price. Mr. Rose will continue to own 20.3 percent of
the Company's stock and he intends to remain active and to continue as Chairman.
The buyback will be accretive to earnings per share.
We're satisfied - in fact, we're delighted - with our current status.
Basic operations remain strong, our management is the best in the industry, and
we are poised for expansion through internal growth and acquisitions. We will
continue our search for other companies that fit our strategic plans.
We've saved the best for last. Our outstanding results were attained only
through the extraordinary efforts of our dedicated employees and the
entrepreneurial spirit at all levels of our Company. With this in sight, we look
optimistically to 1997.
/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
DREW INDUSTRIES 3
About the Company
Drew, through its subsidiaries, Kinro, and Shoals, is a leading supplier
of windows, axles, tires and chassis parts for manufactured homes (81 percent of
sales), as well as windows and doors for recreational vehicles ("RV's") and
windows for mini-buses (19 percent of sales). Both manufactured housing and
recreational vehicles are expected to be solid growth industries in the years
ahead.
[The following table was represented as a pie graph in the printed material.]
1996 Product Sales
MFG. HOUSING - WINDOWS 47%
MFG. HOUSING - AXLES, TIRES AND OTHER 34%
RV AND OTHER - WINDOWS AND DOORS 19%
TOTAL 100%
Drew's record of growth, profitability and strong cash flow results from
the ability to supply quality products and superior service while maintaining
the most efficient and lowest cost production techniques. Drew's strong balance
sheet, the result of both cash flow from operations and asset management, should
enable it to take advantage of future growth opportunities.
Manufactured Housing Industry
A modern manufactured home is an affordable, single family, factory-built
structure, transportable in one or more sections, which bears little resemblance
to the old "trailer" or "mobile home." Single section homes average 1,100 sq.
ft. and multi-section homes over 1,600 sq. ft.
Sales of factory-built homes have steadily taken market share from
site-built homes because they represent the most affordable choice of quality
single family homes. Financing alternatives for buyers, and zoning regulations
are becoming more favorable. Manufactured homes, which cost an average of
$36,000 (excluding land) are built to a stringent national building code.
In 1996 the industry shipped 363,400 homes, up 7 percent from 1995 and 112
percent from 1991. In 1997 shipments are expected to grow to about 380,000
homes, more than 25 percent of single-family housing starts. Growth of Drew's
business is augmented by the continuing trend towards multi-section homes, which
require more windows, axles and tires. Multi-section homes represented 54
percent of 1996 production, versus 47 percent in 1991.
Recreational Vehicle Industry
An RV is, in effect, a traveling home which affords the owner the mobility
to enjoy travel while providing many of the comforts of home. Industry sales of
RV's were 247,500 units in 1996, equal to 1995 and 58 percent above 1991.
Demographic trends continue to favor growth in the RV industry, since typical
first-time RV buyers are in their late 40's or early 50's, the fastest growing
segment of the population. The industry has also recently begun to promote RV's
to younger adults.
[The following table was represented by a bar graph in the printed material.]
Industry Shipments of Mfg. Homes & RV's
(In Thousands)
MFG. HOUSING RV'S
------------ ----
1991 170.7 163.3
1992 210.8 203.4
1993 254.3 227.8
1994 303.9 259.2
1995 339.6 247.0
1996 363.4 247.5
Our Divisions
- --------------------------------------------------------------------------------
"Drew's record of growth, profitability and strong cash flow results from the
ability to supply quality products and superior service while maintaining the
most efficient and lowest cost production techniques."
Kinro
Kinro's ten strategically located factories supply windows for
manufactured homes, windows and doors for RV's and windows for mini-buses.
Kinro's high market share demonstrates its ability to respond quickly to the
demands of its customers. As a result, Kinro has received numerous awards of
excellence from its customers in recognition of its superior service. Through
internal growth and a series of successful acquisitions, Kinro has expanded its
product line and broadened its geographic territory, enabling it to increase
sales from $10 million in 1980 to over $110 million in 1996.
[Photograph]
Kinro's highly experienced and knowledgeable operating management,
participates in profit incentive plans and a company-wide stock option plan,
which ensure incentive to maximize shareholder value.
Shoals
[Photograph]
Shoals, a supplier of products used to transport manufactured homes, was
acquired in February 1996. Shoals manufactures new axles and chassis parts,
refurbishes used axles, and distributes new and refurbished tires.
Shoals increases the Company's presence in the manufactured housing
industry, making it an even more essential supplier to its customers. The
Company intends to expand Shoals' geographic territory, now primarily in the
south eastern and south central states, both internally and through
strategically selected acquisitions.
Shoals' first year of operations after its acquisition was more successful
than anticipated. With the help of Kinro's management team, sales force and
engineering capabilities, Shoals' sales and profits are expected to continue to
grow.
[Photograph]
DREW INDUSTRIES 5
Drew Industries Incorporated
Financial Review
The Company, through its wholly-owned subsidiaries Kinro, Inc. ("Kinro")
and Shoals Supply, Inc. ("Shoals") manufactures and markets (i) windows, axles,
tires and chassis parts for manufactured housing (81% of sales), (ii) windows
and doors for recreational vehicles ("RV's") (18% of sales) and (iii) to a
lesser extent, windows for mini-buses (1% of sales).
Kinro is one of the leading producers of windows for manufactured homes in
the United States. Kinro also manufactures windows and doors for RV's. Many of
the producers of manufactured homes, to whom Kinro sells windows, also
manufacture RV's. Kinro's products are manufactured in ten domestic plants which
provide it with access to its major markets. An eleventh plant is currently
under construction.
Shoals, which was acquired by the Company on February 15, 1996, and is
under the management umbrella of Kinro, is 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. Shoals
operates four domestic factories located in four states.
Results of Operations
Net sales, gross margin and operating profit are (in thousands):
Year Ended December 31,
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Net sales $168,151 $100,084 $82,965
Gross profit $ 42,759 $ 27,482 $22,436
Operating profit $ 22,329 $ 12,791 $ 9,149
- --------------------------------------------------------------------------------
Year Ended December 31, 1996 Compared to
Year Ended December 31, 1995
Net sales for the year ended December 31, 1996 increased 68% over last
year. Sales for the current year include Shoals' sales from February 15, 1996,
the date that Shoals was acquired by the Company. Excluding Shoals, the
Company's sales (consisting of Kinro's sales) increased 11% for the year. The
increase in Kinro's net sales resulted both from the sales of manufactured
housing products, which increased 14%, and sales of RV products which increased
5% for the year. Such increases, which exceed the industry-wide increases in
shipments of manufactured homes and RV's, are volume related. 1996 industry-wide
shipments of manufactured homes were 7% higher than last year and shipments of
RV's of the types supplied by Kinro were 1% higher than last year.
Operating profit increased 75% to $22,329,000 for 1996. Included in the
current year's operating profit are the results of Shoals since the date that it
was acquired by the Company. Excluding Shoals, operating profit increased
approximately 40% for 1996 as a result of the 11% increase in net sales and an
improvement in gross profit as a percent of sales. The increase in gross profit
percentage resulted from lower aluminum prices, which have been volatile and, to
a lesser extent, a reduction in labor and overhead costs. Aluminum prices have
increased subsequent to the end of the year. The Company has been purchasing
aluminum futures on the London Metal Exchange to hedge against potential price
increases.
Selling, general and administrative expenses, again excluding Shoals,
increased 20% for 1996 as a result of the increased sales as well as increased
profits upon which incentive compensation is based. Shoals' contribution to the
Company's operating profit was $4.4 million on net sales of $57 million for the
10 1/2 months since its acquisition.
Year Ended December 31, 1995 Compared to
Year Ended December 31, 1994
Net sales for the year ended December 31, 1995 increased 21% over 1994,
resulting from a 35% increase in the sales of manufactured housing products.
Such increase is primarily volume related including the growth in sales of
Kinro's new vinyl window along with greater demand for storm windows. To a
lesser extent, price increases contributed to the sales growth. Industry-wide
shipments of manufactured homes increased 12% in 1995. Kinro's net sales of RV
products decreased 4% for the year, despite price increases, following the trend
of industry-wide shipments of RV's, which were down approximately 5% for the
year.
Operating profit increased 40% to $12,791,000 for 1995. While material
costs as a percentage of sales were higher in 1995 than in 1994, higher sales
and improved operating efficiencies resulted in a slight improvement in gross
profit percentage. Selling, general and administrative expenses for 1994
included $462,000 of costs relating to the Spin-off of Leslie Building Products
on July 29, 1994. Excluding these costs, selling, general and administrative
expenses for 1995 increased 15% which is less than the increase in sales since a
substantial portion of these expenses are fixed costs which do not fluctuate
with sales.
Shared Services Agreement
Pursuant to a Shared Services Agreement, following the Spin-off by the
Company of Leslie Building Products, Inc. on July 29, 1994, the Company and
Leslie Building Products have shared certain administrative functions and
employee services, such as management overview and planning, tax preparation,
financial reporting, coordination of independent audit, stockholder relations,
and
6
regulatory matters. The Company has been reimbursed by Leslie Building Products
for the fair market value of such services. This Agreement expires on December
31, 1997 and may be extended. The Company charged fees to Leslie Building
Products of $509,000 during 1996, $588,000 during 1995 and $889,000 during 1994
including $340,000 pursuant to the Shared Services Agreement for the five months
subsequent to the Spin-off. These fees are included in selling, general and
administrative expenses.
Interest (Expense) Income Net
Net interest expense increased by $460,000 for 1996 from 1995 primarily as
a result of debt incurred for the acquisition of Shoals and the $2.8 million
purchase of treasury stock. Such debt, and the resulting interest costs, were
partially offset by cash flow from operations.
Net interest income increased by $147,000 for 1995 from 1994 primarily as
a result of operating cash flow. Interest expense on the Company's debt to its
secured lender was $81,000 compared to $141,000 for 1994. Such debt was paid off
on June 1, 1995 and subsequent cash flow from operations was invested in
short-term investments resulting in interest income of $144,000 during 1995. The
Company earned additional interest income of $134,000 for 1995 and $251,000 for
1994 primarily from the notes receivable and the related cash collateral account
arising from the Company's 1986 sales of its direct-to-consumer merchandising
operations.
Accounting Changes
In 1996 the Company adopted Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation," which permits companies
either to adopt a new method of accounting for employee stock options and
similar equity instruments or to continue following the historical accounting
method with supplemental pro forma disclosures. The Company is continuing its
historical practice, and provides the necessary additional information in
footnote disclosure. For 1995 and 1996 the effect of the adoption was
immaterial.
Liquidity and Capital Resources
The Company has a $6 million credit agreement with Chase Manhattan Bank
which matures on January 31, 1999 and is secured by the accounts receivable of
the Company. At December 31, 1996, there were outstanding borrowings of
$3,150,000 under the line of credit and available additional borrowings for
general corporate purposes under this line of credit was $2.8 million. As
discussed further below, subsequent to December 31, 1996 the Company received a
commitment to increase the line of credit. Interest is payable at .25% over the
prime rate. In addition, the Company has the option to either fix the rate or
convert a portion of the loan to a Eurodollar loan at 2.25% over the LIBO rate.
The interest rate is subject to reduction if certain financial targets are
achieved.
The Statements of Cash Flows reflect the following:
Year Ended December 31,
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Net cash flows
provided by
continuing operations $ 11,927 $ 9,593 $ 6,475
Net cash flows (used for)
investment activities $(14,948) $(1,941) $(8,548)
Net cash flows provided
by (used for)
financing activities $ 538 $(4,093) $ 2,392
- --------------------------------------------------------------------------------
Net cash provided by operating activities from continuing operations for
1996, which does not include the balance of the assets and liabilities of Shoals
on February 15, 1996, the date of the acquisition of Shoals, was $11.9 million
compared to $9.6 million for 1995. Accounts receivable decreased $2.2 million in
1996 and increased $1.1 million in 1995 resulting primarily from the timing of
customer payments in late December. Inventories increased $4.6 million in 1996
compared to $.5 million for 1995. Part of the increase in inventories in 1996
was due to a build up in tire purchases. Payables decreased $.3 million and
increased $2.4 million in 1996 and 1995, respectively.
Cash flows used for investing activities in 1996 are primarily the $10
million cost of the Shoals acquisition, as well as capital expenditures. Capital
expenditures approximated $5.8 million in 1996, $1.9 million in 1995 and $1.2
million for 1994. Capital expenditures for 1996 were primarily for the
construction of two new plants and the purchase of related machinery and
equipment. Construction began recently on another plant in Goshen, Indiana which
will be completed in mid 1997. Capital expenditures for 1997 are expected to
range from $4 million to $8 million depending upon expansion projects currently
under review. Such capital expenditures are being funded from borrowings under
the line of credit and cash flow from operations. Cash flows used for investing
activities in 1994 includes Drew's funding of Leslie Building Products of $7.5
million. Leslie Building Products was spun off to the Company's stockholders as
of July 29, 1994.
Cash flows provided by financing activities in 1996 includes the borrowing
of $6 million for the acquisition of Shoals and $.8 million from the exercise of
employee
7
stock options and the income tax benefits resulting therefrom. These funds
provided were offset by $2.8 million used to reacquire 400,000 shares of
treasury stock and $3.5 million to pay down the Company's loan under its
revolving line of credit. The reacquired shares were originally issued in
connection with the acquisition of Shoals.
On September 30, 1994, White Metal Rolling and Stamping Corp. ("White
Metal"), Leslie-Locke's discontinued ladder manufacturing subsidiary, filed a
voluntary petition seeking liquidation under the provisions of chapter 7 of the
United States Bankruptcy Code. The net liabilities of White Metal of $3.5
million are substantially all accrued product liability costs. 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 Leslie
Building Products, Inc. and its subsidiary, Leslie-Locke, 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 allege several duplicate
claims, seeks damages in the aggregate amount of $10.6 million plus attorneys
fees, of which up to approximately $8.4 million is sought, jointly and
severally, from the Company, Kinro, Leslie Building Products and Leslie-Locke.
The proceeding is based principally upon the trustee's allegations, previously
disclosed by the Company, that the Company and its affiliated companies obtained
tax benefits attributable to the use of White Metal's net operating losses. The
trustee seeks to recover the purported value of the tax savings achieved, which
appears to be approximately $7.5 million. Management believes that the trustee's
allegations are without merit and have no basis in fact. In addition, 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. The Company 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 it has sufficient
accruals for the defense of this proceeding and that such defense 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, 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 of these commodities have historically been volatile. In order
to hedge the impact of future price fluctuations on a portion of its future
aluminum raw material requirements, the Company periodically purchases aluminum
futures contracts on the London Metal Exchange. At December 31, 1996 the Company
had no futures contracts outstanding, however, in January 1997 the Company
purchased futures contracts to hedge a portion of its 1997 aluminum
requirements.
Subsequent Event
On February 13, 1997, the Board of Directors declared a two-for-one split
of its Common Stock, payable in the form of a 100 percent stock dividend on
March 21, 1997 to stockholders of record on March 4, 1997.
Simultaneously, the Company announced that it will purchase from Edward W.
Rose, III, Chairman of the Board of Drew, 800,000 pre-split shares of Drew
Common Stock, representing approximately 15 percent of Drew stock outstanding
and 50 percent of Drew shares owned by Mr. Rose, at a purchase price of $26 per
share for an aggregate consideration of $20.8 million. The closing market price
of Drew Common Stock on the American Stock Exchange on February 12, 1997 was
$26.375.
The Company has received a commitment letter from Chase Manhattan Bank to
increase Drew's line of credit to $40 million, of which approximately $21
million will be utilized to repurchase Mr. Rose's shares, and the balance will
be used for potential acquisitions and working capital.
8
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):
Fiscal Year Four Months
Ended Ended
Year Ended December 31, August 31, December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1992(a)
- -----------------------------------------------------------------------------------------------------------------------------------
Operating Data
Net sales $ 168,151 $ 100,084 $ 82,965 $ 67,065 $ 50,703 $ 20,158
===================================================================================================================================
Operating profit $ 22,329 $ 12,791 $ 9,149 $ 7,880 $ 4,679 $ 1,818
===================================================================================================================================
Income from continuing operations before
income taxes and cumulative effect of
change in accounting methods $ 22,003 $ 12,925 $ 9,136 $ 8,519(b) $ 4,327 $ 1,744
Provision for income taxes 8,617 5,103 3,566 2,151(b) 382(c) 699
- -----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before
cumulative effect of change in accounting methods 13,386 7,822 5,570 6,368 3,945 1,045
Discontinued operations, net (d) (111) (726) (193) (174)
Cumulative effect of change
in accounting methods 702(e)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 13,386 $ 7,822 $ 5,459 $ 5,642 $ 3,752 $ 1,573
===================================================================================================================================
Income per common share (f):
Income from continuing operations
before cumulative effect of
change in accounting methods $ 1.25 $ .79 $ .57 $ .67 $ .42 $ .11
Discontinued operations, net (.01) (.08) (.02) (.02)
Cumulative effect of
change in accounting methods .08(e)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income per common share $ 1.25 $ .79 $ .56(b) $ .59 $ .40 $ .17
===================================================================================================================================
Financial Data
Working capital $ 16,124 $ 8,820 $ 6,017 $ 17,706 $ 11,948 $ 12,362
Total assets $ 55,260 $ 28,231 $ 22,082 $ 31,664 $ 24,253 $ 24,489
Long-term obligations (g) $ 4,938 $ 311 $ 3,939 $ 2,513 $ 3,569 $ 2,602
Stockholders' equity (h) $ 34,765 $ 16,002 $ 8,072 $ 22,376 $ 14,164 $ 15,751
- -----------------------------------------------------------------------------------------------------------------------------------
(a) Effective December 31, 1992, the Company changed its fiscal year end from
August 31 to December 31.
(b) In 1993 the Company received Federal income tax refunds of $1,142,000, as
well as interest thereon of $745,000.
(c) Under the provisions of Statement of Financial Accounting Standards No. 96
("Statement 96"), the classification of the tax benefit of a net operating
loss carryforward was based on the source of income in the current year
that is offset by the carryforward. Accordingly, in fiscal 1992, the
Company's net operating loss carryforward was used to entirely offset its
provision for Federal income taxes, subject to the limitations of the
alternative minimum tax.
(d) See Note 6 of Notes to Consolidated Financial Statements.
(e) Represents cumulative adjustments to give effect to the adoption of the
following Statement(s) of Financial Accounting Standards ("SFAS") as of
September 1, 1992:
SFAS No. 106 (Postretirement benefits) $ (46,000)
SFAS No. 109 (Income taxes) 748,000
---------
Total cumulative effect of change in accounting methods $ 702,000
=========
(f) Adjusted to give effect to two-for-one stock split effective March 21,
1997.
(g) Includes long-term indebtedness, as well as long-term portion of
obligations under capital leases and long-term portion of postretirement
obligations.
(h) On July 29, 1994, the date of the Spin-off of Leslie Building Products,
Inc., (see Note 6 of Notes to Consolidated Financial Statements), the net
assets of Leslie Building Products were $20.3 million. Accordingly, upon
the Spin-off the Company's equity was reduced by $20.3 million.
9
Drew Industries Incorporated
Consolidated Statements of Income
Year Ended December 31,
- ----------------------------------------------------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
Net sales (Note 12) $ 168,151 $100,084 $ 82,965
Cost of sales 125,392 72,602 60,529
- ----------------------------------------------------------------------------------------------------
Gross profit 42,759 27,482 22,436
Selling, general and administrative expenses 20,430 14,691 13,287
- ----------------------------------------------------------------------------------------------------
Operating profit 22,329 12,791 9,149
Interest (expense) income, net (326) 134 (13)
- ----------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 22,003 12,925 9,136
Provision for income taxes (Note 9) 8,617 5,103 3,566
- ----------------------------------------------------------------------------------------------------
Income from continuing operations 13,386 7,822 5,570
Discontinued operations, net (Notes 6 and 9) (111)
- ----------------------------------------------------------------------------------------------------
Net income $ 13,386 $ 7,822 $ 5,459
====================================================================================================
Income per common share (Note 11):
Income from continuing operations $ 1.25 $ .79 $ .57
Discontinued operations, net (.01)
- ----------------------------------------------------------------------------------------------------
Net income per common share $ 1.25 $ .79 $ .56
====================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
10
Drew Industries Incorporated
Consolidated Balance Sheets
December 31,
- ----------------------------------------------------------------------------------------------------------------------
1996 1995
- ----------------------------------------------------------------------------------------------------------------------
(In thousands, except shares
and per share amounts)
ASSETS
Current assets
Cash and short term investments $ 1,545 $ 4,028
Accounts receivable, trade, less allowances of $308 in 1996 and $266 in 1995 (Note 8) 4,924 4,165
Inventories (Note 3) 22,663 11,024
Prepaid expenses and other current assets (Note 9) 2,549 1,521
- ----------------------------------------------------------------------------------------------------------------------
Total current assets 31,681 20,738
Fixed assets, net (Note 4) 10,865 5,594
Goodwill, net (Note 2) 11,582 319
Other assets (Note 9) 1,132 1,580
- ----------------------------------------------------------------------------------------------------------------------
Total assets $ 55,260 $ 28,231
======================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable, including current maturities of long-term indebtedness and
obligations under capital leases (Notes 8 and 10) $ 276 $ 128
Accounts payable, trade 3,958 3,511
Accrued expenses and other current liabilities (Note 5) 11,323 8,279
- ----------------------------------------------------------------------------------------------------------------------
Total current liabilities 15,557 11,918
Long-term indebtedness (Note 8) 3,652
Other long-term liabilities (Notes 9 and 10) 1,286 311
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities 20,495 12,229
- ----------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 6 and 10)
Stockholders' equity (Notes 11 and 14)
Common stock, par value $.01 per share: authorized 20,000,000 shares;
issued 11,202,946 shares in 1996 and 9,999,288 shares in 1995 112 100
Paid-in capital 17,218 9,053
Retained earnings 20,583 7,197
- ----------------------------------------------------------------------------------------------------------------------
37,913 16,350
Treasury stock, at cost - 479,770 shares in 1996 and 79,750 shares in 1995 (3,148) (348)
- ----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 34,765 16,002
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 55,260 $ 28,231
======================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
11
Drew Industries Incorporated
Consolidated Statements of Cash Flows
Year Ended December 31,
- ----------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
(In thousands)
Cash flows from operating activities:
Income from continuing operations $ 13,386 $ 7,822 $ 5,570
Adjustments to reconcile income from continuing operations to
cash flows provided by operating activities:
Depreciation and amortization 1,712 797 710
Deferred taxes (297) (259) (316)
Gain on disposal of fixed assets (37) (3) (1)
Changes in assets and liabilities:
Accounts receivable, net 2,188 (1,069) (361)
Inventories (4,623) (515) (2,907)
Prepaid expenses and other assets (74) 400 937
Accounts payable, accrued expenses and other current liabilities (328) 2,420 2,843
- ----------------------------------------------------------------------------------------------------------------------
Net cash flows provided by operating activities
from continuing operations 11,927 9,593 6,475
Net loss from discontinued operations (111)
- ----------------------------------------------------------------------------------------------------------------------
Net cash flows provided by operating activities 11,927 9,593 6,364
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (5,841) (1,944) (1,152)
Acquisition of net assets and business of Shoals Supply, Inc. (9,941)
Proceeds from sales of fixed assets 834 3 142
Net transferred to discontinued operations (7,538)
- ----------------------------------------------------------------------------------------------------------------------
Net cash flows used for investing activities (14,948) (1,941) (8,548)
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Acquisition loan from Chase Manhattan Bank 5,982
Proceeds under line of credit with Chase Manhattan Bank
and other borrowings 23,737 9,450 29,480
Repayments under line of credit with Chase Manhattan Bank
and other borrowings (27,228) (13,651) (27,601)
Acquisition of treasury stock (2,800) (333) (15)
Exercise of stock options and other 847 441 528
- ----------------------------------------------------------------------------------------------------------------------
Net cash flows provided by (used for) financing activities 538 (4,093) 2,392
- ----------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash (2,483) 3,559 208
Cash and short term investments at beginning of year 4,028 469 261
- ----------------------------------------------------------------------------------------------------------------------
Cash and short term investments at end of year $ 1,545 $ 4,028 $ 469
======================================================================================================================
Supplemental disclosure of cash flows information:
Cash paid during the year for:
Interest on debt $ 285 $ 132 $ 255
Income taxes, net of refunds $ 7,986 $ 4,856 $ 3,750
- ----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
12
Drew Industries Incorporated Consolidated Statements of
Stockholders' Equity
Retained Total
Common Treasury Paid-in Earnings Stockholders'
Stock Stock Capital (Deficit) Equity
===============================================================================================================================
(In thousands, except shares)
Balance - December 31, 1993 $ 97 $ 28,363 $(6,084) $ 22,376
Net income 5,459 5,459
Issuance of 154,994 shares of common
stock pursuant to stock option plan 2 385 387
Income tax benefit relating to issuance of
common stock pursuant to stock option plan 141 141
Acquisition of 20,000 shares of treasury stock $ (15) (15)
Spin-off of Leslie Building Products, Inc.
common stock to stockholders as of
July 29, 1994 (20,276) (20,276)
- -------------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1994 99 (15) 8,613 (625) 8,072
Net income 7,822 7,822
Issuance of 114,536 shares of common
stock pursuant to stock option plan 1 289 290
Income tax benefit relating to issuance of
common stock pursuant to stock option plan 151 151
Acquisition of 59,750 shares of treasury stock (333) (333)
- -------------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1995 100 (348) 9,053 7,197 16,002
Net income 13,386 13,386
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 $20,583 $ 34,765
===============================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
13
Drew Industries Incorporated
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 active subsidiaries are
Kinro, Inc. and its subsidiaries ("Kinro"), and Shoals Supply, Inc. and its
subsidiaries ("Shoals"). Kinro manufactures and markets windows for the
manufactured housing industry, and windows and doors for the recreational
vehicle ("RV") industry. Shoals manufactures new axles and chassis parts,
refurbishes used axles, and distributes new and refurbished tires, all of which
are used to transport manufactured homes. All significant intercompany balances
and transactions have been eliminated. On February 13, 1997 the Board of
Directors declared a two-for-one split of its Common Stock, payable in the form
of a 100 percent stock dividend on March 21, 1997 to stockholders of record on
March 4, 1997. Where appropriate, all share and per share amounts included in
the consolidated financial statements and notes thereto have been adjusted
retroactively to give effect to the stock split.
Inventories
Inventories are stated at the lower of cost (using the last-in, first-out
method for Kinro and the first-in, first-out method for Shoals) or market. Cost
includes material, labor and overhead; market is replacement cost or realizable
value after allowance for costs of distribution.
The Company periodically purchases commodity futures to hedge the impact
of future price fluctuations on a portion of its aluminum raw material
requirements. Gains and losses on such futures contracts are deferred until
recognized in income as a component of cost of sales when the finished products
are sold. Cash flow from such futures contracts are included in operating
activities in the Consolidated Statements of Cash Flows.
Fixed Assets
Fixed assets are depreciated principally on a straight-line basis over the
estimated useful lives of properties and equipment. Leasehold improvements and
leased equipment are amortized over the shorter of the lives of the leases or
the underlying assets. Amortization of assets recorded under capital leases is
included in depreciation expense. Maintenance and repairs are charged to
operations as incurred; significant betterments are capitalized.
Income Taxes
The Company and its subsidiaries file a consolidated Federal income tax
return. The Company's subsidiaries generally file separate state income tax
returns on the same basis as the Federal income tax return.
Accounting Changes
In 1996, the Company adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," which permits companies either
to adopt a new method of accounting for employee stock options and similar
equity instruments or to continue following the historical accounting method
with supplemental pro forma disclosures. The Company is continuing its
historical practice, and provides the necessary additional information in
footnote disclosure.
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 at December 31, 1996 primarily relates to the
acquisition of Shoals Supply, Inc. 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.
2. Acquisition
On February 15, 1996, the Company acquired the assets and business of
Shoals Supply, Inc., ("Shoals"), a privately-owned Alabama corporation which is
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. Shoals had 1995 net sales of approximately $56 million.
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 $760,000 payable over 5 years. In addition, the Company assumed $7.5 million
of Shoals' bank debt and certain operating liabilities. The acquisition was
financed primarily with $3.2 million of the Company's short-term investments and
a $6 million acquisition loan from Chase Manhattan Bank (formerly Chemical
Bank). On June 28, 1996, the Company paid $2.8 million for the repurchase of
400,000 shares of its Common Stock issued in connection with the acquisition.
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 $11,757,000, 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 February 16, 1996. The following pro
forma condensed
14
consolidated results of operations, however, assumes that the acquisition had
occurred at the beginning of 1995. 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,
--------------------------
1996 1995
(unaudited)
- --------------------------------------------------------------------------------
Net sales $175,861 $155,827
================================================================================
Net income $ 13,553 $ 9,425
================================================================================
Net income per common share $ 1.25 $ .86
================================================================================
Average common shares outstanding 10,856 10,984
================================================================================
3. Inventories
Inventories consist of the following (in thousands):
December 31,
--------------------------
1996 1995
- --------------------------------------------------------------------------------
Finished goods $ 6,045 $ 2,147
Work in process 1,810 1,076
Raw materials 14,831 9,163
- --------------------------------------------------------------------------------
22,686 12,386
Adjustment to LIFO cost basis (23) (1,362)
- --------------------------------------------------------------------------------
Total $ 22,663 $ 11,024
================================================================================
4. Fixed Assets
Fixed assets, at cost, consist of the following (in thousands):
December 31, Estimated
------------------------ Useful Life
1996 1995 In Years
- --------------------------------------------------------------------------------
Land $ 479 $ 372
Buildings and improvements 2,964 2,099 8 to 45
Leasehold improvements 745 686 5 to 25
Machinery and equipment 7,943 6,038 5 to 8
Automotive equipment 420 283 2 to 3
Furniture and fixtures 1,019 920 3 to 8
Capitalized real estate leases 925 925 15
Construction in progress 3,078 15
- ----------------------------------------------------------
17,573 11,323
Less accumulated
depreciation and
amortization 6,708 5,729
- ----------------------------------------------------------
Fixed assets, net $10,865 $ 5,594
==========================================================
Depreciation and amortization of fixed assets consists of
(in thousands):
Year Ended December 31,
1996 1995 1994
- --------------------------------------------------------------------------------
Charged to cost of sales $ 908 $554 $472
Charged to selling, general
and administrative
expenses 203 116 114
- --------------------------------------------------------------------------------
$1,111 $670 $586
================================================================================
5. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following
(in thousands):
December 31,
------------------------
1996 1995
- --------------------------------------------------------------------------------
Accrued employee compensation $ 3,063 $1,974
Accrued employee benefits 2,291 1,702
Accrued workmen's compensation
and other insurance 2,128 2,039
Income taxes 1,619 940
Accrued expenses and other 2,222 1,624
- --------------------------------------------------------------------------------
Total $11,323 $8,279
================================================================================
6. Discontinued Operations
On April 19, 1994, the Board of Directors of the Company approved a plan
to transfer the stock of Leslie-Locke, Inc. ("Leslie-Locke"), its home
improvement building products segment, to Leslie Building Products, Inc.
("Leslie Building Products"), Drew's newly formed subsidiary, and to spin off
Leslie Building Products common stock to stockholders on a one-for-one basis
(the "Spin-off"). The transfer of the stock of Leslie-Locke to Leslie Building
Products became effective May 10, 1994 and the Spin-off of Leslie Building
Products common stock to stockholders became effective July 29, 1994. Thereafter
Leslie Building Products became a stand-alone company whose common shares are
publicly traded.
Pursuant to a Shared Services Agreement, following the Spin-off, the
Company and Leslie Building Products have shared 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 has been reimbursed by Leslie
Building Products for the fair market value of such services. This Agreement
expires on December 31, 1997 and may be extended. The Company charged fees to
Leslie Building Products of $509,000 during 1996, $588,000 during 1995 and
$889,000 during 1994 including $340,000 pursuant to the Shared Services
Agreement for the five months subsequent to the Spin-off.
As a result of the spin-off, the operating results of Leslie Building
Products and its subsidiaries prior to July 29, 1994 are shown as discontinued
operations in the accompanying Consolidated Financial Statements.
15
On the date of the Spin-off the Company assumed approximately $5 million
of Leslie-Locke's debt. Subsequent to the assumption of debt by the Company, the
net assets of Leslie Building Products were $20.3 million. Accordingly, upon the
Spin-off the Company's equity was reduced by $20.3 million.
Net sales of Leslie Building Products prior to the Spin-off were
$44,639,000 for the seven months ended July 29, 1994.
On September 30, 1994, White Metal Rolling and Stamping Corp. ("White
Metal"), Leslie-Locke's discontinued ladder manufacturing subsidiary, filed a
voluntary petition seeking liquidation under the provisions of chapter 7 of the
United States Bankruptcy Code. The net liabilities of White Metal of $3.5
million are substantially all accrued product liability costs. 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 Leslie
Building Products, Inc. and its subsidiary, Leslie-Locke, 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 allege several duplicate
claims, seeks damages in the aggregate amount of $10.6 million plus attorneys
fees, of which up to approximately $8.4 million is sought, jointly and
severally, from the Company, Kinro, Leslie Building Products and Leslie-Locke.
The proceeding is based principally upon the trustee's allegations, previously
disclosed by the Company, that the Company and its affiliated companies obtained
tax benefits attributable to the use of White Metal's net operating losses. The
trustee seeks to recover the purported value of the tax savings achieved, which
appears to be approximately $7.5 million. Management believes that the trustee's
allegations are without merit and have no basis in fact. In addition, 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. The Company 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 it has sufficient
accruals for the defense of this proceeding and that such defense will not have
a material adverse impact on the Company's financial condition or results of
operations.
7. Retirement and Other Benefit Plans
The Company has a discretionary defined contribution profit sharing plan
covering substantially all eligible employees. The Company contributed $206,000,
$92,000, and $91,000 to this Plan during the years ended December 31, 1996, 1995
and 1994, respectively.
8. Long-term Indebtedness
The Company has a $6 million credit agreement with Chase Manhattan Bank
which matures on January 31, 1999 and is secured by the accounts receivable of
the Company. At December 31, 1996, there were outstanding borrowings of
$3,150,000 under the line of credit and available additional borrowings for
general corporate purposes under this line of credit was $2.8 million. Interest
is payable at .25% over the prime rate. In addition, the Company has the option
to either fix the rate or convert a portion of the loan to a Eurodollar loan at
2.25% over the LIBO rate. The interest rate on such borrowings at December 31,
1996 was 8.5%. The interest rate is subject to reduction after one year if
certain financial targets are achieved. Pursuant to the Agreement, the Company
is required to maintain minimum net worth, working capital, and income levels,
and meet certain other financial requirements typical to secured borrowing
arrangements. In addition, for the term of the loan, the Company will be
prohibited from declaring or paying dividends without the prior written consent
of the lender.
Long-term indebtedness consists of the following (in thousands):
December 31,
------------------------
1996 1995
- --------------------------------------------------------------------------------
Notes payable pursuant to a
credit agreement expiring
January 31, 1999 consisting
of revolving loan, not
to exceed $6,000 $3,150
Acquisition note payable to
seller of Shoals, payable in
quarterly installments of
$44 until February 15, 2001
with interest imputed at
8% per annum 632
- --------------------------------------------------------------------------------
3,782
Less current portion 130
- --------------------------------------------------------------------------------
Total long-term indebtedness $3,652 $ --
================================================================================
9. Income Taxes
The income tax provision (benefit) in the Consolidated Statements of
Income is as follows (in thousands):
Year Ended December 31,
--------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Continuing operations:
Current:
Federal $ 7,429 $ 4,462 $ 3,324
State 1,485 900 558
Deferred:
Federal (200) (245) (233)
State (97) (14) (83)
Total income tax provision
for continuing
operations $ 8,617 $ 5,103 $ 3,566
================================================================================
Discontinued operations $ -- $ -- $ 234
================================================================================
16
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,
--------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Income tax at Federal
statutory rate $7,701 $4,524 $3,106
State income taxes, net of
Federal income tax benefit 902 576 314
Other 14 3 146
- --------------------------------------------------------------------------------
Provision for income taxes $8,617 $5,103 $3,566
================================================================================
The significant components of deferred income taxes are as follows (in
thousands):
Year Ended December 31,
-------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Asset valuation allowances $ 43 $ (29) $ 57
Depreciation 77 43 8
Inventory (159) (51) (36)
Change in accruals not
currently deductible (368) (359) (452)
Other 110 137 107
- --------------------------------------------------------------------------------
Total $(297) $(259) $(316)
================================================================================
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1996 and 1995 are as follows (in thousands):
December 31,
-----------------------
1996 1995
- --------------------------------------------------------------------------------
Deferred tax assets:
Accounts receivable $ 115 $ 97
Inventories 371 200
Capital leases 61 89
Other asset valuation allowances 139 247
Employee benefits other
than pensions 28 27
Vacation and holiday pay 264 268
Other accruals 1,196 811
- --------------------------------------------------------------------------------
Total deferred tax assets 2,174 1,739
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Fixed assets 309 256
Long-term obligations 64
- --------------------------------------------------------------------------------
Total deferred tax liabilities 373 256
- --------------------------------------------------------------------------------
Net deferred tax asset $1,801 $1,483
================================================================================
The Company concluded that it is more likely than not that the deferred
tax assets at December 31, 1996 will be realized in the ordinary course of
operations based on scheduling of deferred tax liabilities and income from
operating activities.
Net current deferred income tax assets of $1,946,000 are included in
prepaid expenses and other current assets and net non-current deferred tax
liabilities of $145,000 are included in other long-term liabilities in the
Consolidated Balance Sheet at December 31, 1996. At December 31, 1995, net
current deferred income tax assets of $1,376,000 were included in prepaid
expenses and other current assets and net non-current deferred tax assets of
$107,000 were included in other assets in the Consolidated Balance Sheet.
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. The interest rate on the capital leases is 13.5%. Most vehicle leases
provide for contingent payments based upon miles driven and other factors.
Future minimum lease payments under capital and operating leases at
December 31, 1996 are summarized as follows (in thousands):
Years Capital Operating
- --------------------------------------------------------------------------------
1997 $170 $2,134
1998 99 1,761
1999 1,600
2000 1,509
2001 1,178
Thereafter 758
- --------------------------------------------------------------------------------
Total lease obligations 269 $8,940
======
Less amount representing interest 29
- ----------------------------------------------------------------
Present value of net minimum
lease payments (includes $146
payable within one year) $240
================================================================
Rent expense was $2,522,000, $1,760,000 and $1,621,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
Other
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, 1996,
the Company had no futures contracts outstanding. The Company has an employment
contract with one of its employees which expires on December 31, 2001. The
minimum commitments under this contract is $400,000 per annum. In addition, an
arrangement with another employee of the Company provides for incentives to be
paid, based on a percentage of profits as defined.
17
11. Stockholders' Equity
Stock Options and Warrants
In June 1995, the stockholders approved amendments to the Drew Industries
Incorporated 1988 Non-Qualified Stock Option Plan and restated it as the Drew
Industries Incorporated Stock Option Plan (the "Plan"). Pursuant to 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").
Under the Plan, since 1988 Drew's Stock Option Plan Committee has been
authorized to grant options to purchase up to an aggregate of 1,560,000 shares
of Drew's Common Stock, of which options for 177,324 shares have not yet been
granted. The Committee will determine 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.
The exercise price for options granted under the Plan shall be determined
by the Committee in its sole discretion; provided, however, in the case of an
ISO granted to an optionee, the exercise price shall be at least equal to 100%
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.
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 dilution of the shares resulting from the Spin-off of Leslie
Building Products, as of July 29, 1994, as well as the two-for-one stock split
effective March 21, 1997.
Transactions in stock options under this plan are summarized as follows:
Number
Of Shares Option Price
- --------------------------------------------------------------------------------
Outstanding at
December 31, 1993 343,750 $1.44-$ 4.19
Granted 420,000 $4.25-$ 4.94
Replaced in connection
with spin-off (629,600) $1.44-$ 4.94
Granted as replacement
of shares canceled in
connection with spin-off 729,042 $1.24-$ 4.27
Exercised (154,994) $1.24-$ 3.50
Canceled (464) $3.03
- -----------------------------------------------------------
Outstanding at
December 31, 1994 707,734 $1.24-$ 4.94
Granted 10,000 $7.35
Exercised (114,536) $1.24-$ 4.27
- -----------------------------------------------------------
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
===========================================================
Exercisable at
December 31, 1996 499,826 $1.24-$10.75
===========================================================
Options available for grant
at December 31, 1996 177,324
===========================================================
The Company adopted the disclosure-only option under SFAS No.123,
Accounting for Stock-Based Compensation ("FAS 123"), as of December 31, 1996. If
the accounting provisions of FAS 123 had been adopted as of the beginning of
1996, the effect on 1996 net income and earnings per share would have been
immaterial.
18
The following table summarizes information about stock options outstanding
at December 31, 1996 (shares in thousands):
Average
Remaining
Exercise Shares Life Shares
Price Outstanding (Years) Exercisable
- --------------------------------------------------------------------------------
$ 1.24 3,474 .1 3,474
$ 3.02 49,338 1.0 49,338
$ 3.62 23,160 2.0 23,160
$ 3.67 69,480 2.1 69,480
$ 4.26 329,374 2.3 329,374
$ 6.94 143,330 4.1 0
$ 7.35 10,000 4.0 10,000
$10.75 15,000 5.0 15,000
- --------------------------------------------------------------------------------
643,156 499,826
================================================================================
Stock options expire in five years from the date they are granted; options
vest over service periods that range from zero to five years.
Weighted Average Common Shares Outstanding
Net income per common share is based on 10,688,552 shares, 9,894,810
shares and 9,761,418 shares for the years ended December 31, 1996, 1995 and
1994, respectively, the weighted average of common shares outstanding after
giving effect to the stock split effective March 21, 1997. Fully diluted
earnings per share is not presented as there are no outstanding securities of
the Company that have not been considered in the calculation of primary earnings
per share.
12. Significant Customers
One customer accounted for 17%, 10%, and 14% of the Company's net sales in
the years ended December 31, 1996, 1995 and 1994, respectively.
13. 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, 1996 (a)
Net sales $34,114 $48,330 $44,815 $40,892 $168,151
Gross profit 8,784 11,932 11,127 10,916 42,759
Net income 2,666 3,815 3,680 3,225 13,386
Net income per common share $ .25 $ .35 $ .34 $ .30 $ 1.25
Year Ended December 31, 1995
Net sales $25,363 $25,430 $24,747 $24,544 $100,084
Gross profit 7,116 6,885 6,634 6,847 27,482
Net income 2,069 2,010 1,918 1,825 7,822
Net income per common share $ .21 $ .20 $ .19 $ .18 $ .79
- -----------------------------------------------------------------------------------------------------------
(a) Includes results of operations of Shoals Supply, Inc. since its
acquisition by the Company on February 15, 1996.
14. Subsequent Event
On February 13, 1997, the Board of Directors declared a two-for-one split
of its Common Stock, payable in the form of a 100 percent stock dividend on
March 21, 1997 to stockholders of record on March 4, 1997. All share amounts in
this report have been adjusted to reflect this stock split.
Simultaneously, the Company announced that it will purchase from Edward W.
Rose, III, Chairman of the Board of Drew, 800,000 pre-split shares of Drew
Common Stock, representing approximately 15 percent of Drew stock outstanding
and 50 percent of Drew shares owned by Mr. Rose, at a purchase price of $26 per
share for an aggregate consideration of $20.8 million. The closing market price
of Drew Common Stock on the American Stock Exchange on February 12, 1997 was
$26.375 (pre-split).
The Company has received a commitment letter from Chase Manhattan Bank to
increase Drew's line of credit to $40 million, of which approximately $21
million will be utilized to repurchase Mr. Rose's shares, and the balance will
be used for potential acquisitions and working capital.
19
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, 1996 and 1995, 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, 1996.
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, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996 in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Stamford, Connecticut
February 12, 1997, except for the first paragraph of Note 14, which is as of
March 21, 1997*
Drew Industries Incorporated
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 Peat Marwick 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 Peat Marwick LLP accompanies the consolidated financial statements.
/s/ Leigh J. Abrams
Leigh J. Abrams
President and Chief Executive Officer
/s/ Fredric M. Zinn
Fredric M. Zinn
Chief Financial Officer
--------------------------------
Per Share Market Price Range(1)
A summary of the high and low closing prices of the Company's common stock
on the American Stock Exchange is as follows:
1996 1995
- --------------------------------------------------------------------------------
High Low High Low
Quarter Ended
March 31 $ 8.00 $ 6.75 $ 5.25 $ 4.19
Quarter Ended
June 30 $ 9.25 $ 7.32 $ 6.56 $ 5.19
Quarter Ended
September 30 $12.32 $ 8.38 $ 6.94 $ 5.75
Quarter Ended
December 31 $13.62 $10.62 $ 8.19 $ 6.32
- --------------------------------------------------------------------------------
(1) Adjusted retroactively to give effect to a two-for-one stock split
effective March 21, 1997 to holders of record on March 4, 1997.
The closing price per share for the common stock on February 26, 1997 was
$13.62 and there were 2,369 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.
20
Drew Industries Incorporated
Corporate Information
Board of Directors
Edward W. Rose, III
Chairman of the Board of
Drew Industries Incorporated
President of Cardinal Investment Company
James F. Gero
Chairman and Chief Executive Officer of
Sierra Technologies, Inc.
Gene Bishop
Retired Bank Executive
Leigh J. Abrams
President and Chief Executive Officer of
Drew Industries Incorporated
David L. Webster
President and Chief Executive Officer of Kinro, Inc.
and Shoals Supply, Inc.
Audit Committee of the Board of Directors
Edward W. Rose, III, Chairman
James F. Gero
Gene Bishop
Compensation Committee of the Board of Directors
Edward W. Rose, III
James F. Gero
Gene Bishop
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
General Counsel
Harvey F. Milman, Esq.
Berlack, Israels & Liberman LLP
120 West 45th Street
New York, NY 10036
Independent Certified Public Accountants
KPMG Peat Marwick LLP
Stamford Square
3001 Summer Street
Stamford, CT 06905
Transfer Agent and Registrar
Chase Mellon Shareholder Services
450 West 33rd Street
New York, NY 10001
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
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
Designed by Curran & Connors, Inc.
DREW
DREW INDUSTRIES INCORPORATED
200 Mamaroneck Avenue
White Plains, NY 10601